Exclusive Interview with Gavin Longmuir, PhD

July 19, 2006

Gavin Longmuir is a consultant with International Petroleum Consultants Association, Inc. He has over 25 years experience as a petroleum engineer in the global oil industry, specializing in the development of future oil fields, economic evaluations of exploration opportunities and assessment of new technologies.

Gavin has worked extensively with British Petroleum, Sohio Petroleum, and Occidental Petroleum. He has a PhD from the University of Strathclyde, Scotland, and an MBA from the University of New Mexico.

WMW: The World Economic Forum gave a 20% chance that oil would go above $80 per barrel in the next year. What do you think?
 
GL: I think the price of oil will be highly volatile, fluctuating within a very broad range of $25-$150 per barrel in the near term. Constrained supplies and increased demand, particularly from developing countries, will continue to drive oil prices higher over the long term.

High oil prices can result in “demand destruction”, such as after the 1979 oil shock. Oil prices steadily deteriorated for about six years and then finally collapsed when demand declined and supply caught up. 

However, EU consumers have for years been paying the equivalent of about $250 per barrel for oil because of very high taxes, and yet the EU is still the world’s second largest oil consumer. Given time to adjust, the world could clearly live with much higher oil prices than $75 per barrel.

An important point is that the EU countries have been benefiting from the taxes imposed. Is that fair?  Will Russia (one of the EU’s main oil & gas suppliers) someday demand that EU governments rebate part of their taxes on Russian oil back to Mother Russia?  Stay tuned!
 
From the perspective of oil exporters like Saudi Arabia, the optimum price profile would be generally high with occasional drops to discourage investment in expensive alternative energy sources.
 
We should also note that oil exporters are unhappy because the declining dollar is costing them lost revenues. There is no assurance that oil prices will continue to be quoted in dollars,  which could have a big impact on the value of the dollar itself.
 

WMW: While proved global oil reserves are estimated at 1.2 trillion barrels, U.S. oil shale and Canadian tar sands oil reserves are estimated at 3.7 trillion barrels. At what price per barrel will oil shale and tar sands be economically feasible to develop?
 
GL: This question really requires four answers:

1. First, estimating oil reserves is very difficult and an inexact science. For example, estimates of proved oil reserves in the U.S. have remained unchanged, at around 20 billion barrels, since 1948. This is despite a production level of 2 billion barrels each year.
2. Most of the big fields in the proved oil reserves are in the Middle East, Venezuela and Russia.  These countries have no incentive to produce accurate estimates.
3. Market price for fossil fuels is driven more by production capacity vs. demand than by reserves. This capacity depends on investment decisions made by a small number of decision-makers in Saudi Arabia, Kuwait, Venezuela and Russia.  Paradoxically, if the price of oil is rising and those few decision-makers become convinced that oil in the ground is appreciating faster than any other investment, they have an incentive NOT to increase production capacity.  But, if they become convinced that new technologies will shortly replace oil, they then have an incentive to increase oil production while it still has some value, even if the price of oil is already falling.  Perceptions of future technological advances could have tremendous impact on the oil market!
4. The problem with oil shale and tar sand extraction is not that it is too expensive to produce. It is rather that it is too inefficient -- about 50% of the oil that is produced from tar sands has to be used to produce the next barrel. Furthermore, extraction requires the availability of low cost gas and fresh water. This severely limits the amount of oil that can be extracted -- regardless of the price of oil.

My view is that we may end up treating tar sands and oil shales more as a mineral that we mine rather than as a source of energy.  We would take energy from nuclear plants, photovoltaics or wind factories and use tar sands/oil shales to convert some of that energy into high value liquid hydrocarbons for use primarily as a transportation fuel. Bottom line -– when it comes to using resources like tar sands & oil shales, improved technology may be the determinant rather than oil price.

WMW: You said at the 2004 North American Prospect Expo that for every unit of energy put in, oil produces 15 units, vs 3 for wind. Even if we go to alternative sources, does this mean that the era of cheap energy is over?
 
GL: Definite maybe.  If we choose to limit ourselves to today’s resources and today’s politically-correct technologies, the long-term trend is definitely towards higher energy costs.
 
However, there could be game changers:

• A revived nuclear industry (including breeder reactors) could provide safe environmentally responsible energy on a TeraWatt scale for centuries. 
• Mok Industries is developing low cost photovoltaics that could put a cap on oil prices and greatly expand supply. 
• Craig Venter (of the human genome project) is working on developing genetically modified organisms that could produce hydrogen, methane, or liquid hydrocarbons (presumably from photosynthesis or from inputs derived from photosynthesis) – replacing fossil oil & gas. 
• Nuclear fusion has been 50 years in the future for the last 50 years.  Someday, they may surprise us all and actually develop a workable fusion energy source.
• There could also be some minor contributions from wind factories and biofuels like ethanol or butanol. But those fuels can’t compete without mandates or subsidies, they have big environmental costs, and there is almost certainly not enough land or suitable marine areas to provide biofuels for the world.

The real issue may be a society’s willingness to pursue technological solutions.  China clearly is ready to go this route, building two nuclear plants per year.  India has the educated population & the need, and is pursing a Thorium-based nuclear energy cycle.  The U.S. has Greenpeace & the Sierra Club!

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