"The Oil Production Plateau: How The Global Oil Grab Affects You"

"The Oil Production Plateau:

 How The Global Oil Grab Affects You"

by Byron King

"I was at a talk recently where a well-known oil economist made an analogy. He said that if you gathered up all the crude oil that people have ever pumped out of the ground since Col. Drake drilled his famous well in 1859, it would cover California to a depth of about 10 feet. “Of course,” he said with a smile, “we don’t have to worry about California drowning under 10 feet of oil. Over the past 150 years, mankind has taken all that oil, burned it, harnessed the energy and put the combustion products into the atmosphere.” Everyone in the room laughed… sort of. We got the thermodynamic point, which is that mankind uses a heck of a lot of oil, much of it via four-stroke engines and that well-known cycle: intake, compression, power and exhaust.

Why has mankind used so much oil? Because global population has risen for over a century, right along with oil use. “People are energy,” as Scott Tinker, the state geologist of Texas, says. And people like oil because it’s energy-dense. A little bit of oil goes a long way, if you use it right. Of course, oil impacts the planet in many ways, good and not so good. Indeed, it’s fair to say that oil defines modernism, even modern civilization. Take away oil, and much else in our world goes away, starting with Big Government and its far-ranging military and police powers. Take away oil, and most of the world’s people go away, too, sooner or later.

Keep in mind that the world’s oil-dependent energy system has been a century and a half in the making. The world — as we know it — needs a constant oil fix, and that won’t change anytime soon. Not without a major dystopian catastrophe.

Flat Output: Enough introduction. Let’s look at some numbers. Every day, the world uses about 84 million barrels of crude oil. That oil, of course, comes out of the ground, from wells scattered pretty much everywhere. Oil comes from the deserts of the Middle East, the frozen tundra of Russia and Alaska. Oil comes, in huge volumes, from platforms in the Gulf of Mexico and North Sea, and wells off Brazil and West Africa. And oil comes in dribs and drabs from stripper wells across the oil patches of America, Canada and many other locales. You get the idea.

These two graphs illustrate the sources and destinations of the world’s daily oil:

First, look at the production side graph. Note how overall global oil output has flattened out over the past five years or so. Is this the proverbial “Peak Oil” plateau, the maximum in global output that precedes a long-term decline?

Some people now hate hearing talk about Peak Oil. They won’t have a word of it. The so-called “fracking revolution” is supposed to solve our energy problems for a long time into the future. Between the Eagle Ford play, down in Texas, and the Bakken play, up in North Dakota, the U.S. is in tall cotton, energywise. Or so I’ve been told. Indeed, lately, I’ve received snarky emails from some readers when I bring up Peak Oil. I’ve been accused of “living in 2005.” One reader asked if I knew that the U.S. “will surpass Saudi Arabia in oil output by 2020.” Well, yes. I received that memo. But there’s more to the story…

I’ve stated many times that the Peak Oil concept is a tool. It’s a lens through which one can observe the world of energy, both to figure out what’s happening now and to forecast possible future scenarios. In simple terms we’re talking about natural depletion.  As we find more “fracking” oil and gas here in the U.S. many “conventional” forms of oil (domestically and globally) are naturally depleting – for example: Alaska’s North Slope, Mexico’s Cantarell field, and other, once-prolific production zone s like Siberia and Egypt.

Indeed, to say the current situation in Cairo has solely to do with natural oil depletion is NOT a far stretch of the imagination. Going forward we’re going to need to produce a lot more oil to make up for this natural depletion. Here in the U.S. we’re actually seeing that happen — it’s that whole “drilling treadmill” idea that we covered last week. Point is, as we find more domestic, unconventional energy we have to agree that the global oil production output — when accounting for natural depletion, — doesn’t jump off the charts. Besides, when it comes to Peak Oil, time will tell. I started thinking about Peak Oil back in the 1970s when I met the geologist M. King Hubbert at Harvard. It’s only been 35 years. I can wait.

Can Consumption Exceed Production? Let’s get back to those graphs. Look at the one for oil consumption. There’s no recent plateau there, right? Globally, oil demand has been steadily growing. It’s pretty clear that more and more oil is moving and burning across the world.

When you compare the two graphs, there appears to be higher oil “consumption” than there is “production.” How can that be? Can the world use more oil than it produces? The difference in production and consumption between the graphs is due to two main things. First is the growing supply of natural gas liquids (NGLs) — essentially “oil” from gas deposits, such as blowing down traditional gas caps, as well as the recent fracking revolution. Basically, the world supplements its crude supply with NGLs.

That NGL phenomenon will work until it stops working due to the dicey economics of what’s called “energy return on investment” (EROI). That is, at some point, eventually, somebody will figure out that they’re putting a barrel of oil in to get a barrel of oil out. Whoops! Busted! At the end of the day, you can’t violate the second law of thermodynamics for long. Physics will prevail. The second aspect of crude oil consumption exceeding production is a quirk of modern technology called “refinery gains.” In essence, down at the refinery, there are ways of transforming a barrel of crude into more than a barrel of refined product.

