WSJ(1/27) Column: Oil, Oil, Everywhere…

The price of oil remains high only because the cost of oil remains so low. We
remain dependent on oil from the Mideast not because the planet is running out
of buried hydrocarbons, but because extracting oil from the deserts of the
Persian Gulf is so easy and cheap that it’s risky to invest capital to extract
somewhat more stubborn oil from far larger deposits in Alberta.

WSJ(1/27) Column: Oil, Oil, Everywhere…
DJ WSJ(1/27) Column: Oil, Oil, Everywhere…

(From THE WALL STREET JOURNAL)
By Peter Huber and Mark Mills

(Editor’s Note: Messrs. Huber and Mills are co-authors of “The Bottomless
Well: The Twilight Of Fuel, The Virtue Of Waste, And Why We Will Never Run Out
Of Energy,” just out from Basic Books.)

The price of oil remains high only because the cost of oil remains so low. We
remain dependent on oil from the Mideast not because the planet is running out
of buried hydrocarbons, but because extracting oil from the deserts of the
Persian Gulf is so easy and cheap that it’s risky to invest capital to extract
somewhat more stubborn oil from far larger deposits in Alberta.

The market price of oil is indeed hovering up around $50-a-barrel on the spot
market. But getting oil to the surface currently costs under $5 a barrel in
Saudi Arabia, with the global average cost certainly under $15. And with
technology already well in hand, the cost of sucking oil out of the planet we
occupy simply will not rise above roughly $30 per barrel for the next 100 years
at least.

The cost of oil comes down to the cost of finding, and then lifting or
extracting. First, you have to decide where to dig. Exploration costs currently
run under $3 per barrel in much of the Mideast, and below $7 for oil hidden
deep under the ocean. But these costs have been falling, not rising, because
imaging technology that lets geologists peer through miles of water and rock
improves faster than supplies recede. Many lower-grade deposits require no new
looking at all.

To pick just one example among many, finding costs are essentially zero for
the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in
Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that’s trillion
– over a century’s worth of al supply, at the current
30-billion-barrel-a-year rate of consumption.

Then you have to get the oil out of the sand — or the sand out of the oil.
In the Mideast, current lifting costs run $1 to $2.50 per barrel at the very
most; lifting costs in Iraq probably run closer to 50 cents, though OPEC
strains not to publicize any such embarrassingly low numbers. For the most
expensive offshore platforms in the North Sea, lifting costs (capital
investment plus operating costs) currently run comfortably south of $15 per
barrel. Tar sands, by contrast, are simply strip mined, like western coal, and
that’s very cheap — but then you spend another $10, or maybe $15, separating
the oil from the dirt. To do that, oil or gas extracted from the site itself is
burned to heat water, which is then used to “crack” the bitumen from the clay;
the bitumen is then chemically split to produce lighter petroleum.

In sum, it costs under $5 per barrel to pump oil out from under the sand in
Iraq, and about $15 to melt it out of the sand in Alberta. So why don’t we just
learn to love hockey and shop Canadian? Conventional Canadian wells already
supply us with more oil than Saudi Arabia, and the Canadian tar is now
delivering, too. The $5 billion (U.S.) Athabasca Oil Sands Project that Shell
and ChevronTexaco opened in Alberta last year is now pumping 155,000 barrels
per day. And to our south, Venezuela’s Orinoco Belt yields 500,000 barrels
daily.

But here’s the catch: By simply opening up its spigots for a few years, Saudi
Arabia could, in short order, force a complete write-off of the huge capital
investments in Athabasca and Orinoco. Investing billions in tar-sand refineries
is risky not because getting oil out of Alberta is especially difficult or
expensive, but because getting oil out of Arabia is so easy and cheap. Oil
prices gyrate and occasionally spike — both up and down — not because oil is
scarce, but because it’s so abundant in places where good government is scarce.
Investing $5 billion dollars over five years to build a new tar-sand refinery
in Alberta is indeed risky when a second cousin of Osama bin Laden can knock
$20 off the price of oil with an idle wave of his hand on any given day in
Riyadh.

The one consolation is that Arabia faces a quandary of its own. Once the
offshore platform has been deployed in the North Sea, once the humongous crock
pot is up and cooking in Alberta, its cost is sunk. The original investors may
never recover their capital, but after it has been written off, somebody can go
ahead and produce oil very profitably going forward. And capital costs are
going to keep falling, because the cost of a tar-sand refinery depends on
technology, and technology costs always fall. Bacteria, for example, have
already been successfully bioengineered to crack heavy oil molecules to help
clean up oil spills, and to mine low-grade copper; bugs could likewise end up
trampling out the vintage where the Albertan oil is stored.

In the short term anything remains possible. Demand for oil grows daily in
China and India, where good government is finally taking root, while much of
the earth’s most accessible oil lies under land controlled by feudal
theocracies, kleptocrats, and fanatics. Day by day, just as it should, the
market attempts to incorporate these two antithetical realities into the spot
price of crude. But to suppose that those prices foreshadow the exhaustion of
the planet itself is silly.

The cost of extracting oil from the earth has not gone up over the past
century, it has held remarkably steady. Going forward, over the longer term, it
may rise very gradually, but certainly not fast. The earth is far bigger than
people think, the untapped deposits are huge, and the technologies for
separating oil from planet keep getting better. U.S. oil policy should be to
promote new capital investment in the United States, Canada, and other
oil-producing countries that are politically stable, and promote stable
government in those that aren’t.

(END) Dow Jones Newswires

01-26-05 2004ET

DJ info:
N/DJCS,N/DJOS,N/OSCM,N/OSEN,N/OSTR,N/DJSS,N/DJWI,N/EDC,N/ENV,N/GEN,N/JNL,N/OPC,
/PET,N/PLT,N/POV,N/WLS

KEYWORDS: FSN40431 CET ENERGY GENERAL