Peak Oil is You
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Page added on November 15, 2014
Welcome To The NEW Era Of Cheap Oil
The world runs on oil. That goes without saying.
And for much of the 20th century, the world ran on cheap oil.
In the early 21st century, however, that briefly changed.
When I moved to Los Angeles from New York in 2004, I could find gas for about $1.25 a gallon. The joke at the time was that bottled water was more expensive.
By 2009, the price had spiked to over $4. The highly profitable, environmentally unfriendly, gas-guzzling big truck and SUV market was completely obliterated for the Detroit carmakers – at the worst possible time.
General Motors and Chrysler went bankrupt. Ford’s stock fell to less than $2 a share.
Dark days.
Back, then, you heard a lot about “Peak Oil” – the theory that all the easy-to-get crude had already been found than that global production had “peaked” and was destined to begin a slide to some future point when gas would be $8-10 a gallon. Or more. Or much more.
Hybrid cars became thick on the roadways. GM started to take small cars seriously for the first time ever. Electric-car startups sprang to life.
Some of the more apocalyptic-minded folks began to talk about living in darkness and oil at $200, $300 a barrel.
Grim.
But then the North American shale boom kicked into high gear. Fracking, combined with an influx of more fuel efficient car engines, simultaneously increased oil supply and depressed demand. Demand in the developing world kept the whole thing afloat, price-wise.
Now we have a total reversal: with oil well below $100 a barrel and growth slackening in developing markets, there’s talk of a global oil glut, of fracking enterprises going out of business because they can’t manage the economics, and of the U.S. becoming an exporter of oil.
The oil market has entered a new era, the experts are saying.
Cheap oil is back.
The International Energy Agency, which typically refrains from predicting oil prices, said in its monthly report that prices could fall further in 2015 after declining to their lowest levels since 2010: below $80 per barrel .
“While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80 to $90 range, supply/demand balances suggest that the price rout has yet to run its course,” the IEA said.
That’s right: it isn’t Peak Oil – it’s a price rout!
Barring any new supply disruption, “downward price pressures could build further in the first half of 2015”, the IEA said.
Oil prices have fallen 30 percent since peaking in June, pressured by a strong U.S. dollar and rising U.S. light oil output while largely ignoring the impact of Libyan supply disruptions.
Benchmark Brent crude oil was up 50 cents at $77.99 a barrel on Friday, having dropped from above $115 in June.
“Pressure on OPEC to reduce production is building, but at the time of writing there appeared to be no clear consensus on a formal supply cut ahead of its meeting in Vienna later this month,” said the IEA, which represents industrialized nations.
For 2015, the IEA left its forecast of global oil demand growth unchanged at 1.13 million from a five-year annual low of 680,000 bpd in 2014, saying the macroeconomic backdrop was expected to improve.
While China, the top source of incremental oil demand in recent years, has entered a less oil-intensive stage of development, years of high prices have helped new technology release oil resources in North America and elsewhere.
“It is increasingly clear that we have begun a new chapter in the history of the oil markets,” the IEA said.
The IEA said supply risks remained “extraordinarily elevated” and could be exacerbated by falling prices.
29 Comments on "Welcome To The NEW Era Of Cheap Oil"
Speculawyer on Sat, 15th Nov 2014 6:23 pm
Well, we’ll see. The current price drop may dry up investment such that supplies then drop and thus cause prices to rise again.
I don’t see prices remaining low for more than a year or two. Either supply will weaken or demand will pick up thus causing prices to go up again. The fracking revolution did increase oil production but it only works at higher prices . . . and I don’t think prices less than $75/barrel will sustain the fracking boom.
shallowsand on Sat, 15th Nov 2014 7:00 pm
Speculawyer. I agree with you. I also think that without it prices would be very high. It has bought some more time.
rockman on Sat, 15th Nov 2014 7:14 pm
“Cheap oil is back.” I always wonder when I see such unsupportable statements if the writer is that incapable of doing a 30 second web search or if they know the truth and assume no one else will fact check their statements.
