Skip ahead three months and that springtime of optimism has evaporated.  Major producers continue to pump out record levels of crude and world demand remains essentially flat. The result: a global oil glut that is again driving prices toward the energy subbasement.  In the first week of August, Brent fell to $49, and West Texas Intermediate, the benchmark for U.S. crude, sank to $45. On top of last winter’s rout, this second round of price declines has played havoc with the profits of the major oil companies, put tens of thousands of people out of work, and obliterated billions of dollars of investments in future projects. While most oil-company executives continue to insist that a turnaround is sure to occur in the near future, some analysts are beginning to wonder if what’s underway doesn’t actually signal a fundamental transformation of the industry.

Recently, as if to underscore the magnitude of the current rout, ExxonMobil and Chevron, the top two U.S. oil producers, announced their worst quarterly returns in many years.  Exxon, America’s largest oil company and normally one of its most profitable, reported a 52% drop in earnings for the second quarter of 2015.  Chevron suffered an even deeper plunge, with net income falling 90% from the second quarter of 2014.  In response, both companies have cut spending on exploration and production (“upstream” operations, in oil industry lingo).  Chevron also announced plans to eliminate 1,500 jobs.

Painful as the short-term consequences of the current price rout may be, the long-term ones are likely to prove far more significant.  To conserve funds and ensure continuing profitability, the major companies are cancelling or postponing investments in new production ventures, especially complex, costly projects like the exploitation of Canadian tar sands and deep-offshore fields that only turn a profit when oil is selling at $80 to $100 or more per barrel.

According to Wood Mackenzie, an oil-industry consultancy, the top firms have already shelved $200 billion worth of spending on new projects, including 46 major oil and natural gas ventures containing an estimated 20 billion barrels of oil or its equivalent.  Most of these are in Canada’s Athabasca tar sands (also called oil sands) or in deep waters off the west coast of Africa.  Royal Dutch Shell has postponed its Bonga South West project, a proposed $12 billion development in the Atlantic Ocean off the coast of Nigeria, while the French company Total has delayed a final investment decision on Zinia 2, a field it had planned to exploit off the coast of Angola.  “The upstream industry is winding back its investment in big pre-final investment decision developments as fast as it can,” Wood Mackenzie reported in July.

As the price of oil continues on its downward course, the cancellation or postponement of such mega-projects has been sending powerful shock waves through the energy industry, and also ancillary industries, communities, and countries that depend on oil extraction for the bulk of their revenues. Consider it a straw in the wind that, in February, Halliburton, a major oil-services provider, announced layoffs of 7% of its work force, or about 6,000 people.  Other firms have announced equivalent reductions.

Such layoffs are, of course, impacting whole communities.  For instance, Fort McMurray in Alberta, Canada, the epicenter of the tar sands industry and not so long ago a boom town, has seen its unemployment rate double over the past year and public spending slashed.  Families that once enjoyed six-digit annual incomes are now turning to community food banks for essential supplies.  “In a very short time our world has changed, and changed dramatically,” observes Rich Kruger, chief executive of Imperial Oil, an Exxon subsidiary and major investor in Alberta’s tar sands.

A similar effect can be seen on a far larger scale when it comes to oil-centric countries like Russia, Nigeria, and Venezuela.  All three are highly dependent on oil exports for government operations.  Russia’s government relies on its oil and gas industry for 50% of its budget revenues, Nigeria for 75%, and Venezuela for 45%.  All three have experienced sharp drops in oil income.  The resulting diminished government spending has meant economic hardship, especially for the poor and marginalized, and prompted increased civil unrest.  In Russia, President Vladimir Putin has clearly sought to deflect attention from the social impact of reduced oil revenue by ­whipping up patriotic fervor about the country’s military involvement in Ukraine.  Russia’s actions have, however, provoked Western economic sanctions, only adding to its economic and social woes.

What are we to make of this unexpected second fall in oil prices?  Could we, in fact, be witnessing a fundamental shift in the energy industry?  To answer either of these questions, consider why prices first fell in 2014 and why, at the time, analysts believed they would rebound by the middle of this year.

