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Page added on July 18, 2015
How the plunging price of oil has set off a new global contest
He’d spent years touting his vision that America would one day dominate one of the world’s most powerful markets. And when Harold Hamm, a pioneer in discovering vast reserves of shale oil under American soil, took the stage in front of several hundred oil luminaries, he never acknowledged that the narrative was in doubt.
“For the next 50 years, we can expect to reap the benefits of the shale revolution,” Hamm said one day this spring. “It’s the biggest thing that ever happened to America.”
But away from the stage, the U.S. oil industry — and Hamm — was in crisis.
In the previous six months, Hamm, founder of oil giant Continental Resources, had lost $6.5 billion, more than one-third of his net worth. The industry that Hamm had helped create was facing its greatest test in a frantic race to stay profitable as rival Saudi Arabia worked to drive down oil prices and, according to some analysts, undermine America’s oil industry at the most important moment in its history.
Behind the low price of a gallon of gas at the pump this summer lies a competition worth trillions of dollars and which is capable of swinging the geopolitical balance of power. On one side are Hamm, a famous wildcatter, and other American oilmen who rode the discovery of hydraulic fracturing to tens of billions of dollars of wealth and a promise of, in Hamm’s words, ending the “disastrous” days of Saudi Arabian control. On the other are the Saudis and their allies in the Organization of the Petroleum Exporting Countries, which are trying to stem rising U.S. oil power and maintain their 40 years of dominance.
On Tuesday, the cost of West Texas Intermediate oil, a U.S. benchmark, fell to $52.11 a barrel — down from a peak of nearly $110. Meanwhile, the number operating oil rigs in the country has fallen to just 645. That was lowest rig count in almost five years, down from more than 1,500 a year ago. OPEC said last month that it would continue to pump 30 million barrels a day, despite low prices, sending a strong signal to U.S. competitors that it had no plans to let up the pressure on the Americans.
And now there is a new pressure on the scene. The decision to strike a nuclear agreement with Iran, which has more oil reserves than all but three OPEC countries, will, over the coming months, unleash new Iranian oil into the markets. Analysts expect Iran to pump 1 million or more barrels a day as a result, so the prospect of the deal has been driving prices down in recent weeks — by about 15 percent — interrupting a stabilizing in the price of oil since the big plunge last year.
Even before the Iran news, the clash between the U.S. and Saudi Arabian energy interests had created a volatile new force in the global economy and unprecedented challenges for the two largest producers. The Saudis need high prices to fund their nation but have lost control of the market because of the oil boom in the world’s largest economy. The United States, after years of easy growth, is grappling with painful adjustments — including tens of thousands of layoffs — with the hope of staying viable amid the price collapse.
At stake is not just the price of filling up a car but America’s energy independence and one of its most vibrant industries. The fallout will ultimately determine whether cheap oil is a mere blip or will continue for years.
In the past, when oil prices fell, the Saudis and other oil-rich states would step in, pulling back on production and letting prices rise. But this time, the price fell in part because of the substantial increase in U.S. energy production. Instead of acting to shore up the market, the Saudis increased drilling themselves, sending oil prices plunging and threatening U.S. drillers who rely on oil prices being high.
As sanctions lift, Iran could again be a major force in the oil market. In this 2014 photo, an Iranian oil worker rides his bicycle at an oil refinery south of Tehran. (Vahid Salemi/AP)
“For the last 20 or 30 years, it was almost like OPEC could flip the switch and change things as they wanted,” said Mike Terry, president of the Oklahoma Independent Petroleum Association and an acquaintance of Hamm’s. “Well, they don’t have that power anymore.”
Nearly a year into the oil contest, senior players in oil capitals from Riyadh to Houston are making risky bets about their next moves. Riyadh is continuing to pump, even as that puts its own petro economy on shakier footing.
For the U.S., the risk is that sustained cheaper energy prices will derail what had seemed only months ago like an inexorable energy revolution, one that was helping to power a still-recovering economy.
“A tidal wave scenario,” Ryan Lance, chairman and chief executive of ConocoPhillips, said in Houston, describing the forces that were challenging producers across the world. “The industry is in a bit of survival mode.”
The Saudis have a built-in advantage in this global contest. They have some of the easiest-to-access oil on Earth, including a single field — the massive Ghawar — that produces more oil daily than any other OPEC member.
Many state oil companies, from Venezuela to Nigeria, are corrupt, analysts say. Saudi Arabia’s state oil company, known as Aramco, is anything but. Aramco’s facilities glisten with a campus of housing facilities, classrooms and training sites.
