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UTILIZATION OF PETROLEUM AND PFTROLEUM PRODUCTS

John M. Ryan

Standard O i l Company (N. J. )


General Economics Department
New York, New York

Petroleum has been u t i l i z e d by man throughout most of h i s s t a y on t h i s planet.


An a n c i e n t Babylonian t a b l e t reports, f o r example, t h a t Noah calked h i s Ark with
bitumen. This s t o r y suggests t h a t petroleum w a s used b e f o r e t h e advent of recorded
h i s t o r y ( 3 ) . Up u n t i l f a i r l y r e c e n t times, however, crude o i l and i t s products were
q u i t e scarce and i t s consumption was l i m i t e d .

I n t h e m i d - l 8 0 0 ' s , t h e o i l i n d u s t r y as we now know i t emerged. This develop-


ment w a s made p o s s i b l e when Colonel Drake improved t h e technology then i n use f o r
d r i l l i n g salt w e l l s and d r i l l e d i n s t e a d f o r o i l i n 1859. The Drake w e l l , which was
t h e first w e l l d e l i b e r a t e l y d r i l l e d f o r o i l , w a s s u c c e s s f u l and r e s u l t e d i n produc-
t i o n of e i g h t t o t e n b a r r e l s of o i l a day. As Colonel Drake's approach came i n t o
widespread use, crude o i l production rose r a p i d l y and during t h e next year t o t a l
doraestic crude o i l production w a s 500,000 barrels. One y e a r l a t e r over two million
b a r r e l s were produced. The c o s t s of crude o i l declined sharply as production rose,
and petroleum u t i l i z a t i o n increased r a p i d l y .

The broad expansion of o i l markets t h a t came about after 1859 w a s made possible
by many f a c t o r s including: (1)high and r i s i n g p r i c e s f o r animal and vegetable
o i l s , ( 2 ) a r a d i c a l l y improved technique of e x p l o r a t i o n and production, and ( 3 )
improved techniques of u t i l i z a t i o n . This experience i l l u s t r a t e s t h e f a c t t h a t t h e
u t i l i z a t i o n of petroleum i s the r e s u l t a n t of a w i d e v a r i e t y of f o r c e s which
u l t i m a t e l y make themselves f e l t i n t h e market p l a c e . The equilibrium achieved,
however, i s q u i t e f r a g i l e and changes i n the underlying f o r c e s l e a d t o continued
and sometimes rapid s h i f t s i n u t i l i z a t i o n p a t t e r n s . Hence, i n d i s c u s s i n g u t i l i z a -
tion, it i s not s u f f i c i e n t t o consider e x i s t i n g o r p o t e n t i a l technology of o i l con-
sumption alone. It i s a l s o necessary t o i n d i c a t e t h e e f f e c t s of p o t e n t i a l changes
i n supply and of new competitive f o r c e s . Any p r o j e c t i o n o f u t i l i z a t i o n must con-
t a i n , a t l e a s t i m p l i c i t l y , s m e assumptions about f u t u r e supply and competing
technology as these f a c t o r s can have important consequences today. Thus a n a n t i c -
ipated shortage of a p a r t i c u l a r form of energy some y e a r s i n t h e f u t u r e l e a d s con-
sumers t o begin searching f o r ways t o economize i n t h e use of the resource o r t o
convert t o a l t e r n a t e sources today. Producers begin t o look f o r new supplies o r
t o improve methods of producing known d e p o s i t s . Producers of competing f u e l s
search f o r ways t o s u b s t i t u t e t h e i r products f o r t h e one i n s h o r t supply. All of
these a c t i v i t i e s tend t o d e l a y o r t o prevent a n a c t u a l s c a r c i t y .

