Is the Peak Oil Myth Dead?

In his 2005 New York Times best-selling book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, renowned oil analyst Matthew Simmons outlined his belief that Saudi Arabia's giant Ghawar oil field would soon begin a terminal decline that would result in permanently falling global oil production. 

Indeed, from the post-recession lows of 2003 until peaking in 2008, oil prices seemed to prove peak oil proponents correct -- with prices seemingly on a long-term exponential increase. 

Brent Crude Oil Spot Price Chart
Brent Crude Oil Spot Price data by YCharts

However, what Mr. Simmons and other peak oil theorists failed to consider is that America's shale oil revolution could not only make up for Ghawar's production fall, but even replace the field entirely. 

Permian Basin: dethroning the Saudis
According to Pioneer Natural Resources, the Permian Basin of West Texas and New Mexico holds an estimated 75 billion barrels of recoverable oil, an estimate that is up 50% in just the last year. 

Compare this to Ghawar's roughly 70 billion barrels of remaining oil and then factor in that the Energy Information Administration (EIA) estimates the US's technically recoverable shale oil and gas deposits stand at 223 billion barrels, and one can see there is little cause for alarm. In fact, according to bank of America, in the first quarter of 2014 the US became the largest producer of fossil fuel liquids in the world, a fact verified by the International Energy Agency in June.  

That impressive feat was accomplished thanks to the incredible growth of oil production from Texas and North Dakota, which increased their production by 117% and 177% respectively between 2010 and 2013. 

However, as impressive as America's explosive oil growth has been and as large as our resources might be, they don't hold a candle to the immense untapped potential that exists around the world. 

Drowning in oil 
Russia's Bazhenov shale formation is the size of California and Texas combined and is estimated to also hold 75 billion barrels of oil recoverable with current technology. To put that in perspective, 75 billion barrels is about 10 times the estimated recoverable resources of North Dakota's Bakken formation, which has increased its production 20-fold in the last six years.

The EIA estimates that the Bazhenov ultimately holds 1.2 trillion barrels of oil in total. 

To fathom just how much 1.2 trillion barrels of oil is, consider this: According to London's Oil Depletion Analysis Center the world has thus far, in its entire history, produced 1.2 trillion barrels of oil. 

Interestingly enough, according to the EIA, the world's traditional (non-shale) oil resources currently stand at around 1.3 trillion barrels as well. 

Russia's Bazhenov formation may be mindbogglingly huge, however it represents just a fraction of total global shale oil resources, which the EIA estimates to stand at 3.357 trillion barrels. And Canada's fabled tar sands alone could hold nearly as much oil as that -- 2.5 trillion barrels at the high end of estimates.

However, the single largest potential mother lode of oil is Colorado and Wyoming's Green River Formation, which the US Government Accountability Office believes to hold as much as 3 trillion barrels of oil.

Unfortunately, these resources come in the form of kerogen, which is trapped inside rock that must be intensely heated to extract. It's estimated that, of this bounty, only 1.8 trillion barrels could ever be technically recoverable due to the intense energy and water resources required. For example, to extract 1 million barrels/day would take enough power for 9 million homes and enough water to supply all of New York City for 45 days.

Nonetheless, the world's remaining oil resources all told stand at 7 trillion to 10 trillion barrels, six to eight times what humanity has thus far pumped out of the ground. At today's production levels it would take 220 to 300 years to deplete all that oil (assuming our resource estimates don't rise over time, as they've been doing for decades).

The stone age didn't end because we ran out of stones
Before we all take to the streets to celebrate the end of the energy crisis, there are several important factors to consider. First of all, recent US sanctions against Russia over its actions in Ukraine have resulted in a denial of key economic resources, including deepwater offshore drilling rigs and fracking equipment. This could hinder exploitation of the Bazhenov formation, at least in the short term, because Russia is increasingly dependent on Western technology to increase oil production from hard-to-drill locations.  

