Oil prices are now higher than they have ever been—except for a few frenzied moments before the global economic meltdown of 2008. Many immediate factors are contributing to this surge, including Iran's threats toblock oil shipping in the Persian Gulf,fears of a new Middle Eastern war, and turmoil in energy-rich Nigeria. Some of these pressures could ease in the months ahead, providing temporary relief at the gas pump. But the principal cause of higher prices—a fundamental shift in the structure of the oil industry—cannot be reversed, and so oil prices are destined to remain high for a long time to come.
In energy terms, we are now entering a world whose grim nature has yet to be fully grasped. This pivotal shift has been brought about by the disappearance of relatively accessible and inexpensive petroleum— "easy oil," in the parlance of industry analysts; in other words, the kind of oil that powered a staggering expansion of global wealth over the past 65 years and the creation of endless car-oriented suburban communities. This oil is now nearly gone.
The world still harbors large reserves of petroleum, but these are of the hard-to-reach, hard-to-refine, "tough oil" variety. From now on, every barrel we consume will be more costly to extract, more costly to refine—and so more expensive at the gas pump.
Those who claim that the world remains "awash" in oil are technically correct: the planet still harbors vast reserves of petroleum. But propagandists for the oil industry usually fail to emphasize that not all oil reservoirs are alike: some are located close to the surface or near to shore, and are contained in soft, porous rock; others are located deep underground, far offshore, or trapped in unyielding rock formations. The former sites are relatively easy to exploit and yield a liquid fuel that can readily be refined into usable liquids; the latter can only be exploited through costly, environmentally hazardous techniques, and often result in a product which must be heavily processed before refining can even begin.
The simple truth of the matter is this: most of the world's easy reserves have already been depleted—except for those in war-torn countries like Iraq. Virtually all of the oil that's left is contained in harder-to-reach, tougher reserves. These include deep-offshore oil, Arctic oil, and shale oil, along with Canadian "oil sands"—which are not composed of oil at all, but of mud, sand, and tar-like bitumen. So-called unconventional reserves of these types can be exploited, but often at a staggering price, not just in dollars but also in damage to the environment.
In the oil business, this reality was first acknowledged by the chairman and CEO of Chevron, David O'Reilly, in a 2005 letter published in many American newspapers. "One thing is clear," he wrote, "the era of easy oil is over." Not only were many existing oil fields in decline, he noted, but "new energy discoveries are mainly occurring in places where resources are difficult to extract, physically, economically, and even politically."
Further evidence for this shift was provided by the International Energy Agency (IEA) in a 2010 review of world oil prospects. In preparation for its report, the agency examined historic yields at the world's largest producing fields—the "easy oil" on which the world still relies for the overwhelming bulk of its energy. The results were astonishing: those fields were expected to lose three-quarters of their productive capacity over the next 25 years, eliminating 52 million barrels per day from the world's oil supplies, or about 75 percent of current world crude oil output. The implications were staggering: either find new oil to replace those 52 million barrels or the Age of Petroleum will soon draw to a close and the world economy would collapse.
Of course, as the IEA made clear back in 2010, there will be new oil, but only of the tough variety that will exact a price from us all—and from the planet, too. To grasp the implications of our growing reliance on tough oil, it's worth taking a whirlwind tour of some of the more hair-raising and easily damaged spots on Earth. So fasten your seatbelts: first we're heading out to sea—way, way out—to survey the "promising" new world of twenty-first-century oil.
Oil companies have been drilling in offshore areas for some time, especially in the Gulf of Mexico and the Caspian Sea. Until recently, however, such endeavors invariably took place in relatively shallow waters—a few hundred feet, at most—allowing oil companies to use conventional drills mounted on extended piers. Deepwater drilling, in depths exceeding 1,000 feet, is an entirely different matter. It requires specialized, sophisticated, and immensely costly drilling platforms that can run into the billions of dollars to produce.
The Deepwater Horizon, destroyed in the Gulf of Mexico in April 2010 as a result of a catastrophic blowout, is typical enough of this phenomenon. The vessel was built in 2001 for some $500 million, and cost around $1 million per day to staff and maintain. Partly as a result of these high costs, BP was in a hurry to finish work on its ill-fated Macondo well and move theDeepwater Horizon to another drilling location. Such financial considerations, many analysts believe, explain the haste with which the vessel's crew sealed the well—leading to a leakage of explosive gases into the wellbore and the resulting blast. BP will now have to pay somewhere inexcess of $30 billion to satisfy all the claims for the damage done by its massive oil spill.
Following the disaster, the Obama administration imposed a temporary ban on deep-offshore drilling. Barely two years later, drilling in the Gulf's deep waters is back to pre-disaster levels. President Obama has also signed an agreement with Mexicoallowing drilling in the deepest part of the Gulf, along the US-Mexican maritime boundary.
Meanwhile, deepwater drilling is picking up speed elsewhere. Brazil, for example, is moving to exploit its "pre-salt" fields (so-called because they lie below a layer of shifting salt) in the waters of the Atlantic Ocean far off the coast of Rio de Janeiro. New offshore fields are similarly being developed in deep waters off Ghana, Sierra Leone, and Liberia.
By 2020, says energy analyst John Westwood, such deepwater fields will supply 10 percent of the world's oil, up from only 1 percent in 1995. But that added production will not come cheaply: most of these new fields will cost tens or hundreds of billions of dollars to develop, and will only prove profitable as long as oil continues to sell for $90 or more per barrel.
Brazil's offshore fields, considered by some experts the most promising new oil discovery of this century, will prove especially pricey, because they lie beneath one and a half miles of water and two and a half miles of sand, rock, and salt. The world's most advanced, costly drilling equipment—some of it still being developed—will be needed. Petrobras, the state-controlled energy firm, has already committed $53 billion to the project for 2011-2015, and most analysts believe that will be only a modest down payment on a staggering final price tag.