Oil Shale Continued

As indicated in an earlier post, I've been doing quite a bit of research on oil shale of late—technology research and market research. It's turning into quite a project.

As I mentioned in the earlier article, oil shale has been subject to numerous false starts going back to the teens and twenties of the last century when an oil shale bubble took shape and fairly promptly burst. This first bubble was occasioned by the publication of a U.S. Geological Survey study of oil shale resources in 1915 which sparked a classic mineral rush with prospectors flooding into upper Rockies and filing mining claims on Federal land with the aid of maps from the study. But since no one knew how to produce refined products economically from the rock, the rush soon abated.

An oil shale of revival of sorts occurred in the period after World War II, but, unlike the first, was not characterized by a lot of independent prospectors filing mineral claims. Rather it was driven largely by the U.S. Navy, which, under legislation passed during the Taft era, was authorized to tap into vast federal reserves located within the immense Green River Formation, the largest single concentration of hydrocarbons in the entire planet.

A third oil shale bubble occurred in the seventies and early eighties before completely deflating in the mid eighties. Now it appears that a new one is at hand only it mightn't be a bubble this time.

But before we examine the present, let's first look at the second and third bubbles, for their turbulent aftermaths continue to shape the industry today.

The U.S. Navy and Oil Shale

Although the U.S. Navy had no difficulty in securing fuel supplies in the early post War period, the notion of a huge private supply held forever in reserve for the Navy's exclusive use remained alluring to that body. Through the nineteen fifties the Navy continued to press for studies on the feasibility of developing the oil shale resource, and the Eisenhower Administration funded ongoing research, most of performed by the major oil companies.

According to Chris Welles, the historian of oil shale mentioned in the first article, the oil companies themselves were at best ambivalent about oil shale development, as indeed they had been during the first upsurge of interest back in the twenties. During the fifties the economics of oil shale production were uncertain—indeed they still are today—but that was not what deterred the oil companies from lobbying the Federal Government to open its oil shale lands to development. Quite the contrary, the petroleum industry feared that the economics of extraction and refining would rapidly improve to the point where oil shale was competitive with oil from the Middle East if not from west Texas. They also feared the possibility that the leases could fall into the hands of the coal companies rather than themselves if the Federal Government proceeded with developing the resource, and that such an eventuality would result in fierce and possibly ruinous competition in the liquid fuel arena with dirty old coal doing dirty deeds to the upstart oil industry.

The fears of the oil guys turned out to be groundless. Nineteen fifties technology for oil shale recovery and processing wasn't remotely cost competitive with conventional oil from here or from abroad. But such was the climate of thought in this period that such fears weren't easily dismissed. The fifties and early sixties was the ultimate know-how-can-do era of American technological hubris. We could put a man on the moon, we could harvest atomic energy for peaceful uses and electricity would be too cheap to meter, we could cure cancer—nothing was beyond the capabilities of mega-corporations like IBM, the Bell Telephone organization, General Electric, and other Fortune 500 manufacturers, all of whom employed armies of scientists and engineers pursuing regimented research inspired by similar efforts during World War II.

The underlying notions behind such work seem fairly laughable today. The post War corporate labs largely depreciated individual talent and creativity and generally offered little in the way of rewards to those tasked with achieving technological breakthroughs, putting organization men and scientific bureaucrats in charge of disruption, as it were. But, at the same time, the major corporate research organizations like Sarnoff Las and Bell Labs were undeniably formidable, and much fundamentally new technology was productized during this period. Cheap synthetic petroleum from black rocks in America's back yard? Piece of cake.

So what was the upshot of this revival of interest?

What actually happened during the second oil shale boom or boomlet was that a lot of speculation took place as sharpies bought up the old mining claims from the nineteen twenties and then sold equity in their investment pools. But nothing more than pilot projects was actually undertaken.

Oil Shale in an Energy Insecure World

In 1973 Israel and Egypt went to war with one another, and the Arab leaders of OPEC decided to cut production to pressure the U.S. to withdraw its support for Israel. An immediate worldwide oil shock ensued with American gasoline prices rising steeply and panic buying occurring which in fact greatly exacerbated the actually rather modest reduction in supply. I remember that time vividly, and I particularly remember the rage expressed by ordinary citizens. "The fucking Arabs are taking our oil!" was a phrase heard with much frequency.

(The fucking Arabs were indeed practicing economic warfare, but it is rather hard to justify the notion that the U.S. had inherent ownership of the oil in the Arabian Peninsula. That would be rather like Europe claiming U.S. oil back when we rather than the Saudis were the dominant producers.)

Fortunately, the Yom Kippur War was of brief duration, and in the end Israel and Egypt cemented a lasting peace, one of the few happy outcomes in the Middle East over the course of the last half century. Then, only six years later, the second oil shock occurred as the second and third largest oil producers, Iraq and Iran, waged war and attacked one another's oil facilities.

This time the dip in production was not brief, and its effects were amplified by uncertainty. How long would the terrible war go on? Would a protracted loss of production follow? Would the whole region explode?

These were questions without immediate answers, and, while they remained unanswered, oil prices remained higher in constant dollars than they ever have been before or since. That's why ordinary automobiles routinely get 25 miles to the gallon today when they used to get 10 to 15 back in the sixties. America tightened its belt. It had to.

America also began for the first time to cast about seriously for alternative forms of energy. Two of those, natural gas and nuclear energy, made enormous strides during the decade of the seventies. Another, utility wind power, was launched and became a real industry. Jimmy Carter, a nuclear engineer by training, was President during this troubled era, and Carter was both knowledgeable and passionate about achieving energy security through a diversified energy portfolio. He encouraged oil shale development, though it would have occurred in any event.

So what actually took place during this third shale oil boom? Read our next installment in a couple of days.