Undulating Plateau

Last decade investors were concerned about the industry’s ability to produce oil and gas.  Natural gas conventionally produced was on a treadmill running too fast and producers could not keep up, forcing the price ever higher.  Natural gas consuming industry was forced out of the U.S.  The higher prices spurred technological advancement to fully reverse the trend in an amazing feat.

The same concern existed with oil production.  Hubbert’s peak in conventional oil production remains real.  Yet over the weekend the suggestion was made “to seriously consider whether or not technology has interrupted Hubbert’s bell shaped curve.”  Gregor‘s oil production chart was shown in response.  Perhaps horizontal drilling may have arrested the world oil production decline.

Eagle Ford oil production averaged 60,000 barrels a day in 2011 and looks to be at 500,000 barrels a day by the end of this this year, on its way to 1 million in a few years according to Valero’s CEO Bill Klesse.  Meanwhile, the Bakken production is booming with over two hundred rigs running also.  This chart of oil rigs is amazing.  The Utica commands speculation.  I don’t even know where the Mississippian Lime is located and the Permian has all kinds plays with names like Bone Spring and Wolfbone.  Unsubstantiated rumors and speculation exist about oil under the Haynesville.  Clearly the US can be on a path to net energy independence, if not outright independence.  This decade.  Perhaps Hubbert’s Peak will be militated.

One issue is not a shortage of BTU’s, but having the right product mix to match the infrastructure.  I can’t put natural gas into my car.  My trucker father-in-law is not going to purchase a natural gas semi-tractor until the technology improves.  Yet pricing signals and time are catalysts for the marketplace to work well.

Oil demand is falling in the OECD countries with stagnant growth and efficiency gains, offsetting emerging market growth.  The model one year newer than my Camry is 8% more fuel efficient.  Clearly the geology of Iraq would allow for spectacular production gains absent political strife.

The discussion is not complete without the effect of price.  Higher prices will speed the mitigation process on both the supply and demand side of the equation.  The horizontal oil plays have much better economics at $110 oil than at $80, and with higher prices the producers have more cash flow to invest.

So what about world oil production going forward?  Looks to me like an undulating plateau, the shape of which will be a function of price.

Sources:  Bloomberg, Haynesville Play, Investor Village, Gregor

Hat tip:  Mark J Perry

2 thoughts on “Undulating Plateau

  1. The oil patch is big place, consider sticking to safe jurisdictions.

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