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In the long run, selling prices will equate with replacement costs if companies are to remain in business. Thus, the study of replacement costs provides a powerful analytic tool for further understanding of the uncertainties in future oil prices and domestic crude oil productive capability.
The analysis provides insights about the time at which supplemental sources of fuel from synthetic or alternative sources may become economic, and provides one means for quantifying the costs and benefits of these alternative decisions.
Most important, the engineering and geologic methodology used in the replacement cost analysis provides the essential and long sought-for "bridge" between the domestic resource base and economically producible supplies.
Much of the uncertainty in future prices and productive capacity for conventional oil stems from international decisions. Use of the replacement cost methodology will help to more clearly understand the effect of other uncertainties, such as: (1) the size of the conventional oil resource base; (2) the level of domestic oil production capacity the industry and nation may wish to maintain; (3) the timing and technical success in enhanced oil recovery; and (4) the constraints that may impede the development of energy in frontier areas.
This analysis discusses these uncertainties and quantifies their impact on domestic energy replacement costs and sustainable levels of oil supply. The major findings of the analysis are:
A. The source of future domestic crude oil supplies will increasingly shift toward frontier, hostile geographic areas and toward enhanced oil recovery.
B. If crude oil exploration and development remain orderly and relatively free of constraints, considerable quantities of lower cost crude oil will be available for the remainder of this decade. However, as these supplies are consumed, the replacement costs will begin to rise rapidly.
C. Many events could dramatically accelerate the time when domestic replacement costs begin their steep climb. Three such occurrences are: (1) a low crude-oil resource base (U.S. Geological Survey, 95%) case; (2) low success with, or constraints on, enhanced oil recovery technology; and (3) lack of access to Arctic or deep-water resources.
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