Oil sheikhs gathering in their robes to plot the downfall of the Western motorist is a popular stereotype. And many international actors would like us to think oil is a desperately scarce resource, to which access must be maintained by kow-towing to producers. The truth is more complex.
Available oil at current prices (or lower) is restricted to the Middle East and a few other locations.
But the limitation is an economic, not technological, one. The world has a profusion of sub-marginal oil or oil-like materials that can be turned into liquid fuel — at the right price.
One that needs no prospecting is the residue of oil in worked-out United States fields. Only about a third of the oil in situ can be extracted under natural flow, by steam injection or by chemicals that flush out the oil clinging to subterranean sandstone or chalk.
Under the stimulus of prolonged high prices, US entrepreneurs would undoubtedly turn old fields — some worked for many decades — into a renewed source of crude.
The New World is home to two other unconventional oil resources, both being worked in a modest way — the tar sands at Athabasca in Alberta, Canada, and Venezuelan heavy oil. Through appropriate technology, production could be expanded enormously from a resource base that could hold about 900-billion barrels of oil equivalent — twice as much as Saudi Arabia.
The US has even more oil shale, which simply needs to be cooked to release oil. Its exploitation has, in the past, been blocked by environmental activists complaining that mining will disfigure the Western badlands.
Industry is constantly enhancing technology for extracting oil from the seabed. Long ago it moved off the shallow waters of the continental shelves on to the continental slopes.
Also of great potential is the Arctic ocean rim, where many sedimentary basins, potentially home to exploitable oil, have been located. Russian Siberia is so vast it has not been fully prospected. The Caspian sea, an extension of the Gulf, awaits aggressive investigation.
Also, vast on- and offshore areas of Indonesia may hold undiscovered oil, while countries such as Libya were long boycotted for political reasons.
For some purposes, there may be scope to develop gas as an alternative to oil. However, much of the gas is to be found close to oil, in Organisation of Petroleum Exporting Countries (Opec) member states.
Lastly, there is the world’s enormous coal resource, perhaps containing 10 times as much energy as oil. At the right price, Sasol’s process or other methods are available to manufacture liquid fuels.
Opec’s managers are too shrewd to push prices to levels at which oil-consuming countries would be tempted to develop these options and push the cartel out of lucrative markets. Its game is to manage prices to yield a good margin above its low production costs, while not pushing its customers into desperate policy changes.
Opec knows that pushing customers too far could prove irrevocable. Once consuming countries have committed to domestic, high-cost and capital-intensive alternatives, they would move to protect the value of their commitments. Physical controls on oil imports or old-fashioned tariffs would follow.
The international oil market would then segment, with the portion accessible to Opec shrinking, perhaps dramatically.
This was the state of the oil market two generations ago, when the US protected high-cost domestic supplies through physical import controls.