Does abundance create a mirage of cheap, stable energy supplies?

With oil sands, shale, the Arctic, and deepwater oil, the energy industry may tout fossil fuels as far as the eye can see.

But that doesn't mean the supplies will be cheap or even stable in price, according to new research from the McKinsey Global Institute.

McKinsey's big-picture report ponders how humanity will get the energy, metals and food for growing economies and populations -- and at what cost.

"While the world does not face any near-term absolute shortages of natural resources, increases in the marginal costs of supply appear to be pervasive and put a floor under the prices of many commodities," the report said.

Sober as the question is, it's a striking departure from the previous fossil-fuel debate: When will we run out? Advances in technology have unexpectedly opened new frontiers in fossil fuels.


The new questions that are being asked: How much can we get? At what cost? And with what consequences for the environment?

On the first question, some might argue that as long as energy prices are high, they'll drive technological innovation and new fossil finds, gradually bringing prices down.

But "resource price volatility is also at an all-time high," said Fraser Thompson, a senior fellow with the McKinsey Global Institute. "And this is to some degree muffling the high price signals."

For one, the volatility spooks investors, who won't pour money into energy if they think prices will fall to an undesirable level.

But there's another factor that makes today's new fossil fuel discoveries different from yesterday's, Thompson said. With much of the low-hanging fruit picked in oil and gas, companies find themselves facing tougher rocks and locations than ever before.

"It's much more difficult now for supply to readily adapt to shifts in demand," he said. Companies have sufficient technology, "but it's still not overcoming the fact that these new sources of supply are much more complex from the geological standpoint, and hence bringing them online is a lot more challenging."

Today's projects also have higher costs for labor, materials, energy and oil field services than in the past, McKinsey said. The firm cited a figure from Bernstein Research: Over the past decade, the marginal cost of producing a barrel of oil has risen 250 percent.

"This has helped to put a floor under energy prices," the report said.

One question, of course, is whether new technologies will emerge to shatter today's model yet again. McKinsey's report said shale gas' emergence is one example of what technology shifts can do.

Still, the report said, it's questionable whether technology can win the battle against geology indefinitely.

Thompson said the oil and gas industry is better positioned than the agriculture and metals sectors, which spend less on research and development.

And in the global context, shale gas has represented a victory, McKinsey said: Although it's a new source, it has made natural gas very cheap in the United States. The technology is advancing rapidly, potentially lowering costs even as productivity doubles.

Globally, natural gas hasn't been so fortunate -- other countries have been producing on the pricier end, Thompson said.

Until Europe and China beat their problems of geology and water supply, McKinsey said, they'll remain tied to the new world of high-priced energy.

"The experience in the United States, which took 35 years to move from discovery to production, suggests that the development of shale gas is subject to a lengthy learning curve," the report said.

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