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Page added on May 13, 2016
Michael Lynch: Whatever Happened To The New Oil Paradigm?
Roughly a decade, many analysts argued that oil had entered a “new paradigm” where strong demand and restricted supply would mean permanently higher oil prices. This is not to be confused with either the “Superspike” argument made by Goldman Sachs or the “peak oil” theory; the former was talking about price reaction to supply disruptions and the latter was a rehash of neo-Malthusian prejudices. The New Paradigm was in fact based on traditional market fundamentals and required no revolutionary thinking, a difference in degree, not kind, and it certainly appealed to many in the oil industry and Wall Street as credible. Unfortunately, none of the aspects of the argument hold up to clear scrutiny.
The most obvious shortcoming was the repeated use of the phrase “the easy oil is gone” whenever describing new investments in difficult environments. For this statement to be relevant would require that, after one hundred and fifty years, the resource base shifted from “easy” to “hard” oil within a few years. Such has never happened in the history of minerals and energy.
A second factor was the shift in Chinese oil demand to rapid growth. In late 2003, most analysts expected a weak oil market in 2004, and OPEC even planned to reduce production in the second quarter of 2004 to avoid a surplus. Instead, prices rose roughly 30% when demand spiked, particularly in China. As the graph shows, Chinese demand grew more than 16%, adding roughly 1 million barrels a day to global oil consumption, a shocking amount from a single country, and creating fear this trend would continue, and even strengthened as economic reforms started to take hold in India. The prospect of 2 billion consumers moving into the income levels where automobile ownership became feasible seemed revolutionary.
Except that examining the previous figure should demonstrate clearly that 2004 was an outlier, not the new norm. In hindsight, the source of much of the demand boom was a shortage of coal for power generation (due to an overburdened train system) and did not persist. It is also worth noting that Chinese demand had been growing rapidly for a decade or more at that point, and was not suddenly switching into overdrive. Finally, world demand growth has not actually been seriously bolstered by this surge, and growth is much below what was experienced before 1973, i.e., the first oil price hike.
Resource nationalism has definitely increased since the oil price collapse after the advent to power of Hugo Chavez, as well as in countries like Russia and Angola, and has reduced available supply but the notion that this was permanent was always incorrect. Resource nationalism is arguably cyclical, but certainly variable and the recent opening up or reform in Argentina, Iran, Iraq and Mexico suggests that the industry is moving to a more friendly investment environment.
Low spare production capacity is certainly a concern, but again, not a fixed condition. The decade long overhang, when OPEC production dropped from 30 mb/d in 1980 to 15 in 1985, created a definite sense of complacency about supply security. What many forget is that, for most of the 1990s, surplus capacity was very low, usually under 4 mb/d, without having a major impact on prices. Because low surplus capacity is a necessary, but not sufficient condition for a price shock. The geopolitics of the oil industry were quite placed in the 1990s.
That all changed abruptly in late 2002, with the strike at Petroleos de Venezuela shutting down production, and the overthrow of Saddam Hussein in spring 2003 doing likewise there. Since then, large amounts of production have been lost due to the Arab Spring uprisings, unrest in the Niger Delta, and other problems large and small. However, the situation regarding both Iran and Iraq is much improved, although supplies from Libya, South Sudan, and Syria remain depressed, and political unrest in Venezuela threatens a new outage. But longer term, it appears as if both surplus capacity will increase and geopolitical threats will decline. Certainly, they don’t represent a permanent shift in the industry condition
In so many ways, the past decade was a replay of the 1970s, where short-term production problems, mostly politically inspired, and increased resource nationalism, by definition temporary due to its political nature, were misinterpreted as representing an irreversible tectonic shift. Many times the same pattern has played out whether the Dutch tulip bubble, the railway mania in the U.S. or various swings in gold, silver and other metals prices. Market bulls always appear prescient when prices are high, and the argument that “this time is different” seems more credible. Until prices come down again.
20 Comments on "Michael Lynch: Whatever Happened To The New Oil Paradigm?"
eugene on Fri, 13th May 2016 12:28 pm
Long ago, a friend and I were discussing peak oil with the conclusion prices would rise, demand fall, prices drop and then rise again. We saw a two steps forwards, one step back type thing. Personally, I amused by all the hype going on with a short term phenomenon lasting a, relatively, short term. And the hype that less energy intensive (biofuels), wind/solar and more expensive to extract (fracking/oil sands) energy is going to save our sorry asses is the stuff of dreams. But it makes for blogs, comments and arguments.
onlooker on Fri, 13th May 2016 2:15 pm
Wild price swings and economic and market perturbations are what the more sound forecasts were saying. So Michael Lynch is full of it. It figures, he would be writing for Forbes.