Adjusted for inflation the current price of oil is higher then the yearly average for 62 of the last 68 years. IOW for 91% of the last six decades oil has been cheaper the we currently find it today. Not only are we not in an “era of cheap oil” it’s incredulous IMHO to even call it “cheaper oil” given it’s still more expensive then in all but 3 of the last 30 years.
yoananda on Sat, 15th Nov 2014 7:28 pm
It’s a new era of cheap oil for the richests !!!! lol
Nony on Sat, 15th Nov 2014 8:00 pm
But, but Matt Simmons said we would be 200 bucks plus.
Richard on Sat, 15th Nov 2014 8:10 pm
A french investman bank claimed $300 a barrel by 2015.
Makati1 on Sat, 15th Nov 2014 8:32 pm
For oil prices to remain low, it would require ALL of the various inputs to also go down in cost. Drill rigs, drill bits, casing, trucks, trains, labor, etc. That can not happen in a capitalist system without incurring a total collapse.
This seems to me to be just another blip on the path down the ladder. If we don’t return to $100+ (profitable) oil soon, it will collapse the world economy as oil wells are shut in. No energy, no production, no economy.
Am I wrong?
shallowsand on Sat, 15th Nov 2014 8:51 pm
Simmons was wrong and so was the bank cited above. They didn’t foresee the US/Canada production spike. Question is how far it can drive prices down, how long will it last, and if it drives prices down will consumption increase?
Makati1 on Sat, 15th Nov 2014 9:13 pm
Off topic but of interest to many of you is this article’s theme. I suggest it to you for the many areas it covers that we ALL are involved with in some degree. I ask this question: “What ‘marriage’ is he talking about? Happy Sunday reading.
http://twoicefloes.com/the-tif-catalog-of-works/series-of-cogs-articles-from-zh/series-by-cog-from-2011/orignial-dispatches/dispatches-from-occupied-territory-the-awakening/
DMyers on Sat, 15th Nov 2014 9:35 pm
Strikes me as being ill-advised, suggesting seriously that cheap oil is back. Granted, my own eyes didn’t lie today, when they observed that $2.70 per gallon sign at the Hess station. I even drove down the street and gassed up at Murphy’s, knowing the price could double by Monday. We’re all very happy with the lower price of a necessity.
But please, no: “Mama,naiyaw we can bah thayut Ayus Youuu Vayeee!”[SUV]
This is simply the price of oil trying to find itself. The present price drop is not a trend. For reasons that may be economic, political, technical, purely market phenomena, or sinister manipulation, price has made a surprising dive.
From that, all the underlying complications become apparent. Government budgets are relying on high prices. Rising cost of production relies on high oil prices. Certain things are not going to get done without high oil prices.
The low gasoline prices are jacking up activity in general, from my own observations. Seems people are taking up the opportunity to get out and spend some of that money they’re saving on driving out to spend money. Good for the economy, eh?
In due course, this, too, will pass. Next, prices will return to recent norms, or they will go much higher even than that. If anything, this is a set up for the next big move. I’m not trying to make a point as to whether the hands here are visible or invisible.
There’s the obvious, that if lower prices cause lower production, then prices will rise on supply pressure. This implies an ongoing up and down that nets little economic gain. Spontaneous shutdown.
In short, this is not likely to to be an era, as we normally understand the word to mean a time of some duration, but it is an irregular move downward, to a level justifiably called cheap.
pat on Sun, 16th Nov 2014 12:41 am
the slide of 30 per cent of oil is only seems begin and further rout, decline is on the line. its that in 2008 it was more a blip that the world hit the 40 levels and had the juice to climb up with the huge pumping of easy paper. But the current rout in prices to 40 levels is for long time and with it the world collapse to see a recession much larger.
GregT on Sun, 16th Nov 2014 2:32 am
“But, but Matt Simmons said we would be 200 bucks plus.”
But, but Matt Simmons, like so many others, didn’t foresee governments creating trillions of dollars in debt, to make the sheep think that oil prices hadn’t reached 200 bucks plus.
