Carpe Diem

Energy fact of the day: US oil output surges during the first week of May to the highest level in 21 years

oil

The Department of Energy reported today that US oil production for the week ending May 3 reached 7.37 million barrels per day, the highest weekly output of crude oil in the US since the first week of February 1992, more than 21 years ago (see chart above). Compared to a year ago, US oil production in the first week of May increased by more than 20%.

In just the last two years, oil production in “Saudi America” has increased by almost 1.8 million barrels per day (and by 37.5%), from about 5.6 million bpd in May 2011 to 7.37 million bpd last week, and has completely reversed several decades of declining US oil output (see chart).

Welcome to America’s shale energy revolution, which continues to be one of the strongest reasons to be optimistic about the US economy.

37 thoughts on “Energy fact of the day: US oil output surges during the first week of May to the highest level in 21 years

  1. Back in 2005, was there is single Peak Oi Doomer who said, “Well doom ahead, but USA oil production is going to surge like we have never seen before.”?

    So what makes oil doomers right today?

    Or anybody?

    • Back in 2005, was there is single Peak Oi Doomer who said, “Well doom ahead, but USA oil production is going to surge like we have never seen before.”?

      So what makes oil doomers right today?

      Or anybody?

      What makes the Peak Oil crowd right is the fact that the production of light crude today is below the levels that it was in 2005. This is after more than $1 trillion in new investment around the globe. What makes them right is the fact that shale oil is not economic outside of a few core areas and the fact that new wells have depletion rates that are north of 50%. The argument still holds true and at best destroying capital to produce uneconomic shale will only move the needle a little bit for a short period of time. What is lost on the naive optimists is the fact that shale is the the high hanging fruit. It requires extremely high prices and those would only be possible if the Peak Oil crowd is right.

      • Why the qualifier – “light crude”?

        And why am I paying about the same today for gasoline, per gallon and adjusted for inflation, as I was in 1981, despite the massive increase in global demand for oil?

        • “Why the qualifier – “light crude”?”

          …Because, just like the “Peak Oil” theory, it has no economic relevance.

          • And I’m not even sure the qualifier “light crude” having peaked in 2005 is even correct, since the oil that comes from the Bakken, Eagle Ford and other shales is high-quality light sweet crude. It’s just an excuse the peak oil crowd has made up to make things sound like they’re going downhill – but it’s likely not even true, at least for the US.

        • One of the symptoms of mental illness(namely, Bi-Polar) is that you believe that you have unique insights that the rest of the world does not have.

          I have never said that I have unique insights. And most of the rest of the world is no more likely to look at the production data than it was to look at the housing financing data, the tech bubble cash flows, or the evidence of WMDs that got the country into an unnecessary and costly war.

          My only point is that people should learn to think for themselves and if they actually bother looking at the data the shale story falls apart very quickly. How many CEOs who used to tout shale gas will have to confess to large losses before you start to question their statements about shale liquids? And when will you actually look at the financial data that is filed with the SEC?

          Now, sometimes those insights are correct as bi-polar people think outside the box. However, at some point you need outside confirmation to support your “special” insight or you are just talking around and around inside your head and everything you see “proves” you more and more “right” in your head. Real-world confirmation be damned.

          The confirmation is staring us in the face. After oil went from $20 a barrel to $150 a barrel there was a massive influx in investment in the sector. That investment did not produce any more oil. Light crude production today is not any higher than it was during the 2005 to 2005 peak. Most of the ‘increases’ that are cited by the naive optimists are biofuels and some heavy sour crudes that take a lot of energy to process and do not produce nearly as much as the high value crude that the world wants. Ironically, when we spend all that extra energy to upgrade the lower quality oil we count the ‘refinery gains’ as a source of new production.

          The bottom line is that the massive investment in production did not create much in the way of spare capacity. That is what Peak Oil looks like.

          1)E&P companies-gearing up for a long haul in the shale-there have not been “waves of bankruptcies” of companies active in the Bakken or the Barnett shales.(The 2 oil and gas areas with the most history, respectively). The real world activities of those most directly affected in his theory do not support his “Unique” insight.

