Current Oil Boom Only A Surprise to Those Who Don't Understand Markets

There is nothing surprising or unpredictable about the current oil boom, except perhaps how far it has gotten in the face of an Administration that has done virtually everything it can to stop it  (thank god there is oil and gas under private land).  Your humble scribe, neither an economist nor an expert in oil markets, wrote way back in 2005:

Everything old is new again.  Back in the late 70′s, all the talk was about the world running out of oil.  Everywhere you looked, "experts" were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn’t have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms....

 Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions. ...

The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25....

All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high.

Postscript:  I really need to find new topics to blog about.  The adjacent article in 2005 included this, a frequent topic on this site.  I had not idea I was writing about this so long ago:

When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state’s health care costs, to justify regulating the crap out of that behavior.  Already, states have essentially nationalized the cigarette industry based on this argument.

  • Mark2

    But it is not a surprise to the eco-warriors who are having incredible success in banning the new oil boom.

    http://www.environmentalleader.com/2012/05/14/dont-board-the-fracking-banned-wagon/

  • Dan Hewett

    It's even better. According to Al Fin using current techniques, and current proven reserves, we "only" have 250 years of oil available. Sorry, I don't have a link to the specific article, but his website is (alfin2100.blogspot.com)

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  • caseyboy

    I don't know why you continue to try and fool people with facts. Sure maybe there is a lot of recoverable oil that could extend our economic prowess well into the future. But that isn't the goal. The goal is to get us off inexpensive energy and on to something fashionable like solar or wind.

  • ed

    Of course high oil prices spur investment in oil recovery projects.

    But it's also true that U.S. oil production peaked around 1970. Would you like to make a bet with me on whether we'll ever get back anywhere close to those levels?

  • Ted Rado

    The whole energy thing is a wonerful display of USG ineptitude.
    1) Make up your mind what is politically the best for
    your career. (renewable energy).
    2) Subsidize programs that support this decision.
    3) Do everything you can to screw up efforts in any
    other direction.
    4) Fudge the info to "prove" that what you are doing
    is good
    5) Demonize and punish everyone that has a different
    view or criticixes (big oil greed, etc).
    6) Create agencies to impede other efforts (EPA, etc.)
    7) If all this fails, blame George Bush.

    ALL the energy programs sponsored by te USG DOE are absolute nosense. As Warren points out, if it was all left to competitive private industry, money would follow demand and the problem would be solved. As an engineer, I can hardly bear to watch. Truly, an insane asylum run by the inmates. How Salazar, Chu, Obama, et al can look themselves in the face in the mirror is a mystery to me.

  • IGotBupkis, Legally Defined Cyberbully in All 57 States

    The late Julian Simon also points out that "Peak Oil" itself doesn't mean crap. Even if it were true that oil no longer became a viable source of energy, the sheer weight of human ingenuity is adequate to (so far) resolve that as a problem. When furs weren't enough to keep us warm, we burnt wood. When the forests started to thin out, we burnt coal. When oil became easier to get at than the coal, we burnt oil. Now we're switching to natural gas.

    Another viewpoint notes that we are decarbonizing our energy structure. If you look closely at the carbon molecules we've been using as our energy sources for the last several centuries, you see that it's been switching to shorter and shorter molecules with fewer and fewer carbon atoms and a much higher proportion of hydrogen atoms. At some point, if we continue to use chemical energy (anything else would require a major breakthrough in technology) we should switch to a carbonless hydrogen energy system in some form. And that will probably involve using nuclear energy to "frack" water and separate out the hydrogen as a "storage device". This may involve either fuel cells or pressurized storage depending on the end purpose needed.

  • Smock Puppet, 10th Dan Snark Master and Gourmand

    >>> The goal is to get us off inexpensive energy and on to something fashionable like solar or wind.

    I think the most interesting thing about solar and wind is that the devices work almost as well if you shove them up Obama's, Reid's, and Pelosi's asses.

  • Ted Rado

    IGot Bubkis:

    If you run the numbers, hydrogen is a very poor fuel. You use nuclear electricity to electrolyze water, then compress and transport the gas, finally using it either in a fuel cell or burning it in an engine. The overall efficiency is quite poor.

    Making H2 out of methane is even worse.

