Your Government Dollars In Action

Jim Brown
Printer Friendly Version

The U.S. Energy Information Agency (EIA) updated their energy outlook this week and it makes for some interesting reading. I am always shocked by the conclusions they reach and how often they are wrong. Somehow they never seem to get the message.

The EIA Annual Energy Outlook focuses on U.S. energy market developments over the long term. Actually the VERY long term. They have a variety of "reference" cases where they project supply and demand to arrive at oil prices and guide lawmakers and consumers on what to expect in the future.

I want to make one thing perfectly clear. This analysis is not worth the paper it is printed on. Your tax dollars would be better off spent on a trip to the zoo.

The opening sentence should be enough to convince even the most hardened skeptic the report is crap. "The EIA sees real U.S. GDP growing by +2.7% per year from 2009-2035, and oil prices will climb to $125 per barrel in 2035 while net imports into the U.S. will still be a major but declining share of total energy demand."

Let's pause for a moment to let that sink in. Oil was trading at just below $114 today and they think it will only rise +$11 over the next 24 years? Whatever they are smoking I want some!

Secondly they expect our dependence on imported oil to decline by 2035. While that may actually occur the actual amount of oil available to import will have declined by a significantly higher percentage. Remember, the International Energy Agency (IEA) did a major study of the 800 largest fields two years ago and said the average decline rate was 7% per year in currently producing fields. That means we are losing about 6.3 mbpd every year to depletion. Since we are only finding and producing a little over 2.0 mbpd every year the obvious conclusion is clear. The oil available for import by 2035 will be shockingly less than is available today and possibly only a small fraction of today's quantity.

The EIA said our dependence on imported oil will be reduced by a large increase in biofuels and a strong upsurge in gasoline economy in the vehicles we drive. They claim we depended on imports for 60% of our liquids (oil, NGL, gasoline, diesel, jet fuel) in 2005. That declined to 51% in 2009 and will fall to 42% by 2035.

They did make a claim I partially agree with. "Rising fuel prices will spur U.S. energy production across all fuels, particularly natural gas from shale gas resources and limit import growth." Apparently they are expecting a revolution in motor fuels with natural gas and biofuel demand surging in proportion to gasoline. I agree the rising fuel prices will greatly stimulate the production of all fuels both hydrocarbon and otherwise BUT the continued explosion of motor vehicles I discussed HERE last week will more than offset any gains in biofuel production.

The EIA is expecting U.S. offshore production to increase by 13% between now and 2035. However, they did suggest that was based on an active drilling program and pointed out that offshore lease sales have been postponed to at least 2017 by the current administration. Given the rapid depletion rates of deepwater wells almost every current discovery will be dry, plugged and over well before 2035. The average life of a deepwater well is between 5-7 years.

They projected Rocky Mountain oil shale production would come online in 2029 and account for 2% of all production by 2035. Come on guys. Put the bong away and come back to reality. Predicting oil shale production in the Rockies to begin 18 years from now is pure speculation of the kind achieved by dart throwing at a calendar. Nobody has even figured out how to produce oil shale after three decades of trying and the EIA is counting this as a major fuel source in 2029?

Farther down in the details they predict U.S. oil production to rise by 600,000 bpd by 2035. Even with their 13% increase in offshore and 2% in shale oil they only show our total production increasing by roughly 17,647 barrels per day, per year for the next 34 years. We are the richest nation on earth with the most private oil companies and the entire continent to prospect and they are only predicting an additional 17,647 bpd per year.

However, that number may be as close to reality as they come. The production from the Bakken has increased from 3,000 bpd in 2005 to 275,000 bpd in 2011 and is expected to climb another 100,000 bpd in 2012. That would seem to contradict their meager increases but we have to allow for the depletion monster. At 7% per year and current U.S. production at 5.6 mbpd that means we lose an average of 392,000 bpd to depletion every year. We have to find and produce another 400,000 bpd every year just to break even. This does not count the 175,000 bpd we lost in the Gulf for 2011 and 375,000 bpd we are expected to lose in 2012 from the drilling moratorium.

To summarize this we only need to remember the peak oil scenario. Globally we are finding and producing an average of 2.0-2.4 mbpd of new oil every year. Demand is increasing between 1.5-2.0 mbpd every year. OPEC claims they have 4.1 mbpd of excess capacity. Depletion is costing us -6.3 mbpd in production every year. Global 2012 demand is expected to be more than 90.0 mbpd. Do the math and by the end of 2012 I would be very surprised if oil prices are not over $150. By 2035 they could be $250 a barrel but it won't matter because we will all be walking or riding bicycles.

Nobody in their right mind could actually believe that oil prices will only be $125 in 2035. That really would be a trip to the Twilight Zone.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?