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Everyone knows that oil production is declining. That it’s only a matter of time before Peak Oil forces us to find new forms of energy or battle over soil like Kevin Costner in “Waterworld.”

As usual, everyone is wrong.

Data recently released by the Energy Intelligence Group shows that production of global crude has now outpaced the demand. Take a look…

While it’s never wise to get too excited about a single data point, this chart isn’t just a blip on the radar. It reflects serious shifts in the supply and demand fundamentals that have changed energy markets over the last few years.

Energy markets may have more moving parts than any other market out there. It’s a wide-ranging mosaic, but when you put all the pieces together, the picture is clear: nearly every measure points to supply outpacing demand for years to come.

Understanding Peak Oil, Supply and Demand

This article is the first in a series of articles devoted to examining recent developments that have rocked the ever-changing energy markets and brought the Peak Oil concept into question.

The Peak Oil bogeyman was first raised by M. King Hubbert in 1956. Hubbert developed a logistic model (which resembles a bell curve) that successfully predicted that U.S. oil production would peak in 1970.

Hubbert’s model gained traction and has accurately predicted the peak levels of production in other countries since then.

But, as in any model, when time scales get long enough the prediction power breaks down as new information becomes a part of the equation.

Hubbert’s curve is based on properties of the natural world, which are based on geology. In that sense, it works. But let’s look at a past example to see where it may break down…

Hubbert’s model would have accurately predicted Peak Whale Oil. But the model wouldn’t have been able to account for technology shocks. Once the unforeseeable means for using petroleum entered the energy economy, the path for whale oil was forever altered.

Just as they did then, new developments have rendered Hubbert’s curve ineffective, or at least delayed it by decades.

Many energy optimists think that technology will bring new sources of energy through solar, wind, or biofuels. Some day they may. For now, the real advances remain in the petroleum industry. Huge discoveries and advanced extraction techniques have changed the economics of drilling for oil and other petroleum products.

You can see the effects of this expanded supply in today’s oil prices.

Of course, the global economy has slowed, providing a short-term decline in demand, as well. I’ll dig into that much deeper next week.

On a weekly basis, I’ll consider all the factors of energy markets in deep detail to determine where energy prices are heading.

I won’t only be reporting the latest news, arcane drilling reports, or updates on different oil projects. I’m going to provide a context to understand what to do with the latest headlines, and how to strategize no matter where energy prices go.

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Fears that the world is running short of oil aren’t going away, but judging by the latest figures on global oil production there’s no sign that the peak oil factor is an imminent threat. Global output rose to a new all-time high last December, according to data from the U.S. Energy Information Administration (EIA): 75.384 million barrels per day, or just ahead of the previous peak of 75.170 million barrels a day in January 2011.

A new high may ease anxiety over oil supplies for the moment, but it’s sure to be a temporary respite. All the challenges that have weighed on the outlook for raising production over the past decade are still with us. Discoveries of big, easily recoverable supplies are dwindling. Yes, U.S. consumption of oil has reportedly fallen 10% since 2005, but world demand keeps rising, mostly because of increasing growth from China, India, and other emerging markets that are rapidly industrializing and using ever larger quantities of fossil fuels.

Yet the peak oil theorists, if not wrong in the long term, seem to have been premature in warning that the summit for production was upon us. In 2009, for instance, one forecast for global oil production via The Oil Drum warned that output was set to fall by more than two million barrels a year. A decade ago, geologist Ken Deffeyes’ widely read book Hubbert’s Peak: The Impending World Oil Shortage opened by stating that “global oil production will probably reach a peak sometime during this decade.” The 2009 edition of the book makes the same forecast.

Deffeyes is hardly alone in warning that the end is near for raising global oil production, as a sampling of the many book titles in recent years on the peak oil subject remind: The Party’s Over, The End of Oil, and Profit from the Peak, for instance.

There is a peak out there somewhere, of course. Production for every commodity with a finite supply inevitably reaches a crest. The question, of course, is when? Estimating the date of the apex is problematic for several reasons. Technology, for instance, can change the analysis. If you can make cars more energy efficient, that’s the equivalent of finding more oil, all else being equal. That leaves us with the troublesome task of predicting what technology will bring in terms of energy savings in the years ahead.