Second, much of these resources will never be economically recoverable simply because the amount of energy it would take to extract that oil would be more than is contained in the oil itself. In addition, though much of the oil could prove recoverable, it would require prices so high the world will have moved to alternative energy sources by then. 

Finally, environmental concerns may convince humanity to forgo using all its potential oil, which brings to mind a famous quote by architect William McDonough:

"The Stone Age did not end because humans ran out of stones. It ended because it was time for a re-think about how we live."

Foolish bottom line
Peak oil is inevitable in the sense that one day the world will find better alternatives to oil and voluntarily choose to stop using it as much. However, perpetrators of the supply side peak oil myth fail to take into consideration the innovative spirit of thousands of engineers, scientists, and industrialists who are constantly looking for solutions to our energy needs. In other words, it's not inconceivable that your grandchildren might be driving gas-powered cars even 100 years from now. 


Read/Post Comments (19) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2014, at 1:48 PM, pondee619 wrote:

    " quote by architect William McDonough:

    "The Stone Age did not end because humans ran out of stones. It ended because it was time for a re-think about how we live.""

    Really?

    http://www.economist.com/node/2155717

    October 23, 2003

    http://sv-macha.blogspot.com/2009/12/stone-age-didnt-end-for...

    "The Stone Age didn’t end for lack of stone, and the oil age will end long before the world runs out of oil."

    This fabulous and pithy quote from former Saudi oil minister Sheik Ahmed Zaki Yamani in a 2005 New York Times article 'The Breaking Point' is often trotted out by those who wish to ridicule the concept of peak oil.

    http://quotespictures.net/quote-pictures/the-stone-age-didnt...

    I think Mr. Mc Donough quoted the Sheik without attribution. Is it bias on our part to continue the misattribution?

  • Report this Comment On August 06, 2014, at 1:55 PM, krohleder wrote:

    Thanks for the article reminding us that: Things are always more complex. Anther issue is ERoEI (energy returned on energy invested). If you have 70 billion barrels of shale that takes 20 billion barrels of energy to get it then that is not the same as when it used to take; perhaps 1 billion or less. Also the estimate: "the world's remaining oil resources all told stand at 7 trillion to 10 trillion barrels" is possible but doubtful. Even if it is the case, and even if we ignored the ERoEI issue, the worlds consumption of energy will rise with development and technology so that 1 trillion will not seem like so much anymore. We definitely need to explore and develop all avenues of energy that are economically viable.

    Finally your point about the stone age is right on point! I agree that it will be economics that does oil in long before it runs out.

  • Report this Comment On August 06, 2014, at 3:38 PM, AdamGalas wrote:

    Pondee 619: You are correct

    http://en.wikiquote.org/wiki/William_McDonough

    It seems McDonough was paraphrasing the Saudi Oil Minister.

    I was aware of Yamani quote, (which is actually from 2003) but chose the McDonough quote because it better emphasized the environmental reasons we may choose to leave trillions of barrels of oil unused.

  • Report this Comment On August 06, 2014, at 6:23 PM, AdamGalas wrote:

    Krohleder:

    The 7-10 trillion barrels of total oil resources is correct as best as I was able to research. It consists of traditional (non-shale) oil in place + international shale oil (total oil in place estimates) + kerogen deposits + tar sands

    As you point out however, EROEI is important and some of these reserves don't even begin to be profitable until oil is $110.

    Since the costs of such projects can run into the tens of billions of dollars, oil companies won't even attempt them until oil prices go much higher for a prolonged period of time.

  • Report this Comment On August 07, 2014, at 9:55 AM, Universling wrote:

    "At today's production levels it would take 220 to 300 years to deplete all that oil..."

    Nice assumption but resource depletion and economics will make it so that today's production levels will not be maintained for long.

    You can already see it happening. Oil major capex spending has gone all hockey stick on us while actual production has declined.

    That is the bald face of resource depletion and no matter how many words you fools try to throw at the predicament there is nothing that can be done about physics.

