What will happen to the oil price? Look to the PC for clues

Fracking analagous to move from mainframe to PC

How is oil extraction like mainframe computing?

Before the PC came along, those engaged in research or communication were tied to large institutions. Heavy computing was done at central locations. Information was transmitted by mail (again through large institutions) or by landline phone. Firms built large centers, some proprietary and some open to the public. The costs of these facilities rose steadily, at times exponentially, as larger and larger machines were acquired, even though the cost per calculation kept declining.

Then along came the PC and computing became something that didn't need vast capital expenditures. Nor was it something that was “chunky” (or to be more jargon specific, it became more granular) in that if you want more computing power you just, these days, buy another consumer box. Yes, of course, this isn't entirely and wholly accurate, but it's a model, right?

Of course that change has altered our world in ways that we've not really absorbed. The smartphone is just the next leap along the curve from the PC and that's definitely changing how we live our lives. And the underlying economic point the report wants us to grasp is that the move from mainframe to PC was a move of computing from that resource extraction model to a manufacturing one. And there's one thing we really do know about manufacturing. It's that over time it makes things so extraordinarily damn cheap. That phone we all check Twatter and Facebitch on might cost $200 but it's more powerful than a desktop costing 10 times that a decade and more ago – and $25-$99 looks like a reasonable short term target for Landfill Android ones.

Computing really changed the world when it moved from that resource-extraction-capital-heavy economic model over to one of simply being yet another manufactured product. And the claim is that fracking has brought oil (and natural gas) closer towards making the same shift:

Recent experience with development in new oil and gas frontiers such as the Tengiz field in Kazakhstan or the Sakhalin field in Siberia precisely follow the trend in computing. These fields are like mainframes. They will produce great volumes at decreasing per-unit costs when and if they come on stream. The expense and time to complete such projects, though, seems to rise at an exponential rate.

That's the old model.

Meantime, fracking, a disruptive technology, makes low-cost manufacturing of oil and gas possible. The process began on a small scale. Over time, the technology’s application evolved in the same way as PC use. Productivity has increased sharply as per-unit output costs declined, which is what happens in all manufacturing process. The relatively modest investment required to build a crude oil manufacturing plant (otherwise known as a fracking rig) guarantees that fracking will be a permanent and ubiquitous feature of the oil and gas business just as the PC is in the computing world.

That's the new one.

There's simply no shortage at all of shales to exploit around the world. And we might also note that if we really have moved from that one to t'other model, then that's pretty much the end of Peak Oil as a viable hypothesis.

No, I don't insist that this model is true and valid in and of itself, nor that it's a detailed picture of the real world. However, I do think that it's an interesting structure within which to think about things. There's parts of the Bakken where shale costs are down under $30 a barrel already and they're still only getting five to 10 per cent of the resource out as usable material, as opposed to the 40 to 50 per cent they get out of conventional fields. That is, fracking recoveries are about where conventional ones were in the 1940s.

Interesting to think of a world in which fracking does to oil what the PC did to computing cycles really. Who in 1980 would have predicted our world of 35 years later? And what will 2050 be like if oil is, as a manufactured good, subject to the same price deflation in the future?

One obvious answer is that the limitation is the ability of the atmosphere to absorb the CO2 emissions but that's a different question. The interesting thing about this model is, well, if it's true that fracking is really like manufacturing oil, rather than resource extraction, it could possibly change the world as much as computing's move from a resource extraction structure to a manufacturing one did. ®

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