Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on January 13, 2015
What Is Behind the Drop? Simple Economics
The oil industry, with its history of booms and busts, appears to be in the early stages of its latest downturn.
The price of oil has plunged more than 55 percent to under $50 a barrel since June. That is the lowest price since the depths of the 2009 recession.
Oil analysts predict that the price could fall below $40 before beginning to rebound. But even optimists say $70 a barrel by the end of the year is highly doubtful.
Why is the price of oil dropping so fast? Why now?
This a complicated question, but it boils down to the simple economics of supply and demand.
United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once found a home in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices.
On the demand side, the economies of Europe and developing countries are weakening and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.
Who benefits from the price drop?
Any motorist can tell you gasoline prices have dropped more than a dollar a gallon in recent months. Diesel, heating oil and natural gas prices have also fallen sharply. All together, they represent the equivalent of a sizable tax cut — putting $1,000 or more in the pockets of the average family over the next year. Europeans and consumers around the world will enjoy similar benefits.
Who loses?
For starters, oil-producing countries and states. Venezuela, Iran, Nigeria, Ecuador, Brazil and Russia are just a few petrostates that will suffer economic and perhaps even political turbulence. Persian Gulf states are likely to invest less money around the world, and may cut aid to countries like Egypt.
In the United States, Alaska, North Dakota, Texas, Oklahoma and Louisiana will face economic challenges. Some smaller oil companies that are heavily in debt may go out of business, pressuring some banks that lend to them.
What happened to OPEC?
The price of oil, as with other commodities, goes up and down. And in the past the Organization of the Petroleum Exporting Countries, known as OPEC, has frequently cut production to firm up prices. Iran, Venezuela and Algeria are pressing the cartel to do so again, but Saudi Arabia, the United Arab Emirates and other gulf allies are refusing to cut. At the same time, Iraq is actually pumping more.
Saudi officials have said that if they cut production and prices go up, they will lose market share and merely benefit their competitors.
They say they are willing to see oil prices go much lower, but some oil analysts think they are merely bluffing.
Is there a conspiracy to bring the price of oil down?
There are a number of conspiracy theories floating around. Even some oil executives are quietly noting that the Saudis want to hurt Russia and Iran, and so does the United States — motivation enough for the two oil-producing nations to force down prices. Dropping oil prices in the 1980s did help bring down the Soviet Union, after all.
But there is no evidence to support the conspiracy theories, and Saudi Arabia and the United States rarely coordinate smoothly.
And the Obama administration is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.
When are oil prices likely to recover?
Not anytime soon. Oil production is still increasing in the United States and some other countries. Many Wall Street banks are predicting that the oil price could fall as low as $40 a barrel in the coming months.
But production is likely to begin declining in the second half of the year, and then crude prices will also begin to recover. The history of oil is a history of booms and busts followed by more of the same.
10 Comments on "What Is Behind the Drop? Simple Economics"
bobinget on Tue, 13th Jan 2015 6:47 am
All I ask, look past “simple” economics.
1) What repercussions result from trade realignments? New alliances, trading partners.
2) Can Arab/Persians ever reconcile differences brewing since the fall of Ottoman Empire?
(Turkey, once a model Muslim nation, once again
falls victim to right wing militarism)
3) Can Christians/Jews/Muslims once again live together in harmony post Afghanistan, Iraqi, Syrian
‘civil’ wars? . Whats to be done with SIX million
Syrian displaced persons?
4) Can violence, military intervention, solve the planet’s overarching problems of Climate Change?
In fewer then two generations billions will be on the
move as result of rising sea levels, water, food shortages.
The very idea we should at the stage be worried
over the fiction of ‘an oil glut’ is ludicrous.. to the max.
If we were in yet another Capital hick-up as in 2008,
no one would question a dramatic 55% drop in oil
prices. Consumption, however has not fallen into a deep hole. The world’s military have taken up the madness (and oil massive oil consumption) exactly where it left off early in 2014.
How the US will cope without six million barrels of imported oil in coming years will challenge everyone to new heights of conservation and adaptability. The good news? There will be no more
articles with simple answers like the one above.
Shame NYT
Amvet on Tue, 13th Jan 2015 8:01 am
Supply and demand pushed the price down?
Nonsense. The majority of global oil consumption is by the developing countries and their demand is increasing. EIA data shows a reasonable global balance in supply and demand. Massive futurees trading plus a propaganda campaign pushed the oil price down as part of the US economic war on Russia, Iran, and Venezuela. The Saudi targets are Russia and Iran. Among the collaterial damage are Canada, Mexico, Norway, our shale oil industry, Nigeria, and so on.
