The Great Oil Deception: Part Three

"Oil Production in the United States is in a permanent decline."

This is one of the loudest of all claims by oil bulls, and the one stated with the most smug self satisfaction, a seemingly impregnable statement that no one with even half a brain could possibly refute. This claim is usually made in conjunction with some comment about M. King Hubbert, and his prescient statement about the aforementioned peak, complete with the required head bowing and reverence for the so called "messiah" of the peak oil movement.

How can anyone deny this after all?

According to the Department of Energy web site, domestic oil production peaked in 1970, at 9.6 million barrels per day. On a monthly basis, it peaked in November 1970, at 10.4 million barrels per day. However, this doesn’t tell the entire story.

1) Production in the U.S has stopped declining and was flat in 2007 vs. 2006. While there is some noise in the numbers due to recent hurricanes, it is estimated that in 2008, production will again be flat before a large 4.1% increase in 2009. The chart below shows the reversal in this decline.



2) During a four-year period, from 1982 to 1985, domestic production grew every year, a legacy of increased oil exploration while prices were high in the late 1970’s and early 1980’s. The total percent increase in domestic production was 4.65%.

Here is a chart from Google Docs. Although hard to see in the chart due to the scale and my technical incompetence in trying to remove the lower numbers, production did increase before tailing off once prices collapsed.



3) Domestic oil production also increased in 1977 and 1978, including a whopping 5% in 1978.

4) Domestic oil production increased 10.3% from 1976 to 1985, from 8.1 million to 8.9 million barrels per day.



5) Recently, sequential production has increased for four straight months (December 2007 to March 2008), although still down on a year over year basis. And yes, I understand that four months does not a trend make, just thought I would mention it.

Why am I wasting time writing this?

To demolish cherished beliefs held by millions of investors who rely on others to do their homework for them. Stop regurgitating what you hear on TV, and do your own god damn research.

What you should really be thinking about is that if production can actually increase in a mature basin like the United States, then imagine what could happen in areas of the world that are at the cutting edge of exploration.

Now before you your make your comments about how stupid I am or how I just don't understand, please read the following about things I am specifically not saying, so please don't accuse me of this:

1) I did not say that U.S production will ever reach its previous peak of 10.4 million barrels reached in 1970, just that production could head up again due to increased exploration.

2) I did not say that it is easier to find oil in the United States.

3) I did not say that the possibility of a small increase in production in the United States will solve all of our supply problems.

Comments

[Alan von Altendorf]

"a mature basin like the United States"

Sigh.

[paultaut]

How much oil will be used to find a new barrel of oil in a mature basin.

[Bored_Skeptic]

So what? The theory does not say that oil production can not increase over periods of time, it simply says that when production is charted, the shape will be roughly bell shaped. Further, no advances in technology were taken into account, when it was developed, (since there were none at the time) and thus it's reasonable to expect such pull backs during the decline.

You haven't advanced yor argument, you haven't provided any new information, and you haven't proven anything other than your ability to grab small pieces of information to support your weak argument. Oil production is declining overall and there is nothing, to date, that can be done to prevent that. Technology has just provided temporary reprieves in the decline rate.

The problem is our continued thirst for more and more cheap oil which is becoming less and less available. There is still plenty of oil for a while, but what's left is becoming harder to get and more expensive to refine. Even if production where to somehow always be able to grow at an annual 1% rate we'd still see high prices because our annual demand growth is several percent higher!

[Johnny Clevland]

LOL! you tell us to do our own research! LOL! LOL! My hands are cramping from so much LOLing! All our technological advancements lead us to 50% of our 1970's production. read trend lines -not short term blips.

[tylakewalker]

So what. The market for oil is global. Long term demand continues to rise. Long term supply continues to lower. Equilibrium price point continues to go up. Alternative energy is needed to SUPPLEMENT existing fossil fuels.

[Jack Yetiv]

Mr. Fox,

I think your disclaimers at the end of the article are good, but they sort of belie the title of the article, don't they?

Do upward movements in domestic production of even half a million bpd (to be generous) out of an 85 million bpd global market really qualify as a "great oil deception"?

I think sophisticated investors all recognize that a doubling in oil price in a period of a year will lead to substantially increased drilling efforts which themselves will lead to moderate and temporary increases in production.

