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Page added on August 13, 2015
The Oil Price: How Low Is Low?
With West Texas Intermediate (WTI) and Brent close to their January 2015 lows some readers are wondering how these lows compare with historic lows when the oil price is adjusted for inflation (deflated). BP just happen to provide an oil price series that is adjusted for inflation (Figure 1). The data are annual averages and based on Brent since 1984. Annual averages conceal the extreme swings in price that tend to be short lived. At time of writing WTI front month future contract was $44.42 and Brent front month future was $49.92.
Figure 1 The blue line gives the annual average oil price (Brent since 1984) in money of the day and the red line adjusted for inflation expressed in $2014. Three large spikes in the oil price are evident in the 1860s, 1970s and 2010s. It is notable that the magnitude of each spike is similar, of the order $100 to $120 (adjusted to 2014 $). The 1860s and 1970s spikes were followed by long bear markets for the oil price, lasting for 110 years in the case of 1864 to 1973.
Related: Congress To Lift Oil Export Ban Next Month?
To understand what was going on 1861 to 1973 I suggest readers read The Prize: The Epic Quest for Oil Money and Power that earned author Daniel Yergin the Pulitzer Prize. It is a tremendous read. Most of us are however, more interested in how today’s prices compare with recent slumps, most notably the slump of 1986 and 1998 (Figure 2).
Figure 2 The main events, Acts 1 to 6, are described briefly below.
To get straight to the point. Brent will need to fall below $30 to match the lows seen in 1986 and to below $20 to match the lows seen in 1998.
Related: Frack Now, Pay Later: A New Era In U.S. Oil?
WTI in particular is trading close to its support level of $43.39 marked on 17 March 2015. If traders push the price below that level then the price could fall a lot lower for a brief period. At the fundamental level, supply and demand need to be rebalanced and the main problem is over-supply of LTO from the USA and of OPEC crude depending upon which way one views the problem. The recent price action since September 2014 has been brutal on producers but not yet brutal enough to remove the 3 million bpd over supply from the system.
I do not believe that the white knight of increased demand is about to gallop over the hill and therefore see a risk of substantially lower price in the months ahead. Colleague Arthur Berman has a somewhat more upbeat perspective.
Historic Fundamentals
The large scale structure of oil price history is shaped by supply and demand driven by both political dimensions and industry action and innovation. The main landmarks are:
1. The 1973 Yom Kippur war followed by the 1974 oil embargo. The amount of crude withheld from market by OPEC was relatively small (Figure 3) but was sufficient to cause the first oil price shock.
Figure 3 Oil exports for selected OPEC countries based on BP 2014.
2. The 1979 Iranian Revolution followed by the 1980 Iran-Iraq war led to the second oil shock. The price reaction at this time did not reflect the fundamentals of supply and demand and gravity soon took over sending the price down again in the years that followed together with OPEC market share.
3. The 1986 slump was caused by OPEC reasserting its authority and trying to reclaim market share that led to a prolonged bear market that culminated in 1998 when the world was awash in oil.
4. The low point since the first oil shock was marked by $10 oil (money of the day) in 1998. I remember it well since I was running an oil related business at that time. This heralded in a new era for the industry that went through a massive restructuring with many household names being swallowed up by the super-majors.
5. The commodities Bull Run that began around 2002 that lasted to 2008 or 2014 depending upon one’s perspective had complex reasons from a perceived peak in conventional oil production, the Chinese industrial revolution, expansion of debt, zero interest rate policy (ZIRP) and bubblenomics. Rune Likvern gives a good account of the links between the oil price and economic policies.
6. The 2008 financial crash brought an end to phase 1 of the Bull Run that was re-inflated by OPEC cutting supply and QE blowing more liquidity into the bubble until 2014.
Rune argues that an end to QE in the USA is implicated in recent global currency adjustments and the rout of the oil price and that is surely part of the story. But the OPEC policy of maintaining market share and over supply of either LTO or OPEC crude have also played a prominent role in Act 7 that is still being played out and still has a way to run before a new market equilibrium is reached.
24 Comments on "The Oil Price: How Low Is Low?"
rockman on Thu, 13th Aug 2015 8:18 am
“Congress To Lift Oil Export Ban Next Month?” And the same old saw: there is no US ban on oil exports. As of last April, according to the EIA, the US was exporting oil at the rate of 8.4 BILLION GALLONS PER YEAR. And that’s in addition to the 40 BILLION GALLONS of refinery products the US is currently exporting yearly.
IOW the US is already one of the major global exporter of hydrocarbon.
