By the OGJ Online Staff
HOUSTON, Nov. 14 -- Technology has transformed the energy industry but incremental improvements will require massive long-term investment in research and development, US Federal Reserve Board Chairman Alan Greenspan said.
Greenspan discussed US energy supplies in a talk Tuesday at the James A. Baker Institute for Public Policy, Rice University, Houston.
He said that largely in response to past oil price jumps, the energy intensity of the US economy has been reduced by almost half from the levels of the early 1970s. Much of the energy displacement was accomplished by 1985, within a few years of the peak in the real price of oil.
"What has changed dramatically in recent years is the production side of the oil and gas markets, where technological changes are taking place that are likely to make existing energy reserves stretch further while keeping long-term energy costs lower than they otherwise would have been. The development of seismic techniques and satellite surveillance that are facilitating the discovery of promising new oil reservoirs worldwide have roughly doubled the drilling success rate for new-field wildcat wells in the US during the past decade. New techniques allow far deeper drilling of promising pools, especially offshore. The newer recovery innovations reportedly have raised the proportion of oil reserves eventually brought to the surface from one third to nearly one half in recent decades."
Greenspan said that despite drilling improvements, the cost of developing new fields has not declined as much as might be expected, because much of the work has been in "an increasingly inhospitable and costly exploratory environment. That has been the consequence of more than a century of draining the more immediately accessible sources of crude oil."
He said, "One measure of the decline in the marginal cost of additions to oil availability in recent years is the downdrift in the prices of the most distant contracts for future delivery of light sweet crude oil. Spot prices have soared and plunged over the past decade, but for the most distant futures contracts -- which cover a time frame long enough to seek, discover, drill, and lift oil -- prices generally have moved lower. The most distant futures prices in 2001 dollars fell from $25/bbl just before the Gulf War to $17-$18/bbl a year and a half ago."
Greenspan said the current 6-year futures contract has risen, on net, over the past year and has been a little more than $21/recently, but that is mostly due to heightened Middle East tensions.
"The long-term marginal cost of extraction presumably anchors the long-term equilibrium price and, thus, is critical to an evaluation of the magnitude and persistence of any current price disturbance. Over time, spot prices are inexorably drawn back to the long-term equilibrium price, as the balance between underlying supply and demand is restored. A premium over long-term marginal costs doubtless exists for oil because so much of the world's crude oil reserves are in areas where disruptive turmoil is always a latent threat."
Greenspan said policymakers should consider national security and environmental concerns when setting energy policy.
"But those concerns should be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets. We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion. Moreover, they stimulate the research and development that will unlock new approaches to energy production and use that we can now only scarcely envision."