Friday, 4 March 2011

Petroleum: A Crude Estimate of the Value of Oil

Last Month I wrote about the need to act on energy consumption far beyond the recommendations of experts and advisors in order to mitigate against climate change effects considerably worse than those anticipated by the advisors that policy makers rely on.  One issue that represents the difficulty, opportunity and necessity of changing the way we consume energy is our use of petroleum, or put another way, our dependence on crude oil.

What is left to say about petroleum that isn’t already obvious? It is a valuable resource that can be converted into many vital commodities very cheaply, not just pharmaceuticals, plastics, fertilisers, solvents and similar products, but thousands of different components of vital technologies and products.  It provides most of the world’s fuel for transport and contributes considerably to the heating and power capacity of our energy supply.  Burning it produces lots of energy, but also CO2 and other undesirable emissions.  It is being used at a rapid rate – best guess is about 84 million barrels a day.  It is a limited – and non renewable – resource, with total oil reserves amount to around 1.2 trillion barrels, with much of these reserves (around sixty percent) in the Middle East, and other reserves concentrated in the former Soviet Union, Venezuela and Africa, leaving only around 20% of oil reserves in countries that the US senate would consider unambiguously stable. 

Another consideration is that while global demand is remains high, easily extractable reserves are declining, and declining rapidly.  High demand, coupled with limited supply, uncertainty over production, a cartel controlling much of the available supply, uncertainty over the existence and viability of extraction, uncertainty over the costs, risks and efficiency of extraction, the growth of a number of emerging economies, institutionalised speculation and changes in the terms of trade between different consumer nations, coupled with greater mobility and more intense global trade has meant that prices are at present both high and volatile.  In short, the price of a vital commodities on which trade and the economy depend, is very difficult to forecast.

In addition to price volatility and limited supply of oil, there are other issues we need to consider in assessing if our relationship with oil is a healthy one. For example, meeting our various climate change agreement targets will require using considerably less fossil fuel; ensuring that the limited landfill space isn’t crammed full of plastics will mean reducing our dependence on plastic packaging; reducing the use of chemicals in the atmosphere is also an opportunity to use fewer petroleum based products.  True, our dependence on oil is deep, but motives for reducing this dependence are strong and multiple. 

This brings me to the subject of climate change, or more specifically to the relationship between climate change and oil.   
One obvious point is that as a fossil fuel, burning it contributes to carbon emissions, which, in turn, contributes to climate change.  Another is that the world’s transportation system depends upon oil and switching to another type of power is neither easy nor low carbon.  There is though, a more intriguing issue to consider: if easily extractable oil is running out anyway, what should we do to ensure that the economic and political consequences are not damaging.  The question, then, is twofold: what are governments doing about the end of easy oil and what should they be doing.

The answer to the first part is easy – governments are doing lots and lots of little things to modify the way we consume, the way we generate and use energy, the way our transport system works and incentives are in place to use less oil/use alternatives to oil.

The second part of the question is a bit more difficult to answer.  We are divided on the topic.  Strangely, those who are most sceptical about climate change (who question the science and scientists or argue that the IPCC has ulterior motives) seem to be least sceptical about oil – they seem to argue that we have hundreds of years worth of the stuff, we can just dig a new well when we need it and as long as we have money countries will be happy to sell us as much as we need, when we want it at a price fair to all (there is no question that Saudi Arabia might have ulterior motives for inaccurately estimating the size of their reserves).  So, do nothing, everything will sort itself out, peak oil is all about misdirection or a taxation conspiracy and long before oil runs out we will have moved on to new fuels and technologies: “the stone age didn’t end because of a lack of stones!” to mention to popular quote.

My view is an alternative to this – we must start thinking of oil as a substitute for sustainable and renewable products/resources and it must be valued – and thus priced – accordingly.  A multi-government transition plan must be developed to end the age of cheap oil long before the succession of empty oil wells decide this for us.  High prices to consumers means reduced world consumption, increased attractiveness of sustainable alternatives, oil price stabilisation, more effective planning in unstable oil producing countries, and government tax revenues able to address fuel poverty in a more fundamental and equitable way and more time for the global economy to become more oil independent. 

The political leadership required to revalue petroleum products is immense as it is a message that voters do not want to hear and have never voted for but, to return to the quote above: no, the stone age didn’t end because of a lack of stone, but civilisations more advanced than those even emerging from the stone age have collapsed because of deforestation and other unsustainable uses of previously abundant resources.  That is a more pertinent analogy.


  1. I think you forgot about Canada, Lots of oil and as stable as you can get. Do you find it bizzare that we have been running out of oil for over 50 years, but they always find more?

  2. Ian - No, Canada is indeed the main "stable" country outside the USA. I think the question is cheap oil, we know there is lots of expensive and difficult to extract oil, oil in the hands of people we don't want to have to deal with (my friend from Edmonton would say Calgary!) and oil that is locally more polluting. We ARE running out of oil, its just a matter of when - we need not quibble over if its in the time of our great great grandchildren as opposed to our great grandchildren.

  3. ...and so we'll develop better technology to access this hard to reach oil - it's called progress.
    It'll be a very long time before we run out of oil and besides, we have no viable alternative right now - look at what a calamity ethanol has been: forests have been destroyed and people are starving because their food crops have been replaced by this wretched 'green' fuel.
    I challenge you: show me a viable alternative to oil/coal/gas/nuclear.

