The Age of Cheap Oil is over

[dan_s]

A lot of people don't understand this concept.

Sometimes the concepts of energy resources and energy reserves get confused, which leads a lot of people to believe we have more oil available than is actually the case. So then people are left to wonder why -- if we have 3 trillion barrels of oil left -- oil prices are still hovering near $100 per barrel. If we have so much shale oil, why is the price of gasoline now $3.50/gallon. They blame Big Oil when in fact it is simple economics.

A resource is the total amount of a commodity that is in place. However, much of that resource will likely be unrecoverable because the technology doesn't exist yet, or it is too costly to produce.

The huge oil resource in tight formations was known for many years, but only began to be unlocked economically through innovations in hydraulic fracturing and horizontal drilling. Today, $100/bbl oil enables lots of it to be extracted economically from the Williston Basin in North Dakota and the Eagle Ford Shale in Texas, but 20 years ago the technology hadn't yet been sufficiently developed.

Today we have both the technology and high enough prices that a portion of these vast tight oil resources can now classified as reserves. But if the price is too low, the resource still will not be developed unless the price increases, or technology improves to the point that the cost to produce drops below the sales price.

Therefore, we will never see the price of oil go much lower than it is today. Yes, we might see some brief dips, but they cannot last without causing a large drop in production.

Consider this analogy. What if I told you the location of several trillion dollars' worth of gold? It does in fact exist, dissolved in the world's oceans, and it's there for the taking. The technology to extract the gold exists.

So why isn't this gold being produced? Because it exists in such a diluted concentration and is mixed with numerous other compounds and elements. As a result, it is incredibly complicated and energy intensive to extract the gold and purify it. Thus, while gold may sell for $1,400 a troy ounce, it might cost $10,000 a troy ounce to produce it from the oceans. It will remain there, untouched, until gold prices are much higher than they are today, or until someone comes up with a much cheaper way to produce it.

Some of the world's oil resources are similarly out of reach for the moment. In addition to the large fraction being as of yet technically unrecoverable, there are oil fields that are only economical at $150 or $200 a barrel. Thus, as oil prices increase, some of these fields that are uneconomical today will eventually be tapped.

This has implications for the concept of "peak oil" because oil reserves and oil production are effected by oil prices. Indeed, the world has likely passed "peak $20 oil." At that price none of the US tight oil plays will be economical, nor will much of the world's oil sands production. The output of oil that is economic to produce at $20 has been falling for years.

IMO "peak oil" has been pushed back by a few years, but the shale oil production will peak soon (some predictions are by 2017) and we will need a big run up in oil prices to go after the tier two oil plays.

[Laurin_DE]

Dan,
I fully agree - this is exactly what I tell my students since the late 1990s!
(besides that crude oil is way too precious to be (ab)used as a fuel and that LNG needs to be developed for that purpose)

cheers - Laurin

[dan_s]

I have been saying for years that if this country was serious about "energy independence" it would focus on alternative transportation fuels for vehicles and #1 should be natural gas. Electric cars won't work because you cannot "refuel" quickly. Plus, all that electricity will come from burning fossil fuels anyway.

What people don't understand about the "Peak Oil" concept is that it doesn't mean we'd run out of oil, but that we'd have to spend a hell of a lot more to get new supplies. The "Cheap Oil" is on steep decline. Now we are forced to produce the real expensive stuff. I think we may see the last of sub-$100 oil by the end of this year.

What's happening today is that this is rapidly separating those who can afford energy from those who can't. Without energy your standard of living declines rapidly. My energy bills are now double my house payment.