On Tuesday 10 February at 13:00 GMT the IEA released its “Oil Medium-Term Market Report 2015”. The day before the release I was contacted by Jens Ergon at Sveriges Television (“Sweden’s Television, SVT) who wanted to get my opinion on the report. I had a number of hours to read through the 140 pages of the version provided to media prior to the report’s official release. This meant that I could comment on the report immediately it was released. SVT has now reported some of those comments in an article that Jens Ergon has written, “The Price Crash Will Reshape The Oil Market”. The subtitle is, “American oil boom behind the falling price. But opinions vary widely on the future of oil.”
Let’s now go through the article together and I will make a few comments as we do so.
“The comprehensive fall in the price of oil has taken the world’s experts by surprise. Since the summer of 2014 the price of oil has more than halved from over $100 per barrel to a price today of around $50. Last Tuesday the International Energy Agency, IEA, made its first report since the price fall. In the report, the development is described as the beginning of a new era. The IEA’s press release that accompanied the release of the report stated, “The recent crash in oil prices will cause the oil market to rebalance in ways that challenge traditional thinking about the responsiveness of supply and demand.
– What is surprising is not that the oil price has fallen but the severity of the drop and that it has continued during half a year until up to a few weeks ago”, commented Daniel Spiro, economist with focus on price developments for oil and natural resources at Oslo University.”
(Aleklett)If we look back in time there were similar price falls at the beginning of the 1980s and in 2008. For economists the price fall were as surprising then as it is now. The interesting thing is that there has always been a good explanation for their occurrence but economists are very poor at predicting when a fall will occur. I have chosen never to predict the price of oil but to say always and only that, “the price will be what the market is prepared to pay”.
“From end of cheap oil to price crash
The price crash comes after a number of years of historically high prices. With the exception of the temporary fall that occurred with the financial crisis of 2008-9 the oil price rose steeply during the entire first decade of this century and stayed at around $100 until the summer of 2014. This contrasts with the price of around $20 per barrel during the 1990s. Some researchers have regarded the high oil prices as a sign of Peak Oil, i.e. that the rate of global oil production is near the maximum that is geologically possible. Others have doubted the concept of Peak Oil and asserted that the higher prices will only encourage new, if more expensive, oil production. Data such as that published by the IEA clearly show that the easily produced, so-called “conventional oil” reached maximum production several years ago – at around 70 million barrels per day. But during recent years the introduction of more expensive, so-called “unconventional oil” – such as from the Canadian oil sands and, foremost, US shale oil – has compensated for the fall in conventional oil and has allowed total world oil production to increase somewhat, to just over 74 million barrels per day.”
(Aleklett) During the 1990s the oil price even fell below $10 per barrel. It was in 1998 that Colin J. Campbell and Jean H. Laherrère published their famous article, “THE END OF CHEAP OIL” in the journal Scientific American at the same time as The Economist wrote that the world was “Drowning in oil”. See my blog “How cheap is oil today?”. Colin and Jean wrote that cheap oil would reach a production maximum in around 2004 and today we know that the conventional oil, that was cheap in 1998, peaked in 2005. From 1998 until 2008 the price of oil rose from $10 per barrel to $147 per barrel. The era of cheap oil was over. Normally economists interpret such a price rise as a sign of scarcity and in this case we can call this shortage “Peak Oil”. Despite that, there are many who use any argument, no matter how contrived, to assert that Peak Oil lies far in the future.
Today, many people regard $50 per barrel oil as cheap and as a sign that we are, once again, “drowning in oil”. According to BP, production of crude oil and natural gas liquids totalled 82.6 Mb/d in 2006. If that production had continued at the same rate during the following ten years then the additional of oil would have raised total production to 92.3 Mb/d in 2013. Instead, 2013 saw total production at 86.8 Mb/d. The increase of 4.2 Mb/d we saw from 2008 to 2013 was not cheap oil. It came from deepwater, from Canada’s oilsands and as NGL and shale oil from fracking in the USA. We can see now that Colin and Jean’s 1998 predictions have proven completely correct.
As you can see in the figure, conventional crude oil reached maximum production in 2005-6 at 70 Mb/d and today is down at 67-8 Mb/d if one includes deepwater oil production as conventional. But deepwater production is expensive. If one also includes oil from oilsands and shale oil then the total production rate reaches 74 Mb/d. Note that NGL are not included in these numbers.
“US shale oil is decisive
A common perception in the oil industry has thus been that the era of ‘cheap’ oil is over. The question is if that perception has been overturned by the dramatic price fall. Kjell Aleklett, a professor in Uppsala and one of the leading researchers behind the theory of Peak Oil, is one of those who do not believe so.
– One must remember that the idea of what is ‘cheap’ oil differs markedly today from what it was 15-20 years ago. During the 1990s a price of around $10-15 was ‘cheap oil’. Today $50 is regarded as cheap but it would have been regarded as sky high back then, comments Aleklett.
