What’s a barrel of oil really worth?

What’s a barrel of oil really worth?

What is a barrel of oil really worth?

The answer starts out sounding like a joke that begins, “An oil producer, an economist, a consumer and an ethicist walk into a bar…”

The oil producer would say the value of the barrel is the cost of getting it out of the ground and cleaning it up for further production, plus a reasonable return on investment and risk.

The economist would reply that it’s worth whatever the producer can get for it.

The consumer might conclude that the barrel of oil is worth nothing in itself. The value it holds is in its contribution to delivering the end-use services like comfort and mobility that people need and want.

The ethicist would say the answer depends on how our appropriation of the oil will affect future generations.

But if a scientist pulled up a chair and joined our little group, she just might conclude that a barrel of oil is priceless, considering the once-in-a-civilization combination of resources and coincidence that made it possible. Each event was unlikely enough in its own right. The sequence is never likely to repeat. And for all of humanity’s formidable technological prowess, we could never in a billion years replace the world’s reservoirs of crude oil.

  • Crude oil originated as organic matter, mainly plankton and algae from ancient marine environments that existed tens or hundreds of millions of years ago. It took 3,000 tonnes of organic matter, mostly dead plankton, to produce one barrel of oil.
  • An unlikely mix of conditions transformed the plankton into petroleum. As the plankton died and settled, about two percent converted to kerogen, a carbon-rich petroleum precursor. After a million to 10 million years, the kerogen became buried deep enough, but not too deep, at the pressure and temperatures necessary for petroleum to form. Then, over thousands of years, some fraction of the carbon in the kerogen converted to petroleum.
  • In the final stage, when conditions were right, the petroleum began to migrate ever so slowly, until some small fraction encountered an impermeable cap rock or trap that caused it to accumulate in what we call a petroleum reservoir.

Petroleum is a cornerstone of Canada’s economy, and it will still be a factor through 2050, the target date for an 80 per cent reduction in Canada’s greenhouse gas (GHG) emissions. In the Trottier Project’s modelling and analysis so far, fossil fuel production doesn’t disappear. However, by 2050, a large share of today’s market for oil and gas could be offset by a steady increase in energy productivity that has already begun reshaping our energy economy over the last 40 years. Much of the remaining demand could then be met by distributed, renewable sources that are either low-carbon or carbon-free.

Will oil lose its value in such a future? Not in a million years. It may be the end of the industry as we know it. But it’s interesting to think about which business opportunities would be foreclosed, and which ones would open up, if we simply asked ourselves what a barrel of oil is really worth.

It took exacting conditions and physical geology to refine trillions of tonnes of organic matter over millions of years, just to make the petroleum era possible. If we kept that in mind when we prepared to drill a well or dig a hole to get at the stuff, we might be more inclined to save it for its very best, most irreplaceable uses. The result would be a very different fossil fuel industry operating in a transformed, largely decarbonized energy economy. But there would still be business opportunities galore, in fossil fuels and in the wider energy sector.

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