Addendum: I thought the picture interesting but don’t take this an attempted refutation of peak oil. Also, the data on oil rigs do not include rigs in Russia or onshore China which means that they are an underestimate, perhaps especially in the later years.
Is the (maximum) production of 1 rig approximately constant? If not, then why is it a good measure for anything? Why not simply yearly production, or yearly investment?
Oil is mostly a homogenous commodity with prices set by nation states and a cartel of nation states. Recognizing it is a cartel, which has large storable in ground capacity relative to current production, means that what dictates prices is the stability of a national resource cartel. What would be interesting to me is not the number of rigs, but the location of rigs–are they outside of countries which have traditionally restricted production to support prices.
I’m betting lower prices as non-OPEC producers expand, as OPEC members need more revenue for local uses and are willing to cheat by vertically integrating downstream into refining and value added, and, most importantly, as some of the largest consumers become more energy efficient.
It appears that the number of working rigs is highly correlated to the price of oil. This, of course, seems intuitive. If the price of a product goes up, producers will put more production facilities into operation.
I think this graph is interesting in the detail that’s easy to see as a generalization, but hard to assess without more “resolution” in the picture (or a table of values). What it shows quite conclusively, I think, is the time-dependency of the two curves, which is easily seen in the location of the inflection points. Very consistently, the upturns and downturns of the number-of-rigs curve lag slightly behind the upturns and downturns in the price. I’d be interested to see a statistical test of that time-dependency.
Totally misleading unless Oil-output-per-rig is some universal constant.
The oil-output-per-rig is not the critical variable.
Rather it is the feet-drilled-per-rig that is the critical variable and that has increased sharply since the 1970s.
Secondly, the percent of successful holes drilled has risen or conversely the number of dry holes has fallen sharply. Either way a given rig is more likely to find oil today than it did in the 1970s.
This is a good first step that rises questions, but that is all it does.
I conclude that building rigs drives up the price of oil.
“Drill baby, drill” indeed.
Ken Rhodes said, “It appears that the number of working rigs is highly correlated to the price of oil. This, of course, seems intuitive. If the price of a product goes up, producers will put more production facilities into operation.”
True, but what if the graph were the other way around? That is, what if there were a strong negative correlation between the number of working rigs and the price of oil? Well, that too would be intuitive. If more facilities are in operation, the supply of oil increases, driving down the price. (And if there were no correlation, we would attribute price movements to demand shifts). And voila–the impossibility of testing the basic economic theory of supply and demand: all observed phenomena serve to “prove” the theory.
NC; Working rigs lag oil prices because it doesn’t make sense to spend millions of dollars to find cheap oil.
It only makes sense to spend big E&P dollars when the price of oil is high and you think it will stay high for some time.
Also, in the current boom, the majors rapidly used up all the existing E&P capacity and started bidding up prices of existing assets — in other words, every drill rig in existence was drilling, and then the majors bid up day rates in a fight over the existing rigs/ships (e.g., from $100k/day to over $500k/day for late-gen drillships).
The majors figured out that wasn’t getting them anywhere, so they throttled back E&P budgets while the drillers built more rigs/ships as quickly as possible. Everything comming on line was under contract.
Also, note that the drillers operate on debt. If the price of oil is expected to stay high long enough to recoup the capital investment, there are plenty of willing lenders.
anon,
That’s true if you take a view of short-sightedness by the oil constructors as oil rigs are durable investment, not perishable inputs. I still think it’s much more likely that it’s a balance sheet effect. If anything, it’s more likely that the lenders are short-sighted ones.
mulp,
Can you supply any links to data which supports your view about major oil companies? In particular, can you provide data which explains why Exxon and BP have any incentive whatsoever to limit petroleum production? That might make sense if they were significant owners of global petroleum reserves. On the other hand, if Exxon’s profits are derived from developing oil fields owned by others, and from refining crude oil, then limiting oil production doesn’t make sense. So which is it, mulp?
