Peak Oil is You
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Page added on November 2, 2014
Is there really an oil glut?
Back in March 1999 “The Economist” magazine carried a cover photo of two men drenched in oil as they attempted to close a faulty valve that was spraying a huge stream of crude skyward. Over the photo was the headline: “Drowning in oil.” At the time it really did seem as if the world were drowning in oil.
The previous December crude oil on the New York Mercantile Exchange touched $10.72 per barrel. That month U.S. gasoline prices averaged 95 cents per gallon. “The Economist” opined that oil might go down to $5 per barrel.
But, of course, in retrospect the magazine’s cover proved to be the perfect contrarian indicator, for oil had already begun its historic ascent toward $147 per barrel. The 2008 price spike was the culmination of a 10-year bull market that had begun in December 1998.
After dipping briefly to around $35 per barrel at the end of 2008 in the wake of the financial crisis, the new oil bull market sent world benchmark Brent Crude to a daily average of more than $100 per barrel for all of 2011, 2012 and 2013. Through October 27 the average daily price for this year has been $104.86, not all that different from the last three years.
The swift price decline of Brent Crude from $110 on July 1 to about $85 today has the media buzzing about a glut. But can oil which now trades at eight times its price in 1998–when there really was a glut–be said to be experiencing a glut now?
Certainly, there is more oil available than people are willing to pay $100 per barrel for. While there have been many explanations for the downward move in price, all we can say for sure is that recently there were more sellers than buyers; and so, the price slid as the buyers stepped away, waiting for the price to come down.
But, is this really a glut? In 1998, even what poor people were paying for oil and oil products was relatively affordable, making it easier for them to enjoy the power and comforts that cheap oil and cheap energy in general make available to individuals.
Now, the price of energy and oil, in particular, is leading some of the newly poor in Greece (made so by that country’s ongoing economic depression) to seek out firewood–both legally and illegally obtained–to heat their homes instead of heating oil. The drop in vehicle miles traveled in the United States in recent years suggests that high gasoline prices are in part responsible for fewer miles traveled.
When it comes to total U.S. petroleum consumption, the top 10 weeks for consumption occurred from 2005 to 2007. The most recent production number (week ending October 24) remains 2 million barrels per day below the peak reading in 2005. European petroleum consumption remains in a downward trend as well. All this suggests a decline in the standard of living for most Americans and Europeans, at least, when it comes to oil and its benefits. (One colleague of mine now speaks of peak benefits from oil rather than peak oil.)
Yes, the price drop has only just occurred, and, of course, we can’t expect that it will have an immediate affect on consumption. But, increased consumption would likely take the oil markets back above $100 per barrel since small changes in supply and demand tend to move the oil price sharply. At the $100 level no one would be calling the situation a glut.
The oil industry has been using the term “abundance” for years as a public relations ploy to prevent people from realizing that oil is neither cheap nor abundant anymore. But the word “glut” has produced night terrors in the minds of oil executives. “Glut” implies that investors should stay away from a market that cannot make them any money. “Abundance” is okay for industry television ads aimed at lulling the public and policymakers to sleep. But, “glut” is bad for business.
The real problem is that it is costing more and more to get the oil that remains out of the ground. Consumers will buy oil depending on their ability to pay, not on the price which the oil companies need to charge in order to cover the cost of producing it.
Ironically, the swoon in oil prices could easily lead to renewed price spikes as the price falls below the cost of producing the most expensive barrels of oil. Under such conditions, the industry will stop producing these barrels and supply will decline–leading to another price spike when demand picks up.
It turns out that between consumers who can’t afford to pay higher and higher oil prices and companies which can’t afford to produce the extra oil we’d like at lower prices, we are stuck in an ever-shrinking no man’s land, a price band really–one that will eventually disappear as the average cost of producing the extra barrel of oil the world desires goes beyond what consumers including businesses can and will pay.
That will have us wondering why we allowed ourselves to sleepwalk through the last few years, even as continuing high prices and consumption declines sounded the alarm–one that told us we needed to speed up a transition to a renewable energy economy and reduce our energy use wherever possible instead of falling for talk of “abundance” and “glut.”
18 Comments on "Is there really an oil glut?"
MSN Fanboy on Sun, 2nd Nov 2014 5:08 pm
LOL
MonteQuest on Sun, 2nd Nov 2014 5:38 pm
The undulating plateau.
Plantagenet on Sun, 2nd Nov 2014 6:01 pm
The word “glut” means that the supply is greater then the demand, so the price falls.