This p o i n t i s w e l l i l l u s t r a t e d i n the case of petroleum. The rapid r i s e i n


crude o i l production after the Drake discovery l e d t o i n c r e a s i n g f e a r s t h a t t h e
industry would be unable t o continue meeting t h e demands being made upon it, I n
1909, when t h e i n d u s t r y w a s a mature h a l f century old, t h e U. S. Geological Survey
expressed the f e a r t h a t t h e n a t i o n ' s petroleum resources would soon prove inad-
equate t o meet t h e needs of i n d u s t r y and suggested f u r t h e r t h a t , i n t h e f a c e of
approaching s c a r c i t y , petroleum should be l i m i t e d t o uses where t h e r e were no
reasonable s u b s t i t u t e s such as l u b r i c a t i o n and i l l u m i n a t i o n ( 5 ). "he introduction
of geological techniques t o t h e o i l - f i n d i n g process around the t u r n of t h e century,
however, e v e n t u a l l y usheEd i n a new e r a of o i l discovery which prevented t h e a n t i c -
ipated s c a r c i t y from developing.

t
224

The rapid acceptance and growth i n t h e u s e of t h e automobile l e d t o a n even


greater demand on resources and t h e c r y of forthcoming shortage was again heard
through t h e land. A l e a d i n g p r o f e s s o r of engineering here i n Michigan t y p i f i e d
t h i s view when he s t a t e d i n 1920 t h a t t h e gasoline powered v e h i c l e would have t o
be abandoned by 1940 a t t h e latest because of a shortage of petroleum(1). The
subsequent i n t r o d u c t i o n of geophysical techniques and t h e i r gradual improvement
ushered i n an era of d i s c o v e r i e s s o great, however, t h a t within a f a i r l y s h o r t
period overproduction, not shortage, became t h e major problem.
1
!The f o r e c a s t s of shortage j u s t c i t e d w e r e not i s o l a t e d events.
Competent
a u t h o r i t i e s have f o r e c a s t impending s c a r c i t y almost since the i n c e p t i o n of t h e o i l
i n d u s t r y . The important p o i n t i s t h a t t h e t h r e a t of s c a r c i t y SO stimulated research
, t h a t shortages w e r e e f f e c t i v e l y f o r e s t a l l e d . Furthermore, research w a s continuing
simultaneously on a wide v a r i e t y of s u b s t i t u t e s , which could conceivably have f i l l e d
t h e gap, a t no dramatic i n c r e a s e i n c o s t , i f o i l resources h a d not kept pace with
requirements. Developments i n these areas have influenced u t i l i z a t i o n a t l e a s t as
much as have t e c h n i c a l improvements i n t h e consumption of energy.

TECHNOLOGY OF PETROLEUM UTILIZATION 4

I n reviewing p r e s e n t and p o t e n t i a l u t i l i z a t i o n p a t t e r n s , i t i s u s e f u l t o begin


w i t h t h e c u r r e n t s t a t e of consuming technology and t h e developments which appear
most l i k e l y t o occur i n the n e a r term f u t u r e . This technology enables us t o make a
reasonable estimate of t h e demands which w i l l be made on resources over t h e period
of a decade o r two. Using our p r e s e n t knowledge of the n a t i o n ' s resources we can
t h e n determine whether o r not t h e demand p a t t e r n appears reasonable and, i f not, we
can a d j u s t it as necessary.

I n t h e l o n g e r term f u t u r e our a b i l i t y t o p r e d i c t i s increasingly inaccurate,


and w e do not have a c l e a r p i c t u r e today of t h e technology o r t h e resources which
w i l l be a v a i l a b l e more than about twenty y e a r s from now. The repeated groundless
f e a r s of shortage i n t h e p a s t i n d i c a t e that it i s probably unwise t o determine
capital budgets, formulate r e s e a r c h policy, o r even e s t a b l i s h n a t i o n a l p o l i c i e s on
t h e b a s i s of developments which a r e a n t i c i p a t e d more t h a n twenty years or so i n the
,
f u t u r e . Longer range f o r e c a s t s serve t o i n d i c a t e p o t e n t i a l t r o u b l e s p o t s which
should be watched, b u t they do not serve as a r e l i a b l e guide f o r p o l i c y today.

I n p r o j e c t i n g f u t u r e demand p a t t e r n s it i s a l s o necessary t o make some


e x p l i c i t o r i m p l i c i t assumptions about t h e r e l a t i v e p r i c e s of f u e l s . For t h e
p r e s e n t we s h a l l assume t h a t r e l a t i v e p r i c e s w i l l be unchanged f o r t h e foreseeable
f u t u r e . Subsequently w e s h a l l i n q u i r e whether t h i s assumption i s reasonable o r
whether t h e r e are f a c t o r s which would make petroleum i n c r e a s i n g l y c o s t l y r e l a t i v e
t o competing f u e l s and which would hence n e c e s s i t a t e a modification of t h e projec-
tion.

