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Page added on September 13, 2014
Exploding World, Cheap Oil
Geopolitical crises abound, but oil producers are still pumping — and pumping more than the world needs.
Here’s a bit of a puzzler. The world is in flames, with an Islamist terrorist group on the rampage across the Middle East, the White House weighing another fight in Iraq, Russia and Europe still trading sanctions and salvos, Yemen imploding, North Africa reeling from one mess to another, and, as if that weren’t enough, a deadly fever spreading exponentially in Africa. Yet oil prices keep falling and are now at their lowest levels in more than a year.
But the markets aren’t crazy: Simple supply and demand are at play. The world’s economy, especially in Asia, has hit a brick wall, which has dented the growth in demand for oil, pushing it down to levels last seen during the Great Recession.
On top of that, oil producers have kept pumping. The United States has added more than 3 million barrels daily in the last three years, and the annual jump in U.S. oil production just set a record. OPEC producers have been running full tilt, even Libya, which doesn’t even have a functioning government, and Saudi Arabia, which used to act as the voice of reason to keep oil markets more or less balanced. Only in August did the Saudis start to dial back oil production, only partially offsetting surprising supply increases elsewhere.
The result: a glut of oil that has driven down benchmark crude prices to levels last seen at the beginning of 2013. Brent crude in London traded at about $97 a barrel Thursday, Sept. 11, while West Texas Intermediate, traded in New York, threatened to dip into the high $80s per barrel.
“If ever there were a geopolitical world that should be driving oil prices higher, it would seem to be right now,” said Daniel Yergin, vice chairman of energy consultancy IHS and author of The Quest: Energy, Security, and the Remaking of the Modern World. “But what it tells you is how powerful the fundamentals of the market are, and right now the fundamentals are winning out.”
The big question is whether cheaper oil represents a short-term hiccup or a long-term, fundamental change, which could have big implications for petrostates in the Middle East, Africa, Latin America, and Europe, not to mention would-be petrostates such as Scotland and the Kurdish region of Iraq.
Rather than asking why oil prices are falling given all that’s wrong in the world, it might make more sense to ask whether all the world’s troubles are the only thing keeping crude prices from collapsing.
The global economy can’t seem to find the recipe for consistent growth: Japan’s horrific 7 percent contraction in second-quarter GDP may be extreme, but other Asian economies are also standing on the brakes. China’s year-on-year demand for oil (and other raw materials) is essentially flat, sending prices for oil, iron, and other basic commodities plunging. Europe is no help, even without worries of what the Russian bear will do next. Next to all of them, the U.S. economy (and its need for oil) looks almost robust. But even U.S. oil demand is at or below the average of the last five years — a dismal half-decade, for sure.
“It’s a demand-led slowdown, and the extra supply is just adding to the bearishness,” said Amrita Sen, oil analyst at Energy Aspects consultancy in London. “It’s very hard to see how we come out of this anytime soon.”
Citing the sluggish economy, OPEC dialed back its expectations of global oil demand for this year and next in its latest monthly report. So did the International Energy Agency in its monthly oil report. “The recent slowdown in demand growth is nothing short of remarkable,” the IEA said Thursday.
And the U.S. Energy Information Administration (EIA) on Tuesday tweaked its outlook for oil prices to reflect the new market dynamics. In the reference case, the EIA now expects prices to stay below $100 a barrel until early in the next decade. Even when prices rebound, the EIA slashed its estimate for how high crude will go — to just $141 a barrel by 2040, rather than the $165 predicted just last year. If global economic growth remains sluggish, the EIA sees oil prices stuck below $75 a barrel for decades to come.
Price fluctuation concerns everyone who pumps or burns oil, especially states — such as those in the Middle East, Russia, and parts of Latin America — relying on steadily rising oil prices to keep their economies afloat and their people pacified.
“If we are going to be in a weaker price environment, that certainly hits at the revenue assumptions on which a number of countries are running their economies and running their political systems,” Yergin said.
