Living on the Plateau, or You Don't Know Jack #2

I am sure you have noticed the recent drop in crude oil and, therefore, gasoline prices. Much of the drop is the loss of the “OhmygodtheMiddleEastisgoingtoblowup” factor, what with Iran negotiating with the Europeans and Israel withdrawing from Lebanon. The other big factor is the much-celebrated success of the Jack #2 oil well in the Gulf of Mexico. Chevron, the company doing the exploration, announced that there could be as much as 15 billion barrels of oil down there. Well, happy days are here again. Go buy that Hummer you always wanted.

Mmmm…..maybe you ought to wait on that Hummer.

The very existence of Jack #2 sends a message that all is not well in the oil exploration business. Chevron went 175 miles out into the Gulf of Mexico in 7,000 feet of water and drilled 28,000 feet down. It was a record-breaking effort that yielded 6,000 barrels per day. When a major international oil company is crowing about finding oil under a mile and a half of water and five miles of rock, it means that they aren’t finding any in the easy places.

As for the flow and predicted reserves, consider that the U.S. uses about 21 billion barrels a year. The headline number for Jack #2 in the news media has been “15 billion barrels,” but the actual report was “between 3 and 15 billion.” So, if Jack #2, meets its expectations it will someday produce between 52 and 260 days of oil for us, total.

That is if it isn’t repeatedly knocked out of action by Katrina-sized hurricanes of the future. The location of the Jack #2 well is right about where Gulf hurricanes reach maximum strength. Jack #2’s neighbor, the BP Thunder Horse platform, was found tilted 20 degrees after Hurricane Katrina, and has been experiencing technical failures. Its 2005 debut has been pushed back to 2008, with hundreds of millions added to its development costs. The deepwater Gulf is a tough neighborhood.

So what’s with all the optimism, after all the pessimism? The problem is that people in the oil trading business aren’t looking all that far ahead. The crude oil price you see on the news is what people are paying for an oil delivery a month from now. There are “long-dated” futures out to 7 years, but most of the action is for deliveries no more than 30 months away. Ten years might as well be forever.

Let me pull my crystal ball out of its velvet lined box and yank the starter cord a couple of times. While it is warming up, I’ll briefly review the Hubbert Curve. Back in 1954. M. King Hubbert, a petroleum geologist, correctly predicted that U.S. oil production would follow a rough bell curve and peak around 1970, which it did. It has become a generally accepted truth that any oil field or group of oil fields will follow this production curve, rising rapidly to a peak, having a plateau, and then irreversibly declining. By this model, world oil production will hit a plateau at some point. In fact, it seems to have hit that point in 2004. World oil production has leveled off and the line on the graph is wiggling up and down depending upon whether there has been a ribbon-cutting on a new oil pipeline or if a hurricane has knocked over some oil platforms.

Now, to the crystal ball. A rising oil price depresses the world economy and discourages oil use, right? Then we get a temporary oil glut and the price falls. The psychology and economics flip, and economic and social forces push usage back up, along with the price. Get in a lather, rinse, and repeat. There is a certain amount of slop in the feedback loop, and very little spare production capacity, so the price of oil will lurch back and forth, the swings getting wilder as the economic and political reactions get more extreme. Eventually the drop in supply will get large enough that it will cancel out the swings, and the price will rocket up and stay there. What we are looking at is a rough sawtooth wave in oil prices with an eventual upward “hockey stick” graph.

So, enjoy the temporary respite from $3 a gallon gas, but don’t get complacent. It is past time to think about how you are going to live your life with gasoline and heating oil prices double that and more.

Comments

[LizJ]

I am reading James Howard Kunstler's book "The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century." That lead me to explore web sites such as www.lifeaftertheoilcrash.net.

I am a well-educated person, and although I did know that oil is an exhaustible resource and that it was going to run out sometime, I really had not taken the time to find out exactly when this is likely to happen, or to consider its ramifications. I think it's fair to say that most Americans have not thought about this either.

Now that I have learned more, I can say that we should all be very, very concerned. Oil exhaustion very like means "the end of the world as we know it."

Thanks for writing about this. I hope you keep doing so.