Makati1 on Thu, 13th Aug 2015 9:10 am
Price of WTI oil in the following years, adjusted for inflation:
1950 = $ 25
1960 = $ 24
1970 = $ 21
(End of the gold standard in the US)
1980 = $111
1990 = $ 42
2000 = $ 38
2010 = $ 84
2015 = $ 48
2020 = ???
http://www.macrotrends.net/1369/crude-oil-price-history-chart
nemteck on Thu, 13th Aug 2015 10:53 am
How is it that Rockman says “… there is no US ban on oil exports.” when the US congress bill 156 wants to repeal the ban?
https://www.congress.gov/bill/114th-congress/house-bill/156/text
114th Congress (2015-2016)
US congress bill H.R.156 – Crude Oil Export Act To repeal the crude oil export ban under the Energy Policy and Conservation Act, and for other purposes.
How can the congress want to repeal a crude oil export ban when such a ban does not exist according to Rockman?
Plantagenet on Thu, 13th Aug 2015 10:57 am
Curiously, all of the charts in this article stop in 2014, with oil priced near $100 bbl.
The actual situation today has oil at about $43/bbl, i.e. the oil glut actually has lowered oil prices to within a few dollars of hitting 40-year-lows—and the way things are going the current oil price may go still lower.
Plantagenet on Thu, 13th Aug 2015 11:00 am
US law currently bans export of CRUDE oil, but allows export of refined oil products.
The US exports large amounts of refined oil to places like Venezuela, where the socialist regime has caused the collapse of their own refining industry. In addition, the Obama administration has granted multiple waivers to oil companies that allow the export of some crude oil in spite of the law.
BC on Thu, 13th Aug 2015 11:18 am
$32-$39 is a target that is conceivable.
The 9-year real, US$-adjusted change rate of WTI has turned negative as it did in the early to mid-1960s (until the US$ was removed from gold, OPEC embargo, etc.) and in 1986 (until the US$ peaked and 9/11 occurred).
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1CIE
Debt to wages and GDP is 70-75% higher today than in the mid-1980s.
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1CIG
The CPI- and US$-adjusted price of WTI was $20-$25 vs. $43 today and 5- and 10-year average prices of $95-$100.
The growth rate of real final sales per capita in the mid-1980s was twice or more today’s rate.
Therefore, the price of oil today in terms of debt, wages, GDP, and the capacity of the economy to grow is NOT CHEAP.
But with the secular US potential real GDP per capita near 0%, $20-$30 oil today would shut the shale sector and cause marginal oil production and consumption to plunge with it, perhaps by as much as 2-3Mbd.
GregT on Thu, 13th Aug 2015 11:26 am
Even more curiously; Why don’t you read the article planter? Instead of being mesmerized by the pictures.
And also;
“US law currently bans export of CRUDE oil”
“the Obama administration has granted multiple waivers to oil companies that allow the export of some crude oil”
So which is it then planter? A ban? Or multiple wavers for oil exports? It can’t be both.
shortonoil on Thu, 13th Aug 2015 11:56 am
In 1960 Saudi Arabia was producing oil for less than 50 cents a barrel, and selling it for $2.88. That was low priced oil that made the Saudis fabulously rich. They are now selling their oil for 17 times as much, and they have to borrow money to pay the bills. Without a comparable production cost figure, BP’s numbers are absolutely worthless.
rockman on Thu, 13th Aug 2015 12:14 pm
nemteck – “How can the congress want to repeal a crude oil export ban when such a ban does not exist according to Rockman?” Not according to the Rockman…the EIA says it’s so. The EIA…the “U.S. Energy Information Administration…your f*cking govt. Don’t take this personal because it’s meant for everyone: don’t take my word for a F*CKING THING!!! Get off your collective asses and look it up. LOL. Here…I’ll make really f*cking easy for you:
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCREXUS2&f=M
Check the link: according to the EIA last April/May the US was exporting oil at the rate of 200 MILLION BBLS OF OIL PER YEAR. The Rockman never said the US was exporting oil. The Rockman has repeatedly and clearly stated that the EIA claims the US is exporting oil. And that’s not just a recent number. Again according to the EIA (same f*cking link as above) the US exported about 100 million bbls of oil during 2014…at the same time every f*cking idiot who didn’t bother to search out the FACTS kept saying the US banned the export of oil. Just as there are f*cking idiots still arguing today that the US has an oil export ban.
So when was the last month that the US didn’t export some oil: Sept 1976. Don’t believe that? Look at the f*cking link. And then just 13 months later in Oct 1977 the US was exporting oil at the rate of 99 MILLION BBLS OF OIL PER YEAR. AGAIN LOOK AT THE F*CKING LINK. Lol.
If someone has a more credible data base then the EIA then let them present it now. Or shut up, go sit in the corner and stop interrupting the conversation between the adults here. LOL
And yes: those number don’t include the 1 BILLION BBLS OF OIL that are refined in the US every year with all those products being exported.
