Friday, October 26, 2012

There's a new oil bonanza, but it comes at a price

Earlier in the week the U.S.'s bursting shale Oil industry made headlines worldwide announcing that the U.S. is set to become the world's top producer of oil and now on the heels of that announcement, Utah has approved the first oilsands operation in the U.S..

Yes, so the U.S. is set to become the world's top producer, but of heavy oil and shale oil. Expensive oil. I always find it interesting how articles on our energy future stick all the information about costs at the end. In the article on the U.S. becoming the top producer of oil, you don't see anything about what the permanent reality and cost of this new energy is going to be until you reach the bottom of the article:
But Saudi oil is cheap to tap, while the methods needed to tap U.S. oil are very expensive. If the price of oil falls below $75 per barrel, drillers in the U.S. will almost certainly begin to cut back.
This statement is an interesting contrast to a statement earlier in the article: 
The increase in production hasn't translated to cheaper gasoline at the pump, and prices are expected to stay high relatively high for the next few years because of growing demand for oil in developing nations and political instability in the Middle East and North Africa. Still, producing more oil domestically, and importing less, gives the economy a significant boost.
The next few years? You think energy is going to be cheaper in a few years when the growing methods will fall apart if oil falls below $75 / barrel? 
"Drivers will have to pay high prices, sure, but at least they'll have a job," Verleger says.
Ya, that's what I thought. This is the elephant in the room that nobody wants to talk about.

The affordability of these new methods of extraction rely completely on the exponential rise of oil prices, and of course this doesn't even include the environmental, health, and infrastructure costs. Once you include everything, it's a losing proposition. It'll take Alberta returning to surplus to change my mind, and I don't anticipate that occurring so long as Alberta continues to pursue Oilsands as a source of revenue which simply amounts to nothing more than gambling on the market price of oil.

I've talked extensively about how Alberta has entered a downward debt spiral now that the exponential rise in oil prices is over. This exponential rise in oil prices which peaked in 2008 created a situation in which oil was being sold at a price more expensive than that which it was produced at and this was adopted as the model to use to predict future oil revenue. The Albertan government has been failing spectacularly at predicting revenue, and this is the reason. Everything the Alberta government set up was based on the assumption that oil prices would climb forever.

As we look to more and more extreme forms of oil extraction, the world economy will continue to destabilize. It's ironic the article makes mention of the Middle Eastern stability as some sort of temporary phenomenon when this instability is directly related to the U.S.'s energy pursuits.

I know some are going to point to this new oil production and say "see! there's no peak oil". The reality is though, this is peak oil. This is confirmation that the low hanging fruit has all been picked, the only energy left is highly intensive and extremely expensive. The return on investment will simply decline from here on out, and market volatility - even with manipulation - will worsen.

You have to look at this situation from the proper perspective: The U.S. is producing everything it's got at the same time as they lose favor around the world. There really is no other choice for them now as their imported supply becomes a growing target.

This isn't a new age of oil, it's the final act of the age of oil.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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