In Houston, at the same conference Hamm attended, hosted by consulting firm IHS, an Aramco oil executive made clear that the Saudis, with many advantages over the Americans, were not going to let up during a downturn. Pulling up logos of fallen American companies on the screen — Kodak, Polaroid, Compaq — Muhammad Saggaf warned: “If we look back, we will see history littered with examples of successful companies that were at the front of the race but in a very short period were relegated to the back … because their competitors won the innovation race.”
During the decades of Saudi dominance, crude prices stayed low, but spiked mightily during wars in the Middle East and oil embargoes. More recently, prices reached a new plateau above $100 a barrel given the demand for energy from China and India. All the while, U.S. fracking companies improved their technology to harness oil from regions that were never thought to offer much in the way of energy.
Eventually, amid a slowing economy and a growing awareness that U.S. oil discoveries were enough to make America energy independent — and potentially even an exporter of petroleum — prices began a steady decline. Then, in late November, for the first time, Saudi Arabia embarked on a new strategy, refusing to cut production to prop up prices. That decision turned a gradual price decline into a free fall.
The Saudis were influenced by a bitter memory from the mid-1980s, when declining global demand had led to a similar oil glut. To try to keep prices stable, the Saudis went from producing 10 million to about 2 million barrels per day. Its customers flocked to other OPEC nations, and the Saudis fought for years to get them back.
“We learned from that mistake,” Ali al-Naimi, the nation’s oil minister, said at a March conference in Berlin. “Today, it is not the role of Saudi Arabia, or certain other OPEC nations, to subsidize higher-cost producers by ceding market share.”
Aramco declined to comment for this story.
The new Saudi strategy has caused ripples across the world, knocking off pricy drilling operations everywhere from the Arctic to South America. More broadly, lower energy prices have delivered a blow to oil-dependent nations, pressuring state-run oil firms, causing a currency slump in Nigeria, and contributing to major economic contractions in Venezuela and Russia.
Some experts also say that the Saudis are hoping to cut off the fracking boom at its knees. If they’d allowed prices to stay high, U.S. production would have continued to grow rapidly.
“And they’d be asked to cut again and again, losing market share,” said Jamie Webster, a global oil markets analyst at IHS.
The Saudis have huge advantages beyond their plentiful reserves. Hundreds of U.S. companies can’t adjust as quickly as one state-run oil company. Saudi Arabia can bring its oil to market in weeks. U.S. frackers need six months or longer, because their oil is more difficult to access. If U.S. companies choose to raise production, they also face the challenge of coaxing laid-off workers back into the oil fields — in some cases after they’ve returned to their home states and found new jobs.
But the choice isn’t simple for Saudi Arabia, which grappling with a leadership change and a military conflict with neighboring Yemen. Despite decades of attempts to diversify the economy, oil revenues essentially subsidize the state.
Sustained lower oil prices will “put the Kingdom’s savings from earlier oil revenue booms at risk of depletion,” Khalid A. Alsweilem, a former investment director at the Saudi Arabia Monetary Agency, wrote in a recent report published by Harvard University’s Kennedy School.
Hamm rose from poverty in Oklahoma, the 13th child of a sharecropper, and spent the early part of his career working dirty oil jobs, cleaning tank bottoms and trucking supplies to drilling sites. But he grew obsessed with the idea of the big strike, the discovery of treasure in the ground, according to “The Frackers,” a book about the nation’s new oil billionaires. He started a tiny company in 1967 named after his two daughters, used the proceeds to pay for geology classes and learn about computer mapping, and ultimately bought up land on the cheap in hard-to-drill places like North Dakota.
Hamm’s company, renamed as Continental Resources, grew into an oil giant over less than a decade thanks to new but pricy drilling technology that opened access to a previously out-of-reach bounty. “Thank God we had good oil prices,” Hamm said at a Continental event last September, with oil at $97 per barrel.
“One time everybody was looking at the sunset of the [American oil] industry,” Hamm said. “We’ve seen America driven to a new era, if you will.”
But the price collapse has put the U.S.’s — and Continental’s — continued rise in doubt.
Since last fall, U.S. drillers have shuttered 60 percent of their rigs, seen share prices tumble with little recovery, and laid off tens of thousands of workers who might not return even if prices were to recover. Only a handful of companies have so far faced questions about their solvency, but they have been furiously cutting projects that are no longer viable. The pullback has been severe enough to slow down the broader U.S. economy, which for years had been powered by oil job growth and investment.
“There was an irrational expectation that the market for U.S. oil was unlimited,” said Michael Levi, an energy specialist at the Council on Foreign Relations. “It led to a lot of ill-advised investment.”
The oil prices of the previous years — $111 per barrel in 2012; $108 per barrel in 2013 — had helped Continental grow at a breakneck pace. In early September 2014, Continental stock hit $80 per share, and Hamm, who owned 68 percent of those shares, was worth more than Rupert Murdoch.
But then prices started to fold.