Here’s a graph that’s based on data from BP. The data show that crude oil production has hit a plateau in recent years at around 82-84 million barrels per day. Yet despite flat oil output, it’s apparent that refinery output has steadily increased. Why? Refinery output has increased due to the proverbial “better living through chemistry.” That is, engineers continually figure out more ways to squeeze more barrels of refined product out of the same amount of raw material. More specifically, refiners take low-cost oil fractions — like distillates, which used to go to asphalt or bunker fuel — and upgrade them to higher-priced chemicals and fuels. More bang for the buck, more bucks for the barrel.

Who’s Burning Oil? As the graphs up above indicate, oil consumption is growing fast in the Middle East. There, population has exploded in the wake of several decades’ worth of more babies and longer life spans. That, and there’s rapid, energy-intense industrialization all across the region. Plus, most Middle Eastern nations heavily subsidize energy use by the populace. Of course, growing internal oil use across the Middle East leaves less oil available for export. Is that a problem? We’re about to find out. We’re exactly on the cusp of that thorny issue. Saudi Arabia’s so-called “spare capacity” is getting squeezed. It’s a problem, and it could transform into a really big problem in short order. Stand by.

The graph above also shows crude oil consumption growing strongly in Asia-Pacific, Africa and South/Central America. It’s the well-known story of how the developing world is… developing. Billions of people are moving toward a higher standard of living. That requires oil.

That said, let’s start off with a simple question… How much oil does it take to be part of the modern world? Today, per capita oil use in the U.S. is about 22 barrels per year and 24 barrels in Canada. That’s how we get our so-called “non-negotiable standard of living.” In Europe, with its famously high fuel taxes, cold apartments in winter and wonderful passenger rail system, per capita oil use is about 10 barrels per year. I suppose that in Europe, their standard of living is slightly more negotiable than ours. Wimps, right? By comparison, in still-developing China, per capita oil use is about 2.5 barrels per year. In even less-developed India, per capita oil use is just over one barrel per year. This doesn’t even hint at the mountainous disparity in energy access between the (few) wealthy people and (multitudes of) poor people.

Think this through. If you’re a North American, using 22-24 barrels of oil per year, will you scale back and use less if the price goes up? Will you negotiate your non-negotiable standard of living? Probably yes, because, after all, you’ve got a lot of room on the downside of your demand. (Look at how those poor Europeans schlep by on 10 barrels per year.)

The bottom line is that the average North American can surrender a barrel or two of oil use. The numbers show we already have! In some respects, we barely miss it. But if you’re Indian or Chinese and using under three barrels of oil per year per capita, what will it take for you to cut back on use? The answer is that you won’t cut back, and you certainly won’t give up your barrels just because of higher oil prices. Indeed, if (actually, when) the price of oil rises, the better-off Chinese and Indians are likely to suck it up and pay what it takes to lay hands on that extra marginal barrel. After all, they want to be modern.

In other words, as the forces of economics unfold, it’s far more likely that average U.S.-Canadian and European oil use will decline than will Chinese or Indian oil use. Indeed, it stands to reason that the “average” Chinese or Indian will pay much more to get one of those annual barrels away from a Westerner. That’s exactly what the numbers show!

Auto Anxiety? Along these lines, the changing demand scenario — wealth and demand shifting from West to East — appears to be playing out. That is, in the established “Western” world, oil consumption in Europe and North America has declined in recent years.

For example, and for a variety of reasons, Europeans and North Americans are driving fewer miles and flying fewer airline flights. Let’s look at our own data, here in North America. According to the U.S. Department of Transportation, Americans drive fewer miles today than six years ago. Adjusted for population, U.S. drivers are racking up about one-sixth fewer miles since 2006. There are fewer registered vehicles, as well. Here’s the long-term chart for miles driven. 

The mileage numbers clearly indicate a structural shift in the U.S. economy. Contrary to one pervasive political myth, Americans don’t just drive more cars with better mileage. They’re driving fewer absolute miles, and in the process burning less fuel. That is, U.S. drivers have changed behavior due to high fuel prices.

What’s happening? We’re competing for the “same” underlying oil barrels — in a world of flat output — against people from developing nations in the Middle East, Asia, etc. Culturally, we in the U.S. like to think that ours is a “rich” country. Yet in the oil pits of the planet, we’re actually getting outbid by developing nations for the world’s marginal barrels of oil.

