A Citigroup analysis of North American oil production suggests that the continent could become the “new Middle East.” The report, ENERGY 2020: North America, the New Middle East?, projects increased oil production as having significant effects throughout North American economies, with an increase in the United States’ real GDP of 2.0 to 3.3% from new production, reduced consumption, and associated activity.
The report points out that “the main obstacles to developing a North American oil surplus are political rather than geological or technological.” In response to the growth in shale development, state and federal governments are crafting regulations to address environmental concerns such as groundwater pollution and increased seismic activity in near well sites. Regulations of greenhouse gases could also complicate oil and gas development in the U.S.
The Oil Drum, an oil and energy blog, argues that the report’s assumptions are overly optimistic, pointing to questions about the future productivity and viability of shale plays across the U.S., as well as declining productivity of current Gulf of Mexico oil rigs and Alaskan oil fields.
What do you make of the Citigroup projections? Could North America become the “new Middle East?” If it can, should it? Does the rising potential of domestic and regional oil and gas production complicate the pursuit of other technologies and policy goals?
Leaving aside the fact that this is a theoretical exercise based on optimistic projections for extracting all technically available crude in North America and the practical implications of what the physical process for this kind of expansion would mean (as well as the political overlay of the forum and tone of the op-ed) I think there is a very important subtext to Dr. Morse’s theory.
Dr. Morse was one of the voices in 2007-2008 calling the climb in prices to nearly $150/bbl unsustainable, bubble, etc. If he really can project a scenario, based on technology that will reasonably be available over the next ten years, for an increase in North American output of more than 70% his view on prices and growth in global demand have changed dramatically since early 2008.
New extraction technologies are expensive, with some exceptions new techniques involve drilling more wells that decline in production faster that conventional wells. These techniques require more sophisticated drilling and extraction processes. New extraction technologies require significantly more energy used for every unit produced. If there is going to be a continued boom in the use of these techniques it must follow that we are looking at a future of sustained very high global crude prices, otherwise most of this production just wouldn’t make economic sense (even in a regulation free world).
Working off of just a fraction of his suggested increase I think there has to be an underlying assumption that global demand is going to rise very rapidly or some significant portion of existing supply is going to tail off more quickly than is currently in most models. In either case what Dr. Morse has to be assuming (I think) is that the days of oil prices under $100 are effectively over.
I think Elias is being generous. Dr. Morse’s op-ed is wildly optimistic at best. The key question is whether non conventional oil (from bitumen, oil shales, etc.) can be ramped up enough to compensate, actully reverse and do much more than compensate, for the continuing (40 year plus) decline in conventional oil. Given the expense of non conventional oil production, and the rapid decline in production in the oil shale “wells” (exactly what one would expect from the physics of the situation), I think we will be very fortunate if these non conventional sources can slow the rate of decline. The idea that they can reverse our decline, even given the best possible political situation, seems very improbable. I would like to learn differently, so I have requested the Citigroup report and will read it carefully. If I am convinced otherwise by their data and analysis, I will post another comment. Until then, my opinion is that this is a pipe dream.
As much extrapolation of a recent trend (3 years) as in the chart above is always a stretch. Nonetheless, much of the increase (45+%) is in North Dakota, presumably from the Bakken Shale (EIA figures). Shale oil and two other recent technology plays – the maturing Deep Water Gulf of Mexico and the very new Sub-salt Exploration play – illustrate what Peak Oil devotees invariably omit from their calculations, the continuing impact of the unknown unknowns of technological advances. Prior to the recent increase, US production had declined for 20 years since the Alaskan North Slope peaked in February 1986. That unique a signal is difficult to dismiss categorically.
Not pointed out by previous comments is that 5 of the 7 top producers in the world, including the top 3 in 2009 (The Economist World in Figures, 2011) show increasing or at least non-declining production rates in the plot. Presumably, the data also predated the recently announced increase in Saudi production. Moreover, Iraqis, more specifically the proved undeveloped oil pools in the Kirkuk region, have the potential to exceed Saudi Arabian production rates as well. To paraphrase Mark Twain, reports of the death of the petroleum era are much exaggerated.
From an absolute standpoint I don’t think anyone is suggesting that there isn’t oil to be gotten out of the ground, the question is at what cost. To achieve even a fraction of this level of new domestic output global crude prices would have to effectively stay at or above current levels (or the U.S. would have to artificially support domestic prices based on a trade/security calculus…there’s an idea).
This may not be wrong, recent reports have the Chinese expanding reserve holding at today’s prices (http://on.wsj.com/IF0jHP) and the Saudi’s investing in solar as a substitute for crude in oil production and desalinization (http://bit.ly/HEGZJo). That’s two fairly sophisticated market participants that are betting on mid- to long-term prices staying high irrespective of new extraction technologies (and $2 natural gas in the North America market and the impact of its inevitable penetration into the transportation market).
Now I’ll spin this back to the policy question.
As this new production is relatively expensive on a unit-produced basis, the argument that production subsidies are necessary to promote new development and all the associated economic activity is probably right. However, if long term there’s no meaningful impact on prices because global demand will outpace supply, could it be a better long term plan to shift more of that policy-based support to alternative technologies? Accelerating the reduction in the cost of alternatives (any alternative) gets us to the point sooner where we can actually start to have some measure of control over not only the source of supply, but also the price and all the associated economic benefit.
Do you see the two separate areas of policy support to be mutually exclusive? Cost is an obvious problem. Could an old fashioned Jimmy Carter oil import tax help pay for them?
Theoretically, no. The two pieces are not mutually exclusive and with a well thought out and comprehensive energy policy the support could be complimentary (and I think that’s true even if you layer the climate related externalities into the analysis). Unfortunately, it’s Washington and there is a) limited money available, especially now, and b) a lot of people paid a lot of money to work as hard as they can to get all of that available policy funding allocated in one direction or another, not to find a reasonable balance.
This might be too many years inside the Beltway increasing my cynicism, but it feels like that adversarial positioning has made it difficult for anyone inside the policy discussion to have a balanced view (and I think this all or nothing position has gotten dramatically more severe since the big GHG legislation push in 2010).
A very interesting, entirely believable and utterly depressing reply, Elias. Obama did finally get it right when he suggested “all of the above” as an appropriate energy policy strategy. If only he’d not gone Bill Clinton on us and started parsing a simple word like “all”. The truth of that adversarial climate you mentioned is the #1 threat to us all in contemporary politics.