According to the IEA’s fresh report the expansion of shale oil production is a decisive factor behind the fall in price. Together with reduced expectations of world growth and oil consumption, the shale oil boom in the USA has led to an imbalance and a temporary overcapacity in oil production. According to the IEA, another signficant factor is that OPEC including Saudi Arabia (contrary to the expectations of many) have not attempted to oppose the price fall by reducing their production.”
(Aleklett) Between 2005 and the present day the USA’s consumption of oil has declined by 2 Mb/d. Two reasons for this are the blending of ethanol into gasoline and that today’s new cars in the USA use approximately 25% less fuel per kilometre than they did ten years ago. By 2014 shale oil production had grown to approximately 4 Mb/d and if we include condensate the figure is 5.6 Mb/d. Compared with 2005 the USA has reduced its need for oil imports by 7 Mb/d which is a volume similar to the entire export volume of Saudi Arabia. The reduction is by 5.5% per year. A reduction with 7 Mb/d amounts to a reduction of 2.6 billion barrels. During the same period the oil price has been around $100 per barrel which means that the USA’s trade balance sinc 2005 has improved by $260 billion per year. It is mainly this reduced need for imports that has led to the current oversupply of oil on the world market.
“Historic change in OPEC
One way of describing these developments is that OPEC has, for the moment, given up its roll as a price cartel and so-called ‘swing producer’. Instead, they have contined to produce oil at their maximum rate and have allowed the market to set the price.
– If the OPEC nations continue to produce flat out then this is an historic change. In that case the organisation will lose, for all practical purposes, its significance, says Aleklett.
There has been considerable speculation regarding OPEC’s recent inaction. However, it is clear that the price fall has hindered costly investments and damaged high cost producers – and those oil exporting nations that have become dependent on a high oil price. Russia is such a nation. According to the IEA, Russia now stands before a ‘perfect storm’ with falling oil production as a consequence. Canada’s oil sands are another example. And – to an uncertain extent – the USA’s production of shale oil.
– One can speculate regarding why OPEC has done this. But an interesting hypothesis is that Saudi Arabia is concerned regarding ‘demand destruction’, i.e. competition from an increasing number of alternatives to their easily produced, inexpensive oil and in particular from shale oil. But Saudi Arabia’s actions could also be addressing a longer term threat from renewable alternatives. Or a combination of these reasons. By allowing the price to fall, Saudi Arabia is hoping to undermine their competitors, says Daniel Spiro.”
(Aleklett) In the 1930s there was overproduction of oil in Texas and the price sank dramatically. It was then decided that the Railroad Commission of Texas (RRC) would limit oil transport to a suitable volume in order to increase the price. They did this until the end of the 1960s when the demand for oil finally exceeded production capacity. It was then time to abandon that system. However, it was the RRC’s system that inspired a number of oil producing nations to form the OPEC cartel. When the OPEC nations reach their maximum rate of oil production or no longer care about regulating oil production then OPEC’s main reason to exist disappears.
There is no doubt that the fracking industry has reacted very quickly. The basis for the industry is that thousands of new wells must be drilled every year. The company Baker Hughes releases weekly reports on how many drilling rigs are operating and what they are drilling for. In 2008 the price of oil fell as dramatically as it has done recently. Back then, over half of the operating drilling rigs were idled within six months. Now, in the last three months we see that 25 % of the rigs have been idled. By summer, certainly half of the rigs that were drilling in October 2014 will be idled and half of the jobs in that part of the industry will have disappeared. In 2008-9 it was mainly rigs drilling for gas that were idled but there was also a reduction in rigs drilling for oil. If no new wells are drilled then the decrease in production from the fracking fields will be about 40% per year. A few new wells will be opened in coming months but then fewer and fewer. If the oil price stays at the current low level then the USA’s oil production at the beginning of next year will be around 1 Mb/d lower than it is today. The frackers will become the ‘swing producers’”.
“Increasing threat of stranded assets
“There is a rapidly growing discussion within the oil industry regarding what are called ‘stranded assets’ – the fact that the larger part of the world’s fossil fuel reserves cannot be produced if the world is to avoid serious climate change. New calculations presented in the journal Nature in January show that 80% of the world’s coal reserves and one third of the world’s oil reserves cannot be used, at least not before 2050.
With renewable energy advancing and a new global climate treaty in sight in 2015, the question is being asked, who will be left holding the bag when this type of stranded asset becomes reality. According to the article in Nature, the cheapest option for the world would be, in principle, if all unconventional oil was left in the ground. But also 40% of the oil in the Middle East. Tomas Kåberger, the former head of the Swedish Energy Agency and currently professor of energy and the environment at Chalmers University of Technology, is one of those who see the oil price fall and OPEC’s actions as a sign of instability in the fossil fuel industry.
– I believe we are seeing the consequences of technical developments that will rapidly make energy cheaper, and primarily renewable energy. It is a change on a broad front: cheaper electricity from sun and wind, cheaper electic cars and more efficient fossil fuelled cars. This is a change that few believed was possible only a few years ago. And it significantly reduces the prospects for future oil consumption. For the fossil fuel industry this means a dramatic change, said Kåberger. “
(Aleklett) That the Middle East’s oil should remain underground because we do not need it in future is still wishful thinking. We see that renewable energy is making inroads and replacing fossil fuels but some of the success of renewable energy sources is due to tax exemptions. Currently, taxation income from the fossil fuel industry is an important part of the budget for European nations.
