Conventional oil and gas discoveries have fallen by the wayside since the shale boom and the subsequent oil price collapse. In fact, they’ve fallen to their lowest in 70 years. 

All in all, this year has seen new discoveries of nearly 8 billion barrels of oil equivalent, compared to 10 billion barrels of oil equivalent discovered last year.

But what’s most striking is that new discoveries aren’t even close to keeping pace with the loss of conventional resources.

So not only has our pace of discovery declined, but discoveries are also in much more challenging geological venues and typically offshore, which means it could take many years just to bring new resources online.

However more importantly the resource replacement ratio has been below 40% since 2013 or about 28% for the past seven years on average. It is a massive amount of reserves that have been taken out.

It means that we have consumed oil and gas at a rate of 3.6 barrel of oil equivalent for only one barrel of oil equivalent discovered for the past seven years.

Worse, the trend is negative, which means without drastic measures to counter this negative trend, it will get more severe. As we all know, the demand for oil and gas is increasing and is estimated at 1.4 M Boep/d in 2020, going down a little to ~1 M Boep/d in 2024.

When you consume almost four times more than you can produce, there will come a time when there is no more to consume, and it is the end of the story.

We are not talking about dollars here and the ability for the US government to print more as needed. In the case of the oil and gas consumed, they cannot be replaced artificially by a "virtual spigot."

Oil and gas is a crucial part of our modern world, which is thirsty for energy, and without this essential energy source, we will be confronted with an existential dilemma.

““We’re going to end up with a real shortage of energy,” he said at a conference in Saudi Arabia.” …His comments were echoed by Larry Fink, who said there’s a high probability of oil soon reaching $100 a barrel…”

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The Indian government ruffled a few feathers at the COP this morning, by raising the thorny question of the £722bn they were supposed to receive to aid their transition away from fossil fuels. Because, when all is said and done, the proposed transition is all about money. Decommissioning the old fossil fuel infrastructure will not happen unless states and private investors stump up sufficient cash to pay for the materials, equipment and workforce required to do the job. And at the same time, an entirely different group of workers, materials and equipment will have to be funded to build out the new, bright green infrastructure.

To aid things along, states will also use legislation to force the hands of businesses and households. The current UK government’s decision to legislate a ban on new internal combustion engine cars from 2030, for example, has forced the car industry to switch investment toward EVs. The ban on coal power plants from 2025 may provide the more realistic example, however, because of its unforeseen consequences – such as companies closing power stations early to save on maintenance, and the threat to energy security which has now emerged. Nevertheless, it is some combination of legislation and money which will drive the process.

The same can be said, of course, for any campaigning/political issue. You can count on one hand the number of campaigns which have called for less state spending and the revoking of laws. Most often, new law and additional spending underpins demand for reform, while failing to spend and/or legislate is among the biggest sins a government can make.

So far so good. Except that both laws and money are merely ink on paper. They do not, in and of themselves change anything. Imagine, for a moment, you are the proverbial shipwreck survivor on your desert island. Lacking sufficient food and drinking water, your days are numbered. But then a passing aeroplane appears to offer salvation in the form of an emergency package parachuted down to you. You tear into the package, saliva dripping from the side of your mouth as you imagine the tinned food inside. But to your horror, you discover that the package contains a copy of a new law banning hunger on desert islands, together with a pile of banknotes that you might use to purchase some drinking water. Laws and money, then, are only useful insofar as they can redirect available resources – in this case, food and water – but are entirely useless when resources are not available.

This is obvious at a small scale – like a single person on a desert island – but is often obscured by the complexity of developed civilisations where resources are nominally available. Even in relatively primitive civilisations by modern standards, complexity served to obscure the resource implications of political decisions. As I explain in my book, The Consciousness of Sheep:

“Complexity, when it does occur, is always a response to the unforeseen consequences of prior solutions. Introducing coins as a means of paying soldiers and merchants, for example, makes theft and counterfeiting of money possible. This means part of societies’ surplus had to be invested in protecting the money supply. In a simple society, this might just mean allocating some soldiers to protect the coins when they are distributed, and to stand guard on market days. But even this apparently simple solution comes at a cost:

• The soldiers have to be fed and clothed
• Peasants – somewhere – have to produce this additional food
• A weaver will have to produce the additional clothing
• Blacksmiths have to do additional work to provide them with arms
• Additional resources and energy have to be found to allow blacksmiths to create the arms
• And, of course, someone else will have to be drafted into the army to take over the duties the soldiers had been performing.

