Oil: Does Supply and Demand Still Apply? 15 comments
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We consistently hear from oil bulls that we've reached peak oil as production can no longer keep up with demand. We discussed the demand situation here, but what about the supply? Have we reached a point where we just don't have enough oil to supply demand? In the short term we're close, but in the long term, with prices at these levels, productive capacity will grow. There are many articles that discuss how supply and demand work, but here let's take a look at past data for the oil industry to see this in action.
Below is a chart showing both the price of oil along with the number of exploratory wells drilled for the last 30 years:
Notice how high oil prices in the early 80s resulted in a strong incentive to drill for oil. As a consequence, supply increases, resulting in lower prices. Clearly, with the price of oil being so low from the mid 1980s to the early 2000s, there was little incentive to explore for oil, as profits were too low. This has resulted in the situation we are in today, with little excess supply. Since 2005, however, incentives appear to again exist for further exploration, and we an increase in drilling occurring.
At first glance, however, it appears that the number of wells drilled is still far below where it was during the 1980s. Could this be that we've run out of places to look? Not so. Digging a bit further reveals that as technology has improved, well exploration success rates have increased, as follows:
Throwing substitutes for oil into the mix (e.g. alternative energy), suggests a future for oil similar to the one we've seen in the past: high oil prices result in exploration that increases supply, and increases use of alternatives, as we've seen here. As such, the long term price of oil will decrease as supplies increase and demand declines.
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This article has 15 comments:
According to energy investment banker Matthew Simmons and most independent analysts, global oil production is now declining, from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%.
This is equivalent to a 33% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.
Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.
We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.
This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....
I used to live in NH-USA, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207.
Not to be facetious, but: does the author not grasp the meaning of the term 'peak'? It implies that looking forward at the downslope is vastly different than looking back at the upslope. Peak oil means an entirely new paradigm, and a new paradigm is one in which the tried and true adages and analyses of the past no longer apply, because the fundamental assumptions have been made invalid - that's what defines a paradigm shift.
I also must question what part of the terms 'finite' and 'non-renewable' are not being understood here?
The implicit assumption underlying the author's logic is that oil is an *effectively* infinitely renewable resources - in which case, more exploration and more drilling, over time, will inevitably yield more oil. But we know this to be false.
Interestingly though, on his own graph, the percentage of successful wells peaks in 2005 - which seems to have been when production peaked as well.
Additionally, this seems to be a rather contrived metric to use - it does not make clear that over time, the *size* of the fields being found has diminished considerably! So in this graph a successful well drilled into a field of 1Gb has the same status as one drilled into a field with 10Gb. The percentage of successful wells is not nearly as significant at the ultimately recoverable resources in these new fields, nor as important as the ERoEI for recovering those resources.
In fact, I would argue that the proper way to interpret his graph of increasingly successful wells over time is by explaining this as an example of what Matt Simmons has called 'super straws' - the better the technology for extracting the oil discovered in new fields, the faster those fields peak and then go into depletion.
Simply, this analysis should makes perfect sense to those who believe that financial trend analysis can somehow render moot and thus obviate physical, geological facts.
It is true that in the long term (say 15-20 years?) alternative energy sources will replace the demand for oil, and make it both cheap again, but in the mean time we do not yet have a hydrogen economy or a solar powered electricity grid yet.
Bringing new oil fields into production takes years and a huge investment. The oil majors need the high prices for the giga-investment needed for offshore exploration and production or for shale kerogen/oil conversion.
First, a large fraction (if not majority) the exploration wells are targeting natural gas, not oil. Liquids production may certainly have peaked (not going to argue about when) but the global energy mix features a lot more nat gas usage today (e.g. via LNG production and transport creating an arb market) and it will continue to grow in importance.
Second, the size of new discoveries follows an approx log-normal distribution, with only rare exceptions (e.g. Brazil). You need an exponential increase in exploration success to maintain a constant reserves replacement, and global offtake is increasing, not flat.
Third, enhanced oil recovery is allowing operators to get substantially more oil from existing discoveries than was possible in the past , and technology is also allowing recovery from intervals previously considered unproducable (e.g. shale gas, dominating US growth in nat gas development) These have a not insignificant effect on the supply side as "conventional" plays are replaced by "unconventional".
Conclusion: the supply side is way too complex to simply talk about drilling success rates and some mythical peak from whence liquid hydrocarbon production will be in terminal decline...
> jack
Ignore the really big whoppers of politics, hoarding and weather. These can completely disrupt current concepts of supply and demand.
What is critical is oil available to be bought. Tally production increases, current field depletions and increasing domestic consumption in oil to get World Oil Exports or Net Oil Exports. This peaked in 2005 at 46.342 mbpd, 2006 at 45.838 mbpd, 2007 at 44.832 mbpd, 2008 at about 43.8 mbpd.
From the peak, this creates an oil deficit 3 times larger than the deficit caused by the 1973 Oil Embargo.
Worse, Economic Growth is equal to Energy Growth times Efficiency Growth. Energy Growth has stopped. Efficiency has not changed much. The decay in Economic Growth can be seen in foreclosures.
On the good side, efficiency in urban transportation is at 4%. This can be increased to about 70%. seekingalpha.com/artic...
> jack
Can we drill "new" fields and increase production?
Ans: Yes but only if demand is willing to pay the "New" price=cost + profit!!
There is a point where "The Horse" does indeed step in.
I see (and correct) this error constantly. Peak oil is purely a measure of the flow of oil. It has nothing to with supply falling short of demand (or the amount of oil still in the ground, which is another common error). For example: If the quantity demanded and the quantity supplied both kept rising, but we had an increasingly tight market with slowly rising prices, then we would clearly not be at peak oil (production is still rising), even though "production can no longer keep up with demand".
I also agree with the other comments above.
Ozzy, I agree that the size of the wells is not identified. My intent was to show how a high price increases supply activity. If you have data on the size of the fields I'd love to see it. Regarding trends, I'm not saying we should look at the price trend, I'm showing that high prices result in more exploration which results in more supply. It is erroneous to draw a conclusion that we've run out of oil when it's clear from the chart that the oil price was so low for so long that there wasn't any POINT to finding new oil, which is why we're at where we are. By the way, well drilling peaks in 2007 not 2005, and only because that's the last year of data available! 2008 will mostly be higher still, again drive by incentives considering the high prices.
Tern, In no way does this talk down the spot price. It takes time for oil exploration to yield results. My conclusion clearly states this is a long-term effect.
MattB, agreed the supply side was simplified here. This is just one aspect of the supply/demand effect I'm trying to illustrate, but your points are valid.
Lou, you are right, poor choice of words on my part.