So This is How the Oil Age Ends
Not with a bang but a whimper… Then a boom?
The age of oil ends when new oil becomes too expensive for buyers to buy, and at the same time too costly for producers to extract — not when a suitable replacement is found and deployed at scale. Recent data from S&P Global shows that oil&gas capital investment costs have surged to new heights globally, even as the price of oil has plunged to depths not seen in many years with no demand rise in sight. What follows will be anything but a “sustainable, diversified, and more resilient global energy system” — rather a dislocation lasting decades into the future. Curtain up! The show begins.
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Over the past two decades the concept of peak oil was dismissed as a fringe, disproved idea. The prodigious amounts of shale oil extracted in America, together with the mountains of tar sands mined in Canada made peak oil supply look like a joke. With the rise of radical climate activism in the 2010's the discussion about oil has thus shifted from its limited availability towards its environmental impact: pollution and climate change. For anyone closely following the topic, however, it was clear that Net Zero and “clean” energy initiatives were nothing but magical thinking. Not only because neither wind, nor solar (or hydro and nuclear for that matter) could possibly be made and built at scale without oil, but because electricity from these technologies are simply no replacement for the black gold. There are thousand good technical reasons why electricity’s share of world energy consumption is between 10 and 15% for decades now… Nevertheless, the public was successfully convinced that one day we will no longer need oil thanks to a rapid deployment of “renewables” and electric vehicles. The concept of peak oil has hence been re-framed once again: this time suggesting “peak demand”. The wee little problem is, that peak oil is not (and never was) about supply nor demand alone.
World peak oil happens when the highest record in global crude oil output is set. It doesn’t mean that we have run out of oil, or that production will fall precipitously the year after. In fact, it’s quite possible that global oil output remains flat for many years to come after such a peak in production is reached, then begin to decline somewhat later on. Peak oil output in and of itself doesn’t tell anything about what happens next, how soon the decline in oil extraction will arrive, how steep the fall in output will be, or when will we fill up our car’s tank the last time in our lives. In fact, world peak oil output has already happened in November 2018, clocking in at 85.5 million barrels pumped daily. (At least when we look at the traditional definition of petroleum, which is crude oil plus condensate. If you happen to believe that natural gas liquids, LNG, refinery gains bio-fuels etc. are also oil and can be added to crude oil figures, then yes we have reached new heights just recently at 103.75 million barrels per day. But more on that later.) In terms of world crude production we only managed to get back to 2015–2016 levels (or around 82 million barrels a day) after the pandemic induced slump, and there is still no substantial growth to be seen on the horizon.
Behind these production figures lies the stern reality of geology and physics. Peak oil occurs when easily accessible reserves are depleted, and it becomes increasingly difficult and expensive to extract the remaining pockets of oil. This reality is not something we can out-innovate. Sure, we can come up with better and better technologies to access hitherto uneconomic batches of petroleum, improve the efficiency of extraction or find ways to suck out the last drops of existing reserves. But technology also comes with increased complexity: in order to access hitherto inaccessible reserves, wells have to be drilled deeper, the source rock needs to be hydraulically fractured, and more steel pipe, sand, cement and other materials have to be used per well than at any time earlier. And as large pockets of oil and sweet spots (where oil flows the fastest) deplete, we have to go after ever smaller and ever less productive locations — effectively forcing us to multiply our efforts just to remain on the same production level.
Were it not for the increased energy demand of technology, innovation could go on for quite some time. However, as wells go deeper and require more raw materials (with their respective mining, smelting, manufacturing and transportation needs) more and more energy will have to be spent with every round of innovation. And if we consider that each new generation of wells produce less oil compared to the previous generation we realize that we face a predicament with an outcome, not a problem with a solution. This is why half a century ago less than 5% of the energy of a barrel of oil had to be reinvested into exploration and drilling, and why we now have to spend over 15% of the hard earned energy from crude on getting the next barrel. This ever growing energy demand per barrel retrieved has no upper limit and can be expected to increase to as high as 50% by the middle of this century. At least in theory. And this is where everyday practicalities, and economic realities come into the picture.