The real question, presented by parts I and II of your series, is whether this will lead to a crash in oil prices. I believe the answer is no. If you believe otherwise, please let us know, and tell us how this relatively small increase (or prolonged plateau) in domestic production will get oil prices back to $50 (or whatever your number is).

If you don't believe that oil will crash, then I think the article is mis-titled.

Jack

[CaptBob]

tylake: You said it all: This idea that greater domestic production will lead to lower prices for the American consumer is fantasy land. That only happens in places like Iran and Venezuela where the State is the Oil Co. Here it goes to Japan at world market prices. More oil depressing world prices means OPEC can merely cut back to compensate=raise prices-(they're running out too).

We made our bed years ago-all our eggs in the oil barrel--now we have to lie in it; and comfort will only come from alternative energy-
well in the future.

[longoil]

David,

You and MK Hubbert are both right.

Hubbert said USA production (for the lower 48 states) would peak in 1970. In 1956, he did not have complete USA picture when he made his forecast for 1970 (i.e. the 1966-67 Alaska drilling results)

Your data also includes Alaska (Prudhoe bay) which came online in 1977, peaked in the early 1980's and started declining after 1985.

The current USA production curve has a double peak: 1970 and 1985.

It is quite possible we will see more peaks when(if) US coastal oil , Bakken oil and oil shale come on-line.

[longoil]

Sorry, I meant Eric, not David

[Sophisse]

How can you post these zoomed-in graphs but not include a complete graph of US oil production? For a post trying to expose deception, you aren't shining a very bright light.

en.wikipedia.org/wiki/...

[jjason]

Phil Davis, on his website, has said that the major oil companies hold leases in the Gulf of Mexico and they are not drilling. Is Phil right?

Also, have any of you read this article:

www.star-telegram.com/...

or this report:

www.commerce.senate.go...

We have been cheated by OPEC, the complicit oil firms, Congress, I-Banks and others.

Enron was involved in price fixing. Don't any of you care about the price fixing now going on in the trading of oil futures contracts?

[yank]

Let's clear the air once and for all on the "greedy" oil companies. The reality is that on every $1 of sales their profit margin is approx 10%. This compares with the following profit margins:

Google- 25%
GE- 12%
Microsoft- 28%
Intel- 28%

Gee, maybe we should be proposing a windfall profit tax on Technology companies? Politicians need to be careful when they throw around the term "obscene profits". What they need to be cognizant of is the "obscene" CAPEX budgets that most oil majors face in trying to replace their reserves. These "pols" have set a new low in incompetence and stupidity.

[drobertus]

Lets look at your graphs again and include mention of the timelines. The top one shows a downward slope over the last 10 years with a projected upturn now that prices are high enough to justify the higher recovery costs. The lower two I don't know what you are trying to show- the middle graph show a 5 years span that includes a bump from the oil spike from horizontal drilling and the brief run up in oil prices, then a decline, and the bottom graph shows a slow rise that the previous graph shows then drops off. Compare that to the top graph of more recent history and you see production dropping to around 7M BPD from the 8.5M BPD. It seems to me that you are selecting graphs that appear to make your point- graph the whole thing from 1970 to today and you can see a few flat spots with raised bumps, but over all a slow but steady decline.

[User 199242]

You open up with all sorts of snide comments about the peak oil movement, and then, lo and behold, everything you say in the article falls exactly in line with what they claim. What was your reason for writing this? It was pointless and didn't accomplish anything at all (besides wasting our time blowing up graphs and showing us noise in long term data..).

[Daisy]

Nearly all of the production increases between the late 70s and the mid 80s you've sited can pretty much be attributed to one massive field: Prudhoe Bay. If there was another one like it out there, it would likely have been found by now, don't you think?

[User 212868]

Oil companies might only make a tiny 10% (or was it 4%?) profit reselling imported oil but make a huge one in domestic oil.

[alphameister]

If we could convert those chips on your shoulder into biofuel, we could stop drilling for oil tomorrow! Barriers on increased domestic production are more political than geological. I'm a bull on oil & gas exploration and also a bull on alternative energy, especially solar.

[StrongR]

I will buy a plug-in when they come out at an affordable price. Meantime, anyone that thinks oil prices are not driven by demand should rent A Crude Awakening available through Netflicks if not other places. Anybody think natural gas in not the major play now?

[bobcousins]

Ok, "Apart from a few insignificant blips, Oil Production in the United States is in a permanent decline".

One of those great articles where the author just confirms the idea he was trying to debunk. Contrariness that leads nowhere is just self-deception.

