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The week of the game changer in oil, or was it?

This past week was supposedly the week of the game changer in the world of oil. Leaked U.S. diplomatic cables from Saudi Arabia called into question the ability of the globe's largest oil exporter to raise production to satisfy a world increasingly thirsty for petroleum. In the United States a technique called hydraulic fracturing--which has seemingly unlocked vast natural gas resources--will now be applied to oil trapped in shale deposits. Are these two developments really the so-called game changers they are claimed to be?

Let's take the Wikileaks revelation that Saudi Arabian oil reserves--thought to be the biggest in the world--have been vastly overstated. It turns out that what the former head of exploration and production at Saudi Aramco--the state-owned oil company that controls all oil and gas development in the country--told American diplomats in late 2007 was too nuanced for their unbriefed brains to capture correctly in diplomatic cables.

Sadad al-Husseini, the man in question, did tell the diplomats that world oil reserves are probably overstated by 300 billion barrels. The diplomats got confused and thought he was talking about Saudi Arabia alone. (Al-Husseini responded with a press release last week to clarify the matter.) Al-Husseini probably did tell the diplomats that Saudi Arabia would likely never exceed its planned expanded output of 12.5 million barrels a day, something he said publicly during that period. Perhaps back in 2007 al-Husseini saw the bottleneck in construction resources needed for such an expansion and equivocated about whether the Saudis would actually meet their 2009 deadline for developing that capacity. In the end they did.

This should all be seen against the backdrop of U.S. Energy Information Administration projections at the time that had Saudi Arabia supplying the world with 16.4 million barrels a day of oil in 2030. This number seemed like mere fantasy to anyone who was reading the news carefully as the Kingdom of Saudi Arabia in the person of the king himself appeared to affirm the 12.5 million barrel limit previously hinted at by his oil minister.

But U.S. diplomats did catch the basic message of al-Husseini. He was trying to warn them that projections for oil production out of Saudi Arabia were too optimistic and that this had serious implications for world supply. And, yet few countries seem to be preparing for this eventuality.

In a rather contradictory way al-Husseini told the diplomats that while he "does not subscribe to the theory of 'peak oil'...a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline." That's a rather clear statement of peak oil theory. Probably al-Husseini was trying to distance himself from the doomers in the peak oil community, and the diplomats did not have enough background to understand what he was trying to do.

That was 2007. Oil flows may have recently just barely exceeded their 2008 highs, but world oil production has essentially been stagnant since 2005. One doesn't need secret diplomatic cables, however, to understand a story last week on the Saudi plan to require insulation in homes to reduce energy demand. Why would a country regarded as the most energy-rich in the world have to embark on an efficiency program? It was right there in the story: "Without reducing the rate of energy consumption growth, the kingdom could see oil available for export drop some 3 million barrels per day (bpd) to less than 7 million bpd in 2028, Khalid al-Falih, the chief executive of state oil firm Saudi Aramco said last year."

Were the Wikileaks revelations a game changer in the world of oil? Hardly. All the basic, but horribly muddled, information in the cables was already public. And, the flat trend of oil production for the last several years has been plain for all to see. Still, governments and societies largely prattle on as if nothing is wrong. Well, perhaps one thing did change. U.S. government officials are now known to have spoken the words "peak oil," albeit in secret cables. At last the feckless corporate media has reason to ask them why. But will they?

But wait, there was another supposed game changer last week as well. This one was supposed to allay our fears about future oil supplies. Oil companies have discovered that the same fracturing technologies used to extract natural gas trapped in shale can now be applied to certain deposits of oil trapped in shale. In the United States alone the new process could mean 2 million barrels a day by 2015 from previously neglected fields once thought too difficult to develop. “It could potentially be a real game changer,” Peter Tertzakian, chief energy economist at Calgary-based ARC Financial Corp, told The Globe and Mail.

But is it really a game changer? Well, it certainly is if you are an oil company on the prowl for the last scraps of oil hidden in hard-to-reach places under the earth. And the hype serves to entice investors into putting money into ventures to extract oil locked tightly in shale, referred to as "tight oil."

But if you are merely a consumer of oil, these new finds won't mean much to you. If the projections are correct, then oil flows from tight oil in the United States will represent about 2 percent of world production in 2015. And if the more pessimistic estimates of the U.S. Energy Information Administration come closer to actual U.S. tight oil production in 2015, that production will represent about 0.5 percent of world production. Neither amount is enough to move the price of oil. Of course, not one word is spoken about declines in production from other U.S. fields which in aggregate have been in decline for 40 years. Will this supposed new bounty reverse that ongoing decline? Not a word in the press about this.

There is reason, however, to doubt the claims now being made for tight oil supplies--reasons beyond the fact that the companies making them are often publicly traded and therefore have incentive to manipulate their stock prices. The original shale gas promoters believed that natural gas would be uniformly available from the giant shale basins found in the United States. They were wrong. Only a few sweet spots have been profitable.

As humans have done throughout the age of oil, tight oil developers will target the sweet spots first since they are the cheapest and easiest to exploit. Then, they'll move on to areas that are progressively harder and thus more expensive to exploit. Over time tight oil won't become easier to get; it'll become harder to get just like shale gas.

Another caution is that tight oil development only thrives in high oil price environments. The shale gas technology which is being applied to tight oil was supposed to herald an ongoing boom in natural gas. Instead when natural gas prices plummeted in 2008 and stayed low, shale gas drilling became far less economical and much of the industry teetered on bankruptcy. The fact that Chesapeake Energy Corp., one of the darlings of the shale gas boom that fell on very hard times, is now focusing on tight oil extraction tells you all you need to know about the viability of tight oil. The technology works when prices are high. But, as we've seen above, it won't be a panacea for strained world oil supplies even if high prices persist.

One final stumbling block will be concerns about drinking water aquifers because of the water and chemicals forced under high pressure into the oil formations to fracture the shale and release the oil. Already several states are considering tougher regulations--which will, of course, drive up costs--and one municipality, Buffalo, New York, banned hydraulic fracturing within the city limits and banned as well "storing, transferring, treating or disposing fracking waste within the city." The measure was largely symbolic since there are no plans for such drilling in the city. But it marks a watershed for municipal regulation and provides a template for others who feel uneasy about the millions of gallons of wastewater mixed with chemicals injected into each well that never return to the surface.

In the end it is the flow rate of oil that matters, not the size of the putative resource. No matter how big each new find is, no matter what new technology is applied, if we can't achieve production rates consistent with our need for economic growth, we will be in trouble. Look at the rebound of oil prices since the 2008 crash, and you will know that we already are in trouble.

I've said this before, but it bears repeating: If you inherit a million dollars with the stipulation that you can only draw out $500 a month, you may be a millionaire, but you will never live like one. When it comes to oil, there may still be very large resources left. Yes, we may technically all be the equivalent of "oil millionaires." But it looks very much as if we are still destined to have lower and lower flow rates for that oil in the decades ahead--which was the already the situation before this week of game changers that weren't.

What do you think? Leave a comment below.

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