On Cornucopian Views of Oil Supplies

Meeting projected (latent) demands for oil and other liquid hydrocarbon fuels over the next couple of decades — taking global production and consumption to the vicinity of 113 million barrels/day in 2030, from the current ~85-86 million b/d — will require bringing online the equivalent of a new Persian Gulf’s worth of new oil production, plus whatever it takes to replace the output from declining fields. The periodic political fantasy of making the U.S. self-sufficient at roughly current consumption levels would take “only” something on the order of a Saudi Arabia’s worth of purely domestic production.

If you find that daunting, then you’re not in the part of the conservative commentariat that’s out there saying that those Saudi Arabias could be us were we only to exploit some hitherto off-limits and/or uneconomical sources with the gusto of the ‘drill here and drill now’ set.

Last week, reader sammy pointed us to a couple of op-eds from the Investor’s Business Daily, one on prospective fossil fuel supplies in the Arctic, and another on shale oil. Even In Liberal Madison, we have right-wing gadflies and one of them, Rick Berg, sounds similar notes in our alt-weekly. The argument, in a nutshell, is that shale oil and new (mostly) offshore fields can provide ample oil for the foreseeable future if only access to it were unfettered. The implication, courtesy of Daniel Henninger in the W$J, is that we shouldn’t overreact and abandon our carbon economy which “run[s] like a Swiss watch (transportation, distribution, production, commuting)” for the uncertainty of low-carbon energy sources. No less of a light than Larry Kudlow says that the mere threat of new U.S. drilling has been working its magic on the oil markets, so maybe that panic-dumping of SUVs on the used-car market was hasty. And last Friday’s Weekend Journal had Todd Buchholz damning the hippies and their stupid Priuses whose fuel-saving features pay for themselves in much less than the life of the car, double-underscored by Stephen Moore.

It’s enough to make a suspicious liberal think there’s an organized campaign on to try to save the status quo, and some people may even be falling for it. But should they? Perhaps needless to say (you didn’t think this was going to be a “credit where due” post to Kudlow?), there are big problems with the pitch. Warning: Long post after the jump.

1. Resources versus reserves

Accounts of extravagantly large unconventional oil amounts elide critical distinctions between measures of oil-in-the-ground and recoverable oil-in the ground. Both the IBD editorials and Berg’s op-ed cite the hundreds of billions or even trillions of barrels of oil in shale formations. IBD:

The quantity of oil to be found in this shale is almost unfathomable. The government conservatively puts it at 800 billion barrels. Other estimates say we have as much as 2 trillion barrels, though some of that wouldn’t be recoverable.


Experts say the “Balkan Formation” [sic; he means “Bakken”] two miles below western North Dakota could yield between 270 and 500 billion barrels of crude oil. The famed North Slope of Alaska that Congress and President Clinton put off-limits in the 1990s has, by comparison, about 60 billion barrels of crude.

The large figures for oil shale both IBD and Berg refer to are estimates of the “resources” as opposed to “reserves” that actually can be produced using current technology. Particularly in the case of oil shale, the latter can be much smaller than the former depending on the formations’ geologies. The Bakken Shale is a case in point. The current USGS estimate of technically recoverable undiscovered oil from the Bakken formation has a range of 3 to 4.3 billion barrels; the state of North Dakota’s estimate is 2.1 billion recoverable barrels from a resource of 167 billion barrels. These are enormous increases from previous estimates, but aren’t going to make North Dakota the Saudi Arabia of the Plains. The existence of large oil shale resources isn’t news to the oil market, either. They’ve been known to be a large resource for the better part of the last century, and the last oil crisis brought about an oil shale boom and subsequent bust.

Likewise, IBD treats the recent estimate of recoverable oil and natural gas in the Arctic as if it were a sure thing as opposed to the result of a statistical analysis. Are they as deferential to the scientific consensus on anthropogenic global warming? Shockingly, they are not. The oil is treated as all but in the gas tank:

So by putting our Arctic resources into play, we would more than double our reserves overnight.

What’s more, there could be more oil up there — much more — according to Donald Gautier, who wrote the report.


This again puts the lie to the “peak” oil theorists, who have asserted repeatedly that the amount of oil we can use is in terminal decline and that it’s therefore futile to drill for more. It’s not.