The initial collapse was widely attributed to three critical factors: an extraordinary surge in production from shale formations in the United States, continued high output by members of the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia, and a slackening of demand from major consuming nations, especially China.

According to the Energy Information Administration of the Department of Energy, crude oil production in the United States took a leap from 5.6 million barrels per day in June 2011 to 8.7 million barrels in June 2014, a mind-boggling increase of 55% in just three years.  The addition of so much new oil to global markets — thanks in large part to the introduction of fracking technology in America’s western energy fields — occurred just as China’s economy (and so its demand for oil) was slowing, undoubtedly provoking the initial price slide.  Brent crude went from $114 to $84 per barrel, a drop of 36% between June and October 2014.

Historically, OPEC has responded to such declines by scaling back production by its member states, and so effectively shoring up prices.  This time, however, the organization, which met in Vienna last November, elected to maintain production at current levels, ensuring a global oil glut.  Not surprisingly, in the weeks after the meeting, Brent prices went into free fall, ending up at $55 per barrel on the last day of 2014.

Most industry analysts assumed that the Persian Gulf states, led by Saudi Arabia, were simply willing to absorb a temporary loss of income to force the collapse of U.S. shale operators and other emerging competitors, including tar sands operations in Canada and deep-offshore ventures in Africa and Brazil.  A senior Saudi official seemed to confirm this in May, telling the Financial Times, “There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including U.S. shale, deep offshore, and heavy oils.”

Believing that the Saudi strategy had succeeded and noting signs of increasing energy demand in China, Europe, and the United States, many analysts concluded that prices would soon begin to rise again, as indeed they briefly did.  It now appears, however, that these assumptions were off the mark.  While numerous high-cost projects in Canada and Africa were delayed or cancelled, the U.S. shale industry has found ways to weather the downturn in prices.  Some less-productive wells have indeed been abandoned, but drillers also developed techniques to extract more oil less expensively from their remaining wells and kept right on pumping.  “We can’t control commodity prices, but we can control the efficiency of our wells,” said one operator in the Eagle Ford region of Texas.  “The industry has taken this as a wake-up call to get more efficient or get out.”

Responding to the challenge, the Saudis ramped up production, achieving a record 10.3 million barrels per day in May 2014.  Other OPEC members similarly increased their output and, to the surprise of many, the Iraqi oil industry achieved unexpected production highs, despite the country’s growing internal disorder.  Meanwhile, with economic sanctions on Iran expected to ease in the wake of its nuclear deal with the U.S., China, France, Russia, England, and Germany, that country’s energy industry is soon likely to begin gearing up to add to global supply in a significant way.

With ever more oil entering the market and a future seeded with yet more of the same, only an unlikely major boost in demand could halt a further price drop.  Although American consumers are driving more and buying bigger vehicles in response to lower gas prices, Europe shows few signs of recovery from its present austerity moment, and China, following a catastrophic stock market contraction in June, is in no position to take up the slack.  Put it all together and the prognosis seems inescapable: low oil prices for the foreseeable future.

Big Energy is doing its best to remain optimistic about the situation, believing a turnaround is inevitable. “Globally in the industry $130 billion of projects have been delayed, deferred, or cancelled,” Bod Dudley, chief executive of BP, commented in June.  “That’s going to have an impact down the road.”

But what if we’ve entered a new period in which supply just keeps expanding while demand fails to take off?  For one thing, there’s no evidence that the shale and fracking revolution that has turned the U.S. into “Saudi America” will collapse any time soon.  Although some smaller operators may be driven out of business, those capable of embracing the newest cost-cutting technologies are likely to keep pumping out shale oil even in a low-price environment.

Meanwhile, there’s Iran and Iraq to take into account.  Those two countries are desperate for infusions of new income and possess some of the planet’s largest reserves of untapped petroleum.  Over the decades, both have been ravaged by war and sanctions, but their energy industries are now poised for significant growth.  To the surprise of analysts, Iraqi production rose from 2.4 million barrels per day in 2010 to 4 million barrels this summer.  Some experts are convinced that by 2020 total output, including from the country’s semiautonomous Kurdistan region, could more than double to 9 million barrels.  Of course, continued fighting in Iraq, which has already lost major cities in the north to the Islamic State and its new “caliphate,” could quickly undermine such expectations.  Still, through years of chaos, civil war, and insurgency, the Iraqi energy industry has proven remarkably resilient and adept first at sustaining and then boosting its output.

