Peak oil: light sweet crude production has peaked globally

Editor’s note: As controversial as the subject of peak oil is, the comments about global warming and other environmental problems are equally controversial. This site does not subscribe to the view that global warming concern is overblown or that technology ‘”will save us” from man’s overuse of finite natural resources without serious ill effects on many populations due to cost and environmental degradation. But the essay is still highly recommended reading.

By Casey Research

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, in our conversation last week about Syria, we talked about implications for the oil business, and you mentioned Peak Oil. That’s a controversial subject to some, and we’ve had questions about it. Care to comment?

Doug: There shouldn’t be any controversy, as the facts are clear – and there wouldn’t be any, if so many people weren’t so obstinate about misunderstanding plain English. For instance, I was just reading an article the other day, entitled Whatever Happened to Peak Oil?, in which the writer comes across as if not an idiot, then at least intellectually dishonest. He does so first by his reference to an apocalyptic religious prediction, where he implies that those who credit M. King Hubbert’s Peak Oil theory are like foolish religious fanatics, as opposed to analysts of a possible geological reality, and second – and more important – by showing a complete failure to grasp the very simple essence of the Peak Oil argument.

L: Which is?

Doug: In essence, that there is a finite amount of conventional light, sweet crude in the earth’s crust. That statement may not seem like a cosmic breakthrough, on its face. After all, if you have a 42-gallon barrel of oil and you consume 21 barrels, it’s simple arithmetic that 21 barrels remain. On the other hand, wealth is something men create, not something that they simply find. That philosophical fact, however, doesn’t really have much to do with Peak Oil theory.

This theory is widely misunderstood, even by economically literate people, oddly enough. Such people rightly point out that the world will basically never run out of anything, as long as the market is free to set prices. Decreased supply increases prices, which simultaneously causes people to economize, and incentivizes new producers and new alternatives to enter the field. That’s absolutely true, but irrelevant to Hubbert’s point, which was strictly a geological one: The number of conventional deposits of light, sweet crude in the US are finite, and the search for them has been more thorough than anywhere else in the world, and a documented decline in discoveries had to lead to a documented decline in production – of this particular kind of oil.

Peak Oil is a major reason why, in spite of a rapidly cooling global economy, oil prices are still near historic highs, at over $95 a barrel. In part, this is due to so-called “quantitative easing” – i.e., money-printing – but it’s also clearly evidence of the essential correctness of Hubbert’s theory, which accurately predicted the peaking of light, sweet crude-oil production in the US circa 1970. It was not only technically daring, but occupationally and politically dangerous in the ’50s for Hubbert to forecast that the US, and then world production, would go into decline. And he was right.

L: Oil sands were not part of his consideration.

Doug: Right. To my knowledge, he never said anything about oil sands, shale oil, oil from coal, heavy oil from Venezuela, or deep ocean drilling off the coast of Brazil or other places. He did not say, and Peak Oil does not mean, that the world is going to run out of oil. All he said was that the lowest-hanging fruit was picked – the production of that particular kind would go into permanent decline. Technology is constantly pushing both production costs lower and expanding economic supply. But the simple fact that the low-hanging fruit is being depleted at an accelerating rate worldwide is simultaneously pushing costs up. In fact, for many years – especially the ‘0s and ’60s – people discovered a lot more oil than the world produced. But since 1980, the world has produced more oil than people discovered. Petroleum geos believe there are about two trillion barrels of recoverable conventional oil, and we now appear to have produced a bit over half of it.

Unconventional oil supplies of all types could easily be ten times as great as the light, sweet crude supplies we’re depleting – but that’s simply not relevant to Hubbert’s theory, which was a geological statement, not an economic one.

L: There’s no real argument on this point, right? US light, sweet crude production did peak, just as he foresaw.

Doug: That’s correct. And he also predicted that in about 2005-2010, light, sweet crude production would peak globally – and it has.

A lot of people pooh-pooh Peak Oil saying, quite correctly, that we’ll never run out of oil. That’s true partly because of the huge amounts of unconventional oil available, partly because of constant improvements in technology, and because of the basic economic arguments I mentioned earlier. But again, these things are irrelevant to Hubbert’s point and its documented correctness.

The take-away point from all this is that the cost of oil production has likely found a new floor. Peak Oil doesn’t mean we run out of oil – only that the cost of production, which now often runs about $40 per conventional barrel and up to $80 per unconventional barrel, all-in, is never going back down to where it was. Prices can never go back to where they were either, because if they drop – or are forced by law – below the cost of production, there won’t be any production.

Even considering the current economic downturn, which is in fact the Greater Depression beginning, the developing world, especially the Chinese and Indians, is going to be using a lot more oil. It’s just going to have to come more and more from higher-cost, unconventional sources. It’s worth noting that oil consumption in the developed world – North America, Europe, and Japan – is flat and has been for years. The growth in consumption – and there will be growth – is coming from China, India, and the rest of the world, where 80% of the people are.