Meanwhile, new and unexpected supply sources are increasingly rare, but they do pop up from time to time, such as the huge discovery in Brazil a few years ago. New finds require new estimates for the peak. Once again, technology must be factored into the analysis. History suggests that a given field’s recoverable supply rises with improved technology through time.

Let’s not forget that there’s always doubt about the data, which further complicates the forecast of the peak. To cite just one example that illustrates the problem: Iran, one of the largest sources of crude oil on the planet. Anyone want to bet a year’s salary that the official numbers from Tehran have been accurate over the last 20 years?

In fact, all analytical roads lead back to the Middle East, starting with Saudi Arabia, which holds the title of the world’s large supplier of easily recoverable crude oil and the repository for most of the world’s spare production capacity. The kingdom, in other words, is the world’s great swing producer, allowing the country to effectively raise output relatively quickly. The late Matthew Simmons, a widely quoted oil analyst in his day, warned in his 2005 book Twilight in the Desert that Saudi Arabia’s production was nearing a peak. The forecast appeared to be accurate for several years, although the latest data reveals that it was premature after all. The kingdom’s crude oil output reached an all-time high at the end of 2011, according to EIA.

As always, there’s the enduring question: Will it last? Can the world continue to increase oil production? Yes, according to the BP Energy Outlook 2030 published earlier this year. Good thing too, since total global consumption of crude is expected to rise in the decades ahead as well. How will the oil industry satisfy this thirst? “Rising supply to meet expected demand growth should come primarily from OPEC, where output is projected to rise by nearly 12 [million barrels per day]. The largest increments of new OPEC supply will come from [natural gas liquids] as well as conventional crude in Iraq and Saudi Arabia.”

EIA also expects global production to continue rising as far as the eye can see, for both OPEC and non-OPEC sources.

None of this deters the peak oil crowd. “Peak oil is a fact, not a theory,” asserts PeakOil.com

From US conventional oil production peaking in 1970 to global conventional oil production peaking in 2006 the figures are indisputable. Even institutions such as the International Energy Agency (IEA) and publications like The Economist that are not known for alarmism have admitted that oil production from conventional sources has peaked. So why are there still commentators out there that refuse to believe peak oil?

Rising production numbers are probably part of the answer.

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Drill all you want. The days of $2-a-gallon gas – hell, $3-a-gallon gas – are over.

That’s just reality. Peak oil or no peak oil, we’re finding new sources of oil, which is good news, except that, bad news, it’s a lot harder (and thus more expensive) to tap these new finds like the ones off the coast of Brazil and in the plains of North Dakota. The reason oil companies are willing to develop these harder-to-extract sources is clear – it’s called moolah, and gobs of it.

Not that the U.S. government or even a coalition of any number of governments worldwide could do anything to cool the speculation on where oil prices are going to go, but even if they could, all that would do is make it harder (i.e. less profitable) for those interested in doing so to actually get the oil out of the ground and from beneath the ocean floor and into our gas tanks.

So basically we’ve got ourselves a bridge to our energy future – maybe five years, maybe fifty years. Either way, that’s what it is – a bridge, and an expensive one at that.

Here’s what we do – one, we continue exploring and developing these new, albeit quite expensive, sources of oil, because oil is a proven commodity in terms of energy generation. Then two, we throw ourselves at developing alternative energies like we did developing nuclear technology in the 1940s and 1950s. Maybe it’s solar, maybe it’s wind, maybe it’s any or all of the above, maybe it’s something new that we haven’t even thought of yet.

Point being, we’ve been fortunate to have bought ourselves some time, however much time it is, before we run out of the fuel that we need to make our 21st century world hum.

Another point being … my memories of filling up as a 16-year-old in 1988 at 59 cents a gallon are as distant as those of my late grandfather when he told me that he used to pay a nickel a gallon when he was a teen in his first car.

Don’t let any politician convince you otherwise. That $2-a-gallon gas we were filling up with in 2009 was that cheap because the world economy was in the tank. The only way it ever gets that low again is if we head back into the hole that we were in at the depth of the worldwide recession.

Cheap gas, or a job and a roof over your head? That’s pretty much what it comes down to.

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Protestations in the mainstream media that we need not worry about a peak in the rate of world oil production anytime soon are suddenly coming fast and furious. As a result, I was reminded both of Shakespeare and Gandhi.

