Peak Oil is You
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Page added on March 6, 2015
Oil Today Is Cheaper Than in 1970
In 1970 a barrel of crude oil averaged about $13 a barrel. Adjusted for inflation, that same barrel of oil should cost about $78 today. Instead, West Texas Intermediate (WTI) crude oil for April delivery traded at just under $50 a barrel in the noon hour on Friday.
With crude prices at multidecade lows, Saudi Arabia pushed its OPEC partners into adopting a policy of no production cuts and letting the market decide the winner. What Saudi oil minister Ali al-Naimi understands — and what many other oil industry experts fail to understand — is summed up in a question he asked at an OPEC conference in December 2014. In a paper by energy economist Philip Verleger, Naimi is quoted:
[I]s there a black swan the we don’t know about which will come by 2050 and we will have no demand [for oil]?
To guard against that (remote) possibility, the Saudis did not cut production to force prices up for every producer, but they took the more sensible step of calling into question the feasibility of all the hugely expensive hydrocarbon projects that were started in the middle of the past decade.
Naimi also said that he gets a “sense that people want to get rid of coal, oil, and gas.” The recent agreement between China and the United States on further steps to slow global warming is just the latest indication of that desire to rid the world of hydrocarbons.
Production costs in the Canadian oil sands, for example, cannot come close to production costs in Saudi Arabia or Kuwait. The same can be said for projects in the Arctic and in ultra deepwater. Virtually all those projects were begun before horizontal drilling and fracking became common in North America, and virtually all require a crude oil price closer to $100 a barrel than to $50 a barrel in order to make a profit. Even horizontal drilling and fracking cannot compete with conventional production in Saudi Arabia and Kuwait.
Exxon Mobil Corp. (NYSE: XOM) said last week that it would reduce capital spending by about 12% year-over-year in 2015 to approximately $34 billion and that capital spending over the following two years would be below $34 billion. Still, production is expected to rise by 300,000 barrels a day in 2015 and by another 400,000 barrels a day by the end of 2017.
The question becomes whether Exxon, or any of the supermajors for that matter, is likely to begin a new, wildly expensive project in the next few years if crude oil prices remain in a range of $50 to $75 a barrel. As the economy recovers and interest rates rise, where will the billions of dollars needed to fund those projects come from if crude oil price projections remain close to the cost of production?
Low prices will, of course, push up demand. We only need look at the boost in U.S. sales of full-size pickups and sport utility vehicles to see the impact of low gasoline prices on demand for less fuel-efficient vehicles.
As long as Saudi Arabia doesn’t blink — and there is no reason to expect it to do so — the country can keep the pressure on prices and ultimately force high-cost producers to decide how long they can continue to pump oil and lose money. It may take several years, even a few decades, with a lot of ups and downs, but in the long run, the last oil man standing is likely to be a Saudi, and he is likely to be selling oil for the 2050 equivalent of $13 a barrel.
17 Comments on "Oil Today Is Cheaper Than in 1970"
Rodster on Fri, 6th Mar 2015 5:39 pm
As Guy McPherson recently said that even if we had a global economic collapse and EVERYTHING came to a grinding halt you still be looking at a 2c warming of the planet. If we have BAU as usual till 2050 we’d be looking at anywhere from 5-7c above baseline according to Guy.
Plantagenet on Fri, 6th Mar 2015 5:42 pm
This article is nonsense. While the Saudis have successfully created an oil glut and driven the price of oil down to record levels, they can’t do it for long. Gnawer will peak soon, and then oil production from KSA will start to drop.
dave thompson on Fri, 6th Mar 2015 5:43 pm
The oil price no longer matters, We are now in net energy decline, there will be no more real growth. The age of limits.
shortonoil on Fri, 6th Mar 2015 5:47 pm
What they missed is that the value of oil to the economy is going down, and it is now going down rapidly. The price of petroleum can be no greater than the value of the energy it delivers to the end consumer:
http://www.thehillsgroup.org/depletion2_022.htm
The value of that energy is now $77/ barrel, as it takes more, and more energy to produce it. If oil goes above that price, there would no longer be a reason for the consumer to buy it. A horse would become a better investment.
http://www.thehillsgroup.org/
Go Speed Racer. on Fri, 6th Mar 2015 6:45 pm
If oil is cheap like 1970, then I want a 1970 Lincoln 4-door. Pistons the size of coffee cans. Power windows, electric seats. 8-track sound. Built in CB. Worse fuel economy than a Mack 18 wheeler. I want one. Lets reset the clock to 1970!
