Learning Objectives Self-Check
Read through the following statements/questions. You should be able to answer all of these after reading through the content on this page. I suggest writing or typing out your answers, but if nothing else, say them out loud to yourself.
The oil business is not for the faint of heart - it has always been a boom-and-bust industry since the first oil well was drilled in 1859 by Edwin Drake in Titusville, PA. Witness, for example, the changing price of oil since 1970 illustrated in the chart below, compared to the average price of electricity and natural gas in the U.S. over approximately the same period. A few things to note:
- The charts, from top to bottom, illustrate the price of electricity, natural gas, oil, respectively.
- The oil price is its price on the international market, while the electricity and gas reflects average cost for residential customers in the U.S.
- Also worth noting is that the nominal price (the bottom line on each chart) is how much it cost at the time, while the real price (the top line on each chart) is the price in inflation-adjusted dollars. The real price is a more accurate indication of how much it cost.
- It's very important to keep in mind that the scales of these charts are different, even though they each show the past 50 years of prices. The real price of electricity has ranged from about 14 cents to 18 cents per kWh and the real price of natural gas has varied from about $7 - $16 per thousand cubic feet. However, the price of oil has swung wildly from $20 to over $100 per barrel.
(All of this information is publicly available from the EIA, and the charts are easy to create and interactive.) It may be a little difficult to see, but the key is to note the overall trends in real prices since 1970.
As you can see from the charts, the price of oil can be quite volatile, even on a year-to-year basis. The price reflects a complicated mixture of international supply and demand, and international events can (and do) severely impact the price. Note the following sudden changes in prices:
- spikes in 1973 and 1979, both of which were due to conflict in the Middle East (the so-called Oil Shocks),
- the rapid increase in prices starting around 2001 as demand outstripped supply,
- the downward spike during the Great Recession starting in 2008,
- the increase as the Recession faded, then
- the recent collapse of the oil market as supply outstripped demand due to a variety of factors, including fracking for oil.
Only ~50 years of history is enough to make your head spin! Here's a good summary of these, and other oil trends in history. But this is the nature of the beast that is the international oil market. Compare that to the retail price of electricity, which has had only minor fluctuations, and mostly been in decline in terms of real prices the whole time. Natural gas prices are smoother than oil, but more volatile than electricity.
Supply and Feasibility
In terms of feasibility, oil is so ingrained in modern society and its infrastructure is so well-established that there is no risk of not being able to integrate oil supplies into the economy and society. However, oil supply projections have a very interesting history, and like the price, projections of supply have been volatile. First of all, like natural gas, the calculation of proved reserves is subject to limitations of using current technology, economics, and known reserves, each of which can change from year to year. Like natural gas, for oil, proved reserves refer to "those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions" (Source: CIA Factbook). The result (again, like natural gas) is that even though oil use is increasing globally every year, there are paradoxically more proved reserves. Please note that the chart below represent global proved reserves.
How is it possible that we can continue to use more oil each year, yet the estimated remaining supplies keep increasing? The primary reason is improving technology. We have so far been able to exploit new resources as the market demands more oil. The most recent increase in proved reserves, especially in the U.S., is from shale oil that can be extracted through hydraulic fracturing (aka fracking). There has been an oil boom that has come in lock-step with the recent natural gas boom, all due to fracking. Access to additional "unconventional" reserves via tar sands in Canada has also contributed to the increase in proved reserves and supply.
To Read Now
Dr. James Conca provides a very good explanation of the somewhat complex workings of the global oil market in the article below. As you will see, the price of oil and the economic feasibility of technology is not as simple as supply and demand. He also throws in a nice lesson on how fossil fuels are formed for good measure. Also, if, like me, you have found yourself wondering whether oil deposits are more like a jelly donut or tiramisu, he'll help you out with that as well.