“The media doth protest too much,” I thought (with apologies to Queen Gertrude in Hamlet). As for Gandhi, a quote commonly attributed to him may shed light on where we are in the peak oil debate: “First they ignore you. Then they laugh at you. Then they attack you. Then you win.”

So, it appears that we are now in stage three of a four-stage process. This may not be as farfetched as it seems. I can remember when I first began writing regularly about peak oil in 2004. The main problem was that the media was simply ignoring the issue. It just didn’t fit any category which the vast majority of reporters recognized.

That was followed by a period of ridicule from oil industry representatives, economists, and a few writers in the trade press, but almost no one in the mainstream media. “Pshaw, pshaw,” they seemed to say in chorus, “no sensible person would take the idea of a near-term peak in world oil production seriously.” (Never mind that these people mostly misunderstood the problem of peak oil as being one related to the size of the remaining resource rather than the rate of extraction.)

Now we have come to the point where there are open attacks in the mainstream media. Yes, there have been attacks before, mostly in the trade press and on specialized sites and blogs on the Internet. It was more internecine conflict within the industry, narrow professional circles, and the activist community. But that doesn’t really count as a public brawl when your true audience is the mass of non-specialists. Now, we have the equivalent of that with the publication of a major piece in Nature, a respected scientific journal, but one that mere mortals are able to read. The piece in question has the reactionary forces in full attack mode.

An op-ed in The National, an English-language publication in Abu Dhabi, set the bar very low when it comes to facts and logic. Bloomberg Businessweek emitted a piece entitled “Everything You Know About Peak Oil Is Wrong” on the same day the Nature piece appeared–almost as if the writer knew it was coming. The Bloomberg piece trots out mostly tired, irrelevant arguments and a few that are relevant but factually wrong. Gail Tverberg does a good job of critiquing this very sloppy piece. Chris Nelder at Smartplanet takes on the Bloomberg piece as well as a number of poorly argued responses to the Naturearticle.

But the latest counterattack actually began last fall with Daniel Yergin, the smooth-talking and smooth-writing oil optimist that peak oil activists love to hate. Yergin felt compelled to push back in The Wall Street Journal at peak oil ideas in the course of promoting his new book. Thanks, Mr. Yergin, for bringing up the subject.

Many readers will no doubt be acquainted with the saying: “There is no such thing as bad publicity.” This corresponds perfectly with Gandhi’s phase three of a struggle. The opposition is now forced by obvious circumstances–i.e., no increase in oil supplies despite years of record prices–to explain away something that peak oil theory explains perfectly.

It may be disheartening to see so much disinformation in the media spewed by people who ought to know better. But it is ever so delicious to contemplate the desperation hiding behind their fretful posturing and incantation. I can almost hear them say, “It can’t be so, it can’t be so…it simply mustn’t!” They seem to believe that if they say “Bakken, Brazil, offshore, tar sands, technology” enough times in a row, it will make $100-a-barrel oil go away. But that incantation will not make the data go away, and so we must keep pointing out that the trend remains flat despite all of those things.

Perhaps the surest sign that the peak oil message is now in fighting form is that the former president of Shell Oil, John Hofmeister, agreed to a debate last week with one of the foremost scientific voices in the peak oil camp. It may be that Hofmeister is just a good, fair-minded citizen who thinks the issue should be aired. But the fact that he chose to give his imprimatur to the notion that peak oil needs to be debated speaks volumes.

Rock-star investors such as T. Boone Pickens and Richard Rainwater have long since put their imprimatur on peak oil. Major banks such as Australia’s Macquarie Bank and Germany’s Deutsche Bank (PDF) are also embracing the near-term peak thesis. And, embarrassing government leaks like this recent one in Australia and this one from the British government last year demonstrate that behind the scenes government planners and politicians are gravely concerned.

Does that mean that peak oil activists have reached their goal of informing the public and policymakers about the risks and opportunities posed by peak oil? Of course not. This is where the hard work begins because the debate has now been elevated to the national and international stage. And, that means we can look forward to a continuous clash that is increasingly in the public eye.

Now is also the opportune time for a well-financed, coordinated communications strategy (which I proposed here in 2008) that can take advantage of a new media environment more open to the idea of resource constraints.

Far from being discouraged by the rash of peak oil denunciations in the media lately, I am invigorated by it. Remember: we’re now on offense; they’re on defence. The opposition has to explain why oil production has been flat since 2005 despite high prices. And, the twisted logic and demonstrably false assertions they offer will provide ever better opportunities to trump them again and again.