Go Speed Racer. on Fri, 6th Mar 2015 6:52 pm
Oh, dont forget the air conditioning. A/C that really works, on Freon. Blows arctic air, snow flakes, even chunks of cdushex ice in your face while cruising the freeways of L.A. with the Mama’s and the Papa’s singing California Dreamin on that 8-track. Whew for a moment I thought peak oil was real. No just a momentary bad dream, already forgotten.
Makati1 on Fri, 6th Mar 2015 7:01 pm
When an article starts to project into the future, I lose interest as they are selling, not informing. 2050 is 34 years away. Half a lifetime, and most readers will not be there to see it.
I project that by 2050, the whole globalization idea will be dead and buried in the memories of a few old timers who are just now in high school. If it is remembered at all.
Petroleum will be a word in a book of words lost in some building built to house such things, if not already burned for heat.
Cars will be rusting hulks, lying where they ran out of gas and abandoned. That is, IF we can keep our psychopathic fingers off of the nuclear button.
MSN Fanboy on Fri, 6th Mar 2015 7:08 pm
Wasn’t there an oil crash shortly after 1970?
Ominous.
GregT on Fri, 6th Mar 2015 9:24 pm
“As Guy McPherson recently said that even if we had a global economic collapse and EVERYTHING came to a grinding halt you still be looking at a 2c warming of the planet.”
2 degrees C gives us a 50/50 chance of a global mass extinction event. Hansen’s original limit was 1 degree C. We’re almost there already, never mind 35 years from now.
dashster on Fri, 6th Mar 2015 10:24 pm
If you google “inflation-adjusted” oil prices, you will find data that doesn’t agree with what these people are giving. The average price was $3.39 and adjusting that for inflation gives $20.63. They could have used 1975 (after US peak and first oil shock).
dashster on Fri, 6th Mar 2015 10:30 pm
“Wasn’t there an oil crash shortly after 1970?”
No, 1970 was good times – the year the US peaked and prices were low. $3.39, not $13 as this article incorrectly gives . After 1970 prices went up, not down.
Greven on Sat, 7th Mar 2015 12:04 am
The world wide consumption of oil is stead at 90 million bbl/day what’s changed is that the US is producing 10 million bbl/day more that in previous year causing a glut. Almost all middle east oil fields are in decline so I don’t know what they are going to do for money when they run out in a decade or 2.
dashster on Sat, 7th Mar 2015 12:22 am
This article should be deleted as the site allows no comments and the headling “Oil Today Is Cheaper Than in 1970” is bunk.
GregT on Sat, 7th Mar 2015 12:40 am
“We only need look at the boost in U.S. sales of full-size pickups and sport utility vehicles to see the impact of low gasoline prices on demand for less fuel-efficient vehicles.”
For the last three years in America, when gasoline price have been at historic highs, the top selling vehicles have been pickup trucks. The article is also misleading by saying
that gasoline prices are low. Lower than 3 months ago for sure, but still much higher than average inflation adjusted prices over the last 130 years. What else should be expected
from a Wall Street investment advisor.
Apneaman on Sat, 7th Mar 2015 11:39 am
Another EXTERNALITY
Train carrying crude oil derails near Gogama, Ont.
This is the 4th train derailment in northern Ontario this year
http://www.cbc.ca/news/canada/sudbury/train-carrying-crude-oil-derails-near-gogama-ont-1.2985703
Kenz300 on Sat, 7th Mar 2015 12:51 pm
The sooner we transition away from fossil fuels the better it will be for consumers, countries and the planet.
Locally produced energy with local labor needs to replace the centralized energy distribution systems of the past. This is better for energy security. This is better for employment levels. This is better for each countries economy.
Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste are the future.
steve on Sun, 8th Mar 2015 4:42 pm
“For the last three years in America, when gasoline price have been at historic highs, the top selling vehicles have been pickup trucks. The article is also misleading by saying….
Uh…what the hell do you drive in Canada? Every time I go up there I see a lot of trucks and SUVss I mean a lot!!! and a lot of the damn things are made up there….