          The shale gas players have all admitted to taking huge losses during the past five years. There are no ‘bankruptcies’ because there is a lot of free money to finance the money losing operations. That is why the balance sheets are showing such huge increases in debt that grows much faster than operational revenues and why the cash flow statements are so bleak.

          2) Direct hydrocarbon infrastructure-Hmm, lots of world-class investment going on in the shale areas. The activity of this real-world facet of the industry does not support his “unique” insight.

          Well, investment in companies that sold pet food and groceries over the internet did not fit my ‘unique’ insight for a while. Neither did the housing investment. But those bubbles popped just as this one is about to pop.

          I will turn this around. If shale were such a good investment why are oil companies risking billions on very risky ultra-deep reservoirs?

        • Why the qualifier – “light crude”?

          And why am I paying about the same today for gasoline, per gallon and adjusted for inflation, as I was in 1981, despite the massive increase in global demand for oil?

          You are paying about the same as in 1981 because that was a blow-off top for oil. A bit less cherry picking and a bit more understanding is probably in order. In 1981 there was a massive amount of capacity in the system. OPEC was doing for its members what the Texas Railroad Commission did for the United States in the decades before the 1970 peak. Other countries had supplies and the North Sea deposits were found. Today the spare capacity is gone so prices are kept low by demand destruction. The new source of production is not inexpensive light sweet crude but very costly shale and other unconventional supplies. The energy companies see the problem, which is why billions are risked on very difficult to develop ultra-deep projects.

          The bubble, as most bubbles are, is driven by a monetary shock created by the central banks. And as such, it will end the same as the other bubbles.

          • “The new source of production is not inexpensive light sweet crude but very costly”

            Meanwhile, people can afford to demand more-expensive gasoline because they’re getting more service from each gallon. This allows a given-size market to exist at higher price points.

          • Meanwhile, people can afford to demand more-expensive gasoline because they’re getting more service from each gallon. This allows a given-size market to exist at higher price points.

            People are not ‘demanding’ the gasoline formulations that you are seeing. They come from government mandates that have nothing to do with the free market. The market would certainly not add a corrosive compound like alcohol and would not look favourably on the taxation levels on energy products.

        • Che is dead

          And why am I paying about the same today for gasoline, per gallon and adjusted for inflation, as I was in 1981, despite the massive increase in global demand for oil?

          That’s a good question. One would expect that, like almost everything else, the price would decrease over time due to advances in technology and improved methods of oil discovery and production. The fact that you’re still paying the same price as in 1981 must mean that oil is becoming harder and harder to produce despite increases in proven and expected reserves.

          You might as well ask:

          “Why am I still paying as much now for gasoline as I did in 1981, despite great improvements in exploration and recovery? Almost everything else I buy has become less expensive.”

          From a Wiki entry describing Hubbert Peak Theory this chart shows that as production in various oil producing countries has peaked and is now declining, world production has increased thru 2005. That helps explain why the price you pay isn’t higher, despite increased global demand.

  2. Vangel>>>The argument still holds true and at best destroying capital to produce uneconomic shale will only move the needle a little bit for a short period of time.<<<

    One of the symptoms of mental illness(namely, Bi-Polar) is that you believe that you have unique insights that the rest of the world does not have. Now, sometimes those insights are correct as bi-polar people think outside the box. However, at some point you need outside confirmation to support your "special" insight or you are just talking around and around inside your head and everything you see "proves" you more and more "right" in your head. Real-world confirmation be damned.

    In the case of Vange's "unique" insights is there outside confirmation of his "unique" insights by the behavior of any of the players?

    1)E&P companies-gearing up for a long haul in the shale-there have not been "waves of bankruptcies" of companies active in the Bakken or the Barnett shales.(The 2 oil and gas areas with the most history, respectively). The real world activities of those most directly affected in his theory do not support his "Unique" insight.

    2) Direct hydrocarbon infrastructure-Hmm, lots of world-class investment going on in the shale areas. The activity of this real-world facet of the industry does not support his "unique" insight.

    3) Non-hydrocarbon infrastucture(Housing -etc)-Again there are world class investments taking place in places like the Bakken. This area does not support his "unique" insight.