Transportation

I n t h e United S t a t e s approximately 50 p e r c e n t of a l l t h e o i l consumed i s used /-

' i n t h e t r a n s p o r t a t i o n s e c t o r . O i l has over 90 p e r cent of t h i s market. Abroad,


t h e s e percentages are probably. somewhat lower, but they are not r a d i c a l l y d i f f e r e n t
f r o m t h e l e v e l s p r e v a i l i n g i n t h e U. S. Since o i l cannot increase appreciably i t s
market share, i t s growth i n t h i s market i s e s s e n t i a l l y l i m i t e d to the o v e r a l l growth
. i n the transportation sector.

There are a w i d e v a r i e t y of technological developments which could have an


impact on t h e t r a n s p o r t a t i o n market. For p e r s o n a l t r a n s p o r t a t i o n , however, t h e r e
appears t o be l i t t l e t h r r a t t o t h e hydrocarbon powered v e h i c l e , a t l e a s t f o r the
22 5

next twenty years. Most of t h e devices which might compete with t h e gasoline-
powered p i s t o n engine are hydrocarbon engines themselves. Among t h e s e are t h e gas
turbine; t h e light-weight, high-speed d i e s e l engine; t h e s t r a t i f i e d charge engine;
t h e f ree-piston engine; t h e S t i r l i n g engine; and t h e NSU rotary combustion engine.
Based on p r e s e n t information, none of t h e s e engines p r e s e n t s a major t h r e a t t o t h e
gasoline p i s t o n engine, although highway d i e s e l use i s growing. I n t h e longer run,
t h e r e may be some s h i f t toward t h e s t r a t i f i e d charge and t h e g a s t u r b i n e engine.
None of these changes, however, would s e r i o u s l y affect t h e t o t a l demand f o r hydm-
carbons although they might n e c e s s i t a t e a s h i f t away from gasoline toward middle
d i s t i l l a t e s i n t h e r e f i n i n g process.

It i s p o s s i b l e that t h e b a t t e r y o r f u e l c e l l may replace t h e gasoline p i s t o n


engine i n a l i m i t e d number of s p e c i a l v e h i c l e s p r i m a r i l y used f o r c i t y driving.
The p r o b a b i l i t y of t h i s development appears q u i t e s m a l l , however. E i t h e r device
would r e q u i r e a technological breakthrough t o be economic and, even i f such a
breakthrough should occur, t h e s e devices probably would not capture a l a r g e segment
of the p r i v a t e t r a n s p o r t a t i o n market i n t h e foreseeable f u t u r e . Furthermore, a
workable f u e l c e l l has a reasonable p r o b a b i l i t y of r e q u i r i n g hydrocarbons a s a f u e l .
For these reasons, it i s not considered l i k e l y t h a t e i t h e r b a t t e r y o r f u e l c e l l
powered automobiles w i l l have a s i g n i f i c a n t impact on petroleum demand f o r t h e next
twenty years although they could a f f e c t demand i n t h e l o n g e r run.

Railroads are another segment of t h e t r a n s p o r t a t i o n market i n which oil i s


dominant. The r a p i d i t y with which t h e r a i l r o a d s converted t o d i e s e l s following
World War I1 shows t h a t s i g n i f i c a n t changes can take p l a c e i n s h o r t periods of time.
The major t h r e a t t o o i l i n t h i s market i s e l e c t r i f i c a t i o n . This t h r e a t i s more
p o t e n t i a l than r e a l f o r t h e foreseeable f u t u r e , however, as s u b s t a n t i a l new e l e c -
t r i f i c a t i o n p r o j e c t s probably cannot be j u s t i f i e d i n t h e U. S. u n t i l such time as
r a i l r o a d mergers and r e r o u t i n g of l i n e s r e s u l t i n h i g h e r t r a f f i c density. G a s
t u r b i n e s may u l t i m a t e l y replace diesels i n some r a i l r o a d a p p l i c a t i o n s but, i n any
event, most of t h i s market appears t o be secure f o r hydrocarbons f o r a t least
twenty years and probably much longer.

