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Issue link: http://read.dmtmag.com/i/27063
MARKETING & SUPPLY BY KEITHREID What’s driving our new oil reality—supply and demand or rampant speculation? GETTING TO THE BOTTOM OF CRUSHING OIL PRICES: PART 2 ments relative to traditional metrics related to sup- ply and demand. Supply (both reserves and pro- duction) is seen by some to be on the verge of a plateau and soon a decline, while demand in devel- oping nations like China, India and the Middle East is expected to ramp up dramatically. Policy deci- sions relative to the off shore drilling moratorium, or the utilization of the petroleum reserve or cli- mate change policy are also seen to factor into cur- rent oil prices. Of course the recent Middle Eastern turmoil is triggering a traditional price spike. This second part of the article takes the counterpoint, that while the fundamentals might have some impact, factors beyond the fundamentals might be adding significantly to the price of a barrel of oil, a gallon of gasoline or a gallon of heating oil. A GLASS HALF EMPTY OR HALF FULL? Many have foretold the doom of impending peak oil over the years but somehow technology, ingenuity and drive have kept expanding reserves. An example of this is that in 1909, NPN Magazine’s first year of existence, a scientist opined in an article that in 40 years the world would be out of oil. Over 60 years after that date was to have arrived the world is still running on hydrocarbons. Details of the current per- spective on the approach of a peak oil type scenario were covered in the first part of the article.However, there are counterpoints to those projections. Conventional oil reserves can be extracted for a cost of between $6 and $40 according to the 14 MARCH 2011 S WE NOTED IN PART ONE OF THIS article, much of the public commen- tary relative to the general increase in oil prices, particularly in the financial media, centers on oil price move- International Energy Agency. The reserves of easy and cheap conventional oil are under pressure and will run out some day, the question is when? A range of conventional oil fields have been identified that have yet to be exploited and other convention- al resources are under exploited. For example, Iraq has the third-largest reserves in the world but cur- rently has a production capacity of about 2.5 mil- lion bbl./day. Experts have estimated that it could be brought up to 12 million bbl./day which is high- er production than Saudi Arabia. The generally “alternative energy” friendly IEA (while downplaying the potential of Iraqi produc- tion) notes that these unexploited fields will typi- cally just replace the loss in production of other maturing fields of conventional oil. But even if that is the case it will still provide a buffer for much of the current decade. So, should current futures prices be reflecting a potential transition period a number of years down the road? There are also enormous reserves of somewhat harder and somewhat more expensive oil to be extracted once a higher base price of oil stabilizes. These reserves become profitable when the price of oil stabilizes in the $30 - $60 per bbl. range, though the initial start-up production costs in some cases are as high as $100 per bbl. These reserves include deep sea oil (with the appropriate oversight and monitoring); oil shale (oil trapped in rock and accessed through the maturing frac- turing process), shale oil (the oil precursor kero- gen trapped in rock requiring heat to process); tar sands; coal to liquids; gas to liquids; heavy oil; and arctic oil. Similarly, shale gas using the fracturing process has opened up tremendous reserves of that fuel source that could significantly offset oil consumption for transportation use, though with NPN Magazine www.npnweb.com