Dr. Conca makes it clear that despite dire warnings of "peak oil" since the 1970s: "For every barrel of oil consumed over the past 35 years, two new barrels have been discovered." In other words, technology has increased the available oil despite the fact that humans have been using it at an increasing rate for over a century. For the past 15 or so years, fracking (and directional drilling) is the main reason that proved reserves have increased. He also provides some insight into the global nature of the oil industry when he notes that Saudi Arabia and other OPEC countries purposefully decreased the price of oil by refusing to cut the output of oil in an attempt to starve out American competition. In short, peak oil will not come any time soon, but Dr. Conca notes that: "Unfortunately, the environmental cost of unconventionals is even greater than for conventional sources." This is important to keep in mind, as fracked oil has the same negative impacts as fracked natural gas.
So, how much oil is left, and how long will it last? Unfortunately, that is an impossible question to answer with certainty. In 2019 BP released its well-regarded annual Statistical Review of World Energy and determined that there is enough oil to satisfy global needs for 50 years, but only if we continue on our current trajectory. (This includes the recent boom in proved reserves.) This is not a very long time, if you think about how important oil is to society.
Also, keep in mind that as we approach this point of exhaustion, the price of oil - and all of the goods that depend on it, which is basically, you know, everything - will increase. Yet, there are people like energy reporter Jude Clemente of Forbes magazine stating that oil will basically never be economically unavailable. In 2016, McKinsey and Company, a highly respected global research firm, reported that the world may actually reach peak demand (not peak supply, as is usually referred to) for oil by around 2025. This was unheard of only a few years ago, but the combination of oil extraction technology, energy efficiency, renewable energy, and energy policy may make the era of oil over before oil becomes scarce. (Note that I wrote MAY, not WILL!) The video below from Bloomberg illustrates how this might occur.
It is impossible to know who is right, that is until the future happens. There is a risk associated with this, as you will see below. But in terms of raw physical resources, the future is difficult to predict.We may run out of oil at some point, given that it is a finite resource. It is almost certain that before we reach the physical end we will reach a point where other issues (e.g., sustainability impacts, economics, or even reduced demand) cause collapse of the oil industry. You've heard it before, so this should be no surprise: when it comes to predicting the future of oil, folks, it's complicated.
Oil is extremely important to the functioning of modern society, as noted in a previous lesson. A little under 40% of all of the energy used in the U.S. is from oil, and in addition to that, oil is used in the manufacture of common things like plastic, car tires, and asphalt. It is energy dense, and relatively easy to transport. Around 150,000 people in the U.S. work in the oil and gas extraction industry, and possibly millions more are "supported" by oil and gas. Oil is intertwined with every industry in the U.S. It has allowed food to become cheaper and made international and other long-distance travel more accessible. You think you could get two-day shipping from Amazon without readily available oil? Electricity and other alternatives can be used to substitute for many of these functions, but for now it is oil that is the dominant force. A lot of this helps provide some quality of life improvements, and even some equity advantages (e.g. cheaper food). But it does come at the expense of other sustainability aspects, particularly environment.
One of the problems with not knowing how much oil is left is that it makes it easier to justify not planning for its eventual unavailability. As discussed above, energy (and oil) is deeply ingrained in modern society. When oil shocks happen, they have a severe negative impact on the economy. If we knew exactly how much oil we had left, and how much we were using, society would be able to prepare for its demise. But because we do not know this with certainty, very little has been done to prepare for it. This is a sustainability issue for many reasons. Primary among them is that if we do not reduce our dependence on oil, there will be a lot of suffering when the next oil shock happens. This is an economic and equity issue primarily, as oil scarcity will hit us economically, and the poor will be most affected, especially at the beginning. I'll leave it to you to think about what those that practice the precautionary principle would advise!
But there are a lot of reasons to be concerned about the current use of oil. First of all, recall from the chart on the Sustainability of Coal page from this lesson that oil is second only to coal in global carbon emissions. There is no practical way to prevent the emission of carbon dioxide when an oil product like gas is burned. Given the gravity of the issue of climate change, this is an essential consideration.
