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Page added on December 1, 2015
Understanding the new global oil economy
If US imports fall, its interest in a stable Middle East will shrink as that of China and India rises
Why have oil prices fallen? Is this a temporary phenomenon or does it reflect a structural shift in global oil markets? If it is structural, it will have significant implications for the world economy, geopolitics and our ability to manage climate change.
With US consumer prices as deflator, real prices fell by more than half between June 2014 and October 2015. In the latter month, real oil prices were 17 per cent lower than their average since 1970, though they were well above levels in the early 1970s and between 1986 and the early 2000s. (See charts.)
A speech by Spencer Dale, chief economist of BP (and former chief economist of the Bank of England) sheds light on what is driving oil prices. He argues that people tend to believe that oil is an exhaustible resource whose price is likely to rise over time, that demand and supply curves for oil are steep (technically, “inelastic”), that oil flows predominantly to western countries and that Opec is willing to stabilise the market. Much of this conventional wisdom about oil is, he argues, false.
A part of what is shaking these assumptions is the US shale revolution. From virtually nothing in 2010, US shale oil production has risen to around 4.5m barrels a day. Most shale oil is, suggests Mr Dale, profitable at between $50 and $60 a barrel.
Moreover, the productivity of shale oil production (measured as initial production per rig) rose at over 30 per cent a year between 2007 and 2014. Above all, the rapid growth in shale oil production was the decisive factor in the collapse in the price of crude last year: US oil production on its own increased by almost twice the expansion in demand. It is simply the supply, stupid.
What might this imply?
One implication is that the short-term elasticity of supply of oil is higher than it used to be. A relatively high proportion of the costs of shale oil production is variable because the investment is quick and yields a quick return. As a result, supply is more responsive to price than it is for conventional oil, which has high fixed costs and relatively low variable costs.
This relatively high elasticity of supply means the market should stabilise prices more effectively than in the past. But shale oil production is also more dependent on the availability of credit than is conventional oil. This adds a direct financial channel to oil supply.
Another implication is a huge shift in the direction of trade. In particular, China and India are likely to become vastly more important net importers of oil, while US net imports shrink. Quite possibly, 60 per cent of the global increase in oil demand will come from the two Asian giants over the next 20 years.
By 2035, China is likely to import three-quarters of its oil and India almost 90 per cent. Of course, this assumes that the transport system will remain dependent on oil over this long period. If it does, it demands no great mental leap to assume that US interest in stabilising the Middle East will shrink as that of China and India rises. The geopolitical implications might be profound.
A further implication concerns the challenge for Opec in stabilising prices. In its World Energy Outlook 2015 , the International Energy Agency forecasts a price of $80 a barrel in 2020, as rising demand absorbs what it sees as a temporary excess supply. A lower oil price forecast is also considered, with prices staying close to $50 a barrel this decade.
Two assumptions underlie the latter forecast: resilient US supply and a decision by Opec producers, notably Saudi Arabia, to defend production shares (and the oil market itself). But the low-price strategy would create pain for the producers as public spending continues to exceed oil revenues for a long period. How long might this stand-off last?
A final set of implications is for climate policy. The emergence of shale oil underlines what was already fairly clear, namely, that the global supply capacity is not only enormous but expanding. Forget peak oil. As Mr Dale notes: “In very rough terms, over the past 35 years, the world has consumed around 1tn barrels of oil. Over the same period, proved oil reserves have increased by more than 1tn barrels.”
The problem is not that the world is running out of oil. It is that it has far more than it can burn while having any hope of limiting the increase in global mean temperatures over the pre-industrial levels to 2°C. Burning existing reserves of oil and gas would exceed the global carbon budget threefold. Thus, the economics of fossil fuels and of managing climate change are in direct opposition. One must give. Profound technological change might undermine the economics of fossil fuels. If not, politicians will have to do so.
This underlines the scale of the challenge leaders confront at the climate conference in Paris. But the response to the fall in oil prices shows how hopeless policymakers have been. According to the IEA, subsidies to the supply and use of fossil fuels still amounted to $493bn in 2014. True, they would have been $610bn without reforms made since 2009. So progress has been made.
