What Peak Oil?

With thanks to Dmitry Orlov, our writer

A quick note on where we stand with regard to the terminal crisis of global oil production. Spoiler alert: Peak Oil is doing just fine, sharpening its claws, getting ready to take a big bite out of your flank. Why isn’t everyone running around with their hair on fire over this? Perhaps some key people are wearing the glasses shown above. I have no better explanation, sorry!

To recap, Peak Oil came and went in 2005, causing an oil price spike, followed by financial collapse in 2008, but then a strange thing happened: the US shale patch started growing, and growing, and growing… making up for lots of production losses elsewhere and then some.

But now that growth has stalled. The US is still producing a prodigious 12.3 million barrels per day, making it a world leader, there is no longer much growth at all: a mere hundred thousand barrels a day since the start of this year, and this in spite of very attractive oil prices. The following chart shows that the oil rig count (which is needed to sustain, never mind grow, production, given the rapid depletion rate of shale wells) is showing a slow but seemingly inexorable decline undeterred by any positive oil price fluctuations.

American officials have been complaining bitterly about Russia’s and Saudi Arabia’s voluntary production cuts. Why would a world leader in oil production see it fit to complain that its competitor’s market share is shrinking? That’s because 12.3 million barrels per day is not enough for it! The US is also a net oil importer of around 2.7 million barrels per day (based on 2022 numbers, and not counting its imports of diesel, gasoline and other refined oil products). What’s more, as the following chart shows, the US administration also slaughtered its Strategic Petroleum Reserve (SPR) — an inexplicable move given that the US is not at war and there are no major supply disruptions.

What can we surmise from all of this?

• In spite of relatively high oil prices, oil production in the US is stagnating and the number of drilling rigs is declining. Shale oil has reached a plateau. Given that the annual production declines from a typical shale oil well are something like a third (in very rough figures), this plateau will extend for months and years, but certainly not decades.
• Apparently, the cost of drilling in the US has increased significantly because of inflation. Higher interest rates and lack of (idiot — sorry!) investors are also hampering new financing and investment.
• The bitter complaining about Saudi and Russian production cuts makes the US unwillingness to compensate for them look silly. A reasonable guess is that they won’t because they can’t.
• The slaughtering of the SPR seems like a rather desperate move by the Biden and his Bidenettes chorus line and supporting vocalists. The quip “Après moi le déluge” springs to mind. A leader of the free world who is one pratfall away from Valhalla may not care so much about the future of his blighted land.
• Although there is still a bit of production growth in the oil patch (400 thousand barrels per day since this time last year), careful observers have been able to discern that most of it came from wells already drilled in years past but left uncompleted. The inventory of such wells is now largely depleted.
• The odd willingness of the Saudis to introduce voluntary production cuts shows that they don’t have any ability to increase production either. Same goes for Russia, except that Russia has enough oil to supply itself for many decades and isn’t quite as dependent on oil export revenues as Saudi Arabia. It is, of course, very nice to have foreign oil buyers allow Russia to maintain balanced budgets with a 13% flat tax rate…

The oil traders and energy experts in the US are steadfastly ignoring such unwelcome realities, perhaps because of the effect of the special protective eyewear shown above. A cursory glance at their expert analyses shows an unhealthy interest in China. Perhaps they should care to glance down and try to figure out what’s going to be keeping up their own pants a few short years from now. And then there are the Europeans with their Green Mafia, still tilting at windmills last anyone checked, and still pretending that some Ukrainians on a rented pleasure yacht blew up their gas lifelines (sic!).

Zoom out to a satellite’s eye view of the scene. We have the US with 4.23% of the world’s population consuming 15 million barrels per day of oil out of a world total of somewhere around 100 million barrels a day, and roughly half of those 15 million (the shale portion) is scheduled to disappear over the coming few years. On average, the world may not be doing all that badly as far as oil, but there is one particular patient in the Peak Oil ward whose prognosis is rather hopeless. Can you work out which patient that is?