Crude Observations

That stuff again?

I don’t know about you, but every once in a while I wake up in a cold sweat with a sense of impending doom. I’m sure this is a fairly common occurrence and the product of an over-active mind and not some manifestation of my advancing years or chicken wing habit.


But what caused this panic? Was it the planned reckless use of the Notwithstanding Clause by Doug Ford in his no-holds barred efforts to show Toronto City Council that he’s the new sheriff in town? Was it the ongoing NAFTA renegotiation or the urgent non-urgency with which the Feds are treating their still unfolding TransMountain disaster. Was it Bill C-69 and the nefarious Liberal plot to finally chase the last new investment dollar out of Canada? Nope, none of those.


Was it the relentless advance of Hurricane Florence onto South Carolina or the prospect of a deepening disastrous trade war with China, Russian troop movements or Iran sanctions? You’d think, right? But no, none of those.


Was it runaway inflation, asset and stock market bubbles, a flooded condo (real thing)?


No, it was something much more catastrophic than that. I think it was the sudden realization that the sector and industry that I know and love and that pays for my ho-hum middle class life style has 5 years left. Yes, at that point the industry will be in terminal decline. Game over. Lights out for oil. How do I know that? Well no less a source than the Wall Street Journal which blared out in a headline for all to see:


Could Oil Demand Peak in Just Five Years?

Recent forecasts point to oil growth ending far earlier than many in the industry expect


Jarring isn’t it? Peak Oil, the lodestar of the climate movement, a mere half-decade away – not even long enough to do adequate consultation on a pipeline project. Makes you want to just stop what you’re doing and pack it all in.


So, how does this venerable publication know this? Well they cited a report by the eminent energy and economic forecasting think tank – the Carbon Tracker Initiative, supported by similar analysis by a Norwegian risk management firm called DNV GL.  Who? What? I mean they’re saying it’s happening, right? And it’s supported by all the other forecasters, think tanks and industry analysts out there, right?


Well, actually, no. Not so much.


Phew, fear partially averted.


But what gives? Why the fear-mongering? Why now? Well it seems to me that this story cycles through the market every year or so and mostly in Q3 or Q4 right when budgets to fund environmental NGOs are being finalized.


Interestingly, I don’t actually disagree with “ Peak Oil” – on either the demand or the supply side. However, being a resident of what I like to call the real world, I’m inclined to dispute the timing.


And, since we are talking about a subject that gets recycled every year, I’m going to shamelessly do the same and pull out an old blog and apply the R’s – Reduce, Reuse, Recycle.


Peak Oil – the Lodestar


So, before we go too far, let’s talk about the difference between Peak Oil Supply and Peak Oil Demand.


Peak Oil supply was the theory that the discovery, exploitation and production of that non-renewable resource we all love to hate but can’t live without was going to hit an eventual peak and inevitable decline because there just weren’t any more big oil deposits left to be found. Prices would spike and force the world to find alternatives or live in chaos.


What Peak Oil failed to take into account were unconventional resources such as the oilsands, tight oil and the like and, most tellingly, human ingenuity and our ability to problem solve our way out of scarcity.


So, the “Peak” never actually arrived and new, seemingly endless supplies of unconventional reserves swamped the market and dropped prices like a stone. So much for Armageddon.


Peak Oil Demand on the other hand says that in an electrifying world, the demand for crude oil and related products is going to hit a peak level at some point in the future (very soon you fossilized fossil fuel loving fossils!) and then decline, mainly driven by switching to EV’s in the transportation sector and decarbonisation as the world seeks to hold back the ravages of climate change. So this time the decline in consumption of oil is driven by fiat and tax, not economics.


Last year it was Wood MacKenzie speculating that Peak Demand was likely to occur by 2035, but now my dear readers, a mere 12 months later we find ourselves staring directly in the face of a mere five years.



Heavens to betsy – whatever is to happen to my beloved industry???


As per usual I was on Twitter, so I got to read all the assembled intellectual rigour of the 280 character crowd, because to them peak demand is already here and the dead and dying energy industry had to pack up its bags and leave so that windmills, solar panels and cars powered by what are basically massive cell phone batteries could have their time in the spotlight along with bicycles. Of course there was a fair share of people who swear that peak demand will never arrive – whack jobs from the other side of the political spectrum I think.


All very alarming right? I mean, who wants to work in an industry that’s going to be in terminal decline in 5 years? What’s the point? And according to Twitter, and some guy named @Fossilfuelssuck678, the industry may actually already have entered its death spiral. WHY EVEN SHOW UP FOR WORK!!!!!


So, take a deep breath and think for a second. What do the other experts say? A quick review shows that pretty much every other industry analyst out there is still sticking to their 2035 time-frame. A few are 2040. No one is in the 20s. A couple just roll their eyes.


So why the difference? Why are these two groups convinced that 2023 is the beginning of the end. While I’m sure it can’t have anything to do with the political leanings of their paymasters, I figured I could at least check some of the reasons.


