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Energy Insights: Energy News: Forum: As oil prices drop, remember that every silver lining has a cloud

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Forum: As oil prices drop, remember that every silver lining has a cloud


31-01-2015


 

 
AP file  
  
 By Martin E. Cobern


The recent drop in oil prices has been greeted with nothing less than euphoria and premature announcements about the death of OPEC. To appreciate the problems hidden in this “happy” turn of events, one must look at it from the perspective of OPEC. Since their beginnings over a century ago, oil cartels have been successful in controlling the market. Their goal is to make competition economically impossible, and their primary weapon is the ability to sell oil at prices below the costs of the competition, even if it means taking short-term losses. Consider three crucial years in the history of the oil market.


1981: The ’70s were troubling years for OPEC. Two politically-inspired crises drove the price of oil up, making alternatives more attractive. Nuclear power was on the rise. President Carter was encouraging conservation and renewable energy. When the Iran hostage crisis ended in 1981, OPEC opened the taps wide, driving down the price of oil to make other options less competitive. President Reagan killed government support for these in favor of the “free market” and even removed the solar panels from the White House roof. Three Mile Island effectively ended the nuclear option. The combination of these three events ensured our oil addiction for another three decades.


2008 was also ominous for OPEC. Prices were soaring, most of the world was embracing renewable energy, and President Obama was trying to get the U.S. to do the same. In the fourth quarter, demand exceeded supply and the price spiked. The logical response for OPEC would have been to increase production to keep the situation from getting out of hand. Yet they did nothing, because they couldn’t. They had no excess capacity; we had reached peak oil production .


Today: The spiraling energy costs were a key factor in the 2008 global collapse into recession. The reduced demand lowered prices somewhat, giving OPEC some reserve production capacity. Then the shale oil boom led to an unprecedented spike in U.S. production. OPEC saw its chance to regain control. By continuing to produce at or near capacity they drove prices down to our current levels. Once again renewables, more efficient cars and conservation provide less of a return on investment. The Republican Congress had indicated its opposition to any government support in this area.

 


Unfortunately, this rosy situation is temporary. The shale boom is nearly over. The DoE Energy Information Agency predicts that under a high price scenario shale oil production will peak in 2018, and then plummet rapidly to the declining curve of the past 45 years. At today’s prices this peak will be earlier. This is a result of the nature of shale oil production. A conventional well has a life of decades, slowly decreasing it production rate over 15-20 years, or longer with advanced recovery technology. By contrast, fracking a well destroys the structure of the formation, allowing the oil to escape rapidly, which created an enormous flow. An average shale oil well’s production drops by 70 percent in the first year. So, for every 10 wells drilled last year, seven or more must be drilled to keep production level. (“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.” — The Red Queen) This level of effort — capital, labor, equipment — is not sustainable long term, especially at current prices. The combination of the coming drop in supply and increased demand as the recovery continues will soon put us back into the 2008 scenario. This cycle of price gyrations, boom and bust, will repeat until we eliminate our oil addiction. Our current situation was created by OPEC specifically to make that possibility less likely in the near future.


What can we do? A sensible approach would take advantage of the current “windfall” in our economy to help reduce our dependence, rather than repeat the mistakes of 1981. The world, and the U.S. in particular, must: 1) maintain its focus on energy conservation including a revenue-neutral carbon tax; 2) continue development of renewable energy and alternate vehicle fuels; and, 3) reinvest in nuclear power, especially the new smaller and safer reactors. All three are eminently achievable, if we have the political will to do so. Unfortunately, “we learn from history that we learn nothing from history.”


Martin E. Cobern, Ph.D., of Cheshire, retired last year as vice president, research at APS Technology Inc. in Wallingford after three decades of work in the oilfield services industry.

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