Buy your turbo SUV on a 12 month lease, we are NOT awash in oil…

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If you are interested in a better understanding of the energy industry, those for whom this site was founded oh so long ago, it’s very irritating to have your head bashed around by waves of statistics from experts that make seldom-corroborated predictions. More often than not the numbers are used to stun opponents or act as peacock feathers. The statistical barrage generally provides an in-depth understanding of trivia without necessarily proving any understanding of the bigger picture issues. On the other hand, sometimes well-chosen ones do indeed help and I will stoop to using statistics when absolutely necessary for clarity or when they’re really simple and harmless.

Such a time is upon us. There are far too many articles about this supposed oil glut to let it go on any longer without some sort of challenge. This will take a few numbers, but I’ll try not to be too flamboyant about it.

The problem starts with the endless cacophony about US shale production and how it has upended the global oil industry, a dubious inference which is extended to topics such as OPEC’s new-found irrelevance, and that the only variable that really matters is the US as the new “swing producer” and how the level of drilling activity in the hinterlands of North Dakota and other miscellaneous states (between the popular ones) is impacting trillions of dollars worth of daily oil trading.

The stories are examples of media at the worst, following a herd mentality and ignoring the appropriate context because that would, well, ruin the story. So here’s a few numbers to put the whole issue in context.

The world produces and consumes over 90 million barrels of oil every day. It is a miracle of economics, or maybe crappy statistics, that the production and consumption numbers are nearly the same. One would expect times of excess production if big new fields come on stream, or times of moderate shortages if demand rises sharper than expected.

Out of this 90 million barrels per day number, the US produces about 10 million. Before the shale boom, the US produced about 5. So after natural production declines (all oil fields decline over time, more on that in a second) the US added 5 million barrels per day to the global total. Yep, that’s quite a bit, if you’re trying to mop it up after a spill in the Gulf of Mexico, but in the big scheme of things it’s small. And came at great cost. According to Bloomberg via the Economist US producing companies have racked up over $200 billion in debt since 2009, largely chasing shale plays. That is debt in addition to shares issued and cash flow spent, items for which I have no statistics but are most certainly in the hundreds of billions in total, and the cost of adding the New World Order shale volumes is astronomical. And with low prices for oil and natural gas, banks are not as willing to lend money, and low share prices make it difficult to issue more shares.

The oil fields of the world lose productive capability at about 3-5 percent per year, depending on whom you believe, but it’s an unavoidable truth. So assuming an average of 4 percent, the world needs to add 3.6 million barrels per day of production (4 percent of 90 million) every year to keep production flat at 90 million barrels per day. It took US shale oil drillers more than 3 years to add 5 million barrels per day, at a cost of hundreds of billions of dollars that are no longer available. So the odds of that growth curve continuing are pretty slim. Meaning the news hounds will next move on to looming shortages, and make that story the central theme of the next wave of hyperbole.

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