That is the current situation in the oil market.
Dave Thompson on Sun, 2nd Nov 2014 6:19 pm
My over simplification is that the PTB, want consumers to think they have more money for the holiday season, by dropping the price of crude.
Nony on Sun, 2nd Nov 2014 6:21 pm
Good article. The term “glut” is kind of meaningless.
I do wonder how much of the rise/height in prices is due to OPEC cartel action. For one thing, we know of a CERTAINTY that they acted to reduce output and push prices up in 2008-2009. So is it impossible that they coordinated the rise previously or took actions to keep it at 100 from ~2011-2014.
platinumshore on Sun, 2nd Nov 2014 6:53 pm
The author is making a bold assumption that oil production comes from price, I would say it the short to medium term comes more from debt, and complex debt vehicles. Regulation reserve reporting season approaches – end of year. It will be fun to see if indebted companies increase their reserve estimates in the light of lower prices to secure more debt, or governments do it for them. So much politics invested in shale/tight oil right now, anything is possible. Oil production can continue, just so long as Shale companies can secure finance.. will be interesting to see how long the reserve asset inflation game lasts.
Plantagenet on Sun, 2nd Nov 2014 7:27 pm
@ Nony
Oh, glut has a meaning all right. It means the supply exceeds the demand so the price falls precipitously.
AND thats what has happened over the last two months in the oil biz.
DMyers on Sun, 2nd Nov 2014 7:30 pm
With China now buying up oil at bargain-basement prices, for stockpiling, the “glut” may soon vanish.
Dave Thompson, I wonder the same, myself. I have observed these gas price drops on other occasions over the years. These occasions do not seem to follow any rational pattern, considering all other factors in play at the respective moment of decline. Low gas prices are, without a doubt, an economic stimulus.
This implies forces beyond the market that are able to set the price of oil, artificially (i.e., political forces). Insomuch as the price does not seem to follow any expected trend based on cost of production or supply and demand, such a suspicion is not completely unfounded.
I believe there will be a price correction following the elections (okay, possibly even the holidays), and the eventual re-equilibration will be weighted with the true cost of production of “unconventional” liquid hydrocarbons.
Nony on Sun, 2nd Nov 2014 8:09 pm
Or maybe the price continues to drop after China has bought all the supply they want.
Or maybe something in between and prices just hang out at 80.
steve on Sun, 2nd Nov 2014 9:06 pm
Yes when I tell people about PO they counter with there is a glut of oil on the market…that is why oil prices are down….NPR is running story after story about how this is true….reminds me of the yellow cake in Nigeria to take us into Iraq….. So many lies so little time…
Energy Investor on Sun, 2nd Nov 2014 9:29 pm
Nony,
King Abdullah spelled out the reasons why they husband their scarce resource…it is so they can leave some for future generations. If you had a finite resource to sell, you would also make sure you didn’t either sell it too cheap or allow it to be depleted by over-production.
Folk point their finger at OPEC for cartel behaviour but if we lived in a sandpit with only one asset we would look after it too.
Nony on Sun, 2nd Nov 2014 10:03 pm
1. Somehow, I think even if the resource were renewable, they would still operate a cartel if they were capable of doing so.
2. The peaker meme has generally been that high prices are NOT the result of cartel action, but of depletion. Furthermore there was a lot of kerfuffle (pretty stupid in 10 years hindsight) from Simmons, Saniford, etc. about Ghawar watering out and the like. Not, withheld production, but that SA couldn’t do more.
Davy on Mon, 3rd Nov 2014 5:42 am
NOo, you have a general attitude of bringing up the past in regards to the Peaker movement in a negative way. I know you remember the days of TOD. Do you remember how the Corns were firmly in control of the airwaves? PO was a fringe subject talked about by wacko doomers and fringe geologist. Some prominent geologist indulging in the subject. In any case the ideas were largely irrelevant mainstream then with a few people engaged in the subject as a fringe group. Few in the general public even had a notion of what PO is. I remember those days around 2003 – 2006. PO although not a new idea was being embraced in a new way towards new realities of obvious depletion issues. The subject in this new group was in its infancy. Much thinking within this group was evolving. Peers were reviewing peers.
Fast forward to the early days of the great recession in 07-08. At this time we had the run up of prices to a high. IMA prices driven by PO constraints among other issues like speculation. Yet, PO played a significant underlying role. Supply did not maintain because there was little excess capacity to offer speculation kicked in and dangerous prices resulted. The economic shale LTO, tar sands, and the more expensive deep water are all a response to that period of PO scarcity and higher prices.