Renewable energy is making inroads into electricity production but there also exists a tradition of renewable energy production by expansion of hydroelectric power. Marginal production of renewable energy is important, not least to put downward pressure on other forms of energy. In that way, subsidisation of renewable energy is a good investment.
“Price prognoses vary widely
So what will happen during the coming year? Will the threat of Peak Oil and rising oil prices be disarmed by technological developments where increasingly cheap alternatives to oil instead begin to challenge the oil industry? Will low oil prices continue – or will prices recover – and, if so, how fast and to what level?
Within the oil industry predictions vary widely. According to Bloomberg the price range for oil in 2015 will lie between $35 and $80 – and during coming years the spread of predictions covers everything between $20 and $200. The uncertainty is greater than seen for a long time.
– If you asked me I would not like to venture a much more precise price range than that. The price of oil has shown itself to be very sensitive, asserts Daniel Spiro.
In its report the IEA is counting on a moderate recovery of oil prices during the next 5 years, to $70-80 per barrel.
– This response to the low oil prices is an example of how shale oil has changed the entire oil market. OPEC’s behaviour in letting the market balance itself is another example. This can make shale oil the new ‘swing producer’ but will not force it out of the market, says the IEA’s head Maria van der Hoeven.”
(Alekltt) When it comes to the price of oil I usually do not express an opinion and the fluctuations we have seen in recent years recently show this to be a sensible decision. In the graph you can see how the oil price recovered in 2009.
“Maximum production or dwindling oil consumption?
Kjell Aleklett is sceptical of the IEA’s future progoses. According to Aleklett neither shale oil nor the price crash of the past six months negate the fact that the world finds itself near Peak Oil.
– The IEA assumes that oil production in the world will continue to grow by just over 1% per year. At the same time, production from today’s conventional oil fields is falling steadily. I cannot see how this equation works.
– According to Aleklett, there is excessive belief in shale oil’s possibilities. Its production requires the continuous drilling of new wells – something that the price fall is now putting an end to.
– The price fall involves two things. One consequence is to freeze investment in discovery of new oil the world over. The other is that it hits US shale oil production hard. I believe we will see a top in shale oil production already this year. Ironically, the fall in the oil price may bring forward Peak Oil. I would not be surprised if maximal world oil production ultimately occurs this year or next year, said Aleklett.
– I agree with Aleklett that there is excessive confidence around shale oil. And I think that he has a number of valid points with his analysis of Peak Oil. But I believe that the market shift we are now witnessing is fundamentally due to that alternatives to oil are becoming increasingly cheaper. And that is a revolutionary development that in principle is impossible to stop, asserts Kåberger.”</em>
(Aleklett) To conclude Jens Ergon discusses ‘Peak Oil’. All agree that we passed the maximum of conventional oil production in 2005-6 (see graph abowe). What remains to discuss is so-called ‘natural gas liquids’ (NGL), oil sands and shale oil. The greater part of NGL is used in the chemical industry but the heaviest components of it are blended with oil from the oil sands so make a less viscous liquid that can be transported in pipelines. A large part of NGL-production is a byproduct of shale gas and shale oil production. A reduction in shale oil may bring a reduction in NGL production. Production of oil from oil sands has been hit hard by the low oil prices, but those projects that are underway will probably continue while there will be a dearth of new projects. If the oil price does not recover quickly then production of shale oil will decline in the coming year.
The IEA says in its ‘Midterm report’ that demand, that was 92.43 Mb/d in 2014, will increase to 99.05 Mb/d by 2020. This is an increase of 6.6 Mb/d. In the World Energy Outlook report they show a collective production decline for all the fields currently producing conventional oil at 6% per year which is the same number that Global Energy Systems in Uppsala reported in 2008. If one considers that currently producing fields will be subject to investment to maintain production then this decline may be limited to 4 Mb/d per year. This means that the current conventional production of 68 Mb/d will decline by 15 Mb/d by 2020. So we can see that more than 20 Mb/d of new production is needed for the demand that the IEA envisages. During this short period there are no new fields that can contribute to this since 6 years is too short a time frame for bringing new fields online offshore, where such new fields normally lie.
Presented plans for Johan Svedrup
One field that will contribute new oil by 2020 is Johan Sverdrup in Norway. When it is brought online in 2019 it is expected to provide 0.32 to 0.38 Mb/d. To bring online new production equivalent to 20 Mb/d requires very large investment and the cheap oil that contributes to oil companies’ investment budgets will be decreasing. If they prioritise development of discovered fields there will be less money available to invest in finding new fields. During the period 2020-2030 it will be extremely expensive and difficult to bring new oil production online. There is an economic limit beyond which oil is left underground. The advantage with conventional oilfields is that one has steady (plateau) production for many years and a temporary fluctuation in price thus has less effect on the project. One can even include price fluctuations in the project plan.