    Peak oil is about the production rate. Even if humanity succeeds in extracting another trillion barrels of oil the global production rate will not go up very much from where it is right now.

    That is peak oil and it happens to every well, every region and ultimately the globe.

    Oil demand in the developed world is being killed/destroyed by the high price of oil.

    The high price of oil is due to the fact that the easy to extract stuff has mostly been pumped.

    Easy oil (cheap) is in decline and now we're left with expensive oil.

    So depletion leads to expensive oil leads to demand destruction.

    If it truly were the miraculous "market" switching people to a new source oil production would be going up and the price of oil would be steadily low or even falling.

  • Report this Comment On August 07, 2014, at 10:53 AM, Universling wrote:

    Tight Oil Well Data From:

    10 Incredible Numbers From the Bakken

    By Matt DiLallo

    The Average Bakken Well

    Lifetime: 45 Years

    Lifetime Production: 665,000 barrels. (Lets just round this up to an even 1,000,000 to give the techno-optimists the benefit of the doubt).

    Given those numbers we can learn a lot.

    The US consumes 18,000,000 barrels of oil a day.

    To power this nation for a single day we're going to have to drill and frack (and refrack and refrack) 18 tight oil wells and let them pump for 45 years?

    So there are more than 7,687 wells in North Dakota right now. If we assume that they all produce way more oil than even the fools here are predicting then it will give us enough to fuel the nation for...

    427 days.

    How many Saudi wells would it take to produce that much oil over 45 years? The answer is slightly less than 100. :)

  • Report this Comment On August 07, 2014, at 5:28 PM, AdamGalas wrote:

    A very good point. In the last 11 years E&P budgets are up 400%, to $650 billion/year yet oil production is up just 15%.

    I'm actually writing an article about this at the moment.

    Matt DiLallo also makes some good points.

    With high depletion rates (I've seen 90% declines within the first year in Eagle Ford, 60-70% in Bakken) shale oil typically only gives up 5%-10% of reserves under primary production.

    Studies show that CO2 injection can get that up to 15.1% but it will take new techniques if shale oil's bounty is to ever achieve anywhere close to its potential.

  • Report this Comment On August 07, 2014, at 7:20 PM, AdamGalas wrote:

    Despite that I think my main point still stands.

    Peak oil won't be a supply side issue but rather due to demand loss.

    For example consider this. Oil prices are elevated yet the global economy is still growing. That's from improvements in efficiency that allows the global economy to prosper in an age of higher energy prices.

    Higher demand from Asia and developing nations will still keep oil demand gradually increasing which will keep pressure on oil prices to go higher. As these prices rise the oil industry will be able to afford to extract oil from previously uneconomical areas such as tar sands, kerogen, and ultra deep water drilling in extreme environments such as the arctic.

  • Report this Comment On August 07, 2014, at 8:10 PM, AdamGalas wrote:

    http://www.fool.com/investing/general/2014/08/07/why-oil-com...

    Actually a lot of oil fields are being revitalized by enhanced oil recovery techniques.

    That plus new fields and improved technology is why the CEO of Pioneer Natural Resources is predicting a near 50% increase in US oil production in the coming years.

  • Report this Comment On August 07, 2014, at 9:00 PM, RushLimbutt wrote:

    When oil was around $20 a barrel from 1985 to 2002, optimism about it made some sense, even though it was finite and depletes with usage. But now that it has plateaued around $100 a barrel, I don't see where optimism fits in.

    Not only do we have supply problems - having had to move on to "fracking it" out of shale, but also going deeper and deeper into the ocean. But we also have horrible demand problems - the OECD countries exported a huge amount of their jobs to India and China. 2.54 billion people are now trying to motorize like the west.

    It is one for the psychologists that the price of oil could quadruple in a decade - and remain there - and yet we see article after article crowing about how everything is fine with oil.

