Reversal of Fortune: The Fate of Oil

  We noted in this article that a Shell Oil geologist by the name of King Hubbert in 1956 correctly predicted that U.S. oil production would peak in 1970, which it duly did.  It has been said that this is the most successful economic prediction ever made.

Hubbert used a technique called the logistic decline plot to make his prediction.  Well, if that technique worked then, what can it tell us about the likely fate of the tight oil boom?

There are four main tight oil basins and formations in the lower 48, and a few minor ones that are currently producing 3.5 million barrels per day, equating to 40% of U.S. oil production.  The four main basins and formations are the Permian, Bakken, Eagle Ford, and Niobrara, as shown in this map produced by the Energy Information Agency (EIA):

The Marcellus and Haynesville are shale gas basins. 

The EIA also provides the data for the analysis here.  There is enough data to determine how much oil each area will ultimately produce and the rate and the year of peak production.  This is a table of the results:

They all peak in 2015.  The EIA provides monthly production data, and if the forecast in this table is to be borne out, the month-on-month production increases should start slowing appreciably within the next six months.  This is what the production profile of these areas looks like out to 2019:

Let’s now look at the big picture of U.S. oil supply – 94 years of historic production data and a projection ten years forward:

Conventional oil production continues its long decline from Hubbert’s peak in 1970.  The contribution from tight oil, welcome as it has been, will decline as rapidly as it rose.  What has stopped total world oil production from falling in the last few years has been U.S. tight oil.  The downslope of U.S. tight oil will be the equivalent of taking Iraq’s production out of the market, which may happen as well.

We will be paying more for oil as a consequence – that is a given.  The prices of things that can substitute for oil will also rise.  The rigs and workers currently drilling tight oil plays will switch to drilling shale gas wells.  The U.S. has plenty of shale gas, which can be used as an automotive fuel almost straight from the wellhead.  The economics of coal-to-liquids will also improve and become compelling. 

Tight oil and shale gas haven’t taken off in other countries yet.  To date, drilling tight oil and shale gas has worked only in the US due to a combination of favorable geology and low drilling costs.  Near half of the tight oil bounty has been depleted already, though there is plenty of shale gas to come.  That bounty was unexpected half a decade ago.  The decline coming in tight oil production might serve as a wake-up call that we have to get our energy house in order for the long term.

A year after Hubbert’s 1956 prediction in Dallas, another prophet spoke of the necessity for the U.S. to make long-term plans for its energy supply.  This time it was a nuclear engineer, Hyman Rickover, giving an address to a group of doctors, the Minnesota State Medical Association.  Among other insights, he said:

Fossil fuels resemble capital in the bank. A prudent and responsible parent will use his capital sparingly in order to pass on to his children as much as possible of his inheritance. A selfish and irresponsible parent will squander it in riotous living and care not one whit how his offspring will fare.

The shale gas boom has given the U.S. another couple of decades of higher fossil fuel production.  Will we squander that bounty on riotous living, or will we set the nation up for cheap energy and a high standard of living in the post-fossil fuel eternity?  Any scientist, engineer, or politician who has contributed to the demonizing of carbon dioxide, or has been silent on that issue, has disqualified himself from being involved in providing the solution.

David Archibald, a Visiting Fellow at the Institute of World Politics in Washington, D.C., is the author of Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short (Regnery, 2014).

 

We noted in this article that a Shell Oil geologist by the name of King Hubbert in 1956 correctly predicted that U.S. oil production would peak in 1970, which it duly did.  It has been said that this is the most successful economic prediction ever made.

Hubbert used a technique called the logistic decline plot to make his prediction.  Well, if that technique worked then, what can it tell us about the likely fate of the tight oil boom?

There are four main tight oil basins and formations in the lower 48, and a few minor ones that are currently producing 3.5 million barrels per day, equating to 40% of U.S. oil production.  The four main basins and formations are the Permian, Bakken, Eagle Ford, and Niobrara, as shown in this map produced by the Energy Information Agency (EIA):

The Marcellus and Haynesville are shale gas basins. 

The EIA also provides the data for the analysis here.  There is enough data to determine how much oil each area will ultimately produce and the rate and the year of peak production.  This is a table of the results:

They all peak in 2015.  The EIA provides monthly production data, and if the forecast in this table is to be borne out, the month-on-month production increases should start slowing appreciably within the next six months.  This is what the production profile of these areas looks like out to 2019:

Let’s now look at the big picture of U.S. oil supply – 94 years of historic production data and a projection ten years forward:

Conventional oil production continues its long decline from Hubbert’s peak in 1970.  The contribution from tight oil, welcome as it has been, will decline as rapidly as it rose.  What has stopped total world oil production from falling in the last few years has been U.S. tight oil.  The downslope of U.S. tight oil will be the equivalent of taking Iraq’s production out of the market, which may happen as well.

We will be paying more for oil as a consequence – that is a given.  The prices of things that can substitute for oil will also rise.  The rigs and workers currently drilling tight oil plays will switch to drilling shale gas wells.  The U.S. has plenty of shale gas, which can be used as an automotive fuel almost straight from the wellhead.  The economics of coal-to-liquids will also improve and become compelling. 

Tight oil and shale gas haven’t taken off in other countries yet.  To date, drilling tight oil and shale gas has worked only in the US due to a combination of favorable geology and low drilling costs.  Near half of the tight oil bounty has been depleted already, though there is plenty of shale gas to come.  That bounty was unexpected half a decade ago.  The decline coming in tight oil production might serve as a wake-up call that we have to get our energy house in order for the long term.

A year after Hubbert’s 1956 prediction in Dallas, another prophet spoke of the necessity for the U.S. to make long-term plans for its energy supply.  This time it was a nuclear engineer, Hyman Rickover, giving an address to a group of doctors, the Minnesota State Medical Association.  Among other insights, he said:

Fossil fuels resemble capital in the bank. A prudent and responsible parent will use his capital sparingly in order to pass on to his children as much as possible of his inheritance. A selfish and irresponsible parent will squander it in riotous living and care not one whit how his offspring will fare.

The shale gas boom has given the U.S. another couple of decades of higher fossil fuel production.  Will we squander that bounty on riotous living, or will we set the nation up for cheap energy and a high standard of living in the post-fossil fuel eternity?  Any scientist, engineer, or politician who has contributed to the demonizing of carbon dioxide, or has been silent on that issue, has disqualified himself from being involved in providing the solution.

David Archibald, a Visiting Fellow at the Institute of World Politics in Washington, D.C., is the author of Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short (Regnery, 2014).