Yet another climate change implication is the use of gas flaring. Frequently, natural gas is found (and hence extracted) along with oil because they often form together underground. When a facility is designed to handle oil and not natural gas, the gas is "flared." Flaring entails separating the gas from the oil, then burning it off and not using any of it. Seems wasteful, right? So how much gas is flared each year? According to the World Bank 141 billion cubic meters of natural gas was flared around the world in 2017, which is actually down a bit from 2016. This is about twice the annual total usage of natural gas in the U.S. each year! In terms of emissions, it results in about 350 million tons of carbon dioxide, which according to the World Bank is equivalent to the emissions from about 77 million cars. That is about 1% of total annual emissions worldwide, or about 7% of U.S. energy-related emissions. (Translation: That's a lot of CO2!) This is being addressed, but is still a major problem.
There are a number of other emissions associated with the burning of oil products like diesel and gasoline, including nitrogen oxides and volatile organic compounds (which cause lung damage), sulfur dioxide (acid rain and some health impacts), particulate matter (asthma, bronchitis, visual pollution, possibly lung cancer), and others (source: U.S. EIA). Exposure to automobile exhaust has been found to increase hospital admissions for people with lung disorders (asthma, bronchitis, pneumonia, etc.). Nearly all of these impacts are extrernalities because they are not included in the price of oil, it should be noted.
Also, all of the issues associated with fracking, in particular the heavy use of water (see the Natural Gas Sustainability page) are the same for shale oil. Another unconventional source of oil is Canada's oil sands (sometimes referred to as tar sands). 97% of Canada's known reserves come from oil sands, and they have such a large reserve that they are second only to Saudi Arabia and Venezuela in terms of proved reserves. Oil sand extraction is particularly damaging to the natural environment, and has a very low EROI (see Lesson 2). Canada is the U.S.'s largest supplier of foreign oil (over 4 million barrels per day in 2017), almost all of which is from oil sands.
As you will see in the article below, oil is often associated with the so-called "resource curse" when it is controlled by corrupt governments. This problem has historically been especially acute in African countries like Nigeria, but oil revenues have propped up many undemocratic regimes elsewhere, e.g. Middle Eastern Countries (Iran, Iraq) and South American Countries (like Venezuela). Finally, oil spills are a common occurrence, some larger than others. Since 2000, hundreds of thousands of metric tons of oil have been spilled worldwide. Some of these spills are more damaging than others.
To Read Now
- "Equatorial Guinea Country Profile - Overview." BBC News. When reading this, please keep in mind that Equatorial Guinea was a Portugese, then Spanish colony for over 500 years prior to independence in 1968. It was used as a source of slaves by the Spanish for the last 200 years or so of that time. This level of exploitation is probably the most important factor in why countries like Equatorial Guinea are subjected to the "resource curse." The exploitation prevented them from developing the necessary political and economic infrastructure and personal freedom that would provide a buffer against exploitation by dictators.
- (Optional) "The Dark Side of the Shale Bust." Nick Cunningham, oilprice.com.
- (Optional) "5 years After BP Oil Spill, Effects Linger And Recovery Is Slow." Debbie Elliott, NPR.
Oil is an extremely useful resource, and it is a very important aspect of the modern economy, and by extension, society. Considering that current projections assert that we only have about 50 years of supplies left, we should probably try to maintain our resources for as long as possible, and avoid an abrupt collapse. But we also should be conscious of the sustainability impacts of its extraction and use.
Check Your Understanding
Which of the following have been shown to impact the price of oil? There may be more than one.
Click for answer.
All of them impact the price of oil. Fracking has significantly increased the supply of oil, international demand is a major factor (China's reduced demand is one thing affecting the current price), and technology impacts both supply and demand (e.g., fracking for supply, car efficiency for demand)
Optional (But Strongly Suggested)
Now that you have completed the content, I suggest going through the Learning Objectives Self-Check list at the top of the page.