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Crude oil extraction may be well past peak

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World crude oil extraction reached an all-time high of 84.6 million barrels per day in late 2018, and production hasn’t been able to regain that level since then.


Figure 10. Figure showing the dramatic drop in oil prices when US debt levels collapsed in 2008. The existence of quantitative easing, which affected interest rates, also seemed to affect oil prices.

It seems to me that all the manipulations of debt levels and interest rates by central banks are ultimately aimed at maneuvering oil prices into a range that is acceptable to both producers of crude oil and purchasers of crude oil, including the various end products made possible through the use of crude oil.

Food production is a heavy user of crude oil. If the price of oil is too high, one possible outcome is that food prices rise. If this happens, consumers become unhappy because their budgets are squeezed. Alternatively, if food prices don’t rise sufficiently, farmers find their finances squeezed because they cannot get a high enough return on all of the required farming inputs.

[7] The current debt bubble is becoming overstretched.

Today’s debt bubble is driving up stock prices as well as commodity prices. We can see various pressures around the world associated with this debt bubble. For example, in China many homes have been built in recent years primarily for investment purposes, rather than residential use. This property investment bubble is now collapsing, bringing down property prices and causing banks to fail.

As another example, Japan is known for its “carry trade,” which is made possible by the combination of its low interest rates and higher rates in other countries. The Japanese government has a very high debt level; it cannot withstand more than a very low interest rate. There is significant concern that this carry trade will unwind, an issue that has already been worrying world markets.

A third example relates to the US, and its role of holder of the US dollar as reserve currency, which means that the US dollar is used heavily in international trade. Historically, the holder of the reserve currency has changed about every 100 years, in part because the high demand for the reserve currency allows the government holding the reserve currency to borrow at lower interest rates than other countries. With these lower interest rates, and the need to pull the world economy along, there is a tendency to “spur asset bubbles.” But an asset bubble is likely to have a debt bubble propping it up.

My previous post raised the issue of the economy today being exposed to a debt bubble. There has been excessive borrowing in many sectors of the economy that have been doing poorly. Commercial real estate is an example, as witnessed by many nearly empty office buildings and shopping malls. People with student loan debt often delay starting a family because they are struggling with repayment of those loans.

If any or all these bubbles should burst, there could be a swift downward fall in oil prices and commodity prices, in general. This could be a major problem because producers would tend to leave the market, and world GDP, which depends on energy supplies of the right kinds, would fall.

[8] Oil is an international commodity. Disruption of demand by any major user could pull prices down for everyone.

China is the single largest importer of oil in today’s world. Its economy seems to be struggling now. This, by itself, could pull world oil prices down.

[9] We don’t often think about the fact that oil prices need to be both high enough for producers and low enough for consumers.

Economists would like to think that oil prices can rise endlessly, allowing more oil to be extracted, but history shows that this is not what happens. If there are too many people for the available resources, wage and wealth disparity tends to increase, leading to many more very poor people. Lots of adverse things seem to happen: the holder of the reserve currency tends to change, wars tend to start, and governments tend to collapse or be overthrown.

[10] Simply because crude oil is in the ground and the technology seems to be available to extract the crude oil doesn’t mean that we can necessarily ramp up crude oil production.

One of the major issues is getting the price up high enough, and long enough, for producers to believe that there is a reasonable chance of making money through a major new investment. The only time that oil prices were above $100 for a sustained period was in the 2011 to 2013 period. On an inflation-adjusted basis, prices also exceeded $100 per barrel in the 1979 to 1982 period based on Energy Institute data. But we have never had a period in which oil prices exceeded $200 or $300 per barrel, even after accounting for inflation.

The experience of 2014 and 2015 shows that even if oil prices rise to high levels, they do not necessarily remain high for very long. If several parts of the world respond with higher oil production simultaneously, prices could crash, as they did in 2014.

There is also a need for the overall economic system to be available to support both the extraction of and the continuing demand for the oil. For example, much of the steel pipe used by the US for drilling oil comes from China. Computers used by engineers very often come from China. If China and the US are at odds, there is likely to be a problem with broken supply lines. And, as I said in Section 8, disruption of demand affecting even one major importer, such as China, could bring demand (and prices) down significantly.

[11] Conclusion.

The crude oil situation is far more complex than the models of economists make it seem. World crude oil supply seems to be past peak now; it may be headed down significantly in the next few years. Central banks have been working hard to keep oil prices within an acceptable range for both producers and consumers, but this is becoming increasingly impossible.

We live in interesting times!


Source: https://ourfiniteworld.com/2024/09/11/crude-oil-extraction-may-be-well-past-peak/


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    • kilroy

      A big difference between dwindling supples and turning off the pump. Which is exactly was done when the current puppet took his place and started to read his script and play his Parton behalf of the inbred billionaire class of psychopaths. The truth is in the name. This is why they no longer teach Latin in public schools. Petroleum literally translates to rock oil. Not dead dinosaurs. A renewable source albeit a slow process. Sucks that the truth is always left out of their bullshit arguments.

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