Thoughts on Oil - and no pictures

Wilkins Micawber in Charles Dickens’ novel, David Copperfield is famous for his statement, “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

The website of the Energy Information Administration allows us to apply this principle to crude oil prices. Data published on July 8, 2008 show world petroleum production of 86.48 million barrels per day. World consumption is calculated at 86.40 million barrels per day. If these figures are accurate the result for 2008 should be happiness. Forecasts for 2009 are not so rosy. World petroleum consumption is estimated to be 87.72 million barrels per day and consumption will be 87.76 million barrels per day. Mr. Micawber’s statement suggests misery in 2009. Obviously, nobody believes Government statistics for 2008 so crude oil is priced above $140 per barrel instead of happier levels. Misery could be here to stay.

Micawber logic predicts that happiness will only return if we increase production or reduce consumption. Our politicians have made loud proclamations about increasing production. They talked about drilling off the East and West Coasts and in the Alaskan Natural Wildlife reserve. A few sensible ones noted that even if this drilling found oil tomorrow it would probably take seven or eight years to bring the new oil to market. Domestic drilling is not going to restore the production/consumption balance. Overseas production increases might be possible in a shorter timetable. Venezuela’s Orinoco basin has about 1.2 billion barrels of extra-heavy oil in place. Venezuela exports about half a million barrels per day of this oil. The Venezuelan government has plans to significantly increase this volume. However, even here, where the oil location is known, the extraction technology is proven, and the environmental concerns are easily addressed, new production will take at least six years to come on stream. A similar situation probably exists in Saudi Arabia where increasing production from declining oil fields is unlikely to be as easy as the newspapers imply.

A different chorus of folks has stated, “we can’t drill our way out of this crisis”. If they had qualified this sound bite by adding “in any realistic timetable and at a reasonable price” they would probably be more correct. (But $145 dollar oil and lots of time can make even harebrained schemes look sensible.) The real answer for us is to reduce our consumption. In the US we use vast quantities of petroleum compared to other nations. We consume 20.7 million barrels per day compared to China’s 6.5 and India’s 2.4 million barrels per day. On a per capita basis those statistics look even worse. We use 70.6 barrels/1,000 people per day. China uses 2.3 and India 5.1. As the living standards in those countries continue to rise demands for petroleum will also increase – maybe to levels like the 30 - 40 barrels /1,000 people used by many countries in Europe? For the long run, it is unlikely that there will ever be enough oil again to satisfy Mr. Micawber’s requirements for happiness.