I have always maintained that when you are in a public dogfight in the media, if you are explaining, you are losing. The peak oil movement now needs to focus on planting doubt about the official cornucopian story. And, the best way to do that is continuously to poke holes in the arguments of the optimists, arguments that can be shown to be ridiculous by combining simple logic with the data that is publicly available.

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Everything you think you know about energy security and energy independence is wrong. All too often you hear that fossil fuels will soon reach their peak, that our consumption of oil causes global insecurity vis-a-vis rogue states and terrorist organizations, and that the United States would benefit tremendously from becoming completely energy independent. Under closer scrutiny, however, the alarmist scenarios, political correctness, and chic notions of sustainability that dominate today’s energy discourse simply do not stand up to actual realities.

The truth is fossil fuels will continue to dominate international energy supplies for the long-term simply because they are the least expensive and most pervasive fuel resources the world currently possesses. Indeed, the amount of natural gas and new sources of oil being discovered today is enough to overwhelm any assertion of peak oil or the need to transition to a zero-carbon energy policy. Consider the sheer amount of petroleum and natural gas found in the one month of September in 2009: BP discovered three billion barrels of oil in the Gulf of Mexico; Spanish energy firm Repsol tapped into the largest natural gas find in Venezuela’s history; Anadarko Petroleum announced the likely presence of hydrocarbon fuels for 700 miles along the west African coastline; and Petrobras of Brazil found even more hydrocarbon fuels in the Santos Basin (which several years prior was said to contain enough energy to make Brazil a global energy power). Simply put, peak oil alarmists and hydrocarbon declinists conveniently ignore the immense power of new technology to harness deeper, untapped sources of fossil fuels. What hydrocarbon engineers can do now no scientist a mere 50 years ago ever thought possible. This accounts for why date estimations for peak oil are continually getting extended.

Many U.S. politicians and security wonks are fond of the assertion that Americans contribute to insecurity at home and around the world by our dependence on foreign oil. By this line of reasoning, our addiction to energy from the likes of Saudi Arabia and Venezuela has effectively bought us our own enemies. This analysis fails to confront such realities that, as a 2009 RAND study concluded, terrorist attacks are so inexpensive that a decrease in Middle Eastern oil revenues would have virtually no impact on al-Qaeda’s fundraising capabilities. To see the irony in the dubious assertions that we fund our own enemies, imagine the kinds of retaliation a state like Saudi Arabia would engage in if we banned their imports. It is not difficult to picture King Abdullah reacting with such scorn and fury as to create an actual national security threat to the United States. Furthermore, two of the largest suppliers of crude to the United States are Canada and Mexico, among our staunchest allies and countries that are hardly terrorist breeding grounds. All of the talk about the benefits of choking malevolent countries from U.S. oil demand borders on ignorant isolationism. Because oil is a global commodity, prices are established globally and oil buyers will seek producers that boast the lowest cost. Thus there is no doubt that Venezuela could simply reap an equal amount of petroleum revenues from China in the event that the U.S. embargoed its oil supplies. The prospect of more Chinese involvement in our own hemisphere means that this is hardly a win-win situation.

More importantly, consuming energy that is only produced at home, as many in the “energy independence” debate are keen to propose, has implications that are at best unclear and at worst actually counterproductive. The gap between oil production and oil consumption in America is so immense that any effort to eliminate oil imports would force extremely costly new patterns of production and consumption on our parts. Declaring that we would no longer engage in the international oil trade, in other words, might very well cause more damage to the U.S. economy than improvement. Many people tend to overlook the fact that while the United States does import the majority of its oil, it is also one of the world’s biggest oil exporters. This is because oil is one of many goods that are being exchanged in a global marketplace. To entertain the notion that we can cease such trade relationships is to deny the inherent benefits of free trade as well as revert back to the import-substitution policies of the past that have well-known records of historical failure.

Many potential domestic sources of energy, such as the Alaskan National Wildlife Refuge, have their fair share of opponents. The ultimate irony in the American energy discourse today is that many of those who voice support for energy independence also oppose domestic petroleum production. You need look no further for evidence of this than the Obama Administration’s stated goal of decreasing oil imports and yet simultaneously maintaining the ban on offshore drilling in both the Atlantic and the Pacific.

