What happens when shale production finally peaks and declines in a BIG WAY? Here’s Steve St. Angelo with the answer…
The global economy would be in serious trouble if it weren’t for the rapid growth of U.S. shale oil production. Since the 2008 financial crisis, U.S. shale oil production has increased by more than 6 million barrels per day. Without these additional barrels of oil, the massive money printing and asset purchases by the central banks would not have been as successful in propping up the economy and markets.
We must remember this simple fact; energy drives the markets, not finance. Finance steers the market. So, for the economy to expand, there must be oil production growth. However, it would be unwise for the market-economy to rely upon the U.S. shale industry as the leading driver of global oil production growth for the foreseeable future.
Why? Well, there are several reasons, but let’s first look at how much the increase in U.S. shale oil production has accounted for the rise in global oil supply since 2008. Of the 9.6 million barrels per day (mbd) of global oil production growth 2008-2017, the United States supplied two-thirds or 6.3 mbd of the total:
Interestingly, global oil production minus the United States and Canada didn’t increase in 2009, 2010 or 2011. There was a small bump up in 2012 and finally by 2105-2017 did global oil production minus the U.S. and Canada increase by 1.7 mbd. Now, let me repeat that. If we add up ALL THE OTHER COUNTRIES in the world producing oil, the net increase from 2008 to 2017 was only 1.7 mbd. Thus, of the total 9.6 mbd of global oil production growth 2008-2017, the U.S. (6.3 mbd) and Canada (1.6 mbd) accounted for 82% of the total.
The figures in the chart above came from the 2018 BP Statistical Review. BP will be providing data for last year when their 2019 Statistical Review is published on June 11th. So, I only have data up until 2017. Regardless, I was quite surprised to see overall global oil production flat, minus the U.S. and Canada for the past nine years.
However, the situation in the global oil industry looked much different in the previous decade. From 1997-2007, global oil production minus the U.S. and Canada increased 11.4 mbd, or nearly seven times more than the following decade (2008-2017):
So, from 1997-2007, the overwhelming majority of global oil production growth came from all other countries, not including the United States and Canada, but, quite the opposite took place from 2008-2017 when the U.S. and Canada were the predominant leaders in global oil production. Thus, PEAK OIL seems to be a real factor when we exclude the high-cost, low EROI (Energy Returned On Investment) of Canadian oil sands and U.S. shale oil.
To truly understand the difference in global oil production growth minus the U.S. and Canada over these two periods, this next chart wraps it up nicely:
Here we can see that excluding the United States and Canada, global oil production increased a hefty 18.7% from 1997-2007, but could only add a mere 2.3% more supply from 2008-2017. And that also takes into account the $100+ a barrel oil the global oil industry enjoyed from 2011-2014. So, why so little oil production growth from the rest of the world?
Well, I believe the FALLING EROI and the THERMODYNAMICS of oil depletion are finally wreaking havoc on the global oil industry.
Why The World Shouldn’t Rely Upon The U.S. Shale Oil Industry For Future Sustainable Growth
Even though U.S. shale oil production is likely to continue higher, it will not be sustainable for the longer term. The reason is simple, the MASSIVE DECLINE RATE that plagues the U.S. shale oil industry. But, before I get into that, I want to lay a foundation on the “natural decline rate” of the global oil industry.
The natural decline rate is the amount of oil production loss annually if no new investment is made. And according to the International Energy Agency’s (IEA) World Energy Outlook 2018, the natural decline rate of the world’s oil fields is about 9.5% per year. So, if we take the data from BP’s 2018 Statistical Review and apply a 9.5% natural decline rate to total global oil production in 2017, this is the result:
Global oil production of 92.6 mbd in 2017 would fall 8.8 mbd or 9.5%. However, due to a great deal of investment, the world has been able to keep the actual decline rate, not including additional new projects and fields, to about 3% per year. Unfortunately, at some point, the new investment will not be able to offset the more significant declines in the future.
So, what does the natural decline rate for the U.S. shale oil industry look like? Well, the data from Shaleprofile.com shows that if no new investment were made in 2018, total U.S. shale oil production would fall from 5.26 mbd to 3.0 mbd in just one year:
Now, let me tell you, the data in this chart is by no means, GUESSWORK. Enno Peters who runs the Shaleprofile.com website takes the data from over 100,000 horizontal wells in the lower 48 states to arrive at the chart above. A different color shows each year of new production. By the end of 2017, total U.S. shale oil production reached 5,263,365 barrels per day (bd), and if no new wells were added in 2018 (light blue color), then overall production would have declined to 3,000,000 bd or 43%.
Thus, the U.S. shale oil industry natural decline rate of 43% is not quite five times higher than the average of the world’s oil fields of 9.5%. So, why should the world count on the United States to be the leading driver of global oil production growth with this sort of massive decline rate? Good question. Let’s look back at the Shaleprofile.com chart one more time.
If we focus on 2014’s production (light green color), it topped a little more than 4.1 mbd by the end of the year. If no new wells were added over the next four years, 2014’s shale oil production fell to 1 mbd by the end of 2018. That is a 77% decline in four years. Which means, the inevitable decline of the U.S. shale oil industry will be much more severe than the market realizes.
I believe when the U.S. and the global economy finally falls into a recession (or depression), oil prices will decline. This will be the death knell for the U.S. shale industry. Several readers sent me this article, Canadian Oil Driller Abruptly Shuts Down, Abandons 4,700 Wells. The Canadian energy company went bankrupt because the energy prices it was receiving wasn’t enough to satisfy lease and debt obligations.
The bankruptcy of this company brings to mind Sanchez Energy, which I wrote about in my article, SHALE STOCK LOSES 99% OF ITS VALUE: Investor Warning For The Future Of The Industry? In that article I showed the price chart of Sanchez that once reached $38 in 2014, is now a penny stock trading at a 13 cents a share:
Sanchez Energy has 4,200 net wells in production and owes $2.4 billion in debt. Sanchez reported a negative free cash flow loss of $347 million in 2018, with only spending $613 million on total CAPEX. That is a horrible statistic, which is why Sanchez is now a penny stock. But, I believe most of the shale oil companies will eventually follow the same trend.
For example, Oasis Petroleum’s stock chart looks eerily similar to Sanchez. In 2014, Oasis was trading at $55 and is now trading ten times less at $5.50 a share. Once Oasis falls below its SUPPORT LINE OF DEATH of $5, it will likely end up the same way as Sanchez when it finally dropped below $2.50… it became a penny stock:
Oasis will be releasing its earnings on Wednesday, May 8th. So, it will be interesting to see how the news will impact the price. I BET that it will likely push the stock lower.
Lastly, without the rapid growth of U.S. shale oil production, the global economy wouldn’t have been as successful in pulling itself out of the depths of the 2008 financial crisis. Again, it takes rising oil production to provide real economic GDP growth. If we want to look at what could happen to a country’s currency which suffers a serious decline in oil production, Venezuela is a perfect example of a hyperinflationary outcome.
So, what happens when shale production finally peaks and declines in a BIG WAY? It will severely impact the world economy because with U.S. shale oil accounting for 66% of the rise in global oil production over the past decade, it was the leading driver for economic growth.
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