    4) Hydocarbon users-ie Dow Chemical and so forth. Once again there are world class investments taking place and planned based on shale oil and gas. This area does not support his "Unique and Special" insight.

    5) Gov't reports and so forth-recent updated report on the Bakken/3 Forks by USGS-Enough said.

    At some point, Vange has to determine whether his "special" insight is real(through outside confirmation) or simply rolling around in his head with no outside(real-world) confirmation.

    I think in the case of Peak-Oilers there is so much desire for the shales NOT to be true that they ignore the real-world happenings.

    • I don’t disagree, however, you then get yourself into the arguements of which outside confirmations are “valid”.

      Also, there was “world-class” investment in the tech industry and housing markets at one time. One shouldn’t equate where investors throw their money to the validity of the investment.

    • 3) Non-hydrocarbon infrastucture(Housing -etc)-Again there are world class investments taking place in places like the Bakken. This area does not support his “unique” insight.

      ???Hot money attracts a lot of activity. That does not mean that the operations are sustainable. Just ask people in Calgary or Houston about that.

      4) Hydocarbon users-ie Dow Chemical and so forth. Once again there are world class investments taking place and planned based on shale oil and gas. This area does not support his “Unique and Special” insight.

      Dow is asking for the prices to remain below production cost. It has not been able to sign long term contracts with producers that guarantee supply at current cost levels. Neither have the LNG terminal developers.

      5) Gov’t reports and so forth-recent updated report on the Bakken/3 Forks by USGS-Enough said.

      The government told you that Saddam had WMDs. It told you that Obamacare would save money and that debt levels did not matter. It also says far more about resources than reserves. You might want to look up the difference.

      At some point, Vange has to determine whether his “special” insight is real(through outside confirmation) or simply rolling around in his head with no outside(real-world) confirmation.

      To prove me wrong all you have to do is to show me that the shale operations are economic. Just point to the 10-Ks where debt growth is not an issue and projects are self financing.

      I think in the case of Peak-Oilers there is so much desire for the shales NOT to be true that they ignore the real-world happenings.

      Shale is high hanging fruit that is not economic to pick. The operators already confessed about their sins in the shale gas sector. It is too early to confess about shale oil because there are still suckers that are buying the story.

  3. Radical and rational ignorance, uncertainty, distortions, and so on exist so perhaps shale is hyped. I don’t know. On one hand I am inclined to not bet against the market but it is operating in an environment that weakens that presumption in my opinion. Vangel, are you literally going against shale in your portfolio? Perry and Vangel, would you be open to a bet agsinst the other?

    • Vangel, are you literally going against shale in your portfolio? Perry and Vangel, would you be open to a bet agsinst the other?

      I have sold the oil companies that have exposure to shale but I do not short anything because shorting is a fool’s game. What I want from Perry is for him to look at some of the SEC filings and use the skills he should have acquired as an economist to show me that the operations are self financing. Perry talked a great game about shale gas but has recently been quiet about the terrible losses in that sector. He seems to have forgotten, if he every knew, that speculative events are common, mostly because of distortions created by monetary shocks. The funny thing is that he seems to have a blind spot that does not permit him to see signs that his Panglossian view is flawed.

  4. If capital destruction is a function of shale drilling, then a lot of destroyers are leaving ports for U.S. petroleum fields.

    From CNN Money:

    “More than $5 trillion is expected to be invested in U.S. shale and other “unconventional” energy developments by 2035, according to the consultancy IHS.”

    Sure, capital has been destroyed or wasted in the shale fields, but the more efficient drillers, in richer formations, will reward investors as well the U.S. economy.

    • Sure, capital has been destroyed or wasted in the shale fields, but the more efficient drillers, in richer formations, will reward investors as well the U.S. economy.

      As I have explained over and over again, there is money in shale wells drilled in the core areas of the better formations. Most drillers can make money in those areas. The trouble is that the argument of some depends on the average shale well being profitable and it isn’t if the production data and SEC filings are to be believed. Since both come from the industry I do not see why I would reject the negative conclusions that are developed by the analysis of that data.

