The Price for Energy Independence

Posted by Jeff Rubin on November 19th, 2012 under SmallerWorldTags: , ,  • 22 Comments

Move over OPEC, North America is about to become a net exporter of oil. At least that’s the supposed good news from the International Energy Agency’s latest outlook. According to the IEA, the drilling boom for shale oil is putting US production on track to pass Saudi Arabia. North of the border, output from Alberta’s oil sands is expected to notch a similarly grand expansion.

Notions of energy independence, however far fetched they may seem today, play well to the IEA’s target audience, which is largely American. Irrespective of the political rhetoric we endured from both presidential candidates, energy independence isn’t really the issue confronting the US economy or American motorists. The real problem is the price of oil—not its country of origin.

It doesn’t really matter whether the US drills for its own oil, gets it from Canada, or ships it in from Venezuela or the Middle East. Hostile or friendly, no foreign supplier has turned off the spigot. At least not since the last OPEC oil shock three decades ago. The problem for oil consumers right now isn’t the availability of the fuel, but the price needed to get it out of the ground. Unfortunately, that’s already more than we can afford.

Brent, the de facto world oil price, is hovering near $110 a barrel precisely because of our growing dependence on the very unconventional sources of supply being championed in the IEA report. Energy independence isn’t going to change the reality of triple-digit oil prices. On the contrary, oil prices will have to climb much higher for the IEA’s forecast to come true. If that’s the case, does energy independence actually have any value for oil consumers?

The IEA pretends that its prediction for a huge increase in unconventional oil supply can occur with only a modest increase in oil prices. Such unbridled optimism is belied by what’s going on in the industry. Getting oil out of the ground has never been more expensive. And costs are only going up from here. Just look at the pullback in capital spending among oil sands operators. And that says nothing of the lack of pipeline routes coming out of Alberta. Does it really look like bitumen production is about to triple in the next few decades?

Good old-fashioned North American engineering know how like horizontal drilling, fracking, or steam-assisted gravity drainage (SAGD) isn’t why we’re now tapping supply from problematic sources like the oil sands or the Bakken formation. Neither of these are new discoveries. The real heavy lifting that’s catapulted once marginal sources of supply to prominence has been done by soaring global oil prices. Without higher prices, no one would be chasing tight oil from shale formations or trying to pull tar-like bitumen out of the oil sands.

It’s no mystery how rising prices work. Just think about the simple power described by an upward sloping supply curve. The higher the price of oil, the more will be produced. This is a fundamental economic tenet that continually confounds the geologists of the peak oil movement.

In a world of $200-a-barrel oil, the IEA is probably right in believing that US production might reach 11 million barrels a day or that Canada could deliver 6 million barrels into the global market.

The problem with such a bullish outlook for supply is explained by another economic axiom—the dampening effect of a downward sloping demand curve. The higher the price of oil, the less of it our economies can afford to burn. If global economic growth is already grinding to a halt when oil prices are around $100 a barrel, what do you think would happen to economic growth—and hence global oil demand—if prices reached the levels needed to make the IEA’s supply dreams come true?

  • Laurent

    Interestingly, the IEA
    predicts a price of oil reaching 127$ in 2035.


    Well, we all know how
    accurate are the IEA forecasts especially when this is an election year. I have
    no doubt to follow Jeff’s assumptions

  • Crash_watcher

    There is a different way that North America can become a net exporter of petroleum than suggested by the IEA.  Maintain the domestic production rate at about the same level as present and continue the trend of decling consumption.  Vis.  

  • JB

    Excellent comment Jeff and by the way your latest book “The Big Flatline” is excellent although there is strangely not a work about EROEI…


  • LucAstro

    Merci pour traduire votre livre “la fin de la croissance”. Je partage cette traduction avec cousins et frères.

  • Unc

    Jeff, I always like it when you put things into a perpective that is simple for us folks that are not economists to see.I agree with you that supply,at this point is not an large issue but the cost to supply is relative to pricing on the market, the very imput of cheap oil has been what has been driving the standards of living world wide,the party is over,thems that do adjust will do better,than thems that do not.the market will always, have the last word. further ,when people are accoustomed to a particullar standard of living, the politicta-coes will try to accomodate,albeit in a sub standard way. UNC

  • Robert MacDIarmid

    perhaps a candidate for next federal election?

  • Outside_of_the_Box


    What you say makes sense, but there must be a reason people in the know are talking seriously/openly/optimistically about the prospects for a US shale fracking boom. What are the projections for global demand of oil? Increasing or decreasing? If it increases, projects like the tar sands and the fracking will be profitable, as import countries will presumably need more than the conventional easy oil producers can supply. I wonder if per barrel oil really needs to be as high as you say, in order for these unconventional projects to make sense? This could mean the difference between a new golden age in US/Canada and a pipe dream. I would be interested to hear any comments related to this.


  • Ian Brett Cooper

    People are talking optimistically about shale fracking because it’s their last best hope for cheap oil. The problem is, fracking is a short-term measure. No shale oil well has lasted more than a few short years before it went into steep decline. Also, fracking is not as cheap as the industry claims it is. So the shale oil fracking boom is going to be over soon. I reckon, even if it continues to get strong investment, it will have peaked by 2015.

