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The cost of new oil supply

Chris Nelder, Smart Planet
Numerous factors affect oil prices, like supply and demand, geopolitical unrest, natural disasters, monetary policy, and speculation, as I detailed in February.

But there is another factor exerting a continuous upward pressure on prices: the substitution of unconventional resources for conventional crude.

When conventional oil hit its production plateau around 72 – 74 million barrels per day at the end of 2004, but demand kept growing, we turned to various unconventional liquid fuels to make up the difference, such as natural gas liquids, biofuels, and most recently, “tight oil” from shales like the Bakken Formation in the U.S…

The argument was that high oil prices would make these previously-uneconomic resources viable, and to a limited extent that has been true. What we didn’t know then, however, was the pain tolerance limit of consumers. In 2008 we found that limit as we approached $120 a barrel for oil and $4 a gallon for gasoline. Prices are once again beginning to kill demand in the U.S., but under a slightly lower ceiling, because the economy isn’t nearly as strong as it was in the first half of 2008. Now the ceiling is closer to $100 a barrel.

The new floor

The new floor for oil prices is being set increasingly by the production cost of these unconventional liquids. A few decades ago, we could produce conventional oil profitably in the U.S. for under $15 a barrel. But those days are long gone for the U.S., and for most of the world (except a few old fields in places like Saudi Arabia). As every major oil company has admitted in the past few years, the age of easy and cheap oil has ended…
(18 April 2012)

Feeling peaky

Buttonwood, The Economist
AS THE developed-world economy tries to gain momentum, it faces a persistent headwind. The oil price remains stubbornly over $100 a barrel, acting like a tax on Western consumers. Some blame the high price on evil speculators—Barack Obama unveiled plans to increase penalties for market manipulation on April 17th. But there is a simpler explanation: that supply is inadequate to keep up with rising demand.

The concept of peak oil—the idea that global crude production may be at, or close to, its limit—is far from universally accepted. One leading asset manager talked recently of the world being “awash with energy” because of the exploitation of American shale gas. Nevertheless, oil is still the main fuel for cars and trucks. And crude output (as opposed to alternatives such as biofuels and liquids made from gas) has been flat since 2005.

A number of countries (including Britain, Egypt and Indonesia) have turned from net oil exporters into importers in recent years. And although rich countries have curbed their energy-guzzling a little, demand continues to surge in emerging markets…
(21 April 2012)

Peak oil goes mainstream (again)

Kate McKenzie, FT Alphaville Blog
Well, The Economist is talking about it in a non-sneery way…

…it’s interesting, in this time of triumphalism over shale gas and oil, to see such a pessimistic piece….

That won’t be news to anyone who thinks about energy a lot, because it gets to the heart of the challenges facing the world today.

We’d sum it up as this:

– It’s the price, stupid: It’s not the amount of oil, it’s the price at which it can be produced under both technical and political constraints.

– The primacy of transport liquids: There may be plenty of coal and unconventional gas out there, but they can’t displace oil. Oil is oil. Heating oil can be substituted fairly easily, but other sources of energy are not so useful for transport, yet.

– The critical contribution of cheap energy to the modern industrialised world. You can argue the numbers on just how important it is, and there are plenty of fun debates to be had about resource economics/mercantilism/scarcity/EROI (energy return on energy invested); but… who is really willing to say that the abundant and relatively cheap oil was not an essential component in building any modern developed economy?

– There’s also this problem of carbon constraint – let’s not go there just now, but you get the idea…
(20 April 2012)

Peak Oil Off: Great Game On

Matthew Hulbert, Forbes
Peak oilers have had a pretty hard time lately. Not only have global unconventional finds flattened Hubbard’s ‘peak’, more and more conventional plays are cropping up. ‘Running out’? We have more than enough of the black stuff to incinerate ourselves several times over. Such supply side bounty has been well documented in the Americas – not just in the US and Canada, but across Latin America, offering a second pass at resource riches. Head all the way over to Australia, and you’ll see a dazzling display of unconventional technologies rapidly increasing kangaroo LNG production. The North Sea can squeeze out a few more drops; Europe can finally get it’s ‘energy sovereignty’ back from shale plays, all while the Arctic offers Russia untold oil riches. Anywhere you look, the narrative is the same. But just when we thought the global hydrocarbon map was complete, another serious player has cropped up, and it comes in the form of East Africa. This is the new African oil rush, and the race to secure regional riches between East and West is on. Nobody wants to lose: Peak oil is dead, the Great Game is back…
(19 April 2012)