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The Forum > Article Comments > Why oil prices must go up > Comments

Why oil prices must go up : Comments

By Nicholas Cunningham, published 24/2/2015

It may be difficult to look beyond the current pricing environment for oil, but the depletion of low-cost reserves and the increasing inability to find major new discoveries ensures a future of expensive oil.

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The author's figures are hopelessly confused.. when he refers to investment increasing three fold he's referring partially or mostly to market infrastructure - pipelines and refining capacity - and not exploration and new fields. As for reserves declining, prices had leveled off and declined well before the recent collapse, so its not surprising that reserve ratios had declined - these are mostly (note, mostly) a function of oil price, not of resource availability. Its the same in other extractive industries.

There is some truth in his comments about the shift to more expensive oil, but there are other factors in that..
Posted by Curmudgeon, Tuesday, 24 February 2015 9:26:09 AM
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Well I find myself agreeing in part with Curmudgeon; the guy wouldn't ever get a Guernsey as a forensic account. And I believe he's even worse as an analyst!

Recent discoveries in Edmonton reveal a 1.7 trillion barrel reserve!

And that's the conservative estimate; moreover, they have vastly improved extraction methods by heating the oil and gas insitu and allowing gravity and increased pressure to assist the then less viscous liquid to naturally migrate to where they have placed the extraction drill holes.

And while a new reserve of around 1.7 trillion will force prices lower; so also will the new wealth of natural gas in the USA and China! And why prices must go down and down!

So much so some analysts are saying we and they should convert our transport options to NG.

And easily done thanks to the new ceramic fuel cell, which works nearly as well on methane as it does hydrogen, And whats more, produces mostly water vapor as the exhaust product.

And given an energy coefficient of that combination of around 80%, for less than half what we are currently shelling out for our transport options.

The guy seems to always be trying to talk up the price of energy; to the point, where you'd be forgiven for believing he was a major shareholder?

In any event, it's hard to find what you're patently not looking for, and were we to find/look for the huge hydrocarbon reserve thought to lie to our immediate north; and developed what appears to be a fairly shallow reserve; prices would fall to below the recovery costs of some of the more notable players!

But particularly a sabre rattling Russia, patently paying for its military adventures, with oil revenue! Ditto ISIL!

Yes oil is an economic weapon, which can work two ways! For and against!
Rhrosty.
Posted by Rhrosty, Tuesday, 24 February 2015 10:59:58 AM
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Without buying into future prices I can guarantee that at some point there will be less litres to go round. It stands to reason that after a century of oil powered industries (ships, planes, plastics) now including nearly a billion cars and trucks demand must soon exceed supply. If you want to believe that turning point is decades away OK but I think in hindsight it could easily turn out to be 2014.

The IEA opines that we will stay on a long plateau of 100 mbpd of liquid fuels as per Figure 7 here
http://www.resilience.org/stories/2015-02-19/free-oil-next-stop-free-oil-crunch
I think that graph may peak about now at 90 mbpd and decline after about 2018. A decade from now the decline will be steep.
Posted by Taswegian, Tuesday, 24 February 2015 12:19:49 PM
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Taswegian - the point you make about a decline in oil production is an attractive one, but similar forecasts have been made literally since oil production by drilling started in the Nineteenth century. As for the supposed IEA figures you link I have my doubts about them.. they don't look right.. oil production has expanded sharply in the past few years, hence the current slump in prices.. If I had time, I'd go and check the originals..
Posted by Curmudgeon, Tuesday, 24 February 2015 12:33:58 PM
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Curmudgeon

You are partly right about higher costs driving higher prices, but remember that in the resources sector the relationship between price and cost works both ways. High prices induce producers to move up the cost curve, as more expensive production methods become economic. Thatís why the shale revolution happened Ė sustained high prices made previously uneconomic production methods worthwhile. Itís what underpinned the development of the North Sea and Gulf of Mexico in the late 1970s 1980s following the OPEC price shocks. It is also, I believe, the reason for the Australian mining industryís shocking productivity record in recent years.

History suggests that, once new technologies are adopted, companies quickly become more efficient at them, and costs fall. That is already happening in shale, as it happened with offshore oil production in the 1980s. The trade-off between declining quality of reserves and improving technologies and productivity is the driver of long-term cost movements in resources. For the past few hundred years, productivity has mostly won, and relative commodity costs have tended to fall (the past 15 years being a notable exception)
Posted by Rhian, Tuesday, 24 February 2015 3:32:29 PM
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Liquid fuel production is experiencing declining EROEI or energy output over input. 1930s crude oil was said to have an EROEI of 100 but corn ethanol is 1.25 and Canadian tar sands about 5. As yet values for Arctic oil or 5km deep offshore are unknown. EROEI <1 uses more energy than it produces.

On the face of it you'd think the declining EREOI trend would steadily increase fuel prices but if incomes don't keep pace fuel is less affordable. Given that oil deposits while large are nonetheless finite at some point the average energy return will get too low to justify the effort. Don't be surprised if it all goes bad quicker than we think eg 2014 from the rear view mirror.
Posted by Taswegian, Tuesday, 24 February 2015 4:28:09 PM
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