Crude Awakenings

Out where the river broke
The bloodwood and the desert oak
Holden wrecks and boiling diesels
Steam in forty five degrees
--Midnight Oil

Subscribers to Peak Oil Theory generally claim that we've passed the point of maximum oil production and that, consequentially, we're destined for supply shortages and higher prices.

This situation may indeed be true for classic sweet crude supplies. There are likely few remaining low cost oil deposits to be discovered.

However, as profiled in this article, there remains a very large supply of what I like to think of as 'shadow' oil reserves. Forms of shadow oil include Canadian oil sands, oil lodged in ideosyncratic geological cavities, and residual oil from previously 'used up' conventional oil fields.

Estimates suggest that there may be 500 billion barrels or more of shadow oil supply. By my estimates, we currently use about 85 million barrels/day * 365 days/yr = 31 billion (!) barrels/yr. That's a huge amount of consumption, but shadow sources may offer at least 15 yrs worth of oil given current usage levels.

Oil bulls argue that world usage levels have nowhere to go but up in a capacity constrained world. But conservatory efforts, and innovation in the energy space, could easily alter the dynamic. Substitutes may lower demand for crude, plus capacity may be much higher than currently estimated as shadow sources are developed.

Oil bulls also argue that costs to develop shadow supplies only kick in at higher crude prices. This is true, but as the article reports, the economics are already attractive for development of some shadow sources at current prices. And, it is difficult to imagine that efficiency does not improve with volume as operators learn by doing, thereby reducing the breakeven point of shadow projects.

Couple this with a deflationary view of the world and it's hard for me to get bulled up about the future of crude. There's a bullish scenario to be sure, but there's also plenty of risk that makes the picture far from clear from an investment perspective--at least as I'm seeing it.

no positions