The Truth About the Price of Oil

The price of oil recently spiked at $80 a barrel. Prices at the pump have have come down slightly after peaking at over $3.00 a gallon. The price for any commodity is affected by supply and demand. And the big question at this point is whether or not prices have been manipulated. Americans are screaming bloody murder and blame the oil companies for the high prices. Others say that it is the government playing games with prices to gain favor with the big oil companies. Elections aren’t all that far away and the politicians need to beef up their coffers.

Oil is a huge part of our way of life. Energy drives our economic growth and therefore our prosperity, at least to some extent. When times are good, more people experience a rise in living standards. The major problem with the supply of oil is not that we are running out. The real force behind the rise in prices is the ability to bring new oil to market and refine it into usable products. Certainly, world-wide demand has risen over the last five years or so. And prices have risen mainly because of lack of infrastructure to meet the increased demand.

During the previous decade, the price of oil remained relatively low. At one point, it was at $10 a barrel. Many years it stayed below $25 a barrel. So in effect, any rise in demand was was easily met with existing supplies. With prices so low, oil companies did not invest in new oil fields or new refineries. Fast forward to the mid 2,000’s, and this lack of investment has led to the inability to meet rising demands. Make no mistake, the oil is there waiting to be developed and brought to market. The problem is that it will take new technologies and development methods to bring it to consumers. For the most part, it will take several years to update or build new infrastructure.

These are the major oil reserves around the world. The amount of estimated oil reserves in many cases is nothing more than guesswork. Usually if an oil field contains 1 billion barrels in place, extraction methods of today can capture 50 to 70%. There will usually be a significant amount of reserves that cannot be brought to surface with existing technologies. It pretty much gets down to a numbers game. Who can you trust nowadays? Governments or the oil companies themselves? Most of the fields in this list are known to contain proven or certified reserves.

The recent Gulf of Mexico discovery is estimated at about 15 billion barrels. This is not certain and it will take at least 5 years to develop this field. The entire gulf region might contain three times this much.

There has been much activity in off-shore Africa. There is oil in the deep water continental shelf and it could be much more than in the Gulf of Mexico. Again, it will take several years for these fields to reach full potential.

China has recently gone on a exploration spree. Major reserves are believed to be located in off-shore China waters. It will take many years to develop this source of oil.

The Saudis can lay claim to some of the largest reserves in the world. But exactly how much oil is really there? The estimates say about 200-300 billion barrels. They keep pumping it out of the ground but who really knows how much is there?

Iran and Iraq have significant reserves in place. However, the infrastructure, or lack of it, is the limiting factor in this area. If these reserves are to be eventually processed, there will have to be significant investment in the area to upgrade facilities.

There are a tremendous amount of reserves in Russia. They have been increasing their output over the last few years. Major reserves are in place in several areas. It is the question of development and infrastructure that will determine how quickly these hydrocarbons can be brought to market.

Many geologists estimate that the Arctic holds significant reserves. Global warming is now allowing the possibility of getting to them. As much as 30-50 billion barrels could be developed over the next decade or more.

In the Orinoco basin in Venezuela, there sits an estimated 300 billion barrels of oil. However, it will take $10’s of billions to explore and develop it. Not to mention, it will take at least another decade to build the proper infrastructure and produce any significant quantities.

The Canadian oil sands hold major reserves that are known in fact to exist. The problem is that it will take significant leaps in technology to extract the oil from the frozen sands. At best, it will be five to ten years before this area can become a major producer.

The Colorado oil-shale formation has been known to exist for decades. The estimates of possible reserves are the largest in the world at well over a trillion barrels of oil. New technologies are being developed to extract this oil economically. But it will take at least a decade before any significant results can be seen. Why the government hasn’t gone whole-hog to fund new technology in this area is beyond me. Here sits an oil field that could begin to lesson the dependence on Middle East reserves. I guess it makes more sense to spend billions fighting wars in the Middle East at the expense of American lives. Mind Boggling!

Simply put, the current problems in the oil patch are the result of lack of building new refineries and developing new oil fields. The oil industry is walking a tight rope; while at the same time it has a noose around its neck. Big oil needs to keep the price high so that profits will help them find and develop more oil. But as they do, they will increase supply and the price will fall unless demand increases. The oil is there. Estimates place world reserves at 3 to 4 trillion barrels. New technologies will be needed to get at most of it. At least for the next decade, supply and demand will walk its own tightrope. And we the consumer will feel the tightening noose as prices bounce up and down in an upward trajectory.

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