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Page added on November 7, 2014
The case against US oil abundance
The swift decline in oil prices has the media buzzing about an oil supply glut, Cobb writes. But can oil – which now trades at eight times its price during 1998’s glut – be said to be experiencing an oil glut now?
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 consumption 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.”
19 Comments on "The case against US oil abundance"
redpill on Fri, 7th Nov 2014 7:25 pm
Which news source to pay attention to, the CSM or Forbes….hmmmmm.
Norm on Fri, 7th Nov 2014 8:44 pm
Pretending there is a perpetual eternal oil supply, is insane. Also its national energy policy.
Plantagenet on Fri, 7th Nov 2014 9:31 pm
All the word “glut” means is that the supply exceeds the demand to such a degree that the price falls significantly.
Thats what has happened to oil We are clearly in an oil glut.
Now it my not last very long, and it may be dumb for KSA to be pumping so much oil, but the fact remains that right now we have an oil glut.
GregT on Fri, 7th Nov 2014 9:38 pm
Thats right Plant. As the world’s economies continue to limp along at a 4% increase per annum, 200,000 people are added to the equation each and every day, oil production has flat lined, and all of a sudden we are swimming in oil.
Okee Dokee……..
Nony on Fri, 7th Nov 2014 9:52 pm
frack the anwar. open the vacapes. approve the keystone xl. open GOM. drill, drill, drill!!!!!!!!
Makati1 on Fri, 7th Nov 2014 11:29 pm
Oil is a political weapon in these “End Days”. The reasons for this sudden price drop for the US is based in politics and not the amount of oil in demand or flowing out of the exporting countries. It appears that this latest blip is Saudi/USSA caused and is already making bad waves in OPEC. $150 oil by Easter?
Apneaman on Sat, 8th Nov 2014 1:34 am
We’re in an oil glut. We’re in a retail glut. McDonalds has a hamburger glut. There is a glut of unemployed people, there is just no demand for them. Didn’t they use to call that a depression?
Perk Earl on Sat, 8th Nov 2014 1:57 am
“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.”
You mean diminishing returns actually means it ends up becoming unaffordable? But right now the consumers are partying like it’s 1999. Come on, don’t let the fact that developed countries need to QE, manipulate gold so their currencies don’t hyper-inflate and keep interest rates at a bare minimum to pump up the debt bubble to an even higher unprecedented global level, dissuade the sheer tenacity of insisting on driving hard to the hoop to kick the can down the road just a tad bit farther! We just need to believe!! /sarc off
GregT on Sat, 8th Nov 2014 2:53 am
“frack the anwar. open the vacapes. approve the keystone xl. open GOM. drill, drill, drill!!!!!!!!”
Anybody still have any questions as to why our species is doomed to fail?
Davy on Sat, 8th Nov 2014 6:59 am
You can call it a econ 101 “glut”. If you included oil into its other half the economy a glut has different meaning. I have been saving PO/doom pictures and graphs since 05. Looking back on some of the corn analysis in the corn years of 07 we saw plenty of projections of oil production approaching 100MBD by now. If you look where we are now you see a significant divergence. Remember we generally saw what was a goal seek by the IEA and EIA in the pre great recession days of 07. Their analysis seemed to fit so nicely with what economic growth would demand of oil supply. It appeared a goal seek for average 2% growth. The extra sources were so blaringly optimistic because they were yet discovered, proven, or developed. Look at today we are around 86MBD. Shale was a godsend for the economy.
That 14MBD difference is the “economy stupid” using a political slogan. A glut in this case indicates an economy that is depressed per 07 projections further presently showing compression. To be fair with the corns if over the next few months economic growth responds to this so called oil glut then OK we can call it a corn oil glut with growth improving. OTOH if we see growth continue to stagnate or God forbid drop then we are going to be doomerish and say the glut is economic POD in origin. One view says over supply by a robust oil sector mainly shale. The other says the economy is stagnating for multiple reasons. Are oil prices too high to stimulate real bottom tier growth one would expect from a healthy global economy? So a doomer view is this is a demand glut. Perk linked this from the article: “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.”
I would add to that the down side note of “as the average price the economy can afford declines at what point will production fall off precipitously. If we look at this systematically in a financial way we could further say at what point is supply too low to maintain complexity. At what point will supply drop to a point the global economy will experience real growth destroying levels, shortages, and financial market confidence destruction. When will we move from carving fat to meat to bone?