The exact ramifications of this process would be neither known nor knowable to those making the decision. They will merely have been aware that people stealing money were eating into their surplus. And since the way to protect against robbery was to allocate guards, that is what they would choose to do. They would most likely not even think about the additional work for the farmer, weaver and blacksmith; still less the supply of resources and energy that would be required. They would, if you will, push their complex civilisation slightly out of balance, and leave it to individuals within it to try to find a new equilibrium.”

The only differences today are that there is far more complexity and the potential for negative unforeseen consequences is exponentially greater. Consider, for example, the current haulage crisis. It is not simply a shortage of lorry drivers – in fact, the UK has more than enough qualified HGV drivers. Rather, if is due to the confluence of unforeseen consequences from a raft of policies of both states and private companies, including:

• Legislation making drivers personally responsible for everything from vehicle safety to transporting illegal migrants
• Legislation changing the tax status of self-employed drivers
• The centralisation of giant distribution hubs with long waiting times and poor facilities
• Local council by-laws that ban parking near to toilets, shower facilities and food outlets
• Pay and conditions that have been allowed to deteriorate to the point that almost any other job is better
• Brexit and the pandemic restrictions causing Eastern European drivers to leave and not return.

These are merely the direct causes. Less obviously, Blair’s push to get 50 percent of school leavers into higher education is now being felt, as fewer school leavers have been trained in non-academic work skills including HGV driving. In this respect, applying policy of any kind to a complex globalised economy looks a lot like hanging poor wallpaper – you push a bubble down here only to cause more bubbles to appear over there.

One saving feature of our complex, globalised economy remained true for the best part of three centuries. This was that whatever changes we made, there were sufficient resources available to allow the system to accommodate them and to return to some kind of equilibrium. What began with small pits to carve out minerals gradually morphed into literally moving mountains to expose the resources beneath. Politicians could pass laws and borrow new currency into existence, and the economy would provide all of the necessary resources to bring the desired policies to fruition.

But something changed around the year 1970. Most notably, the US dollar – which had provided the financial foundation of the post-war economy – stopped working. Instead of facilitating economic growth, printing new dollars began to generate inflation. Why? Because – largely unseen by economists and politicians – exponential financial growth could no longer generate exponential resource growth. This was the result of a single process unfolding in both mineral resources and, crucially, in energy. In both cases, the industrial economy had operated on a “low-hanging-fruit” basis – using up all of the cheap and easy resources before moving onto more expensive and difficult ones. But so long as energy remained cheap and easy, so that energy consumption could grow exponentially, resource growth could also grow to meet whatever commercial or policy aims the combination of legislation and spending desired.

Most obviously, what changed in 1970 is that US land-based, conventional oil deposits passed their production peak. In the financial field, this brought an end to the Texas Railroad Commission’s monopoly over world oil prices. Less obviously, it marked the point at which global oil production ceased growing exponentially:

“Nobody goes there anymore. It’s too crowded.” – Yogi Berra

We have a small confession to make. Discovery Channel’s Gold Rush is one of our favorite television shows. For those that don’t know, a television is a thing that looks remarkably like a computer monitor, but instead of simply watching whatever you feel like whenever the urge hits you, you must wait for specific times to see the shows you like. Crazy, we know.

Currently in its 12th season, Gold Rush profiles various gold mining operations as they set about chasing the dream of extracting life-changing riches from the ground. While the crews being chronicled and the locations of their mines have changed over the years, the series is grounded in the Klondike region of the Canadian Yukon.

Gold mining, even on television, is a business – and a brutally tough one at that. Heavy equipment represents capital investments, spare parts are working capital, fuel and labor are variable costs, and gold is the only source of revenue. The miners on the show are constantly balancing the various cash pressures involved in operating a successful gold mine, while holding out hope of hitting the proverbial mother lode.

One operational decision that fascinates us is how mine owners balance the need to remove overburden to expose gold-rich paydirt with the actual processing of that paydirt through their sluice plants (i.e., the facilities that wash the paydirt and capture the gold). Removing overburden (otherwise known as stripping or “opening up a cut”) is a necessary precondition to obtaining paydirt, but it is cash intense and generates no revenue.

