Executive Summary

• The importance of understanding the difference between depleting vs declining
• Why the shale "miracle" can't rescue us from this predicament
• Why 2019 will be a seminal year
• How high will oil prices go when the shock arrives?
• Why the next oil shock will force the economy — and EVERYTHING we depend on — to diminish

If you have not yet read Part 1: The Looming Energy Shock available free to all readers, please click here to read it first.

Remember, you have to find it before you can pump it.

Well, oil companies haven’t been finding oil. That’s now a predicament that is going to create a heck of a disturbance in the not-too-distant future. The typical lag between finding and full production is always between 3-6 years.

So a project not discovered in 2014 won’t be showing up in the supply somewhere between 2017-2020. The lack of finds in 2014, 2015 and 2016 will result in reduced oil output between 2018-2022.

The other part of this story is the amount of oil that is disappearing from existing fields.

There are two words that are related but important to understand the distinction between. One is depletion, which refers to the amount of oil that is removed from a reservoir. The other is decline, which refers to the amount of oil flowing from a given well or field.

Depletion is a relatively straightforward process. If there are 100 units of removable oil in a field and you pump out 3 of them, the field has depleted by 3%.

But you might be able to hold the rate of pumping constant for a long time by injecting water or performing other stunts to force more oil out of a given well. If in our example we kept removing those same 3 units year after year, our decline rate would be zero. But the depletion rate would be increasing, because 3/100 = 3% but 3/97 = 3.1%. And after ten years the rate would be 3/70 = 4.3%.

That is, all efforts to keep oil flowing out of the wells at a maximum rate results in increasing rates of depletion.