How Bad Is Oil? A Brief Historical Analysis

We keep hearing about oil prices and how they have plummeted. But what do you really know about them? If you’re like me — living in a non-oil producing region, getting most of your exposure from price of gas and roofing — it’s high time to take a look.

This is strictly from an American point of view, mostly because I’m an American and partly because the steep rise in American and Canadian output has been a game changer.

There are a few totals that we need to look at. First is the total crude oil US production over time:

Compare that with US exports of oil:

Oil prices have been pretty volatile. I suppose that is not a big surprise to anyone who has been buying gas for the last 20 years. The following is in inflation-adjusted dollars.

What surprised me is that oil really did use to be really cheap. Even after the steep rise during and after the war — one imagines due mainly to the meteoric rise of the US economy and the rebuilding of Russia, Europe and Japan — the price actually dropped. Until the great OPEC price manipulation of 1973.

The 1998 price collapse was much lower but less severe than the present’s. The 2016 February 02 (01:46 PM EST) price for West Texas Intermediate (WTI or NYMEX) was $30.35, over 86% higher than the inflation-adjusted 1998 December price of $16.28. But the falll in 1998 was a smaller percentage, and there had been a long period of low prices, which meant the markets weren’t betting on high prices. That’s totally different today, as you can see from the charts.

What’s even weirder is looking at “proven” oil reserves, the oil we think is in the ground that we believe, with 90% certainty, that we can recover with today’s technology, economy and political environment. So sometimes a known bit of oil isn’t “proven” because you can’t get to it because of war or an embargo. Other oil is simply impractical or too expensive to get to with today’s technology.

Proven oil reserves have continued to grow, even as we pull more of it out of the ground. Technology has made a lot of oil that was previously “known to be there but impractical to get” into oil that made economic sense. Some of the oil nations have simply upped what their official line was. The world’s proven oil reserves keep getting larger, even though we keep pulling it out at higher rates.

An example: According to Continental Resources, Bakken may hold something between 100 billion and 900 billion barrels of oil (or equivalent). Unfortunately, the extraction rate right now is ~3.5% on the confident 100 billion barrels, and probably considerably lower on the rest. But new technology, including some I’ve seen, may make that rate pop up to 7%, doubling the “known reserves” of Bakken without ever finding new oil. The expansion into the Arctic as the ice melts will also add “proven reserves” since no one can get to it right now. Even with no new oil finds, we may double our proven reserves simply by developing new technology.

I used to be a “end of oil” person, and I probably even blogged about that several years ago. I assumed that the Middle East would collapse due to the collapse of oil, but I thought that it would be created by the U.S. researchers who had built a bacteria which ate CO2 and excreted oil. They were even working on bioengineering one that “pooped” refined product. I knew that there were several game-changing technologies being deployed that made fracking look old-school, but I simply lacked the imagination to see a collapse due to the rise of energy independence in the U.S., among other factors. Regrettably, my imagination extended to the geopolitical problems. I assumed it would cause the US government to destroy the oil-producing bacteria, to preserve the balance of the middle east, which would descend into chaos once the money and foreign interest dried up. The Russians wouldn’t need it, the US wouldn’t care, and the EU would be busy trying for energy independence with the bug. Put that one into “muddled up your foresight, Forrest!”

Today we are seeing the beginning of what may well be the collapse of the Energy States, including Russia and the gulf producers. Certainly the gulf states survive only on their ability to pacify the people with the revenues that come from high production. With free market forces returning to oil for the first time in decades, they may simply not be able to

This has massive geopolitical ramifications, ones that the presidential candidates would be wise to start planning for. There aren’t any good solutions.

Image Credit: Oil wells at Signal Hill (detail), Los Angeles county, California, c. 1923. By The Aerograph Company via Library of Congress collection (public domain).