Iraq, which is 93 percent reliant on oil for the government’s income, needs crude at or above $106 a barrel to balance its budget; slipping prices already prompted a warning from the IMF this summer. Many other OPEC countries, from Iran to Nigeria, are in the same boat.
Russia needs to fetch $114 a barrel to stay in the black; what’s more, if Moscow wants to maintain oil output by tapping tough but promising reserves in places like the Arctic, it needs oil to be expensive. Even Canada needs high oil prices to make the economics of extracting crude from tar sands — a tricky business — to work.
Lower prices wouldn’t hurt just established producers. Kurdistan and Scotland, which are hoping to turn black gold into independence, stand to lose too. Baghdad isn’t sharing oil revenue with Iraqi Kurdistan anymore, making it dependent on turning its ample oil reserves into sales in order to make up the difference. Iraqi Kurdistan’s modest ambitions of selling 400,000 barrels a day are being sorely tested by a gun-shy market now. How it would sell even more to account for declining prices is unclear.
Meanwhile, Scotland’s dreams of independence from the United Kingdom will be determined by a referendum on Sept. 18. A Scottish state’s viability hinges almost entirely on the question of how much oil is left in the North Sea and how much it will fetch.
32 Comments on "Exploding World, Cheap Oil"
MSN fanboy on Sat, 13th Sep 2014 6:21 am
“A Scottish state’s viability hinges almost entirely on the question of how much oil is left in the North Sea and how much it will fetch”
As it has already peaked with a steep decline, i would wager plenty is left…
How much is economical though…
And if so, to attract the investment to produce more oil from such a mature field they would better remain part of the U.K.
Aside from this, what else does scotland contribute to the world, aside golf?
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As scotlands fish stocks are already in decline and their oil is too.
They dont have any other exports lol that could create the balance of payments.
I reckon the SNP wish to turn scotland into a tax haven, with a bit of a tourist economy. Thats the only way they would survive fiscally.
rockman on Sat, 13th Sep 2014 8:06 am
“The big question is whether cheaper oil represents a short-term hiccup or a long-term”. “Cheaper oil”… and folks wonder why the oil patch sits back and laughs at the absurd spin some folks spew out like puke from a drunk. LOLLLLL.
Wow…$90/bbl oil is so much cheaper then it was last year. Well, gotta run now and deposit my latest bonus check in the bank. Very disappointing: it would have been bigger were oil selling for 320% more then it was not too long ago instead of that measly 300%.
I don’t mean to rub it in, lads. It is what it is and I didn’t cause it. We’ve only responded to the circumstances consumers have created.
ghung on Sat, 13th Sep 2014 8:50 am
“The recent slowdown in demand growth is nothing short of remarkable,” the IEA said Thursday…..
…. except that it was nothing short of predictable, and predicted by some. Economic Undertow’s ‘Triangle of Doom’ (HT to Steve) is playing out, and the need for producers to get higher prices runs smack into economies’ ability to pay those prices. We can’t afford the new ‘energy revolution’, not for long, not without piling on more massive debt; the slow but relentless death spiral of the industrial age.
Brent Georgeson on Sat, 13th Sep 2014 9:01 am
It will be interesting to see how long the shale producers can hold on under these prices.
shortonoil on Sat, 13th Sep 2014 10:18 am
re-post from below:
Petroleum has an intrinsic value that is dependent on its physical properties. Those properties are reliant on its molecular structure, and they determine its value. Petroleum is not some magical potion that powers the world. It is finite, and so is its value. The price of oil hit about $100/barrel, and stayed there for over three years. It is now declining. Long term it will continue to decline. Oil is now not worth more than about $100/b to the end consumer, and that value is going down as the energy it can deliver falls.
