Gail Tverberg: This Is The Beginning Of The End For Oil Production

With the recent collapse in the price of oil, Gail Tverberg, returns to discuss the likely impact on the US shale oil industry, as well as the global market for oil.

Gail is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. These days, she writes at her website OurFiniteWorld.com.

While as an actuary, Gail is one to avoid hyperbole and the let the numbers speak, her analysis of the outlook for future oil production is nothing short of dire:

What we need is cheap energy. We need cheap, liquid oil. When it’s high-priced it really messes up the economy. We need oil to run our cars and to operate our trucks and such things, but it needs to be cheap. And it suddenly is today. 

But, you have to be able to keep pulling it out at that same price. And the critical thing is, we can’t keep pulling it out at that price. What is going to happen, I’m afraid, is that once production goes down, we won’t be able to get it back up again. 

 

There’s several reasons. One of them is that very low interest rates have been helping keep production up. Once you get your interest rates back up because there’s been a lot of failures, particularly in the shale industry, the costs will be higher. So, they can’t pump it out for the same price that they had it before. But, there’s also the issue that these old wells need to be produced continuously and they need continuous investment. If you cut that off, it’s going to be very hard to restart them. So, there will need to be an extra investment just to get it back online. Trying to do that becomes extremely difficult when the price is low. If it’s really an affordability issue, you've got a double hurdle then. Not only do you have to get the price up, but you have to get the price very high so you can get lots of investment dollars so you can kind of make up for lost time, besides everything else. As we know, it takes a long time to get new production online.

 

I think, too, that it gets to be even worse than that, because financial institutions have sold derivatives based on the assumption that things can kind of go along as normal. So, you start seeing very strange motions in terms of the rise of the dollar, the fall of the dollar, and a variety of other things besides just these oil price changes. Over time, what you're going to get is a bunch of business failures. That’s going to come through these derivatives and it’s going to come through the financial system in a different way than just the oil price itself would. We have multiple impacts of these things, some of which are not obvious when you just first look at the story. 

Suppose you have a derivatives problem. If you have a derivatives problem and you have to go back against depositors, your depositors are things like companies that are making payroll payments. So, the big danger is that these payroll funds will be taken in this process of taking the money away to try to get enough money to fund the derivatives problem. Or, they might not be derivatives problems. They might be other kinds of problems that are putting banks under.

If you start taking the money from the oil companies that they were going to use to pay their employees or if you take the money from electricity companies that they were going to use to buy coal or that they were going to use to pay their employees, you have a very bad effect on the economy, which has nothing to do with the shape of the oil depletion curve.

As I said, the big issue I see is an affordability issue. I don't see oil prices bouncing back up again, or certainly not bouncing up very long, for very far. So, for oil production, this is basically the beginning of the end…what we're seeing is the beginning of Peak Oil, basically. The oil production will actually permanently turn down at this point because we will not be able to get it back up, and because of all the financial situations coming along. 

Click the play button below to listen to Chris' interview with Gail Tverberg (44m:20s)