The downward slide has left Continental particularly vulnerable because Hamm bet wrong on what would happen in the oil market. As oil began its slide in early November, Hamm believed that oil had reached its “bottom rung.” So he sold off Continental’s hedges, netting $433 million in cash while losing his assurances that he could sell oil at a fixed price.
The company, in industry parlance, was “going naked,” fully exposed to the markets. Then, on the day after Thanksgiving, OPEC held a meeting in which the Saudis determined that they’d no longer work to balance the market. Though Hamm perhaps saw that part coming, what he didn’t foresee was how the markets would react: They freaked out.
“In hindsight, it was not the right decision,” said Leo Mariani, an analyst at RBC Capital Markets who follows the energy industry.
Continental declined to make Hamm or other executives available for comment to describe company decision-making, but responded to several questions by e-mail.
Warren Henry, Continental’s vice president of investor relations and research, said by e-mail that “no one anticipated the rapidity of the price drop, in part because it was based on price-cutting actions by OPEC members rather than supply/demand fundamentals alone.”
Continental is a much different — and smaller — company than it was a year ago. It’s pressured suppliers to lower their costs and has fewer rigs in fewer places. In the Bakken formation that made Continental famous, operations were once spread across eight counties. Now, Continental works only in a tight cluster where oil is cheapest to come by.
“Last year, I could sit on my deck and count 60 trucks in an hour,” said Jean Nygaard, a Divide County resident who leases her farmland to Continental. “Now, I can drive to work 28 miles and not see a vehicle.”
Today, the U.S. oil industry is trying to feel out what will happen next. Some figure an increase in oil prices has already been set in motion, triggered by the fact that so many companies have cut down on searching for the next place to drill. Without exploration, companies can maintain production for one or two years. But not for a half-decade.
Hamm has come to interpret the events of the last half-year as a sign of U.S. oil’s staying power. Continental lost $33 million in the first three months of 2015, but Hamm says the company will be able to tread water for the rest of the year — and quickly ramp up if oil prices touch $70, something he says “could happen fairly soon.”
“We are adapting well to the new price environment,” Hamm said. “It’s a great time to be in the American oil business,” he added. “America will again be an energy superpower.”
41 Comments on "How the plunging price of oil has set off a new global contest"
paulo1 on Sat, 18th Jul 2015 8:00 am
re: “Eventually, amid a slowing economy and a growing awareness that U.S. oil discoveries were enough to make America energy independent — and potentially even an exporter of petroleum ”
Step right up folks, stock to sell stock to sell. Get your hot and cold stock right here. Peanuts. Peanuts. Dogs Dogs. Beer. Cold Beer. Get your ice cold beer right here.
Expensive oil kills ecocomies, Harold. Cheap oil kills oil companies. Ponzi debt to keep BAU going kills any hope of transition for our society.
Use what time (and cash) you have left for a few sensible preps that fit your circumstances. It’s nuts out there.
dave thompson on Sat, 18th Jul 2015 8:18 am
“In the previous six months, Hamm, founder of oil giant Continental Resources, had lost $6.5 billion, more than one-third of his net worth”, So this guy Hamm is still worth 13 billion? What are we supposed to feel sorry? Is this guy just another example of the psychopaths running things? There is a “hoarding disorder” that people are labeled with if their house is stuffed floor to ceiling with old newspapers. Does Hamm Qualify?
Davy on Sat, 18th Jul 2015 8:25 am
Paulo said “Expensive oil kills ecocomies, Harold. Cheap oil kills oil companies”
I like how that sounds Paulo. Good bullet point for the corns to chew on.
Davy on Sat, 18th Jul 2015 8:29 am
Dave, do you really believe he is worth that knowing what we know about oil, shale, and what is likely coming. I think the guy is broke right now but “he don’t know it yet!”
joe on Sat, 18th Jul 2015 8:31 am
Seems like they are saying that Saudi forces America to buy it’s oil. Americans pay half what Europeans pay because Europe’s refiners use expensive oil from the north sea, US refiners are not told where to get their oil therefore they get the cheapest they can.
Maybe if America wanted to end it’s involvement in foreign wars it should man up, pay more and use shale and it’s own resources, problem is though that the US uses so much oil it’s can’t fuel domestic supply. It would mean forcing refiners to buy only US sources. It’s an old idea called protectionism, to use only the products from your own economy. It didn’t really work in the inter world war years. It might work now though, it would certainly cause the world to turn to China to grow it’s economy, but that’s another day dream.
joe on Sat, 18th Jul 2015 8:33 am
In Canada there is another word for the ‘fraklog’. It’s, UNWANTED.
BobInget on Sat, 18th Jul 2015 8:39 am
lifted from another (market oriented) energy board,
Investor Village. #4 should be of special interest here. IMO this news is huge with LT implications.
