Consider This…

Posted by Oil Tycoon

January 11, 2008

In early 2002, George Bush requested that the DOE and EIA conduct a joint study to see what would happen if the world temporarily lost 4% of its oil production due to a terrorist attack. The result? They estimated that crude prices would spike to over $130 per barrel (at the time, crude was trading at ~$35/barrel on the NYMEX).

Even without a terrorist attack, we are running into a fundamental problem with oil production: big fields are rapidly maturing or even declining.

Many will say that current prices (nearly $100/barrel) will spark a new wave of oil exploration and new alternatives that will act to meet demand. Consider this though:

1. Conventional oil exists in a narrow “window” between 5,000 and 15,000 feet. Below 15,000 feet, pressure and temperature break oil down into methane. Conventional oil is also only trapped by salt domes. It isn’t a mysterious art to find oil. We’ve had the seismic imaging capabilities for two decades. We’ve probably found all the super-giant fields.

2. All the new conventional oil will probably be in deep water (c.p. the Tupi field in Brazil) and will be difficult to produce. It would be a stretch to get more than 100,000 barrels/day from such a field. This leads me to my next point….

3. Peak oil has nothing to do with reserves and everything to do with production. Here’s a good way of understanding it: Let’s say I told you that you had $1,000,000,000 in a safe in your basement and that’s all the cash you’d ever have. Would that be enough for you to live on? Most people would say “yes” but they’d be overlooking a critical point. They didn’t ask how much cash they could withdraw every day. It doesn’t matter if you have a billion dollars if you can only withdraw a dollar a day. This is the problem that faces the oil industry and the world economy. We might have billions upon billions of barrels of oil in reserves, but the rate at which we can extract that is falling dues to the laws of nature (see note below).

4. Unconventional oil resources face a problem that is similar to conventional oil: the reserves are high but production will ultimately be low. The University of Alberta was commissioned to study the use of nuclear power instead of natural gas for extracting heavy oil from tar sands. The result? To reach 1,000,000bpd four gigawatt nuclear reactors would have to be constructed at a cost of (more than) $20,000,000,000. The earliest such a reactor would be operational would be 2017. Just in time (sarcasim)

The best answer we have in the short term is conservation. We need massive carpooling programs and a fundamental redesign of vehicles NOW. Just simple stuff like engine downsizing and turbo compounding can double fuel economy. It’s a start (cue BP logo and music)

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