The 90 billion barrel figure is a mean, so the true amount could be less, of course. The issue is not that the estimate is implausible, but rather that it’s an estimate that doesn’t even say “drill here.” Determining how much oil and gas the Arctic actually could supply (and where exactly it is) is a matter for future exploration, assuming it’s feasible to carry out. Feasibility of Arctic oil production is not a trivial matter, as an important caveat for USGS’s analysis (not mentioned by IBD) makes clear:

For the purposes of this study, the USGS did not consider economic factors such as the effects of permanent sea ice or oceanic water depth in its assessment of undiscovered oil and gas resources.

Neither factor is trivial when, according to the USGS study, 84% of the estimated resources would be found offshore. K Harris in comments has another telling quote and gloss:

Here, from a press piece reviewing the same data and also [quoting] Gautier… from Oppenheimer’s oil analysts. “We don’t have to go to the [Arctic] for new supply. Right now in the U. S. there are billions, trillions of cubic feet of natural gas and billions of barrels of oil.” The point to the quote is that while the data are getting more accurate, there is not really much surprise among experts at the amount of oil being found. They [k]new it was there, but also knew it was mostly not economical to extract. The Oppenheimer guy is pointing out that, at prices which make much of our Arctic reserves exploitable, it is now affordable to exploit resources in the lower 48.

An amusing irony is that if global warming were to turn out to be a myth after all, the resurgent Arctic sea ice would make the resource especially difficult to recover, whereas circumstances that made offshore Arctic oil not much more difficult than any other offshore oil production in extremely remote places would not inconceivably be associated with carbon prices that discouraged the production.

2. From reserves and resources to production

Another big part of the oil-price picture is the rate of (sustainable) production, as commenters noted in the previous thread. On this front, the IBD Arctic oil editorial just assumes a production rate:

Using a conservative estimate, let’s say we pump 3 million barrels a day after developing these Arctic resources. That would boost total U.S. crude output of 8 million barrels a day [sic — the ~8 million b/d figure includes crude oil and natural gas liquids] by 38%.

The IBD editorial doesn’t say whose “conservative estimate” that might be, but I wouldn’t be surprised if it weren’t the editorial writer supposing that if we have 30 billion barrels of new oil reserves in Arctic Alaska and can make 5.2 million b/d out of the current 21 billion barrel reserves, then 3 million b/d must be “conservative.” The Great Gazoogle might have told them that the Trans-Alaska Pipeline’s capacity is 2.1 million barrels/day, which is an effective ceiling on near-term production from the Alaskan Arctic. (This isn’t a binding near-term constraint, though, as production from the existing fields that feed the pipeline is 20 years past peak and declining; a looming issue is meeting the pipeline’s minimum flow rate.) Natural gas resources in the Alaskan Arctic are stranded until a separate gas pipeline is built. The need for substantial oil and gas infrastructure development on top of exploration means that the new resources can not be made productive in the near term.

The EIA’s Annual Energy Outlook forecasts unconventional liquids production (including production from oil shales) to gradually ramp up to approximately 2 million b/d in 2030 in its baseline scenario, and 3 million b/d in the “high price” scenario. However, it’s inappropriate to add that production, or hypothetical future Arctic or OCS production, to the current U.S. liquids output, since some of it would offset declines in production from conventional sources — about 1 million b/d in the baseline, less in “high price” where the projected U.S. conventional production peak is later.

Moreover, oil shale roduction rates may be economically limited by the energy and water intensity of the production processes. Commenter Michael Cain recounted:

A couple of years ago, I had the opportunity to listen to Shell engineers talk about their in situ process at the Colorado School of Mines. One of the interesting back-of-the-envelope points that came out was that producing a million bbl/day using the process would require an amount of electricity just about equal to the current generating capacity in Colorado. Building that much generating capacity in that part of the country is problematic at best: water for cooling is in short supply; and the most readily available fuel is coal.

You can do the back-of-the-envelope calculation yourself. There’s about 5.8 million BTU, or 1,700 kWh, in a barrel of oil. So if you want to make a million barrels of oil at an EROEI of 4:1, then energy input is the equivalent of 250,000 barrels. The equivalent in electricity is 424,750 MWh, which requires 17.7 GW of ’round-the-clock generation capacity to produce in 24 hours. That is, indeed, more than the nameplate capacity of all of the electric generating units in Colorado as of 2005 (xls). I assume electricity isn’t the process’s only energy input, but Cain’s story does accurately report the order of magnitude of the energy-input problem for low-EROEI unconventional resources. EIA forecasts note that the carbon-intensity of oil shale and coal-to-liquids among other unconventional sources makes their prospects particularly sensitive to potential carbon emissions regulation.

