The recent Houston Chronicle op-ed, ostensibly written to respond to my New York Times op-ed, is worthy of reading for a variety of reasons, but primarily entertainment. The reference to me as Stephen Lynch was apparently an editor’s error, but the analogy of oil fields and glasses of water was quite enlightening as to the state of the debate. The three gentlemen comment on the difference between a straw in a glass (a supergiant field) and a puddle of water on the table requires many straws.
In fact, I know of no supergiant fields that have not required many straws, since oil fields are not ‘pockets’ of oil but rather oil that is in rock, rather as water is in a sponge. Drawing all of the fluid from one spot doesn’t mean that all of the oil will flow freely and uniformly to the straw: to the contrary, a given well usually drains a very limited area, and supergiant fields typically have numerous wells, hundreds even thousands, depending on the geology and geography.
[The inappropriate use of analogy is reminiscent to the website of Colin Campbell, the founder of the Association for the Study of Peak Oil. He points out that when you have finished half the glass in a beer, you only have half left. Given that he lived in Ireland, this prompted the rejoinder that his inability to find another glass of beer should raise questions about his understanding of resources.]
There is also the rather illuminating comment that not knowing much about Russian and Middle Eastern supergiants suggests that they could decline much faster than we expect. And yet, couldn’t they also decline much slower than we expect? This selective attention is what is known as ‘bias’. In fact, while it is not possible to download comprehensive information about oil fields in those areas, I have done work in the past by relying on such information as is available, including the piece, “The Economics of Petroleum in the Former Soviet Union,” in Gulf Energy and the World: Challenges and Threats (The Emirates Center for Strategic Studies and Research, Abu Dhabi, 1997) as well as “Crop Circles in the Desert” (on this website), which show what can be done, given a little effort.
Finally, the issue of cost and the increasing difficulty of producing oil is raised. This is an interesting and pertinent matter, but one that is poorly understood. Many of the recent studies arguing that oil prices must remain near $70/barrel because that is the new ‘marginal cost’ of production suffer from two major problems: taking transfer payments such as royalties as costs, and assuming that the cost increase is due to geological effects, not cyclical in nature.
As an example, cement and steel make up a large portion of the development of any big field, especially offshore. Those costs rose sharply in the past few years, but there is hardly any danger of either being ‘depleted’. Indeed, since 1900, cement prices have fluctuated repeatedly, but have actually tended to decline over time. Steel prices (only available from 1940) have risen in the past few years before declining with the recession, but this was clearly due to the economic boom in Asia tightening markets. They had actually been on a long-term decline from 1980, dropping fairly steadily from $180/ton to $100 before the recent run-up.
And the very fact that costs have appeared to double (or more) in just three to five years should be suggestive: depletion has hardly increased during that period, nor has there been any sudden change in drilling targets. Most of the deepwater fields now being developed were found before the price/cost run-up, and the expensive projects like Sakhalin and Kashagan were begun when prices were below $50. To the extent that more expensive fields are now under development, higher prices are the explanation, not depletion. Operators are free to target marginal projects when prices are high; if prices drop, they will be ignored, bringing costs down.