  5. If the areas outside of the “core areas” were profitable, then they too would be “core areas” and Vangel would be arguing that Bakken isn’t legit because the area outside of those “core areas” aren’t profitable.

    • If the areas outside of the “core areas” were profitable, then they too would be “core areas” and Vangel would be arguing that Bakken isn’t legit because the area outside of those “core areas” aren’t profitable.

      BUT THEY ARE NOT PROFITABLE. That is the problem for you guys. I have already told you how easy it is for you to prove me wrong. Look at the EURs. Look at the ultimate recovery that is coming from the production data. Look at the SEC filings. Show me that the production data supports your view that the EURs are reasonable and show me the 10-Ks that show that the shale operations are self-financing. Until you do that all you are doing is hand waving.

      • While I don’t disagree with much of what you say, even if it is a bubble, that doesn’t mean what’s going on North Dakota isn’t real. Bubbles are a result of prosperity leading to excess, as was the case of the dot.com bubble, but, the Internet DID change the world, and the dot.com bubble produced some of the biggest, most innovative companies in the world. So, would that bubble have been better off never having happened? As it relates to Bakken, should everyone there just pack up and go home?

  6. Michael Filloon’s latest Bakken Update at Seeking Alpha includes this:

    “As more earnings announcements are released, we continue to see better well results at lower costs. Some have to do with pad drilling, but that is only part of the equation. Across the board, operators are now able to cut costs at lower contracted prices, and still get jobs done quicker. This should continue, and it may hurt oil service more than anyone. Completion jobs used to take forever in the Bakken, and costs were very high. Now that multiple jobs can be fracced at once, costs have moved down and there are too many crews. Bakken producers are drilling the same amount of wells doing batch drilling, and then following with zipper fracs. As well pads get bigger and more wells are drilled per location, this will further decrease drilling and completion costs/foot. I believe we will continue to see bigger and better wells going forward and this will only improve margins in one of the best liquids basins in the United States.”

    • Michael Filloon’s latest Bakken Update at Seeking Alpha includes this:…

      Great. Look at the companies that he lists and check out their cash flows and balance sheets. Tell me which ones look good to you because I have not seen any that look all that good to me.

      And while you read Michael’s postings keep in mind his statement, “The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results.” This little statement gives him a way out if the EURs are not going to pan out and the earnings have to be restated to reflect the true depreciation costs. Funny how people keep falling for the same scam over and over again. The tech companies did the same thing and most investors bought the narratives without question just as they are doing today. Sadly, the ending will not be ver different.

    • Taking investment advice from someone with NO accountability to you is not a good idea IMO. He’s no different than Cramer. (…and I never, ever, ever take advice from a guy who posts a picture of himself wearing a do-rag!!!!!)

      • “and I never, ever, ever take advice from a guy who posts a picture of himself wearing a do-rag!!!!!)”

        knuck, knuck knuck :-)

        Vangel and Moe, put the investment advice aside and please note the lowering of costs dialogue in the Bakken.

        • Vangel and Moe, put the investment advice aside and please note the lowering of costs dialogue in the Bakken.

          The problem in the Bakken now is that most of the core area oil is gone. The lower cost wells are now drilled in areas that have lower IPs and lower ultimate return rates. That is the problem and that is the reason why the explosion in drilling activity that created the increase in production has not improved average well productivity.

          As I have pointed out for a long time, it is easy to prove me wrong. All that has to happen is for someone to show that the EURs are realistic and to point to SEC filings that show that the average shale project is self financing. Let me note that we had this same argument about shale gas. The producers were giving us very high EURs and reporting very low depreciation costs because they claimed that wells would continue to produce for three decades. A few years later the companies have admitted that they lost their shirt in shale gas and are now touting a move to shale liquids without pointing out that the reason that they lost big on shale gas was not just the lower prices but the much lower ultimate recovery rates due to the higher depletion rates. The same people that were hyping shale gas and telling us to ignore the depletion problem are now doing the same with oil and suggesting that the only way to lose on shale oil is if prices went down. They fail to mention the inflated EURs and the artificially low depreciation costs that their operations depend on.

