What keeps driving oil prices higher?
MSNBC.com answers your questions on business, personal finance
By John W. Schoen
Senior Producer
MSNBC
With oil prices racing toward $70 a barrel, Answer Desk readers want to know what it will take to send prices lower again. Wyatt in Florida wants to know just how much more oil is out there. And Mark in San Francisco can't see why oil speculators are allowed to bid up prices -- and ruin life for the rest of us.
CAN'T WE FIND MORE OIL?
I did some math on your estimates of oil consumption and reserve. You estimated 82 million barrels per day consumption with a 2 million per barrels per day increase which is close to 2.5 percent. If I take your figure for known reserves at 1 to 1.2 trillion barrels this comes out to exhaustion of known reserves in about 15 years. That would seem to me to be bordering on crisis! Have we discovered all the oil or do we have other (supplies) available?
-- Wyatt B., Wellington, Fla.
The only honest answer is that no one knows for sure. Optimists (mainly those in the oil industry) will tell you there’s plenty of oil out there for at least another few decades — if not longer. Pessimists, using some fairly sophisticated analysis of oil reserve data, believe that the relentless rise in oil prices is the direct result of the world’s demand for oil close to exceeding supply. Some believe we’ve already reached that point.
Who’s right? You have to start with the fact that the total amount of oil underground is really unknowable. Even with the technology available to today’s “Nintendo geologists” — who can “see” underground by displaying 3-D seismic data on room-sized screens — identifying oil deposits is not an exact science.
Click for related story
Who benefits from rising pump prices?
Story continues below ?
--------------------------------------------------------------------------------
advertisement
--------------------------------------------------------------------------------
To cope with this uncertainty, petroleum geologists and oil executives have come up with several ways to describe what’s out there. “Known reserves” are oil that’s been found but not produced. This is then broken down into “probabilities.” So-called P90 (“proven”) reserves are those where geologists figure there’s a 90 percent probability that the oil field is as big as they say it is. They also calculate P50 and P10 estimates. So a specific oil field might have P90 reserves of 100 million barrels and P10 reserves of 1 billion barrels. It’s not like figuring out how much gas you can put in your tank.
Then there’s the question of how much is really “recoverable” — you may be able to see it, but it’s just not feasible (or economic) to get at it. Modern horizontal drilling allows oil producers to squeeze barrels of oil out of tight spots that were considered inaccessible 30 years ago. But you can’t really know just how much oil you’ll get until the last well dries up. (Actually, it usually “wets up” as underground water replaces the flow of oil.)
And the big number, called the “ultimate recoverable” reserve of oil requires an even bigger guess: How much oil is out there that hasn’t yet been found? (No surprise: estimates vary widely on this one.) The oil industry spends billions of dollars every year looking, but with a few exceptions there haven’t been any major new oil fields (on the order of say, the North Sea) found in the past several decades. It’s always possible some big new oil field is out there. But the global oil industry has already poked an awful lot of holes where the geologists told them to look. Meanwhile, existing oil fields aren’t getting any bigger.
Many pessimists argue that it doesn’t matter how much oil is underground: the critical question is: How fast you can pull it out of the ground every day. Once you find oil, it takes years to drill the wells and install the pipelines and build the processing stations needed to produce it. Excess production capacity — the difference between what you can pump and how much is consumed — has been steadily shrinking worldwide for decades. Today, it’s pretty much gone.
According to the U.S. Energy Information Administration, global oil production hit 84.5 million barrels per day in May (the latest numbers available) and demand in the first quarter averaged 84.4 million. That leaves a margin of about one-tenth of one percent. That’s why oil prices are rising.
So, in the short term, the question is whether oil producers can add capacity fast enough to keep up with relentless growth in demand. Saudi Arabia is one of the few producers that has promised to keep expanding production to try to keep up: It remains to be seen whether that’s possible. And it’s not easy to predict how fast demand will continue to grow.
But one thing is certain: the world has never been this close to seeing oil demand overtake production capacity. Unless production keeps up with demand, oil prices will continue moving higher.
CONTINUED: Aren't oil speculators to blame?
--------------------------------------------------------------------------------
1 | 2 | Next >
msnbc.msn.com |
