Monday, July 22, 2013

Higher Oil Prices a Blessing for Fracking but what about Renewables?

A new publication espouses the virtues of high oil prices for shale gas development in the US. "...persistently high prices have stimulated investment in the production of unconventional oil, in particular “tight” oil from oil bearing shale formations."

In July the Bank of Canada released a working paper titled, "A Blessing in Disguise: The Implications of High Global Oil Prices for the North American Market."  This paper examines the implications of unconventional crude oil production in North America.

The report indicates that we are faced with declining production from traditional oil fields as well as increased global demand. The authors of the working paper make the point that as long as oil prices remain high it will continue to expand what they call unconventional supply, namely, shale gas and tar sands oil.

"Oil prices must remain sufficiently high that an increase in unconventional supply growth will balance the effects of increasing decline rates and strong demand from emerging markets." the report says.

According to research by Della Vigna et al. 2012, we need to see oil stay above the $90 per barrel hurdle rate necessary to make the exploitation of shale on a global scale profitable. After climbing to a high of $147 per barrel, oil prices fell as the global recession slashed demand but they have quickly rebounded (as of the date of writing this article crude prices are at $108 per barrel). As the global economy improves demand will continue to increase and this will add upward pressure on oil prices.

The increased price of oil makes more expensive recovery techniques like fracking and tar sands oil more viable. The report sites prediction that indicate fracking will continue to significantly increase US domestic production of gas.

"The presence of these unconventional sources of oil throughout the world and the ability to recover them makes a large expansion in the physical production of oil a possibility. Recent estimates suggest that about 3.2 trillion barrels of unconventional crude oil, including up to 240 billion barrels of tight oil, are available worldwide (IEA 2012a). By 2035, about 14 per cent of oil production will consist of unconventional oil, an increase of 9 percentage points. U.S. domestic liquids production has expanded by nearly 30 per cent since 2005 and is expected to continue to increase (IEA 2013). The International Energy Agency (IEA 2012b) projects that the U.S. total petroleum supply will increase from 9.7 million barrels per day in 2012 to a peak level of 11.1 million barrels per day in 2020."

This report suggests that the ongoing exploitation of these new sources of hydrocarbons in North America will not significantly alter the price of oil, thereby ensuring that the development of unconventional sources of oil will continue.

Further the report indicates that although there are massive shale gas fields in Argentina, Poland and China, the "unique infrastructure and technological advantages" enjoyed by the US will not enable the American experience to be replicated elsewhere. This will keep oil prices high.

"The lack of technology and infrastructure outside of the United States that would enable the rapid development of unconventional oil resources, coupled with accelerating decline rates in the world’s conventional oil fields, are likely to keep oil prices at elevated levels over the medium term."

The report concludes that market conditions are favorable for the ongoing exploitation of shale gas in the US.

"Over the past decade, strong demand for crude oil from emerging-market economies has pushed oil prices above their historical inflation-adjusted average. These elevated price levels have been a blessing in disguise for the United States. While high oil prices may have adversely affected the recovery of the United States from the Great Recession, they have also made the extraction of its tight oil resources commercially viable."

What we do not see in this report is any attempt to communicate the value of truly clean alternative sources of energy like renewables. Increased oil prices also make renewable energy more viable. While this report indicates that higher oil prices mean more fossil fuel development, it eschews the fact that higher oil prices also have positive implication beyond petrochemicals.

Outside of the hermetically sealed world of hydrocarbons, there are a number of powerful forces driving the logic of moving quickly away from fossil fuels. High prices, not to mention the risks associated with oil and gas, are already driving the growth of safer and cleaner alternatives.

Developing a sustainable energy infrastructure is good business in addition to being good for the environment. As the business logic sinks in we will see more entrepreneurs get on board, more research and development, and more scientists and inventors working on improvements to renewable technologies.

© 2013, Richard Matthews. All rights reserved.

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