July 2004
Before we can come to grips with our critical world oil situation we must embrace a simple but profound fact: strictly speaking, there is no such thing as oil production. There is only oil extraction.
We humans can't produce crude oil any more than we can produce sunlight or mountaintops. We will continue to pump the finite amount of oil that nature made many millennia ago, and when there is no more readily accessible oil to extract, we will stop pumping and go home.
Now, the world will not run out of oil any time soon. There are still small oceans of petroleum waiting beneath Middle Eastern sands, Siberian ice pack, Venezuelan jungles and Alaskan tundra.
Indeed, right here in the Lower 48, there are yet-undiscovered lakes of oil patiently awaiting the driller's bit. Many billions of dollars will be made by those fortunate enough to discover this oil and bring it to market. We may be entering the Autumn of the Oil Age, but it isn't December 31 st quite yet.
The question for investors is this: What price will tomorrow's oil command? We have recently seen crude sold for over $42 per barrel. Is this a temporary price spike, or part of a major, more or less permanent, upward price trend?
That question hinges on three major factors: Surging worldwide demand, war and terrorism, and a third, not-so-well-known phenomenon: Peak Oil.
What is Peak Oil? It is the name geologists have given to a proven fact of oil exploration and development: when half of an oil field's reserves have been extracted, the field will begin to yield progressively less oil with every passing year, until it yields zero.
Imagine you have a loaf of bread, and you decide to eat half of that loaf with every meal. With the first meal, you enjoy half of the entire loaf. With the second, you get half of the half that remained after the first meal. With the third meal, half of that, and so on, until eventually you're splitting tiny morsels and crumbs, at which point it just isn't worth bothering with anymore.
That's what peak oil is like. With any given field, the big payday is up front, in the field's first half of production. Now, you still get paid as you extract the second half, but it is in progressively smaller amounts , until the paydays are negligible.
Now, before the discovery of the Peak Oil phenomenon, many assumed that rates of oil extraction in any given field could or would plateau at high levels, until there remained no more oil to extract, at which time the well would simply quit producing. Full throttle until the gas tank runs dry, as it were.
All that began to change after Dr. Marion King Hubbert, one of the most respected geophysicists of his time, stunned the world geological community with his audacious and counter-intuitive prediction in 1956 that U.S. crude oil production would peak sometime between 1966 and 1972.
Many of his fellow geologists were both shocked and dismayed. Here was this eminent scientist, holding multiple advanced degrees from the University of Chicago, himself a Columbia University professor, the Director of the Shell Oil Research Laboratory no less —proclaiming a kind of wild-eyed doomsday scenario, at a time when U.S. fields were spurting oil nearly everywhere one bothered to poke a hole. It was almost scandalous.
Dr. Marion King HUBBERT
(1903-1989)
M. King Hubbert, geophysicist, son of William Bee and Cora Virginia (Lee) Hubbert, was born in San Saba, Texas, on October 5, 1903. He received his B.S. from the University of Chicago in 1926 and his M.S. in 1928. While working towards his doctorate he was hired, in 1930, to teach geophysics at Columbia University, where he remained until 1940. He finished the Ph.D. in 1937. From 1943 to 1964 he directed the Shell research laboratory. After retiring from Shell in 1964, Hubbert joined the United States Geological Survey as a senior research geophysicist, a position he held until 1976.
Hubbert is perhaps best known for his studies of petroleum and natural gas reserves, a subject he became attracted to in the 1920s while a student at Chicago. In 1949 he employed statistical and physical methods to calculate the worldwide volume of oil and natural gas supplies, then documented their sharply increasing consumption. In 1956 he predicted that the peak of crude-oil production in the United States would occur between 1966 and 1971. Although Hubbert's interpretation was later judged as essentially correct, his figures of future reserves were much lower than those accepted by many American petroleum companies and leaders of the USGS. As a consequence of his studies of natural resources, he was invited to participate on various government panels, including the Committee on Natural Resources Advisory to President John F. Kennedy, organized by the National Academy of Sciences.
Well, here's the amazing thing: it all came true. U.S. crude production peaked in 1970 at just over 11 million barrels per day—right on schedule—and never reached anywhere near those levels again, introducing the oil shocks of the 1970's. (Since 1970 U.S. production has steadily declined to its current level of around 7.5 million barrels per day, despite the construction of the Alaska Pipeline).