But low oil prices now justify elimination of subsidies. In rich countries the opportunity of low prices could — and should — have been used to impose offsetting taxes on consumption, thereby maintaining the incentive to economise on use of fossil fuels, increasing fiscal revenue and allowing a reduction in other taxes, notably on employment. But this important opportunity has been almost entirely missed.
45 Comments on "Understanding the new global oil economy"
rockman on Tue, 1st Dec 2015 3:44 pm
“Moreover, the productivity of shale oil production (measured as initial production per rig) rose at over 30 per cent a year between 2007 and 2014”. And of course they fail to mention that during that period the length of the laterals greatly increased as did the number of frac stages per well. Both factors that cuased the average cost of a well to almost double.
And of course they drag out the increase new well production per rig and ignore two important factors: those wells are costing more and, more important, if the number of rigs drill falls significantly (as it has) the total COMBINED production from all these new “miracle wells” will not match former total rates or recoveries.
theedrich on Tue, 1st Dec 2015 4:41 pm
Hmmmm. It seems that the Bank economist here is overly infatuated with numbers, charts and extremely abstract data. The gristly facts about actual mechanisms and diminishing returns are not included in these abstractions. The calculations simply project current and historical numbers into the future — a typical math exercise which does not recognize intervening factors. As with many people steeped in ciphers, many economists cannot see that mathematics is not reality but a LANGUAGE. Yes, that language can describe many physical events quite well. But being incomplete (and often based on arbitrary assumptions such as ceteris paribus), it cannot always predict or even describe reality. Compare Newtonian mechanics with relativity (based on classical math), and then these two with quantum mechanics, which is incomprehensibly wild but accurate. Consider also String Theory, which is perfectly “logical,” but simply unprovable and detached from true science. Ditto for economic projections made by Bank economists.
shortonoil on Tue, 1st Dec 2015 5:38 pm
“He argues that people tend to believe that oil is an exhaustible resource whose price is likely to rise over time, that demand and supply curves for oil are steep (technically, “inelastic”),”
It is amazing that supposed, educated and intelligent people can not comprehend that it is always the best of a resource that is taken first. The best coal, the best iron, the best trees. There is a very logical explanation for this, it is just that if you are a coal miner, and you take the lest valuable of your resource first, your competition will put you out of business. He took the best he had. The petroleum industry has taken the best of its resource base for the last 150 years. What remains is essentially the scum at the bottom of the barrel; shale, bitumen, and extra heavy that takes a ton of energy to refine. Oil prices are going down because the best is now gone, and the industry wants to sell what it has left – which isn’t very valuable!
We describe this process of always extracting the best in energy terms; that is because that is why petroleum is used. It is used because it has the ability to supply energy. Oil is not used by the barrel, it is used by the BTU. The consumer wants to get from point A to point B and that takes X amount of energy. He is not the least bit concerned with how many barrels EXXON sold last month.
Of course these educated, and intelligent people who write these articles probably never saw a real extractive industry work, and so are unaware that the best is always taken first, and the best is now gone. If they did they won’t be asking stupid questions like, “why is the price of oil going down”. So we’ll tell them, the price is going down because what is now left just isn’t worth very much!
There! Think they’ll figure it out now?
http://www.thehillsgroup.org/
apneaman on Tue, 1st Dec 2015 5:53 pm
Short, education and intelligence are no armour against ape hopes.
HOPE, n. Desire and expectation rolled into one.
AMBROSE BIERCE, The Devil’s Dictionary
makati1 on Tue, 1st Dec 2015 7:32 pm
FT = Wall Street Pimp. More bullshit pilled high for the uneducated masses.
idontknowmyself on Tue, 1st Dec 2015 8:23 pm
Here are some more info for you youngtards. This is my contribution to scientifically educated some of you youngtards
https://www.youtube.com/watch?v=J7qnBz9W-qk
Shale has a lot content of energy. The video above show how to measure energy content of brut fuel before refinery.
idontknowmyself on Tue, 1st Dec 2015 8:25 pm
Sorry I mean shale, tar sand have low energy content.
makati1 on Tue, 1st Dec 2015 8:39 pm
Interesting…
http://www.platts.com/latest-news/oil/tehran/iran-gives-chinese-companies-priority-in-development-27003196
Not a surprise.
shortonoil on Wed, 2nd Dec 2015 8:36 am
“The video above show how to measure energy content of brut fuel before refinery.”
