Liquidation, also known as a going-out-of-business sale, is a stunning word to use about the oil industry, unless you think about it for a minute. A company in liquidation stops making or buying its product and keeps selling until its inventory is gone, then turns out the lights and locks the doors. Oil companies don’t make oil, they have to find it, and they aren’t finding any. What’s more, take a look at their capex (capital expenditures for exploration and development) numbers and you see that after a decade of increasingly frenzied and expensive searching for new oil fields, with ever-diminishing returns, the industry has virtually stopped looking. Which brings us once again to the shoals of peak oil.
Oil hypists have been declaring the “theory” of peak oil to be dead since the phrase was first used. Never more enthusiastically than when the shale oil “revolution,” a.k.a. the fracking boom, took hold in America five years ago. The assault on logic and uncommon sense was massive, well funded and for a time successful: for a while, the term “peak oil” became synonymous with “loser.” Not any more. Peak oil is back, and Rex Tillerson is, if anything, more terrified than he was at the beginning of the year.
First of all, peak oil is not a theory, it is a straightforward expression of mathematical reality. If you are using a resource whose supply is finite, at some point you will have used half of it. And by extension, of course, at some point you will run out altogether. But peak oil is not about running out, it’s about reaching that halfway point, after which the supply of oil will steadily decline toward zero. That’s because everybody goes after the cheap and easy oil first; the second half is harder and more expensive to get.
Once we drilled a hole a few hundred feet into the ground and watched a gusher soak the neighborhood with crude. Now we drill through four miles of rock in order to wring oil by the pailful out of a sponge made of stone. As if that were not enough evidence that we are, as someone said, taking jelly beans out of a jar that is no longer even close to full, consider the torrent of reports and articles that just in the past few weeks has documented our arrival at the peak:
- The Return Of Peak Oil – Worrying Signs From U.S. And Russia — oilprice.com
- ‘Beyond petroleum’ – fracking’s collapse heralds the arrival of peak oil — Ecologist
- The U.S. Production Decline Has Begun — Resilience.org
- Kemp: US Oil Production Is Probably Peaking Right Now — Rigzone
- Oil production falling in three big shale plays, EIA says — fuelfix.com
- Debunking America’s Energy Fantasy — naked capitalism
The oil hypists would have us believe that this is all the fault of the collapse of oil prices last fall, and all will be well as soon as this temporary blip is over. But well before prices fell below $100 a barrel, the oil companies were giving up on their capex budgets and the frackers were up to their eyeballs in debt and running out of sweet spots to frack.
Where there is no liquidity, there is liquidation. Now the stockholders are finding out. Be afraid, Exxon. Be very afraid.