Davy on Fri, 13th May 2016 2:48 pm
What is it about this site and their fasination with routinely posting from Forbes? Is it to make sure and show the worst of what is American so we have a good topic to bash the Americans with. There are many articles that show the US in a better light than Forbes and you rarely see any.
peakyeast on Fri, 13th May 2016 2:58 pm
lol Davy. Ease up, dude. There are also many places that shows much worse and they dont post those either.
Its a fair mix if – not you – but other people ask me. 🙂
onlooker on Fri, 13th May 2016 3:00 pm
Forbes is a totally compromised publication. Nothing more need be said.
shortonoil on Fri, 13th May 2016 3:51 pm
As Gurdjieff said, “you never go broke telling people what they want to hear”. Michael Lynch has made a career by following that advise. His articles are careful not to touch too much into reality; that is not what his readers want to hear. Lynch’s writings are custom tailored to the oil industry, and the White Knight kills the evil witch, and they live happily forever after.
Unfortunately, for the rest of us, the White Knight never showed up for his debut.
Plantagenet on Fri, 13th May 2016 5:43 pm
We are in an oil glut because oil production rose faster then oil demand. The current oil glut is being extended by the growth in exports from Iran
makati1 on Fri, 13th May 2016 6:42 pm
The New Oil Paradigm met the immovable wall of debt. Nuff said.
Northwest Resident on Fri, 13th May 2016 7:17 pm
We are in an oil glut because (primarily) shale oil production was transformed into a steroid monster by ZIRP, trillion$ in newly created debt and an accompanying propaganda campaign designed to trick investors into believing in the “shale miracle”. As a result, production skyrocketed and demand did not keep up, in fact just the opposite. The financial manipulations that greased shale and unconventional oil growth set in motion a historic transfer of wealth away from the middle and lower classes, destroying demand for oil even as oil production increased. And that explains the so-called oil glut.
Wolfie52 on Fri, 13th May 2016 7:54 pm
Plant, do yourself a favor…lose the stupid skeleton, And get a brain, Geesh. Same old rehash you can read in the NY Times. Bold thinkers need not apply in here…just trolls. Just get tired of seeing the same insipid, jejune trolls saying the same thing, over and over.
Tank on Sat, 14th May 2016 3:21 am
F”#”k yeah Wolfe we’re all so over seeing that f*#kwit plant shill talking glut
onlooker on Sat, 14th May 2016 3:59 am
Your the one sounding like a troll Wolfe. And yes Tank, I second that.
peakyeast on Sat, 14th May 2016 4:32 am
@onlooker: Not many media are without bias and free from owner, investor, government influence – if any. You could say the same about many articles about Russia, Venezuela and so forth from other sources.
But that is what we have.
And I agree on forbes being compromised.
Apneaman on Sat, 14th May 2016 4:36 am
Planty thinks she’s super duper smart because she graduated second overall at Alaska remedial high.
Everyone else was tied for first.
onlooker on Sat, 14th May 2016 8:05 am
True Peak, but some are more subservient to the Elite Establishment than others who rail against it and point out its abuses and lies.
Speculawyer on Sun, 15th May 2016 12:19 am
“We are in an oil glut because oil production rose faster than oil demand. The current oil glut is being extended by the growth in exports from Iran”
It really is that simple.
Apneaman on Sun, 15th May 2016 12:37 am
The rise and fall of Linn Energy
“Linn Energy spent the past decade on a $17 billion, debt-fueled shopping spree, buying a vast collection of wells and companies during the frenzy of one of the great U.S. oil and gas booms.”
http://www.houstonchronicle.com/business/energy/article/The-rise-and-fall-of-Linn-Energy-7466099.php
Apneaman on Sun, 15th May 2016 12:41 am
Penn Virginia, one of the region’s oldest businesses, files for bankruptcy protection
“The company, whose acreage is concentrated in Texas but includes holdings in Pennsylvania’s Marcellus Shale region, listed assets of $518 million and debts of $1.4 billion in filings with the U.S. Bankruptcy Court for the Eastern District of Virginia.
“Like many other exploration and production companies, Penn Virginia has been significantly affected by the recent and continued dramatic decline in oil and natural gas prices,” Edward B. Cloues II, chairman and interim chief executive, said in a statement.”
http://www.philly.com/philly/business/energy/20160513_Penn_Virginia__one_of_region_s_oldest_businesses__files_for_bankruptcy_protection.html
poor things
GregT on Sun, 15th May 2016 1:16 am
“It really is that simple.”
Everything in life appears “that simple”, to simple people. Considerate and intelligent people find life to be more complex. It’s all a matter of perspective.
zarquon on Sun, 15th May 2016 8:57 pm
Art Berman writes for Forbes, too. Now I’ve never read Forbes, but I read Berman. Should I stop?
“The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil — as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.”