The year that we reach Peak Oil we will produce more oil than we have ever done previously. We may well feel that the market is oversupplied with oil in that year, just as we do now. The Peak Oil that we now discuss is the peak of unconventional oil production. Since production of this type of oil is very price sensitive the oil market will be a factor contributing to when we reach the global peak of all oil production. There are strong indications that 2015/2016 may see this global peak. In any case, we are certainly on a production plateau compared with the increase in oil production that we saw from the 1980s until 2006.
Davy on Sun, 15th Feb 2015 7:45 am
A great article that will frustrate the cornucopian visions of tradition supply demand dynamics, substitution, and market reactions. We are talking a foundational commodity that will not behave in a traditional supply demand manner as it approaches its peak.
Substitution is ending with energy sources and within the oil complex. Renewables are a “dead in the water” substitution per the requirements of a complex energy intensive global system. Renewables rely on energy intensity to produce, maintain, and for their power distribution. You can’t substitute expensive oil for inexpensive oil and call that production growth.
Short’s group has studies showing significant results that demonstrate the ETP oil trend per thermodynamic volumetric analysis. These results even if discounted are profound in their implications for a complex interconnected society with dispersed economic production and distribution. When one understands the instability of a complex human ecosystem facing limits and resulting diminishing returns we see the further dangers of a POD & ETP oil complex.
The market’s vision of the cornucopians is good is good and bad is good. The cornucopians will say low oil prices will stimulate demand and producers will resume their activities when oil rises to a proper level. What we are instead seeing is demand destruction and supply destruction in an environment of POD & ETP of oil. IOW the current oil complex is a foundational commodity in a vicious cycle down with economic energy contributions declining and an economy that is unable to grow per restrictions from an oil complex in disequilibrium.
My central point is we are leaving the bumpy plateau of PO conventional and entering the bumpy descent of POD & ETP of oil from unconventional and expensive oil. We are entering the Peak POD environments of national oil producing countries having social and political requirements of oil at a price that is increasingly too high per the current POD and ETP oil. This extends further to an economic value of oil per the requirements of our complex global economy hitting limits of growth, diminishing returns and substitution restrictions.
We have likely entered the bumpy descent. This bumpy descent has a new set of fundamentals for economics. The effects of the bumpy descent must change perceptions and analysis of the socio-political with food production, population, and failed state implications. The position of science today will have to shift its analysis of AGW and other analysis related to the environment.
This article covers the issues in a respectable way. The message is respectable enough to be a MSM article. I will leave it to the experts here to digest this article. It is the digestion of these articles that is what makes this site so important.
rockman on Sun, 15th Feb 2015 8:31 am
A well balanced piece IMHO that avoids the extreme positions of both sides of the debate. But a bit of clarification:
“…the Railroad Commission of Texas would limit oil transport….They did this until the end of the 1960s when the demand for oil finally exceeded production capacity. It was then time to abandon that system.”
The TRRC didn’t limit transport: they limited the amount of oil produced at the well head. Each month the commissioners would set the “allowable”: the percentage a well could produce of its max rate. If the oil price dropped too low the allowable might be set at 60% for the next month. If prices recovered it might be set at 80% the next month.
And the TRRC hasn’t abandoned the allowable regulation. It’s still in force. Violate your allowable and you would be subject to a significant financial penalty and possible prison. The commission still sets the allowable every month. Since the 60’s it has been set at 100% for every month.
Next month the TRRC could decide to reduce the Texas oil production rate by 50%. Not very likely IMHO. First, it could destroy many companies: OTOH it would increase the price they got for their oil but reduce their income even more then they’ve already experienced. But notice I said “could”: what if the increased price offset the volume loss? Even more provocative: what if the price increased enough to produce a higher revenue by selling less then companies are receiving today by producing more? This is similar to the complaint some levy against the KSA: by not reducing production they are intentionally hurting other producers. By keeping the allowable at 100% couldn’t the same charge be made against Texas?
And consider another motivation to decrease the allowable: jobs. The drilling boom has provided the state with many thousands of high paying jobs…many of which have already been lost. Increasing the price of oil could quickly recover many of those jobs.
Of course if the TRRC decreased the allowable to, say, 60% on 1 March it would likely lead to the Mother of All States’ Right battles with the federal govt. The oil/NG resources of Texas fall under the purview of the state…not the federal govt. There’s extremely strong legal precedence for this including support from the federal law. Of course the feds could counter with its jurisdiction over interstate commerce. But understand that only a very small amount of oil is shipped out of the state: it’s refined products that are exported to the other states and around the world. But if you have time on your hands search the web for stories about NG shortages in Texas a few decades ago and the call by some politicians to shut down NG pipelines exporting it out of state. Even suggestions that the Texas State Guard blow up pipelines at the border. That did bring in the interstate commerce argument. Fortunately the shortages didn’t last long.
There hasn’t been a peep out of Austin about the TRRC reducing the allowable. But I can offer complete assurance it is being discussed behind closed doors. Also consider this: the commissioners hold elected positions…they aren’t appointed. If there were a sudden surge of voter support to decrease the allowable those ELECTED commissioners might pay attention to those voters.
