Peak Oil is You
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Page added on December 6, 2014
How Low Can Oil Prices Go?
The price of oil in global markets has plunged by nearly 40 percent over the past six months. As a result, the price of a gallon of regular gasoline in the U.S. has dropped from an average of $3.68 in June to $2.74 this week. In June, the U.S. Energy Information Administration had projected that a gallon of gas would average $3.48 per gallon this month. What happened, and where might oil prices go in the next two to five years?
What’s going on is that the world is awash in crude oil while the world economy is slowing down. Demand for crude has dropped, yet supplies are increasing; the predictable result is lower prices. A huge part of the glut in global production stems from the fracking boom in the United States that has seen domestic oil production rise from a low of 5 million barrels per day in 2008 to over 9 million barrels per day in November.
Over the Thanksgiving holiday, the Organization of Petroleum Exporting Countries (OPEC) declined, reportedly at the behest of Saudi Arabia, to reduce its members’ production. Some analysts have suggested that this strategy aims to keep global oil prices low with the goal of killing off fracking in the United States and preventing the drilling technique’s spread to other parts of the world. It costs less than $10 per barrel to get oil out of the ground in most Middle Eastern countries, whereas production costs hover around $65 per barrel for U.S. fracked wells.
NYMEX
Michael Lynch, an analyst at Strategic Energy and Economic Research, thinks this strategy is unlikely to work. Lynch estimates that most fracked wells in the U.S. break even below $60, although sustained lower prices will likely cut future drilling investment by 10 to 15 percent. But even that has upside because slackening demand for drilling rigs and crews will lower the costs for new fracked wells. In addition, technological improvements are generating something like an annual 10 to 20 percent reduction in fracking costs and offsetting increases in production. In any case, owners will pump oil from wells already drilled as long as production covers their variable costs.
Lynch argues that during the first decade of this century, oil prices were affected by the perceived threat to production capacity caused by strife in places like Iraq, Nigeria, Iran, and Venezuela. In effect, purchasers paid a security premium. He now believes, despite the continuing turmoil in the Middle East, that the geopolitical risk premium has abated somewhat. If that’s true, leading technologically savvy private oil companies might be enticed back into certain oil-rich hellholes to rescue their heroically mismanaged petroleum fields. The sad fact is that nearly 80 percent of the world’s oil reserves are in the hands of government-owned companies. It’s not too far-fetched to believe that, if properly handled, the combined additional production from Libya, Iraq, Iran, Russia, Nigeria, Venezuela, South Sudan, and Mexico might amount to an extra 10 to 15 million barrels per day.
In the meantime, budget shortfalls stemming from lower oil prices might encourage unsavory petro-state regimes—Russia, Venezuela, Iran—to be more tractable. Furthermore, the International Monetary Fund estimates that lower oil prices will goose U.S. economic growth from 3.1 percent to 3.5 percent next year.
During the last decade, even as alarums about the advent of “peak oil” grew ever more frenzied, world oil production actually increased from 77.6 million barrels per day in 2003 to 86.8 million barrels per day in 2013. Lynch’s book The “Peak Oil” Scare and the Coming Oil Flood, scheduled for publication this coming spring, predicts even larger leaps in the global production of crude. Lynch thinks world oil production will increase to around 110 million barrels per day during the next decade. In the meantime, global oil prices will hover around $60 per barrel over the next couple of years and conceivably drop to $40 per barrel in five years. At $40 per barrel, the price of oil would, in inflation-adjusted dollars, just about equal the annual average price of $17 per barrel in 1998.
I asked Lynch if this meant oil markets might be in for a replay of the price collapse that occurred in the 1980s. He replied that he thought so. In inflation-adjusted dollars, the price of oil reached its peak annual average of $106 per barrel in 1980 and then collapsed to an annual average of $30.80 per barrel in 1986.
Another factor to consider when attempting to project future prices is that demand for oil appears to have peaked in the United States and Europe. This is due in large part to the recent period of sustained high prices that encouraged drivers to buy more energy-efficient vehicles and to conserve the amount of fuel they burned. U.S. gasoline consumption peaked at 142 billion gallons in 2007 and has since fallen by 6 percent to 135 billion gallons in 2013. In the European Union, transport fuel consumption has fallen by 8.4 percent since peaking in 2007. In addition, the total estimated vehicle-miles traveled by Americans has dropped by more than 2 percent since 2007. (Lynch muses that low oil prices may mean we’ll “see the death of the electric car” once again.) Finally, if the big industrial countries do get serious in the next decade or so about cutting carbon emissions, that too will tank demand for oil.
In other words, oil consumption may well eventually peak. But not because we ran out of the stuff.
9 Comments on "How Low Can Oil Prices Go?"
Dave Thompson on Sat, 6th Dec 2014 6:30 pm
“Lynch thinks world oil production will increase to around 110 million barrels per day during the next decade.” It is anyone’s guess where the 30 million bbls per day will come from, now that the fracking boom is bust.
