Money Wells Dry Up

So oil prices have fallen. That’s great news, isn’t it? Must mean there’s loads of the black stuff on tap. Well, it’s not that simple — although the media too often try to pretend that prices are a straightforward relationship between supply and demand.

This extract is from my new book, Solving the Grim Equation, pages 76-77.

“World oil consumption continues to edge upwards by 1%-1.5% annually.[i] The US Energy Information Administration (EIA) expects oil use in 2015 to grow by another 1.5% to 92.89 million barrels a day, 130,000 barrels less than daily production. Annual consumption would be pushing towards 34 billion barrels.

The EIA reckoned that in 2009 the world’s proven reserves of crude oil totalled 1,342.2 billion barrels. That equalled 43.3 years’ supply at the 2009 consumption rate. By 2013, reserves had inflated to 1,646.0 billion barrels, a phenomenal 22.6% growth in four years although no major new oilfields have been discovered. By 2013 the world appeared to have some 50 years of oil reserves. The inclusion of ‘tight oil’, which is ‘liberated’ by hydraulic fracturing, commonly called fracking, boosts the reserve figures but has a low return on the energy invested in extraction. The issue is not so much the absence of oil under the ground, but absence of money to give producers a profit sufficient to reinvest in exploration. The market is held back by impecunious consumers more than by dry wells. The actuary Gail Tverberg, who analyses energy and commodity prices, comes to this conclusion:[ii]

‘Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.’

Oil with a high return on energy invested in extraction gives pricing flexibility. Where the energy return is small, the price needs to be consistently high, or there is no financial incentive to extract it.

Saudi Arabia, Venezuela and Canada are supposed to have the world’s largest oil reserves. In both Venezuela and Canada, the energy gain from drilling ‘oil’ is low and in Canada is sometimes negative. The tar sands in northern Alberta are strip mined, and carried in trucks to processing plants where water is added to create a slurry, which is placed in separation vessels. The bitumen rises to the top. It is diluted with naphtha and further separated in centrifuges. The bitumen is processed again to yield gas oil, naphtha and hydrocarbon gases. The liquids are cleaned up with hydrogen to remove sulphur and nitrogen compounds. The naphtha is from local natural gas which is ‘stranded’ – i.e. there is not enough of it to justify exporting it through a long-distance pipeline. That limited supply of natural gas is an important element in the energy-heavy process to convert bitumen into synthetic crude oil.

The current financial cost of producing synthetic crude oil from sands is about $90 a barrel.[iii] Ignoring the heavy environmental damage, the immediate production cost means that unless the oil is sold at over $100 a barrel, there is scant reason to produce it, and insufficient return to justify new investment. So is it realistic to assume that Canada will supply the world with over 173 billion barrels? Hardly. The oil price was on a plateau in 2011 and 2012, and in 2013 and 2014 trended downwards to below $100 a barrel, in September sinking close to $90. The fall continued in October and November, to under $80, followed by a precipitous collapse in late November and early December to under $63, and in January 2015 to below $50, for benchmark WTI (West Texas Intermediate).”

[i] US Energy Information Administration, Short-Term Energy Outlook, September 9th 2014.

[ii] ‘Low oil prices: sign of a debt bubble collapse, leading to the end of oil supply?’ by Gail Tverberg, http://ourfiniteworld.com/2014/09/21/low-oil-prices-sign-of-a-debt-bubble-collapse-leading-to-the-end-of-oil-supply/, September 21st 2014.

[iii] ‘Peak Oil becomes an issue again after the IEA revised its predictions’ by Tom Dispatch, http://oilprice.com/Energy/Crude-Oil/Peak-Oil-becomes-an-Issue-Again-after-the-IEA-Revised-its-Predictions.html, January 9th 2014.

Later note: in August 2015 oil prices slid further. On the 21st, the West Texas Intermediate price dipped below $40 a barrel. 

PDR

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