Iran’s once mighty oil industry, crippled by fierce economic sanctions, has suffered from a lack of access to advanced Western drilling technology.  At about 2.8 million barrels per day in 2014, its crude oil production remains far below levels experts believe would be easily attainable if modern technology were brought to bear.  Once the Iran nuclear deal is approved — by the Europeans, Russians, and Chinese, even if the U.S. Congress shoots it down — and most sanctions lifted, Western companies are likely to flock back into the country, providing the necessary new oil technology and knowhow in return for access to its massive energy reserves.  While this wouldn’t happen overnight — it takes time to restore a dilapidated energy infrastructure — output could rise by one million barrels per day within a year, and considerably more after that.

All in all, then, global oil production remains on an upward trajectory.  What, then, of demand?  On this score, the situation in China will prove critical.   That country has, after all, been the main source of new oil demand since the start of this century.  According to BP, oil consumption in China rose from 6.7 million barrels per day in 2004 to 11.1 million barrels in 2014.  As domestic production only amounts to about 4 million barrels per day, all of those additional barrels represented imported energy.  If you want a major explanation for the pre-2014 rise in the price of oil, rapid Chinese growth — and expectations that its spurt in consumption would continue into the indefinite future — is it.

Woe, then, to the $100 barrel of oil, since that country’s economy has been cooling off since 2014 and its growth is projected to fall below 7% this year, the lowest rate in decades.  This means, in turn, less demand for extra oil.  China’s consumption rose only 300,000 barrels per day in 2014 and is expected to remain sluggish for years to come.  “[T]he likelihood now is that import growth will be minimal for the next two or three years,” energy expert Nick Butler of the Financial Times observed.  “That in turn will compound and extend the existing surplus of supply over demand.”

Finally, don’t forget the Paris climate summit this December.  Although no one yet knows what, if anything, it will accomplish, dozens of countries have already submitted preliminary plans for the steps they will pledge to take to reduce their carbon emissions.  These include, for example, tax breaks and other incentives for those acquiring hybrid and electric-powered cars, along with increased taxes on oil and other forms of carbon consumption.  Should such measures begin to kick in, demand for oil will take another hit and conceivably its use will actually drop years before supplies become scarce.

The initial near collapse of oil prices caused considerable pain and disarray in the oil industry.  If this second rout continues for any length of time, it will undoubtedly produce even more severe and unpredictable consequences. Some outcomes already appear likely: energy companies that cannot lower their costs will be driven out of business or absorbed by other firms, while investment in costly, “unconventional” projects like Canadian tar sands, ultra-deep Atlantic fields, and Arctic oil will largely disappear.  Most of the giant oil companies will undoubtedly survive, but possibly in downsized form or as part of merged enterprises.

All of this is bad news for Big Energy, but unexpectedly good news for the planet. As a start, those “unconventional” projects like tar sands require more energy to extract oil than conventional fields, which means a greater release of carbon dioxide into the atmosphere. Heavier oils like tar sands and Venezuelan extra-heavy crude also contain more carbon than do lighter fuels and so emit more carbon dioxide when consumed. If, in addition, global oil consumption slows or begins to contract, that, too, would obviously reduce carbon dioxide emissions, slowing the present daunting pace of climate change.

Most of us are used to following the ups and downs of the Dow Jones Industrial Average as a shorthand gauge for the state of the world economy.  However, following the ups and downs of the price of Brent crude may, in the end, tell us far more about world affairs on our endangered planet.

13 Comments on "Why an Oil Glut May Lead to a New World of Energy"

Kenz300 on Sat, 15th Aug 2015 8:06 am 



“Big Energy is doing its best to remain optimistic about the situation, believing a turnaround is inevitable. “Globally in the industry $130 billion of projects have been delayed, deferred, or cancelled,” Bod Dudley, chief executive of BP, commented in June. “That’s going to have an impact down the road.”

