With the recent period of high prices (a “cycle”), petroleum has garnered a large amount of attention from pundits, expert and otherwise. Amazingly, people in the industry often have heard things that are incorrect, misinterpreted or misleading, but they not only believe them, but repeat and even publish them. So let’s clear up a few things. (The various arguments are labeled W for Wrong, M for misinterpreted, and I for Irrelevant.)
Oil is finite! No it’s not. Oil is generated from biological material and is continually be produced. However, the amounts are so small as to be irrelevant—each year enough is generated to satisfy about an hour of global consumption. So, it could be said that oil is effectively finite. W, I
We’re running out of oil! Technically, yes as with any nonrenewable resource, every barrel produced is one less left for the future (although see above). However, since there is more than 10 trillion barrels of conventional oil in the resource base, and we’ve used only a little more than one, this is largely irrelevant. You could say that oil is effectively infinite. I
Oil prices must increase over the long term. An amazing number of people believe this, including some economists, but it is completely untrue. The effort required to produce petroleum increases with time as the best deposits are used up, but at the same time, scientific and engineering advances tend to offet the increased physical requirements. Empirically, mineral prices tend not to rise over time. W
The industry only finds one barrel for every four produced in recent decades. This is an oft-repeated myth (T. Boone Pickens said it in Playboy in January 2007, for those of you who only look at the pictures), believed partly because few have access to the actual data and assume the statement to be correct, but also because even some in the industry don’t understand the nature of the data. Each year, an estimate of the amount discovered is announced, but the size is typically very conservative and the reserves in a field grow on average quite a bit over time. So, while it might be said that only one quarter of oil produced is replaced by new discoveries every year, the other three are replaced by better recovery in previously discovered fields. M
Oil in the ground is worth more than money in the bank. This works only if you pick a low price as starting point and a high price as the end point, which is to say rarely. It gained great currency in the late 1970s, a period when high inflation in the US and the decline of the dollar made bank deposits look unattractive, especially for foreigners. Since 1970, the price of oil has risen by 2.5% per year above inflation; US Treasury bills, the least risky investment, have similar yields, but the dividends can be reinvested, and oil is a risky asset. W
More investment is going into development of existing fields than exploration for new fields. This is true, but irrelevant. Developing a field usually costs many times discovery, so that the industry has always spent more for development than exploration. I, M
The industry must run faster just to stay in one place. Also called the Red Queen’s curse (from Alice in Wonderland), this refers to the role of depletion in oil and gas fields. As the gas or fluid is produced, the rate of production drops, all else being equal. So just to maintain production, the industry has to add a lot of new capacity; thus the gross amount of new capacity is often three times the net increase. (Example, 4.5 million barrels a day of capacity is lost to depletion, so 6 mb/d must be added to get an increase in capacity of 1.5 mb/d.) The thing is that this condition arose with the beginning of the industry: it has not only managed to stay in place, but go forward. I
Prices are too low to allow replacement of equipment, foretelling shortages in the future. Although I suspect this predates me, I’ve heard it for at least three decades. Naturally, it is the service companies who complain that they are not getting enough prices for new builds. And the impact is obvious over the past decade, when high utilization rates of drilling rigs (for example) let to a tripling of costs, not unlike what occurred in the late 1970s/early 1980s. But the ability to expand the fleet is much greater than most alarmists realize. Sophisticated deepwater rigs take years to build from scratch, but older rigs are often upgraded to fill the demand, and much more quickly. M
World oil production peaked in 2005. Really? Pull into your neighborhood and tell them that. Production is up 8 mb/d since 2005 (as of last year); half of that is crude oil, mostly shale oil production in the US. Peak oil believers tend to exclude various categories of petroleum from the accounting, especially those that have been expanding of late. (See next item.) Neither the industry nor the consumer considers this important. W
NGL volumes should be ignored when considering production trends. Peak oil advocates have seized upon this as a way to dismiss rising petroleum production since 2005 (see above), saying that NGLs are not used to fuel cars, for instance, so it should not be considered the same as crude oil. Of course, crude oil isn’t used in cars either, it goes into refineries—just as much NGL output does. Other NGL is used to make petrochemicals, displacing other petroleum products. W, M
The Energy Return on Energy Investment for oil is falling and oil production will soon be "energy negative" and thus unviable. This is the newest argument seized upon by neo-Malthusians and the reasons it is irrelevant and mostly wrong are complex. But most oil production generally is quite profitable now, which means that the energy, capital and labor combined is less than the return on production, so how can just the energy be near the total? W, M, I