Spec9 on Tue, 13th Jan 2015 11:38 am
Great rational summary of the situation. It is sad that this obvious information is needed.
bobinget on Tue, 13th Jan 2015 2:49 pm
Lets examine the definition of a political movement
that easily describes our great Allie, Saudi Arabia;
Fascism
Noun
1.
(sometimes initial capital letter) a governmental system led by a dictator having complete power, forcibly suppressing opposition and criticism, regimenting all industry, commerce, etc., and emphasizing an aggressive nationalism and often racism.
2. France voted today to join 42 nations bombing
ISIL. This, I’m guessing will provoke additional violence on the homeland.
3. France, like the US is moving to the Right.
http://blogs.reuters.com/great-debate/2015/01/13/charlie-hebdo-fallout-specters-of-fascist-past-haunt-europes-new-nationalism/
Since I brought up those 42 nations aiming to protect oil interests in the region, I beg you to read
yet another dictionary entry defining “World War”:
“A world war is a war involving some of the world’s most powerful and populous countries. World wars span multiple countries on multiple continents, with battles fought in multiple theaters. The term is usually applied to the two conflicts that occurred during the 20th century”
Wikipedia
If you discover another definition that better suits
your particular view of our current situation, please,
let us know.
While there is no fighting in North America or Australia, there was none during two World Wars preceding.
Currently most of the action is taking place, ironically, where lots of the world’s oil happens to be located. The Middle East, Europe and Africa.
Most growth in coming years will come from Asian nations not engaged in attempting to quell religious fundamentalism with military force.
Wars are inflationary when full employment is achieved. The hand wringing has begun. Soon
Western Europe will join the US in another waste-filled decade filled with bad choices.
Voices on the Left will be marginalized using highly successful FOX (news) disinformation platforms made popular in Europe during the first third of the 20th century.
Not a great time to be Muslim or Jew.
Dredd on Tue, 13th Jan 2015 3:33 pm
“What Is Behind the Drop? Simple Economics”
Yep.
The simple economics of the oil wars of the past century.
“Me like, me take …” (The Front Fell Off).
shortonoil on Tue, 13th Jan 2015 4:31 pm
We were not surprised by the drop in oil prices. We have been predicting such an event since May, and put up this page in September (the date is on the second graph):
http://www.thehillsgroup.org/depletion2_022.htm
It is not the drop that caught us off guard, it is the magnitude of the drop. It is twice what our model predicted. The drop occurred because of depletion, and that is a measurable value. Depletion not only pertains to the amount of extractable reserve in the ground, it also pertains to the value of the reserve that is extracted. The value of any extractable commodity declines with time because the highest quality reserves are usually extracted first. That leaves the lower quality reserves toward the end. Petroleum is no exception.
On a volumetric bases 82% of all the petroleum that will ever be extracted was removed by 2014. On an energy bases it was 74%. Over the last 15 years we have witnessed ever increasing production costs, and an every declining quality of petroleum that is being extracted. Bitumen, shale, ultra deep, and high sulfur extra heavy have all been attempting to fill in for the decline in conventional. There has been a growing demand for petroleum that became impossible to satisfy from increased conventional production.
Like any commodity, as the price increases it becomes less affordable to the end user. Petroleum is again no exception. Because petroleum is a foundational commodity, that is, its availability is necessary to run a modern civilization, its value can be determined by the amount of economic activity it can power. The price of petroleum can be no greater than the dollar value it contributes to the economy. In 2012 its price exceeded that value when it reached $104/barrel.
One possible explanation for the overshoot of petroleum prices, as determined by our model, is that we have over estimated the value of non conventional to the economy. The use of “creative accounting” by that sector of the industry would have resulted in a miss calculation of its true value. As there has been very few high quality studies of its ERoEI to base determinations upon, we have been forced to use a BTU/$ costing approach. If a reliable GAP accounting method was not employed the results would be erroneous. That is, the non conventional being used to supplement conventional my be having a negative impact on the economy.
Once the high cost production is washed out of the market, prices should return to the graph. The next year should be a good indication of what is to come.
http://www.thehillsgroup.org/
tahoe1780 on Tue, 13th Jan 2015 7:20 pm
Short – 82% or 62% ?
Perk Earl on Wed, 14th Jan 2015 2:03 am
“It is not the drop that caught us off guard, it is the magnitude of the drop.”
