The Arabs of the north

Dateline: 18 October 2006

It is inconvenient that some of the world’s largest oil reserves are in unstable regions populated by some people and governments who wish America harm. The result is, among other things, a $60 price tag on a barrel of oil and consequent $3 a gallon for gas. The oil price is now down 25% on recent highs, and gas is, slowly, following it downward.

But what of the long-term? What will the uncertain future of countries such as Saudi Arabia, Iran and Iraq mean for the price of filling your tank?

Current highs in the oil market are caused by the lows of the late nineties. Around fifteen years ago oil companies brought in new technologies – “silver bullets” - which enabled them to extract more oil from each well. Suddenly their long term planning was blown to pieces. Wells which they had believed were dying down now had decades of accessible oil in them. But the process of drilling the new wells, designed to replace the ‘exhausted’ ones, was already underway, and could not be stopped without writing off billions in investment.

By the late 1990s there was massive oversupply and the oil price touched $8 a barrel. Investment had already been cut back to almost nothing. The pendulum had swung too far the other way. By 2000 the problems of today were already anticipated and investment was rising again. Six years ago Shell was predicting that the oil price would peak in 2006.

So what do the oil companies expect in the next few years? Since investment takes years, sometimes more than ten, to produce results, the decisions which will affect the oil price for the next several years have already been taken. Currently, oil companies are anticipating a long-term price of between $30-35 a barrel – a little more than half current prices, and a lot less than half the rates of this summer. This is well up on a couple of years ago when they were still thinking in terms of $20.

That oil companies expect the price of oil to fall by half over the next few years is, obviously, good news for consumers. It is less obvious, but so is the rise in their assessment from $20 to $30. This raises the total level of global oil reserves by a simply stunning amount.

What’s that you say? How can oil reserves go up when we keep on burning the stuff? Because ‘reserves’ is an economic more than a geological concept. There is enough oil to keep us going for thousands of years. But not all of it is economically accessible. Oil companies will invest in projects uneconomic at $20. Some of the biggest will exploit oil under the deep waters of the Gulf of Mexico, or trapped in the tar sands of Utah and Alberta. At $20 a barrel extracting the oil and bringing it to market would make no sense

The cost of extracting oil from these difficult locations will come down as the investment pours in, though they will remain high by Saudi standards. As knowledge and experience of extracting oil, especially from Alberta’s tar sands, improves the price will start to trend downwards from $30. This is where you should expect to see oil prices ten years from now. Canada, by the way, has more oil than Iran or Iraq, and as much as Saudi Arabia.


Quentin Langley is editor of http://www.quentinlangley.net an academic at the University of Cardiff and is a columnist with Campaigns & Elections. This article was first published in the Common Sense series for Lake Champlain Weekly.

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