We know that a small drop in supply of liquid fuels has a magnified effect on the markets. This is both a real effect from economic activity abilities stifled and a perceived effect on market confidence. If we are in a “no man’s land” with energy we are in one for the economy. They go hand in hand. What good is gas without a broken car? A drop now of either is very dangerous and may be the paradigm shift to descent and an all liquids PO
The economy and oil are the key risk management variables now. This demand drop (doom) or supply glut (corn) could be an inflection point. We see financial repression policies faltering, a business cycle recession due, and a clear stagnation of growth across the board. The next few months may cement the direction of the economy and oil supply. It is still very possible a growth spurt will occur but it could still be in the classic downward trend missing the highs in a bounces down. There is a point down where the drop could be beyond recovery both for oil price, oil supply, and economic demand. The Christmas season is the “Key” for financial confidence. Will this be the last happy Christmas?
Kenz300 on Sat, 8th Nov 2014 7:07 am
Enjoy the drop in oil prices while it lasts…..
It will help the global economy recover from the Great Recession and that recovery will drive up demand and prices.
Danlxyz on Sat, 8th Nov 2014 8:08 am
Glut, to me, implies that there is more production than consumption. If this were so, then wouldn’t inventories be going up? According to the EIA, that is not the true. Crude oil inventories are at 380.2 million barrels which is slightly more than last week but lower than last year at this time. Motor gasoline is below the lower half of the normal range. Total commercial petroleum inventories decreased by 2.4 million barrels last week.
We are still importing a net of about 5 million boepd of crude and petroleum products. So I don’t see any glut in the US right now.
Maybe there is a glut in the rest of the world.
Nony on Sat, 8th Nov 2014 9:10 am
GregT: our species is charged by God to multiply and to dominate the Earth.
Davy on Sat, 8th Nov 2014 9:26 am
NOo who’s God? Sounds like Wall Street’s God? Oh I forgot Wall Street’s god is money.
Northwest Resident on Sat, 8th Nov 2014 9:37 am
Nony — With that “charged by God” quip, you simply add to the point that GregT made regarding your prior comment. Please tell us you’re just joking around. In any case, our species has already multiplied and dominated the Earth — mission accomplished. What did God say about poisoning Earth’s biosphere to the point that the other species he created die off in mass numbers? Didn’t he say something about being a “good shepherd” of the Earth, or something like that?
Nony on Sat, 8th Nov 2014 9:59 am
NWR:
https://www.youtube.com/watch?v=4bHZRSlhJxY
Northwest Resident on Sat, 8th Nov 2014 10:09 am
Nony — “God-given V8 power”. I love it! Ok, now I know you’re joking around.
But just in case you aren’t — and I suspect that you might not be in some sense due to your past comments — here’s some of what the Bible has to say on the subject:
Isaiah 24:4-6. The earth dries up and withers, the world languished and withers, the exalted of the earth languish. The earth lies under its inhabitants; for they have transgressed the laws, violated the statutes, and broken the everlasting covenant. Therefore a curse consumes the earth; its people must bear their guilt.
Jer. 2:7. I brought you into a fertile land to eat its fruit and rich produce. But you came and defiled my land and you made my inheritance detestable.
Revelation 11:18. The nations were angry and your wrath has come. The time has come for rewarding your servants the prophets and your saints and those who reverence your name, both small and great – and for destroying those who destroy the earth.
In that Revelations quote, is the God condoning destruction of those who destroy the earth?
Snoopy on Wed, 19th Nov 2014 4:46 pm
Northwest – Not just condoning, but bringing about the destruction of those ruining the earth.
Northwest Resident on Wed, 19th Nov 2014 4:58 pm
Snoopy — In other words, the Revelations quote is saying that the time has come for destroying those who ruin the earth.
No “condoning”. Just do it. The time has come.
Of course, that time was a few thousand years ago, give or take. But at least, if you’re a believer in the Bible being the direct word of God, you get an idea of what God thinks about those people who ruin the earth.
And as it so happens, those rascally evil-doers who are ruining planet earth also happen to be the ones who will have a more difficult time entering the kingdom of heaven than a camel will have going through the eye of a needle — with “needle” being the passage through one of those little entry doors into the mosque/temple, if I remember my Sunday school lessons correctly.