We were reminded of this strip/sluice tension when we came across a fantastic article written by one of our favorite Substack authors. Rory Johnson is the writer of Commodity Context and his most recent piece, US Shale Patch’s Lackluster Recovery is a Problem for the Post-COVID Oil Market, is a fascinating and sobering read (subscribe to Johnson’s Substack here and follow his Twitter account here).

As Johnson explains, US shale operators function in an analogous manner to the miners on Gold Rush, balancing the drilling of new oil wells with completing them for production. Just like overburden can be stripped for future processing, so too can oil wells be drilled but left uncompleted. Such wells are colloquially known as DUCs. Here’s a relevant quote from Johnson’s piece:

“Drilled but uncompleted wells are a function of the fact that the US shale production process has two major steps: (1) a well is drilled with a drilling rig and then (2) it is “completed” by a different team (i.e., the actual fracking part) after which it begins to produce marketable crude. When drilling runs ahead of completions as it largely did through 2017-19, the industry accumulates a sizable mountain of this potential production. These DUCs were yet one more bearish factor weighing on pre-COVID market prospects: even when US drilling declined, producers could lean into their DUC inventory to keep production humming along despite weaker rig activity.”

The shale boom enabled the US to reestablish itself as the top global producer of oil and gas. Prior to the Covid-19 lockdowns, the US was producing approximately 13 million barrels of oil per day (mbpd) – more than double what it had been generating just a decade earlier.

UK gas prices have fallen back this week – although they are still some 400 percent higher than at the start of 2021. And the reasons for the fall in price should not breed complacency. First, the arrival of a south-westerly airflow off the Atlantic has finally begun to spin those offshore wind turbines after last week’s doldrums.

The second reason for the lull in price is worrying for a more complicated reason. On Wednesday, Marwa Rashad at Reuters reported that:

“At least ten cargoes of liquefied natural gas (LNG) have recently been diverted from Asia to head west drawn by Europe’s record high prices amid supply concerns ahead of peak winter demand, industry sources said…

“In addition to the above cargoes, a U.S. cargo onboard Marvel Crane had headed toward Panama bound for Asia before being diverted northeast and now signalled it was bound for the UK’s South Hook terminal, according to ICIS LNG Edge.

“Data Intelligence firm Kpler said it has listed more tankers diverting towards Europe from Asia and Other destinations like Brazil including British Contributor, Tembek, LNGShips Manhattan, LNG Alliance and are eying two more for possible route change.

“Furthermore, West African cargo onboard Maran Gas Sparta, a vessel chartered by Shell, has been called back to Europe after it was on the cusp of passing the Cape of Good Hope, said Felix Booth, head of LNG at energy intelligence firm Vortexa.”

Liquified natural gas is expensive. And the reason these ships have done a U-turn to head toward Europe and the UK, is that – for the moment – the pound and the euro still carry enough nominal value for our gas supply companies to outbid their Asian competitors. This though, is about to change. And in future, countries like the UK are going to struggle to outbid anyone for fossil fuels that are now either depleting or being used by producing countries for domestic supply. In short, Western Europe, and especially the UK, are about to be hit with higher import prices just as the value of our currencies take a post-pandemic dip.

Inevitably, the UK establishment media only sat up and paid attention when the supply companies threatened a 50 percent increase in energy bills, hitting the salaried liberal class and prompting calls for the government to take action. But it is far from clear at this point that governments can do much more than the energy equivalent of rearranging deckchairs as the ship goes down.

Neither the government, the supply companies nor the establishment media understand the essential role of energy in the economy. In part this is because – until now – we have only had to pay the cost of extracting and supplying fossil fuels, not the true value they provide to the economy. And saddled with economic theories – both left and right-leaning – which simply assume that there will always be enough supply to meet demand, politicians and the economists who advise them will claim that we only need to issue some additional new currency to solve the problem.

Once we understand, however, that nothing gets done without energy – including securing future energy itself – then we can begin to understand that the rise in gas prices – coming on the back of big rises in the price of oil and oil-derived fuel – are about to rip through what remains of the post-covid economy like a hot knife through butter.