1. Baker Hughes Rig Count
Verticals and Permian went up for a 2nd week in a row.
Horizontals and non-Permian continue to crater.
No good explanation, but HBP and exploratory makes more sense than sweet spots.
2. ND Rig Count
According to Baker Hughes, the ND rig count is 68. The ND DMR is still reporting 73. In my experience, Baker Hughes leads the ND DMR, maybe because BHI calls the companies, while ND waits for them to report updates. I suspect the ND rig count will drop another 5 rigs over the next 2 weeks or so…
3. Speaking of Bakken, WLL
Whiting upped capex guidance from $2.0 billion to $2.3 billion, upsetting the street.
However, WLL fessed up to already spending $1.59 billion in H1. WLL guidance is for $340-380mm per quarter, $720mm midpoint for H2 ($1.44B annual run rate). In that vein, they spent $155mm in June ($1.86B annual run rate) vs $300mm in April and May ($3.6B annual run rate).
In other words, the ‘capex increase’ is monies already spent, due to cutting slowly, rather than increased expenditures.
4. COP Ensco cancellation
COP paid $550,000 per day for 2 years on a NEWBUILD rig, to avoid 3 years of contract. COP just puked up $400 million to avoid a $600 million drilling committment. Apparently offshore sucks so much that ‘1/3 cycle economics’ don’t justify exploration.
5. Natty and NGLs
Ng and ngls are domestic, mostly landlocked markets. Structural demand is growing, due to power generation, petrochemicals, and exports. Many plays (e.g., Permian, EF, Mid-Con) have a typical mix of 50%/20%/30% oil/ngl/ng. With oil drilling cratering, that means a lot less ‘associated’ ngl and ng. At some point, especially with $50 oil, prices for both ngl and ng will have to rise to incentivize primary drilling. The question is, when?
tita on Sat, 18th Jul 2015 8:49 am
Feels more like an advertisment adressed to the investors than a guenine article describing the real shit shale players are in right now.
shortonoil on Sat, 18th Jul 2015 9:07 am
“Eventually, amid a slowing economy and a growing awareness that U.S. oil discoveries were enough to make America energy independent —”
“Petroleum production is a process which provides for the delivery of energy from a liquid hydrocarbon.”
Apparently, the author hasn’t figured that out yet!
http://www.thehillsgroup.org/
Makati1 on Sat, 18th Jul 2015 9:07 am
tita, I see the same in most oil articles today. Nothing more than slightly disguised advertisements to get more suckers to lose their life savings by ‘investing’, or to keep the smart rats from jumping off of the sinking SS Petroleum.
Notice the source. WaPO, the inside the beltway, arm of the Ministry of Propaganda.
Cloud9 on Sat, 18th Jul 2015 9:33 am
I am worth fifty trillion dollars. Would you like to invest in my company? I must know what I’m doing if I’ve got that much money right? My wealth is backed up by a reserve bank. Does that make you feel better? The note that I have is a claim against the Reserve Bank of Zimbabwe. Does the last fact matter much?
Snake Oil salesmen are a part of life.
freak on Sat, 18th Jul 2015 10:47 am
Saudi’s pricing strategy seriously damaged the fracking industry worldwide. I think that is a blessing in disguise. The damages that fracking can create are really worrisome and isn’t fracking just making more difficult for the renewable energies sector to flourish?
But absent any major technology breakthrough, renewable will never replace petroleum products.
The critical factor is an energy density of 16 Kj/g, which is the energy density available from gasoline at the wheels. (~40 Kj/g x Q). Batteries aren’t there now, and the technologies (or more accurately, the chemistry thereof) is decades away.
The dirty secret of windmills and solar is the natural gas backups for when the wind isn’t blowing enough or the sun isn’t shining. Which means that so-called renewable power grids will actually be natural gas grids with renewable supplements.
In case you are interested here you have an open poll on whether fracking is an opportunity or a threat: https://netivist.org/debate/fracking-pros-and-cons
Jerry McManus on Sat, 18th Jul 2015 12:49 pm
For years and years the peak oil crowd has been relentlessly beat over the head with the cornucopian belief that higher prices and “new” technology will always be sufficient to bring more oil supplies on to the market, and will continue to do so for the foreseeable future.
Now we see the flip side. All the whiz-bang technology in the world won’t save you if demand destruction and low prices conspire to wipe hundreds of billion of barrels off of your list of so-called “reserves”.
They did get one thing right, we will never run out of oil. Trillions of barrels of low grade hydrocarbons, mostly substances that can’t even really be called “oil”, will remain in the Earth’s crust long after our brief shining moment of overpopulation and overconsumption has crumbled to dust.
BobInget on Sat, 18th Jul 2015 1:36 pm
BBC
Saudi security forces have arrested 431 suspected members of the Islamic State militant group, officials say.
