1. how is the cost of oil calculated.
2. that not all oil is the same.

Authors (for example, Hanley, Hogren and White, “Environmental Economics: in Theory and Practice”, 2007; Palgrave Macmillan) define the price of any non-renewable resource as a sum of the shadow price (a measure of uncertainty concerning the size of economically recoverable reserves) and the marginal cost of extraction. The author’s discussion addresses the former, not the later.
2. Not all oil resources are the same. Even conventional fields have different characteristics, with differing marginal costs of extraction. After a well peaks, the marginal cost of extraction increases because of the diminishing pressure, leading to more energy being needed to sustain (a decreasing) output. So, as many wells peak, the average marginal cost of extraction increases, taking prices with it. Extraction costs from unconventional sources are higher than conventional sources – that is the reason why they are unconventional and have only recently come online.
The Marginal cost of extraction is measured in the energy needed to produce oil. In the end, the energy output for a well might be inferior to the energy input needed to produce oil. When there’s little or no energy gain in the extraction, why extract?

Also, extracting oil from unconventional sources is an extremely CO2-intensive activity.

See my rejoinder on his views

http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1378&Itemid=103

In the same statistical review a peak in Saudi Arabian oil production is shown in 2005, see

http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1360&Itemid=105

If its chief economist interprets figures in a contrary manner to those plotted from BP’s statistical review, he needs to explain why!

Even the IEA, after a decade of wildly optimistic future hydrocarbon price predictions is facing up to the fact that future hydrocarbon resources will be both progressively scarcer and more expensive.

For example, the last time I saw tar sand extraction costs at a notional $25/b was 10 years ago. The estimated extraction cost for tar sand is now $80 – 100/b. The figure for oil shale is probably unknowable because the energy investment to extract useful HCs from shale may exceed the energy won. Unless, of course, one simply burns oil shale as if it were a particularly poor quality coal as they still do in Estonia.

Most large reservoirs of conventional oil are depleting much more rapidly than new production capacity is being brought on line. The IEA’s latest estimate is higher than CERA’s 2007 estimate of 4.5% per year. The depletion rate of conventional reserves exceeds 300,000 b/d per month which means that simply to stay on plateau at 87 million bopd, we need to be bringing on a new large oil field every month.

We are not doing this.

The current economic crisis is undoubtedly slowing down the annual global increase in demand and this may be causing marketing problems and thus temporary stock increases and price falls. However, new investment in production has also slowed so that when and if demand picks up again, we will see an unholy price spike and thus further economic crises in the years just head.

By the way, LNG will be in permanent shortage for a decade, simply because the investments in many plant liquefaction plants never got past Final Investment Decision (FID). So yes, we will see shale gas reversing years of declining North American gas production but for a much higher price than the current $7 per mmBtu. But the rest of the World will likely see gas and oil prices converging above $15 per mmBtu and rising steadily despite the resulting financial crises.

I wish it were otherwise! I really do.

If say 10% of the North American natural gas reseves were to be dedicated to SCO production only 15 Gb of the “recoverable” bitumen would be upgraded. In recognition of this problem. there is a proposal to build a nuclear power plant to provide steam and hydrogen. An allied problem is the amount of process water needed and also the permanent scarring of the landscape.

North America is now a major importer of LNG and it is questionable whether it is worthwhile using ever more expensive, partially imported gas for tarsands recovery. If a nuclear power plant is built in Alberta, it would be of more use generating electricity!

Around half of the recovered bitumen is diluted with pentanes and piped South of the border to US refineries, where it is blended with other refinery feedstock.

The other major problem is that only 6% of the tarsands is mineable, the remainder requiring more sophisticated measures to extract the deeper lying bitumen by for example steam-assisted gravity drainage (SAGD). So far the more readily accessible mineable deposits have provided the majority of the production.

So what is claimed to be the equivalent of Saudi Arabia is in fact likely to provide but 6 months of the world’s crude oil production.

Note that according to this graph the world still has twice as much oil left (2 T BOE) at a cost of under $2 / bbl as it has used in total so far. This implies that the competitive price of oil is at most $5 / bbl, while peak oil analysis suggests it is over $200 / bbl. My guess is the oil markets are smarter than either group.

Just as peak-oil analysis leads to the conclusion that climate change is not a problem because we will run out of CO2, this analysis should state the obvious. If we do manage to use these resources, the earth is doomed. For a more sensible, though less detailed analysis see Carbonomics at stoft.com.