The last and most prevailing argument for energy security revolves around climate change. This line of reasoning argues that countries must come together to find more sustainable and less carbon-centric forms of energy so that we may live in a cleaner, safer, and cooler world. No matter where one’s views lie on the global warming debate, imagine a world where the U.S. told powers such as China and India that the coal-based method of production that has allowed their economies to undergo historic transformations in recent decades is no longer permitted; if unstable countries such as Nigeria were to be deprived of revenue that fuelled their financial systems; and if energy consumption became much more expensive worldwide simply due to precautionary measures taken by global politicians. In short, the notion that we would be more secure if we fundamentally transformed our energy system in order to stave off climate change is short-sighted.

All of this is not to suggest that we should abandon hopes for a more renewable and sustainable energy future. Indeed, there are many promises in the prospects of renewable energies. Yet, we must not kid ourselves to think that we can transform a crucial part of the global economy overnight, nor that our reliance of fossil fuels creates more problems than it does solutions. Nearly every source of energy comes with its own risks. And with this in mind we can conclude that the risks posed by fossil fuels are far outweighed by their benefits. While this may come across as heretical, the cold truth is that for the time being, there is little to no cause for alarm in how we consume our current energy supply.

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A flurry of new mainstream media articles telling people not to worry about Peak Oil and hydrocarbon depletion have begun appearing on financial sites like Bloomberg, Forbes or The Wall Street Journal.  Peak Oil is the point when global oil production reaches its maximum, plateaus, then eventually begins declining.  According to the IEA, conventional oil production peaked in 2006.  World all-liquids production has been on a plateau since 2005, and should soon start declining.  “All liquids” includes unconventional sources such as tar sands, ultra deep water, and shale, which the media is championing as ushering in a new era of abundance.  Just to set the record straight, I though it would be worthwhile to analyze some of their arguments.  At least some media outlets are willing to even discuss peak oil at all—most remain completely silent.

One Bloomberg article, “Peak Oil Scare Fades as Shale, Deepwater Wells Gush Crude,” by Joe Carrol, claims that “more than 2 trillion barrels of untouched crude is still locked in the ground,” and that “technological advances enable companies to image, drill, and shatter subterranean rocks with precision never dreamed of in decades past.”  The article then goes on to cite the oil sands of Northern Alberta.  What the article doesn’t discuss, however, is the key concepts of EROEI and flow rate.  Unconventional resources, even with modern technology, always take far more energy to extract, which diminishes returns, and the flow rate is much lower.

Another Bloomberg article by Eric Roston argues that tar sands and shale gas show that there is no need to worry about peak oil, although the article admits that (high flow rate) conventional oil has probably already peaked (it has).  Bob Lutz of Forbes describes a Houston oil & gas conference he attended, where “company after company, executive upon oil economist, all described the coming flood of North American oil and gas discovery and production… whether shale gas or Canadian bitumen, the Bakken field in North Dakota and Southern Canada, coupled with advanced new exploration and extraction technology, it was a scenario of abundance.”  This is the same mantra as another Bloomberg article, “Peak Oil—No Longer the Right Question,” which also sites shale gas, tar sands, and deepwater.

The main fallacy in the articles’ logic is that peak oil isn’t about running out of oil, it is about having to use a bit less oil every year, when our growth-based economies were used to a bit more each year.  The significance is the end of growth as the biggest shock to oil dependent economies, not “running out.”  The Carroll article even says “we will not run out of oil in my lifetime, your lifetime, our children’s lifetimes or our grandchildren’s lifetimes.”  According to Matthew R. Simmons, former energy advisor to George Bush, Houston investment banker, and author of the book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” which accurately predicted the 2008 oil shock of $147 a barrel and subsequent global economic implosion, “we’ll never run out.”  “Never.”  There’s a tail to the peak oil logistic distribution curve that can go on for centuries.  What matters is flow rates and how much money and energy it takes to mine the resource.  So if we are forced to use a lot less, that is still a problem.

All-liquids oil production is now at an all time high of about 89 million barrels a day, and will soon enter terminal decline of a few percent per year according to Dr. Robert Hirsch.  Even a former head of the IEA admits that 90-95 will be the absolute max, in spite of the fact that as recently as 2005 the IEA was predicting demand to be met at 120 million barrels a day by 2030.  Obama’s recent State of the Union speech echoes the articles, citing “almost 100 years” of natural gas due to fracking technology, and that domestic oil production is back to 2004 levels.  Indeed, new horizontal well and hydro-fracking drilling technology has opened up new reserves, but these resources tend to be expensive in terms of both money and energy, and are limited in flow rate.  In other words, we can’t use the stuff quickly.  An analogy would be someone living off a savings of millions of dollars, but only being able to withdraw a few hundred dollars a month.