While I’m on the subject, I should note that other forms of technology account for some of the driving mileage decline, as well. For example, according to the Bureau of Labor Statistics, over 5 million U.S. workers now “telecommute” between a home office or remote site and their “official” place of work. This saves fuel, although it adds a new psychological and social twist to working. In other words, modern workers had better enjoy being around their home and family. It’s also accurate to say that the recent decline in miles driven reflects the lingering economic recession in the U.S. economy. Many people aren’t driving much anymore because they have nowhere they really need to go, and not a lot of money to pay for gas. It’s what happens when a “rich” nation gets poor.

More and More Americans Grounded: The decline in fuel use isn’t just confined to cars and trucks. Aviation industry data reflect a major contraction in available flights and overall airline fuel usage. According to the Federal Aviation Administration (FAA), total airline departures fell over 13% in the U.S. between 2007 and 2011. That is, in 2007, the FAA logged over 10.5 million scheduled airline departures. By 2011, the number had declined to about 9.1 million departures, due to airlines cutting back on routes and trimming their schedules.

It’s interesting that the decline in airline departures didn’t hit too heavily at major hubs, like New York, Chicago, Atlanta, Dallas, Los Angeles, etc. Major hub departures fell from just over 6.2 million in 2007 to 5.9 million in 2011. That’s a pullback of under 5%. But for medium and small cities with airports? Their departure numbers crashed, so to speak. In 2007, medium and small hubs had well over 3.3 million departures. By 2011, that number was down to 2.5 million, a decline of over 24% — which continued all through 2012, although statistics aren’t out yet. Indeed, across the U.S., many small towns lost almost all — if not all — scheduled airline service. They’re now virtually cut off from regular commercial air access.

Other Nations Buy the Oil: The bottom line for the U.S. is that the country’s daily oil demand has declined between 2007 and now from about 21 million barrels per day to about 18 million barrels per day. Any number of politicians brag about how the U.S. economy is “conserving energy” and becoming “more efficient.” Actually, it’s equally arguable that the numbers reflect a nation in long-term economic decline.

There’s another angle to this, as well. While U.S. fuel usage has declined for cars, trucks and airliners, over the past five years, lower U.S. demand has not translated into lower global prices for oil. Why not? Doesn’t the U.S. set the world price for oil? Well, no, not anymore. It gets back to that oil production plateau that I discussed, yesterday. For every barrel of oil that the U.S. isn’t using, other nations are buying it and burning it in their cars, trucks and airplanes. Outside the U.S., global demand for oil is strong, and even rising. The developing world leads the charge.

Six Yankee Stadiums: Looking ahead, is there enough oil to go around? That question gets us back to the crude oil story. How much is 84 million barrels of oil, the amount that the world uses up every day? Did you ever visit the old Yankee Stadium in New York? Here’s an aerial shot of the place from the 1920s, on a day when a full house was rooting for the home team. Yankee Stadium was pretty big, right?

Now imagine Yankee Stadium filled to the brim with crude oil, instead of baseball fans. In fact, imagine six Yankee Stadiums filled to the brim with crude oil. That is, if you filled six Yankee Stadiums with crude oil, you’d have about 84 million barrels, which is about the amount of oil that the world uses up every day in recent years. When you add it all up, at the end of every day, the world has about 84 million barrels to go around — six Yankee Stadiums. Then, all this oil moves by tanker, pipeline and truck to refineries, to be turned into product that keeps the engines turning. When the clock strikes midnight — at least, in a figurative sense — the world has to do it all over again the next day. It’s all day, every day, and quite an industrial process.

The World’s Daily Oil Supply: Could it all just stop one day? Could the world’s oil supply and refining system just shut down and everything seize up like an overheated engine? No, it won’t work that way. But you should anticipate that world oil production will have a hard time increasing upward from the current 84 million barrel daily plateau, due to all manner of technical and capital cost issues — EROI foremost among them.

More worrisome, it’s quite possible that overall, daily world oil output could decrease from 84 million barrels, even with an all-out fracking push in the U.S. Uh-oh. Looking ahead, it’s pretty much written that oil exports to everywhere will decline from suppliers in the Middle East. Middle East demand is growing much faster than new supply additions. (Iraq might offer a bright spot, but that place has its own issues, as I’m sure you know.)

Here we are getting back to that Peak Oil argument. We’re dealing with an idea — and at root, it’s a mathematical tool — to demonstrate that mankind has found and exploited the largest conventional oil fields, with the “easiest” oil already drilled up. (Of course, it’s never truly been “easy” to find and recover oil!) Looking ahead, the world oil industry is all but destined to find smaller, more isolated fields in more remote locales. All while demand is rising.

Getting back to that Peak Oil idea, one reader emailed, “I don’t so much discount Peak Oil as it’s just depressing when you talk about it.” Really? Don’t be depressed. There are a lot of hydrocarbon molecules out there. And here’s the good news: the whole thing is investable. That’s all for now. Thanks for reading.”

- http://dailyreckoning.com/

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