Low Oil Prices Pose Threat to Texas Fracking Bonanza – The New York Times

http://www.nytimes.com/2015/08/15/business/energy-environment/low-oil-prices-pose-threat-to-texas-fracking-bonanza.html?emc=edit_th_20150815&nl=todaysheadlines&nlid=21372621

Plantagenet on Sat, 15th Aug 2015 11:46 am 



This article is already out of date. The price of oil has now gone down to $42 bbl due to the oil glut. I will be surprised if nations voluntarily cut their oil use still farther to reduce CO2 emissions, but who knows—stranger things have happened.

rockman on Sat, 15th Aug 2015 11:48 am 



This post is already out of date. Much of what it says will and won’t happen have already happened and not happened. More wasted space IMHO

MrNoItAll on Sat, 15th Aug 2015 12:50 pm 



“The price of oil has now gone down to $42 bbl due to the oil glut.”

No, NOT due to the oil glut. The miniscule oil glut is just a symptom of the basic forces impacting the oil industry today. Those forces are pushing oil prices down AND resulting in the tiny oil glut, among other effects. The “oil glut” is really nothing more than the speed of falling demand slightly outracing decreasing production, leaving an trace of too-expensive oil unsold on the global market which constitutes the “oil glut” that Plant keeps crowing (and lying) about.

Plant knows this, but he keeps repeating the big lie anyway. Probably as a paid troll he is just doing his dirty job.

BobInget on Sat, 15th Aug 2015 5:40 pm 



Mr KnowItAllKnowsItAll,

I’ll blame drones. Able to stay aloft for up to 30 hours on a single tank of fuel.
Drones made ‘conventional war’ fuel efficient.
The Pentagon worried more about oil shortages then any “PeakOil” advocates ever did.
Drones are the new leading edge Modern War.
https://www.wsws.org/en/articles/2015/07/14/dron-j14.html

We’ve all see pictures of ten of thousands of ‘WarBirds’ parked in the desert —
https://www.google.com/search?q=Images+surplus+war+plANES+PARKED+IN+THE+DESERT&espv=2&biw=1164&bih=565&tbm=isch&imgil=p6nX0wUFd2UDGM%253A%253BhaRnVWVeqmcsyM%253Bhttp%25253A%25252F%25252Fwww.airplaneboneyards.com%25252Fpost-wwii-long-term-aircraft-storage-sites.htm&source=iu&pf=m&fir=p6nX0wUFd2UDGM%253A%252ChaRnVWVeqmcsyM%252C_&ved=0CCkQyjdqFQoTCMD1kf6QrMcCFUediAodb-4AXQ&ei=nbzPVYCzB8e6ogTv3IPoBQ&usg=__KJsy8bP4FPqsRkVLDV8XF7CgRdE%3D#imgrc=p6nX0wUFd2UDGM%3A&usg=__KJsy8bP4FPqsRkVLDV8XF7CgRdE%3D

These aircraft are all useless fuel hog junk.

Tanks also are no longer useful because of drones,
ecurity.blogs.cnn.com/2012/10/09/army-to-congress-thanks-but-no-tanks/

http://www.thenation.com/article/us-special-forces-are-operating-more-countries-you-can-imagine/

During the fiscal year that ended on September 30, 2014, US Special Operations forces (SOF) deployed to 133 countries—roughly 70 percent of the nations on the planet—according to Lieutenant Colonel Robert Bockholt, a public affairs officer with US Special Operations Command (SOCOM). This capped a three-year span in which the country’s most elite forces were active in more than 150 different countries around the world, conducting missions ranging from kill/capture night raids to training exercises. And this year could be a record-breaker. Only a day before the failed raid that ended Luke Somers life—just 66 days into fiscal 2015—America’s most elite troops had already set foot in 105 nations, approximately 80% of 2014’s total.

http://droneswatch.org/about/

My newest theory:
Fuel sipping drones are such game changers,
at least from a US perspective, military fuels consumption are taking huge hits.

At any one time the US military have thousands of drones in the air scoping out and killing off “enemies”.

BobInget on Sat, 15th Aug 2015 6:06 pm 



We do know two things. Low oil prices have boosted auto sales and miles driven big time.
In the US consumption is going up by 100,000
barrels a day every week for the past four.

We also know if oil stays below $50 for much longer there is no way demand can be satisfied.

