[p2p-research] Gulf Oil Spill: With so many oil resources, can't we just drill somewhere else?

[Ryan]

  Sent to you by Ryan via Google Reader: Gulf Oil Spill: With so many
oil resources, can't we just drill somewhere else? via The Oil Drum -
Discussions about Energy and Our Future by Gail the Actuary on 5/29/10

This post is an adaptation of one posted in December 2009, relating to
a talk given at that time. A PDF of the talk can be found here.

There is a huge amount of oil which theoretically can be extracted. The
question isn't whether it is there--the question is whether the cost to
extract the oil will be cheap enough for us to be able to afford the
oil. If oil is too expensive, the high prices seem to cause a
recession, similar to what we recently have been experiencing.



In many ways, people who say we have lots of oil are correct. All one
has to do is include the oil which is extremely expensive and slow to
extract. Much of the cheap, easy-to-extract oil has already been
removed.



Economic theory talks about oil prices rising, and substitutes being
found, which will tend to bring prices back down. When oil prices rose,
we found substitutes, but they were poor substitutes-- generally more
expensive, and hard to scale up. Corn ethanol requires huge land use
and imported fertilizers. Wind isn't a transportation fuel--it is a
substitute for natural gas and coal in electricity production. Making
sufficient electric cars and trucks to replace our current fleet would
be a huge expensive project, requiring many years, at best.

In the above slide, I purposely exaggerated the impact of an oil price
rise on food and gasoline. The effect would be greatest on a low income
individual. It would also be very great, if the price rise were to
something like $400 barrel.



This is pretty obvious, if you think about it. Does it sound like
anything we have run into in the last few years?



Many people think of the effects of peak oil as a future event. But we
are really experiencing them here and now. Oil production stopped
rising in 2005, so by 2006, we were feeling the effects of the squeeze.
The effects were being felt as early as 2004, when oil prices began to
rise.



The US was the earliest place where drilling for oil, and the earliest
place where production began to decline, in spite of technological
improvements and increased drilling. But fortunately, when oil begin
declining in 1970 there were other places that were not too hard to
reach.



After the US 48 states production began to decline, production was
ramped up in a number of places, including Alaska, shown here. It
production began to decline only a few years later.



The North Sea was another place where production was ramped up after US
production began to decline. It too began to decline rather quickly. I
didn't show Mexico, but it was another nearby location that was ramped
up, but then began to decline, after US 48 states production began to
decline.



At this point, most of the fields that are in easy to access locations
are in decline, and we are "stuck" with what is left--the slow to
extract, expensive oil from difficult locations. Deep water oil is one
of the kinds of oil we have left, but it is expensive to extract, and,
as we have just seen, if there are oil spills, they can be very
difficult to stop.



So many people have equated high prices with oil shortages, that people
have come to believe that if prices are low (or at least relatively
low, compared to recent past prices), everything is OK. But we really
need lots of quite inexpensive oil to fuel the economy, or it goes into
a recession. Reduced credit reduces demand, and has the effect of
bringing oil prices down.



In the above slide, the cutback in credit is especially important.
Without credit, many people cannot buy new cars, new houses, or
expensive Christmas presents. All of these use oil in their manufacture
and distribution, and keep oil prices up.



US consumer credit (including things like credit card loans and auto
loans) peaked the same month as oil prices. Mortgage loans peaked about
the same time, and many types of commercial credit have been affected.
The government has tried to pick up the slack with additional
borrowing, but this is not the same.



The EIA indicates that on a constant dollar basis, energy expenditures
more than doubled between 1990 and 2008. Going forward, the EIA sees
more increases in energy expenditures, on an inflation adjusted basis.

I might mention that one of the major uses of new technology is to
bring down prices. There are limits to what can be done--if oil is very
deep in the ocean, it is likely never going to be cheap to extract. The
need for new technology to bring down prices is probably as great or
greater with fossil fuels as it is with things like wind, solar, and
biofuels. Fossil fuels are at least well adapted to running our current
infrastructure. Anything that is very different will require huge
expenditures for conversion.



In my view, the big question is how debt (and financial institutions
holding the debt) will fare. The front page story on today's Atlanta
Journal Constitution is "Troubled banks find it hard to stay afloat".
How long will bailing out failing banks with printed money work?



The growing gap is the concern. Regardless of whether oil production
remains flat, or declines fairly steeply, we have a major problem. With
many people from around the world interested in using oil products, and
many new cars in places like China and India, the gap between
production and what we would normally consume (if prices were low and
credit were available) is likely to continue to grow, even if somehow
oil production could be kept flat. If we intentionally decrease deep
water drilling, it will tend to make the gap worse.



The advanced economies have in the recent past been able to "offshore"
their energy intensive industries to places like China, giving the
illusion that countries can get along with only non-energy intensive
services like finance. But for the world as a whole, there seems to be
a close relationship between growth in oil consumption and GDP growth.
Since finance and some other services don't need much oil to grow, the
relationship is not exactly 1:1. Efficiency growth would also tend to
make GDP growth higher (but declining energy return on investment would
tend to lower it).



My big concern is international trade. If debt defaults are a problem,
this could interfere with the workings of the whole system, especially
if it leads to major countries (perhaps Greece) defaulting on their
debts.



In the years since fossil fuel use has developed, world population has
greatly expanded.



We are already seeing problems with people in some of the poorer
nations having adequate food. Even in the US, there are people at the
margins who are "food insecure". Currently, there are government
programs to help, but states are finding it increasingly necessary to
cut back, because of falling tax revenue.



It would be a lot easier to get politicians to talk about the situation
if there were a good solution in sight. There are some partial
mitigations, but they likely don't get us back to "business as usual".
Voters are likely to be very unreceptive to such news.

We are in the midst of a predicament, even if we continue to ramp up
deep water oil from the Gulf of Mexico. If there is less oil from the
Gulf of Mexico, it will make our predicament even worse.

The world doesn't really have many more good, cheap places to drill any
more. Any place we do drill, requires substantial capital investment
and long lead times. Much of the remaining oil is in solid form, like
the oil sands, and oil shale. Such resources will be very slow to
extract, so it is very difficult to ramp them up, even if we decided we
wanted to. There may be other limiting resources as well, such as
water, meaning that this obstacle needs to be overcome as well. So
there are no easy substitutes for oil from the Gulf of Mexico.

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