‘The price of petrol saw its biggest daily jump in 17 years’, writes the BBC. ‘Fuel hits £2 a litre’ exclaims the Daily Mail and meanwhile The Economist reports that ‘the oil price is spiking again’.
The price hikes we are currently seeing at petrol stations across Great Britain and the globe are, of course, multifactorial. The War in Ukraine is one of them, environmental policies that are making extraction ventures increasingly difficult are another, and the current 9 per cent inflation rate is not helping the problem either.
But in the midst of what seems like a living nightmare for commuters, taxi drivers and car enthusiasts alike, the research group Climate Action Tracker proclaims in their latest report that we are witnessing a global gold rush for fossil fuels. In addition to that, last year’s figures from the Organization of the Petroleum Exporting Countries (OPEC) show that the number of proven crude oil reserves in the world are actually increasing – even though crude oil is a scarce resource. How can that be?
First of all, it needs to be recognised that our technology is constantly improving – and with that the ability to detect and recover further parts of an underground oil field. A few decades ago, the average oil recovery rate used to be at about 20 per cent. Now, thanks to technological advancements, this has risen to roughly 35 per cent, with room for improvement still.
So why haven’t we seen a decrease in price if more oil is becoming available for extraction? The law of supply and demand certainly says we should. But with a natural resource like crude oil, the supply process also includes first the discovery and then the extraction of the underground oil. A process, which is profoundly affected by the present value of the resource – and comes at a price.
In 2011, Benjamin Wallace-Wells reports for the New York Times Magazine:
“Two miles below the ocean floor, on a ridge the size of metropolitan Houston, modern-day wildcatters have pinpointed what they believe is a major oil field. Now all they have to do is spend $100 million to find out if they’re right.”
There may be enough crude oil underground to last us for centuries – which is certainly longer than the 3,690,000,000 google search results for ‘running out of oil’ suggest – but only once the current price of oil products such as petrol rises to a certain level, does it financially justify digging for more. Without wanting to reminisce and bring back old memories, but during the pandemic in 2020, the price for a barrel of crude oil had dropped to an 18-year low. Times like these simply do not incentivise digging for more because it is not financially sensible.
Similar to oil, the same goes for other natural resources too: we have seen a vast expansion in iron and steel production in the 20th century, yet their reserves increased multiple times over this period. The same is true for aluminium, lead and copper.
External factors like war, sanctions and inflation of course are additional variables in the equation that makes up the daily petrol price at your local station. But at the same time, these price-spiking externalities are also incentivising future exploration, a consequence of which is the “gold rush” we are seeing now.
As soon as the present value of a tonne of oil exceeds the price it takes for a tonne to be discovered and extracted, it becomes worthwhile to invest – and therefore also risk – to explore for more. Let’s hope we will soon see the results of it.