The Hills Group is a pack of engineers, and engineers (probably because they had to work so hard to get that title) are, by and large, a lazy bunch critters. We just aren’t going to do that kind of stuff that has been done 1000 times before by someone else. We just grab our CRC, and look it up. The slaves of science (I mean grad students) are employed for such purposes. They love to hop around a lab all day, smelling stinking stuff, and impersonating people of knowledge. If by any chance you can find a property of some substance that has not been measured, calculated, graphed, and re-graphed 500 times before find a grad student. They’ll do it again for you, and with gleeful delight.
Kenz300 on Wed, 2nd Dec 2015 10:01 am
Too many people and too few resources……..
If you can not provide for yourself you can not provide for a child.
Our World Living With Slums(philiphines)
https://www.youtube.com/watch?v=2s9o_kb-gZg
Kenz300 on Wed, 2nd Dec 2015 10:02 am
This Is The Beginning Of The End Of The Fossil Fuel Industry
http://www.huffingtonpost.com/entry/end-of-fossil-fuels_564f7457e4b0258edb316faf
—————–
Fossil fuel companies are spending millions to spread doubt about Climate Change……
4 Ways Exxon Stopped Action on Climate Change
http://ecowatch.com/2015/11/27/exxon-stopped-
climate-action/?utm_source=EcoWatch+List&utm_campaign=1d016dacb9-Top_News_11_28_2015&utm_medium=email&utm_term=0_49c7d43dc9-1d016dacb9-86023917
Has Exxon Mobil misled the public about its climate change research?
http://www.pbs.org/newshour/bb/exxon-mobil-mislead-public-climate-change-research/
Truth Has A Liberal Bias on Wed, 2nd Dec 2015 7:05 pm
Five more years of $50/barrel and KSA will look like eastern Syria. If that happens Europe can plan on another 30 million people walking in. KSA needs $106/barrel to stay whole. KSA is having a staring contest with US LTO. Once that little game is over prices will settle higher.
Truth Has A Liberal Bias on Wed, 2nd Dec 2015 7:13 pm
@ short
Prices in capitalist markets are a function of supply and demand. Not Value. Value is a Marx-Ricardo thing. The energy in a barrel of oil is equivalent to 12 people working full time for a year, yet even at its most expensive it is much cheaper than employing 12 people full time for a year. You continue to confuse the price of oil and the value of oil. Quite frankly I think your analysis regarding the future of oil completely fucked.
If I need to plow a field to grow food or starve and I have the choice between burning a barrel of oil or employing 12 people full time for 52 weeks what do you think the price of oil will be if my only other alternative between oil vs workers is starvation? Look that up in your CRC smart guy.
idontknowmyself on Wed, 2nd Dec 2015 7:38 pm
Shortonoil is a single guy working with matlab tring to scam people for money.
He is such a serious business person that he does not give his business address and take only paypal payment.
One day shortonoil uses money to explain why the price of oil is low, the next day is using some energy concept to explain why the price os oil is low.
Shorttonoil was banned from peakoilbarrel because he was trolling there trying to push his paper.
He is a young kids with a overlarge self-esteem. I still think Gail Actuary is hiding behing shortonoil.
Stop taking himserioust.
He is just another cheap internet scammer.
Paypal
idontknowmyself on Wed, 2nd Dec 2015 7:46 pm
Shorttonoil says:
The slaves of science (I mean grad students) are employed for such purposes. They love to hop around a lab all day, smelling stinking stuff, and impersonating people of knowledge. If by any chance you can find a property of some substance that has not been measured, calculated, graphed, and re-graphed 500 times before find a grad student. They’ll do it again for you, and with gleeful delight.
Shorttonoil make fund of science by calling them slave of science but he has no problems himself to be a slave of mathematic and modelling.
