Not too long ago, all an oil producer had to do was punch a hole in the ground of an oil field, and the stuff squirted to the surface. It cost pennies to produce. Those days are long gone. The easy-to-find oil has long been found and produced. New oil produced now will cost around $80 to bring to market, and future oil will cost even more. Current prices are high because current costs are high.

All new oil that has been produced in the past few years and is likely to ever be produced requires expensive aerial surveys and exploratory wells to find, risky and complicated production wells and equipment to produce, and then more money to transport it to refine and market. The oil that is being found today to produce tomorrow is very expensive. If producing companies cannot expect at least $80 a barrel, they will not undertake most of the projects that are being done today.

As an example, Petrobras, the oil company of Brazil, announced a major discovery in November, 2007: the Tupi field. This field is located in the Santos Basin, a formation that is located some 300 kilometers (190 miles) off shore of Brazil. At that point, the water is 2,000 to 3,000 meters(1-2.5 miles) deep. But the oil is not right below the water. You have to set up a platform and start drilling. First there is a layer of rock about 2,000 meters thick. Then there is a layer of salt of about the same thickness. Then you finally reach the oil reservoir.

Maybe you think that producing oil in such conditions is routine, but it is not. In fact, no one has ever produced oil through such a thick layer of salt, and no one can be sure of exactly what is required to do so. Observers believe that Petrobras will probably be able to overcome the technical challenges, but it is far from a sure thing. The website "The Oil Drum" (http://www.theoildrum.com/node/3269) explained that at the pressure and heat that prevails at those depths, the salt is more like a liquid than a solid. Drilling through is like going through jelly. It is not what petroleum engineers are used to doing.

The discovery was announced in November of 2007. The first testing of production is hoped to take place in early 2009. Regular production may start as early as 2011, or it may not. If all goes well and the challenges are overcome it may be producing at its peak level of 400,000 barrels a day by 2015. At that point it will contribute about one half of one percent to world oil production!

According to an article on the website Seeking Alpha (http://seekingalpha.com/article/57162-petrobras-tup i-discovery-will-likely-be-profitable) the field will cost at least $50 billion to develop and could easily cost twice that amount.

This field is the largest found in seven years. New oil is being discovered all the time, but it comes in smaller and harder to find and produce pools.

Thirty years ago when the Arabs raised the price of crude artificially, the world market was soon hit with a gigantic wall of new supplies that forced the price of crude way down.

Now in the middle of 2008, world oil prices have been climbing steadily for four years, but so far we have seen no dramatic increases in supply, and none of the experts has been able to foresee any major new sources of supply.

In such a situation, companies with established production that was set up in earlier days of cheap and easy finds will reap windfall profits. But the old producing fields are in decline all over the world. Mexico, Norway and even Russia are producing less and less oil. Unless we are willing to pay the higher prices for new oil, we will soon run out of cheap older oil.

Learn more about this author, M Plaut.
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