“It’s not a scenario; it’s just obvious,” says the Carbon Tracker report’s author, the preposterously named Kingsmill Bond (long lost son of James?).  OK then. I’m out!


“The transition is undeniable” says the author of the other report.


Undeniable and obvious because government subsidized renewable energy is replacing fossil fuels at an accelerating pace and electric vehicles are going to take over the world. I don’t know – I find it hard to buy.


Look, 2023 is the blink of an eye in the energy world.


But these guys do have a point, the world is transitioning so it pays to be on the ball and look at the why’s and how’s of that transition.


So let’s look at the more realistic scenario. Because it’s worth understanding.


So, 2035. That’s a long way off. The Wood Mackenzie people are smart – they aren’t going to run around doing a Chicken Little dance. Turns out they are a little more sober in their assessment. Driving growth in demand through 2035 was China, India and other rapidly growing, rapidly industrializing non-OECD countries while the more mature economies of the OECD would see plateaus then secular declines in demand.


So 2035 is still in play, not 2023. Phew, right? I mean I plan to be retired and driving an electric golf cart by then. So, if Peak Demand is coming, what does that mean for little old me and the energy world?


Well, let’s start with some numbers, because that matters.


Demand for oil in 2018 is expected to grow by about 1.8 to 2.0  million barrels a day. That’s a lot. We will soon pass the 100 million barrel per day threshold, likely this year – November 17 in fact.


Assuming that demand will continue to grow by 1% a year through the theoretical peak (as Wood Mackenzie does), we end up with demand for oil of about 117 million barrels a day in 2035. Let’s further assume that demand after the peak declines in a similarly civilized and predictable manner, let’s say by the same 1% a year. What we end of with is a scenario where by 2050 or some date 30-35 years from now, the world is consuming the same amount of oil as it is today. Which is an enormous amount of oil.


Put another way, meeting only the demand “growth” and subsequent decline over the next 35 years that brings us back to today’s levels of consumption would require about 100 billion barrels of oil in total.


Factor into this the decline rates of various fields around the world, estimated at about 5% or 5 mm barrels a day or, roughly 2 billion barrels a year over that same 35 year period and you are now at about 178 billion barrels of new oil needed to meet the peak demand scenario – an amount equivalent to ALL of Canada’s oilsands. If only we could ship it somewhere…


Let’s also not lose sight of the fact that the existing baseline production requires constant investment and upkeep, so decline rates may in fact be understated.


The point here is that the demand scenario contemplated in the Peak Oil demand thesis still requires a mind-boggling amount of oil for the foreseeable future.  Contrary to the views of many in the anti-oil crowd, the term Peak Oil Demand doesn’t mean demand stops on a dime, today, in five years or in 2035. It means that at some time in the fuzzy future, all other things being equal, growth in demand is probably going to peak. Are we going to meet all this needed extra capacity by squeezing every last drop out of the oilsands? Not likely. But it has to come from somewhere, so why not? The point is we have a lot of reserves that can still be accessed cheaply and therefore will be used.


The biggest argument supporting Peak Demand and the one trotted out most often to argue that fossil fuels are a dying industry is the replacement of the transportation fleet with electric vehicles. The basic premise being that since transportation represents about 65% of oil consumption, then it’s really just a simple matter of everyone getting a Tesla and banning internal combustion engines, oil demand falls off the cliff and the planet is saved – bob’s your uncle.


Never mind the logistical and fiscal nightmare of replacing more than a billion vehicles and building a charging infrastructure, the real fallacy here of course is that the cars and passenger vehicles are only a portion of the consumption of oil – it’s the heavy use vehicles, trucks, boats, airplanes and there is currently no commercially feasible battery-powered solution in place for these. I don’t doubt it will come, but it’s not here and won’t be for a long time, no matter how much we talk about it on social media.


The problem with the spin doctors and enviro-prophets who preach and propagate this line of thought is that they end up making easily influenced leaders chase bad policy.


A couple of examples.


Consider the proposed banning of internal combustion engines by certain dates by various countries. Seems like a good idea right? Environmentally responsible, carbon-loving and hip. Might even accelerate Peak Oil demand! But, this is foolish and short-sighted policy on so many levels. Aside from the emptiness and unenforceability of it, first it punishes domestic industry, second it eliminates choice for consumers and we all know what a great track record government has in selecting winners Third, in the rush to be seen as doing something/anything, the anti-oil bandwagon creates a situation where one policy can cancel out the effectiveness of another. If you already have a robust price on carbon, shouldn’t you let the market determine the best way to maximize efficiency and reduce emissions – isn’t that the point? If we are going to ban these types of vehicles then why bother with a carbon tax? Better yet, if we are going to ban internal combustion engines, why do we need subsidies for electric vehicles?  What about the gas taxes, which have been in place forever, that fund everything from roads to renewable energy. Never mind that internal combustion engines are improving all the time. Hybrids use about 1/3 of the gasoline of a comparably sized non-hybrid. Why an EV? Hydrogen batteries are on the way. How do we even know that the current EV incarnation is going to be the standard. First to market, yes, but so was Beta. In the meantime, demand for oil keeps growing.