    In the meantime, fracking will only be truly profitable if the oil price goes to around $120US/bbl. Tar sands don’t get profitable unless oil gets to $150US/bbl. Neither of those things are going to happen because at those prices (usually before) demand destruction sets in – people can’t pay those prices without the economy going into recession.

    It is possible that high oil prices will force people to slowly change how they do business, so that higher oil prices can be withstood by the economy, but this adjustment to resiliency may take years. In the meantime, conventional crude oil (production of which peaked in 2005) is running into production limits, and this, combined with demand from countries such as China and India, also forces oil prices up.

    Put simply, the age of cheap oil is over. We are about to enter the age of declining oil use. Whether we like it or not, Peak Oil is here.

  • Outside_of_the_Box

    Interesting Ian.
    What is the current situation with the tar sands project?
    Is it getting investments? Is it starting to churn out oil for export? What are the lastest prospects?
    We are currently at $110/b.
    Are you saying the tar sands operation will not begin to make a profit until oil hits $150/b? And even if we get there, it would cease being profitable once it fell beneath $150/b again?
    Sounds to me like an extremely risky investment. No?
    Any comments are welcome.

  • dave houston

    Now that it appears that the USA has lots of oil, is there any point in scaring people about 200/ barrel predictions of oil any more

  • dave houston

    “Getting oil out of the ground has never been more expensive. And costs are only going up from here” This is the flaw in your argument. It may be expensive now, but efficiencies in extracting the oil will be found just as in other industries over time lower costs of production. It’s expensive now because the methods are new. With time these costs will come down. Therefore the Balkan oil find is a huge boon to North America in the longer term and will deflate oil prices and keep them well below $100 per barrel 

  • dave houston

    we are in the late stages of the  10 year commodities bubble. new oil fields, new pipelines, new refineries, and alternative sources
    of energy such as shale gas will cause a glut of energy to form. THis overbuilding is typical is the late stages of a bubble and is happening now. 

  • Outside_of_the_Box

    Interesting article in CNN Money recently:
    “U.S. oil prices could sink to $50″

    I think it’s tough to say which way things are going to go in the next few years or so.

  • D Moberg

    I shook my head when I heard IEA said that the US was going to be a net exporter of energy(oil and gas).   Your explanation makes a lot of sense.
     Doug M in Wpg

  • dave houston

    There are reports that fracking could turn the USA into the largest oil and gas producer in the world. Jeff Rubin may have to rewrite his books

  • Propensity6

    What this article is really saying is he was wrong about peak oil, he was wrong about $200 oil and if he keeps coming ups with something else, eventually, one of these days, he might be right about something. with moderate inflation, by the time I reach 100 years old, oil probably will be $200 a barrel…mind you, the average salary will be $100,000+ too

  • Outside_of_the_Box

    Two things
    in particular need to happen if Jeff’s predictions are going to come to pass.

    Labour wages
    need to increase in countries we currently do significant imports with.

    And the cost
    of oil needs to increase significantly.

    Either on
    their own, if they reach a certain point, could be enough to bring jobs back

    Together, we
    could no longer justify the cost of importing many of the products we import

    This could
    bring manufacturing, agriculture, and other industries back home.

    It could be
    the end of the growth-at-all-costs mantra.

    It could
    bring a return to a slower pace life-style.

    vehicles on the road.

    walking, biking, outdoors.


    returning to farm land, parks, forest.

    political system could change from “for special interests, by special interests”
    to “for the people, by the people”.

    Move away
    from global interests/economies/policing/wars and focus on the home front –
    health, local economy, infrastructure, public transport, welfare, clean water,
    fresh nutritious local foods, human rights, security, education, environment,

    wall street, mega corps, mega lobbying, the MIC, MSM, all of it could be
    reigned in.

    And all of it thanks to rising wages and expensive oil?
    Well, who knows.


    Now that is
    my kind of future!

  • Bmorrow100

    I fear the off the books cost of these new oil and gas supplies will greatly harm the quality of life of our children. How do we factor in the potential consequences of messing with the water table?

  • Calgary Gal

    Sorry, Ian Brett Cooper, but you are incorrect about oil from oil sands not being profitable until oil reaches $150/barrel. It was more like $40/barrel, and that happened quite a while ago; Alberta and Canada have been making huge profits from the Alberta oil sands for quite a while now.

  • Outside_of_the_Box

    Well now I’m really interested.
    Now Gal, it’s not only Ian saying this.
    It’s Jeff Rubin as well – a respected Energy expert and economist.
    I would love to hear the arguments for and against on this one.
    Doubt Jeff will weigh in. Any other experts?
    At what price are the tar sands break-even and/or begin to be profitable, with all factors included?
    What has it been in recent years, what might it be in years to come?

  • fortmcmurraywork

    jeff, oil may hold price. But economic reality is that technology only becomes reality when economics viability is reality. I expect a steady move toward other energy forms similar to the move from horse to autos. my father started with horses in the 1920′s and grudginly moved to farm tractors. Economic reality should bring lifestyle to electric or some other energized vehicle to provide movement. We have the BRIC contries moving into their industrialized development stages for middle class existence. They will provide the pressure for the move toward the next energy. USA will have a dificult time moving away from carbon. They are to busy day-dreaming of their last tow centuries to relaize their position.

  • Ceausescu

    If you add up the EIA forecasts for US, Canada, and Mexico, and also look at the most likely consumption trend, by 2030, there will still be a 2 mb/d shortfall, which will have to be imported.