L: Is there really no chance of ever running out? Even the unconventional stuff must be finite…

Doug: No – or rather, it’s an academic point. As a matter of basic science, oil is really a simple chemical. It’s just carbon, hydrogen, and oxygen, all of which are common and abundant on our planet. We can make oil in the lab now; and at high-enough prices, it would be economic to make oil products in chemical plants, out of these three basic elements. If we’re right about nanotechnology, the cost of synthesizing gasoline and almost any molecules you can think of will drop to trivial levels – with no waste or byproducts.

L: If we ever get cheap, programmable assemblers

Doug: Even without that, they – in particular Craig Venter, who is also responsible for huge breakthroughs in sequencing the human genome – are already working on algae that make oil. There are lots of technological fixes for this. It simply makes no sense to worry about running out of oil in particular or fuel in general. It’s not going to happen.

L: That doesn’t stop the Mad Max wannabes from citing Peak Oil as scientific proof that The End is nigh.

Doug: [Chuckles] Yes, there seem to be two schools of thought relating to Hubbert’s theory. Both are basically reflections of the psychology of the people in question and have nothing to do with Peak Oil. One group says the world is running out of oil completely – the “Mad Max” group you referenced. The other says Hubbert was wrong, and we’ll never run out of oil. Of course, they are right that we’ll never run out, but Hubbert was right about conventional light, sweet oil – which is basically what the world has run on for the last century.

L: Investment implications? People wonder if these more-expensive-to-produce, alternative oil supplies are viable, and the answer is…

Doug: Yes. The answer is yes. But even that’s no big deal, over the long haul. Oil is the most compact, dense store of easily transportable energy we have, making it ideal for vehicles today. Fifty years from now, however, there will be a dozen cheaper and better technologies.

The chattering classes have an innate and most regrettable tendency to become hysterical over any possible problem – most of them temporary, illusory, artificial, or imaginary. Global warming, overpopulation, immigration, food shortages, nuclear power, drugs, genetically modified organisms – they’re all blown up out of all proportion, just like the so-called energy crisis. That’s because hysteria leads to calls for political action, and political action feeds power to the state and its minions.

The fact of the matter is that most things are nonproblems… or absolutely would be if the market was allowed to solve them.

L: Sure – just look at how far electric cars have come. Nobody wanted them before, because something like a golf cart is simply not practical for driving the kids to school, bringing home a cord of wood, or driving across the country. Enter the Tesla Roadster – the thing can accelerate faster than my Corvette. If it could go both as far and fast as my ‘Vette, I might just buy one. But that design is already several years old, and batteries and electric motors keep getting lighter and more powerful. As they get better, there won’t be any point in governments forcing people to buy electric cars – they’ll want them because they are better cars. I’ve already seen free electric-charging stations at rest areas between my house and Vancouver – this could work for me.

Doug: Exactly. Moore’s Law applies here too, though maybe at a different rate. As I like to point out, there are more scientists and engineers alive today than during all the rest of history combined – and they are busy doing things.

L: So would you buy stock in Tesla Motors (Nasdaq:TSLA)?

Doug: I might, but I don’t know the company well enough. And the stock market doesn’t impress me as a bargain, either. Anyway, a great idea doesn’t always make for a great company. It’s a pioneer, and pioneers often wind up full of arrows. I leave that sort of thing to Alex Daley and the Casey Extraordinary Technology team.

L: Other investment implications?

Doug: Well, as I was just saying, oil prices have probably reached a new plateau, based on the cost of production, which is driven by the Peak Oil factor. Prices of raw materials cannot fall below the cost of production, even with government price controls – not for longer than stockpiles last, anyway.

I think the same argument applies for gold and silver – and many other elements and minerals, by the way.

L: So are you buying oil stocks now, or are you looking for lower prices, given your bearish view of the global economy in the near term?

Doug: As with Alex and the technology stocks and you with mining stocks, when it comes to particular oil companies, I follow whatever Marin Katusa says in our energy letters very carefully.

But I have to say that the oil business is different from mining. Mining is a tough and, in today’s world, basically a crappy business. It’s unwanted, expensive, high risk, and has a myriad other problems. They can be addressed, but they never go away. At least on technical grounds, oil is a much easier business; you can see what you’re usually looking for with 3D seismic surveys and one drill hole can both make your discovery and put it into production. Some of those holes can deliver thousands of barrels of oil per day for years. So, as far as the economics, science, and engineering goes, it’s a much better business than mining – but for the same reasons, it’s become much more politicized. That makes government risk even greater than mining.

