Page 31 - Introduction to Petroleum Engineering

PETROLEUM ECONOMICS 15
TAbLE 1.5 Sensitivity of Oil Recovery Technology to Oil Price
Oil Price Range

2016$/bbl
Oil Recovery Technology 1997$/bbl 5% Inflation
Conventional 15–25 38–63
Enhanced oil recovery (EOR) 20–40 51–101
Extra heavy oil (e.g., tar sands) 25–45 63–114
Alternative energy sources 40–60 101–152

The efficiency of oil recovery depends on cost. Companies can produce much
more oil from existing reservoirs if they are willing to pay for it and if the market will
support that cost. Most oil‐producing companies choose to seek and produce less
expensive oil so they can compete in the international marketplace. Table 1.5
illustrates the sensitivity of oil‐producing techniques to the price of oil. Oil prices in
the table include prices in the original 1997 prices and inflation adjusted prices
to 2016. The actual inflation rate for oil prices depends on a number of factors, such
as size and availability of supply and demand.
Table 1.5 shows that more sophisticated technologies can be justified as the price of
oil increases. It also includes a price estimate for alternative energy sources, such as wind
and solar. Technological advances are helping wind and solar energy become economi-
cally competitive with oil and gas as energy sources for generating electricity. In some
cases there is overlap between one technology and another. For example, steam flooding
is an EOR process that can compete with conventional oil recovery techniques such as
water flooding, while chemical flooding is one of the most expensive EOR processes.

1.4.3 How High Can Oil Prices Go?
In addition to relating recovery technology to oil price, Table 1.5 contains another
important point: the price of oil will not rise without limit. For the data given in the
table, we see that alternative energy sources become cost competitive when the price
of oil rises above 2016$101 per barrel. If the price of oil stays at 2016$101 per barrel
or higher for an extended period of time, energy consumers will begin to switch to
less expensive energy sources. This switch is known as product substitution. The
impact of price on consumer behavior is illustrated by consumers in European coun-
tries that pay much more for gasoline than consumers in the United States. Countries
such as Denmark, Germany, and Holland are rapidly developing wind energy as a
substitute to fossil fuels for generating electricity.
Historically, we have seen oil‐exporting countries try to maximize their income
and minimize competition from alternative energy and expensive oil recovery
technologies by supplying just enough oil to keep the price below the price needed to
justify product substitution. Saudi Arabia has used an increase in the supply of oil
to drive down the cost of oil. This creates problems for organizations that are
trying to develop more costly sources of oil, such as shale oil in the United States.
It also creates problems for oil‐exporting nations that are relying on a relatively high
oil price to fund their government spending.