Every year we hear the same thing. More US drilling will result in more oil production, driving down prices. And, every year, massive ongoing drilling efforts fail to deliver these promises. Instead, though US oil production increases at significant costs to US land, environments, and increasing damage via CO2 pollution, prices have remained at historically high levels.
Unfortunately, the answer to this particular question is a complex one. But the gist of the problem can be summed up in one simple phrase. The oil, and its related fossil fuels, are depleting, dirty and harmful to the environment, and they are geo-politically dangerous.
In the early 2000s, when oil prices were around 20-30 dollars per barrel, about 5,000 wells were drilled in the US each year. US daily oil production was around 6.5 million barrels per day and the cost of producing a marginal barrel of oil was around $15 per barrel.
Today, more than 20,000 wells are drilled each year. The amount of oil produced per well is much, much lower. And many of these new, rapidly drying, wells must be repeatedly fracked to get at hard to reach and diffuse underground deposits. The cost of producing a marginal barrel is around $75 to $80 dollars and the price of oil itself ranges from 80-120 dollars per barrel on the world market.
The US, for all its massive drilling and investment efforts, now produces a little more than 7.2 million barrels of crude oil each day. To just keep that number flat, it will have to increase the number of wells drilled each year even beyond the current 20,000. To increase oil supplies, US drilling efforts will likely more than double. More and more drilling for harder and harder to reach pockets of oil means continued upward pressure on prices. In all likelihood, the cost of a marginal barrel will continue to rise or, at least, remain at a level high as new technology fights an ongoing battle against depletion.
Depletion has also delivered a high volume of low-grade oil that is difficult to refine into gasoline. The issue is that every bit of oil that can be found is being sucked from the ground, regardless of quality. As a result, easy to refine oils are now scarce. So depletion creates a second price pressure as refiners scramble to acquire the means to turn low-quality oil into high-grade gasoline.
In the face of depletion, demand is still rising. China, India, and the Middle East consume more and more oil each year. Though the US and Europe continue to increase efficiency, demand growth from emerging economies more than makes up for any efficiency gain. Currently, more than 80 million new gasoline-powered vehicles are produced each year. This production creates an un-meetable demand for a depleting commodity.
During October and November of 2012, world oil demand reached an all-time high around 90.1 million barrels per day. But world oil supply lagged about 800,000 barrels per day behind this number. This kind of situation, which has become common-place since the mid-2000s, shows that boasts by the world oil industry of being able to meet demand via fracking and other new avenues are mostly hollow. Fracking, instead, is an irrational scramble to supply markets by any means necessary.
In addition, though oil production in the US comes at a very high cost, production in other countries is even costlier. Russia and Saudi Arabia both boast marginal production costs above $90 dollars per barrel. And drilling in both countries has been a frantic effort to slightly increase production. The risk for these countries is that large drilling efforts eventually fail and major oil fields go into rapid decline. Such events would wipe out many of the supply gains achieved via fracking. And, as time goes by, the risk of another super-giant field collapse increases.
Dirty and harmful to the environment…
With climate change producing increasingly severe weather and resulting in very rapid sea ice melt in the Arctic, oil producers face a growing number of strengthening protest movements. 350.org, a movement dedicated to returning world CO2 levels to a ‘safe range’ under 350 ppm, spear headed pipeline protests that have stranded oil supply within the US.This stranded supply pushed US oil and gasoline prices lower even as it resulted in higher world oil prices. In addition, protest movements are pushing divestment from fossil fuel companies.
Broad protest action against fossil fuel companies is the direct result of a failure to transition to more sustainable energy: wind, solar, and vehicle to grid technology. Now, the oil companies face disruption via political and non-violent action that will also likely have a deleterious effect on their efforts to expand production. The result is that increasing damage and disruption due to climate change and related protest movements are also likely to keep oil and related gasoline prices high.
Much of the world’s oil production occurs in geo-politically unstable regions. Saudi Arabia, Nigeria, Iraq and Iran account for more than 20% of world oil supply. Mexico and Russia account for 15%. Political turmoil and supply chain disruptions consistently impact these regions.
Geo-climate also now impacts major oil producing regions. The Gulf of Mexico falls under the gun from intensifying hurricanes, the US northeastern refineries have also been consistently impacted by major storms such as Irene and Sandy. The Bakken fields of North Dakota and Canada are under the gun for powerful direct wind-line storms should ice melt from Greenland continue to intensify. Arctic drilling efforts are also likely to be hampered by powerful storms and erratic weather in those regions.
The time for transition is now…
In fact it was yesterday. But since we didn’t transition away from oil yesterday, today will have to suffice. As mentioned above, oil is dirty, dangerous and depleting. It is a substance that involves severe and increasing risks for price shocks and even worse risks to the climate. Assurances that prices will substantially fall or that climate change risks will not emerge are imprudent at best and madly irresponsible at worst.
Therefore, oil should be considered something we must wean ourselves off of as rapidly as possible. Everything else is just pandering to a false hope.
In the end, massive efforts to exploit depleting and increasingly diffuse and hard to reach oil supplies are unlikely to succeed in long-term reductions in gasoline prices. In fact, such production faces a growing list of political risks and challenges. Further, such production is likely to fall under increasing threat from a less stable climate, both through the impact of storms on production and refining infrastructure and through a growing response by protest actions.