PrintSeptember 25, 2008
The Myth of No Oil
Oil prognostication and exploration have come a long way since the first U.S. oil well was drilled in Pennsylvania in 1859. At the time, wood and coal were the primary sources of energy and the nation's petroleum supply consisted of crude oil that oozed to the surface. Fifteen years later, when Pennsylvania was the nation's leading oil producer that state's geologist warned of supply depletion, forecasting that only four more years of oil remained to light the nation's kerosene lamps.[1]
Predictions of nationwide oil supply exhaustion soon became regular occurrences, with seven made prior to 1950[2], even though the United States was the world's largest crude oil producer until 1973. Indeed, through the mid-1980's, most oil consumed in the country was of domestic origin. Today, however, the United States imports the majority of its oil and, due to environmental regulations, has not authorized the construction of new refineries since the mid-1970s.
Yet, our country does not lack adequate oil resources. Rather, supply estimate methodologies seriously undercount our true oil resources. This and our lack of political will to use advanced recovery technologies contribute to the myth of no oil. This myth hobbles our ability to draw on our own existing resources and keeps us in a dependent posture, looking to others to provide for us.
Oil-supply Estimates & Prices
Oil supply estimates have been historically understated. That's because they are calculated using oil reserves - the amount of oil that is considered economically and physically recoverable using available technology - rather than the much larger oil resources. Resources are significantly higher than reserves because they include developing and yet-to-be developed technologies that can be used to extract oil from more challenging and unconventional oil resources.
The lower calculations use current oil prices and existing production rates and technologies. Plus, they overstate depletion, using current production and usage rates against existing reserves.
Even with these limitations, estimates have grown considerably throughout the 20th century. In 1920, geologists announced that the world supply was 60 billion barrels. But by 2000, 900 billion barrels of oil had been produced[3]. In 1950, 1970 and 2000, estimates were constantly raised upward to 600 billion, 2,000 billion, and 3,000 billion barrels, respectively.
Further, oil exploration and development, like any commodity in a free market economy, responds to efficiencies at particular price points. Since 2005, the price of oil has not dropped below $40 a barrel. Oil prices were as high as $145 per barrel in June and now hover around $95 per barrel. Thus, oil that may not be economically recoverable at $20 a barrel may become financially attractive at $40 a barrel.
Also, as the price of oil rises, set-up and investment costs for unconventional oil sources appear increasingly feasible. Typically, oil resource estimates don't incorporate price fluctuations, yet prices can significantly affect supply. Thus, market interference and political instability can be more significant factors for price and supply than actual geological constraints.
New Technology
Further impacting oil reserves are improved technologies. The first American oil well was drilled to a vertical depth of 69 feet. With vast improvements in drilling technology since then, well depths now approach 30,000 feet on land and, in offshore drilling, water depths to 9,000 feet. The yield from a single well has increased greatly through the use of horizontal drilling techniques. Instead of a single well accessed through one vertical shaft, multiple horizontal shafts are now bored from a vertical shaft, resulting in substantially greater yields.
Other new technologies that have increased the efficiency and effectiveness of oil discovery and exploration include:
- Hydraulic fracturing - Injection of fluids into a well under high pressure to release oil from rock formations.
- Tertiary recovery techniques - Injection of C02 or natural gas into the well to improve oil viscosity and draw more oil into the well bore.
- Reservoir simulation technology (RST) - Computer modeling of reservoir properties through mapping and behavior simulation to aid in resource prediction.
- 4-D seismic imagery - Use of time intervals and dynamic evolution of reservoirs, to lessen guesswork and allow geologists to view reserves below the surface. It also reduces drilling risks and improves recovery by identifying drainage patterns and bypassed petroleum sources.
In addition, technological advances have led to re-tapping of previously capped wells and opening of closed formations to production. It has also dramatically reduced the oil-production footprint. In the 1970s, wells were spaced at least 100 feet apart. Today, with drilling and equipment advances, wells can now be placed 50, 25 and even 10 feet apart. An oil field covering 65 acres thirty years ago would use less than 10 acres today.
The affect of new techniques and technologies on oil exploration efficiency and effectiveness has been considerable. According to energy economist Michael Lynch[4], the success rate for exploratory petroleum wells has increased by 50 percent over the past decade.
Unconventional Sources
Although substantial oil resources exist and are increasingly viable at today's prices, unconventional sources for oil - such as shale, tar sands and coal, abundant in the United States and Canada - are not included in oil-resource estimates. As extraction and processing technologies improve, production costs for these unconventional sources will drop, greater efficiencies will be achieved and more resources tapped.
