Is $80 A Barrel the New Floor For Oil?

Anybody who is still in denial regarding the reality of Peak Oil need only consider the type of drilling being done now. Never has so much money been committed to such high-risk drills in places so difficult to access and requiring so much new and expensive technology, for such relatively trifling yields, as with the deepwater drills being done by Chevron and Petrobas.

Newsweek writer Matthew Philips, in his article last week, Journey to the Center of the Earth, called this deepwater field, which could contain enough oil to supply the U.S. for ten years, "perhaps our best shot at energy independence." If so, we are destined for considerable economic hardship and material deprivation going forward, because the cost per barrel of drilling alone is nearly 50% more than the current price of oil, about $80 a barrel.

Chevron's offshore drilling platform, the Tahiti, is located about 190 miles from the shore in the deep waters of the Gulf of Mexico, where the drill must plunge through 7,000 ft of water, then through a thick layer of much and a salt bed beneath it that is over a mile deep, and then through several miles of crust to reach a paybed estimated to contain 85 billion barrels of sweet crude. That's a real giant, a stunning find relative to the relatively piddling yields projected for other deep sea drills, which are expected to yield 15 billion barrels at best, or the Bakken formation, which is considered to be good for 3.5 billion barrels at the most.

But it will not be cheap oil, and we can put to rest any dreams we may have of seeing $30 a barrel oil ever again.The project is expected to cost about $100 Million, which means that if it yields the 85 billion barrels thought to reside there, the cost per barrel will be $117.64. And that assumes that all 85 billion can be recovered, and that nothing major goes wrong with the project to cause massive cost overruns, which are pretty optimistic assumptions.

Why would Chevron do a drill that costs at least $117 a barrel when oil is currently trading around $80? Now we know why oil companies have been a little recalcitrant about obeying the command to "Drill, baby, drill!" and you have to figure that there must be a very powerful incentive to induce the people who front the money and risk to do the drilling to embark on such a massively risky project. Chevron is, after all, a business, and we can safely assume that it isn't doing this to take a $37 a barrel loss. The oil producers can only be extending themselves to this extent in the belief that near-future oil prices will support these projects and give them a decent return on this massive investment, and they must have a reasonable basis for believing that the supply/demand balance will work in their favor.

There is less dispute everyday over whether Peak Oil is a reality, and the major argument now is not if but when, and the estimated years of arrival are closer together. Kenneth Deffeyes believes that 2005 was the year that global production peaked, and points out that production has never exceeded that year's level. Other analysts say 2008, and most ominously of all, Sadad as Husseini of Saudi Aramco predicts that its Gwaihir field, the largest in the world, will reach peak production in 2015.

Just as the early Peak Oil prognosticators warned, demand is increasing while each new discovery is smaller and harder to exploit, and we're now arriving at the interstice between increasing demand and declining supplies, and arguments about exactly what year the peak will occur or has occurred are really beside the point. We will be paying more for less, not only oil, but everything that is somehow dependent upon it. And that means just about everything.

Looks like we are in for a long economic convalescence.