What we are witnessing is the beginning of the end of the oil age . We will first see the end of high production cost petroleum. Ultra deep, arctic, bitumen, and shale will soon, and already are in many cases, not be worth the cost of extracting, and processing them. The cancellation of these projects, and shut-in of fields will become a commonplace event. Over the next few years these highly cherished terms will become anachronisms in the lexicon of oil.
By 2020 it will become apparent to the most uniformed, brain dead of observers that the age of oil is ending. The cheerleaders of technology will be silenced as one after another of the world’s economies collapse. The chaos, and transition that will occur during the following decade will mark one of the important eras in the history of civilization. The ongoing depletion of petroleum is rapidly bringing us to that point.
http://www.thehillsgroup.org/
Davy on Sat, 13th Sep 2014 10:25 am
G, please tell that to the likes of Noo and Planter who represent on our forum our techno cornucopian exceptionalist economic and political global leadership. In any case for the last remaining bastion of optimism for these folks, the “pig with tits” capital and financial markets, bad news is good news. Any news is spin fodder for these folks to perpetuate the smoke and mirrors of corruption, manipulation, and parasitic wealth transfer which in any other recent historic time would be a breach of the rule of law. These folks would be exposed and ruined but today they are promoted and realize great wealth. We are now in an insane asylum of psychopathic greed, corruption, and in the codependence of graft. This will end painful and ugly for the poor bastards struggling to survive in this unholy hyper complex society that has taken all our personal lives and delocalized locals we live in to the brink of disaster. This is truly a predicament and global danger to a global population 50% in overshoot to carrying capacity
Davy on Sat, 13th Sep 2014 10:27 am
Shot said – It is now declining. Long term it will continue to decline. Oil is now not worth more than about $100/b to the end consumer, and that value is going down as the energy it can deliver falls.
Yeap, short but it will be anything but a smooth drop.
JuanP on Sat, 13th Sep 2014 10:48 am
It could be the triangle, http://www.economic-undertow.com/2013/08/11/triangle-of-mood/ playing out as Ghung pointed out above. If this is so then the system should crash in less than two years. I hope not.
At this point it is hard to tell, we will only be certain after the fact.
Northwest Resident on Sat, 13th Sep 2014 10:53 am
The big question that is always on my mind is whether we as the human race will be allowed to continue on this path we’ve been on, foolishly and insanely WASTING vast amounts daily of the one and only thing that enables us to live with the benefits of technology — oil. Will the human race burn every last available drop in a desperate bid to cling to BAU as long as possible? Or will some wiser human force prevail which STOPS the excessive waste now or near term, preserving what little is left of this God-given finite and precious resource for a future where many fewer humans populate planet earth but where they use oil sparingly and with great reluctance and only for specific essential purposes? The jury is still out, the clock is ticking, millions of barrels of oil are still being utterly and uselessly burned and wasted every day, and the dark likelihood of a human future without oil grows increasingly close. Whichever path humanity takes — burn it all now or preserve for the future — there will be epic death, disruption, chaos and grueling pain. But one path leaves humanity with the chance to maintain and grow our technological capabilities, with an environment that is not nearly as ruined as the other path leaves us with, with an ability to support higher learning and science and advanced medicine and with some semblance of comfort in a modern technological world. I hope someone or some group of someones somewhere makes the right decision, and soon.
Davy on Sat, 13th Sep 2014 11:01 am
NR, have you ever jumped off bridges? When I was in High school we had a club of guys that would drink then test our fearlessness. We would go to the highest of bridges and jump off. Some would do back flips and other fancy stuff. We would even jump at night occasionally. I remember the feeling of debating the jump just before the jump. I feel many of the TPTB are feeling that hesitation. I think they know how unstable the world is under the surface. They are just a little fearful of letting the dogs loose and what may shake out. We are talking a very ugly cascading situation potentially. It will be ugly and nasty anyway but if it is handled wrong man it will be the worst of the bible.
ghung on Sat, 13th Sep 2014 11:33 am
Gosh, Davy, I’m giving up trying to break the spell of “our techno cornucopian exceptionalist economic and political global leadership”, and their minions who choose to remain clueless. They conveniently ignore the tight link between economic growth and growth in energy consumption, and the debt that can only be serviced via levels of growth much higher than we’re seeing now. Indeed, whatever supposed growth we’ve seen in recent years is faux growth created by massive injections of faux capital, essentially digging the hole deeper. Credit as an analog for true economic growth can only extend the pretence for a while.