[Dush]

yank wrote "Gee, maybe we should be proposing a windfall profit tax on Technology companies?"

Oil companies make their money by exploiting a countries natural resources. Those resources belong to the people of that nation. Under a democratic system I am sure they would vote to have a cut of the profits. Technology companiees do not exploit an inheriantly natural resource. They profit from human inovation. Two completely different things.

[longoil]

Dush,

The citizens do get a share of the profits via taxes.
Last year Exxonmobil alone paid $27 billion in taxes.

At least in the USA and Canada, a good part of the oil revenue flows back to the citizens through corporate taxes and a huge chunk via fuel taxes.

In most countries where the oil companies are nationalized, the oil money directly goes in the hands of a few corrupt government leaders or a royal family. Those citizens rarely see a cent of this money.

[yank]

Dush:
I suppose there is no "human innovation" by energy companies trying to figure out the most cost-effective way to extract oil from reserves? Just back up the truck, stick a well in the ground and start pumping. Give me a break please. As LongOil correctly pointed out oil companies pay more taxes to the US Govt than any other industry. Again I would gladly take you to places like Venezuela and Mexico and show you where corruption by the Govt has now led to irreversible declines in oil production, lower oil profits, and hence lower Govt tax revenues. Is that what you want? Leave the oil industry alone. They have enough problems with whack jobs like Chavez and Putin trying to confiscate their profits.

[martinpw]

As others have pointed out, this is not a very well argued piece, and ends up making the point the author is trying to dispute. But just to pick over some of the entrails:

1) Production was flat in 2007 vs 2006 only because production in 2006 was still heavily reduced due to the after effects of Katrina. Check out the monthly data from the EIA here:

tonto.eia.doe.gov/dnav...

it shows that all the gains in 2007 compared with 2006 happened in the first half of the year, when the leftover effects of Katrina were strongest.

2) 82-85 was Prudhoe bay, a massive new field brought online. The real message the author misses is how little effect it had overall, just a minor bump on the way down, no major trend reversals.

3) & 4) are meaningless as production always fluctuates at some level, so sometimes things will go up. The important point is that the long term trend has been consistently down for almost 40 years.

5) Sequential is not a good way to do analysis due to seasonal factors. Year on year is the better way to go, and as the author admits, that still shows declines from 2007 to 2008. No corner being turned here.

Telling others to do their own research is rich coming from someone who completely fails to do a decent research job themselves and instead skews and misunderstands every metric they quote.

[FrankRichards]

As so many others have said, the article does not support the headline. Folding in Alaska made the curve move sideways for a few years. Quadrupling the price of crude gets you an uptick to two years ago's productionl
Dunno what alpha is, but you're not finding it.

[Blutown]

Thanks to all of the posters for being more informative than the original author!

North America and the World will never run out of oil, it will just be too uneconomical to bring to market. Big Oil has already figured this out and that is why relatively little investment has been made despite government incentives for exploration. But don't take my word for it, listen to what T. Boone Pickens is saying these days.

Our reaction to the dramatic increase in oils prices is akin to a junkie realizing that he/she is too broke to afford the next hit. We are too stoned and/or desperate to fully understand the predicament we are in. To me, this is the true "great oil deception".

[Jack Yetiv]

Actually, in many regards, oil will still be economical at $200/bbl because although one might pay $7-8/gallon for gasoline, if that gasoline is poured into a plug-in hybrid yielding 100 mpg, the cost of gasoline per mile will be far less than it is today in a car getting 25 mpg.

Oil will become expensive enough that we will use it selectively and sparingly, rather than squandering it, as we have in the past century.

Jack

[John Sherman]

Just a Seeking Alpha article idea; for example, Oil prices we pay at the pump, so who are the money beneficiaries from the one gallon retail gasoline sales price as sold?

I believe most people, and that includes me, understands that oil is extracted from some oil well somewhere, transported to an oil refiner process where the oil is converted to gasoline, transported to the gas storage and distribution facility, and finally delivered to my local gas station where I can purchase gasoline at the pump.

So the system of providing value added product called gas seems quite-simple, but who gets how much money for each gallon of gasoline along-the-way when I purchase one-gallon of gasoline at my retail gas station pump now at U.S. retail gas station gasoline prices?

