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Is North America the New Middle East for Oil?

Geoffrey Styles's picture
, GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

  • Member since 2018
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  • Mar 23, 2012

With the President of the United States currently playing the role of pessimist-in-chief with regard to US energy independence, it’s refreshing to see that goal raised as a serious possibility by someone whose experience and position give him deeper insights on the subject. A few years ago Ed Morse was running the oil trading operation for Hess, and now he’s at Citigroup. His op-ed in the Wall St. Journal offers an upbeat analysis of the ongoing resurgence in US and Canadian production and the potential for North America to move within striking distance of true oil independence. He doesn’t appear to be predicting $2.50 per gallon gasoline any time soon, but he does remind us that permanently higher oil prices needn’t be inevitable, although he is also very clear about the obstacles that could impede these developments.

How often have politicians and pundits reminded us that we can’t drill our way to energy independence? I’ve said that myself numerous times in the eight years I’ve been blogging here. So before exploring the implications of producing significantly more oil than we do today, it’s worth asking why some experts are starting to question what has been a bedrock assumption about the US energy situation since our conventional oil production peaked in 1970–not coincidentally just before the first oil crisis in 1973-74.

If the tired talking point about the US having just 2% of the world’s oil reserves were truly reflective of reality, rather than a technicality based on the way the SEC requires oil companies to account for their chief assets, people like Ed Morse wouldn’t give energy independence a moment’s thought. The number to focus on is not the 21 billion barrels of proved reserves on companies’ books, but the nearly 200 billion barrels of discovered and undiscovered “technically recoverable oil resources” onshore and offshore, in the lower-48 and Alaska. That figure represents more than 95 years of production at current rates.

That estimate is also mostly based on assessments from the 1980s done with technology that bears the same relationship to current exploration techniques as an old Ma Bell rotary phone does to an iPhone. It’s technology that is shifting expectations about what is actually possible. Consider the Bakken shale formation in the Dakotas. The conventional Williston Basin oil fields were discovered in the early 1950s and mostly played out by the late 1980s. The billions of barrels of resources in the adjacent Bakken shale, which might produce a million barrels per day by the end of this decade, simply couldn’t have been produced at commercially useful rates with the technology that was available until the last decade. The hot question now is where the next Bakkens will be found.

Then there’s deepwater drilling, which suffered a big setback with the Deepwater Horizon accident and spill but is still contributing 1.2 million barrels per day and could reach 1.9 million next year. What moves Mr. Morse’s speculation from wishfulness into the realm of practical possibility is the potential of applying technologies like those to exploit conventional and unconventional reservoirs to which industry has not had access since their development, if ever.

Another talking point that we’ve heard like a drumbeat over the last several months is that even if the US could produce more oil, it would make little difference to oil prices in a global market of 90 million barrels per day. We simply don’t control the price of oil; OPEC does. That has been true for essentially the entire time I’ve worked in energy. But here’s where it’s handy to have the background in oil trading that I share with Mr. Morse. Traders have to think about how prices are really set, and they understand that it’s the interaction of the last few million barrels per day of supply, demand and spare capacity that really count, along with inventories. An extra million or two barrels per day–a quantity of which North America is certainly capable–can make a huge difference in oil prices. We saw that in 2009, when a drop of about 3 million barrels per day of demand sent prices from $140 to $40 within a few months, and we saw something similar involving both supply and demand during the Asian Economic Crisis of 1997-98. (See chart below.)

Nor is OPEC monolithic; it’s made up of a group of producers with very different levels of reserves and production, and differing domestic requirements for the revenue they earn from selling their oil. That means that, contrary to yet another talking point, OPEC does not have unlimited capacity to back down production, in order to keep prices high when others increase output. And even when it can maintain enough cohesion to tighten quotas and restrict its own output, the production in question merely shifts to “spare capacity”, the expansion of which reduces oil market volatility. Imagine how different the market’s response to the current confrontation over Iran’s nuclear program might look if other producers had a multiple of Iran’s exports in reserve.

Just because something is possible with a decade or so of determined effort doesn’t make it inevitable. While I share Mr. Morse’s optimism about the benefits of boosting North American oil production on a scale that would dwarf the modest recent upturn, which has received so much attention from politicians who had nothing to do with it, I’m also skeptical that it could proceed to quite that extent in today’s climate. Aside from people who are genuinely concerned about the possible environmental impact of more oil development, there are also those who would regard such a turn of events as contrary to their own interests and their perception of the nation’s. How would we convince consumers to pay the premium for new cars achieving an average of 54.5 mpg in 2025 if gasoline remained between $3 and $4 per gallon, instead of trending toward $6–let alone shifting them into electric vehicles that the government and carmakers have invested billions in developing? And how would we stimulate production of advanced biofuels if the future price of crude oil were seen as being capped at or below $100 per barrel, except during geopolitical crises?