  7. Vangel,
    It has been amazing following this debate over the last few years. If truth be told, most of us WANT peak-oil to be wrong because it gives us hope that we can enjoy some freedom from foreign oil dependency. But, LOGIC says that NOTHING is infinite as an energy source, unless it is rapidly renewable.
    I want to compliment you on your presentation of your viewpoint.
    Now for my question. Regardless of whether this is a “bubble” or not, whenever this much money is pumped into something there SHOULD be a way for an investor to make money.
    Do you have any ideas?

    • Now for my question. Regardless of whether this is a “bubble” or not, whenever this much money is pumped into something there SHOULD be a way for an investor to make money.

      Do you have any ideas?

      I think that eventually we will figure out a way to extract methane from hydrates but that is likely to be a long time coming and should produce only a few winners. I also think that coal and nuclear should do fine once most of the green nonsense is rejected by voters. (That may be starting in the EU as consumers revolt against energy taxes and high costs.) I also think that once the shale bubble bursts many of the arguments that are allowing the Fed to play its games will be finished. At that point some of the undervalued royalty companies should do extremely well. I think that Silver Wheaton, Eurasian Minerals, and Franco Nevada will be big winners in the future.

      I just look at data points and see if there is a way to exploit opportunities that come from mispriced assets. I stay away from shorting, which means that if you follow my strategy you might have to sit around for several years and be looking at 50% or higher losses before things go your way. Most people can’t do that, primarily because they are unfamiliar with the reasons why the assets were bought in the first place.

      The other problem with my approach is the huge political risk. If you purchase asset classes that are hated by the central banks and governments you will find that when things go your way governments will try to confiscate the profits. Coal and uranium are always easy targets. Miners do not have much in the way of political power and wind up giving up shareholder profits to governments hungry for tax revenues. Then you have natural disasters, wars, revolutions, etc.

      We are now coming up to some interesting points that will have to be resolved one way or another. Given the very low inventories in the metals warehouses and the huge demand for physical I wonder how all those paper gold and silver contracts will be covered. And what happens if the recent cooling trend interferes with the Russian and North American wheat and corn harvests? Or we get some silly war again? I suspect that we will see a catalyst drive investors into the PM and energy markets some time in the next year or two. The Dow/Gold ratio should start to head back down to the 1:1 level before it bottoms as a huge bubble in the precious metals markets drive prices substantially higher from here.

      The problem is timing and what happens to holdings that are in the hands of a bankrupt financial system. We have already seen Swiss banks refuse to give people their allocated gold and US funds use cash account holdings registered in the name of the account holder as part of their own gambling pool. Sadly, I think that the current money printing will break the system and will shift financial power away from the US and the EU.

  8. What’s amazing about this is that it was done with out help from the Government. In fact, the Federal government has reduced Federal Lands available for production and fought the industry tooth and nail (Energy Department and EPA) and actively tried to kill the growth. Just think what could happen if we had a government that wanted to help America and it’s people!

    • What’s amazing about this is that it was done with out help from the Government.

      Why is that amazing? Government did not find the great oil fields of the world. It did not develop those fields or build the infrastructure that would deliver their oil to the markets. All that was done by individuals pursuing their own interest.

      But to say that government is not doing anything today is wrong. It is allowing the Fed to rob savers through the printing press and encouraging malinvestments in a number of sectors, including shale.

  9. Horay for Hydrofracking. Now if we could only convince Congress that a percentage of this locally drilled oil be mandated to be sold within our own homeland, this way, the surpluss of oil here will actually create a gasoline price reduction. But that’ll never happen. Both parties don’t want that for two totally different reasons, and, big oil which also doesn’t want it, has Congress in their pocket.

    • That is a very stupid idea. The oil does not belong to you, me, or Congress. It belongs to the people who invest their own resources to produce it. They should be free to sell it as they see fit to whoever offers them the best price.

      And there is no way that the US can ever rely on its own domestic production unless demand collapsed as the real economy crashed. At best you will be seeing just over 8 mbpd of production for a year or so until the depletion rate takes the Bakken levels much lower.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>