By Matthew Figgie and Rick Solon
In the United States, we still reminisce about the days of cheap oil, where filling up our cars cost less than $5. People still dream of cheap oil. While there is a boom in shale oil, energy independence based on it is not yet on the horizon.
Media accounts of America’s new oil abundance and the shale-oil revolution are leading many to believe we will soon not depend on the Middle East. This, however, is not reality, when you realize that the cost of finding oil has been steadily increasing, and will continue to rise.
Since 2008, America’s proven oil reserves have increased by a rate of 25 percent. America now produces 9 million barrels per day, yielding a 24 percent increase since 2008. America is the third largest producer of oil in the world, and the U.S. has been in that position since 1965. While this news may seem exciting, it really is not a new matter.
Understand some basic ideas
There are a few things that people need to understand:
1. Our reserves and daily production remain less than they were in the 1980s. However, our consumption is up 20 percent.
2. Even though the U.S. is continuing to grow oil production, it is not at a point where it can supply all our daily needs. Our demand far exceeds our supply, both domestically and globally.
3. Getting the oil takes a lot of energy, effort and will be more expensive. It can often cost $1.50 to drill for every dollar producers get back. The cost of exploration and production of a barrel of shale oil is between $60-$80 per barrel. The cost of traditional crude oil from the Middle East is $20 per barrel.
4. Shale oil is much more susceptible to market price fluctuations due to production costs. So long as oil prices exceed the cost of production, shale oil will continue to increase in price.
Out of necessity, America will have to rely on foreign oil, and as oil prices increase, they will ripple through the economy, affecting prices on everything from food to utilities.
Consider the complexities
Because shale oil and the geology of it are complex, the cost of finding and producing it is not going down. The best guess that oil prices are going to stay between $90 and $110 per barrel and will continue to rise. Even if an economic crisis shifts the price down, it will only be temporary.
The shale revolution is good. It creates jobs. But, we need to not only be aware, but prepare for the cost of increasing oil prices and the true reality facing the United States on supply and demand of this valuable natural resource.
Matthew P. Figgie
Clark-Reliance is a global, multi-divisional manufacturing company with sales in more than 80 companies, serving the power generation petroleum, refining and chemical processing industries.
Matthew is also chairman of Figgie Capital and the Figgie Foundation.
President and CEO, Clark-Reliance
Rick has more than 35 years of experience in manufacturing and operating companies.