At this time 2008 – 2014 we see further evolution of thought on the subject. LTO shales were a PO movement missed forecast rightly spoken about by you. Yet, the PO’ers are rightly pointing out the instability of this resource geologically and economically. The world’s economy is partly in difficulty because cheap oil is no longer in abundance of affordable supply and economic quality. Unconventionals are part of this economic difficulty by being expensive and low quality.
Look at the airwaves now NOo. There is a steady stream of articles and reports on the subject. In MSM the articals are bent on discrediting the movement in a desperate way with little of substance offered as alternatives. It is very apparent PO is a solid issue. SO my point is 2003 -2014 is 11 years and a very short time for a movement to coalesce and hammer out a message. We have to refer to Gahndi’s quote:
“First they ignore you, then they ridicule you, then they fight you, and then you win.”
― Mahatma Gandhi
PO is at the point of being fought about currently and we will soon win. NOo in life if you fight nature you will lose but if you orient to nature the stars will work for and within you. You can’t lose with nature on your side. Doomers and Peakers will win because nature is on their side. Geology and economics support descent not growth.
The winning is nothing more than forecasting the end of industrial man and the beginning of something new. Initially maybe not radically new but eventually a radical new society post carbon and post complexity. Initially over the next 20 years it appears we will be in a transitional period between complexity and FF towards post carbon and forced simplicity.
The undulating plateau appears to be losing lift and will begin the descent within 3-5 years. There is little chance for the exponential energy forecast of 2020-2030. These forecast are wildly optimistic with phantom supply.
The transition will be reactions to descent with forced mitigation policies ad hoc. This will be a time of economic abandonment, systematic dysfunction, and unstable social fabric. It could very well be the worst of the bible in revelations with the worst of the dangers of industrial man. It may well be a manageable drop to a reboot level we can recognize and begin our adjustments to postindustrial man.
Right here right now is the critical period. Now is when the direction of all of mankind is being decided. Now more than ever we must do risk management in an honest truthful way. We must give up those lifestyles and attitudes that are not resilient and sustainable. We have to dive into the abyss and hope for the best. I am ending with a quote from Napoleon:
Strategy is the art of making use of time and space. I am less concerned about the later than the former. Space we can recover, lost time never
GregT on Mon, 3rd Nov 2014 9:02 am
It continues to amaze me how short people’s memories really are. Oil is still at 266% of the price that it was only a decade ago. When it drops below the historical price point of ~$30bbl, only then will we have an oil glut.
penury on Mon, 3rd Nov 2014 12:01 pm
An oil glut? Hundreds of factories close. Thousands of working age people drop out of the work force. For about 15 per cent of the working age population in the U.S. the chances of the purchase of a house,or a vehicle, or of finding a living wage job means that yes oil is in a glut. So are McMansions, debt levels both individual and .gov are at unservicable levels, the MIC continues their expansion and Americans apparently are not going to moderate their imports from EMs so if a glut can be defined as the third largest nation both in terms of population and production of FF must continue at this time of glut to import half of the FF they use when the glut disappears (and it will) the carnage will be unimaginable.
Northwest Resident on Mon, 3rd Nov 2014 12:19 pm
Davy — Nice history on the Peak Oil “movement”. Thanks for that. I was one of the ignorant masses back when the debate really heated up, having just became of aware of Peak Oil (and its consequences) a little more than a year ago. The logic and facts are on the side of Peak Oil, along with nature. How individuals like Nony and others that we see posting on this forum can continue to live in denial of reality just amaze me. I don’t see any large scale efforts on the part of TPTB to prevent that “dive into the abyss”. What I see are preparations for the dive into the abyss. As far as I can tell, a dive into the abyss is what it is going to be. I hope deniers like Nony and others can learn how to swim (and/or fly) real fast, for their sake.
steve on Mon, 3rd Nov 2014 7:02 pm
Funny, I have people coming to me to try to get me to vote…I explain to them that it does not matter who wins….the collapse is baked in the cake….there are no green shoots or tooth fairies….and your pensions are about to run dry….
Geek on Mon, 3rd Nov 2014 8:41 pm
We do not yet know the affect of horizontal drilling, fracking and shale oil technologies. If the US becomes a true force in oil production that is a game changer. If other countries such as Mexico adopt advanced oil extraction technologies OPEC’s historic market leverage goes away. I don’t understand the word glut but it is clear supply is increasing and it is unlikely demand will be surging. The usual OPEC suspects require oil revenue for their political and economic stability as does Russia.