If others either can’t, or choose to not see the problem with this paradigm, woe be unto me for trying to slap some reality sense into the deluded. Indeed, waking them from their dream-state is probably not a good idea, at least not yet. I’m hoping for a few more years before the music really stops; the point when prepping flips over to survival mode. Knowledgeable leadership understands this (at least some do) but are in the awkward positions of making things worse, either way, and rendering whatever powers they currently enjoy even more impotent. No point in turning the heat up on the frogs too fast.
It doesn’t generally occur to the realists out here that the cornucopians are doing us a favor. Party on dudes!
Davy on Sat, 13th Sep 2014 11:51 am
Well said G!
Davy on Sat, 13th Sep 2014 11:53 am
Awesome read Juan!
J.R. on Sat, 13th Sep 2014 12:22 pm
Fuck “growth”. The growth paradigm is FALSE and always has been. Only those bastards that rely on greed think growth is good – which is 100% of the business world and industry – but it is NOT all of the people who are trying to live on this planet.
Contraction is GOOD. Decline is GOOD. Expansion and growth is NOT GOOD.
Norm on Sat, 13th Sep 2014 12:25 pm
Economy and oil price hits a ceiling. At about 120 a barrel, economy slows and people lose jobs. Those are new additions to Hooverville and they don’t use fuel. So the price retreats to below 100, until the next cycle. Logically it makes sense. Price can’t go up forever because then we would drill for oil on the moon. What’s really happening makes sense. The oscillation keeps repeating until all people are living under a bridge and oil production is very low.
J.R. on Sat, 13th Sep 2014 12:27 pm
Northwest – the jury is not out. The verdict (evidence) is in. We will burn every last drop. There is absolutely no question about this. Humans are a stupid, arrogant species.
The same selfish mentality that produced nuclear power and nuclear waste, an impossible “byproduct” that contaminates and destroys for THOUSANDS of generations to come to benefit but a single generation, still prevails.
Any examination of the oil industry (or any industry) reveals the wholesale willingness to rape, plunder and profit for the “now” by already obscenely rich companies.
There is no thought for the future. There is no compassion for humanity (present or future). The whole of civilization is operating on the greed paradigm. There is no hope whatsoever that common sense and wisdom will prevail – has it ever?
J-Gav on Sat, 13th Sep 2014 12:57 pm
Ghung – Pretty much in agreement with what you say. But the “favor,” i.e. benefits derived from a little more adaption time before TSHTF will accrue to a very small proportion of the general population. And those not benefiting might take a dim view of others who were more insightful and lucid (jealousy or just plain hunger). Might even go after them. All of which is simply to say that various levels of ‘discomfort’ and tension are unlikely to spare anybody.
Northwest Resident on Sat, 13th Sep 2014 1:33 pm
Davy — Yes, I used to jump off of a couple of bridges, and I know what you mean. The fear and tension just before the leap — the adrenaline thrill. The difference being of course that logically I knew that when I jumped off that bridge and thirty or forty feet down into the river below, everything would be just fine. The bridge that we and our elites are standing on as we contemplate the jump presents a much different scenario — there is no way to know if any one of us will end up surviving that jump or not. Still, great analogy. We are on that bridge, or precipice, staring down into the dark murky waters far below. But hey, whether we jump of free will or we wait for the bridge to crumble until it no longer supports us, we’re going to end up in the same place. So let’s just jump and take the risk and the pain up front, on our own terms. I’m sure plenty of elites are thinking along those same lines. One thing we do know for sure and that is BAU is on life support — killing BAU would be simple — just unplug the life support and it will die quickly.
nemteck on Sat, 13th Sep 2014 1:33 pm
shortonoil wrote:” Long term it [the crude oil] WILL continue to decline.”. Why is the statement so affirmative as if the future lays bare to him?
