Weeden’s Maxwell: Brace For $300/Barrel Oil
November 03, 2010
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When IndexUniverse.com Managing Editor Olivier Ludwig caught up with Charles Maxwell, Weeden & Co.’s senior energy analyst, it was to talk about so-called “peak oil,” the theory that holds that the day when oil production around the planet is no longer sufficient to meet demand is nearly upon us. Maxwell, who has been involved in the oil industry for more than half a century, speaks with the slow cadence and easy charm of a man who has mastered his subject. The problem is that if you take his message seriously—and there are plenty of reasons to believe it unreservedly—it can pretty much ruin your day. From having to eat more root vegetables in winter instead of enjoying oranges from Chile, to watching oil prices spike to $300 a barrel by 2020, a world of slowly but steadily dwindling supplies of petroleum would be very different indeed. But there is an upside, once the shock of it sets in: Peak oil will undoubtedly unleash a wave of technological innovation, most importantly in energy efficiency.
Ludwig: You’re a believer in the peak oil theory, correct?
Maxwell: Yes, but remember, we won’t run out of oil for thousands and thousands of years. There will always be some kind of drilling going on in some isolated place in the world and new supplies will be available.
What we’re saying is that there are oil fields around the world that are young and vigorous and still full of gas with good pressure—remember, it’s the gas that drives oil out through the rock. But the older mature fields have had a good deal of their gas taken off, and with pressures dropping, they’re slowly reaching the stage where they can’t move the oil through rock, and production begins to falter.
Normally the production life of an oil field is shaped like a bell-shaped curve on the first half of production.
Ludwig: You’re sounding a bit like M. King Hubbert, the Shell geologist who successfully predicted that U.S. oil output would peak in the 1970s.
Maxwell: Well, Hubbert thought there was a continuation of the bell-shaped curve, that the second half of an oil well’s productive life was a mirror image of the first half. But we’ve learned now through the use of high technology that we can make the second half of production look more like a crocodile tail.
We used to get about 25 percent of the oil out of a field about 100 years ago, and we had to leave the rest. Today, we probably get an average of about 40 percent, so that’s a huge increase. But on the other hand, it’s still a very unsatisfactory number relative to the 100 percent that’s there. But by and large, we’re now making progress rather slowly. I would think that in 10 years, we’ll be at 41 or 42 percent. So what’s happening is that the old fields are beginning to fail.