At any rate, my gut sense is that just like the junior mining stocks, junior oil stacks are bouncing around near a bottom. And oil juniors are almost as volatile as junior mining stocks.

L: Well, whether it’s in oil, technology, or metals exploration, when you go from having nothing but an idea to having a discovery with measurable value, the results for shareholders can be spectacular. The change in value from nothing to something – whatever that “something” is – can make for three- and four-digit percentage gains in days. That’s why we like these “most volatile stocks on earth,” as you call them.

Doug: That’s right. Speculating on a discovery in any of these fields takes nerves of steel and a true contrarian mindset, but for those who have the discipline, the results can be life-changing.

There are literally thousands of these little venture companies you could bet on. You have to be diligent – ruthless, actually – about narrowing the field, which is what makes our “8 Ps” approach to separating the wheat from the chaff so important.

L: The 8 Ps – my mantra and my marching orders. Okay then, thanks for the clarification on Peak Oil.

Doug: My pleasure. See you next week at our upcoming Carlsbad Summit. I look forward to spending time with many of our readers there.

L: Me too – always fun. And for those who can’t make it, we’ll both be at this year’s New Orleans conference.

Doug: Well, speaking of other gatherings, there are efforts to start new Casey phyles in Thailand and Tennessee. If any of our readers live in those areas and are looking for like minds – or if they live somewhere else and would like to find or start a Casey group, they can find out more by emailing[email protected].

L: Very good. See you soon!

  1. Ceausescu says

    Technology cannot fix everything, even though we are highly inovative, and the market is a very good driver of the economy. The reality is that once the low hanging fruit has been picked, what is left is the stuff, where we have to cut down some of the fruit trees to make ladders. Once the fruit we pick going up the ladder is not enough, we will start eating the half rotten fruit on the ground, and even the fruit that may be infested. At that point we are no longer getting such a high net benefit. It is partly true that we will never run out of oil, but if we lose the ability as a result of economic issues to undertake increasingly complex operations to get to it, it might as well not be there.

  2. Pops says

    LOL, you can “make” oil in the lab but you can’t make the energy required to do it, that is the entire point. Oil is a concentrated carrier of ancient energy, like a solar bullion cube.

    The gentleman says oil is finite then says it is effectively infinite. In fact he is correct on both counts, we’ll never run out of oil because at a point it will cost more to extract than anyone can pay – we won’t be able to burn it but it will still be there.

  3. MrColdWaterOfRealityMan says

    Energy depletion in 6 easy steps

    1) Oil becomes scarce, forcing prices up.

    2) Energy return from oil keeps declining, making existing oil less useful as an energy source.

    3) Worldwide, oil use is concentrated in the transportation sector.

    4) Transportation
    of goods and services for the world’s interdependent, just-in-time
    supply chains depends on cheap oil to be profitable and/or possible.

    5) When the energy return from oil can no longer economically support world supply chains, economic activity can’t continue.

    6) The
    process of getting and moving energy from hydrocarbons (oil, coal,
    natural gas) is dependent on a viable supply chain. Even the energy
    supply chain breaks when oil prices get high enough. Oil price feedback
    kicks in.

    7) Supply chain breaks are nonlinear processes. You can survive a loss of hard drives. You can’t survive a loss of food, or
    coal the fuels a power plant that keeps you from freezing in winter. Multiple breaks of critical items won’t be survivable.

  4. blindanddumb says

    cant grow the economy with ever decreasing amounts of oil

  5. GN says

    Hi Doug,

    You are quoted above as saying:

    ” if you have a 42-gallon barrel of oil and you consume 21 barrels, it’s simple arithmetic that 21 barrels remain”

    I fault the logic, although I suspect that you really meant gallons where you say barrels.

  6. David says

    “No – or rather, it’s an academic point. As a matter of basic science,
    oil is really a simple chemical. It’s just carbon, hydrogen, and oxygen,
    all of which are common and abundant on our planet. We can make oil in
    the lab now; and at high-enough prices, it would be economic to make oil
    products in chemical plants, out of these three basic elements. If we’re right about nanotechnology,
    the cost of synthesizing gasoline and almost any molecules you can
    think of will drop to trivial levels – with no waste or byproducts.”

    As Pops stated, the energy to create those hydrocarbon molecules is not “free,” it requires energy inputs to get them into more “unstable” energy states – which we like to call high-energy density transportation fuels. Where is this energy going to come from? The sun? In which case, why not bypass the need to convert from solar to hydrocarbon, liquid fuels (with all of the associated thermodynamic losses) and just use electricity powered by the sun. Humans just don’t have the capacity to cheat the 2nd Law, no matter how many economists wish these happened to be the case.

  7. ttman says

    Remarkable. This Doug both believes the world has peaked in light sweet crude oil production, and simultaneously believes we have nothing to worry about. Just remarkable.

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