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Rising instability may make $100-a-barrel oil seem cheap

"Five years ago, they told us we were running out of oil," the speaker quips with a chuckle. Grinning, he pauses and fires the shot at the audience, "But we didn't run out of oil."

You'll often hear variations of this wisecrack delivered at energy conferences or in written words. But the notion that a shortage of oil was avoided circa 2007 is misplaced. Make no mistake: The world did run out of oil in that decade.

The world ran out of $20 (U.S.) oil.

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It's an unsettling reality that the price of a barrel had to jump fivefold and sustain at $100 before producers found the inventiveness to coax more out of the ground. And it's remarkable that even after this sharp quintupling of price, global demand still continues to grow at over one million barrels a day, year over year.

Ten years ago, in the geriatric oil fields of the United States, Canada and the North Sea, a twenty-dollar bill had long lost its appeal as a draw for domestic investment. Abroad, twenty bucks lacked lustre in many major oil-producing countries. "Above ground" fiscal friction like corruption and geopolitics had added a fat layer of soft costs to the hard problem of satisfying unsustainable consumption growth from emerging economies.

"We're not running out of oil. There is plenty of oil left in the ground to last us many decades, if not longer. We are, however, running short of cheap oil," were the opening words to my 2006 book, A Thousand Barrels a Second. This thesis endures today.

In fact, it's time to reconsider whether $100 a barrel is high enough to continue providing oil to an energy-dependent world.

That price is more than enough if our narrow frame of reference is North America. Surging production demonstrates that a lot of projects are viable at prices at the century threshold or less. However, the world's 93-million-barrel-a-day (MMB/d) addiction can't be satisfied with the mere 12 million barrels that the U.S. and Canada cobble together every day.

Politely put, much of the rest of the oil-producing world is "unstable," mired in the same above-ground issues as the past decade, only worsening. Oil outages have grown to 3.3 MMB/d, an all-time high within the Energy Information Administration record. Restoration of stable production is not likely any time soon. A long list of oil-producing countries – Libya, Yemen, Syria, Iran, South Sudan and Nigeria to name a few – are lame or limping. Iraq, a 2.5-MMB/d exporter, is disintegrating into an ungovernable state, throwing doubt onto its ability to produce and grow. Who would invest in Iraq now for $100 a barrel?

Our feature chart shows that in the sphere of non-OPEC countries, only Canada and the United States are delivering growth at the $100 price. Since 2011, the additions to capacity have shifted to North America, where the industry was able to pull a rabbit out of a barrel and reverse a 40-year downtrend in domestic oil production. It's remarkable, because the U.S. and Canada were often regarded as having the highest-cost marginal barrels to come out of the ground. But that's an antiquated notion, and was even debatable a decade ago if the above ground costs were considered in the accounting.

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Which line item on the invoice for a barrel of oil ascribes costs to the risk factors that include: corruption, civil war, insurgency, political instability, expropriation, unpredictable Western sanctions, and a long list of other chronic business impediments? None of these unpleasantries are marked on the round sticker at the gas pump – you know, the one that nobody bothers to read; the pie chart that breaks down the cost of a litre of gas to the consumer.

The world's marginal barrel of oil doesn't come from the US and Canada any more. It comes from a long list of countries mired in degenerating conflict and instability. And at the current rate of proliferating chaos, it may not be long before the world runs out of oil again, this time $100 oil.

Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.

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About the Author

Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies. More


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