Bruce Stevens is a former partner of The Boston Consulting Group, where he advised several clients in the energy industry, among others. He holds an MBA from Harvard and an economics degree from Duke.
Bruce Stevens writes:
Dr. Bostom pointed out recently that there is a huge pool of oil sitting within the Lower 48 that could make the US energy independent. This reserve, known as the Bakken Formation, stretches from North Dakota northwest into Saskatchewan. While it is thought by some analysts to hold between 270 and 500 billion barrels (B bbl), last week the US Geological Service reported it contains “only” about 4 B bbl of “technically recoverable” oil. So, is there a big reserve or not? And what are the implications for US energy independence?
To understand the implications of these new reports, they must be put into context, both physical and economic. The world currently holds about 1.3 T bbl of proven oil reserves, and humans consume about 80 M bbl a day, or 29 B bbl per year, which would consume the reserves in about 44 year. And while consumption is growing steadily, particularly with the economic rise of the Asian giants, many geologists believe that the world is at or near its peak production of oil and will see falling production henceforth. (Just Google “peak oil” for a wealth of sites debating this point.) However, with new discoveries cropping up frequently with the current high prices, including this large, 33 B bbl find in Brazil.
Of the global proven reserve, the Saudis are the leader with about 266 B bbl, while the US has less than 1/10 that – 22 B bbl, or a little over 1% of global reserved. Moreover, the US is consuming about 1/4 of the world total, 20 M bbl/day, and it imports 70% of that.
In addition, the current global oil reserves – broadly known as low cost oil – cost something under $15/bbl to produce, at least according to some analysts. Indeed, the Saudi and Iraqi fields cost only a few dollars per barrel to retrieve.
In this context, the USGS report of about 4B bbl of oil in the Bakken might be considered favorable but ultimately inconsequential, as it would represent only about a half year of US consumption. However, the USGS report defines these reserves as “technically recoverable,” that is attainable given current technology and economics, yet drilling technology is advancing rapidly. Indeed, compared to the prior USGS estimate of the Bakken twelve years ago, the new estimate is 20-30 times greater. If the total Bakken reserves are in fact about 400 B bbl, then a mere 1% recovery rate would be extraordinarily and perhaps implausibly low. Getting at those reserves may ultimately only be a matter of cost.
As it is, the unusual characteristics of the Bakken make it a more expensive formation to discover and produce than the low cost fields. Numbers of $20-40/bbl are bandied about, but nothing definitive has yet appeared. The main indication of the Bakken’s production costs is that drillers are currently increasing their activity in the region, so at today’s record prices, it appears attractive.
If the Bakken could produce half the estimated 400 B bbl potential, it would be about the size of the Saudi reserves. This alone could make the US energy independent for decades. But the big game changers are two other massive reserves, also here in North America.
The first of these is the Athabasca oil tars (or sands) in Alberta. These reserves are now being developed, and in 2003 the Canadian government officially added 177 B bbl – 2/3 as much as Saudi Arabia – to its reserves from these fields. However, this is only about 1/10 of the total reserves of Athabasca’s total reserves. In other words, this field holds more than the world’s proven reserves. It also is thought to be more expensive to produce than conventional oil – again, perhaps in the $20-40/bbl range, but, again, they are now being developed.
The US also has oil sands, in the west, but relatively small at 32 B bbl and evidently not yet being commercialized. Venezuela has reserves as well, of about 235 B bbl, but their characteristics have so far precluded development.
The other big game changer could be US oil shale, the reserves of which lie in the Rockies and are estimated to hold 3 T bbl – more than twice the world’s conventional reserves. The costs of producing these reserves are thought to be higher than oil sands, but well below the current prices of oil.
So with these massive reserves, why aren’t they being developed rapidly? There are numerous logistical, environmental, and regulatory barriers to doing so, but the main issue is economic: oil producers have witnessed huge swings in oil prices in the last 35 years, with peaks in 1974, 1979 and 1991 close to current levels (in inflation-adjusted dollars), with deep troughs as low as less than $25/bbl in adjusted dollars in the mid-80s and late 90s. This bitter history and the prospect of similar price swings in the future increase the perceived risks associated with making the long term investments necessary to exploit these resources. Such risks chill investments.
To see the outline for a policy to achieve energy independence, merely combine some of the points above: global production from conventional, low cost reserves are near a peak; oil prices are at all time high and likely to grow if production falls while demand continues to grow; but enormous supplies of higher cost oil lie within North America – or, eco-politically, NAFTA. Imagine that the US government imposed a sort of “reverse tariff” on oil imported from outside NAFTA, so that as the world price of oil fell below a certain point – say $50/bbl – the tariff would make up the difference and keep the North American price for crude at $50. Producers of Bakken, Athabasca and western shale oil would have some security that prices would not force them to stop production, so they would be more willing to produce.
Such a policy would have several benefits, both economic and political. Setting a price floor like this would not impose an immediate increase on consumers, would only kick in if prices fell to one-half of current levels, and indeed may never be invoked. Moreover, it wouldn’t necessarily represent a hard floor – if North American sources turned out to be producible at lower price levels, competition among producers should drive the price down below the target. Tariffs would arise only if/when global oil prices cycled towards a trough, from which they would probably eventually emerge. And the costs of having this tariff should be weighed against these benefits: making North America truly energy independent, free from supporting the hostile nations currently providing us our energy; increasing the world supply of oil, thereby reducing the prices available to those other oil producing nations; and – importantly for those who believe in anthropogenic global warming – setting a minimum price for North American oil that should in turn stimulate both conservation and alternative energy sources.
Without incentives like a reverse tariff policy, the US may ultimately develop its own oil resources, but the process will probably take longer and in the meantime, the US will continue, in Tom Friedman’s words, to fund both sides of the jihad. We have an opportunity now, with current oil prices, to break out of dependency on hostile oil states and establish a rational strategy towards energy independence. Once the political silly season is over in the fall, we should push our elected officials to take up this process. It’s well past time to take this deadly issue seriously.