I n the area of marine t r a n s p o r t a t i o n t h e major t h r e a t t o o i l comes from nuclear


energy. Although it i s u n l i k e l y t h a t nuclear energy can compete economically with
hydrocarbon engines i n t h e U. S. i n p r i v a t e marine t r a n s p o r t a t i o n over t h e next
twenty years, it w i l l be of growing importance i n m i l i t a r y a p p l i c a t i o n s . Abroad,
i n t r o d u c t i o n of nuclear energy i n marine t r a n s p o r t a t i o n w i l l probably be i n h i b i t e d
by c a p i t a l l i m i t a t i o n s .

The a v i a t i o n market appears q u i t e safe f o r hydrocarbons i n t h e years ahead.


The r a p i d i t y with which t h e gas t u r b i n e replaced the p i s t o n engine i n t h i s market
argues s t r o n g l y a g a i n s t o i l industry complacency, but t h e technological developments
i n t h e o f f i n g do not appear t o be of a nature t o challenge o i l ' s dominance of t h i s
market .
The f u t u r e of o i l i n t h e important t r a n s p o r t a t i o n s e c t o r can be r e a d i l y
summarized as follows:

1. Because of o i l ' s overwhelming p o s i t i o n i n t h e t r a n s p o r t a t i o n market, i t s


growth i n t h i s area w i l l be l a r g e l y l i m i t e d by t h e growth of t h e market, p a r t i c -
u l a r l y i n t h e U. S. The a d d i t i o n a l volumes which w i l l be consumed i n t h i s s e c t o r
i n t h e U. S. w i l l be q u i t e l a r g e , b u t t h e annual average growth r a t e here w i l l be
somewhat lower than t h e growth rates a n t i c i p a t e d abroad.

2. There are no new technological developments i n s i g h t which s e r i o u s l y


t h r e a t e n hydrocarbon f u e l s i n t h e t r a n s p o r t a t i o n market i n the f o r e s e e a b l e f u t u r e .
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3 . There may be s h i f t s i n demand away from gasoline toward middle d i s t i l l a t e s


i n t h e U. S., b u t any such s h i f t s are expected t o be gradual and are not expected
t o a f f e c t t h e o v c r a l l demand f o r petroleum s i g n i f i c a n t l y .

I n d u s t r y and Power P l a n t Use

General i n d u s t r y and power p l a n t use c o n s t i t u t e a second market for o i l .


Most of t h e petroleum f u e l supplied t o t h i s market i s i n t h e form of heavy f u e l
o i l . I n t h e U. S. o i l i s not a major f a c t o r i n t h i s segment. It accounts f o r
about 7 p e r c e n t of t h e steam e l e c t r i c power p l a n t f u e l used by u t i l i t i e s and about
1 3 per c e n t of t h e manufacturers' h e a t and power market. I n a d d i t i o n t o t h e s e
uses, o i l w i l l be of i n c r e a s i n g importance i n s p e c i a l i z e d i n d u s t r i a l uses. F o r
example, a pound of o i l can d i s p l a c e 1.6 pounds of coke i n b l a s t f u r n a c e s with
s i g n i f i c a n t savings. O r e reduction and f e r t i l i z e r manufacture a l s o r e p r e s e n t l a r g e
p o t e n t i a l markets f o r o i l .

The f u t u r e of o i l i n t h e i n d u s t r i a l markets of t h e U. S. i s determined b y


f a c t o r s o t h e r than technology of u t i l i z a t i o n , however. The domestic production of
heavy f u e l o i l i s d e c l i n i n g as r e f i n e r s c o n t i n u a l l y improve t h e i r y i e l d p a t t e r n s
and it i s now e q u a l t o o n l y a b o u t one h a l f of domestic consumption. Imports of
heavy f u e l o i l , which make up t h e balance, are l i m i t e d by t h e O i l Imports Admin-
i s t r a t i o n i n such a manner t h a t t h e t o t a l domestic supply of heavy f u e l o i l h a s
been held f a i r l y constant s i n c e t h e i n c e p t i o n of t h e program. It is, of course,
impossible t o p r o j e c t w i t h confidence t h e import p o l i c i e s of t h e f u t u r e , b u t it i s
clear t h a t i f t h e c o n t r o l s l i m i t t h e supply t o a f i x e d l e v e l , as t h e y have i n t h e
p a s t , they will serve t o prevent increased i n d u s t r i a l o i l consumption i n t h e U. S.
as a result of e i t h e r normal growth o r of new technology. Furthermore, widespread
improvements i n t r a n s p o r t i n g coal w i l l probably r e s u l t i n some f u r t h e r reduction i n
d e l i v e r e d coal p r i c e s which w i l l make c o a l more competitive. Abroad, however,
t h e r e i s q u i t e a d i f f e r e n t s t o r y . O i l w i l l be i n c r e a s i n g l y important t o general
i n d u s t r y and, for t h e foreseeable f u t u r e , rapid expansion i n t h e generation of
e l e c t r i c i t y w i l l i n c r e a s e t h e demand f o r o i l d e s p i t e probable n u c l e a r developments.
Coal costs w i l l continue t o rise in Europe and t h e r e i s some hope f o r reducing t h e
p u n i t i v e e x c i s e t a x e s l e v i e d a g a i n s t heavy f u e l o i l i n much of Europe today. As a
r e s u l t , o i l should become i n c r e a s i n g l y competitive o u t s i d e t h e U. S.

