The bar graph represents discoveries, the line represents consumption. According to the above chart, we have been drawing down our inventory of oil since about 1980. If the market were functioning properly, this inventory draw-down would result in higher oil prices. It seems to me there are only two possibilities: 1) the data is bogus or 2) the markets are not working.
I am going to suggest both. It seems to me that as oil prices increase so would our reserves, at least this is what I was taught a few decades ago - about the time your graph begins. The rationale being that there are many oil reserves which are not profitable to access and as the price of oil increases so does our accessability to those reserves. For example the tar sands are not feasable at less than $50 a barrel but at $80 + it works. It was also my understanding that the US carries substantial oil reserves to mitigate any shortages in the event of catastophe in any of it's oil sources.
ReplyDeleteIn looking atthe graph I was expecting to see something drastic in the mid-70's when the oils crisis hit and the US was rationing gas..but that may have just been OPEC flexing?? Should either premise you make be true - we better start remembering how to walk again. This of course could open up a whole discussion on how oil companies appear to control alternate research which in any way alleviates our entire dependance on fossil fuels - from high mileage carburators years ago to high priced electric cars. Make an electric car affordable(10-20K - preferaby less) and you will see one in virually every driveway in a very short time.
I think Little Chief brings up a good point.
ReplyDeleteAdditionally I would add that looking at reserve discoveries as this chart shows, is not the correct metric in determining available oil for two important reasons.
First, the increase in oil reserves that occur in any given year come primarily from technology improvements not from new discoveries. If you look at the balance sheets of many big oil companies, you will see a line item called "improved recovery" which is a result of improved technolgy enabling higher recovery. For example, bringing in a slant-drilling rig (vs a vertical drill), it may improve ones ability to recover 30% of a deposit, vs 10% prior, as most wells today are only capable of extracting a minor percentage of the reserves given technical limitations.
Second, the available resources(which are discoveries not yet in development for a variety of reasons) are not included. So for example the oil sands in Canada, which is a massive resource not in reserve calculations as it is not yet in development.
So yes, the amount of newly discovered wells are declining, but there are vast amounts of discovered resources not yet tapped, and the existing producing wells still have a lot of production improvements available with technolgy advancements. Experts believes we have at least 100 years of discovered oil in the ground, and long before that runs out alternative energies will take share (as they already are).
What about the Energy Return On Energy Invested?
ReplyDeleteIn traditional oil fields, EROEI is about 100 to 1. You consume one barrel of oil to drill a hole in the desert, and 100 barrels come gushing up. Today, EROEI in traditional oil fields has fallen to 25:1. Oil scraped off the surface of Alberta's tar sands has an EROEI of only 6:1. Oil retrieved from deep in the tars sands has an EROEI of 3:1. The ratio for corn-generated ethanol is barely over 1:1.
Oil supplies with an EROEI lower than 1:1 will never be produced, no matter how high the price of oil, because they absorb more energy than they yield. And that's why it's meaningless to note that there may be billions of barrels locked up in formations like oil shales, which have never been mined at a net energy profit. It's possible, of course, that technology will find an efficient way to extract oil from such sources -- but not soon, and not on a sufficiently massive scale to allow us to continue using oil at our present breakneck clip.
Obviously, if we had access to plentiful oil reserves with an EROEI of 25:1 or so, we would not be bothering with low-yield sources like corn ethanol and the tar sands. We would not be spending $100 million to lower a drill bit through a mile of ocean water in order to drill down through four more miles of Gulf or Brazilian sea-floor.
Since the ERoEI is going down all the time, but oil prices are not going up accordingly, the market is not doing what it should.
I don't know that much about EROEI (i am certainly not an oil expert) but there are thousands of smart people that build a career around trying to predict the price of oil and the hundreds of variables that go into it. If people thought that oil supplies were depleting at dangerous levels, and were correct in that prediction, one could easily adopt a strategy to become fabulously wealthy. If you think people are ignoring EROEI and that it is the key metric, and that the world will wake up to this fact at some point in the next 40 years, you could become tremendously wealthy with minimal investment (place bets on out of the money futures contracts). Therefore, people are constantly trying to predict this, and at our firm alone we have 5 people whose job it is to predict, short, medium and long term prices of energy.
ReplyDeleteNow I agree the market is not perfect, if I did i wouldn't be in the line of work that I am in as prices would always reflect all available information and my job would be completely luck. But I am constantly surprised how difficult it can be to correctly bet better than the market with consistency. And therefore, despite its flaws, I do have a lot of respect for the market accurately predicting most available information. If you disagree, then you can adopt a strategy to capitalize on the market flaws, and donate the profit windfall to green energy.
I am also not an oil expert, but do know a little more about agriculture. With the exception of a few, farmers engage in activity becasue it makes economic sense. Most agricultural economists devote their energy to exploring that perspective. Recently more attention is being paid to the energy equations within agriculture. Subsistent agriculture is energy efficient -- that is, more energy comes out than goes in -- so it is sustainable. Industrialized agriculture is inefficient -- that is, more energy goes in than goes out -- it is not sustainable. With rational energy pricing (ie not free-market energy pricing) I have faith that industrialized agriculture would find ways of farming more efficiently, but that cannot happen in a few years. That would take a long time.
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