Who knows how much longer Saudis can keep bombing Yemen without sustaining meaningful retaliation? How much longer Venezuela collapses from shear weight of debt and worker dissatisfaction?

Alberta elected a Socialist PM.
Socialists leading in Canadian national polls.

Low oil prices are beginning to have serious effects everywhere.

Two leading US Presidential candidates, a committed Socialist and a modern Mussolini.

Signs are everywhere.

How much longer can Russia, Iran, tolerate
ruinous oil prices without taking steps leading to more violence?

Boat on Sat, 15th Aug 2015 8:05 pm 



Bob,

If you haven’t seen the the rail gun google it. I think it may make most ships worthless and change the navy as we know it.

http://www.foxnews.com/tech/2015/04/15/navy-will-test-its-electromagnetic-railgun-aboard-ddg-1000/

http://video.foxnews.com/v/4454912/navy-tests-electromagnetic-railgun/?#sp=show-clips

apneaman on Sat, 15th Aug 2015 9:07 pm 



Really like that fox newz hey boat?

Makati1 on Sun, 16th Aug 2015 2:42 am 



Rail guns are old news.

“In 1918, French inventor Louis Octave Fauchon-Villeplee invented an electric cannon which is an early form of railgun. He filed for a US patent on 1 April 1919, which was issued in July 1922 as patent no. 1,421,435 “Electric Apparatus for Propelling Projectiles”.[10] In his device, two parallel busbars are connected by the wings of a projectile, and the whole apparatus surrounded by a magnetic field. By passing current through busbars and projectile, a force is induced which propels the projectile along the bus-bars and into flight

In 1944, during World War II, Joachim Hänsler of Germany’s Ordnance Office built the first working railgun, and an electric anti-aircraft gun was proposed. By late 1944 enough theory had been worked out to allow the Luftwaffe’s Flak Command to issue a specification, which demanded a muzzle velocity of 2,000 m/s (6,600 ft/s) and a projectile containing 0.5 kg (1.1 lb) of explosive. The guns were to be mounted in batteries of six firing twelve rounds per minute, and it was to fit existing 12.8 cm FlaK 40 mounts. It was never built. When details were discovered after the war it aroused much interest and a more detailed study was done, culminating with a 1947 report which concluded that it was theoretically feasible, but that each gun would need enough power to illuminate half of Chicago” WIKI

I suppose a rail gun is going to shoot those supersonic missiles that China has, out of the sky? The US Navy already knows that if it ventures closer than 1,000 miles from China’s coast that they can be hit and sunk. It’s called the Carrier Killer for a reason.

But dream on and take another hit on that Faux News…

Kenz300 on Sun, 16th Aug 2015 6:57 am 



The transition to electric vehicles continues…. every auto maker is or will soon be producing an electric or hybrid vehicle.

Apneaman on Sun, 16th Aug 2015 2:30 pm 



What is the price of oil telling us?

“With the recent renewed slump in oil prices, the industry is trotting out the same kind of stories it trotted out when oil was around $80 and then $60. Oil at $30 a barrel will be no problem for a special breed of drillers in the Bakken Formation of North Dakota, we are told. If you actually read the story, it is stating the obvious: That break-even prices vary from well to well. And, the writer refers to “realized” prices, not the NYMEX futures price. It turns out that because Bakken lacks pipelines for transporting oil, it must use oil trains. That’s expensive.”

http://resourceinsights.blogspot.ca/2015/08/what-is-price-of-oil-telling-us.html

Makati1 on Sun, 16th Aug 2015 10:02 pm 



Kenz, ‘producing’ and ‘selling’ are two different things in the real world. Auto makers all over the world are shrinking and shutting down. The Age of the Auto is coming to a close. If you are young, you were just born too late to enjoy that luxury for very long. Adjust.

Texas Engineer on Mon, 17th Aug 2015 9:17 am 



The shale revolution boys new meme is cutting edge technology. As in “we have cut our costs with cutting edge technology”. Actually they have cut costs by laying off over 100,000 people from all of the associated work forces that support hydraulic fracturing. If the demand really comes back they will have to massive hiring to ramp up. Then all those costs return – of they can afford them.