via – Bloomberg
Former Toyota CEO James Lentz noted in 2009 that oil production would peak “sometime in the neighborhood of 2017 or 2020.” In hindsight, this observation was extremely prescient: world liquids production is -1.1 mmb/day less than the November 2018 peak level, and crude plus condensate production is -3.9 mmb/day less than in November 2018 (Art Berman). The question is whether or not the November 2018 peak will be surpassed (if it even can be).
The “peak ‘cheap’ energy” question opens up a Pandora’s box of what motivated COVID-19, Net Zero objectives since then, and European deindustrialization which also peaked in 2017 — all of which are examples of demand destruction that restricts prices from moving prohibitively higher. Barring the banking crisis in late 2019, there was already a concurrent and arguably more significant crisis of energy.
This post describes peak oil theory in terms of peak EROI, suggests that a collapse in cheap energy prices would threaten global debt and FX markets, and speculates that it is therefore a plausible motive for COVID-19 and the state policy actions taken on since.
Energy-backed World
Declining oil production in the face of constant (or rising) demand would not only risk resource wars and/or famine, but the loss of cheap energy which could spillover into global debt markets. Debt, private (like a business or personal loan) and sovereign (issued by a nation), exists primarily with the expectation of future growth. The last century of growth has been one of industrialization, built on cheap energy.
To illustrate this crisis, we can imagine an example:
As previously noted, conventional oil reached its resource-limited global production plateau in 2005, at least for oil prices up to well above $100/bbl. Oil prices “well above $100/bbl” would necessarily be expensive for import-dependent nations and prohibitively so in emerging markets. Since the global oil trade is priced in USD, the demand for USD would increase and, to the detriment of the rest of the world, strengthen the dollar FX rate.
A global balance of payments crisis could unfold where a nation’s increase in dollar demand to pay for higher-priced oil drains their dollar reserves. Dollar reserves are typically held as US Treasuries, and access to dollars can be obtained readily in Treasury repo or by Treasury sales. If an nation’s dollar reserves are insufficient to cover the trade deficit, it would face difficulties in meeting its external payment obligations — leading to a vicious cycle of currency depreciation, capital flight, and economic contraction.
Thus, such a scenario playing out over an extended period could ultimately create a marginal incentive to de-dollarize, purchasing energy in foreign currency or in repriced gold. De-dollarization would necessarily collapse US debt markets, as foreign demand for US Treasuries (who own 30% of US debt) declines.
*This scenario is a dramatic simplification that describes only one example, and there are nuances/alternate scenarios that cannot be fit onto this post.
Oil Headed for $150 Without US Support for More Drilling, Shale CEO Says
Oil is headed as high as $150 a barrel unless the US government does more to encourage exploration, according to Continental Resources, the shale driller controlled by billionaire Harold Hamm.
Crude output in the Permian Basin will one day peak as it already has in rival shale regions such as the Bakken region of North Dakota and the Eagle Ford in Texas, Continental Chief Executive Officer Doug Lawler said during an interview with Bloomberg TV. Without new production, “you’re going to see $120 to $150” oil, he said.
“That’s going to send a shock through the system,” he said. Without policies encouraging new drilling, “you’re going to see more pressure on price.”
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via Gorozen
Permian productivity has been a hot topic since well performance dropped last year. That trend looks to be continuing into 2023.
We don’t yet have a ton of data on well history (after you factor in reporting delays), but so far, it looks like performance has continued to fall. Looking at peak rates, Permian wells have fallen from an average peak month production of 986 bbl/d in 2021 to 942 bbl/d in 2022 and now 861 bbl/d in 2023.
Of course, the 2023 numbers are for a smaller sample size than 2021 and 2022, but this is nevertheless worth watching.
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via – Ted Cross
Hubbert’s Peak is Finally Here
06/15/2023
The article below is an excerpt from our Q1 2023 commentary.
Conventional oil production has now unequivocally rolled over. Unconventional production, the only source of growth in global oil supply over the last 12 years, has also significantly slowed. The only growing non-OPEC basin is the Permian in West Texas. Never before has oil supply growth been so geographically concentrated. Six counties in West Texas are now 100% responsible for all global production growth.
