Relevant and even prescient commentary on news, politics and the economy.

The oil industry is undergoing a major structural change.

Lifted from comments from this post US to be leading producer of oil is Spencer England’s comment about structural change in the oil markets. Obvious to some but bears repeating for a lot of us, as we discuss environmental issues or gasoline prices in the media more than structural economic impacts:

Spencer says:

The development of fracking and the tar sands means that the oil industry is undergoing a major structural change.

Use to be that one of the thing that made the oil industry very unique was that virtually all their costs were sunk or fixed costs and variable costs were relatively insignificant. Under this cost structure if prices fall it still pays to produce oil when prices fell as long as revenues covered the variable costs. So falling prices did not lead to falling output.

But now the marginal supply of oil is from tar sands or fracking where variable costs are very high. Moreover, the marginal costs of bringing in new oil from these sources is now in the $80 to $100 range.

So now, when prices fall, at the margin some producers will withdraw from the market and output will fall.

This is creating a fairly solid floor, the price for oil at about $80 — where oil bottomed last year and again this year.

Very few people are incorporating this structural change in the oil market into their analysis.

Spencer

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US to be leading producer of oil?? What does that mean?

Lifted from a note on energy from Reader rjs comes a link filled narrative on oil and production issues for oil.  He deals with one aspect of drilling for “energy independence”.

From reader rjs:

Saudi America?

The release of this year’s edition of the World Energy Outlook from the IEA (International Energy Agency) received quite a bit of media attention over this several weeks, mostly for its forecast that the US will overtake Saudi Arabia to become the world’s largest oil producer by around 2020. That such would happen shouldn’t be much of surprise to anyone who’s followed world oil production for any length of time; the Saudis, Russia and the US have been the world’s leading producers for at least 40 years.

 Just compare historical production for the US, for Russia, and for Saudi Arabia).  Our problem has always been that we’ve consumed more than twice our production, while the Saudis, with their smaller population and domestic usage, have been the world’s leading exporter and the one country seen as having reserves ample enough to backstop the markets. Apparently the IEA feels that even with enhanced recovery methods, the Saudi’s cant squeeze much more out of their declining Ghawar oil field, which supplies 60% of their production, and for the next few decades US production will increase due to our unconventional recovery techniques, notably fracking.

But we should note is that even if this temporary switch in world production leaders were to come to pass (and there are plenty of skeptics), this near energy independence will not lower our costs of gasoline for several reasons. The most obvious reason self sufficiency in energy wont lower prices is that crude oil is fungible and prices are determined by worldwide demand & supply. Moreover, the IEA figures include natural gas liquids in our expected production, which by 2011 had come to account for 28% our total unconventional production, & you cant produce gasoline from natural gas liquids. The other reason that domestic oil will of necessity stay high priced is the amount of continued investment that is needed to produce oil from shale.

The adjacent graph, which comes from a report from the N.Dakota Dept of Resources (pdf), shows the production over time from a typical well in the Bakken shale, which is now the most productive field in the US. What you see here is that unlike conventional oil wells, where you might drill one well that produces decently for 40 years, the typical bakken well production falls by over 80% in just two years, because after the initial oil flow from the pulverized rock, the flow slows to a trickle.

So to continue to produce oil from the bakken, or any other shale formation, you have to drill more & more wells, smash more bedrock, truck in millions of gallons more of water & chemicals, all of which is an ongoing capital drain. And even though we are expanding our capacity to tap shale oil considerably, the seven fold increase in oil drilling rigs in the US since 2009 has only produced about a 20% increase in oil production

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Energy independence and a national fleet of hot air baloons

Via Economist’s View on reducing oil imports and energy independence for the US is reader Min’s proposal, which I have unabashedly stolen:

For forty years politicians have been promising energy independence for the US. Forget it. It is not going to happen, at least not any time soon. Our best bet is to cut back on oil and develop renewable energy. In the long run, renewable energy is the only alternative, and we should move in that direction.
Meanwhile, I propose a national fleet of hot air balloons. Each balloon would get its supply hot air from a Federal or state legislator, all of whom, as we know, are full of hot air.
😉

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