  • Report this Comment On August 07, 2014, at 10:22 PM, AdamGalas wrote:

    I'm not optimistic that oil will ever be that cheap again. Indeed for oil to get to $20/barrel would require a depression and no one wants that.

    What I am optimistic about is that the flow of oil we need to get us to a future in which we no longer want to use oil will be relatively uninterrupted.

  • Report this Comment On August 08, 2014, at 11:23 AM, ralfyman wrote:

    According to the EIA, shale oil is expected to peak by 2020.

    Meanwhile, fossil fuel demand is expected to soar due to the rise of many emerging markets.

  • Report this Comment On August 08, 2014, at 11:57 AM, chalem wrote:

    EROEI aside, there is also the problem of flow rates. If the installed capacity only delivers about 1 mbd (Streets, Trucks, Trains etc.) and no more rigs are economically available (credit shortage e.g.), then there can be 200 Trillion Barrels in the Bakken, but it will only deliver some 1 or 2mbd.

    So get used to it and ditch the car.

    Oh, btw, are you better than 500 Million Chindia middle class earners? If not, you will be outbid by them. So you can have all 30mbd for Murrica, but when the Chinese buy your oil out and the market remains free, well, as I said, you can ditch your car.

  • Report this Comment On August 08, 2014, at 6:12 PM, AdamGalas wrote:

    Peak oil has been predicted since 1956, when M. King Hubbert correctly predicted that the US would peak in 1970. That was at 9.6 million barrels/day. Today we have Pioneer Natural Resources's CEO confidently predicting that the US can achieve 50% production growth from here, to 14 million barrels/day.

    As Yogi Berra said, "its difficult to make predictions, especially about the future"

  • Report this Comment On August 08, 2014, at 7:57 PM, AdamGalas wrote:

    Case in point, I've recently spoken with John Cusik, senior mid-stream analyst at Miller/Howard investments and he informs me that the companies he works with think they are in the third inning of a major energy trend that is likely to last 50-100 years.

  • Report this Comment On August 13, 2014, at 11:20 AM, antred wrote:

    If you're so sure that Peak Oil is just a silly myth then perhaps you'd like to explain why the oil majors' (Shell, BP, capital expenditures have exploded in the last decade, while their production of crude has actually shrunk?

    http://ourfiniteworld.com/2014/02/25/beginning-of-the-end-oi...

  • Report this Comment On August 13, 2014, at 11:21 AM, antred wrote:

    You're just like any other denier. Playing the reserve-numbers game like a champ. The problem is, Peak Oil isn't about reserve numbers, it's about our ability to use those reserves, i.e. extraction RATES.

  • Report this Comment On August 14, 2014, at 7:18 PM, AdamGalas wrote:

    I agree extraction rate is the key. Market supply and demand is a self correcting mechanism. If the supply is too low, then prices rise and new technology will allow extraction rates to increase.

    This may not work forever, but it will likely continue for decades, long enough for the world to transition to alternative energy that is more economical.

  • Report this Comment On August 30, 2014, at 12:50 AM, Originofquake wrote:

    Words , visions generated, does any have intrinsic value?

    No . Knowledge is power, that's what it said on the encyclopedia cover. How does knowledge give you power? Tesla had knowledge and J P Morgan destroyed him.

    This group talks of fools with a break even point in a fracked well of $4.04 cents, and yet drill over 7,000 in North Dakota, when natural gas is $4.02 today.

    You realize that if you jack up your leased car and let in run in reverse you will not reduce the mileage on the odometer , but that's what the frackers are doing.

    My point is things are not what they seem to be.

    The US of America is in bed with the Saudis, why?

    19 out of the 20 world trade idiots were Saudis.

    The Saudis are sunnies, and financed the isis idiots, and that's what power does, whatever it wants to do.

    My point, words, knowledge , are a waste of time.

    Goodnight.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3058611, ~/Articles/ArticleHandler.aspx, 12/21/2014 7:06:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement