A friend wondered what I thought about this statement from ExxonMobil and Saudi oil ministers that oil reserves in the Kingdom would soon be doubled. So I mixed myself a cocktail, tighened my robe and here's what came out.....
If memory serves, the oil majors all downgraded their proven reserves substantially a few years back, and were forced to pay significant fines for having overstated them so I take any statement from them with a large grain of salt. Besides, once the Saudis publicly state that their oil reserves are in decline, the West will begin to pull its support from the regime and then the ruling family is ....well, toast.
More generally, for a reserve to be "proven" it must be economically viable to be extracted. At $20 crude and current wage and capital equipment rates there are no proven reserves in Canada's oil sands. At $100, assuming wages and capital equipment costs stay the same, there are billions of barrels. At $1000 crude, other things equal, there are many trillions of barrels of proven reserves. That is, as the real price of crude rises, other things equal, proven reserves will grow. To think of it in labor terms, the more man hours spent, the more crude which can be extracted. Whether that change in labor and savings resource allocation is sustainable is another question, man can't live by oil alone. As a corollary, indigenous resistance to oil extraction reduces proven reserves by raising costs. To wit, proven reserves in Iraq are plummeting as the cost of the Iraq War keeps mounting.
I sometimes think the peak oil advocates overstate the case in their zeal to inflame the public mind and thus create a "straw-man" which is easy to refute for the skeptics. The issue isn't so much that the world is running out of oil, but rather that, for reasons which include the exhaustion of many large fields, greater extraction difficulty in the newer fields (including Hurricanes), and disputes over ownership of those remaining, the real costs of extraction are rising, currently quite quickly.
Ultimately, though, we will all have to wait and see in the Saudis have more oil. Of course, real oil prices have been high for years now, which, you might think, would already have spurred extra capital investment in Saudi Arabia. Heck, why spend $250B going to war in Iraq if $20B invested in Saudi's oil infrastructure would get you, according to the boys from Exxon and Saudi, more oil? I'm sure in the years before the turn of the last century there were many whalers on the New England coast who assured everyone that there would always be enough whale oil.
Wednesday, September 28, 2005
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1 comments:
Jeff,
I agree with your general observation that humans in a position to gain or lose substantially depending upon a vision of the truth will be sorely tempted to see and describe the world as they wish it to be. This applies as well to the decadent House of Saud as it does to the US financial structure (perhaps Franklin Raines might think about applying for a job as Saudi Oil Minister).
Yes, I agree there are limiting factors to the real oil price rise = more oil reserves calculation, i.e. the relationship is non-linear, most likely similar to a population within a closed environment curve. As we cannot live by oil alone, everyone can't be working to obtain it, nor can all capital resources be designed for the purposes of extraction and refining. Indeed, the very value of oil is based on other necessary labors performed more efficiently with its use. If, for instance, auto manufacturers decided to redeploy their capital and labor resources in the oil fields, the supply of cars would decline and the need for oil would drop. As with the human body, balance between multiple systems is crucial.
This is the subtle point I didn't make clearly enough. Greenspan can wax poetic about "economic flexibility" all he wants but this change in real crude prices is already proving to be a tough shock to the system. I don't disagree with the general outline of Peak Oil Theory nor would I bet that the Saudis have all the oil they claim. I just think that the US' problems are more immediate. Long before the world runs out of oil, increasing real petroleum prices will devalue the existing capital stock of oil dependent nations, which serves as the basis for the financial system. In human terms, during periods of food supply decline the first concern is not starvation, but disease caused by malnutrition. To focus on the first effect is not to deny the eventual.
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