I still don’t think this is likely to happen…at least in the next few months. But understand that when US citizens are abroad and are asked where they are from the nearly universal response is “the United States”. Unless they are from the Lone Star State: that answer is almost 100% “Texas”. I’ve had that pointed out by a number of foreigners. The fact that our state flag has but one lone star is not accidental nor is it taken by most Texans as some sort of historical trivia. The “Don’t Mess With Texas” bumper stickers were aimed at folks dumping trash on the roadways. But many on the far right also consider it a threat and fair warning on many other issues.
Personally the Rockman, a TBC (Texan By Choice) does adhere to that sense of independence but also likes the “United” portion of the country’s name. United will always be better in the Rockman’s opinion even if it means supporting all you leaches out there. LOL.
paulo1 on Sun, 15th Feb 2015 8:53 am
Excellent article and two excellent comments. Terrific.
Rockman, wouldn’t the TTRC be as political as the next outfit, and wouldn’t Texas production pump as much as possible simply to keep cash flow rates up and stave off temporary failure like everywhere else?
I read about Houston’s massive supply of new office buildings, etc and assume things are coming to a crux? I guess my focused question is to ask why would Texas rescue price discovery levels with a production decline when nowhere else on Earth is anyone prepared to do so?
Rodster on Sun, 15th Feb 2015 10:35 am
Two quotes I especially liked:
“As you can see in the figure, conventional crude oil reached maximum production in 2005-6 at 70 Mb/d and today is down at 67-8 Mb/d if one includes deepwater oil production as conventional. But deepwater production is expensive. If one also includes oil from oilsands and shale oil then the total production rate reaches 74 Mb/d. Note that NGL are not included in these numbers.”
————————————
“One must remember that the idea of what is ‘cheap’ oil differs markedly today from what it was 15-20 years ago. During the 1990s a price of around $10-15 was ‘cheap oil’. Today $50 is regarded as cheap but it would have been regarded as sky high back then, comments Aleklett.”
Ted Wilson on Sun, 15th Feb 2015 12:33 pm
Brent crossed $61/barrel. These cheap prices won’t last long.
Recently there is news that China sold 2.3 million vehicles in January-2015.
At this rate, its 27 million vehicles in a year. Expect their demand to go up and so does the Oil prices.
http://www.bloomberg.com/energy
Kenz300 on Sun, 15th Feb 2015 12:50 pm
Quote — ” I believe we are seeing the consequences of technical developments that will rapidly make energy cheaper, and primarily renewable energy. It is a change on a broad front: cheaper electricity from sun and wind, cheaper electic cars and more efficient fossil fuelled cars. This is a change that few believed was possible only a few years ago. And it significantly reduces the prospects for future oil consumption. For the fossil fuel industry this means a dramatic change, said Kåberger. “
The transition to safer, cleaner and cheaper alternative energy sources continues to grow every year.
We can deal with the cause of Climate Change (fossil fuels) or we will deal with the impact of Climate Change.
Mark Shaw on Sun, 15th Feb 2015 2:00 pm
After rising for more than 12 months, US Oil production declined in Nov-2014 as per the latest report.
We don’t know whether its because of November’s 30 days to October’s 31 days or the impact of price decline.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M
If Saudi’s plan to raise their production by few million barrels from the conventional vertically drilled wells, then we are depleting the oil faster.
bobinget on Sun, 15th Feb 2015 2:42 pm
Climate Change Attitudes won’t change until
a majority of Americans are directly effected.
Even then, as now with cigarettes, there remains a
hard core in denial.
Ted Wilson, China exports most auto production.
This of course spreads, more evenly, oil demand.
Deep water is only expensive if something goes horribly wrong. Thirty thousand barrels per day from a single well may prove less expensive then thousands of rapidly declining tight oil wells.
Here’s a recent, credible, shale evaluation;
http://oilprice.com/Latest-Energy-News/World-News/The-Worrying-Math-From-US-Shale-Plays.html
Perk Earl on Sun, 15th Feb 2015 2:44 pm
“As you can see in the figure, conventional crude oil reached maximum production in 2005-6 at 70 Mb/d and today is down at 67-8 Mb/d if one includes deepwater oil production as conventional.”
Sounds like an admission of peak conventional oil.
“But deepwater production is expensive. If one also includes oil from oilsands and shale oil then the total production rate reaches 74 Mb/d.”
That is an interesting philosophical question, i.e. how does one define conventional oil? Is it the quality of the oil or based on the cost of production? Deepwater is extracting conventional oil but at such a high price maybe it should be considered non-conventional. If so, then we are even farther down the post peak conventional oil decline.
Oil (tar) sands and shale oil (LTO) should definitely be considered non-conventional, which means we are already past peak conventional oil.
The transition to alternatives like EV’s, only exacerbates the oil situation because it reduces the capability to produce a profit from oil, and by most measures will not be able to completely substitute for the energy we need from oil because solar is too diffuse and energy dependent for it’s manufacture.
bobinget on Sun, 15th Feb 2015 2:46 pm
Just because shale requires constant drilling doesn’t mark tight oil as a failure. Unless of course,
financial restraints forbid constant drilling.