From the above:”Iraq … needs crude at or above $106 a barrel to balance its budget. Many other OPEC countries, from Iran to Nigeria, are in the same boat.
Russia needs to fetch $114 a barrel to stay in the black.
Do these countries go under or do the oil producers become non-profit companies just to serve the energy hungry public?. Isn’t it that if less and less crude is found and expensive to produce, and while production is declining, oil will become expensive?
Oil cannot be produced below cost for a long time before producers go broke and leave the oil patch. Hence, long-term oil should not decline below a minimum, perhaps $90-$110.
Perk Earl on Sat, 13th Sep 2014 2:14 pm
“If this is so then the system should crash in less than two years.”
Why do you choose 2 years, Juan? I mean, even once the price drops so low all non-conventional folds, there is still lots of conventional that will flow at even lower prices. I guess what I am thinking is we will go into a deep recession but actual collapse might be more like 4-5 years out as thing devolve to greater degrees of chaos.
But of course many factors are involved and it is difficult to know when exactly the cliff comes into focus, but to see clearly it will end, sure does fly in the face of BAU today in which most people are still acting like things will keep going ad infinitum. What a wake up call that will be.
JuanP on Sat, 13th Sep 2014 2:47 pm
Perk, Two years is what the triangle graph appears to indicate, it is not my personal conclusion. I think the theory behind the graph is interesting. The basic idea is something like this: the cost to produce oil increases at the same time that the value to society of a barrel of oil decreases because of reduced EROEI and diminishing returns.
ghung on Sat, 13th Sep 2014 2:50 pm
J-Gav, I’m not under any delusions that any of us are immune to what’s coming, be it collapse or decline. Making one less susceptible to the effects is a different matter. It’s more like the idea that you don’t have to be faster than the bear, just faster than the other folks running from the bear, and maybe fast enough to help some others get out of the bears way.
It’s mainly about lifestyle and appearances. There are plenty of folks around that have spring-fed water systems like ours, who heat with wood and have gardens, etc. Then again, there are plenty of well-off transplants nearby in their 6000+ square foot McMansions. This is Appalachia, and folks have a long history of working together. Those who brought their upscale city lifestyles here, like in the gated golf community down the road, will be the likely targets initially.
The haves will become the have-nots, and those who have less will continue to have less as they always have, continue to go to church together, continue to help each other out. The biggest hurdle is mental/emotional preparedness; to not be blindsided by what may come. In short, expectations.
Best hopes for watching things play out from the cheap seats. Lifeboats aren’t always a sure bet, but it beats the crap out of not even thinking you’re going to need one. Beside, there’s not much I’d rather be doing. Call it a retirement plan without the retirement.
Davy on Sat, 13th Sep 2014 3:03 pm
G, shut up, your making me blush. As usual you are talking like a doomer politician I would vote for. G, ever thought about running on the doom and gloom platform. I will be a campaign supporter.
shortonoil on Sat, 13th Sep 2014 3:19 pm
“shortonoil wrote:” Long term it [the crude oil] WILL continue to decline.”. Why is the statement so affirmative as if the future lays bare to him?”
Affirmative, no; very high level of probability, yes. After you have looked at a set of equations, dozens, hundreds, thousands of times, and find no error in them, you begin to believe them. After you have tested them against every metric you can find, devise, or conjure up, and still find no error, you begin to believe them. Only a fool would do otherwise.
The cost of production is increasing, the Second Law says that it has to be so, and the history of oil prices confirms it. The price the end consumer can pay is not infinite. The Second Law says so, and the history of oil production, and the economy is confirming it. There has to be a point where the two meet; mathematics confirms it, and common sense tells us no other outcome is possible. It is not a question of IF, but merely WHEN.
