Speculation: $80 Oil and the Dog that Didn’t Bark

Al Moon

August 2, 2006

A year and a half ago, with oil passing the $50 mark, we had a flurry of discussion about $80 oil. Some of us pointed out the potential for oil sands and oil shale to provide replacements for shortfalls in supply. At the time, Alberta oil sand could be used to produce refinery feedstock at something just under $40 per barrel.

Eighteen months later, oil is flirting with the $80 level, and the production from oil sand hasn’t increased to abate the rise. What happened? Why, with a margin of almost 100%, aren’t the sand and shale producers pouring it out? Probably because of the risk. Oil price is notoriously sensitive to small changes in supply. New discoveries are in the works. The Caspian Sea field is close to coming on line, and discoveries in Southeast Asia are being made. In addition, given the political climate, it’s only a matter of time when the remaining reserves in Alaska will be tapped. If someone stepped up to the multi-billion dollar or euro investment to produce feedstock from the sands, and this oil came on the market, we probably wouldn’t have $75 oil any more. We may not anyway. The investors in that big plant might be faced with a lot longer payback period that they would calculate with a $35 per barrel margin. So they haven’t. It may take a lot longer and a lot more alarmist cries about depleted oil reserves before this investment is made.