BC on Thu, 13th Aug 2015 12:18 pm
@short: “Without a comparable production cost figure, BP’s numbers are absolutely worthless.”
So true and a point lost on SO MANY, if not a large majority.
Nony on Thu, 13th Aug 2015 3:12 pm
Rock, there is a big difference between some exceptions to the ban and no ban. General exports of crude and lease condensate are banned. Exceptions are for Alaska North Slope and sales to NAFTA (basically Canada). I believe one (!) cargo has been allowed to South Korea also.
Sales of refined products, to included distilled crude through a splitter (first stage refinery) are allowed. But this just means that US refiners collect extra value in US crude at the expense of US producers.
Because the US refineries are some of the most complex in the world (basically complex means better for heavy, simple is better for light), US LTO is better suited for overseas refineries than onshore ones. There is a mismatch right now with US LTO, an unexpected (years ago) source of an extra 4.5 million barrels per day of light sweet crude.
The economic impact here is that WTI is about $5 less than Brent even though the substances are nearly equivalent. (Brent is very slightly heavier and sourer than WTI.) Traditionally Brent has been about $0.50 more than WTI. This is now reversed and opened to a large spread to the disadvantage of US oil.
What this means economically is that simple refineries in the US (and Canada) are MINTING money. They basically get a free $5 per barrel. This is because the crude exports are restricted, but gasoline, diesel, etc. are sold on open markets.
Oil producers (EOG, CLR, etc.) take it in the ass because they lose about $5 a barrel. US retail consumers don’t get any benefit either because RBOB (gasoline) is freely exported/imported and has a world price. It tracks with BRENT, not with WTI. In fact, they’d be doing better on gas prices at the pump if the two prices equalized.
Your continued sophistry around the oil export restrictions shows you to be either a liar or stupid.
See here for some FACTS:
http://oilexports.com/fact-check-deltas-claims-on-oil-exports-hits-some-rough-air/
Look at the charts at the bottom.
The correlation of retail gasoline to Brent, versus WTI is crystal clear.
If you can’t understand these concepts, I worry about your technical ability to do geology, evaluate piping systems, etc. Then again, I have seen you screw up numbers a lot, also.
Nony on Thu, 13th Aug 2015 3:34 pm
Here is a bill to repeal the export ban:
https://www.congress.gov/bill/114th-congress/house-bill/156/text
BobInget on Thu, 13th Aug 2015 4:03 pm
The US on Wednesday launched its first air strikes by Turkey-based F-16 fighter jets against Islamic State in Iraq and the Levant (ISIL) targets in Syria, marking a limited escalation of a yearlong air campaign that critics have called excessively cautious.
In a brief statement the Pentagon announced the F-16 strikes were launched from İncirlik Air Base in southern Turkey but provided no details on the number or types of targets struck. It did not say how many of the six F-16s now based at İncirlik were used in the initial strikes.
On Thursday, however, the Turkish foreign minister denied such strikes had originated from Turkish bases, claiming that the warplanes were carrying out reconnaissance missions.
Foreign Minister Mevlüt Çavuşoğlu denied the strikes were launched, in an interview on HaberTürk TV on Thursday, in the latest in a series of conflicting statements by American and Turkish officials on issues regarding the Syrian conflict and the air base deal.
Later in the day, an official from the Turkish Foreign Ministry felt the need to elaborate on Çavuşoğlu’s remarks, saying the foreign minister meant to say that Turkish fighter jets did not take part in the flights.
Speaking to HaberTürk TV, Çavuşoğlu also said Turkey does not expect to deploy ground forces in Syria to fight ISIL but that the option should remain on the table.
“Right now, no ground operation is envisaged, but in the future whatever is needed to fight ISIL — including ground operations — should be done. This is my personal opinion,” Çavuşoğlu told HaberTürk TV in an interview.
Long a reluctant partner in the US-led coalition against ISIL, NATO member Turkey last month made a dramatic shift in policy, sending warplanes to attack the hardline group in northern Syria. It has also opened its air bases for use in coalition air strikes.
But the agreement for the use of Turkish air bases by the US-led coalition is still riddled with ambiguity and conflicting interpretations over its scope, often leading to different judgments by officials from Turkey and the US.
Earlier this week, the US State Department denied it has agreed to a “safe zone” in northern Syria, after broadcaster CNN Turk quoted a senior Turkish diplomat as saying the countries have settled on terms for such a zone in their campaign against ISIL.
“There’s no agreement on some kind of zone,” State Department Deputy Spokesperson Mark Toner said on Tuesday when asked about the report.
CNN Turk quoted Foreign Ministry Undersecretary Feridun Sinirlioğlu as saying the countries have agreed to create a 98-kilometer-long, 45-kilometer-wide area to be patrolled by members of the opposition Free Syrian Army (FSA).