As another example, consider the short sightedness of governments that have no clue how the energy sector works or its size and complexity and who impose new and well-meaning regulatory burdens on the energy sector under the guise of “responsibly growing the economy while protecting the environment” that actually accomplish neither. Infrastructure projects don’t get done, investment dollars go elsewhere, product is shipped by alternative means that are either unsafe, not environmentally responsible or over-loaded, supply growth in the region slows and the economic opportunity is lost domestically but seized by other parties who have a much less magnanimous view of the environment and regulation. In the meantime, demand for oil keeps growing. And you’ve just in essence handed a cheque to a despot.


How do the two preceding examples relate to Peak Oil Demand?


Easy – both arise out of a misinformed and narrow world view that if Peak Oil is coming, it must be hurried along with government guidance, having little regard to the complexity of the undertaking or the economic consequences of these decisions. Demand continues to grow – energy is cheap and cheap energy is needed to bring people out of poverty. But meanwhile in fantasy land, we continue to put up all these roadblocks to exploiting a resource that is going to be very much in demand for decades to come, peak or not, because of the staggering reality of how much we already use.


And this is where the Peak Risk of the Peak Demand lies. Because we have politicians who live inside 2 and 4 year election cycles, very loud environmental lobbies stifling development at every turn and massive electric vehicle hype and frenzy fed by the media, we are in a situation where people (in general and in positions of power) start to, deliberately or otherwise, misinterpret what Peak Demand actually is. They act like we are already in a declining demand environment and implement policies that may be vote winners but ultimately will only penalize the people that governments are purportedly elected to help.


And you get the charlatans and special interest groups whose timelines continually get shorter.


All it leads to is a confused discussion of what Peak Oil Demand may or may not be. We hear it all, but the reality is different. Given how much oil we need regardless of whether peak oil demand is a thing or not, if we let the fringe and hype make us take our eye off the ball now on exploration and production and the amount of oil we need, we are done societally – we are just not ready for an alternative.


Look, 17 years is a lifetime in any industry, never mind 35 and things can change – I’m happy to be wrong. But 17 years ago everyone thought the world was going to come to an end because of a date change, iphones didn’t exist, blackberries were a fruit, Beyonce was in a trio and the West Wing was a TV show, not a side show.  But the one constant is that the world thirsts for more and more energy. It did then, it does today and it will in 17, 35 and 50 years, regardless of whether one component sees its demand “peak” after a century and half of continuous growth.


Abundant and cheap energy is the fundamental contributor to our quality of life and we should maintain and develop all the resources we need to ensure the survival of the species – including oil.


Peak Oil Demand? Maybe. But right now? No. Five years? No. For most of us, it’s so far off it may as well not exist.


Prices as at September 14th, 2018 (Sept. 7, 2018)

  • The price of oil rose during the week on supply fears before giving ground on emerging market concerns. Can you say yoyo?
    • Storage posted a decrease
    • Production was flat
    • The rig count in the US was up marginally
  • After a smaller than expected injection, natural gas did nothing during the week…


  • WTI Crude: $68.99 ($67.77)
  • Nymex Gas: $2.767 ($2.772)
  • US/Canadian Dollar: $0.7674 ($ 0.7615)



  • As at September 7, 2018, US crude oil supplies were at 396.2 million barrels, a decrease of 5.3 million barrels from the previous week and 72.0 million barrels below last year.
    • The number of days oil supply in storage was 22.3 behind last year’s 29.4.
    • Production was up for the week at 10.900 million barrels per day. Production last year at the same time was 9.353 million barrels per day. The change in production this week came from increased production in Alaska and decreased production in the Lower 48.
    • Imports fell from 7.714 million barrels a day to 7.591 compared to 6.480 million barrels per day last year.
    • Exports from the US rose to 1.858 million barrels a day from 1.556 last week and 0.774 a year ago
    • Canadian exports to the US were 3.131 million barrels a day, down from 3.507
    • Refinery inputs were up marginally during the week at 17.857 million barrels a day
  • As at September 7, 2018, US natural gas in storage was 2.636 billion cubic feet (Bcf), which is 18% lower than the 5-year average and about 20% less than last year’s level, following an implied net injection of 69 Bcf during the report week
    • Overall U.S. natural gas consumption was down 1% during the report week
    • Production for the week was flat. Imports from Canada were down 11% from the week before. Exports to Mexico were down 7% from the week before.
    • LNG exports totalled 21.2 Bcf.
  • As of September 10 the Canadian rig count was 306 (AB – 217; BC – 24; SK – 60; MB – 5; Other – 0. Rig count for the same period last year was 358.
  • US Onshore Oil rig count at September 14, 2018 was at 867, up 7 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was flat at 186.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 1 at 18.
    • Offshore rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%


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