They are accused of plotting suicide attacks on security forces and mosques in various parts of the country.
Most of the suspects are Saudi citizens, but they also include people from six nationalities, including Yemen and Syria, the interior ministry said.
Saudi Arabia is part of a US-led coalition carrying out air strikes against IS militants in Syria and Iraq. (and Yemen)
In its statement, the interior ministry said the suspects were planning suicide operations targeting mosques “on every Friday timed with assassinations of security men” in the east.
“Terrorist plots to target a diplomatic mission, security and government facilities” the southern province of Sharurah were also thwarted, the ministry added.
In April, Saudi authorities said they had arrested 93 IS suspects and foiled planned attacks on targets including the US embassy in Riyadh.
Boat on Sat, 18th Jul 2015 1:41 pm
Jerry…
Now we see the flip side. All the whiz-bang technology in the world won’t save you if demand destruction and low prices conspire to wipe hundreds of billion of barrels off of your list of so-called “reserves”.
This is a heard mentality on a doomer site.
http://www.economist.com/blogs/graphicdetail/2015/01/daily-chart#comments
Dermand destruction didn’t cause the low price of oil. Over supply of oil did. The US economy isn’t shrinking, just the pace of growth. The worlds economy isn’t shrinking.
joe on Sat, 18th Jul 2015 2:09 pm
I bet those crazy sunnis are kicking themselves for letting 9/11 happen. The last time the US made such a smart diplomatic move was when it sided with the British in WW2. Its a move totally in US interest and not with any other middle east country in mind. The truth on the large scale is that probably Iran will one day get a nuke. But as each year grows hotter on this world, I think we may have bigger problems now.
Boat on Sat, 18th Jul 2015 2:25 pm
joe,
If Iran gets a nuke so will 50 other countries. Don’t think it will happen without war.
joe on Sat, 18th Jul 2015 2:37 pm
no doubt. I think Iran has cleverly used nukes in a very political way. Iran got a deal not just from the US, its got a deal from 6 countries much more powerful than itself, this deal has been going on for I think over 10 years, its not something that just happened. I don’t know if it will rain tomorrow, I just know, someday, its gonna rain. I don’t buy this ‘never again’ stuff. Its not in our nature to be at peace, lobotomised people are at peace. Our unrest, our pain, our energy, these make us better, but it will probably destroy us too.
Davy on Sat, 18th Jul 2015 3:12 pm
Boat is showing his true colors as a corn. Demand destruction most certainly has contributed to low prices. Excess supply from over production is a factor also. We can acknowledge this by the fact that all central banks are unable to normalize policy. High oil prices from central bank distortion of the commodity markets was a big factor in oversupply. Blue Chinese slowing growth is a significant factor. We are just now seeing this slowing in their messaged numbers.
The U.S. Growth rate is poorly by historic standards. If we include all the data massaging it is worse. Boat pull that bag off your head and start thinking clearly in a balanced way. This is not all doom but you are ignorant if you think you can dismiss the doom.
shortonoil on Sat, 18th Jul 2015 3:27 pm
The price of oil has fallen by 50% over the last year, and consumption has barely moved. Using the old Econ 101 theories (that obviously don’t work) that implies that the price of oil is almost completely elastic; the P/Q curve is flat. Economists have been telling us for years that it is perfectly inelastic; the P/Q curve is vertical. Performance over the last year unequivocally demonstrates that they they have been barking up the wrong tree for a long time.
In actuality, the price of oil has historically been driven by its value to the economy. Oil was worth more to the economy than what the producers were charging for it. Demand has followed supply for the last 100 years because of that situation. As production went up, so also did consumption. Three years ago, because of the effects of depletion, that changed; the price of oil became higher than its value to the economy. Its price fell, and producers began pumping frantically to make up for the difference in lost revenue, which depressed prices even further.
2012 was a point of criticality. It was the point were falling price (temporarily) increased production, but that decline in price had no impact on the economy. The energy supplied from petroleum did not increase, thus the economy did not improve, so demand stayed the same. The world of petroleum is now Topsy Turvy: declining price increases production, but it does not increase demand. For those attempting to explain this phenomena using supply/ demand curves it has turned into a quagmire. For those using energy balance equations, it all makes perfect sense.
http://www.thehillsgroup.org/
Boat on Sat, 18th Jul 2015 4:46 pm
Davy, I don’t miss all the signs of trouble. US 18 trillion dollar debt, 420+ interest on the debt every month. Over 450 billion dollar deficit per year. Conflicts we don’t need to be involved in etc.
My only point is, 5 years a go we were in a lot worse shape, unemployment is down, stock market is at all time highs blowing away 12,000 djia at the time of the crash. Unlike others I think it’s great that big oil is subsidizing the poor driver with cheap oil. It’s only temporary anyway.