So, an interesting article content would explain who, which specific people, collect how much money starting with how much money does the oil-well pump operation receive for oil from which each gallon of gas that could be extracted and distilled to gasoline products from its well operation, and who pays the oil-well from what cash source. Next, the oil-refiner that buys crude oil for distillation into gasoline and the distiller process pays who and how much for each gallon of potential gas value added oil product input into the refinery. Distribution, the gasoline distribution centers, transport and store gasoline for local delivery pay how much money for each gallon of gasoline and who do they pay for each gallon of gasoline. Finally, my local gas station buys a gallons of gasoline from the local gasoline distributor, so how much does my gas station pay for each gallon of gasoline it sell to me at the advertised pump prices. And I almost forgot, if anybody else are middle-persons in this process of producing and selling gasoline that take a "scope of money" without touching the gasoline product as they move through the process to the retail customer me; as a result, add that names of these people, their title, and where they exist or are inserted into the process of gasoline product, and what benefit do these additional people provide (if they exist) to whom or to the process of producing a value added product called gasoline and at what cost?

I would appreciate a good in-depth article about the economics of production of a gallon-of-gasoline and who gets what money along the production process, and to inform me about things I just don't know that are also in the process that take my and other peoples money for what benefit to whom?

Have a good day, Maybe other people that read your articles would find such a gasoline process and its costs along the way: informative.

[oldgoldbug]

Thanks to the author and all the well informed subsequent comments.
To johnesherman - take a look at Valero or Sunoco and you'll get a good insight into some of your questions.
It seems to me that the rocketing oil price might have a lot of hedge fund money propelling it perhaps significantly above the physical markets equilibrium point. If that is the case and if those guys decide they need greener pastures, having made a massive bundle in oil, might they not at least create an airpocket in this advance? Uh oh, as hedge funds they might even turn on oil and start pounding it into the ground (bad pun).
I think the author's point of view might be expanded by considering what could happen to the oil market if demand dropped significantly due to these higher prices and production increased by a couple of %. We might be looking at lower prices before much higher ones.
As far as OPEC goes, the ones most likely to shut in production are the Saudis and they are pushing for lower prices (or so they say) because they are concerned about longterm drops in demand and development of alternative energy sources.
In any event, $140 oil has focused everyone's attention on our energy future far better than any Earth Day observance to date.

[Dush]

LongOil, yes Exxon pays taxes. But the majority of government spending is on welfare, that is welfare for corporations. Check the military budget, the amount spent bailing out banks or subsiding roads or paying exorbitant costs of drugs supported by patent monopolies. Furthermore Exxon pays taxes to the US government. It just won some contracts in Iraq. Paying taxes to a government engaged in an occupation of Iraq doesn't help the Iraqi's one bit. Infact it works directly counter to the majority of the will of the population, as supported by polls.

As is the case of every other area where oil companies or mining companies or any natural resource extracting company steals the natural resources of a country. It's theft unless there is a legitimate democratic government, not puppets. The history of the middle east is obviously dominated by brutal dictators supported by the west, to control resources. Understandably the people want to control these resources themselves. Maybe they would like to hire Exxon to come in and use their expertise to extract their wealth, but they do not have that choice. If they did maybe the contracts wouldn't be so favorable to big oil.

yank, there is innovation in figuring out how to tap oil. But if you are suggesting it is anywhere near the scale of the technology industry I think you are seriously mistaken. The end product to sell is a commodity that the geologic forces naturally produce. Human innovation is required to extract that oil.

With technology companies the innovation is of a much greater level. Computers were born from mathematicians and logicians figuring out if all axioms in mathematics can be proved or not. Today the industry/academia is attempting to employ the most exotic effects of quantum mechanics. They are not selling an inherently natural resource produced by unguided forces of nature. I guess you could reductio ad absurdum this to the fact that the silicon is natural though, but that'd be um, reductio ad absurdum.

Your views on Venezuela's corruption merit some interest. There is much corporation. But a far more interesting metric to me is what the people of Venezuela want. For this we have very accurate polls carried out by western agencies. That, to me, is far more important. Overwhelming they want their oil wealth to be used for social spending. Things like healthcare, education, sanitation and so on.

[Dush]

final para above: corporation = corruption.

Great Fruedian slip there.

[tuckfinitee]

Dush the people of the nation get to use the oil for energy and many other usefull products to make they're lives better. You don't know what money is or it's relationship to the material world. If you would learn that and how wealth is created, and how resources should be managed, I would love to see you rewarded. Admittedly the material rewards are trivial but you might use the freedom to grow intellectually.