  4. Andy - thanks for taking the time to read the article and comment.
    In sentence 1 you said "it's called progress" in sentence two you said "we have no viable alternative right now" which makes me scratch my head because not having alternatives is the reason to search for them, a type of progress, to use your terminology.
    Which people are starving? Do you mean paying more for food? One of the likely effects of climate change will be crop failure. What do you mean by viable - reducing global energy use in half is viable. No one energy method is the answer - the energy mix can be modified over time.

  5. Second go at posting. Assuming you didn't reject my comment.

    There is a simple solution for the US to ensure crude oil based energy sufficiency. That is to offer all emerging crude production projects (secondary and tertiary recovery, shale oil, tar sands, gas to oil, coal to oil etc) a guaranteed price of, say, US$60 per bbl for 20 years.

    The issue for project proponents (other than the majors who can fund projects on their corporate balance sheets) is that funding is almost impossible to obtain for alternative oil projects due primarily to the historical price volatility. Take away that factor (easily done by the US Govt guaranteeing the offtake price) and the emerging projects can get funded and address the energy security concerns.

    Worth considering, I would have thought.

  6. Apologies if there were any posting problems and thanks for the intriguing thought. It is certainly an interesting market intervention (not in the DNA of the USA, but that is a separate issue). Price volatility is more complex than you have stated - its about short term changes in supply, which with a unilateral floor would not halt (what would OPEC do to ruin such a scheme). A price floor as outlined would be an astonishingly risky policy adding to, not subtracting from speculation - it would have to be high enough to act as an incentive, and would need to be underwritten by a guarentee worth trillions of dollars in the event of a new substitute technology.

    Thinking such a policy through in detail to ensure no such problems or to assess the likely issues is certainly an interesting case.

  7. There is absolutely no doubt that oil is irreplaceable.

    People bring up shale oil etc etc. Merely a distraction I'm afraid. the bottom line is by the time we have used half of the oil on the planet (still leaving half remember) the price will be so high as to make it prohibitivly expensive to most people.

    I have friends who are engineeers out in the middle east and the kurdish area of Iraq. They are already capping wells that - although half full - are uneconimical to extract unless oil were above $200 a barrel at today's prices.

    As a point of interest, you'd be surprised how many people don't know that once a well is half empty the pressure drops so low that you then need to pump tens of thousands of gallons of water mixed with chemicals to make a porridge down the well to lift the stuff. That requires a huge amount of energy in itself. Imagine derricks 200km out in the Saudi desert. Imagine how much pipe work and energy is needed to shift that quantity of water and then force it underground at great pressure.

  8. Red Flag.

    Why is shale oil "merely a distraction"?

    Could back up this assertion?



  9. Hi Paul-great little article there. One thing I'm trying to find out is how much of a barrel of oil does it take to get a barrel of oil currently? Trying to explain the EROEI conecpt seems to be quite difficult to just about everyone-even when I use analogies like low hanging fruit and the energy required from the fruit to get more fruit. Once it takes more than a barrel of oil to get a barrel of oil then the Crude Age is over. I do actually think that denial is a huge and powerful force that prevents people from seeing this. Shale oil seems to be a distraction because of the huge costs(production and setup) and energy investments required to extract-compared to 'easy' oil. As for the argument that progress and technology will get us through, I agree that there could be some innovation that will turn on the magic tap again...however, it could well be a race between the innovators and everyone else who just wants to use up what easy oil we have. Can we innovate before we lose access to the cheap(energy-wise) supply?

  10. the reason Andy that it's a distraction is because like drowning men clutching at straws people are using it as a reason not to change what they do and how they do it.

  11. Red Flag:

    Why are they drowning men clutching at straws? I thought it's just people finding new ways of accessing a relatively cheap resource.
    I suspect you have a major hang-up about people using oil as a source of energy. What do you suggest instead - do you want us to go back to an age of rubbing two sticks together?
    I hope instead you are more sensible than that. Hopefully you are in agreement with me that the only viable alternative would be to go fully nuclear (thorium reactors are rather wonderful!)

  12. Red Flag - its for that reason that even some game changing advance in energy, like fusion becoming both technically and economically feasible overnight, would still be ultimately disasterous, maybe even more disasterous than Peak Oil. It would just mean us continuing on in the manner we are until we breach some other physical constraint on our excesses.

    Energy is not the only constraint on human existence: there are plenty of other raw materials, from soil to rare earth materials, that our current mode of living is consuming at a completely unsustainable rate. This silo-thinking - of reducing our unsustainability down to single issues, whether oil or CO2 - needs to be abandoned in favour of the bigger picture.

  13. harry m - why would cheap, clean energy (such as cold-fusion) be such a disaster? What is wrong with us having access to abundant energy?

    Our access to cheap energy (such as oil and coal) has helped us to drag ourselves out of the world of poverty, disease and hunger of past centuries and into the rapidly more prosperous 20th and 21st centuries.

    Please don't tell me your one of those 'back to the garden of Gaia' types who thinks the world would be a better place if we all lived like we did 200 years ago!