The Amazing Reversal of the US Oil Industry

A few years ago, I made the observation that the best thing that could happen to mitigate against some of the potentially severe consequences of peak oil was for oil prices to rise, and remain high in the years before oil production peaked. That would have the effect of encouraging conservation, as people adapted to a world in which oil is no longer cheap. High oil prices would also incentivize oil production, which would have the effect of preventing steep declines in global oil production — which some had predicted would lead to severe economic crisis or possibly economic collapse.

We have certainly seen both conservation and increased oil production, but I have been really surprised by some of the details of how it has happened.

For example, as oil prices raced to $100, consumption in the US and Europe declined as I expected. But consumption in all developing regions increased sharply — so much so that the net impact was for global consumption to increase.

(Read More: Petroleum Demand in Developing Countries)

I didn’t expect this; rather I expected that we would see oil consumption decline across the board.

But perhaps we simply have not reached an oil price high enough to discourage increasing consumption in developing countries. We have to keep in mind that per capita consumption in these countries is very low, so oil makes up a small part of individual expenditures.

Changes in Oil Consumption 2005-2010

But the second surprising thing — actually “stunning” would be a more appropriate descriptor — is the extent to which oil production in the US has reversed direction. I always expected that peak oil would be a function of oil prices. In other words, if oil prices were fixed at $25/bbl, I have no doubt that global oil production would be in decline. In other words, we have passed “peak $25 oil.”

But oil prices are not fixed, and as oil prices rose more and more marginal production began to make economic sense. The development of horizontal drilling and hydraulic fracturing (fracking) opened up vast new supplies of oil by the time the price reached $100/bbl.

(Read More: The Effect of New Production Methods on U.S Oil Output)

Oil production in the US began to rise in 2009, in response to record capital expenditures by oil companies in the face of sharply rising oil prices starting in about 2005. The production increase has been sustained to the point that production rose all four years of President Obama’s first term. To put that in perspective, that’s the first time this has happened since the 1960’s when Lyndon B. Johnson was president.

For those who watch production numbers from the Energy Information Administration (EIA), it was clear that 2012 was shaping up to be a big year. US oil production rose above the 6 million bpd mark in late 2011 — for the first time since 1998. By the end of summer 2012, production had risen by another half million bpd. (Source).

U.S. crude oil production 1940-2013

Last week the American Petroleum Institute (API) released their Monthly Statistical Report [pdf], which puts 2012 — and the current status of US oil production — into perspective. According to the API, in 2012 US oil production increased by 779 thousand bpd — an increase of 13.8% over 2011 levels. But more amazing is that this marks the largest annual increase of oil production in US history. Further, the EIA predicts another jump of 900K bbl/day in 2013.

(Read More: How Much Oil Does the World Produce?)

If you had told me in 2005 that we would see these kinds of production gains in the US, I would have thought you were crazy. I have always cautioned people that the future is uncertain, no matter how certain you may be of a particular outcome. I know people who were absolutely positive that by 2013 we would see natural gas at $15/MMBTU and oil at $300-$500/bbl. Then along came fracking and those expectations were turned upside down.

I still think it’s going to be difficult to threaten the all-time US production high of 1970. For two consecutive months in 1970, US oil production exceeded 10 million bpd before beginning a very long decline. But I have been so shocked by the rapid rise in US oil production, I will no longer say it is impossible. I simply don’t know how long this revolution might run, but it won’t take too many more years like 2012 and the US will be pushing up against the all-time production record.

Previous Articles on Peak Oil

Peak Demand Before Peak Oil?
Leaked Study on Peak Oil Warns of Severe Global Energy Crisis
Five Misconceptions About Peak Oil
Peak Oil Interview: Misconceptions, Replacing Oil, and False Solutions
Peak Lite Revisited