This graph from ExonMobil's February 2004 “Report on Energy Trends” clearly demonstrates the sharp decline of Hubbert's Peak on a world-wide scale.
Obviously. Dr. Hubbert understood something about the behavior of oil fields that his contemporaries did not. What was it? Richard Heinberg, author of The Party's Over: Oil, War and the Fate of Industrial Societies explains:
“Let us trace how Hubbert arrived at his prediction. First, he noted that production from a typical reservoir or province does not begin, increase to some stable level, continue at that level for a long period, and then suddenly drop off to nothing after all of the oil is gone. Rather, production tends to follow a bell-shaped curve. The first exploratory well that punctures a reservoir is capable of extracting only a limited amount; but once the reservoir has been mapped, more wells can be drilled.
This diagram from BP's “Statistical Review of World Energy 2004” shows proved reserves defined as "the estimated quantities of oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under current economic and operating conditions".
“During this early phase, production increases rapidly as the easiest-accessed oil is drained first. However, at a certain point, whatever remains is harder to get at. Production begins to decline, even if more wells are still being drilled .
“Typically, the production peak will occur when almost exactly half of the total oil in the reservoir has been extracted. Even after production has tapered off, some oil will still be left in the ground ; it is economically impractical—and physically impossible—to remove every last drop. Indeed, for some reservoirs only a few percent of the existing oil may be recoverable ( the average is between 30 and 45 percent )” (pp. 88, 89, emphasis ours). This is what we mean by “The End of Easy Oil.” It's not that there will be no more oil in the ground. There will always be oil in the ground. For producers the questions will be, how hard will it be (and thus how much will it cost) to get it out? And, how high will the going rate per barrel have to be to make it worth my while?
Now, as investors our concern in this discussion is simply this: as peak is approached, what is left in the major fields is becoming harder to extract, reducing the growth of oil supply, thus increasing its price .
Growth in crude oil production is slowing, and prices are moving steadily higher. When worldwide growth actually stops, we'll know we're at peak. Then the
long decline in net crude production will set in, and the real price fireworks will have been underway. It's anyone's guess how high the price of crude will eventually go, but triple digits per barrel certainly does not seem out of the question.
But we're getting ahead of ourselves. Even if the U.S. has peaked in production, do we know for a fact we're approaching peak worldwide? That's the key question, which we'll explore next time.
Mammoth Tech Tip
Every computer should have antivirus software and more importantly should be kept up-to-date. New viruses appear everyday, many with the ability to delete files, format your hard drive, or even send your most confidential documents around the world. Unfortunately, millions of PCs are left unprotected by outdated, disabled or non-existent software.
If you have antivirus software on your computer, make sure it is updated at least weekly. Many of the major brands will do this automatically if they are properly set-up. Otherwise, get some. While the price range and variety are near limitless, I recommend trying the software before you buy it. The major brands will have a website with a trial version. This will allow you to use it with your other programs to make sure there will be no conflicts.
I recommend the software we use, Grisoft's AVG. They have a paid and a free version, both of which have worked flawlessly for me for years. You can download either version from them at http://www.grisoft.com I also use the online scan from Trend Micro as an added assurance before I install new antivirus software on a computer. You can try it out at http://housecall.antivirus.com
Daniel R. Northcutt, CISE
Director of Information Technology
Editor, The Mammoth Advantage
Dr. Roger L. Cory
Dr. Roger L. Cory serves as President of Mammoth Resource Partners, Inc. He has a lifetime of experience in both law and business spanning over 25 years. Roger's life passion has always been and remains creating mutually beneficial alliances with investors that become long-term relationships on both a business and a personal level.
Dr. Cory received a Bachelor of Arts-Journalism Degree from California State University at Fullerton and holds a Doctorate of Jurisprudence from Pepperdine University, School of Law. He currently possesses a Series 63 Certification from the Division of Kentucky Securities.
He lives with Toni, his wife of 20 years, and their seven dogs in Metcalfe County, Kentucky. On Sundays they walk their beautiful 50-acre farm where they raise a small band of show cattle, sheep and Tennessee Walking Horses.