The vast majority of the world’s heavy machinery used in mining, agriculture, construction and long distance transport still burns diesel fuel to this very day. And this is equally true to the trucks delivering wheat into a mill and dumpers hauling hundreds of tons of copper ore in Chile. I’m sorry to say, but neither electrification nor hydrogen made a dent on the world’s diesel fuel use. The deteriorating economics of oil production and natural depletion did. Simply put: the world economy could not bear the ever increasing burden of rising fuel prices. Slowly but steadily high fuel costs simply killed demand. It not only forced people to drive and fly less, but also increased transportation, construction, mining and farming costs… To the point where folks not only started to drive less, but buy less. Now you see why new oil has slowly become too expensive for buyers to buy and why demand growth melted down to a big fat zero. Yes, that awfully high pitched screeching sound you hear, Dear Reader, is the sound of the world economy slowly grinding to a halt.
For producers, though, oil has become almost too cheap to produce. Looking at inflation adjusted prices we are already at a level where prices were ten years ago — after their collapse following a trade war between OPEC and American shale producers. And this is where the recent data tracking upstream oil&gas costs from S&P Global come into the picture. Upstream capital costs — tracking the costs of materials, facilities, equipment, and personnel for oil and natural gas producing projects — are back in the range where they were in the early 2010’s when oil prices were twice as high as today. (The same goes to upstream operating costs, now close to their all time high.) For context, the charts linked above (which I cannot reproduce here) are indexed to the year 2000 (at 100), and now stand at around 200 for upstream capital and operating costs, and are above 250 for downstream activities (refining, processing, and distributing petroleum products and natural gas to end-users).
Needless to say, such a combination of low selling prices and record high expenditures both up- and downstream are not a recipe for business success. Practically this means that producers will focus on pumping oil from existing wells (which they can do at even $40/barrel comfortably for a rather long time) and abandon costly projects such as exploration, drilling new wells, building new pipelines, refineries etc... Even if that means a slow decline in oil extraction following the natural depletion curve of existing wells. When it comes to shale oil, however, that means a rather abrupt decline in the years ahead, as fracked wells deplete much faster than conventional ones. Should OPEC open the taps on their existing wells (if there are taps which are not yet fully open), they could suppress prices long enough to drive many shale producers into bankruptcy.
This is just the opening scene, however. If living standards continue to fall across the West — and throughout much of the developing world — even “cheap” oil from existing wells could prove to be too expensive for consumers. And this is not just about oil, but everything we produce. The same depletion curse affects a whole lot of things from mining copper to forestry and even fishing: as we run out of the high quality easy-to-get stuff everywhere, we are forced to go further deeper at an ever increasing cost — just to get the same amount of products as yesteryear. Combined with highish interest rates (or rather a return to the historical norm), trade barriers, geopolitical tensions, an ongoing dedollarization, a global debt crisis, a general erosion of trust and rising uncertainty, we can see that the world economy is not marching towards more growth… Quite to the contrary: a global recession starting this year looks more likely than not.
The world desperately tries to replace once cheap and abundant oil products with “something else” — just to keep the show going a day longer. This is where the energy economics of oil extraction, and the addition of natural gas liquids, LNG, bio- and synthetic fuels etc. comes back to haunt us. While some of these “liquids” can be used in transportation (such as biodiesel and LNG in special trucks and shipping), the overall energy cost of their production is still much higher than that of diesel distilled from crude oil. And as the energy cost of petroleum production keeps rising in tandem with complexity, so will these alternative fuels steal more energy from the productive economy. Corn and soybeans take diesel fuel to produce from sowing to harvest and delivery, as well as natural gas during their transformation into usable fuels. LNG requires 8–12% of its energy content to be spent on super-chilling and delivery. All this above and beyond the already rising upstream production costs — i.e.: increasing material, facilities, equipment, and personnel expenditures — ultimately due to high energy costs when it comes to mining, manufacturing and agriculture.
