The Coming Oil Whiplash: Mad Max Edition

“There has been too much violence.  Too much pain.  But I have an honorable compromise.  Just walk away.  Give me your pump, the oil, the gasoline, and the whole compound Just let me give you my crude oil and I’ll spare your lives.  Just walk away and we’ll give you a safe passageway in the wastelands.  Just walk away take the crude oil and there will be an end to the horror.” – The Road Warrior (Updated for 2020)

Did you see the new Mad Max® prequel?  It was playing on every channel last night.

Whiplash is coming.

Currently, like the rest of the economy, the energy industry is a mess.  It was just the energy industry’s turn.  First it was Gamestop®, and now it’s the industry that underpins every bit of modern society.  Our modern world is built on the premise that cheap, available energy will always be abundant.

How can we afford to have fresh lettuce and tomatoes in the middle of winter when there are none growing within a five hundred mile radius?  That depends on cheap energy to grow it, and cheap energy to transport it.  Cheap energy provides modern society the ability to use the weather of one continent to grow strawberries when it’s winter on another.  The miracle is that it allows this to be done at such a low cost that it’s affordable to nearly everyone in society to eat fresh strawberries in winter and for stoners to grow weed year round in the basement.

Energy is important, and probably the most important component of energy in our lives is crude oil.  I know that it will give Greta Thunberg the whiskey shakes, but oil is currently absolutely required to feed several billion people on this planet.  Beyond that, it provides luxuries that no king in history could have had to everyday people.  Want to see what the weather is on the other side of the planet?  Want to watch a celebrity 1500 miles (34°C) away in their 10,000 square foot (17 liter) summer home in a gated community virtue signal that #weareallinthistogether because their maid isn’t considered an “essential” employee and they’re suffering, too.

Seriously, it was in the newspaper that Greta had a cough and was certain she had COVID-19, but my diagnosis is that the symptoms were caused by an acute lack of having people write about her on a daily basis.

So, oil is important.  But the oil industry is currently collapsing.

How bad is it getting?  I filled up my tank on Monday, and was offered a complementary free oil well with my purchase.  I had to turn it down because I couldn’t afford how much money people wanted me to pay to take the oil from the well.  I’m joking, they actually offered me six oil wells.  But oil producers really had to pay to get people to take their oil last week.  This is a situation that’s unheard of in the history of, well, everything.

Economics is based on the study of scarcity of stuff, not on the overabundance of stuff.  And right now we have more crude oil than Bernie Sanders has houses.  Why?

Gasoline demand has plummeted.

This week we’re partying like it’s 1994, because that’s the last time that gasoline consumption was this low.  In 1994, the United States had a population of only 263 million, 80% of what it is today.  Remember 1994?  That was the year that Nancy Kerrigan got kneecapped by Tonya Harding’s buddy and O.J. Simpson was arrested after the Coronavirus of police chases, since the whole chase involved people you didn’t know dying and it dragged on forever, which both seem to be symptoms of COVID-19.

Hipsters had problems skating on lakes.  They wanted to do it before it was cool.

The oil market is so bad in April, 2020 that oil producers are shutting down existing wells.  Oil demand has dropped 29% in the last month, down from approximately 100 million barrels a day to only 71 million barrels a day.  71 million barrels a day is a number last seen when people were coming out of their Y2K bunkers to see if Skynet® crashed the world.  Spoiler alert:  if 2020 keeps going like it has been, I expect Y2K to actually happen sometime in June.  It’s been that rough of a year.

To me, the really stunning figure is that oil demand dropped by nearly the combined production of every single OPEC nation.  Yup.  13 nations.  Think about that when you think about the ramifications of our current situation.  The economic output of entire nations is now no longer important.  How do you eat in Venezuela?  Even when oil was profitable you couldn’t find food in Venezuela, thanks to the miracle of socialism.  One positive note about socialism – if there is a socialist hell (and if I have to go to hell), I’ll sign up for that one instead of the capitalist one.  They probably have already run out of money to pay for heat.