Kenz300 on Sat, 6th Dec 2014 7:15 pm
Ethanol is now 10% of all gasoline and biodiesel is gaining in popularity…….. reducing demand for gas and diesel. The fossil fuel companies hate that.
shallowsand on Sat, 6th Dec 2014 9:04 pm
At $40 per bbl what percentage of US reserves will be left in the ground? Where is this 110 million bopd that costs under $40 to develop and produce?
Makati1 on Sat, 6th Dec 2014 9:13 pm
Lynch does not get the FACT that the American people are poorer and cannot buy gas OR efficient cars. Miles driven reflect that poverty.
Electric cars/hybrids are out of reach for 70+% of Americans. Any car is out of reach for at least 30% of Americans. The US is descending into the 3rd world, one day at a time but relentlessly.
rockman on Sun, 7th Dec 2014 3:26 am
“It costs less than $10 per barrel to get oil out of the ground in most Middle Eastern countries, whereas production costs hover around $65 per barrel for U.S. fracked wells.”
And once again the flagrant lie or utter incompetence. They are presumably describing the lifting cost of ME oil as $10/bbl. LC is how much it cost to produce a well ONCE IT HAS BEEN DRILLED. The lifting cost to produce a US shale well isn’t anything close to $65/bbl. I don’t produce any shale wells but the lifting costs for my conventional oil wells ranges between $1.50 and $8 per bbl. And production equipment and operational costs for conventional and unconventional reservoirs are roughly the same because all these wells use similar equipment to lift oil.
Since their comparison defies logic I can only guess the $65/bbl “production
cost” is referring to “development cost”: how much it costs to drill, complete and frac a shale well. I won’t guess what the typical “development cost” for ME well might be. The first problem is that there is no single number to represent that value: just like every other oil play on the planet that number varies greatly from field to field and can even do so from well to well in the same field. But most important: logic tells you if it were anything close to $10/bbl to develop new reserves in the region every drill rig in the world would be cutting hole in the ME. This would be especially true for countries at or approaching their PO. But forget them and just consider the KSA: if they could put new oil into the market place that they could sell it for $40/bbl and make a 400% profit wouldn’t you think they would be drilling more holes then the US shale players? Thanks to the recent high oil prices the KSA has many $BILLIONS in cash reserves. So the kingdom must have that money invested in something else that’s yielding better then 400%. Otherwise they would be drilling up all that “cheap oil”, wouldn’t they? LOL.
Now consider this update from last summer:
“Despite its huge reserves the Kingdom is investing cautiously to increase again the oil production {in Khurais and Shabbat Fields} after a couple of years developing the petrochemical sector and more recently the unconventional gas or deep offshore exploration in the Red Sea.
In respect with the ongoing maturing fields to decline at that term, Saudi Aramco is due to compensate 550,000 b/d of crude oil production by 2017.
{So what this article expects you to believe that the KSA has been somewhat timid to develop what they themselves claim to be their largest undeveloped oil reserves. And that 200 million bbls of oil per year won’t be brought into production for 3 more years. Oil that they supposedly can develop for $10/bbl and sell for considerably more even at today’s collapsed prices?}
From these 550,000 b/d, Khurais should contribute for 300,000 b/d and Shaybah for 250,000 b/d. Saudi Aramco selected Khurais and Shaybah because they present accessible reserves at a minimum of capital expenditure compared with other fields to require intensive enhanced oil recovery (EOR) activities.
Discovered in 2009, Khurais is currently producing 1.2 million b/d of crude oil while Shaybah is running at 750,000 b/d.
{And to be clear we’re not talking about developing these two fields from scratch: they’re currently producing over 700 million bbls of oil per year. The KSA needs to expand the production infrastructure of these proved reserves. Reserves we are told they could develop for $10/bbl but hasn’t begun during years of $70+/bbl oil let alone when prices were well above $100/bbl?
And lastly with all this “cheap $10 oil” ONSHORE why has the KSA been drilling OFFSHORE exploration wells in 2,000′ of water in the Red Sea for the last two years?}
Kenz300 on Sun, 7th Dec 2014 10:02 am
Facts matter
Quote — ” The U.S. economy grew even faster in the third quarter than initially thought, posting the strongest six months of growth in more than a decade and pulling further ahead of other big economies of the world.”
————–
US economy posts even stronger growth in Q3 – Houston Chronicle
http://www.chron.com/news/article/US-economy-grew-at-3-9-percent-rate-in-3rd-quarter-5916376.php
tahoe1780 on Sun, 7th Dec 2014 12:37 pm
Indeed, “Facts Matter” : http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
shallowsand on Sun, 7th Dec 2014 1:44 pm
ROCKMAN. It is incompetence. MSM never specifies what expenses they are referring to because they probably don’t understand the difference.
BTW, you have some of the lowest LOE I have heard of. I doubt most US conventional is anywhere near that low. Most of the MLP conventional I read about is in the $25-35 range company wide.
shallowsand on Sun, 7th Dec 2014 1:55 pm
I should say for oil only. Per boe is less when natural gas is included b