    ALL the alternative energy schemes collapse when one quantifies the idea. Many ideas sound good until you hang numbers on them.

    A better idea is to have small cities built around nuclear power plants. Instead of condensing the LP steam, use it for heating and absorption refrigeration (A/C). Small golf cart type electric cars would be adequate in a small city, where going a very few miles at 15 MPH would be adequate. I am sure there are other ideas for using nuclear electricity that would be workable. The idea that we MUST have high performance cars has to go at some point in the future as fossil fuels become scarce and expensive. Hopefully, that is a long time from now, giving us space to come up with new WORKABLE ideas, rather than the pie-in-the-sky DOE stuff.

  • Vangel Vesovski

    "All the oil doomsayers tend to define the problem as follows: Oil production from current fields using current methods and technologies will peak soon. Well, OK, but that sure defines the problem kind of narrowly. The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies. I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands. Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high."

    We already have projects that produce oil in the tar sands. But the problem with those is their low production levels. They simply cannot make up for the decline in conventional production. And the last time we looked the move in prices from $35 to $150 attracted a huge amount of investment in new production but little in the way of added production. The amount of light sweet crude produced today is around the same level it was in 2005 even though hundreds of billions went towards the development of new fields and enhancement techniques to increase yields from older fields.

    Oil prices have fallen lately because the real economy is falling off a cliff in many nations, not because there was a supply solution. Yes, destroying capital to produce tight oil from shale formations will add barrels but given the fact that $7 million wells are producing 100 bpd after a year and a half that cannot be a solution. And neither can tar sands projects or deep water projects because they take a long time to come on line and carry extraordinary high costs even when the supply chain is capable of handling the new orders. It is time for the optimists to have another look. The real world data is not painting a good picture and false optimism is not a good strategy for prudent individuals looking to protect their family's standard of living.

  • Gil

    You expose your inadvertent doom&gloom: more and more energy is being required to extract thus defeating the purpose of it in the first place, i.e. Peak Oil. The more energy it takes to get crude oil means oil become an energy carrier than an energy source. The question is whether the substitutes that would replace oil are superior or inferior. After all, Ted Rado's proposal would be seen as a inferior substitute.

  • drB

    Ted Rado:

    MOST programs sponsored by DOE are crap. Some are not. For example, a lot of technical developments that went into fracking were funded by DOE at times when private capital was not funding it. Look at who subsidized Mitchell Energy :).

  • IGotBupkis, Legally Defined Cyberbully in All 57 States

    >>> If you run the numbers, hydrogen is a very poor fuel. You use nuclear electricity to electrolyze water, then compress and transport the gas, finally using it either in a fuel cell or burning it in an engine. The overall efficiency is quite poor.

    No dispute, but it's based on the presumption that we actually "run out" of oil -- that is, the cost to retrieve it becomes greater than that of making H from electricity.

    And that's based, of course, on the fact that energy storage tech hasn't kept pace with energy production tech, making chemical feedstocks still the most effective option on matching up speed, range, and time-to-recharge. Hydrogen is the most effective alternative when those "run out" that we currently know we can make.

    As far as building small cities, I suspect the 15mph golfcart idea is a bit unlikely on two levels, not only is that still way too slow (40mph is more likely unless you go the urbmon or the Arcology routes), but it's also still got many of the same issues with refueling that any electric vehicle has.

    You also presume that the fuel cells themselves can't or don't have the capacity to reverse process, which could be driven or catalyzed by some form of energy input. There's a lot of potential in fuel cells, and that's why there's so much investment in them as an alternative energy storage technology. Unlike solar cells or wind turbines, getting high output numbers out of them isn't acting against the laws of physics, depending on the cycle being used. They're grounded in basic chemical processes, and we're constantly improving our knowledge of those. The closed-cell cycle is limited, but not the overall concept.

  • IGotBupkis, Legally Defined Cyberbully in All 57 States

    >>> The idea that we MUST have high performance cars has to go at some point in the future as fossil fuels become scarce and expensive.