What a joke you are boy, girl, women, man.
idontknowmyself on Wed, 2nd Dec 2015 7:52 pm
Shorttonoil is using generic data that he is getting from some reference book.
Maybe shorttonoil should use real data taken from actual shale oil production right now instead of generic data measure a long time ago.
shortonoil on Wed, 2nd Dec 2015 8:02 pm
“Shortonoil is a single guy working with matlab tring to scam people for money.”,
If you are trying to make yourself look like an fool you are doing an explanatory job of it! If that is the best you can do, you better give up your trolling job, and go back to hiding in the basement(with the rest of the varmints).
But we must admit that your choice of names is perfect. Who did you steal it from?
idontknowmyself on Wed, 2nd Dec 2015 8:08 pm
This is a really generic answer for someone that loves science and know everything.
shortonoil on Wed, 2nd Dec 2015 8:09 pm
“@ short
Prices in capitalist markets are a function of supply and demand.”
If that is true then why has the demand curve followed the supply curve for the last 100 years? When you figure that out, get back to us.
shortonoil on Wed, 2nd Dec 2015 8:12 pm
“This is a really generic answer for someone that loves science and know everything.”
If you took an IQ test you would have to go back twice. You would own them points!
idontknowmyself on Wed, 2nd Dec 2015 8:14 pm
Shorttonoil:
But we must admit that your choice of names is perfect. Who did you steal it from?
When women run out of arguments, they usually used personal attacks like calling you ugly, making fun of you physical appearance and so on.
Attacking my username is something that women do wħen running out of arguments.
This is why I am saying Gail is hiding behind shortonoil.
idontknowmyself on Wed, 2nd Dec 2015 8:16 pm
Here you go again, a personal attack on my IQ instead of answering me.
shortonoil on Wed, 2nd Dec 2015 8:21 pm
“This is why I am saying Gail is hiding behind shortonoil.”
Somebody forgot to lock the dam cave door, and now we have troll shit all over the place!
Good going!
Davy on Wed, 2nd Dec 2015 8:21 pm
Short, your group’s analysis speaks for itself. It is a terribly important work that hopefully will get through to a critical mass of people alerting those who can understand we have very little time before the economy crashes from energy starvation.
I-don’t-know-my-ass-from-a-hole-in-the-ground is not worth your time. Liberal biass dumbass probably has never been to your site and studied all the material. Give him time he is new. Eventually he will get a clue.
idontknowmyself on Wed, 2nd Dec 2015 8:23 pm
I-don’t-know-my-ass-from-a-hole-in-the-ground is not worth your time. Liberal biass dumbass probably has never been to your site and studied all the material. Give him time he is new. Eventually he will get a clue.
Is that you shortonoil hiding under Davy username. Sure look like it.
idontknowmyself on Wed, 2nd Dec 2015 8:24 pm
Trolling is a way better way to spend time then watching porn. I love it
shortonoil on Wed, 2nd Dec 2015 8:26 pm
Test time:
How many trolls does it take to screw in a light bulb?
ans;
Three, one to hold the bulb, and two to turn the ladder.
shortonoil on Wed, 2nd Dec 2015 8:33 pm
“I-don’t-know-my-ass-from-a-hole-in-the-ground is not worth your time.”
Does that mean that you are so stupid that you couldn’t find your ass with both hands, and a full length mirror?
We sort of suspected that!
shortonoil on Wed, 2nd Dec 2015 8:36 pm
Did you hear about the troll that went hunting? It was following the tracks, and got run over by a train!
shortonoil on Wed, 2nd Dec 2015 8:50 pm
“Give him time he is new. Eventually he will get a clue.”
Do you remember that delta, epsilon stuff from calculus? If the epsilon side is our probability, “may we live so long”. Your chances of teaching Quantum Mechanics to a fruit fly are probably better?
makati1 on Thu, 3rd Dec 2015 2:20 am
Short, if nothing else, this site brings out the point that the dumbed down education system is working. LOL
Davy on Thu, 3rd Dec 2015 6:36 am
Mak, did you know both the above “cats” in question in this “short trolling” are Canadians? Just so you know your anti-American rhetoric missed its target in this case. Are you anti-Canadian now?
makati1 on Thu, 3rd Dec 2015 6:56 am
As those here who are Canadian will and have admitted, Canadians are slowly becoming like the US. I am well aware of my ‘paint brush’, Davy.
