How We Measure the Cost of Oil

The Oil Drum has found fault with the classical economic assessment of oil production, and in particular such notions as "proven" reserves, and the foundation those numbers and that thinking play in energy policy formation. They propose a more useful analytical approach in an era of increasing resource contention:

The analyses presented by the IEA assume that only dollars will need to be invested (and $24 trillion at that). But oil, like anything else, requires real resources to procure, and it will be obtained only in proportion to how much real resource (energy, steel etc) is spent in getting it. The main problem is that geology, not the market, holds the key, and the geology of earth is getting more and more parsimonious in two ways: quantity and quality. Both of these concepts impact the energy return on investment (EROI) of national and global oil and gas supplies.

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Just to give you a rough idea as to where we are at present with respect to EROI, “according to legendary oilman Charles Maxwell” on The Money Show, most countries report that it costs from $55 (Saudi Arabia) to $70-90 (Russia and most of OPEC) to $90 (Iran and Venezuela) to produce a barrel of oil.

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Many economists will say that EROI undervalues the role that technology will play in accessing deeper and poorer quality reserves. But as we have stated, EROI in the US obtained at least 100 barrels of oil from each barrel invested in going after it in the 1930’s but only about 10 for one in about 2000, despite the tremendous increases in technology (Cleveland et al., 1984, Cleveland 2005). Therefore, in the US, and subsequently the world, geologic limits have trumped technological advances, and so we reiterate: the arguments about how much oil is left in the ground misses the point - what is important is not the total oil remaining but how much we can get out at a significant energy profit.

Another reason to think Peak Oil may be much closer than it has recently appeared.