Absolutely, shortonoil, the magnitude is bone jarring. Adding to the drop in oil price is the parallel plunge copper is taking. The following article paints a worrying picture as today there was a 6.2% drop in copper price! It concludes with this; “The global economy is at a disconcerting juncture,” World Bank chief economist Kaushik Basu told reporters.
http://www.reuters.com/article/2015/01/14/us-markets-global-idUSKBN0KM01O20150114
Copper suffers meltdown on growth anxiety, euro on defensive
Unease over the global economy engulfed commodities and dented Asian equities on Wednesday, while the euro loitered near nine-year lows as investors bet the European Central Bank was just a week away from launching a new stimulus campaign.
As if the plunge in oil prices is not enough of a worry for global policymakers, copper futures dived 6.2 percent to $5,499 a tonne when major chart support cracked and triggered a host of stop-loss sales.
The metal is often considered a barometer of industrial demand, so the slump leant extra gravitas to news the World Bank had cut its 2015 growth forecasts blaming sluggishness in the euro zone, Japan and some major emerging economies.
“The global economy is at a disconcerting juncture,” World Bank chief economist Kaushik Basu told reporters. “It is as challenging a moment as it gets for economic forecasting.”
Davy on Wed, 14th Jan 2015 6:17 am
Perk, underlying healthy economic growth is not there. It is only Ponzi scheme type growth. Ponzi scheme growth experiences this pyramid disequilibrium. In the beginning of the Ponzi scheme there is stability with resources flooding in to build the pyramid. We now see the bottom of the financial system not supporting the top in numbers and confidence physically. The top where the new normal has an economic relationship between central bank and global investor is remaining strong. This is a form of graft, corruption, and bribery. The central banks are covering the highest levels of the financial system with policies to cement the loyalty of investors. The central banks are the only game in town as far as fundamentals.
The latest move by the Fed was due to the disequilibrium of policies that hit limits of growth and diminishing returns. The repression policies have put the Fed at the end of a business cycle with no tools to fight a recession other than this financial bribery of “confidence or else” at the top. The results are the real economy is suffering with no tools to assist and mitigate a physical slowdown. The top is cemented in an unholy alliance of wealth transferring policies.
The taper of the Fed’s asset purchases have disturbed the global carry trade where much of the world’s wealth flows. The dollar is now out of its goldilocks range for FX stability. Oil is now out of its stability range. Other commodities are following suit. These are physical assets that have direct impact on employment and sovereign budgets. This is not the abstract fundamentals of the markets this is real and physical and will immediately flow through to the real economy with what appears to be a building crisis.
It appears the central banks have no choice to stay the course. If the central banks waiver the top will lose confidence and the system is likely to implode. It is anyone’s guess how this legalized Ponzi scheme of global systematic bribery, legalized market manipulation, and legalized systematic corruption can continue. Corruption always ends badly eventually. It is an infection that distorts and destroys real wealth eventually.
Much like “Putin’s Way” the 1%ers are all in it together and they are going to fiddle as Rome burns. Sooner or later the smoke will overwhelm them. Ponzi schemes always end in tears. The time frame is key for us here. How many more years can all this go on. This financial situation has the potential to break at any time just as the Ukrainian crisis or a ME crisis. Yet these crisis can fester on also. Oil’s depletion and instability is working out slowly and offer the brick wall for industrial man. Yet, this oil dynamics is uncharted waters. It appears we just entered a period of a drop in the global consumer’s ability to pay for the economic value of oil per the price requirements for production growth. Short’s analysis is tough to pick apart. PO production levels can very well hit PO supply or demand or both in a vicious circle down but when will the drop become a cascade?
I see no news globally that is good news other than the top is in an anxiously struggle to plug the leaks. Each leak that is plugged two appear. Water is difficult to stop once it begins its erosion. It is becoming more apparent that low oil will not be the promised economic lift to the global economy. There is absolutely nothing to have confidence about in this global situation other than bribery and “common fate” of those at the top. This scenario can’t end well. Civilizations never survive card houses.
shortonoil on Wed, 14th Jan 2015 3:58 pm
Short – 82% or 62% ?
On a volumetric bases it is 82%. But the key number is 74%. The lower quality oils will be priced out of the market, and only the oils with the highest energy delivery capabilities will remain. The end game problem is that the majority of that high quality oil is in the Middle East. As other fields are shut-in, as they become uneconomical to operate, stress will build in the remaining oil production centers of the world. This is not likely to end well.