Oil Shale Economics

Thomas Friedman wrote today about the need for the United States to reduce our need for foreign oil, proposing a phased $1 tax on gasoline to help wean us from it. This would certainly reduce consumption, but it would not really reduce our dependence upon foreign oil (only reducing the amount we consume) and would result in significant job losses. There is potentially a better solution.

A few years ago, I saw a study that said that with oil at $100 there is vastly more oil available than there is at $50. The lower price point makes it impossible for companies to consider investing billions of dollars to reach shale oil. However at $100, it could make economic sense.Once the investment is made, the available oil supply would be much larger than it currently is. Of further note is the fact that North America has by far the largest reserve of this type of oil in the world. As a general rule, as the price increases, so does the amount of oil available.

I don't know if the price point is $100 or not at this point, but I do know that the US would be able to be self sufficient should the price go much above that, having reserves so vast as to support not only our own economy for generations, but others as well.

This is evidently one reason why OPEC has worked to keep the price of oil below the critical level. If oil is at $40 or $50, it is only cost effective to drill where there are large pools of oil. As I understand it,we're nearing the tipping point when it will become worthwhile to go after the shale oil. At that point, we could end our dependence upon foreign oil entirely without providing incentives for change (taxation) in our own economy.

The real fear on the left, and this is why taxation is proposed, is that there will be no new incentive, other than increased cost, to use alterative sources of energy and that fossil fuel usage might even increase. Taxation would alter the value of the commodity, potentially keeping its value below the critical tipping point by reducing demand. In other words, taxation will force us to continue to depend upon foreign oil while also forcing us to reduce our consumption.

The markets left alone will result in higher oil prices that will make exploration and usage of the vast reserves of oil in North America more worthwhile, resulting in a dramatically reduced, if not eliminated, reliance upon foreign oil, while also reducing consumption simply because of the increased price. Basically, the markets will alter behavior as much as taxation could do while benefiting the United States far more.

There are clear negative environmental impacts of shale oil exploration and legislation will no doubt need to be implemented to address them, likely raising the costs somewhat. In the long run, finding effective and inexpensive alternative forms of energy is by far the best alternative.

For a simple explanation of oil shale economics, see this basic explanation from Wikipedia.