U.S. oil extraction rates are indeed back to 2004 levels, after 23 years of falling every year.  This is in part due to an oil boom in North Dakota, which is now the one corner of the country with 3 percent unemployment and growth.  This shale formation only produced 111 million barrels of oil up until 2008—or in other words, over 50 years of extraction, only enough oil was pulled up to meet U.S. needs for 6 days.  This deposit is now producing about a half million barrels a day, a massive increase due to horizontal drilling and fracking technology—but will likely peak by 2015 at below one million barrels a day.  Not much compared to the 21 million barrels a day the U.S. was using in 2006, and 19 million today in our downsized economy.  And Alaska and other areas are steadily declining.

As for the Canadian Tar sands and Shale gas, there is a similar story.  The oil sands is solid earth with about ten percent bitumen, which must be strip mined, heated, processed, and treated with large amounts of fresh water.  The process is so energy intensive, it barely has a positive EROEI, meaning that its only use to us would be as a way of converting natural gas into a liquid fuel—and North American conventional gas has been declining since the 1970s.  They are also working tirelessly, 24/7, to produce about 1.5 million barrels a day—not much compared to the global consumption rate of 89 mbpd.  That’s less than 2 percent, and assumes enough fresh water and natural gas exists to continue to produce that much.  A “crash program” may yield 3 million barrels a day by 2030—but this would still mean a global 75 mbpd flow rate, max, in 2030, optimistically.  And demand by then will be over 100 mbpd, even with perpetual recession curbing growth in demand.  Think peasants on scooters in Third World societies that use very little and derive a greater economic value from the fuel.

“Shale gas,” in contrast, may be a bit more promising, and indeed, natural gas prices are now only $2.50 per million BTU, compared with Brent crude, the world benchmark price for oil, now at $116 on the NYMEX, or $20 per million BTU.  This is a great deal right now, especially for power generation, but prices likely won’t remain low for much longer.  Conventional gas is declining, and an unprecedented amount of fracking shale plays would be needed to cancel this out.  The recession has reduced industrial demand in North America, but in Asia gas is $14 per million BTU.  In fact, the EIA recently downgraded the large Marcellus shale’s technically recoverable resources to 141 tcf, just a 6 year supply, from a previous 410 tcf.  The “hundred year” estimate is absurd, and the flow rate and EROEI don’t even justify drilling at these prices.  Natural gas is probably in better shape than coal, and especially oil, but it too is likely to soon begin slowly declining.  Clearly, growth has ended, and the future will be fueled by something other than fossil fuels.

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The U.S. oil market could be on the verge of its own fracking revolution, similar to what the natural-gas market is already experiencing. As a result, domestic production is now projected to rise significantly over the coming decades, reducing the relative share of imports in U.S. oil consumption.

Advances in horizontal drilling and hydrofracking, in which highly pressurized liquids are injected into underground rock, have been used increasingly over the past few years to extract natural gas. The result has been a substantial increase in recoverable reserves — accompanied by a lot of controversy over fracking’s environmental effects — and an associated decline in the cost of natural gas.

In late 2007, wellhead prices for natural gas were hovering in the range of $6 to $7 per thousand cubic feet; by late 2011, they had declined to $3 to $4, and they have fallen further since. John Deutch, a former director of the Central Intelligence Agency, has written that, given the impact on energy markets and therefore geopolitical dynamics, “it is perhaps a permissible exaggeration to claim a natural-gas revolution.”

The same controversial technologies used to recover natural gas from deep-rock formations are now increasingly being used to extract oil. Oil is already being produced from shale at several locations throughout the U.S., most notably the Bakken shale in North Dakota.

As Jim Mulva, the chief executive officer of ConocoPhillips, recently said, “The revolution has spread to domestic oil production. And it may track the path it followed with natural gas. We just don’t know yet. But it looks promising.”

Rising Domestic Oil

The federal Energy Information Administration certainly thinks so. An early release of its annual energy outlook projects a substantial increase in onshore production of oil from shale formations — what experts call “tight oil.”