Davy on Thu, 3rd Dec 2015 7:11 am
No you are not Makster because you did not know they were Canadian. You painted with your anti-American brush in ignorance as agendas consistently do in their failures. You would not want to offend your friends otherwise. It is bad for agenda.
JuanP on Thu, 3rd Dec 2015 8:35 am
The delusional American exceptionalist is accusing others of trolling! LOL! Kettle calling the pot, over! And insulting others in the same comment! Talk about being a TROLL!
Davy, you are not only a delusional American exceptionalist one percenter and the board’s fool, you are also the board’s main troll. I guess your mental health doesn’t allow you to see this truth. Your exceptionalist perspective distorts all your perceptions and makes it very hard for you to see reality and accept the truth. Just count your comments, fool, you have been trolling here without a break for a very long time! Has anyone posted more comments on this board than you in the past year?
YOU ARE THE TROLL, FOOL!
Davy on Thu, 3rd Dec 2015 11:26 am
Juan, thanks for being so concerned about me. It shows how I am under your skin. I love irritating an asshole.
Juan, didn’t you puke the same thing yesterday? Basically you are saying nothing-something. You are trying to be tough but instead you are acting like a puss.
JuanP on Thu, 3rd Dec 2015 12:07 pm
Davy, the board bully, strikes again! Keep proving what a fool you are! You are doing an awesome job! How does my comment show concern for you? You are really gone, man. I guess you read whatever your sick mind can into what other people write about your sensitive issues. Face the truth, you are living in denial! LOL!
You are a traitor to your country and people. A real patriot would fight the government’s corruption and illegal foreign actions and criticize them, not defend them and excuse them like you do. What you do is exactly the opposite of what a real patriot would do, you defend and condone the destruction of your nation. Isn’t that the definition of a coward and a traitor?
Let’s see how many buttons I pushed there, bully. Hit that keyboard, man. Make my day! LOL! You will regret the day you crossed me for the rest of your miserable life, fool! 😉
JuanP on Thu, 3rd Dec 2015 12:22 pm
Davy, I will puke back at you every day from sunrise till sunset if you make me, get used to it. I will hit you three times back for every time that you bully someone on this board or tell a lie, falsehood, distortion, or any other type of non truth.
You can always turn the other cheek. Don’t you claim to be a Christian? WWJD? Or are you a hypocrite, too?
Davy on Thu, 3rd Dec 2015 12:29 pm
Wow, Juan, I am impressed. Keep it up I love the attention!
JuanP on Thu, 3rd Dec 2015 12:37 pm
Davy, I knew you’d answer within a few minutes. Your behavior, like your comments, is very predictable.
Will you follow Jesus like you claim to do and turn the other cheek sometimes? It is your move. The moment you stop your abusive behavior I will be off your back. Your call!
GregT on Thu, 3rd Dec 2015 12:47 pm
Juan isn’t the only one concerned about you Davy. Your personal attacks are getting more and more ridiculous, and your blind servitude is clouding your ability to think and act rationally.
Sad to see. You have so much more to offer.
Davy on Thu, 3rd Dec 2015 2:18 pm
Hi, Greg, You guys are a hoot!
JuanP on Thu, 3rd Dec 2015 2:28 pm
Davy, That one gets a free pass since it was neither offensive nor disrespectful, just foolish!
JuanP on Thu, 3rd Dec 2015 2:33 pm
I am learning to use this forum in new ways and new platforms. Today I started using it on my iPhone, so I can now log in wherever I am. 😉
Maybe, tomorrow I will investigate the Twitter feed thing. Any comment on this Twitter thing?
Davy on Thu, 3rd Dec 2015 2:44 pm
Aren’t you a smart one Juan. Graduated to IPhone. How is that O’ goofy one?