The age of oil will not last forever

Energy independence sounds good, and that's why politicians and oil company executives love to say the words. It's so easy to say, but oh so hard to actually accomplish, which is why the United States has been a consistent importer of oil since the late 1940s.

Recent overblown statements about U.S. energy independence from the oil industry, its paid consultants and the fake think-tank academics it funds simply aren't supported by the numbers. I have discussed this issue in two previous pieces, "The Oil Industry's Deceitful Promise of American Energy Independence" and "Oil and gas industry uses deceptive energy independence message to push U.S. exports".

Recently, friend and colleague Jeffrey Brown--who is best known for his Export Land Model which foretold of shrinking global oil exports--did some fairly simple math to show how difficult it will be for the United States just to maintain its current production, let alone produce all the oil and natural gas it consumes.

In a recent email Brown, who is a Dallas-based independent petroleum geologist managing a joint-venture exploration program, wrote the following: 

The EIA's [U.S. Energy Information Administration's] estimate for the most recent four week average crude oil production rate (Crude + Condensate) [which is the definition of oil] was 7.6 mbpd (million barrels per day). Refinery runs were 15.8 mbpd, and net crude oil imports averaged 8.0 mbpd. The numbers for total liquids are, of course, different.

As several people have noted for some time, the primary problem with the tight[oil]/[natural gas] shale plays is the high decline rate.

At a (probably conservative) 10%/year decline rate for existing U.S. crude oil production, in order to simply maintain current U.S. crude oil production, the industry would have to put on line the productive equivalent of every current oil field in the U.S. over the next 10 years, or in round numbers we would need the productive equivalent of 10 new Bakken plays over 10 years, in order to maintain current crude oil production.

Citi Research [an arm of Citigroup] puts the decline rate for existing U.S. natural gas production at about 24%/year, which would require the industry to replace about 100% of current U.S. natural gas production in four years, just to maintain current production, or we would need the productive equivalent of 30 new Barnett Shale plays over 10 years, in order to maintain current natural gas production.

Companies are not finding one new Bakken play each year; nor are they finding three new Barnett Shale-sized plays each year. In fact, production of U.S. natural gas has been just about flat since the beginning of 2012. U.S. crude oil production continues to grow, outpacing most projections. But, the United States would have to more than double its output from here to supply all of the country's needs.

Keep in mind that U.S. energy independence has almost always been about oil. U.S. coal production has long satisfied U.S. consumption. And, U.S. natural gas imports from 1990 through 2010 averaged just 16.8 percent of total U.S. consumption. Almost all of that came from Canada, the country's northern neighbor and longtime ally.

That percentage came down in 2011 and 2012 to 14.2 percent and 12.5 percent, respectively. It's possible that U.S. production may yet grow just enough to bring that percentage down to zero. But, given the steep production decline rates for natural gas wells being drilled today, it's doubtful that production at a level high enough to avoid net imports could be maintained for very long.

That leaves us with oil. On average from 1990 through 2012, for domestic use the United States imported about 54 percent of its crude oil and petroleum products such as gasoline and diesel fuel (based on historical data gathered by the EIA). In 2012 the percentage had come down from that average to 48.3 percent.* It's progress, but the country is not even close to becoming energy independent. These percentages are based on crude oil and total petroleum products which include natural gas liquids that come from natural gas wells. It isn't clear how to back out these non-oil liquids in the statistics.

Still, the numbers give us an reasonable look at what the data actually say about the prospect of U.S. energy independence, which really means oil independence. The prospects are not good.

Brown points out that we've been down this road once before when the huge oil find around Prudhoe Bay in Alaska boosted U.S. oil production for a time in the 1980s. But Prudhoe Bay peaked in 1988 and has been on the decline ever since then. And, with it went total U.S. production until recently.

Given the potential for U.S. tight oil in deep shale deposits and a high oil price which makes it possible to incur the high costs of getting it out, U.S. production could grow for a time. But at some point the high production decline rates for tight oil wells (around 40 percent per year) will be too much of a barrier, and total U.S. crude oil production will begin to decline once again, Brown believes.

The cornucopian's argument is that the third time's the charm, that the industry can now do what they could not do from 1970 to 1977 [after the peak in U.S. oil production] and what they could not do from 1984 to 1991 [during the boom in Alaskan oil production], i.e., indefinitely maintain the rate of increase in production. And, of course, we are going to do this with the highest overall decline rates that we have ever seen.

Brown says you have to keep in mind that tight oil wells drilled today will in a few years be producing just a small fraction of what they are producing now. And, that means new wells will have to be drilled just to make up for this decline. Only then can production start to grow. As total U.S. production increases and the number of producing wells grows considerably, the number of new wells needed just to make up for the decline in the production of existing wells will grow along with it. At some point it will become impossible both to make up for declines in existing wells and to grow production.

Brown believes that the United States is unlikely ever again to exceed the 9.6 mbpd of crude oil production it achieved in 1970, the peak year. More likely is a continuation of an undulating decline with occasional upturns followed by fresh downturns.

What he finds ironic is that those who are saying that peak oil is dead are using the United States, an oil producer that saw its production peak more than 40 years ago, as the poster child for their arguments. Yes, the ride down the peak can feature a significant bounce here and there, just as--if you'll forgive the analogy--a dead cat hurled downward can appear to show some life as it bounces off the floor.

The oil age may not be dead yet, but Brown believes that the top is nearby--not just for the United States, but for the world. And, that means we are wasting precious time being lulled to sleep by the oil optimists when we should be preparing for a post-peak oil world.

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*I arrive at this percentage by subtracting U.S. exports from total U.S. consumption which includes petroleum products refined for export. This gives me actual domestic consumption. I also subtract U.S. exports from U.S. imports to give me net imports. Then I divide net imports by domestic consumption to yield the percentage of that consumption which is dependent on imports.