R e s i d e n t i d and Commercial Consumption

The r e s i d e n t i a l and commercial s e c t o r i s a n o t h e r major petroleum market.


Gas dominates t h e space h e a t i n g component, however, and e l e c t r i c i t y i s t h e major
factor i n t h e a i r cooling segment. Oil--largely i n t h e form of middle d i s t i l l a t e s
--supplies about one t h i r d of t h e t o t a l energy consumed i n t h i s market.

Oil's share of t h e space h e a t i n g market i s under a t t a c k by both n a t u r a l gas


and e l e c t r i c i t y , p a r t i c u l a r l y i n multi-unit dwellings. Natural gas h a s accounted
. f o r most of t h e growth of t h i s market i n r e c e n t years b u t e l e c t r i c i t y i s a growing
t h r e a t t o b o t h gas and o i l . More new homes were heated by gas than e l e c t r i c i t y
last year and more wem heated b y e l e c t r i c i t y than by o i l .

F u r t h e r t h r e a t s t o o i l ' s p o s i t i o n i n t h e r e s i d e n t i a l and commercial market are


posed by research on t h e r m o e l e c t r i c h e a t i n g and cooling and on gas-fired absorption
c y c l e combination heating-cooling u n i t s . On t h e o t h e r hand, o i l ' s p o s i t i o n i s being
strengthened by research on o i l - f i r e d a b s o r p t i o n cycle u n i t s and hydrocarbon f u e l
c e l l s which can be used t o supply e l e c t r i c i t y t o i n d i v i d u d residences o r t o groups
of consumers i n l i m i t e d areas.

A s i g n i f i c a n t technological. breakthrough would be required before any of t h e s e


p o t e n t i a l new u s e s would be a b l e t o a l t e r u t i l i z a t i o n p a t t e r n s appreciably and it
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i s not at all c l e a r today what t h e n e t e f f e c t on petroleum demand is l i k e l y t o b e ,


It i s a l s o worthwhile t o note t h a t given t h e assumption of adequate resources and
no s i g n i f i c a n t changes i n r e l a t i v e p r i c e s , t h e r e i s no overwhelming n a t i o n a l
urgency f o r conducting such research a s f a r as c i v i l i a n uses a r e concerned.

T o t a l Petroleum Demand

Most s t u d e n t s of t h e petroleum i n d u s t r y are i n agreement that i f t h e r e a r e no


unforeseen technological. breakthroughs by o i l o r by competing forms of energy and
if r e l a t i v e energy p r i c e s remain e s s e n t i a l l y unchanged, petroleum demand w i l l grow
i n t h e United S t a t e s at 2 t o 3 p e r cent a year over t h e next decade o r two. I n
f o r e i g n areas, where t h e growth p o t e n t i a l i s g r e a t e r and where supply i s l e s s
l i k e l y t o be d i m c t l y l i m i t e d by import c o n t r o l s , petroleum demand a l r e a d y exceeds
t h a t of t h e U. S . and annual growth rates w i l l be about twice as g r e a t a s those
expected i n t h e U. S.

ADEQUACY OF SUPPLY

The demand p r o j e c t i o n s of t h e previous s e c t i o n are p r e d i c a t e d on t h e assump-


t i o n of no change i n r e l a t i v e p r i c e s . If, however, petroleum resources should
prove inadequate t o meet expected demand and i f p r i c e s should rise, t h e f u t u r e
demand p a t t e r n s would diverge from t h e p r o j e c t e d l e v e l s . It i s important, t h e r e -
f o r e , t o balance projected demand a g a i n s t t h e resources which can be made a v a i l a b l e
during t h e period i n question.

