What Price Crude? – To Keep Our SUVs or Hybrids Humming

World wide demand for black gold is increasing as Brazil, Russia, China, and India motorize billions of their citizens.   Hurricanes have wreaked tens of billions of dollars in damage to our oil infrastructure.     The desire to conserve died in the eighties.   The supply of oil is limited and the cost of a barrel of oil peaked in early September at over $70 per barrel.  Â With all that in mind, what will it cost to keep our US economy going and our SUVs and hybrids humming?   What are our options, the likelihood of their success, and when does it become cost effective to invest in those options?

In Why $5 Gas Is Good for America, Spencer Reiss wrote, “For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence.  Â  But growing demand is outrunning the oil industry’s carefully computed supply curves, bidding up long-term expectations for the price of energy.   The long term may not mean a lot when you’re standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes.   Crude hit $70 a barrel last August, but oil companies have learned the hard way how quickly prices can crash.   They adjust their expectations accordingly – downward.”

Mr. Reiss goes on to say that recent oil industry long term expectations for making profits on investments in new technologies have been based on $20 per barrel of oil, in today’s dollars.    So far, this level of investment has resulted in “advanced analysis of rock cores, 3-D seismic imagery, software for diagnosing underground oil flows – all integrated using something called fuzzy logic.”   There is also the “digital oil field” that takes the well to the petroleum engineer half way around the world and could add oil reserves equal to more than what is available from Iraq by 2013.   Then there are the deep water free-floating rigs that drill in water twice as deep as 30 years ago that account for 90 billion barrels of liquid oil reserves.

Unfortunately, all of these recent investments only improve access to about 16 percent of the world’s known reserves – those that are liquid.   Â  According to a graphic in the published version of Mr. Reiss’ article, over 49 percent of the known reserves are in tar sands and the rest, 35 percent, are in oil shale.

Tar sands “is a hot commodity at today’s prices,” but the environmental issues of open-pit mining will take time to resolve and that will increase the costs of extraction from the current $15 to $20/barrel.   Also, most of the reserves are outside of the USA -  Venezuela, Canada, and elsewhere.

As for Oil shale, Mr Reiss reports, “The US has 85 times more shale oil than crude,”  which could provide the US with independence and enough oil for “212 gasoline years”.   Â  A gasoline year is the calculation of how many gallons of gasoline we all use each year.   However, the problem here is that crude oil would have to cost $70-$95 a barrel to make this option a profitable long term investment.  Â On the other hand, recent efforts by 160 Shell employees, 30 in Colorado and 130 in Houston, may bring this cost down to $25-$30, and the extraction won’t require the bulldozing of the countryside.

So, if oil is to remain our best option, then oil shale might be the best possible source for the future.  Â   

But what about the non-oil options?  Â What about other liquids or gases?   Liquids can be created from coal and plants like soybeans, corn, or other biomass.   Gases include methane, natural gas, and hydrogen.

To help compare other liquid and gas options to the cost of oil, the article introduces a ‘barrel of oil equivalent’ (boe), which equates to what oil would have to cost to make investing in the other option profitable.   Â   

To make coal liquefaction profitable, its cost would have to be around $35 to $40/boe, which makes it more expensive than tar sands and the low end for oil shale.   On the other hand, this option could provide 363 gasoline years for our cars and trucks and improve carbon emissions.   However, the land would suffer considerably.  

As for gases, the most promising of the bunch is methane hydrates.  Â  There is the equivalent of 10,882 US gasoline years locked away in the Arctic permafrost and seabeds.   There are also serious technological issues and the cost is around $90/boe.

One other option of note is biodiesel.  Â  It rates high for environmental friendliness and technical maturity, but has a cost of $45 to $50/boe.  Â  There is also the issue of having enough arable land to grow the soybeans needed to replace just one US gasoline year.  Â The amount of land needed is approximately 2,000 times larger than what is used for growing soybeans now.   Â  To put that in a little better perspective, this required land is about 30 times larger than all the arable land in the US.   There is also a moral issue.  Â Which do you prefer, burning food or feeding the hungry? 

A more likely alternate liquid replacement is ethanol.  Â It only requires about one third of all arable land in the US to replace one US gasoline year and has a cost of $60 to $75/boe.

For more details, and other alternatives and their chances of keeping your SUV or hybrid humming, here are other articles by Mr. Reiss from the same issue of WIRED.   To see the related graphics referenced for this article, you will have to buy the magazine.

1.) As Prices Rise, Technologies Emerge
2.) As the long-term price of a barrel of oil reaches $20-$30
3.) The Data Pipeline
4.) As the long-term price of a barrel of oil reaches $30-$70
5.) Fill ‘Er Up With Frankenfuel
6.) As the long-term price of a barrel of oil reaches $70 & up
7.) Tapping the Rock Field