The future of alternative oil sources

Oil demand will increase by 25 percent and prices will more than double by 2030 from 2006 levels, according to the Energy Information Administration (EIA).

These prices should enable more extraction from oil sands and oil shale, said Michael Owyang and Kristie Engemann, two researchers at the St. Louis Federal Reserve.

Change in the oil industry is constrained by cost. Currently, oil prices are not high enough to justify a meaningful deviation from the status quo, which is drilling for oil from the ground. But if oil prices become high enough, more costly alternatives like clean energy, deepwater drilling and production from oil sands and oil shale will develop more rapidly.

Oil Sands

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Oil sands are petroleum deposits, in an extremely dense and viscous form called bitumen, that is mixed with sand, clay and water.  When bitumen is extracted and separated, it must then be processed in an upgrading facility to turn it into a form most refineries can use.

The largest known reserves are found in Canada and Venezuela. 

As of 2005, there were 5.8-trillion barrels of oil in oil sands and 0.3 trillion of it is recoverable. This compares to 1.2 trillion barrels of conventional crude oil that is recoverable and U.S. oil consumption of nearly 20 million barrels in 2008.

Oil Shale

Oil shale is not actually oil; they are sedimentary rocks that contain kerogen, which releases a substance similar to oil when heated. 

These rocks are mined, surface-retorted, and then processed in an upgrading facilitiy to turn it into a form most refineries can use. 

There are about 2.8 trillion barrels of oil in oil shale deposits, although not all of it is recoverable.  The United States has about 75 percent of the known deposits.

Outlook

Owyang and Engemann said oil prices must be sustained above $70 per barrel for the oil sand operations to grow in Canada.  A 2005 study said oil prices must also be sustained above $70 per barrel, in 2005 dollars, for the oil shale industry in the U.S. to grow.  Although oil prices has certainly spiked $70 per barrel in 2005 dollars, they never remained above it for long in the past 10 years. 

There are also environmental resistance to these alternative sources.  For oil sands and oil shale production, the greenhouse gas emissions is higher than conventional oil production. The disposal of their processed materials may also damage the environment. Thus, increased environmental regulation is likely to make the cost of production even higher.

Nevertheless, because of the expected secular uptrend in oil demand and prices, these alternative oil sources will likely become more prominent. Also, the U.S. may be incentivized to stop the "greatest transfer of economic wealth in history" -- to use the words of former Massachusetts governor Mitt Romney --  by importing oil from Russia and the Middle East.

The EIA expects total world production from oil sands to eventually increase to 5.4 million barrels per day and oil shale to increase to 200,000 barrels per day.