Conventional non-OPEC oil production peaked in 2007 at 46.2 mm b/d and now stands at 44.2 mm b/d – 4% below its peak. Including OPEC, conventional global output peaked in 2016 at 84.5 mm b/d and now stands at 81.3 m b/d – 5% below its peak. Even if OPEC has its alleged 4 mm b/d of unused production capacity (something we do not believe), conventional production would barely regain its 2016 peak.
In 2009, we tried to predict non-OPEC production growth based on every major project expected to come online over the next ten years. Based on our modeling, non-OPEC supply would begin to contract by about 200-400,000 b/d annually. New fields would not grow enough to offset underlying field depletion that we estimated at 4% in the non-OPEC world. In our 2Q18 letter, we tackled the subject again. In two essays (“Conventional Oil: The Problems No One is Talking About” and “Conventional non-OPEC Oil in Depth: Declines are Set to Rapidly Accelerate”), we discussed how conventional non-OPEC production was in terminal decline. Our research looks to have been correct.
However, the world has enjoyed a great luxury—it could ignore the problems firmly embedded in conventional oil production. Surging production from non-conventional oil sources more than offset these declines.
Non-OPEC oil production between 2006 and 2015 grew by 8.6 mm b/d. Conventional oil supply contracted by 1.4 mm b/d. Unconventional oil supply more than offset these declines, surging by 10 mm b/d and broken down as follows: US shales grew by 6.8 mm b/d (65% of all growth), bio-fuels grew by 1.9 mm b/d (19% of the growth), and Canadian oil sands increased 1.4 mm b/d (14% of the growth). Please note that out of this 10 mm b/d growth figure, the Permian represents only 1.4 mm b/d or 14%.
Between 2016 and 2023, unconventional production surged by another 7.4 mm b/d, representing all non-OPEC supply growth. US shales accounted for 85% of the increase. However, whereas all the major shale basins grew from 2006 to 2015, only the Permian grew afterward. The Bakken and Eagle Ford peaked at 1.5 mm b/d in 2015, and this year are each expected only to be between 900,000 and 1 mm b/d. Significant unconventional growth also came from natural gas liquids production in the liquids-rich Marcellus and Utica, which we estimate each added 1 m b/d. This source of production growth is now set to fade, while the plateauing of the Marcellus will turn into a decline.
Between 2006 and 2015, the Permian represented only 14% of unconventional supply growth. Between 2015 and 2023, the Permian represented almost 75% of this growth.
Conventional production started declining in the non-OPEC world over a decade ago. Conventional oil production has most likely turned negative in the OPEC world as well. Over the last thirty years, global oil supply growth has come from multiple geographic areas, including the North Sea, Mexico, Brazil, West Africa, and the Former Soviet Union. Over the last decade, however, these areas have had slight growth, and specific basins, such as the North Sea, have experienced considerable declines.
Consensus opinion believed global oil demand would peak in 2019 and gradually decline through this decade. Just the opposite has occurred: demand has come roaring back post-COVID. Global demand in 1Q23 surpassed 102 mm barrels per day — three million barrels above the 1Q19 (pre-COVID) level and almost 2 mm b/d above the International Energy Agency’s (IEA) 1Q23 estimate. Strong demand and faltering supply led OECD countries to release 250 mm barrels of oil from their strategic petroleum reserves to keep prices from surging. Given the seasonality in demand and China’s ongoing reopening, the 4Q23 demand could surpass 104 mm b/d.
From here on out, just six counties in West Texas must meet all global demand growth. Given the strategic importance of the Permian, it’s imperative to understand its underlying health. Using our neural network, we have updated our basin analysis, and the results are shocking. The Permian is likely less than a year from peaking and starting its decline. The only source of non-OPEC supply growth is now primarily tapped out.
Toyota, is the only company whose CEO publicly acknowledged peak oil afaik. The fact that they recently came out and said EVs aren’t the future indicates they have their head on their shoulders and have diligently kept their eyes on oil production, like an automobile company should be doing.