Ed Ellingson's Blog


7. We’re Running Low on Oil

If you’re reading this, you’ve likely already heard of “peak oil”, but if not, do an Internet search on that, and “peak oil debunked” just to get up to speed.  Make sure you look at www.aspo-usa, the Association for the Study of Peak Oil, one of the best.

I think everyone understands conceptually that oil is a finite resource, laid up about 90-150 million years ago, and that we’re using it up at the rate of about 85 million barrels a day, but the questions are, “just when will we reach peak?” and “just what does that mean?”

As you search this subject, try to consider the investment required to harvest oil, historically, and from the latest discoveries.  What you’ll find is that the “easy” oil has been pumped first, so an oil pump in Oklahoma in 1952 was a pretty inexpensive piece of equipment.

Oil Well in Oklahoma, 1952

The more recent finds are primarily in deep waters, so might require working in water two miles deep, and then drilling through 3 miles of rock.  The investment required to do that is huge, maybe $650 million to make the deep-sea rig and get it in place to start drilling.  By the time you’re pumping oil, you could have $1 billion invested.

Modern Oil Platform

If it’s a huge deposit, maybe one billion barrels, the amortized cost is only $1/barrel; not too bad.  But if the deposit is only 100 million barrels, then it’s $10/barrel; if only 10 million barrels, then $100/barrel.  The economics don’t justify small pockets of oil.

The quality of the oil is important too.  The heavy oils, extending even to bitumen, require more processing to turn into a useful product, so require additional investment for that treatment.

The next concern is the “marginal” cost of the newer discoveries.  We don’t usually see the figures regarding the up-front costs, just the break-even cost.  Thus, if the price of oil is up somewhat, we hear of projects to start harvesting oil or tar sands in a certain field; conversely, projects get canceled if the price of oil drops.  From this inference, the projects that should be started now, in order to keep oil flowing into our factories and cars, need oil priced at $100-150 per barrel in order to be economically justified. The oil deposits in the Middle East, however, are relatively shallow, good quality (sweet, needing minimal refining), and even under pressure, so need little pumping.  It’s generally considered that oil priced at $20/barrel would be very profitable at most fields there.

This disparity creates a condition of price uncertainty.  It might seem possible that oil would be over $120/barrel at one point in time, but then quickly change (maybe due to a new discovery, or the commitment to develop a new field) to a much lower value, thereby discouraging the investment.

The situation now is shaped by this price uncertainty.  Investments have not been made in the recent past, so few new fields are coming on-line in the near term.  Production is basically at a plateau, and demand in developing countries is expected to continue to grow.  We have only about 5% excess capacity, so any condition that causes more than a 5% imbalance (ie, growth in demand, or decreasing supply, like a hurricane in the Gulf of Mexico) will result in “demand disruptions”, prices rising so as to reduce the demand to match the available supply.


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Comment by Gina




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