I wrote >>It appears that the number of working rigs is highly correlated to the price of oil. This, of course, seems intuitive. If the price of a product goes up, producers will put more production facilities into operation.>>
Libert replied>>True, but what if the graph were the other way around? That is, what if there were a strong negative correlation between the number of working rigs and the price of oil? Well, that too would be intuitive. If more facilities are in operation, the supply of oil increases, driving down the price. (And if there were no correlation, we would attribute price movements to demand shifts). And voila–the impossibility of testing the basic economic theory of supply and demand: all observed phenomena serve to “prove” the theory.>>
As to simple correlation, Libert, you’re absolutely right. Can’t tell a thing; could be either way. However, in my post I mentioned a key factor that tells a tale–the time dependency of the correlation. There is a very consistent time lag of the inflection points in the two curves. If the price curve changes direction, then very soon the drilling curve changes direction in the same direction. As prices and drilling are both going down, and then prices reverse direction and start going up, within a few months drilling starts going up. Likewise in the other direction.
rob: “Why the stark divergence starting around 2005?”
The assumption that historical trends will continue might not be valid. As both Spencer and I have pointed out, technological change has likely changed the relationship between drilling rig counts and production:
- Fewer dry holes are being drilled.
- Producers have developed methods by which a single hole can now do the work that previously required several.
- Production from already drilled wells has sharply increased.
Further, owners of petroleum reservoirs likely believed the 2005 to 2008 price level to be an unsustainable bubble. They have been proven correct.
NC wrote:
“That’s true if you take a view of short-sightedness by the oil constructors as oil rigs are durable investment, not perishable inputs. I still think it’s much more likely that it’s a balance sheet effect.”
You need to stop making stuff up and study the industry. What do you think happens to ships, jackups, etc. and land based drill rigs when dayrates are too low to use them, or there are not contracts available at any price? What happens to the crews?
BTW, how much do you think it would cost to mothball a 800 foot long drill ship for 15 years (e.g. from 1985 to 2000)? What about the debt servicing?
What do you do with the crew? How do you reassemble them 15 years later — they’ve all died, retired, or moved to other industries.
This is a long-term boom and bust industry, and you can’t triple the number of rigs, ships, jackups, and people overnight.
Output per rig has been increasing steadily over time for both oil and gas thanks to horizontal drilling and other innovations. I agree it does not refute Peak Oil–there are plenty of other sources that do. Check out the BP stat review xls tables for both oil and gas reserves over time–even as we use more we find more, faster.
Regarding “there’s only so much locked in the ground” check out “abiogenic petroleum origin” and “the deep hot biosphere”. You could just read The Ultimate Resource by Julian L. Simon.
Hydrocarbons In The Deep Earth?–ScienceDaily (July 27, 2009):
“[Carnegie Institution's Geophysical Laboratory, with colleagues from Russia and Sweden]…for the first time…have found that ethane and heavier hydrocarbons can be synthesized under the pressure-temperature conditions of the upper mantle —the layer of Earth under the crust and on top of the core.”
Horizontal drilling will increase recoverable oil slightly, however it just drains the reservoir quicker, it is not cheap and is prone to many problems, get the directional drilling assembly stuck and it will cost a million. Bits and mud systems are getting better, we have computers hooked to everthing but not much has really changed in my 36 year career. We are loosing productivity like all industries, costs were increasing rapidly untill the crash of 2009 and will resume increasing once the spare capacity in the drilling and completion sector is destroyed (happening now). Proven world reserves are decreasing although production is increasing (we just put a larger hose on Mother Natures big tank in the ground). Most of the wells I worked on in the last 15 years were classified “development”, not exploratory.
Thanks for the insights, Keith.
But look at the unprecedented divergence at the right end of the graph, and compare it to what happened in the late ’70s/early ’80s oil shock. Thirty years ago, skyrocketing price led to more oil extraction, and the price fell back down. This time around, skyrocketing price has NOT led to more oil production. That suggests that the Peak Oilers are correct, and the supply no longer fluctuates in response to demand. Price is set entirely by fluctuating demand for a fixed supply–the same mechanism that Henry George observed in land prices.
“There is a trend to more offshore drilling, deeper and deeper (more expensive), I have never seen a discussion of the negative effects of a offshore blow out (just think, millions of barrels of oil into the ocean from a uncontrollable well could bankrupt Exon Mobil).”
Nah, this could never ever happen.
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