I believe all such questions have answers that don’t depend on us constraining access to our resources at the cost of remaining more vulnerable to overseas suppliers and weakening both our trade deficit and our currency. I’d rather have the extra domestic oil and then worry about how to spend some of the resulting windfall of federal and state taxes, bid bonuses and royalties on achieving our other policy objectives, such as promoting efficiency and reducing emissions. Nor is relying on OPEC to keep prices high the best or most effective way to encourage us to use oil more frugally.

I don’t know if North America is the next Middle East, although it’s worth recalling that we were the world’s biggest oil supplier before the first well was drilled in Saudi Arabia, and DOE estimates suggest we have as much oil left as we’ve produced to date since 1859. However, I do know that I would much rather give OPEC’s leaders sleepless nights worrying how they’ll keep oil prices high in the face of a wave of new production from the US, Canada and possibly Mexico, in preference to giving US consumers sleepless nights about how they’ll pay for the gasoline they need for their commutes and the fuel to heat their homes, if prices stay this high or higher from here on out.

Rick Engebretson's picture
Rick Engebretson on Mar 23, 2012

To end the scoffing at biofuels I suggest you fly over the US midwest about this time of year. Where springtime once meant birds, bees, flowers, trees; it now means dirt from horizon to horizon. The 100 year oil era has dug up and killed off one of the greatest biological systems on earth; from the Gulf of Mexico now into the sub-Arctic.

You often use corn ethanol as an example biofuel. I use corn as an example of a crop that often germinates in May and misses most of the best sun insolation and moisture. Then to say the starch from the kernel, fermented and distilled is somehow a biofuel is preposterous.

I’m not aware of anything in history that compares to this scale of biological destruction; due only to the excessive use of oil products and government subsidies.

So before you again scoff at the biofuels potential, before the mainstream environmental movement wonders why the climate changed, consider what has been destroyed in the last 100 years of oil. Unprecedented in global history.

I don’t agree with President Obama, either. But deliberately killing off the natural wonders of the earth has been a spiritual challenge.

Geoffrey Styles's picture
Geoffrey Styles on Mar 23, 2012


I don’t consider it scoffing at biofuels to recognize that the next-generation fuels that go beyond the corn ethanol we both seem to regard as highly inefficient of its inputs still aren’t at the point at which they can be produced on a meaningful scale at a price that will compete with fossil fuels, despite years of hype. Cane ethanol seems to be there, but it doesn’t translate beyond the sub-tropics.  I am optimistic we’ll get past the big hurdles with non-food biomass, but I remain skeptical that it will happen on the set schedules of impatient investors.  Every year the EPA must revise its cellulosic ethanol target, because the production just isn’t there, yet, and every year the names of the companies it’s depending on for next year’s quota are different, because half of last year’s companies went bust, and most of the rest experienced further delays.  As you would know better than I, if breaking down cellulose were easy, the world we live in would look entirely different.  And even once they’ve cracked the code, it will be neither easy nor cheap to develop efficient supply chains based on diffuse biomass.  If I scoff at anything, it’s at the folks who jump into endeavors like this expecting glamour and a quick buck, instead of hard, patient toil and the unspectacular returns of a commodity business.

Rick Engebretson's picture
Rick Engebretson on Mar 23, 2012

My perspective is different. I live in the middle of mixed agriculture. I’ve been burning day and night for 4 months inside the porch and outside in a wide open shop. Some day I hope to get a ceiling in the porch. Logging trucks have hauled logs to market all winter on our road so people can make paper and throw it in landfills. The Indians had bonfires and pow-wows to manage biomass but we have to worry about insurance. The only way to maintain a low fire threat is to plow it under and spray it and grow corn. I wouldn’t have a chance keeping up if our growing season was more that 4 months long.

I wish I had time to be a Biophysical chemist again and go to all those urban expert meetings full of politicians and colorful slide shows. This isn’t high tech. Just the oil industry protecting their interests. And they do it very aggressively, as you know.

I don’t nurture biofuel, I’m over-run by it. So when you talk about drilling for fuel miles under the ocean, I’m trying to keep fuel from falling on my head.

So how about leaving a little life left after your 100 year run?