Toner said he could not address the official’s remarks as he had not seen them. “We’ve been pretty clear from the podium and elsewhere saying there’s no zone, no safe haven. We’re not talking about that here. What we’re talking about is a sustained effort to drive ISIL out of the region,” Toner said at a news briefing.
“Tonight, the US began F-16 strike operations against #ISIL terrorists from #Incirlik base in #Turkey (a short 15 minute flight to #Syria),” tweeted Ambassador Brett McGurk, deputy special presidential envoy for the global coalition to counter ISIL, late on Wednesday.
In another and earlier tweet, McGurk who was in Ankara for official talks, he said he discussed with senior Turkish officials advancing joint cooperation against the ISIL terrorists.
Earlier this month the US began flying armed drones from İncirlik, but the F-16 flights add a new dimension to the air campaign, in part because of the added risk to pilots who might encounter Syrian or other air defenses.
Pentagon officials have said the main advantage of using İncirlik is its proximity to ISIL targets in northern Syria, although a senior US defense official said on Wednesday that the F-16s may also be used on missions over Iraq. The official was not authorized to discuss F-16 mission details publicly and spoke on condition of anonymity.
Most US aerial combat missions over Iraq and Syria are being flown from more distant air bases in Qatar and elsewhere in the Persian Gulf region, although the US also is flying F-16s from Muwaffaq Salti air base in Jordan.
BobInget on Thu, 13th Aug 2015 4:07 pm
As the pace of many undeclared wars pick up,
two things happen. Oil consumption rises and jet fuel consumption goes up.
http://www.wsj.com/articles/oil-demand-growing-at-fastest-pace-in-five-years-says-iea-1439367413
Plantagenet on Thu, 13th Aug 2015 5:09 pm
@GregT
The graphic images are based on out-of-date info.
Are you also incapable of telling time? Why is it so hard for you to understand how the calendar works?
SHEESH!
Dredd on Thu, 13th Aug 2015 5:12 pm
The price of oil is the death of civilization.
Divest.
shortonoil on Thu, 13th Aug 2015 6:31 pm
“As the pace of many undeclared wars pick up,
two things happen. Oil consumption rises and jet fuel consumption goes up”
Those bombed out nations are sure to be huge oil consumers! At least after they get the holes in their roads filled in.
Apneaman on Thu, 13th Aug 2015 6:51 pm
U.S. oil slides to six-and-a-half year low under $42 as stocks build
http://www.reuters.com/article/2015/08/13/us-markets-oil-idUSKCN0QI02220150813
Yep they be building stocks…that’s what it is.
Apneaman on Thu, 13th Aug 2015 6:58 pm
look nony, the lobbyist agrees with you. One ape law to repeal the laws of thermodynamics. I’m having me a good ole time listening to all the frantic panicking and blaming and magical thinking from the mouth pieces, paid or otherwise, of econ 101/empire. ROTFLMAO.
shale tales
Oil company lobbyists forecast a US job bonanza if only they can export oil, but they are wrong
http://qz.com/478240/oil-company-lobbyists-forecast-a-us-job-bonanza-if-only-they-can-export-oil-but-they-are-wrong/
GregT on Thu, 13th Aug 2015 10:34 pm
Nony/marm,
There is a big difference between a ban, and restrictions. The rest of your post above “shows you to be either a liar or stupid”, and judging from your previous track record, you aren’t lying.
Makati1 on Thu, 13th Aug 2015 10:35 pm
the ONLY important number is the one on the food you need to survive. All the other numbers today are bullshit in huge piles.
Nony on Fri, 14th Aug 2015 12:08 am
Hey if there’s no ban, than I guess it won’t matter if we repeal it.
Oh…and you STILL haven’t explained the several dollar Brent-WTI spread or the RBOB-oil correlations.
Apneaman on Fri, 14th Aug 2015 12:16 am
He’s a stupid liar.
shortonoil on Fri, 14th Aug 2015 6:56 am
“Yep they be building stocks…that’s what it is.”
As previously mentioned the Etp Model projects that the world will never again be able to consume all the oil that is produced. It now requires more energy to produce petroleum, and its products than is delivered to the economy. The energy balance equation is weighted heavier on the producer side than on the consumer side. One unit of production will never again be able to drive one unit of demand. That is the bases of this graph:
http://www.thehillsgroup.org/depletion2_022.htm
Whether or not the export ban is lifted is irrelevant. There will be no market for that production. The ban is a political football being promoted by the LTO industry. Lifting it would only give a dying industry the means to encourage hapless investors into parting with more of their money. It would be a means of transferring funds from the sector of the industry that is still benefiting society to the sector that is parasitical to it.
http://www.thehillsgroup.org/