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Ed Quillen: Shale oil surprises and other economic lessons

It was with some surprise that I read in a recent Wall Street Journal editorial that “Engineers recently perfected refining solid shale rock into diesel or gas, which may amount to the largest oil supply in the world ” perhaps as much as 1.8 trillion barrels in the American West. That’s enough to meet current U.S. oil demand for more than two centuries.

“Yet as late as 2007, Democrats attached a rider to the energy bill that prohibits leasing the federal interior lands that contain at least 80 percent of America’s oil shale. The key vote was cast by liberal Senator Ken Salazar from Colorado, of all places.”

Part of the surprise was learning that torture-enabling, Alberto Gonzales-promoter Ken Salazar is a liberal. Another element of the surprise was the assumption that a Colorado politician would naturally support oil production from his state. Didn’t the one-time governor of Florida ” a fellow named Jeb Bush ” oppose offshore drilling around his state a few years ago?



But most of the surprise was reading that engineers have “recently perfected” a process to refine shale oil. Search the Internet as I might, I couldn’t find any announcements of new technology for extracting fuels from oil shale.

The basic knowledge has been around for more than a century. Colorado folklore has it that some 19th-century pioneer on the Western Slope built a log cabin and constructed its chimney from local rock. The first fire set the chimney itself ablaze, and thus was oil shale (“the rock that burns”) discovered.



“Oil shale” is something of a misnomer, since the sedimentary rock is not necessarily shale, and the organic stuff in the rock isn’t oil. It’s a complex of hydrocarbons called “kerogen,” and if you heat it under the right conditions, you produce something similar to crude oil, which can be refined into familiar stuff like gasoline and kerosene.

It requires moving about a ton of rock for every barrel of oil, or applying heat in the ground (“in-situ” processing).

Oil shale has been “the fuel of the future” for a long time, and it’s likely to stay that way for some time. Go back far enough, when crude oil was $2 a barrel, and you’ll read that once the price gets up to $3 a barrel, shale oil will be competitive. If crude is at $20, shale works at $30 ” you get the idea.

Now that crude is at $135, maybe shale oil would pay. Let’s assume that you could produce it profitably for $85 a barrel. But before you start production, you’ve got to develop a mine with a reclamation plan, find a big water supply in a desert, then build a retorting plant and related facilities. In other words, you’d need a big upfront capital investment in the billions before you start reaping those windfall profits of $50 a barrel.

Then consider that Saudi Arabia has immense reserves of regular crude, and a production cost of about $10 a barrel. How much are you going to be willing to invest in an $85-per-barrel oil-shale plant if some feudal despot can open his taps one morning and put you out of business with $10-per-barrel oil?

That’s pretty much why Exxon pulled the plug in 1982 on its $5 billion Colony Oil Shale Project in Colorado. The project made sense when prices were rising, but when oil prices fell, it was a waste of resources that could be more profitably invested elsewhere. And there’s no guarantee that prices will stay high enough to ensure that shale oil will be profitable.

So it really isn’t fair to blame “liberal Ken Salazar.” There’s plenty of oil shale in private hands, not dependent on government leasing. Blame instead those gutless capitalists who are reluctant, for some reason, to invest in a bubble that could burst any morning.


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