E Marion Hubbert And Boone Pickens On Oil's Mess

The price of oil is as difficult to predict as it is important to investors' economic outlook. Books have been written on a correlation between climbs in oil and subsequent recessions so that all you had to do is look for a swift enough climb in oil to know that a recession was soon to follow. But for every such analyst, there is one who points to weak oil as a sure sign of recession at hand. Whatever your views, we all know oil is the 800 pound gorilla in the economic china shop. So when accomplished oil price experts like Daniel Yergin and Boone Pickens speak, investors lean, hand cupped to ear, to listen.

Hubbert's Curve

In the early days of oil in 1956, a Shell geophysicist named Marion Hubbert, a much more obscure expert, developed a math model of oil production.  He was reviled as crazy, almost unpatriotic in the robust American oil business of the 1950s.  But his projection method called for a peak in US production in 1970, after which would be a permanent decline. And that actually happened:

 

The red line is Hubbert's math projection made in 1956, and the green line is how it actually turned out. The above Wikipedia chart is for the lower 48 and doesn't show the large contribution of Alaska in the '80s. But Alaska wasn't even a state in Hubbert's 1956 model. His math was for conventional oil from naturally pressurized reservoirs (the only kind of oil they knew back then) and it has essentially proven to be correct.

But then, along came shale. This unconventional bonanza has blown the needle far away from Hubbert's curve of physics for conventional reservoirs.  Drilling horizontally in oil laden rock and propping open fissures with sand fracking is a totally different recovery with a whole new set of physics and planet of reserves. This departure from Hubbert's world can be seen very graphically in the US production history above. Two things happened to take us far away from the conventional curve, deepwater oil in the Gulf, which started in earnest in the mid '90s as the above chart shows, and the recent shale revolution, the radical explosion starting in 2009.

So, as Hubbert's projection for a global peak approached in the early 2000s, slightly fewer considered him a lunatic because his US prediction had been so accurate. His global peak prediction was refined mathematically by Ken Deffeyes, a Shell associate of Hubbert's, as being 2005.  So how did Hubbert's global prediction turn out?  Well, that crazy man was right again:

 

The peak was 2005 right on the nose, just as Deffeyes pegged it in his 2005 book Beyond Oil  and in his 2001 book Hubbert's Peak: The Impending World Oil Shortage where, according to Amazon's review :

Deffeyes used a slightly more sophisticated version of the Hubbert method to make the global calculations. The numbers pointed to 2003 as the year of peak production, but because estimates of global reserves are inexact, Deffeyes settled on a range from 2004 to 2008

You see varying levels of this "conventional" oil from about 74 mb/d (EIA numbers) to around 84 mb/d depending on how many NGLs (natural gas liquids) and other things are included in "oil". NGL is from gas production, so purists don't like lumping them in with crude production dynamics.

Here we see a rough breakdown of just what is propping us up from the disasters of peak oil. The two big props are the pale green one and the pink one - that is fracked gas liquids and shale oil (unconventional crude). If it weren't for the gas shale fracking revolution that came along, natural gas production, along with the associated liquids, which get put into the "oil" totals, would have plummeted long ago.

This difference in conventional crude and total liquids is behind all the arguing over whether peak oil was right or wrong. "Peak total liquids" has not happened yet, and with shale, may not happen for a long time. Peak conventional crude did happen, and it happened exactly as Hubbert and Deffeyes said. It is also what Boone Pickens has said. Without the pink prop shown above, we would be put back on Hubbert's curve, and Pickens estimates something like $175 oil would result. And without the natural gas shale fracking giving us the green prop, oil would probably be even higher, if the economy could stand it.

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