[Paleopsych] The future of oil

Lynn D. Johnson, Ph.D. ljohnson at solution-consulting.com
Tue Feb 1 14:01:57 UTC 2005

I tried to send this yesterday; I don't think it went through. This is a 
very counter-intuitive piece, good for challenging the popular notions.

Oil, Oil Everywhere . . .
Why is it expensive? Because it's so cheap.

Sunday, January 30, 2005 12:01 a.m. EST

The price of oil remains high only because the cost of oil remains so 
low. We remain dependent on oil from the Mideast not because the planet 
is running out of buried hydrocarbons, but because extracting oil from 
the deserts of the Persian Gulf is so easy and cheap that it's risky to 
invest capital to extract somewhat more stubborn oil from far larger 
deposits in Alberta.

The market price of oil is indeed hovering up around $50 a barrel on the 
spot market. But getting oil to the surface currently costs under $5 a 
barrel in Saudi Arabia, with the global average cost certainly under 
$15. And with technology already well in hand, the cost of sucking oil 
out of the planet we occupy simply will not rise above roughly $30 a 
barrel for the next 100 years at least.

The cost of oil comes down to the cost of finding, and then lifting or 
extracting. First, you have to decide where to dig. Exploration costs 
currently run under $3 per barrel in much of the Mideast, and below $7 
for oil hidden deep under the ocean. But these costs have been falling, 
not rising, because imaging technology that lets geologists peer through 
miles of water and rock improves faster than supplies recede. Many 
lower-grade deposits require no new looking at all.

To pick just one example among many, finding costs are essentially zero 
for the 3.5 trillion barrels of oil that soak the clay in the Orinoco 
basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, 
that's trillion--over a century's worth of global supply, at the current 
30-billion-barrel-a-year rate of consumption.

Then you have to get the oil out of the sand--or the sand out of the 
oil. In the Mideast, current lifting costs run $1 to $2.50 per barrel at 
the very most; lifting costs in Iraq probably run closer to 50 cents, 
though OPEC strains not to publicize any such embarrassingly low 
numbers. For the most expensive offshore platforms in the North Sea, 
lifting costs (capital investment plus operating costs) currently run 
comfortably south of $15 per barrel. Tar sands, by contrast, are simply 
strip mined, like Western coal, and that's very cheap--but then you 
spend another $10, or maybe $15, separating the oil from the dirt. To do 
that, oil or gas extracted from the site itself is burned to heat water, 
which is then used to "crack" the bitumen from the clay; the bitumen is 
then chemically split to produce lighter petroleum.

In sum, it costs under $5 a barrel to pump oil out from under the sand 
in Iraq, and about $15 to melt it out of the sand in Alberta. So why 
don't we just learn to love hockey and shop Canadian? Conventional 
Canadian wells already supply us with more oil than Saudi Arabia, and 
the Canadian tar is now delivering, too. The $5 billion (U.S.) Athabasca 
Oil Sands Project that Shell and ChevronTexaco opened in Alberta last 
year is now pumping 155,000 barrels per day. And to our south, 
Venezuela's Orinoco Belt yields 500,000 barrels daily.

But here's the catch: By simply opening up its spigots for a few years, 
Saudi Arabia could, in short order, force a complete write-off of the 
huge capital investments in Athabasca and Orinoco. Investing billions in 
tar-sand refineries is risky not because getting oil out of Alberta is 
especially difficult or expensive, but because getting oil out of Arabia 
is so easy and cheap. Oil prices gyrate and occasionally spike--both up 
and down--not because oil is scarce, but because it's so abundant in 
places where good government is scarce. Investing $5 billion over five 
years to build a new tar-sand refinery in Alberta is indeed risky when a 
second cousin of Osama bin Laden can knock $20 off the price of oil with 
an idle wave of his hand on any given day in Riyadh.

The one consolation is that Arabia faces a quandary of its own. Once the 
offshore platform has been deployed in the North Sea, once the humongous 
crock pot is up and cooking in Alberta, its cost is sunk. The original 
investors may never recover their capital, but after it has been written 
off, somebody can go ahead and produce oil very profitably going 
forward. And capital costs are going to keep falling, because the cost 
of a tar-sand refinery depends on technology, and technology costs 
always fall. Bacteria, for example, have already been successfully 
bioengineered to crack heavy oil molecules to help clean up oil spills, 
and to mine low-grade copper; bugs could likewise end up trampling out 
the vintage where the Albertan oil is stored.

In the short term anything remains possible. Demand for oil grows daily 
in China and India, where good government is finally taking root, while 
much of the earth's most accessible oil lies under land controlled by 
feudal theocracies, kleptocrats, and fanatics. Day by day, just as it 
should, the market attempts to incorporate these two antithetical 
realities into the spot price of crude. But to suppose that those prices 
foreshadow the exhaustion of the planet itself is silly.

The cost of extracting oil from the earth has not gone up over the past 
century, it has held remarkably steady. Going forward, over the longer 
term, it may rise very gradually, but certainly not fast. The earth is 
far bigger than people think, the untapped deposits are huge, and the 
technologies for separating oil from planet keep getting better. U.S. 
oil policy should be to promote new capital investment in the United 
States, Canada, and other oil-producing countries that are politically 
stable, and promote stable government in those that aren't.

Messrs. Huber and Mills are co-authors of "The Bottomless Well: The 
Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of 
Energy," just out from Basic Books

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