$200/barrel will bring a supply avalanche..............NOT!

The following is a guest post by Dr. Saif K. Lalani of Vanderbilt University

$200/barrel will bring a supply avalanche..............NOT!

This is what everyone says nowadays. Gone are the days when $35/barrel would bring a recession, $50/barrel would get supplies out of canadian tar sands, $75 would make oil shale economical and $100 would get supplies from camel's posteriors in Saudi Arabia.

The super optimists now focus on a new higher target to prove their economic theory of supply and demand. I have long tried to explain to readers the difference between geology and economics. While Geologists are generally intelligent enough to grasp economics, economists seem to think the rules of geology do not apply when they use the magical hand of Adam Smith.

I have failed to explain basic geology to these morons. So now I am going to have to argue with them at their level. Fair enough.

Why will $200 not work?

The cornucopians argue that $200 will allow us to access oil at the super marginal levels, i.e oil that was, say, unprofitable at $175/barrel. This will allow supply to come back on and will save the day. High prices will prove peakists wrong. This logic is inherently flawed.

The world uses about 87 million barrels of oil a day. Current decline rates are at least 4%. That means that we need to find about 3.5 million barrels/day worth of supply, this year, next year, and every year thereafter - just to stay flat. Any field or fields that need to make a dent in this demand will need to be of at least 100,000 barrels a day or greater. So tell me where are these 100,000 barrel-per-day fields being sequestered? Which company has announced that it will not develop a certain field at current prices? Presumably there are tons of these fields - which will come to the rescue until every Indian has a car, right?

The truth of course is that there are no such fields. At current prices $100/barrel generates $10 million per day for a 100,000 barrels/day field. Regardless of the high rig rates (some as high as $600,000 a day), that is extremely profitable. Nobody is mothballing any such fields. The only fields that may come online at those prices are those that will produce less than a 1000 barrels a day. Those are the ones that are not profitable now and may become profitable at higher prices. Sure, there will be a few of them. Not enough to make a difference.

All that is assuming we can find the rigs (notice high prices above) and skilled personnel to devote to hundreds of such mini projects. Our current rig fleet is about 3 decades old and will fall apart slowly over the next decade. Rebuilding it will be a great challenge; expanding it will be Herculean effort. The supply of newly minted Geologist’s borders on the pathetic, as few young people were wise or lucky enough to join this field in the last of decade.

But wait: these supremely witty individuals think that this oil is yet to be discovered. In other words at $200 we will all go out prospecting to the vast untapped reserves of the Arctic, Antarctic and Saturn (the planet, not the car). The EIA is its infinite wisdom finds it necessary to say that there are billions and billions of barrels in such places where no one has ever looked. No one has ever looked? But the EIA knows? That is either a boatload of B.S. or the EIA is employing some pretty nifty psychics. Unfortunately these psychic’s are one trick ponies and only specialize in finding oil and not predicting its price as the EIA's long term prediction history will show.

So friends, supply is inelastic regardless of price so the only elasticity is going to come through economic (demand) destruction. $200 barrel will also come to pass (probably after 2010) without any great new supplies."


Yours for a better world,


Mentatt (at) yahoo (d0t) com