Cheap Energy Ahead

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Cheap Energy Ahead

It wasn't so long ago when some pundits were warning that the world faced a future of "peak oil," in which the planet's oil wells would run dry and the developed economies that depend on combustion engines would follow a downward spiral into chaos.

Today, thanks to new technologies that are tapping into oil and natural gas deposits, the world—and the U.S. in particular—can look forward to a future of energy abundance. Over the next five years, the price of oil is likely to drop from the current price of $100 a barrel to $75 a barrel.

The reasons? The supply of oil and natural gas is going up due to new discoveries and new technologies, while the demand for oil is going down as more cars and trucks are converted to natural gas.

As pointed out in a recent Barron's cover story, "The game changers on the supply side are the three new types of oil production that have not been counted as part of the oil supply until recently: deepwater oil, shale oil, and oil sands.1 Each of these sources of oil has been estimated at more than 300 billion barrels, totaling more than one trillion barrels in all. That's a huge addition to the previously estimated reserves of some 1.5 trillion barrels. According to Citigroup energy analyst Eric Lee, a good proportion of the extra trillion barrels could be recoverable at $75 a barrel or less. In fact, he notes that a $75 cost estimate could even be on the high side, as production costs for shale oil, and even deepwater oil, can continue to fall over time."

Let's take a closer look at each of these three new types of oil production:

  • According to a report by Rystad Energy of Norway, there are 317 billion barrels of recoverable deepwater oil, including 53 billion barrels in the waters around North America.2 Deepwater drilling stalled in the wake of the 2010 BP drilling rig explosion in the Gulf of Mexico. However, the EPA recently reinstated BP's rights to bid on oil leases in the Gulf, and the company quickly won 24 leases.3 Meanwhile, deepwater drilling has accelerated off the shores of East Africa, where 63 billion barrels are recoverable, and the Asia-Pacific region, where another 32 billion barrels can be extracted.
  • The U.S. Energy Information Administration estimates that 345 billion barrels of shale oil are recoverable throughout the world, including 58 billion barrels in the U.S. Shale oil involves using water to release the oil through hydraulic fracturing but, as we will discuss, even more productive methods are on the horizon.
  • According to the BP Statistical Review, only two countries have deposits of oil sands...

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