In a sign that oil companies respond to the price mechanism, current drilling for oil (in locations where it’s currently allowed) actually has increased markedly from its cheap-oil trough, as measured by the number of crude oil rotary drilling rigs in operation. This is the drilling that can plausibly add to near-term domestic supplies.

The effect of this so far has been to stabilize if not slightly increase domestic crude oil production, which otherwise has been in a long decline. (In a sign that the Bush Administration was too lazy or distracted to convert its own domestic-drilling policies into reality, the rig counts bounced along at their trough into the second term; U.S. crude oil production [xls] remains a few hundred thousand b/d lower than when our oilmen-in-chief took office.) Drilling rig utilization rates are also very high, so that’s another near-term supply constraint.

3. More supply lowers prices, other things equal, but relative to what?

The reality-based view of expanded drilling is that it will have relatively small and distant effects on oil prices, simply reflecting that unexplored resources can’t be turned into reserves and then into large-scale production overnight. Particularly in evaluating stay-the-carbon-course commentary from the likes of Henninger, it’s worth considering the baseline scenarios against which the modest long-term effects of additional drilling would accrue. This brings us back to the long-range forecasts mentioned at the top of the post.

The EIA’s baseline scenario from its 2008 Annual Energy Outlook — published in June, but reporting analysis clearly developed much earlier — figures on an oil supply of 113.3 million b/d in 2030 at a light crude oil price of $70.45 in 2006 dollars. As an exercise, inflate that to 2030 dollars; e.g., if the Fed managed to produce 2% CPI inflation between now and then, that means that the nominal price of oil in 2030 would be approximately the same as it is now.

Since actual production for the year-to-date has averaged 85.5 million barrels, someone has to come up with 27.8 million b/d of net new production. Again, that’s a little more than a Persian Gulf’s worth of production, which currently is 24-25 million b/d. The AEO’s “high price” scenario (which has looked optimistically low for much of the year-to-date) makes for less of a production challenge, but still calls for 97.7 million b/d of 2030 production, now with a light-crude price of $118.65/bbl in 2006 dollars. That inflates to the better part of $200 in nominal terms with low inflation.

Drilling advocates may well look at this and say ‘let’s get cracking.’ However, all the sources that Republicans have been eager to drill put together are no more than a small downpayment on the production needed to bring back real prices to levels of the AEO reference scenario that, don’t forget, were still incipient Armageddon for SUVs, big rigs, and airlines among other notable elements of the oil economy. What passes for the political discourse hasn’t been going out of its way to point out that what we might be buying via the drilling route is $9.95 gas instead of $10 the next time oil supplies prove to be a couple million b/d short. Meanwhile, lots of money will have been made and run off with, and the oil that might be more valuable to future generations in the ground can’t be unburnt.

Barry Ritholtz recently posted a picture that’s worth quite a few words on the recent paths of world output — a proxy for latent demand growth — and oil production. When, as has happened, supply plateaus and latent demand grows onward, prices need to rise to ‘destroy’ enough latent demand to equilibrate actual demand and supply. So what have we seen recently? In part, oil production stagnated since rising to its current plateau:

This would be no big deal in the face of a cyclical downturn, but this was not the case in ’05 (much as we might find fault with the expansion out of the 2001 recession). Having price-inelastic demands and supplies is a recipe for price volatility, and in this case there was a fair amount of demand to shed. The last Annual Energy Outlook figured on 2008 oil supply of 87.23 million b/d with a light crude price of $83.59 in 2006 dollars, or around $91 in current dollars. For the first five months of the year, oil supplies actually have been 85.5 million b/d [yet another .xls]. Prof. Hamilton has been telling the rest of the story.

There’s been a lot of demand destruction with $4 gas, plus the business cycle isn’t what it used to be, so there’s no reason why we couldn’t see $91 oil or lower in the near term. In that regard, I wouldn’t necessarily bet against sammy on near-term price increases.

But keeping on the EIA’s “high price” path involves keeping world oil production growth at 0.6% per year and of course holding world oil demand growth to 0.6% per year while (we hope) general economic growth is rather more robust. Even the more generous baseline from the Annual Energy Outlook involves reducing global demand growth 0.3% per year as compared to the last twenty years’ average while coming up, as we’ve seen, with vast new supplies. Can this happen? Sure it can, but knocking out decent chunks of demand growth over long periods of time and refusing to restructure the the more oil-intensive economies risks trouble. If 0.6% supply growth were to prove optimistic over the longer haul, then we’re likely to find that we wanted the economic restructuring Henninger considers “risky” yesterday.