I f t h e domestic consumption of petroleum products should grow at t h e indicated


upper l e v e l of 3 p e r cent a year, t o t a l consumption would exceed 100 b i l l i o n b a r r e l s
during t h e next twenty years. The r e s u l t i n g d r a f t on domestic resources would
depend on t h e a d m i n i s t r a t i o n of t h e import c o n t r o l program and t h e amount of n a t u r a l
gas l i q u i d s produced, b u t i t i s not unreasonable t o assume t h a t t h e p r o j e c t e d demand
p a t t e r n implies t h e production of 70 t o 80 b i l l i o n b a r r e l s of domestic crude o i l
during the next two decades. The domestic i n d u s t r y had not produced q u i t e t h i s much
o i l after t h e f i r s t century of i t s existence. Is it l i k e l y t h a t it can produce t h i s
huge q u a n t i t y i n the next twenty y e a r s o r are t h e pessimists, who f e e l t h i s i s an
impossible burden, c o r r e c t ? Even i f i t i s p h y s i c a l l y p o s s i b l e t o produce t h i s
volume, can it be done at competitive p r i c e s ? Given t h e assumption of an unchanged -
import program, these questions must be answered i n t h e a f f i r m a t i v e i f t h e preceding
demand p r o j e c t i o n i s t o be accepted.

One's answer t o t h e s e questions depends on h i s estimate of t h e petroleum


content of known petroleum r e s e r v o i r s and those t o be discovered during the f o r e c a s t
period, on t h e q u a l i t y of t h e s e r e s e r v o i r s and on f u t u r e developments i n techniques
of production.

One highly competent a u t h o r i t y has estimated t h a t t h e domestic i n d u s t r y can


develop at l e a s t 70 b i l l i o n b a r r e l s of reserves i n t h e next two decades from f i e l d s
which have a l r e a d y been found and from f i e l d s which w i l l be found on acreage which
i s a l r e a d y p a r t i a l l y explored and i s c u r r e n t l y under l e a s e ( ) + ) . I see no reason t o
challenge t h i s view. It must a l s o be kept i n mind t h a t t h e n a t i o n ' s p o t e n t i a l l y
productive sediments are f a r from explored. Another a u t h o r i t y h a s estimated t h a t
l e s s t h n one f i f t h of t h e n a t i o n ' s p o t e n t i a l l y productive sediments have been
explored with any degree of thoroughness( 6 ).
It would be most unwise t o w r i t e off i n advance t h e s e unexplored sediments as
unproductive. Many p o t e n t i a l l y productive areas have been s u b j e c t t o l i t t l e i f any
reconnaissance e x p l o r a t i o n . Furthermore, t h e s e n s i t i v i t y of our e x i s t i n g explor-
a t o r y t o o l s i s such that we are f r e q u e n t l y unable t o l o c a t e valuable d e p o s i t s by
surface e f f o r t s alone. I n p a r t i c u l a r , we are g e n e r a l l y unable t o l o c a t e strat-
228

i g r a p h i c traps through such s u r f a c e e f f o r t s and some of t h e world's l a r g e s t known


f i e l d s have been found i n such t r a p s . A s we extend o u r e f f o r t s t o the l a r g e l y
unexplored areas, a s we g a t h e r a d d i t i o n a l information through d r i l l i n g i n d 1 areas,
and as we c o n t i n u a l l y improve t h e accuracy of our geophysical equipment it i s almost
i n e v i t a b l e t h a t we s h a l l d i s c o v e r a d d i t i o n d l l a r g e volumes of o i l . Furthermore,
-1
A ,
I

t h e r e i s e v e r y reason t o b e l i e v e t h a t w e shall be a b l e t o continue t h e l o n g evident I

trend of i n c r e a s i n g recovery of o i l i n place.


