High Costs Could Prompt Premature End to Oil Production
This article in Renewable Energy Weekly caught my attention this morning. The author, Charles Cresson Wood, offers up a scary proposition, that “At that point, it won’t matter who you are, or how important your organization’s mission is, nobody is going to produce the commodity your organization may be dependent upon.” I beg to differ with Mr. Wood, as it is my belief that the market described by Adam Smith over 300 years ago in An Inquiry into the Nature and Causes of the Wealth of Nations is still alive and healthy, and that as long as there is a demand for a product and there is a potential supply to meet that demand, the market will deliver that product; the catch is, at what price? Oil may get very expensive, true, but I hardly think “…nobody is going to produce the commodity…” as Mr. Wood asserts. What think you?
September 15, 2008
High Costs Could Prompt Premature End to Oil Production
by Charles Cresson Wood
Consider what’s now happening at the major mining companies as a harbinger of what we can expect to see with oil production companies. According to a recent article appearing in The Wall Street Journal (link below), a number of mining companies are curtailing certain of their operations, in some cases shutting them down completely. The explanation, which at first blush seems strange, especially given the run up in commodity prices over the last few years, has to do with operating and investment costs. The cost of energy to run mining trucks and other equipment has skyrocketed. In addition, certain materials needed to make mining buildings and related infrastructure, materials like steel, have also become considerably more expensive.
Mining nickel, lead, copper and other metals from the ground actually has many similarities to pumping oil out of the ground. While the processes are technologically different, in both cases we are talking about discovering and extracting a commodity that is in limited supply. In both cases, the supply of these commodities is in the process of being exhausted, and as a result, these commodities are increasingly more difficult to find, and increasingly more expensive to extract from the earth. For example, no new giant oil fields are being discovered these days. Producers must now go into very inhospitable environments, such as the bottom of the sea, in order to find significant new deposits of oil.
In the future, firms that are mining minerals, and firms that are producing oil, will both be hit with the double whammy of higher energy prices combined with higher commodity prices. Higher energy prices mean that the cost per ton of ore produced, or the cost per barrel of oil produced, will be higher than it was in the past. Higher commodity prices will discourage investment in new and more efficient infrastructure, just as it will discourage efforts to develop additional deposits.
As was the case for carrier pigeons, bison and many other animals, the extraction of these “resources” continues until it is no longer economical. Personally, I think it’s deplorable that organizations make these decisions primarily based on economics, but that’s the way the system is set up right now. So the production of minerals and petroleum from the ground will continue until it is no longer economical for the producers to engage in this activity. This point comes when the variable operating costs, and the fixed investment costs, both mentioned above, no longer look attractive relative to the revenues that can be obtained from further production activities.
Exactly when this point will come for oil or other commodities is hard to estimate. Many factors will affect this timing, including remaining supplies, prevailing demand levels, available technology, government subsidies and taxes, as well as the cost of capital. The important take-away point is that there will come a time when the producers stop producing, NOT because supplies have run out, and NOT because demand has dried up. At that point, it won’t matter who you are, or how important your organization’s mission is, nobody is going to produce the commodity your organization may be dependent upon….
…Charles Cresson Wood, MBA, MSE, is an alternative fuels management consultant with Post-Petroleum Transportation in Sausalito, California. His most recent book is Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. You can learn more about the book, read his alternative fuels blog, and reach him at www.kickingthegasoline.com.
Source: http://www.renewableenergyworld.com/rea/news/reinsider/story?id=53557