Point 2: “Develop domestic unconventional oil and gas resources.”
When we look at the current picture and see our diminishing conventional petroleum resources, we automatically think that this will be the end of oil. Time to switch to something else. The reality of the situation, however, is that oil can come from a number of resources, not just liquid petroleum. Instead of the price of oil simply increasing steadily until we are almost out of it, the price will likely hit a number of plateaus—some which will last for quite a while—as we move through the alternatives.
In this light, Point 2 is can easily be seen as a hedge against Point 1. Exploration of tar sands and oil shale will create these oil price plateaus. So, if Point 1 is either not realized or does not work out as planned, the price of oil will rise until it is cost effective to produce synthetic oil with unconventional methods using non-liquid resources.
This plateau is actually not so very high. In fact, much of the oil we import comes from Canada’s Alberta tar sands. At an estimated $25 per barrel, the cost of producing tar sands pales in comparison to current oil price of $120 per barrel. Compare that $25 cost with $5 for a barrel of Saudi crude and $15 for oil from the Gulf of Mexico. The cost differential between conventional and unconventional supplies begins to seem less significant relative to the high commodity price of oil.
These unconventional oil reserves derived from Utah tar sands and Colorado oil shale—prices for these are considerably higher than Alberta’s unconventional resources, but still quite feasible with the $120 per barrel price tag—will keep Shell in business as the price for a barrel of oil moves upward. Estimates of the resources in the Western U.S. are around 1 trillion barrels. Think of it as a safety valve at which Shell can continue to operate and we can stay in our cars, although there is little doubt that driving habits and technologies will shift at such high prices.
The one holdup is that this move towards unconventional oil has happened before. In the late 1970s there was a significant push to begin unconventional oil exploration in order to exploit the high oil prices of that era. However, it didn’t take long for the bottom to fall out as oil prices plummeted in the mid 1980s, leaving tar sand and oil shale explorers in a much compromised position. Shell would obviously, then, prefer to take the conventional step in Point 1 before risking a significant amount of money in Point 2 both through investment in exploration and to the consequences of the automotive attitude and technology shift that is certain to occur. Shell must tread carefully here.
It is interesting to ponder the shift in oil resource location as commodity prices increase. After the oil price hits a certain point, the amount of reserves from these unconventional sources increases dramatically and all of a sudden a great deal of power transfers to the Americas. The Western U.S., Western Canada, and the Orinoco River in Venezuela all have considerable unconventional resources, which represent a very large amount of global oil resources, both conventional and unconventional. Geopolitically, it may be beneficial for the U.S. to move to this next level of oil prices where it can get oil locally from within its borders and from its closest neighbor and ally instead of relying on volatile regions around the world.
Some conservationists may even agree with this logic as the efficiency of our automotive fleet improves and the fundamental technologies largely remain the same. This is certainly comforting. But as we move forward, we cannot lose sight of the fact that obtaining unconventional oil resources is a lot more like coal mining than conventional oil drilling. Environmental degradation from this type of exploration is horrendous and it is occurring in some of the most beautiful places in North America. Moreover, the amount of energy input required to process tar sands and oil shale is tremendous. This energy demand could very well put increased upward pressure on natural gas prices and expand the use of larger centralized power stations burning coal and splitting atoms.
Moving into the future, there will certainly be some experimenting with unconventional resources to supply our liquid fuel needs and act as a hedge against rapidly increasing oil prices. Again, the geopolitical and technological dynamics of a move to the next plateau is undeniably exciting; maybe even comforting as visions of highly efficient automobiles running on North American resources are conjured up. However, there must be an effort to balance what can be done within the status quo economic outlook and how we move forward in a sustainable manner. Just because we can get it out of the ground and make a profit doesn’t mean that we should.