I don’t get scared of a meltdown like the crash. At some point all of us has to demand better rules from the stock market. Like a much larger capital safety net. More expensive insurance rates for bond holders etc I believe it will happen. May just take another crash or two.
We also disagree about growth as must. If we did not give tax breaks for having children, that would help. If we did no allow immigration for any reason, that would help. if we jailed the employer instead of the illegal immigrant and stopped subsidizing business on, the tax payer back that would solve that problem. If we cut military spending to 200 billion instead of 620 billion, that would help etc You can call me a corn or whatever you want, I just think most of our problems are political and the fixes are doable. I tend to focus on the changes that are happening and will happen where the world and the US has and are making great progress. I just have not seen a collapse coming in the next 5 years for over 10 years. The time I started following energy.
If we had receding populations there is plenty of room for consumer goods in the efficiency industry and room for investment in the environmental sector. Zero energy homes and buildings are mandatory for example. A carbon tax for another. No more flaring. Free online collage run by computers
Where do we get people to fill jobs in a receding population? Technology makes it possible for a flat tax. No need to employ people there. Health care as a commodity instead of a for profit system would drop 10’s of billions and not require the massive labor force. Banks and insurance someday won’t have the biggest and nicest building in every town. They will be ran off the net. In fact in the future I see a huge drop in infrastructure. All retail will be ran off a scan on your phone. No need for check out lines. We have so much inefficiency in almost every sector of life. These will be the jobs of the future, doing common sense improvements. In closing my rant lol, You may call a small cut in growth a signal of collapse, I don’t worry, now WWIII because of idiot humans? Possible.
Boat on Sat, 18th Jul 2015 5:14 pm
Short,
The world of petroleum is now Topsy Turvy: declining price increases production, but it does not increase demand.
Americans drove a record 988 billion miles during the first 4 months of 2015, compared with the last record of 966 billion in the first 4 months of 2007.
http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
As a result, refinery wholesale gasoline margins, (the difference between the wholesale price of gasoline and the price of Brent crude oil) have been strong in recent months leading to record high levels of refinery runs. U.S. average wholesale gasoline margins averaged 62 cents/gal in June, 28 cents/gal higher than June of last year and 25 cents/gal higher than the five-year average (2010-14) for June.
Doesn’t look like your scenario fits this report. I predict gasoline sales will continue to flourish because cheaper prices leads to more consumption. Let’s look next month.
Davy on Sat, 18th Jul 2015 5:41 pm
Geeze Boat, can’t you understand what Short just commented on? What he just said is about as profound as it gets. Boat reread what short said 5 times. Each time research it and dissect it, distill it, then drink it down brother cause that’s where we are going.
shortonoil on Sat, 18th Jul 2015 5:52 pm
“Americans drove a record 988 billion miles during the first 4 months of 2015, compared with the last record of 966 billion in the first 4 months of 2007.”
That is a 2.2% increase on a 50% reduction in the price of oil. What’s your point?
antaris on Sat, 18th Jul 2015 6:48 pm
And what did the rest of the world do with that 50% reduction ? My guess is not much.
tita on Sun, 19th Jul 2015 12:14 am
Short… I’m not an economist, but for what I know, when demand doesn’t change when the price is changing, that means that it’s inelastic! Actually, oil has a very small positive elasticity. Also, demand move very slowly on price variations. It’s just that you can’t switch quickly from a ressource to another, like you could switch from rice to wheat when price is to high.
You lack a little bit of credibility on this one.
marmico on Sun, 19th Jul 2015 4:32 am
2012 was a point of criticality
The quart shy of oil wins another Buffoon of the Day Topsy Turvy Award.
World GDP grew 3%+ in 2013 and 2014 and is estimated to grow likewise in 2015.
Source: IMF
World liquids consumption grew by 1.4 mb/d in 2014 and is estimated to grow likewise in 2015.
Source: EIA
tita on Sun, 19th Jul 2015 6:57 am
Short… I’m not an economist, but for what I know, when demand doesn’t change when the price is changing, that means that it’s inelastic! Actually, oil has a very small positive elasticity. Also, demand move very slowly on price variations. It’s just that you can’t switch quickly from a ressource to another, like you could switch from rice to wheat when price is to high.
Davy on Sun, 19th Jul 2015 6:59 am
Marmi, I am sure you are getting nervous with your smallish investment in today’s volatile uncertain times. You like to boast and swagger about past and present growth with your bullet points. You are afraid to admit to the storm clouds ahead because that would open a can of worms with you rosy outlook.
Marmi boy, when the Fed normalized, ECB/EU normalizes, and China normalizes then I will bow to you and kiss your feet. You are the buffoon that comes on here occasionally spouting off how great things are when the majority here on PO know otherwise. Until you show some fairness and balance you look the same fool as others here spouting off an agenda.
