"The shale/tight oil boom is... the most important revolution in the oil sector in decades." – Leonardo Maugeri, "Oil: The Next Revolution"
As I write, oil sells for around $90 per barrel. It's bounced around a lot lately, reflecting bubbling uncertainty about the revolution in oil that is just getting started.
Let's take a look at some evidence
, which suggests the great bull market in oil is over – for now...
The facts speak for themselves. The world now produces 91.1 million barrels of oil per day, according to the International Energy Agency. The world has never produced so much oil before. Meanwhile, demand is running at about 89 million barrels per day.
The figures are so astonishing that most people don't want to believe them. As Peter Tertzakian wrote: "The oil data that's coming in every week is scary enough to instill the usual response to human change: denial."
Tertzakian is the chief energy economist at ARC Financial Group. He wrote a book in 2007 entitled A Thousand Barrels a Second. The main thesis outlined a variety of choke points that would force the oil price up. Oil hit $147 per barrel in the summer of 2008, validating his thesis. Now, the data tells him something else. And like any good analyst, when the facts changed, he changed his mind. The data says that what happened to natural gas could well happen to oil. Natural gas prices peaked at nearly $14 in 2008 before sliding in the $2s. Today, it remains under $4.
"Oil fundamentals today are showing very similar characteristics to natural gas a few years ago," Tertzakian wrote in his June letter. "Although some circumstances on the oil side are different than natural gas, it's folly to think that North American oil prices couldn't come under further pressure over the next year or two."
I agree with the wise Tertzakian.
Thanks to new technologies, there is a flood of new oil from wells in North Dakota, Oklahoma, and other states. Texas oil production rises 35,000 barrels per day every month. Annualized, that's almost equal to China's incremental oil demand for 2011! The Canadian provinces of Saskatchewan and Alberta also show bigger production numbers every month.
"Quite unnoticed, a big wave of oil production is mounting worldwide," writes Leonard Maugeri. His research is in direct opposition to "the misguided but still prevalent perception that oil must become a rare commodity."
Maugeri is a former executive of Eni, the oil and gas giant. His June report is called "Oil: The Next Revolution – the unprecedented upsurge of oil production capacity and what it means for the world." I have printed it out and read it twice. My copy is well-marked. I suggest you read it if you have any doubts about its thesis. (You can find it here).
Maugeri does a bottom-up, field-by-field analysis that covers the world. The results are simply mind-blowing. It is Maugeri's report that finally made me change my view on the oil markets.
For example, you probably have heard of the Bakken. It's a huge reserve of oil and is making North Dakota and Montana into the equivalent of big Persian Gulf-producing countries. And the Bakken is only one of 20 such fields in the U.S. alone. In Maugeri's words, these others "have so far been virtually untouched." Most are profitable at just $50-$65 per barrel! These costs will likely fall, as technology improves. As they develop, the U.S. could be the second-largest producer of oil in the world by 2020, behind only Saudi Arabia.
I can only give you a taste of what is in this meaty report. Beyond the current analysis of global oil production, it is a great reference on the evolution of the oil industry. You'll read about how geologists consistently underestimate oil production. There is a long history of oil fields and how they've consistently produced way more than predicted.
My favorite is Kerr River in California, which is actually fairly typical. In 1942, expert geologists said there were 54 million barrels of recoverable oil at Kerr River. The geologists routinely revised their estimates as the years rolled by and Kerr River routinely exceeded them. Today, it's produced two billion barrels so far. And the current estimate is that 627 million barrels remains. "The oil literature is filled with cases of oilfields that gained a second or third life after years of production," Maugeri writes.
Then there are fascinating discussions about the huge untapped reservoirs still remaining all over the world. And there is the story of record investment in oil and gas in recent years. The year 2012 may set another record. The payoff is new oil – lots and lots of new oil. In this way, every commodity cycle is the same. They destroy themselves. Oil will be no different.
And yet, we've only talked about supply so far. What about demand? With Europe in recession, China's growth slowing down, and the U.S. tipping toward another recession, it hardly seems worth discussing. Demand growth is going to be sluggish. If anything, demand is another headwind, irrespective of supply.
Also, be wary of those who want to apply to oil the same arguments people used to defend natural gas. Remember those arguments? The decline rates are so steep. The production costs are higher than advertised. They are tapping the best fields first and the numbers will get worse. The infrastructure isn't in place to hook up all the new gas. And on and on it went.
Yet what happened? The technology got better and better. People got smarter. The techniques improved. Production rates got better, not worse. Completion costs didn't rise, they fell. People uncovered more giant fields. People built pipelines. Drilling inventory swelled and reserves ballooned. I remember people used to say the gas coming out of the Barnett would fall significantly by the summer of 2011. Instead, it hit a record.
I think the same technological revolution is happening in oil. The oil companies will get better at this, not worse. They will get smarter about how to do it. Techniques will improve. Costs will fall, not rise. Production will exceed the imaginations of the geologists once again. Prospective acreage will swell. Reserves will mushroom. Oil prices will fall.
I think it could happen.
Remember Schopenhauer's bit about the stages that truth passes? First, it is ridiculed. Second, it is opposed. Third, it is accepted as self-evident.
I say again, my guess is the bull market in oil is over.