It is now over 20 years since a pair of European geologists set forth the concept of “peak oil” in Scientific American. When the idea that the world’s oil supply might soon hit a peak was first developed, the world consumed about 63 million barrels of oil per day, and consumption was rising. Official projections at the time forecast that world consumption would rise to 110-120 million b/d in the first decades of the 21st century. These forecasts were based on the idea that oil would be available for the foreseeable future and nobody worried about how much CO2 going into the atmosphere.
An important, but ill-understood, part of the peak oil thesis was the cost of producing the oil. As cheap-to-produce oil was running out in the latter decades of the 20th century, new production sources would have to come from deep under the sea or under the polar ice cap at much higher costs of production.
The technology of fracking horizontal wells for shale (tight) oil had not yet been discovered, so those who understood the problem believed that finding and producing millions of barrels per day of crude at a profit would be difficult.
As oil prices rose from $30 to $140 in the mid-’80s, innovative drillers experimented with better ways of horizontal drilling and fracking. They found success, and with oil prices at around $100 a barrel, the shale oil revolution, which by 2019 was producing nearly 8 million b/d, was underway. Other countries tried to follow the US but for various reasons such as unsuitable geology, the remoteness of deposits, and in Europe, reluctance to clutter up the pristine countryside with oil wells, have been unable to do so.
Shale or “tight” oil from horizontal wells, however, has some significant downsides in comparison with conventional crude. The “oil” from fracked wells is much lighter than most conventional oil and is not suitable for some products or profitable processing in many American refineries.
Moreover, the more important trait of tight oil wells is that they are much more expensive to drill and frack than conventional wells, and then only produce for a few years. It is very easy to lose money on a fracked well that does not yield as much as expected.
Thousands of new wells must be drilled each year to maintain production and, in the US, the total count of horizontal wells now exceeds 110,000. As shale oil turned out to be generally unprofitable during times of low prices, drillers were forced to rely on a constant stream of new investment from banks and other investors who, after absorbing tens of billions in losses, are losing interest.
In 2012, when shale oil started to make a significant contribution to the world’s oil supply, total world oil production was about 91 million b/d. By late 2019, however, when world oil production hit the pre-Covid-19 peak, the world was consuming about 100 million b/d. This means that nearly all the growth in the world’s oil supply between 2010 and 2020 came from fracked oil wells in the US and Canada plus an increase in Canadian tar sands production. “Conventional” oil that comes from vertical wells, both on land and at sea, did not increase very much in the last decade.
After the coronavirus hit last winter, everything changed. Oil demand dropped from 100 million b/d to about 80 million and then climbed to stabilize at about 92 million. Prices, which briefly fell below zero, rose to stabilize at about $40 a barrel in recent weeks. The shale oil industry contracted, shutting down hundreds of the drilling rigs needed to maintain shale oil production. Unless there is a radical change in the pandemic and economic situations, shale oil production is likely to drop further in the next year or so. Without an economic recovery in the next year or two, there will be minimal shale oil production ahead.
For now, world oil production has peaked, but this is because of low demand, not supply shortages. The global economy’s poor state means that capital expenditures of finding and exploiting new oil have dropped around the world. There are too many factors in play to foretell the future — the virus, the global economy, and the world’s reaction to climate change, to name a few.
The demand side will control the oil markets for the immediate future.
However, eventually, the gradual depletion of oil from existing wells and reduced drilling because of low prices or climate change regulations will lead to problems on the supply side. The peak oil story is not over yet.