ModernGraham

$100 Oil due to False Speculation

Today there is a very good opinion article in the Wall Street Journal.  The article is titled The World has Plenty of Oil and was written by Mr. Nansen Saleri, president and CEO of Quantum Resevoir Impact in Houston.  Mr. Saleri essentially says that we are nowhere near running out of oil and the ongoing concerns that many have that leads to higher oil prices are without base.  I looked at some of his numbers and did some of my own calculations.  Here is what I found out:

Some assumptions need to be made for this little estimate.  First, assume that oil consumption – currently at 86 million barrels a day – will grow consistently at 2% annually, which is at the higher end of the estimates for growth.  Second, assume that due to improving technologies we are able to extract 0.5% more oil per year.  Clearly with these figures an end is a mathematical certainty. 

Given the above assumptions, it may surprise some that the depletion of oil will not come until 2098.  Granted this is only 90 years away, but at the current rate of technological growth wouldn’t it make sense that we will find a new source of energy to replace oil?  Or perhaps even slow the growth in consumption?  Let’s look more into that.

In a second estimate, let’s assume that oil consumption grows at 2% for the next 20 years then slows to 1% for 20 years, then to 0.5% indefinitely.  Keeping extraction rates the same, the depletion of oil does not come until 2144.

Going one step even further, what if oil consumption grows by 2% for 10 years, 1% for 20 years, and then by 0.5% to a peak in 2050 and then declines by 0.5% annually indefinitely?  In this situation, we never run out of oil.

So out of the three examples, which is the mostly likely situation we can expect to see?  I think the first example is the absolute worst case scenario the world would see, whereas the third example is probably not going to happen either.  However, I would expect reality to be somewhere between the second and third examples.  As a result, I would estimate that the earliest the world would run out of oil would be 2144. 

That brings up another question though.  Where will we be in 136 years?  Perhaps we’ll have access to some of the fuels that may exist on Mars.  After all, NASA plans on landing there by 2030.  That would leave 114 years to find at least some oil on the planet.

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Benjamin Clark

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3 responses to “$100 Oil due to False Speculation”

  1. AaronH Avatar
    AaronH

    I have to disagree with the above strongly. Price here is not due to speculation. In commodities markets, supply and demand exist in relative terms instead of linear. In other words, consider rates of change, not absolute quantities in linear terms.

    Here is an analogy. If you turn on the faucet to your bath tub and you happen to be draining more water than you are pouring in, then your available supply of water diminishes relative to the rate at which you are replacing it. As the supply diminishes, costs increase. So does the motivation to use increased profits to find new sources of water. In order to increase profits at higher prices, new revenues pay for a larger faucets and pipes leading to new sources of supply until the bath tub can be maintained at full levels again indefinitely.

    Compare this analogy to the oil markets. Oil exploration, delivery and production costs have sky rocketed. It now costs oil companies in excess of 500 million dollars a day to rent a rig to drill in the Gulf of Mexico. Eventually economies of scale will introduce new energy sources as oil becomes more expensive. Although we do have plenty of oil, the challenge is to produce it fast enough to satisfy market demand. The article is correct that we will not run out of oil. The question is, can we produce it fast enough to handle increasing demand? This is where the term “Peak Oil” comes from.

    The markets always rebalance and the US economy has always proven resilient over time.

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  2. AaronH Avatar
    AaronH

    Correction from above. Day rates for offshore rigs are in excess of 500K a day.

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  3. clear1 Avatar
    clear1

    I think the $100/barrel price tag reflects the end of cheap oil NOT the lack of recoverable oil. There could also be a premium price above the mere supply/demand assessment to reflect the loss of purchasing power (and the anticipated further erosion in purchasing power) of the US dollar. The same can be said of any of the commodities including precious & industrial metals et al…let’s not discount the impact of general market enthusiasm or pessimism regarding specific asset classes as a large component of its present price.

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