Editor’s Note: Remember, Arrias is a real human being and he writes powerfully.

Under the hard country of West Texas and eastern New Mexico, Comanche country, lies a 70,000 square mile geological formation called the Permian Basin. Since the first commercial oil well in the Basin in 1921, approximately 30 billion barrels have been pumped, and nearly 75 trillion cubic feet of natural gas. Current production is 2 million barrels per day. How much more is in the ground is a subject of debate, with estimates running from several tens of billions to nearly 100 billion barrels.

How much is recoverable? In 2007 the US Geologic Survey (USGS) estimated there remained approximately 1 billion barrels of recoverable oil. By 2012 that number had climbed to 2.7 billion barrels. In 1980 the USGS estimated there were 5.7 billion recoverable barrels if prices reached $40 per barrel, roughly $150 per barrel today.

But, figures released in the last few weeks suggest 20 billion barrels or more of recoverable oil, at prices between $20 and $40 per barrel.

This lower cost (and the increase in the amount that can actually be recovered) is, obviously, the result of improved technology to recover oil (and gas) from shale and other rock formations. The implications are obvious: gasoline prices, and natural gas prices will remain low; production costs for fertilizers will also remain low; shipping costs will remain low: all good news for farmers and average families. For the US as a whole (and Canada), this technology, coupled with huge oil and gas reserves in shale oil and tar sands, means the US could soon dominant the world energy market.

But that might not be very good news for others.

Oil wells need constant maintenance; all the associated pieces must be maintained: pipelines, pumping stations, port terminals, refineries, distribution networks, etc., etc. It’s a very capital intensive industry and simply because a well is producing oil and has been for several years, and still has good pressure, maintaining the well (and the pressure) and all the other pieces of the industry is expensive, and will reflect current prices, not the price when the well was drilled. Prices go up, all the other costs go up; prices go down, the other costs go down – but more slowly.

For OPEC and others, falling oil prices mean that once profitable wells may no longer be profitable. For many OPEC countries oil revenue is essential not only in funding the basic functions of government, but also in supporting every sector of their societies. Schools, houses, food are often paid for by oil dollars. In some cases the price of gasoline is subsidized, keeping prices low so that everyone can “fill their tank,” and kill time driving around. The concept is simple: give young men something to do and a way to do it; give them gasoline for their cars at low cost so that they can drive around, meet their friends, socialize; in short, it’s a social “release valve.” This activity was – and is – important in nations where there is little real business not related to oil and where unemployment rates among men under 35 are believed to be above 20% (the actual numbers aren’t revealed by many nations).

Unfortunately, as oil production costs rose, gross revenues increased, but net revenues declined as production costs rose in a number of countries. OPEC countries are trying to diversify their economies. But this is difficult and slow, and low oil prices will make it slower still. And meanwhile, populations have grown, as have the costs of maintaining the rest of society.

And this changed market will affect more than just OPEC. Consider this one point: China is a net importer of energy, currently importing more than 7 million barrels of oil per day (some estimates suggest 8 million barrels per day). As prices drop it would seem that that would be a good thing for China. But, as prices drop, some of China’s own oil production will become too expensive, boosting imports, and their would-be suppliers in the Middle East (in particular Iran) will see declining production, due to no-longer profitable wells falling off line. And that would mean China would need to buy oil from a market increasingly dominated by the US.

A rising Asian power buying oil from an international market dominated by the US… That happened before – in 1941… And it didn’t end up well.

Copyright 2017 Arrias
www.vicsocotra.com