The snake bites into its own tail at this point: as it takes more energy to produce energy, so does the cost of producing energy increase — making everything else made with that energy costlier still.
This whole civilization was built around cheap fossil fuels, and after the Great Depression of the 1930’s: oil. With the slow agony of the oil age, and as global economic growth turns into stagnation then decline, the longest era of rising prosperity in human history comes to an end. Oil production has effectively hit a high plateau and failed to rise meaningfully over a decade now, even as world population grew by 10% during the same time period. Considering the rise in energy demand of extracting petroleum over the past decade, this stagnation translated into a steep loss of oil products used per capita. Since the production of just about anything (from fish to solar panels) involves oil, the average world citizen has got poorer and poorer over the past decade. As for what to expect, hear out Dr Tim Morgan, former head of research at Tullett Prebon:
If population numbers remain on their established trajectory of continuing (but decelerating) increase, this would leave the World’s average person some 34% poorer in 2050 than he or she is today. At the same time, this person’s real cost of necessities is likely to carry on rising at a rate of about 2.2% annually. Together, these trends imply that the affordability of discretionary (non-essential) products and services will contract by about 80% over the coming twenty-five years.
Let that sink in.
While some regions produced miraculous growth over the past two decades, America and its allies have slumped into a seemingly endless economic malaise — despite their heavily massaged and debt-inflated GDP figures indicating otherwise. The West’s full-fledged proxy war on the world’s largest country and their complicity in the extermination of an entire nation has laid bare their moral, economic and civilizational decline for the entire world to see. The end of the oil age would be hard enough to manage with all its sudden dislocations, looming financial and food crisis, shortages and falls in life expectancy across the world even in peaceful times. With a hubristic western ruling class in full denial of their predicament and with the drums of war beating ever louder over who gets to control the last easy-to-get resources on Earth, however, a bloody and tumultuous end to the oil age looks more likely than ever.
“I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.” — Albert Einstein
Until next time,
B
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If energy is going to be as scarce as you say, it doesn’t seem like our AI use would be sustainable.
With regard to your statement about finding ways to “suck out the last drops of existing reserves,” I suggest reading the Science and Environmental Health Network’s report on Enhanced Oil Recovery (EOR) using carbon dioxide.
A large proportion of remaining oil in place is not in untapped oil fields but stuck in rock pores in existing fields and in the residential oil zones (ROZ) in deeper source rock. This oil can be extracted via heat or solvents/ surfactants. Heat from natural gas is too expensive and the amount of solvents needed at scale is massive.
Enter the U.S. oil industry’s current efforts to expand use of CO2 EOR, which in a supercritical form is an excellent solvent. The industry developed this tech in the 1970, but due to costs it has never produced more than 2-3% of US extracted oil. Industry reports identify two barriers to expansion: (1) limited availability of CO2 supplies, as geologic CO2 sources are limited and fully committed to existing CO2 EOR operations in western Texas and the Gulf Coast, and ; and (2) the cost of anthropogenic CO2. To exploit remaining oil in place and ROZ, the industry would need massive amounts of CO2 from anthropogenic sources, but carbon capture is too expensive, otherwise the industry would have been capturing CO2 for decades. So, public subsidies are needed to help pay for the costs of capturing CO2.
But, how to rationalize public subsidies for carbon capture? Ah yes, to mitigate climate change. In the U.S. the public subsidy mechanism is the 45Q tax credit that currently grants tax credits of $60/MT for CO2 used in EOR.
Now, the U.S. oil industry is lobbying hard for continuation and an increase in the U.S. 45Q tax credit. The 45Q tax credit is one of the few Biden “clean energy” tax credits supported by congressional Republicans and the Trump administration, and not for climate change mitigation purposes.
My point is that if the oil industry needs massive public subsidies to extract this remaining oil, isn’t this an admission that the industry knows it is becoming uneconomic?