Marmi the yard gnome: http://www.designtoscano.com/product/code/QM22997.do?code=PDINCLUDE&code=DTPLAS12&gclid=CNeXwLiR58YCFQEcaQodcqQE7w
GregT on Sun, 19th Jul 2015 7:07 am
“World GDP grew 3%+ in 2013 and 2014 and is estimated to grow likewise in 2015.”
“Gross domestic product (GDP) is the most commonly used measure of economic growth. But GDP isn’t just inaccurate and misleading – it’s the contrivance of Keynesian economists seeking to push their own, big-government agenda.
That’s right. GDP is a financial ruse – the biggest of the past half-century. And it’s time to move past it to another, more accurate measure of economic growth.”
http://www.nuwireinvestor.com/articles/gdp-not-real-indicator-of-economic-growth-57693.aspx
Boat on Sun, 19th Jul 2015 7:28 am
tita, I doesn’t matter even when the evidence and facts show a trend that goes against their agenda. Short laughs off a record amount of driving. Saying the drop in oil has had no impact on the economy is ludicrous. It is estimated the savings per family is close to $750 per year. After taxes thats two weeks work for somebody making $10 an hr or less.
Davy on Sun, 19th Jul 2015 7:30 am
Ti, shorts point is oil has cross over into new supply demand territory exhibiting a new supply demand dynamics unlike the old. His primary point is oil does not deliver the same energy in aggregate to the economy as it used to. This is systematic and at the global macro level in my understanding. This is not a direct causal relationship it is an underlying situation. The early onset of climate change is a good analogy.
Climate change cannot be blamed for all the weather but we know it is increasingly a significant influence. More heat and energy in the ocean and atmosphere must exert an influence. This is natural law. By analogy a foundational commodity oil exerts overly strong influences with minor changes on a complex interconnected global world. These influences on the just in time production and distribution through economies of scale and leveraged exchange are subtle but at the levels we see globally the effects on a small amount of growth get magnified. This is especially true with consumption and population pressures that are growing.
We are hitting marginal return on so many complex efforts. If you take the global systems foundational all important commodity oil and reduce its overall value by depletion of quality and quantity then you begin to see supply and demand tensions. I say quantity because of the depletion reductions of conventional high quality crude. I say quality because many new sources are either lower quality by composition or lower quality because of the difficulties of extraction.
When you have subtle changes to the underlying foundation of a system at this level you get system wide perturbations. Currently we are seeing these along with several other perturbations. A similar situation is occurring with food and water availability. The same is true with the constant increase in population pressuring the global infrastructure. We are at a point where oil, food, water, and vital global system networks are showing subtle disruptions.
It is the summation of multiple issues of limits that are converging. We can’t blame everything on oil. We by nature want to use linear thinking and analysis to simplify our discussions. Hence the econ 101 demand supply curves. There are definitely global demand issues or the central banks of the world would be normalized. There is definitely issues with oil supply or we would not have a huge debt overhang with oversupply and low prices.
The system is no longer in an optimum range in a number of areas. This is what happens with the approach of limits of growth. Marginal returns on activities and networks develop. This turbulence causes inertia on the momentum of growth. The current system cannot make it very long without sustained growth of at least 3% over the long term. We are at that point where growth is falling behind and the manifestations are appearing like cracks in a dam. When will the structure fail? Good question but I can tell you the cracks will get larger not smaller because the outlook shows nothing of promise. All major issues are getting worse not better. Please give me some positives to change this outlook.
Davy on Sun, 19th Jul 2015 7:40 am
Big deal Boat “It is estimated the savings per family is close to $750 per year.” What about all the other issues with cost increasing? What about all the other economic issues? $750 is going to make everything ok? Please Boat don’t tickle me.
Boat you have the lame agenda that everything will be OK. I don’t think you are capably of understanding what short is discussing that is the problem. You want to grab simplistic numbers and say “look how good this is”. You have an underlying cognitive dissonance from a global predicaments. You know things are not good but you can’t come to admit it fully. You try to say “ok we have problems but look here or there at the wonderful news”. You can’t see the forest Boat. Stick around I have seen others like you develop some critical thinking that pops their cornucopian bubble.
Boat on Sun, 19th Jul 2015 8:17 am
Davy,
That was your best post that I can remember. Let me make a couple remarks and propose another idea.
Maybe the high price of oil was just a learning curve on how to extract oil. True it did take a high price for fracking to evolve. For example using horizontal drilling and many more wells per pad is a relatively new idea along with an ever growing number of stages per line.
For the US 600 or so drillers left they are much more efficient and production is up per well. They are also fracking much cheaper.