    I disagree with you here, as hydrogen fuel CAN take the place of oil, it's just not cost-effective yet. Even as reverse-electrolysis, it's not that horrible, and that presumes we can't devise some better process for cracking the H away from the O (or find some better source for producing H from common materials which does not require as much full-cycle energy, which is the same thing)

    Cars are about Freedom. That's what makes them so uniquely American. As for Golf Carts, I think it says all that needs to be said when you realize that The Great Big 0 seems to like spending a lot of time in one. :-D

  • Ted Rado

    IGot Bupkis:

    The efficiency of hydrogen powered cars compares to electric as follows:
    Eff. of Electrolysis to make H2: 80%
    Eff.of hydrogen fuel cell: 40%
    Eff. of engine running on H2: 20%
    Eff. of charge/discharge of battery: 80%
    Eff. of steam power plant: 37%

    Overall efficiency from boiler fuel to wheels:
    Electric car: .37x.80 = 29.6%
    H2 fuel cell car: .37x.80x.40 = 11.8%
    H2 engine car: .37x.80x.20 = 5.9%

    These figures do not include the losses in power transnission and distribution or the compression and distribution of H2.

    The enrgy required to electrolyze water into H2 is based on fundamental physical chemistry. No amount of cleverness can circumvent this fact.

    Fuel cells are not energy storage. They convert H2 into electricity. Energy can be stored as H2 by electrolyzing water and storing the H2. The latter is extremely expensive, as H2 is almost impossible to liquify (it can be at horrendous expense, near absolute zero temperature).

    It would be nice if we could perpetuate our auto age, but this seems to be impossible once fossil fuels run out. If distances are short (2-3 miles), low performance, short range cars might be OK.

    People seem to have a mystical faith in what science and technology can achieve. Unfortunately, the laws of physics are limiting. You can't produce somethinng out of nothing. You can't "crack away" H2 at less than the free energy of formation of water, which is the energy needed for electrolysis.

  • Ted Rado

    DrB:

    Fracking has been around for decades. It is cirrently getting lots of press because, in conjunction with horizontal drilling, it opens up tight formations that would otherwise be uneconomical. I am not sure, but I believe all the early work was done by private industry.

    If the USG would just get out of the way, human ingenuity and free enterprise would move the energy thing ahead much faster and MUCH more efficiently. The huge waste of money by the DOE on stupid projects would stop.

  • drB

    DOE started funding fracking in late 70's when almost no one in private industry was giving them money, and some things were also developed in National labs. Please see http://thebreakthrough.org/blog/2011/12/interview_with_dan_steward_for.shtml for interview with one of pioneers of commercial fracking. This is what he says: "They (DOE) did a hell of a lot of work, and I can't give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE's involvement." Basically there would be nothing or it would come much later without DOE involvement. Anyway, one can not say that EVERYTHING DOE funds is crap. MOST or MANY things are :)

    Admittedly, I am somewhat conflicted about all this - one can think of it also as "corporate welfare", but then again one can say that in this case research at DOE and DOE involvement has been crucial, as shown by someone who is in business.

  • Ted Rado

    DrB:

    Thanks for the additional info re the history of fracking. The EPA has been tryimg to use fracking regulation to harrass the oil producers (or so it seems).

    One thing that no one can argue about: human activity may result in accidents. Ships sink, cars wreck, planes crash, bridges collapse, etc. Thus the EPA can argue (irrefutably) the groundwater pollution MAY occur due to fracking. There have been tens of thousands of fracking jobs over several decades withou serious trouble. None-the-less, groundwater pollution is certainly possible. With this argument, ALL human activity should be stopped. It sounds more like a continuation of Obama's antipathy toward the oil industry than rational thought.

    After studying renewable energy schemes for many years, I am not a fan of the DOE. Apparently you have a more positive opinion of them than I do. They have pissed away billions on nonsense.

  • Allen

    ed:
    Of course high oil prices spur investment in oil recovery projects.
    But it’s also true that U.S. oil production peaked around 1970. Would you like to make a bet with me on whether we’ll ever get back anywhere close to those levels?

    How much of that is because the oil isn't recoverable at market prices and current technology versus political restrictions? How much does that matter?

    Why limit the measurement to these human imposed lines marking the borders of a human construct, the nation? What if all the world's oil were in Greenland or all the world's oil was in Senegal? Would a lack of oil in the US mean were had ran out?

    IIRC in the last 30 years we have used twice as much oil as we had for known reserves 30 years ago.

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