[longoil]

Dush,
You are correct, collected taxes are not always optimally spent by the government. But at least, we have some recourse in the voting booth when that happens.

Tuckfinitee,
Your arguement applies well to democracies, but not to countries that control the vast majority of oil resources today. In places like Sudan & Nigeria, the citizens are actually worse off because of their oil wealth. Corruption in goverenment has made made them poorer or dead.

[MonkDonk]

Oil is a non-renewable resource, eventually we will run out of it.
Here is an interesting chain of events that nobody likes to talk about...
1. In 2000, an orbiting space probe discovered evidence of water flows on the surface of Mars. This supported a long held belief that channels and rivulets on Mars surface were created by running water long ago. Water means that life may have existed.
2. Oil is formed from the remains of animals and plants living in a water environment. Over time, the layering of sediment over the remains combined with heat and pressure result in petroleum deposits.
3. Methane was discovered in the Martian atmosphere by the European Mars express orbiting spacecraft. Methane is a hydrocarbon and has been thought to originate, as petroleum, from dead organisms. In the 1990s, a different theory was introduced suggesting that coal and oil may actually derive from methane (www.usatoday.com/tech/...).
4. In 2000,NASA, in conjunction with the Department of Energy and engineers from the oil and gas companies, band together to invent a robotic drill to drill "the water" from within Mars. (www.space.com/sciencea...)
5. In 2004, George W. Bush delivers a speech at NASA touting the exploration of the moon, Mars and beyond in the quest for valuable "resources".
6. In 2006, the prototype of the Mars drill is completed and tested.
My point is the government appears to believe that large reserves of petroleum might exist beneath the surface of Mars. Their efforts are clearly aimed at drilling Mars for "useful resources." How will they get the oil back to earth? I don't know. This may seem farfetched but then again look who's president.

[Eric Fox]

I have been at the Beach all week, so have not been ignoring your comments.

[Eric Fox]

Alan von Altendorf…Although I am not a geologist like you, I do understand that the U.S. is not one giant oil basin. It was a poor choice of words on my part. I think you would agree that the U.S. as an oil producing area is mature.

Paultaut…You said, ”How much oil will be used to find a new barrel of oil in a mature basin.” I am not sure what you are saying. Are you stating that to find one barrel of oil, you have to expend more than one barrel of oil?

Bored skeptic…. You state “Further, no advances in technology were taken into account, when it was developed, (since there were none at the time)”…are you saying that there were no advances in technology in drilling in the 1950’s when Hubbert wrote his paper? This is not true. You also said, “Oil production is declining overall and there is nothing, to date, that can be done to prevent that.” Oil production has steadily increased over the last 70 years worldwide. Also, you said, “Technology has just provided temporary reprieves in the decline rate.” Decline rate is a different concept than production. Just ask Mr. Altendorf.

Johnny clevland….I do read trendlines and did admit in the article that we will never reach 10.4 mm BD in the U.S. My very narrow point is that production can increase for a multi year period within that decline. I don’t think this is generally known or expected by the market. If we can do this in the U.S., then we can do this worldwide.

[Eric Fox]

Tylakewalker…yes, the market for oil is global. No, long term demand doesn’t always go up. Demand is rolling over in the OECD, and this will cancel out demand by the emerging economies. Yes, Equilibrium price point continues to go up, but the cost of finding oil is cyclical historically, and because we have been in a boom period for so long people assume that it is a secular increase in costs. I don’t. Yes, Alternative energy is needed to SUPPLEMENT existing fossil fuels – we finally agree on something.

Jack Yetiv…the term oil deception was a little dramatic maybe, but a catchy headline does draw the reader in. How temporary these production increases are remain to be seen. I haven’t yet drawn the conclusion that there will be a “crash” in oil prices. Maybe a future article?

Long oil….you said “Your data also includes Alaska (Prudhoe bay) which came online in 1977, peaked in the early 1980's and started declining after 1985.” Are you suggesting that we don’t count this production? That we ex it out? Production is production…I don’t mine data. Also, you said “the current USA production curve has a double peak: 1970 and 1985.”…. maybe it is actually a triple peak. Time will solve that mystery.

[Eric Fox]

Sophisse…read the entire article. I stated at the end that we would never surpass our previous peak. I don’t need a chart for that. Maybe you should loo