“An Unconventional Truth”

Jan 19, 2015

The dramatic plunge in oil prices has exposed an “unconventional” truth: Not all oil is created equal.

    Recent events have shaken our fantasy of becoming the new Saudi Arabia of oil. It was based on the false premise that “conventional” and “unconventional” oil are one in the same.

     Plunging oil prices are revealing the gaping geologic and production cost differentials between the two oil types. The Saudis, for example, can produce their conventional oil at a fraction of what it costs to produce unconventional oil from shale or tar sands.  

     What makes the two oil types so different? Think of “conventional” oil as a pool of crude oil that drillers tap into with a vertical drill – like putting a straw into a glass of water. Far easier to extract and process, it also provides a predictable flow of oil for years to come.

    “Unconventional” oil – extracted from shale, tar sands and deep water drilling – is a totally different story. Shale oil requires horizontal drilling and a massive fracking enema to extract the oil, and it has a rapid depletion rate; tar sands have to be mined and liquefied; and deep water drilling is astronomically expensive. Costlier to extract, process and ship; unconventional oil leaves a higher carbon footprint, a resource-intensive production regimen and a host of litigious socio-economic and environmental issues in its wake.

     These differences – unnoticed when oil traded at $100 per barrel – can no longer be ignored.  Shale oil growth is, in fact, unsustainable at today’s prices. The reductions in rig counts and loss of capital to finance new drilling operations attest to this. Cash-strapped drillers and the junk bond markets that financed them are in trouble; local and state economies so heavily dependent on oil royalties and taxes are reeling. 

     It happened so fast: The so-called “shale oil revolution,” a bubble in disguise, is not the panacea that Wall Street and the financial media would like us to believe. Make no mistake; today’s lower pump prices are transitory – not the new “norm” – and can rise as fast as they fell. We’re only a global crisis away from changing the oil equation overnight; it’s that volatile.

     But, here’s the real problem: Conventional oil production has flattened in recent years at about 75 or so million barrels per day against a current global demand of about 92 million barrels. The shortfall is made good by the production of unconventional oil. As demand increases,  the mix of unconventional oil will grow disproportionately to the total, and the incremental cost of each new barrel will rise with it. The cost implications are enormous. 

     Try as we might, we can’t change the immutable laws of geology or find new sources of conventional oil of sufficient size to sate our oil addiction. The cheap and easy oil is gone, and the unconventional oil needed to meet future demand is expensive. That’s our new reality.   

    Bottom line: This isn’t our first rodeo – the oil supply and demand cycle will repeat itself:  Demand will spike, prices will rise, and shale oil production will once again become profitable. As this happens, it’s worth remembering the “unconventional truth” that not all oil is created equal and that:

  1.  Unconventional oil is costlier, has a heavier carbon footprint, and will become increasingly problematic and unsustainable over time; 
  2. Demand reduction and energy conservation  offer a better way to a brighter future than wistfully hoping that oil prices will remain low, and 
  3. Building our Strategic Petroleum Reserve and accelerating clean energy policies – while oil is cheap – is our best long term bet. 

For more information, please visit our website at: www.weatheringthestorm.net 

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