Replacing Today's Oil

If money were no object, and we had unlimited access to engineering and construction capabilities and materials, I'm confident we could produce enough synthetic oil from unconventional resources and coal-to-liquids processes to displace the 10 million barrels per day of petroleum that the US currently imports. Wood Mackenzie, a British consultancy, recently released a report indicating that global unconventional oil resources--oil that is either too heavy and viscous to produce normally, or that is bound up in oil shale or oil sands--stand at 3.6 trillion barrels, roughly three times current estimates of proved conventional oil reserves. But as the Financial Times article above describes, producing this bounty will be no simple matter. Even if the technology were fully proved, as it is in case of oil sands and Venezuela's Orinoco heavy oil deposits, there are other significant barriers to reaching this energy future.

Aside from the direct environmental impacts of these conversion processes, which are inherently higher than for conventional oil and gas, and are beginning to receive serious scrutiny, there are fundamental problems of attracting the capital and other resources required to build such complex facilities on the required scale, and doing so rapidly enough to fill the expected gap between conventional oil supply and aggregate worldwide petroleum product demand. Some of this investment is already underway. The output of major new oil sands facilities in Canada has become part of the base-case assumption for global supply over the next decade, and it is already starting to have an effect on petroleum pipeline infrastructure in the Midwest, where much of it will go. But as I've discussed in previous postings on this topic, the oil sands projects also illustrate many of the practical constraints inherent in the large-scale production of synthetic fuels, in terms of their use of land, water and natural gas supplies, skilled labor and even housing. While the US could certainly supply more of these factors than Canada's smaller economy and population are able to, environmental and local permitting seem likely to create bigger hurdles here than up north. Interestingly, biofuels share some of the same potential limitations, as they scale up to compete as the incremental supply into the world's transportation fuels market.

As long as global demand for liquid fuels continues to grow, these challenges will compound. At the same time that geometric growth steadily increases demand, it drives cumulative consumption to levels that will approach even the enormous endowments of coal and unconventional oil within a few generations, while liberating a comparable tonnage of carbon into the atmosphere, which is on track to reach double its pre-industrial CO2 concentration sometime between mid-century and 2100. For these reasons, fuel efficiency remains a critical component of any energy security plan, whether it is based on biofuels, synthetic fuels, petroleum, or a combination of the three. But efficiency, too, will take many years to bear fruit.

Without resorting to central planning and "industrial policy", we will be asking the market to allocate $20 trillion in energy investments over the next couple decades, within a geopolitical context that looks at least as complex as anything we saw in the 20th century. Unless we want to make the problems we face today even worse, the result of all that investment can't just look like a bigger version of the status quo.