Those equations are telling us that point can not be very far away, and what we are witnessing today confirms it.
“The bridge that we and our elites are standing on as we contemplate the jump presents a much different scenario — there is no way to know if any one of us will end up surviving that jump or not.”
There are solutions to the present scenario, but what will give mankind a shot at the future will guarantee the demise of the elites. Most everything that has put them in their preferred positions will have to be abandoned. Mankind may or, may not perish, but they would be assured of their own destruction. It is doubtful that they will be willing to jump until the bridge is crumpling beneath them. After that, there won’t be much time before we hit the water, and rocks below.
http://www.thehillsgroup.org/
ghung on Sat, 13th Sep 2014 3:20 pm
nemteck – I suggest you study the energy/credit nexus and feedback loops. Energy/credit/debt are intimately linked and an integral part of the global economy. The oil patch doesn’t operate in its own little world, and economies/tax bases/jobs/production of other necessary commodities are all inextricably linked. Will prices rise again? Most assuredly. Will rising energy costs take another big chunk out of economies? Yes. Will this cause another bout of demand destruction? Absolutely. Will some people lose jobs or see declining incomes as they adapt either to higher prices or inhibited availability of necessary commodities? Yes.
Industrial economies have a minimum operating level to remain viable and they don’t just run on energy; they run on cheap energy. That’s why we’ve seen years of ZIRP/NIRP. Energy shocks=> employment shocks=> credit/debt shocks=>energy shocks….. rinse and repeat. Is it a linear system? Of course not, it’s a highly complex, interconnected concoction of systems.
GregT on Sat, 13th Sep 2014 3:32 pm
Excellent post ghung!
Nony on Sat, 13th Sep 2014 3:50 pm
Bakken hit a new record. 🙂
GregT on Sat, 13th Sep 2014 4:11 pm
Bakken hit a new record.
You SOUND like a broken record. No point in elaborating further…………..
J-Gav on Sat, 13th Sep 2014 6:14 pm
Ghung – That’s a way of putting it which (as I suppose you surmise) is pretty close to my own. Cheap seats and retirement without retirement – I’m there already. Where it goes from here though, I really can’t say (for me or anybody else), even if it should be clear by now to those who read my posts that I’m hardly a raving techno-optimist and that (further) financial disruptions will signal the end of an era which has lasted too long.
But I seem to remember that at one point you mentioned that you were … ehem … armed and ready. That’s probably a good way to be but I ain’t there yet. And even many of the millions who are armed are not ready for what’s coming up if you see what I mean …
MSN fanboy on Sat, 13th Sep 2014 8:41 pm
Why dont you guys just eat people in the collapse?
You can’t deny, it is logical.
Tastes just like chicken
GregT on Sat, 13th Sep 2014 10:00 pm
MSN fan,
You’re welcome to eat other people if or when a collapse occurs. Many of us here are learning how to grow our own food so we don’t have to. To each their own I guess. Personally, I plan on eating chicken, instead of other things that may, or may not, taste like chicken.
bobinget on Sun, 14th Sep 2014 12:56 pm
WASHINGTON — Secretary of State John Kerry said Sunday that the United States is “at war” with Islamic State militants, marking a shift from his insistence last week that America is not at war but engaged in a “very significant counterterrorism” operation.
Not that he thinks the wording matters much anyway.
“In terms of al Qaeda, which we have used the word ‘war’ with, yeah … We are at war with al Qaeda and its affiliates,” Kerry said in a “Face the Nation” interview. “In the same context, if you want to use it, yes, we are at war with ISIL in that sense. But I think it’s a waste of time to focus on that. Frankly, let’s consider what we have to do to degrade and defeat ISIL … That’s what I’m frankly much more focused on.”
http://www.huffingtonpost.com/2014/09/14/john-kerry-war-isil_n_5818554.html