But the oil situation is scary.  36 crude oil super tankers are lined up in the ocean, just lurking off the coast of California, right now.  They represent 20% of the world’s daily production, and they have absolutely no place to go.  And I expect it to get much, much worse.

See, I can make fun of the metric system using Star Wars™, too.  (H/T to Arthur (LINK) for the idea.)

If demand dropped that much, what about production?

In some cases, production is ongoing because oil producers will lose leases if they shut down.  In others, the concern is that shutting a producing oil field can damage the reservoir, forever trapping some oil that could have been recovered.  In yet other cases, the producers have done the calculation that some money coming in is better than none, although when you have to pay to get rid of the oil, you can’t really make that up in volume.

Drilling will soon come to a standstill for the fracked shale oil wells that have been entirely responsible for the oil production boost seen since 2008.  One thing about fracked wells:  you have to keep drilling to get the oil.  A typical fracked oil well can decrease as much as 65%-85% in the first year, but keeps producing at a lower level for a very long time.  This produces a very simple equation:  to keep producing oil, you have to keep drilling and fracking for it.

Fracking for oil is just like the Red Queen said to Alice in Alice in Wonderland’s sequel, Through the Looking-Glass as Alice asks why they’re running and not getting anywhere:

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Drilling will stop, so a lot of that 8 million barrel per day increase in US oil production since 2010 will evaporate.  Gone.  And it will take years of drilling to get back to that number.

See?  Now you can have an Irish accent, and describe our oil situation with just one phrase!

The oil demand collapse will last for years, and will be in tandem with the economy.  My bet?  At least five years, if not a decade.  A slowly moving economy doesn’t need as much fuel since you don’t have the money to drive, anyway.  And we were pretty fuel efficient in the past, after all, it only took Christopher Columbus three galleons to find the New World.

But what happens when things start to get better, people start to drive more, and economies around the world begin to try growing again?  All the drilling rigs are put up.  All the drillers are doing other things.  The companies that used to drill and frack the shale are gone.  The expertise that was won over a decade of drilling shale in Texas and the Dakotas?  Like a Kardashian’s dignity, it’ll all be gone.

That’s when we’ll face whiplash.

Just as the economies of the world start to wake up from the slumber of their economic coma, they will have to face a hard ceiling on energy production.  Oil production won’t keep pace with demand, and then the fun begins as oil prices skyrocket and strangle an economic recovery.  This will lower demand, and you have a nasty loop where the systems will cease to reinforce each other, and will instead fight each other.

I know people talk about alternative energy, but even now alternative energy plays as big a role in the world’s energy makeup as alternative rock.  Eliminate the disastrous and uneconomic use of ethanol for automotive fuel here in the United States, and alternative fuel use across the United States (including windmills) becomes minimal.

But Darth Vader® insists on using Castrol Siththetic™ Oil.

63% of the energy for electricity (in the United States) comes from fossil fuels.  Nuclear is in second place with 20%.  The only other sources worth mentioning are hydropower and wind, which each produce about 7%.  Transitioning to alternative energy is even harder than re-learning how to frack oil shale:  it will take decades and billions of dollars of sustained investment.  On top of that, alternative energy faces technical, economic, and environmental hurdles that make teaching a fashion model to read look simple.

We could try to blame this mess on COVID-19, but COVID-19 couldn’t crash a system that wasn’t already as fragile as Alec Baldwin’s ego in the first place.  The developed world’s economic, monetary, and credit systems were already broken.  COVID-19 just came along and gave them a nudge.  If it weren’t Coronavirus, it would have been something else, like too many people showing up with 30 items in the 12 items or less line at the supermarket.  Every year of the last decade has been that system living one more day on borrowed time as it danced near the edge of a cliff.

But for now:  anyone want a great deal on some crude oil wells?