In 2010, oil companies produced 5.5 million barrels per day of domestic crude. The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of “continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico.” The U.S. has not produced as much as 6.7 million barrels per day since 1994.

The mirror image of this projected increase in U.S. production of oil and natural gas is a decline in reliance on imports. In 2005 and 2006, about 60 percent of the liquid fuel used in the U.S. was imported. By 2010, that share fell to 50 percent, and it continues to decline. The Energy Information Agency expects it to drop to 37 percent by 2035.

Other analysts believe that even this projection is too conservative because tight-oil production could rise faster than expected. Every time projections are revised, the numbers seem to move higher.

So, will this push oil prices down overall, as shale gas has done to natural-gas prices? For years, analysts have worried that known oil reserves have peaked, so that prices will keep rising. Tight oil could change that dynamic. As the energy analyst Seth Kleinman, a colleague of mine at Citigroup Inc., argues, the price effects of the shift to tight oil “may be more immediate and subtle than the supply-and-demand balances hint at.”

The year ahead, he says, “could really see the death of the peak-oil hypothesis, something that has been underpinning a lot of the structural bullishness on oil.” (The terminology is thus borderline ironic, since tight oil could make oil markets much less tight.)

Still, significant uncertainty surrounds the entire fracking movement, for both natural gas and oil. The environmental controversies — especially regarding water pollution — are not yet as prominent for oil as for natural gas, but that’s undoubtedly because tight-oil production is only now ramping up. If it grows to be as large as projected, there’s little doubt that environmental concerns will become much more prominent, too.

Expect to hear a lot more about tight oil over the next few years — and not just from the Energy Information Administration.

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I’m a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am.

One of the things that really rather annoys me about the peak oil (and in the UK, there’s a similar one about peak gas) argument is that it entirely ignores the impact of changing technology. The point is indirectly made here at The Guardian:

The Earth’s crust is riddled with fossil fuels. The issue is not whether there is a shortage of the stuff, but the costs of getting it out. Until recently, the sheer abundance of low-cost conventional oil in places like the Middle East has limited the incentives to find more, and in particular to go after unconventional sources. But technical change has been driven by necessity – and the revolution in shale gas (and now shale oil, too) has already been transformational in the US, one of the world’s biggest energy markets.

And to make the point more directly. Once we invent a new technology to extract oil or gas (or indeed any other mineral you might like to think of) this does not mean that we’ve just found that one new field that we’ve developed the new technology to extract oil or gas from. It means that we’ve just created a whole new Earth, an entire new planet that we can prospect for similar deposits that can be exploited with the new technology.

To take a few examples, BP’s Macondo well was the first to drill down to 5,000 feet below the sea bed. Previously we had only been drilling perhaps a couple of thousand feet below the sea bed. Now it is true that that particular well didn’t work out so well (sorry) but the basic point still stands: that we now have the entire planet to prospect again at 5,000 feet down, not just the 2,000 feet down that the previous technology afforded, to see how much oil there is.

The Bakken Shale in North Dakota. This has propelled the State into the number three oil producing State in the nation. But now that we’ve found the technology to get oil from oil shales this does not mean that we’ve only found the Bakken Shale. This means that we want to scour the entire planet for other oil shales that can be exploited using the same technology.

The Marcellus Shale, the technologies developed to exploit that gas shale: this does not mean that we’ve only got the gas from the Marcellus Shale. It means that we’ve now got the whole Earth o explore again for shales that we can exploit using that same fracking technology. As Cuadrilla Resources has just found out in Lancashire. As most people don’t know as yet, British Gas had explored that very same shale some 20 years ago. They knew the shale was down there, there was just no way of extracting the gas at that point. Now there is and there are other fields in Poland, China and so on as well.

In fact, what seems to be becoming a consensus among some geologists is that shales are abundant (oil shales come from terrestrial plants, gas from marine) and what we’ve been thinking of for a century or two as oil or gas deposits are just those few places where geology has done the fracking and collection for us already. Now that we’ve developed fracking, to do what geology hasn’t done in the far more numerous shales, there just really isn’t any long term, long term meaning century or more, shortage of oil and or gas.

This does pose other problems to do with atmospheric carbon dioxide emissions and climate change but that’s a very different argument. What shale has really done is destroy the whole Peak Oil, and peak gas, argument.

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