1. The Marcells Shale thickens to the East and dips to the East.
2. When estimating the size of a reserve (in the case of our discussion, an oil reserve), accuracy is difficult because:
a. subsurface geology is very complex and even if an area has been thoroughly surveyed/studied, it is difficult to know how much oil there is in place, how productive the wells will be, etc.
b. there are incentives to misrepresent oil reserves (both understating reserve volume and overstating reserve volume)
c. a reserve is, by definition, based on the volume of technically and economically recoverable oil within some defined area; therefore, the volume of a reserve changes with technological improvements and changes in price.
2. In 1956, M. King Hubbert published a method for estimating reserve volumes by looking only at production. The Hubbert Method is based on the observation that a graph of production as a function of time for an oil field is a bell-shaped curve and by looking at annual production and cumulative production in an oilfield (or country or planet) you can estimate the volume of a reserve, the timing of the peak of production, as well as future production decline rates. This production peak is the "peak" in "peak oil" which we will discuss next week. Our method for calculating the Hubbert peak uses a mathematical simplification developed by Kenneth Deffeyes.
3. There is a clear correlation between the price of natural gas and the number of active drill rigs in the US in the past 35+ years.
4. In the case of crude oil, the relationship between price and the number of active drill rigs in not as obvious. If the data are segregated temporally, however, some clear trends begin to emerge... During the time period that world crude oil prices were effectively controlled by OPEC (up to 2003), the number of active drill rigs increased slightly with increases in crude oil price. After OPEC lost control of world oil prices (after 2003), we also see an increase in the number of active wells with increasing price but now drilling activity is much more sensitive to fluctuations in the price of crude oil (small increases in price correlate with more substantial increases in the number of active drill rigs.) During the late 2000s recession, a new relationship emerged, still with a positive correlation between price and drilling but now we are seeing lots more drilling and a reduction in sensitivity.
5. OPEC is a consortium of countries that have worked together in the past to stabilize (control) the price of oil; this worked well until around 2003 and less well after that.
6. The mechanism to affect the price of a desired commodity is to control the demand (and please keep in mind that I am a geology professor, not an econ professor...) The standard supply and demand curves occupy price-time space such that they intersect at an equilibrium price and quantity (or rate of consumption. If demand remains constant (and we have good evidence that it does), then a reduction in supply will result in a reduced quantity sold at a greater price (equilibrium 2). If demand falls and the supply remains constant, then the price will decrease with a reduction in quantity (equilibrium 3)
If on the other hand, your equilibrium price is unacceptably high, you can increase the supply and a new equilibrium price (with increased quantity) will result.
In short, if you reduce the supply, the price goes up and if you increase the supply, the price comes down. Historically, the best example of this are OPEC raising and cutting production, KSA raising output, and drawdowns of the US strategic petroleum reserve. We will continue with this on Monday.
Slides from lecture today are on Sakai. For Monday, please read Scraping Bottom: Once considered too expensive, as well as too damaging to the land, exploitation of Alberta's oil sands is now a gamble worth billions by Robert Kunzig in the March, 2009 issue of National Geographic Magazine.
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