Political developments in the Middle East are likely to bring the world’s largest oil reserves into production after decades of neglect. At the same time, new scientific advances are making the recovery of enormous Canadian oil deposits economically feasible.
As a result, the supply of cheap oil that has underwritten western prosperity for decades will continue long into the future. Arguments for a transformation to expensive renewables will have to made on non-economic grounds.
Energy Prices and Prosperity
The price of energy, economists have long observed, has a direct and significant impact on economic performance. “A cheap supply of oil,” noted the London Guardian in the days leading up to the Second Gulf War, “underwrote western prosperity in the golden decades of the 1950s and 1960s.” The same could be said for the 1980s and 1990s. Conversely, notes the Guardian, oil price spikes in the 1970s and in 1990 prompted widescale western recessions.
Proponents of such expensive oil alternatives as solar, wind, and hydrogen frequently argue a switch to renewables is necessary now because world oil reserves will soon be exhausted. A 1998 Scientific American article, “The End of Cheap Oil,” to which many anti-petroleum Web sites link, asserts “world production of conventional oil will peak during the first decade of the 21st century.” Accordingly, “what our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.” The solution, according to the article, is to switch to expensive renewables now.
Predictions of a “looming oil crisis” have been made for decades and repeatedly proven wrong. Recent political and scientific developments make it unlikely such predictions will ever come true.
Iraqi Oil Reserves
While the war in Iraq has saddled the American economy with added short-term debt, it has also resulted in a promising outlook for world oil prices. The May 19 issue of Time magazine noted Iraq boasts the world’s most prolific oil wells and has the potential to become the world’s largest producer. Although abundant oil reserves were identified in Iraq in the 1920s, for a variety of political reasons, Time noted, “Iraq has never come close to achieving its potential.”
In the post-Saddam era, Time reported, an influential group of former Iraqi exiles “has concluded that the country needs to double its output by the end of the decade to ‘invigorate Iraq’s economy and lift the Iraqi people out of a future of impoverishment.'”
With almost limitless oil reserves, the technology to tap those reserves at least as inexpensively as does Saudi Arabia, and the political will to crank up production, the new Iraq is poised to become a key player in the world oil marketplace. Those developments are likely to ensure a return to the low oil prices of the 1990s, which were largely responsible for record economic expansion in the U.S. without the threat of inflation.
Canadian Tar Sands
But international politics are not the sole reason for energy optimism: Scientific advances are having a similarly positive effect on energy availability.
Eighty years ago, at roughly the same time the world’s largest oil reserves were discovered in Iraq, scientists devised a way to extract crude oil from tar sand. The advance was theoretically significant because tar sands offer the promise of almost unthinkable energy abundance.
Tar sands in a 250-mile radius of Canada’s Athanabasca wilderness alone are believed to hold 315 billion barrels of recoverable oil–“enough to supply all U.S. import needs for the next 50 years,” reported the March 3 issue of Forbes magazine.
However, “scientifically possible” and “economically feasible” do not always go hand-in-hand. Until recently, producing oil from tar sands has been prohibitively expensive. But that is changing.
In 1991, reports the March 3, 2003 issue of Forbes magazine, Richard George began streamlining the methods to extract oil from tar sand. Since that time, George’s Suncor Energy company has reduced operating costs from $15 per barrel to $7 per barrel, and the costs are still falling. Operating costs to extract conventional North American oil are roughly $3.60 per barrel.
Although its operating costs remain higher than those experienced by conventional oil operations, Suncor is gaining an economic advantage in other ways. Royalty and capital costs approach $10 per barrel for conventional North American oil, but barely top $4 per barrel for oil extracted from tar sand. Suncor’s pre-tax earnings reach $13.45 per barrel, versus $9.13 per barrel for its conventional oil rivals. Accordingly, enormous, previously untapped oil reserves are poised to enter the global market.
James M. Taylor is managing editor of Environment & Climate News. His email address is [email protected].
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The March 3, 2003 Forbes article can be found at http://finance.lycos.com/home/news/story.asp?story=31886004.