MIGHT THE ROOM BE FILLING WITH EMPTY SHELLS?

That's a parable from four years ago.

[I]magine a room full of whole peanuts, with kids let loose to eat the peanuts while they're required to leave the shells in the room as they eat. Early on, it's easy to find the whole peanuts, but as the room fills up with shells, it's harder to find them.  Locating exhaustible resources is like that, and we even have a Hotelling principle for the pricing of exhaustible resources that ought manifest itself if peak oil is indeed at hand.

Peak oil might not be upon us just yet, and yet, notes Paul Krugman, Our President's Venezuelan oil play might be failing its market test.  "None of the oil executives were willing to make specific commitments to invest in Venezuela, although some of them talked about possible increases in Venezuelan production."

To steal from an antiwar slogan of the Consciousness Revolution, what if the Bureau of Land Management held an oil lease auction and nobody showed up?  That happened, and the reason might be current levels of development and production are roughly in equilibrium.

After decades of oil extraction, gushers are a thing of the past. Today, most of the oil extracted by the U.S. petroleum industry is shale oil. To extract that oil sedimentary rocks must be fractured with pressurized liquids — “fracking.” Now, there are many environmental issues associated with fracking. But even if you ignore those concerns, drilling a new well isn’t worth doing unless the price of oil is sufficiently high.

As I pointed out a few days ago, the breakeven price for drilling in America’s major shale areas — the price at which drilling a new well is just worth doing — is around $62 a barrel. And current oil prices are slightly below that. So it makes perfect economic sense that oil companies aren’t interested in bidding on public land in Colorado. It’s simply not an investment worth making.

So if oil companies are unwilling to invest in drilling in Colorado, why would they want to sink money into Venezuela? Venezuela’s huge official oil reserves mostly consist of heavy crude, which is highly viscous. Berkeley’s David Levine says that it has roughly the consistency of cold peanut butter. This oil doesn’t come gushing out when you drill a well. Extracting it often requires injecting steam to get it hot enough to flow. Thus just getting the oil out of the ground is expensive.

And Venezuela’s oil infrastructure — the pipelines, tanker facilities, etc. that get oil to market — is decrepit. Experts estimate that just rehabilitating this infrastructure, which would allow a modest rise in Venezuelan production, would cost between $10 billion and $20 billion. Getting production back up to 1990s levels would require $100 billion or more.

That's money not worth spending now, and as the parable post noted, the existing fracking and steam extracted wells had not been recovering their capital costs, not at current prices, although those assets might be worth developing at higher prices.  Moreover, as Reason's Ron Bailey notes, there's a lot of asset discovery, whether in anticipation of future higher prices for a barrel of crude, or not.

In 1972, Limits estimated that world's remaining reserves of copper amounted to 308 million tons, gold at 11,000 tons, tin at 4.37 million tons, zinc at 123 million tons, and lead at 91 million tons. Crude oil reserves stood at 455 billion barrels and natural gas reserves amounted to 1.14 quadrillion cubic feet. At 1972 rates of consumption, all of those reserves would have been entirely depleted before the year 2000.

The USGS reports that 50 years later current proved reserves of copper stand at 880 million tons, gold at 54,000 tons, tin at 4.9 million tons, zinc at 250 million tons, and lead at 90 million tons. Global reserves of petroleum is estimated at 1.7 trillion barrels and natural gas 7.3 quadrillion cubic feet. In other words, the proven reserves of nonrenewable resources have not been depleted over the past 50 years, they have instead increased substantially.

In his insightful 2021 article in Mineral Economics, German geologist Friedrich-Wilhelm Wellmer explains that when markets signal that a mineral or metal is in short supply, companies develop new more efficient ways to exploit current reserves and seek to find new resources. Consequently, the supply horizon for most metals, minerals, and fuels remains always about 20 years out. In addition, efficiency innovations mean that most products and services use less and less of any specific resource over time.

In Mr Bailey's article, the prices of minerals are increasing, although he attributes those increases to regulatory effects and world economic growth.  There's no evidence in any of the charts he presents of a Hotelling-style, real prices increasing at two or three per cent per annum.  Nor have those prices provided incentives for entrepreneurs to work on backstop technologies, whether involving renewable electricity or any of the other pet projects rent seekers would like to mandate.  The conclusion of the parable post, "neither the bad financials story nor the Hotelling principle at work, for now,"  still seems valid.  Whether there's an option value in holding the Venezuelan peanut oil fields against future supply shocks elsewhere or in case of war remains to be seen.