Robert Bernal's picture
Robert Bernal on Mar 23, 2012

I hope we NEVER allow the conversion of forests into liquid fuels!

We need to use oil to build the next energy platform… and do it like we mean business (that is, make less of a profit per little watt) before we really do have a liquid fuels problem.


Unless you want to consider advanced nuclear like LFTR, solar and wind are the two renewable candidates. All others are just trivial, especially biioofuuels…    because it would take all the world’s crops and forests just to replace the growing demand for fossil fuels. It would only take just 1 to 2% of the land if solar was used. That’s for ALL fossil fuels, preferably, mass produced GaAs concentrating Fresnel arrays (as they are twice as efficient and is the same hardy material NASA used).

If Americans weren’t so bogged down with excess regulatory fees, we could use advanced machine automation to build solar and batteries (lifepo4) for very much less, almost as cheap as the raw materials. No bother trying to have us “inefficient humans” make it (or import them), better to have the machines crank it out for us to install over thousands of square miles.

Now that’s a jobs plan that, incidentally would require more oil, so yes on the XL, even if it is dirty (someone’s gonna do it anyways! Because I want my children to be able to drive whether its gas or electric!

Rick Engebretson's picture
Rick Engebretson on Mar 23, 2012

Yes, I’ve been a strong advocate for direct band gap near Infrared PVs. And I program Linux and microcontroller automation. And I’ve spent 30 years opposing the “liquidation” of forests.

But we now face 80 degree F temps in the north woods in March with a year long drought. And if all that tangled dead brush and dead-fall erupts this summer I can imagine all the academic discussions and proclamations. It needed some effort to sustain our biological infrastructure, and the knowledge base was lost in a clueless generation.

All the time, money, and wars, and all we have is more mess, debt, and hostility.

Geoffrey Styles's picture
Geoffrey Styles on Mar 23, 2012

Perhaps it all comes down to population and footprint.

Geoffrey Styles's picture
Geoffrey Styles on Mar 23, 2012

One of the reasons biofuels look attractive is that they only require one transformation, involving their production.  A fully electrified world requires at least two, involving both generation and fleets, neither of which will be quick.

Rick Engebretson's picture
Rick Engebretson on Mar 23, 2012

China recently purchased one of the large paper mills in Minnesota, got rid of the paper production, and is now shipping pure cellulose back to China. There are probably hundreds of things we could discuss.

But last fall we had a forest fire in the Boundary Waters Canoe Area National Wilderness. Being surrounded by water and winter controlled it. And now we head into another season, warmer and drier.

The dust bowl was ignored, too. Until dust started falling on Washington D.C. I worry that we will see the canyons of New York City “investors” fill with suffocating smoke before they figure out the air they breathe comes from living plants.

I sounded a heads up last fall, and did so again. Thanks for the web site to post it.

Roger DePoy's picture
Roger DePoy on Mar 23, 2012

Re: Is North America the new Middle East for oil?


90 billion barrels per day of world oil production? The energy crisis has been solved in one fell swoop.

Robert Bernal's picture
Robert Bernal on Mar 23, 2012

On a personal level, yes. Clear the extra debris from the forests and let the locals use it in the winter as we do here in the mountains.

On the collective level, I assume that liquid fuels will become to scarce for us to continue… oblivious. We could go back to the trolly days, but this time, use them to charge the batteries for “off line” routes… It should be easy, since there are so many ways to generate electricity.

Rick Engebretson's picture
Rick Engebretson on Mar 25, 2012

Thanks Geoff. Population, footprint, and I would add expectations. Many people deserve credit for providing so much, and it will just have to be good enough. Congratulations to the oil industry for their important innovation. Congratulations to agriculture for feeding so many.

Efforts at conservation have been disappointing.

Geoffrey Styles's picture
Geoffrey Styles on Mar 25, 2012

Should be “90 million barrels per day” of course.  Nearly 600 people read that post and you were the first to spot that typo.

Erim Foster's picture
Erim Foster on Sep 17, 2012

Good article, thanks. How do you think the increased energy costs of tight oil production effects things going foward though? Surely it's going to continue to get less profitable as time goes on and we're forced to rely on oil shale and sands.

Geoffrey Styles's picture
Geoffrey Styles on Sep 18, 2012

That will be determined by at least two competing factors: whether the next tranches of wells are less productive, after the best opportunities are "creamed off" initially, vs. steady improvements in efficiency and cost as the extraction technology and techniques are refined over time.

Geoffrey Styles's picture
Thank Geoffrey for the Post!
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