A potentially significant supply of oil is trapped in shale in the American West. Rocks in Colorado, Utah and Wyoming alone are believed to contain over 1,500 billion barrels of oil. Previous government experiments with shale oil production were labor and energy intensive and environmentally disruptive, producing little oil. But efforts by private companies have revolutionized the extraction technology with development of an in situ process of heating rocks, trapping oil and extracting it profitably at oil prices of just over $30 a barrel. Shell Oil, the leader in this new technology, estimates that it will be able to produce one million barrels of oil per acre.
Meanwhile, it is estimated that oil production from tar sands in Canada and South America would add an additional 600 billion barrels to the world's supply.[5] Canada, which does not segregate conventional oil from tar sands, is currently the largest U.S. oil supplier with about half of Canadian crude derived from oil sands. This oil is forecast to reach 3 million barrels per day in 2015. The Economist[6] recently noted that there exist "174 billion barrels of proven reserves in the oil sands of Alberta" alone.
Another technology, coal liquefaction to produce oil, becomes competitive when the price of conventional oil is higher than $30 per barrel, according to U.S. Energy Department estimates. The coal-to-oil process produces natural gas and removes pollutants that are released when coal is burned to produce electricity. With the United States possessing 27% of the world's coal supply, U.S. coal-to-oil production could be substantial. South Africa has been producing petrol and diesel from coal since 1955 and currently produces 40% of the country's oil from this source. China has begun experimenting with coal liquefaction and predicts that it will produce one million barrels of oil per day from coal by 2020. Currently, the U.S. Air Force, the country's largest user of jet fuel, is experimenting with this technology as a way to reduce its reliance on fuels from hostile or unstable countries. The Air Force intends to use its vast purchasing power to spur the development of a coal-based synthetic fuel industry in the United States. It hopes to fly all stateside missions using synthetic fuel by 2016.
Current Supply Estimates
Although Congress has not authorized a thorough inventory of offshore resources for over 30 years, the American Petroleum Institute estimates recoverable U.S. oil resources at about 86 billion barrels offshore and 32 billion barrels onshore.[7] This estimate doesn't take into consideration technological advancements, unconventional sources and recent discoveries.
Currently, the United States is the only industrialized country in the world not actively seeking to explore new offshore resources. In fact, offshore drilling is allowed in most of the Gulf of Mexico but prohibited on the East Coast, West Coast and Alaska. Only 17% of non-park, non-wilderness federal land is open to energy development and 85% of coastal waters are off limits. Further, since 1983, the amount of federal land available for development has decreased by more than 60%.
Recent assessments of the extent of economically recoverable, conventional oil in two important locations -- the Bakken Formation and the Arctic National Wildlife Refuge (ANWR) -- could increase these estimates considerably.
First discovered in 1953, the Bakken Formation covers part of Montana, North Dakota and Saskatchewan. In April of 2008, the U.S. Geological Survey (USGS) estimated that Bakken contains 3 to 4 billion barrels of technically recoverable oil, a 25-fold increase from the agency's 1995 estimate. Market conditions and drilling and production advances could transform Bakken, the largest continuous oil accumulation in the lower 48 states, into one of the largest producing oil fields in the world.
Meanwhile, petroleum experts have estimated that ANWR contains anywhere from 9 to 16 billion barrels of technically recoverable oil and could prove to be one of the largest oil fields yet in North America. Since current USGS estimates are based on the petroleum geology of adjacent lands, the true potential for oil recovery is uncertain.
Environmental arguments about risks to wildlife and pristine forests have kept ANWR off limits to energy development, even though such risks are unfounded. Drilling in the region would cover a mere tenth of one percent of its 19 million acres. Plus, ANWR is a flat, treeless plain with temperatures inhospitable for most animal species. The area is already home to a village of Native Americans, who support its development. It currently contains an airstrip, power lines, an oil well and a military radar site. Two decades of drilling in the North Slope area has had no negative effects on the ecology of the area and, during that time, the caribou population actually increased sevenfold.
[1] E. D. Porter, "Are We Running Out of Oil?" API Discussion Paper No. 081, 1995, American Petroleum Institute.
[3] McCabe, Peter, "Energy Resources - Cornucopia or Empty Barrel?" Table 2.2, "World Crude Oil Production, 1991-2000," Energy Information Administration, U.S. Department of Energy, 2001.
[4] Lynch, M.C., "Forecasting Oil Supply: Theory and Practice," Quarterly Review of Economics and Finance, Vol. 42, 2002, pages 373-89.
[6] "Please Buy Our Dirty Oil," The Economist, March 13th, 2008, http://www.economist.com/world/americas/displaystory.cfm?story_id=10853957