,1
There i s thus no convincing evidence t h a t a p h y s i c a l s c a r c i t y of resources w i l l
i n h i b i t petroleum production i n t h e foreseeable f u t u r e . O i l whose presence i s
. a l r e a d y known o r whose e x i s t e n c e may be l o g i c a l l y i n f e r r e d i s adequate f o r twenty
years of consumption. I n a d d i t i o n much more o i l , whose existence can o n l y be con-
jectured today, w i l l undoubtedly be found o r made a v a i l a b l e through improved
recovery. To the e x t e n t t h a t such o i l becomes a v a i l a b l e , t h e period when p h y s i c a l
s c a r c i t y w i l l begin t o i n h i b i t consumption w i l l be deferred i n t o t h e unascertainable
future .
The o i l shale d e p o s i t s i n t h e U. S. and t h e tar sands i n Canada provide f u r t h e r
assurance that resources w i l l n o t be a l i m i t i n g f a c t o r on petroleum u t i l i z a t i o n i n
t h e foreseeable f u t u r e . Not o n l y are t h e s e resources immense i n terms of o i l i n
place, b u t l a r g e volumes of o i l can probably be produced from them p r o f i t a b l y a t
p r i c e s which are n e a r l y competitive with crude o i l .

Resources outside t h e U. S. are even more p l e n t i f u l r e l a t i v e t o demand than i n


t h e U. S. Thus t h e r e i s l e s s l i k e l i h o o d of shortage abroad than i n t h e U. S.
Furthermore, t h e discussion of U. S. resource adequacy assumed continuation of
import r e g u l a t i o n s similar t o t h o s e i n e f f e c t today. If f o r some reason oil should
not be found i n a n t i c i p a t e d volumes i n t h i s nation, import c o n t r o l s could be relaxed.
T o t a l free world resources are undoubtedly q u i t e adequate t o meet a J l a n t i c i p a t e d
demands over t h e foreseeable f u t u r e .

Although resources i n t o t a l may not serve t o l i m i t u t i l i z a t i o n it i s possible


t h a t e x p l o i t a t i o n of i n c r e a s i n g l y i n f e r i o r resources i n c e r t a i n areas such as the
U. S. could l e a d t o rising c o s t s which would, i n turn, i n h i b i t demand i n those areas.

I n t h e U. S., for example, t h e r e h a s been a c l e a r l y d i s c e r n i b l e p a t t e r n of


d r i l l i n g t o g r e a t e r depth and moving toward less a c c e s s i b l e deposits--notably those
under t h e Gulf of Mexico and t h e West Coast offshore. Thus, it might be presumed
t h a t i n c r e a s i n g c o s t s of production m i g h t soon l e a d t o higher p r i c e s which would
be a l i m i t i n g f a c t o r on u t i l i z a t i o n even i f p h y s i c a l presence of resources were not
an a p p l i c a b l e c o n s t r a i n t .

Although the hypothesis of i n c r e a s i n g u n i t c o s t s r e s u l t i n g from d e p l e t i o n of


t h e more economical resources appears reasonable on t h e surface, a n important
recent study by Resources for t h e Future c a s t s s e r i o u s doubt on i t s v a l i d i t y ( 2 ) .
Improved technology i n e x p l o r a t i o n and production have, according t o t h i s study,
more than o f f s e t those f a c t o r s which otherwise would have l e d t o r i s i n g c o s t s .
There i s no evidence of a r e v e r s a l i n t h i s trend as of today and no l o g i c a l reason
t o p o s i t one i n t h e f o r e s e e a b l e f u t u r e . Accordingly, it appears l i k e l y from what
' we know today that petroleum p r i c e s w i l l not r i s e r e l a t i v e t o all o t h e r p r i c e s i n
t h e f o r e c a s t period. This conclusion i s reinforced by t h e f a c t t h a t shale o i l
would probably come i n t o production q u i t e r a p i d l y w e r e crude o i l p r i c e s t o rise
appreciably. Thus t h e magnitude of our crude o i l resource base combined with
p o t e n t i a l competition from s h a l e o i l and o t h e r f u e l s w i l l q u i t e probably serve t o
keep crude o i l p r i c e s from r i s i n g appreciably i n t h e U. S.

One p o t e n t i a l t h r e a t t o oil markets--and a f u r t h e r s a f e t y f a c t o r f o r hydro-


carbon consumers--is t h e production of l i q u i d f u e l s from coal. Research i s
..