Perk Earl on Sun, 15th Feb 2015 2:48 pm
Just because the red queen is running in place ever faster doesn’t mean some day she won’t move forward a tiny bit.
rockman on Sun, 15th Feb 2015 4:08 pm
Paolo – “…wouldn’t Texas production pump as much as possible simply to keep cash flow rates up and stave off temporary failure like everywhere else?”. But that’s the $64,000 question isn’t it: what is that price sweet spot the produces max income for a certain sales volume. IOW if you double the price of your widgets but still sell 60% of what you sold at the lower price you actually increase your revenue. And this is the identical question the Saudis are struggling with.
Also remember how the state benefits financially from oil/NG production. First from severance tax which, like oil sales, is a function of price X volume. But there’s also the question of jobs: lose 50,000 jobs averaging $65k/yr and the voters lose $3+ BILLION in income. And how many tens of $BILLIONS do the oil field service companies lose in revenue along with the corporate taxes they pay to the state? And consider the loss of sales tax to local municipalities. Yes: we pay a sales tax on all the materials we use to drill/complete wells. For every $1 BILLION in materials the counties are collecting around $50 million. And during the height of the Eagle Ford Shale boom about $2 billion PER MONTH was being spent.
We’re not talking a small amount of money. Again not a move the state would make quickly IMHO. But we’re no where close to how severe the pain could get either. And as has been said: it’s not just $’s…it’s politics and elections. Trust me: crucifying politicians in Texas is a favorite sport of folks down here especially when times turn bad. LOL.
And the consideration isn’t just local: the oil patch, and Texas in particular, has accounted for much of the base in what national economic improvement we’ve had. For a number of years almost half the new jobs created were in Texas. And that’s helped a lot of non-Texans: in 2013 alone there was a net gain of almost 400,000. And that also took some of the unemployment pressure off of those areas where folks left. Consider just one metric: housing starts. In the last two years there have been more in just the city of Houston then the entire state of CA. In time the national economy with benefit from lower oil prices. But it’s going to be a net loss for the country’s GDP for a good while until it turns around. What happens in Texas is what happens. But there are significant links with the rest of the country.
rockman on Sun, 15th Feb 2015 4:37 pm
Earl – “…how does one define conventional oil?” All you non-oil patch types are certainly free to make up any terms you want… like “conventional oil” and then argue amongst yourselves till the cows come home. But such a term isn’t used by usins who actually develop hydrocarbons for a living. LOL.
For us there are conventional and unconventional RESERVOIRS. And those definitions hang on the nature of the porosity in the reservoir. In its simplest form a conventional reservoir contains its hydrocarbons in the pore spaces between grains. In an unconventional the producible hydrocarbons are commonly found in the pore space created by the fractures.
Again, this is just a general definition. Now consider a sandstone reservoir with very little pore space containing producible hydrocarbons… say 15% porosity. It will produce but at a relatively low rate. That would be considered a “tite” reservoir compared to one with 30% porosity. It would be considered a tite conventional sandstone reservoirs by the most of the oil patch. But now let that tite sand get fractured by Mother Earth allowing most of it production coming from those fractures: it’s now an unconventional sandstone reservoir with a relatively good flow rate.
There, that should certainly clear matters up: Oil is oil regardless of the nature of the reservoir it came from. And as far as “LTO” goes billions of bbl of light oil/condensate have been produced from very porous conventional reservoirs. So LTO doesn’t carry the meaning many think it does.
Perk Earl on Sun, 15th Feb 2015 8:34 pm
“In its simplest form a conventional reservoir contains its hydrocarbons in the pore spaces between grains. In an unconventional the producible hydrocarbons are commonly found in the pore space created by the fractures.”
Ok, interesting, but how does tar sands fit into either one of those categories?
Northwest Resident on Sun, 15th Feb 2015 8:37 pm
The crash in the price of oil already IS changing the oil market. And not JUST the oil market. The entire global economy and all markets are distorted bloated bubbles of debt-driven mania.
Peel away all the many layers of our current global economic problems, including (and most importantly) the vast amounts of accumulated debt. At the very core I believe you’ll find one big — HUGE — problem that is driving all the rest. And that is, finite resources.
They can’t admit it. Not publicly. But it is all about to fall apart anyway, they can’t stop reality forever.
Most people won’t ever understand that peak oil and other declining resources are at the root of the major market distortions we are all witness too. Most will look at it from just the financial point of view — but even that foreshadows epic doom!!
David Stockman Interview: The Global Economy Has Entered The Crack-Up Phase
http://davidstockmanscontracorner.com/david-stockman-interview-the-global-economy-has-entered-the-crack-up-phase/
Makati1 on Mon, 16th Feb 2015 12:21 am
Buckle up! The ride is going to get very, very rough from now on out to the Wyle Coyote air walk. Beep! beep!
