He’s a decade too late – the oil price will stay high

George Bush’s plans to boost US oil production are pathetic… but there was nothing more he could say.

None of the measures announced yesterday will have an effect for a decade or more. This makes them virtually irrelevant.

However, the plans gave us a succinct snapshot of the difficult quest for new reserves... so I would like to take a look at them further.

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The mains points of the plan concern development of the Colorado oil shales, the lifting of a ban on US offshore drilling, and the opening up the Arctic National Wildlife Refuge (ANWR) in Alaska.

First let’s consider the Colorado oil shales.

There’s not enough water, stupid

Tar sands are going to be a major oil resource in the economy of the 21st century… but massive amounts of investment are needed before they will be productive.

There are two major factors that limit the development of oil shales; water and energy. Water is a major problem in Colorado.

Processing oil sands requires an astounding five barrels of water to create one barrel of oil and the Colorado River basin is already seeing significant water stress.

Such a massive use of water in one of the hottest states in the US is likely to have disastrous consequences for people living in the area.

The south west US is in its eighth-consecutive year of drought. Fears are growing that Cities served by the river, such as Las Vegas, will experience a water crisis sooner rather than later.

The process of extracting oil is also very energy intensive. Massive energy requirements mean massive expense.

Because of the investment required and the lack of water in the area, I don’t expect any significant extraction from here for at least a decade... if at all.

Canadian oil sands are a much better bet. They are larger and Canada is not short of water or gas to power the process.

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There’s not enough rigs, stupid

The ban on offshore drilling was also lifted, but there are no offshore rigs available to do the drilling.

As I explained last week, most of the world’s existing drill ships are booked solid for the next five years.

This has caused hire rates for new rigs to go through the roof. In the Gulf of Mexico, new rigs day rates have reached about $600,000, compared with $150,000 in 2002.

There is very little chance that new finds off the coast of the US will hit the pumps in the next decade because of this.

There’s not much oil, stupid

Then we come to the Alaskan Arctic.

The US Energy Information Administration (EIA) recently released a study on ANWR reserves.

If the Arctic was opened for drilling this year, its base-case sees production starting in 2018. There is only a four-month window for operations each year in the Arctic and there is a shortage of specialised rigs.

But when you look at the figures, there isn’t that much oil there anyway.

The largest field in ANWR contains 1.4bn barrels of oil.

Daily oil consumption in the US was almost 20.7m barrels in 2007. This means that the largest field only contains enough oil to last for 67 days… and that’s if they can remove all the oil from the field.

Traditional methods allow for the recovery of about 20%-40% from oil field. New technology means enhanced oil recovery techniques up to 60% of an oil field’s oil can be extracted.

At a 60% extraction rate, there will be enough oil to quench the US’s thirst for just 40 days at today’s rate of consumption.

This is a conservative figure because I expect consumption will increase as the US population grows.

The other fields are smaller.

Two of them are estimated to contain 700m barrels of oil and four additional fields each with 360 million barrels of oil.

At a 60% extraction rate, this would give a further 80 days of oil, making a total of just 120 days worth of energy for the country.

When look at that way, it’s not very impressive, is it?

So George Bush’s plans are unlikely to have any significant impact on the oil price or America’s quest for energy independence.

To discover how to play the buoyant oil price click here.

Regards,

Garry White
Editor
Smart Commodities UK

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