229

c u r r e n t l y underway t o develop economical techniques f o r producing such f u e l s from


coal. To t h e e x t e n t t h a t t h i s research i s s u c c e s s f u l it w i l l , of course, reduce
t h e demand f o r crude o i l . There have been some i n t e r e s t i n g r e c e n t developments i n
c o a l l i q u e f a c t i o n but, nevertheless, a t p r e s e n t t h e r e i s no convincing evidence
t h a t c o a l w i l l d i s p l a c e any s i g n i f i c a n t volume of petroleum i n t h e l i q u i d f u e l s
' market. This view i s apparently f a i r l y widespread since very few companies believe
such research i s s u f f i c i e n t l y a t t r a c t i v e t o warrant the use of t h e i r own funds and
t h e bulk of t h e work being done i n t h i s area i s under Federal contract. Coal
l i q u e f a c t i o n i s a n i n t e r e s t i n g speculation but, given t h e information a v a i l a b l e
today, it does not appear t o pose a real t h r e a t t o o i l i n t h e foreseeable f u t u r e .
Furthermore, i f adequate s u p p l i e s of all f u e l s w i l l be forthcoming a t no s i g n i f i c a n t
change i n real p r i c e s over t h e f o r e s e e a b l e f u t u r e , then t h e r e i s l i t t l e , i f any,
economic j u s t i f i c a t i o n f o r federaJly sponsored research i n t h i s area.

CONCLUSIONS

The demand f o r petroleum products i n the U. S. w i l l probably grow a t a r a t e of


2 o r 3 p e r c e n t a year. Abroad, t h e annual growth rate w i l l be perhaps twice as
g r e a t as t h e rate i n the U. S. Resources w i l l not-be a l i m i t i n g f a c t o r e i t h e r i n
t h e U. S. o r t h e f r e e world and t h e r e should be no s i g n i f i c a n t s h i f t i n r e l a t i v e
f u e l prices i n the foreseeable future.

It is u n l i k e l y t h a t o i l demand w i l l be increased appreciably i n t h e U. S.


. through research i n u t i l i z a t i o n . Research on improved exploratory and productive
techniques w i l l probably have a g r e a t e r influence on domestic o i l demand than w i l l
research on o i l u t i l i z a t i o n . Research on new uses i s l i k e l y t o have a much
s t r o n g e r influence on f o r e i g n u t i l i z a t i o n , however, than i s t h e case w i t h i n the
U. S. The changes i n o i l u t i l i z a t i o n which appear most probable w i l l not a l t e r t h e
growth rate of o i l demand i n t h e U. S. so much as i t s composition.

F i n a l l y , some research i s being conducted today on t h e supposition that crude


o i l i s i n l i m i t e d supply and hence t h a t refined product p r i c e s are l i k e l y t o rise
i n t h e near f u t u r e r e l a t i v e t o p r i c e s of competing f u e l s . Those undertaking
research on these grounds a r e l i k e l y t o be disappointed j u s t a s t h e y have been i n
the p a s t . Such research may represent an i n t e r e s t i n g speculation, but t h e r e i s no
overwhelming n a t i o n a l urgency o r prof it incentive t o develop s u b s t i t u t e s f o r crude
o i l and i t s products.

i
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230

LI!l!Em CITED

Ann Arbor (Mich.) News, May 1920. Quoted by Kenneth K. Landes, " F a n t a s t i c
Coal and O i l Reserve Figures, 'I Paper presented t o Michigan Academy of
Science, Arts, and L e t t e r s , March 23, 1962. c

Barnett, Harold J. and Morse, Chandler, " S c a r c i t y and Growth," p. 192, The
Johns Hopkins Press, Baltimore, 1963.

Clark, James A., "The Chronological History of t h e Petroleum and Natural


Gas Industries," p . v., Clark Book Co., Houston, 1963.

Davis, Morgan J., "DOmestic Petroleum Exploration," Paper presented t o t h e


American Association of Petroleum Geologists, Dallas, March 17, 1959.

Day, David T., "Papers on t h e Conservation of Mineral Resources," pp. 46-7,


U.S.G.S. B u l l e t i n 394, Government P r i n t i n g Office, \.lashington, 1909.

Zapp, A. D., "Future Petroleum Producing Capacity of t h e United S t a t e s , "


p. II-23, Geological Survey B u l l e t i n ll42-H, Government P r i n t i n g Office, ' I
Washington, 1962.

_I