GregT on Mon, 16th Feb 2015 12:43 am
“From the days of Spartacus-Weishaupt to those of Karl Marx, and down to Trotsky (Russia), Bela Kun (Hungary), Rosa Luxembourg (Germany), and Emma Goldman (United States), this world-wide conspiracy for the overthrow of civilization and for the reconstitution of society on the basis of arrested development, of envious malevolence, and impossible equality, has been steadily growing. It played, as a modern writer, Mrs. Webster, has so ably shown, a definitely recognizable part in the tragedy of the French Revolution. It has been the mainspring of every subversive movement during the Nineteenth Century; and now at last this band of extraordinary personalities from the underworld of the great cities of Europe and America have gripped the Russian people by the hair of their heads and have become practically the undisputed masters of that enormous empire.”
– Winston Churchill
Ordo ab Chao, Annuit Coeptis, Novus ordo seclorum
https://www.youtube.com/watch?v=Rc7i0wCFf8g
marmico on Mon, 16th Feb 2015 4:37 am
the vast amounts of accumulated debt [driven mania]
Household debt service payments as a % of disposable personal income is lower than when Reagan was elected 35 years ago.
Federal government debt service payments as a % of GDP is lower than when Kennedy was elected 55 years ago.
Carter was right. There has been global peak oil per capita since 1979.
theultravixens on Mon, 16th Feb 2015 5:05 am
Rockman,
I don’t know if you’re familiar with control systems, but the price sweet spot you mention is kind of like the setpoint in something like a PID control loop, and ideally it’s the price point that the system should actively seek out and try to oscillate around, ideally with the oscillations being damped. The problem is that adding a rapid response component like shale (switched on/off very quick) will tend to produce anti-damped oscillations (akin to a malfunctioning derivative algorithm), which blow up quick. I think we’re seeing something like that now in the price, and will likely see a rapid swing up in price too. Something like the RRC limiting production would actually be a sensible move, as it would probably help stabilise price swings. OPEC no longer seem capable of performing this role, but the oil industry seems to need someone to do it or else it’s going to do itself serious damage which will impact it’s long term viability.
GregT on Mon, 16th Feb 2015 5:42 am
Marmico,
Ditch the FRED charts, they’re complete BS.
Davy on Mon, 16th Feb 2015 6:05 am
Marm, you are using selective data to make a point. You are being a cornucopian agendist. Your selective facts are corn porn. Your figures are referencing a narrowed band of the economic strata. Household’s debt service is so low because interest rates are repressed. When these rates normalize all hell is going to break loose. This is especially true of the federal government and most other major powers governments. This means interest rates may never normalize like Helicopter Ben predicted in a speaking event. Debt is too high with all sectors.
Rates are dysfunctionally low for a normal economy. Part of the global economies problem is a lack of price discovery and proper risk determination because of repressed interest rates and the use of debt as a central bank tool. Read this article: http://www.zerohedge.com/news/2015-02-15/only-question-about-so-called-recovery to see the extent of this central bank activity reality. Numbers point to a recovery or sorts until you acknowledge this central bank activity. You of all people should acknowledge this irregularity. Your numbers are fine in the right context but the way you apply them they are nothing more than selective facts of an agendist.
rockman on Mon, 16th Feb 2015 6:59 am
vixens – Well put. I understand exactly what you’re talking about and have seen such analysis used in developing oil patch strategies. But I’m not nearly as well versed as you obviously are so I have to use more basic language. Please continue to post your incites.
Your comment points to the generality I keep tossing out: some folks continue to not appreciate the time lags we suffer rom in the oil patch. Shooting for a price sweet spot looks great on paper…until you lose $millions because it takes so long to determine if you’ve found the spot or not. Then add the peripheral feedback loops that develop as a result of significant volume/price change.
Perk Earl on Mon, 16th Feb 2015 11:41 am
Not trying to be redundant here, but just prying you rockman for your designation of tar sands in relation to the two categories for oil. So my post above is repeated below.
“In its simplest form a conventional reservoir contains its hydrocarbons in the pore spaces between grains. In an unconventional the producible hydrocarbons are commonly found in the pore space created by the fractures.”
Ok, interesting, but how does tar sands fit into either one of those categories?
bobinget on Mon, 16th Feb 2015 11:45 am
I second rock man’s glowing vixens recommend.
Getting additional incite into (oil) extraction gives a person better global understanding of oil trading, politics.
OT: (from the Onion)
WASHINGTON—Calling it an important but often overlooked step of the process, Environmental Protection Agency officials issued a statement Friday once again advising Americans to sort their plastics and glass materials into separate oceans. “We would like to remind Americans that clear, brown, and green glass should be placed in the Atlantic Ocean, and plastics classified as 1, 2, 4, 6, and 7 belong in the Pacific,” said EPA spokesman Daniel Gray, adding that individuals should properly rinse out all containers before depositing them off the appropriate coastline. “Also, lakes and rivers are reserved strictly for paper products. We simply ask that cardboard be flattened before it is left in any one of the thousands of designated freshwater bodies across the country.” Gray also stressed that Americans should only place old computers, televisions, mobile phones, and other unwanted electronics in forests on their assigned day of the week.
marmico on Mon, 16th Feb 2015 1:08 pm
Ditch the FRED charts, they’re complete BS.