As to the value of this new oil. Almost all it is light sweet crude. Easier and much cheaper to refine and produces a higher percentage per barrel of products that sell higher in the market. My sense of it all is there is just to much oil on the market period and not because of demand destruction. Growth and demand will continue but the market does not turn on a dime. I believe tita’s point is exactly right, huge markets are not elastic and it takes time for the cheaper oil to show it’s impact.
If you type in any GDP chart you will see the big dip after the crash and then a return to fairly normal growth.
Boat on Sun, 19th Jul 2015 8:21 am
Rock,
Part of the reason gasoline prices do not show up at the pump is refineries are getting huge historical crack spreads. Can you or anybody explain this dynamic.
Kenz300 on Sun, 19th Jul 2015 8:50 am
More people should ride bicycles.
Low cost transportation that is good for the environment and good for your health.
roxy on Sun, 19th Jul 2015 9:26 am
My guess is that if the GDP were calculated the way Shadowstats does for the USA, I bet it would be in negative territory such as the USA has been for a number of years. The GDP of many nations is probably manipulated to look better for political purposes and for probably other reasons.
Northwest Resident on Sun, 19th Jul 2015 9:55 am
“If you type in any GDP chart you will see the big dip after the crash and then a return to fairly normal growth.”
Sorry, Boat. That is flat out wrong. Fairly normal growth is a thing of the past because the economic era we now live in is anything but normal. GDP growth is debt-induced these days, pure and simple. That, and some cleverly and not-so-cleverly cooked up numbers as roxy points out in the above comment. It takes cheap, excess energy to generate GDP growth especially in a world of exponentially increasing population coupled with severely depleting natural resources. We are reaching or have already reached the limits to growth, and without growth, our economic system collapses. That is why they fake the GDP numbers and keep pumping billion$ (trillion$!!) in debt annually into the economy — it is the only “growth” that is left in a world that has just about run out of the cheap and plentiful energy and unexploited natural resources that made all past growth possible.
shortonoil on Sun, 19th Jul 2015 10:22 am
“Short… I’m not an economist, but for what I know, when demand doesn’t change when the price is changing, that means that it’s inelastic!”
No change in quantity supplied with a change in price is perfectly inelastic. The curve is vertical on a P/Q plot. Price has fallen by 50%, and there has been almost no increase in product supplied. The product is now almost perfectly inelastic.
“Actually, oil has a very small positive elasticity.”
A positive elasticity would mean that a change in price would bring about a large change in quantity supplied, or demand would increase with declining price. That has not happened! Your statement that oil has “a very small positive elasticity” is completely refuted by the data.
“Also, demand move very slowly on price variations. It’s just that you can’t switch quickly from a ressource to another, like you could switch from rice to wheat when price is to high.”
With price declining there would be no switching to another resource. Your argument that demand would be slow to react because of the need to switch to another resource has zero merit. That could only apply if price was going up. It is not; it is going down.
Point being is that the Econ 101 curve is not working in the present situation, and never has worked. Price is going down but demand is not increasing. Over the last 100 years production has gone up, demand has gone up, and the price has gone up. If demand had not gone up, as production and price increased there would now be billions of barrels of unsold oil. Since 1960 production has increased by 1214%, and price as of 2012, 3,470%. Demand increased along with both increases. For that to happen the demand curve had to be sloping in the wrong direction. Presently, the only increase in demand is in the Petroleum Production System itself, which we calculate is now 2.5% per year.
No matter how much one wants to sugar coat the present situation, in essence, the petroleum industry has run out of expanding market. The price is now so low that producers can no longer replace extracted reserves. $50 oil is not going to buy new fields. When the present reserves have been completely depleted the oil age will be over!
http://www.thehillsgroup.org/
joe on Sun, 19th Jul 2015 10:38 am
Oil price/supply is in equilibrium at 50 because in economics 101 you ASSUME that all actors are rational and that markets are perfect. OPEC disrupts perfect markets and it’s goal is to be the only reliable supplier. The real issue is to solve the problem of how to stimulate the economy and overheat it without killing the goose, ie forcing the hand of central banks, it’s a limit to growth issue, not a price one.
At higher prices all that happens is that new actors enter the market but price is not stimulating the economy enough, it seems that massive rounds of QE aren’t enough all this money is simply being washed around the stock market and recycled into more debt. Nobody trusts the current construct of the economy where the FED and ECB are the biggest players. You might as well nationalise the whole lot because otherwise these private central banks will soon own everything.
shortonoil on Sun, 19th Jul 2015 10:48 am
“World liquids consumption grew by 1.4 mb/d in 2014 and is estimated to grow likewise in 2015.”
On 93 mb/d that is an increase of 1.5% per year. Between 1960 and 2012 production increased at an average rate of 2.5%. World petroleum production growth is now down 40%. You are right, the oil industry is in trouble, and so is the rest of the economy.