Empiricism is anathema to the ecclesiastical authority of the zero dead head tribe who bendover to the ShadowStats High Priest of The Apocalypse. LOL
Davy on Mon, 16th Feb 2015 1:20 pm
Marm, the freddy charts don’t have to be ditched they need to be digested in the context of reality. For you they “are” reality and because of that you are living deluded.
marmico on Mon, 16th Feb 2015 1:52 pm
the freddy charts don’t have to be ditched they need to be digested in the context of reality
I can count on Davy-boy’s expurgation from the alimentary canal.
Neither household nor federal government debt servicing is a “selective reality” issue in 2015. Sheesh, I wish I had a 30 year 4% mortgage interest rate in the 1980s.
GregT on Mon, 16th Feb 2015 2:06 pm
Somehow, I doubt very much that you even had a mortgage in the 1980s Marmico.
Davy on Mon, 16th Feb 2015 3:14 pm
Marm, you have no reason to digest the fact that interest rates are repressed. Does that not mean anything to you? What about this: http://www.zerohedge.com/news/2015-02-15/only-question-about-so-called-recovery. Shouldn’t your Freddy fetish be digested by this abnormal market situation?
Perk Earl on Mon, 16th Feb 2015 4:25 pm
Ok, interesting, but how does tar sands fit into either one of those categories?
Alright, ring one up for Perk Earl, as rockman got caught in his own two category definition of oil in which tar sands does not fit. Ring a ding ding!
marmico on Mon, 16th Feb 2015 4:44 pm
Oh Davy-boy. Economic growth is essentially the sum of the growth rate in the labor force plus the growth rate of labor force productivity not some bogus repression crap. Real interest rates were lower in the stagflationary 1970s.
The 2009 economic recovery and expansion is okay. The productivity trend is ~1.5% per year. But the growth rate of the prime age working population (ages 25-54) is negative.
The baby boomers are exiting the labor force and the millennials are slow to enter the labor force. Hence, the slow growth rate in the labor force which pulls down the overall economic growth rate relative to the 1970-2000 trend. It’s demographics not peak oil.
Northwest Resident on Mon, 16th Feb 2015 5:08 pm
“the millennials are slow to enter the labor force”
More like, totally excluded from the labor force — exception being all those outstanding part time fast food and pizza deliver positions.
Because of a total lack of good paying full time jobs, perhaps? Military service excluded, naturally…
It isn’t just peak oil — it is excessive debt to hide the effects of peak oil, combined with finite limits on resource extraction and food production, made even worse by an environment that just can’t take the pollution and waste much longer.
Davy on Mon, 16th Feb 2015 5:25 pm
NR, Marm is incapable of admitting there is a problem with debt and interest rates. He is fooling himself into believing this current repressed markets and debt monitarization is OK. He always has an angle instead of just saying “yea Davy Boy things are not quite right” “But”. That would do for me Marm but instead you make yourself look like an idiot. You are the type that is so smart you fool yourself. Sometimes the smartest of folks are so smart they are dumb. That is you Marm.
Wake up son and face reality. There is so much you could contribute that would be worthwhile. Instead you spew corn porn that is easily discounted. Numbers cannot be trusted today as in the past especially your freddy numbers that you are so generous here with.
I am curious Marm why the constant hostility. People know why I get hostile with Mak but you have a continuous chip on your shoulder with everyone here. Could it be a subconscious anxiety for all those investments you have that are going to poof into the ether and you will be broke with a house and car payment. The repo man will be calling and the girlfriend will ditch you because you can’t produce the goods. What are people like you other then the sum of your toys and your portfolios.
GregT on Mon, 16th Feb 2015 5:35 pm
marmico,
No matter how hard you eCONomists try to pretend otherwise, infinite exponential growth in a finite environment, is a mathematical and physical impossibility.
We live on a finite planet, with finite ‘resources’. Growth will end, and when it does, the ponzi schemed economic, financial, and monetary systems will collapse in on themselves. As sure as rain.
The longer we keep playing the eCONomists’ game, the harder the collapse and the bigger the die-off will be. We have already reached the point where we have done irreversible damage to the planet Earth. The longer you idiots keep chanting your growth mantra, the more likely that our species will face near term extinction.
Get a grip on reality already.
Dragon Oil on Tue, 17th Feb 2015 2:48 pm
Debt is the equivalent of slaverey. For instance: a slaveowner must provide to the slave, food, potable water, housing, medical care, sanitation, some time off, housing and other things like tools to work with, training and a place to do the work. The list goes on, including the fact the slave owner had to buy the slave. He has a considerable investment in the slave. The slave, on the otherhand, gets all this stuff at no cost to him but pays for it with his labor and lack of choice. This country was founded, in large part, by voluntary slaves called “indentured servants”. They came here in droves from everywhere and worked their way out of that situation. Nothing has changed. We’re still slaves only now it’s called a credit card. In slavery both sides have to keepup their side of the deal or it falls apart and both sides lose. Same with a credit card. Borrowing money to produce overpriced oil is guarenteed slavery which must end in one side or the other failing to keep upmtheir side of the agreement. Who do we see about that?
The Dragon