Norm on Sun, 16th Nov 2014 2:53 am
Good, now that cheap oil is back… we also need to bring back 1978 Ford LTD Royal Brougham. It has power headlight covers, power seats, power windows, 8-track and CB radio built in, a 460 cubic inch engine with pistons the size of coffee cans, a 30 gallon gas tank… plush carpeted trunk, electric aerial, the rolling livingroom. oh gets 12 mpg but who cares? Sure glad cheap oil is back! Ready to order the car. Should be available for factory orders since cheap oil is back again.
Shaved Monkey on Sun, 16th Nov 2014 5:58 am
Enjoy the temporary price drop until shale companies start dropping like flies and the price starts rising again.
Dredd on Sun, 16th Nov 2014 6:04 am
“Back, then, you heard a lot about “Peak Oil” – the theory that all the easy-to-get crude had already been found than that global production had “peaked” and was destined to begin a slide to some future point when gas would be $8-10 a gallon. Or more. Or much more.”
A mischaracterization of peak-oil science due to a lack of intellectual capacity.
The finite Earth is still here (You Are Here and you are not Elijah).
Dredd on Sun, 16th Nov 2014 6:10 am
The military bodyguards of Oil-Qaeda around the world where they do military drills for oil, is asking for more money.
Those socialized costs are transferred to the public but are not put on the gas pump price.
Got religion (The Virgin MOMCOM)?
Davy on Sun, 16th Nov 2014 7:34 am
If, and as has been if, the economy manages to maintain it’s bumpy plateau we may see a partial recovery. I fear the economy and oil sector are at risk of a demand/supply destruction period that will be the end of the bumpy plateau period. We may enter the bumpy descent period.
This new period may appear a bumpy plateau in the beginning but that is only because of financial repression. As this new period gathers speed a noticeable descent period may be evident. Time will tell. I give this transition period one year or less.
dave on Sun, 16th Nov 2014 8:44 am
Matt Simmons could not have predicted the continuing weak world economy that we’ve had since his passing. That is one of the major reasons why we have not seen $200 oil. Given the depletion rates inherent in fracking and the very high costs of synfuels, peak oil and higher prices are likely to return sooner than some might imagine.
bobinget on Sun, 16th Nov 2014 10:03 am
World economies are already beginning to benefit
from lower cost oil.
The problem, few are counting on the cheapest gas and oil in a decade to last.
Much depends on the effects of our ‘new’ weather patterns. For now, it appears them that were dry are parched. Those that in the past had too much rain, today, are flooding.
It will require massive amounts of fuels to adjust.
JuanP on Sun, 16th Nov 2014 10:22 am
“The International Energy Agency, which typically refrains from predicting oil prices, said in its monthly report that prices could fall further in 2015 after declining to their lowest levels since 2010: below $80 per barrel.”
I just want to say that I consider all the OECD IEA’s future predictions of oil consumption, oil production, and oil prices to be systematically wrong. I feel the same way about the American EIA. Both the IEA and the EIA are political institutions, and all their predictions and projections of the future are nothing more than political statements.
I use the EIA and IEA as a data source for information about the past. They are somewhat more reliable in that role. Unfortunately there aren’t any really good unbiased scientific sources that I know of.
So, I basically ignore all predictions and projections about the future made by the IEA and EIA. I have found my own ignorant opinions to be systematically more accurate than their ridiculous predictions. They keep revising theirs through the years, and in every revision they get closer to mine.
You couldn’t make worse predictions than they do unless you were doing it on purpose to beat them at it. 😉
Dave Thompson on Sun, 16th Nov 2014 11:34 am
Short term for the holeedaze yes cheap oil for the masses, now be good consumers and go rack up your credit card on cheap Xmas gifts.
Northwest Resident on Sun, 16th Nov 2014 11:42 am
I think the global economy has already spoken on the topic of “cheap oil” and made its point clear. And that point is “I can’t take the pain any more!!!”.
And what is “cheap”? Cheap is relative. Cheap to me is when something you want or need is available at a price that is far below the price being asked for comparable products. Oil doesn’t have a comparable product. $80 per barrel is NOT cheap and either is $70 per barrel, not even $60 per barrel — it is just not as extremely expensive as $100.
But let’s just cut out the crap and get to the bottom line. And the bottom line is that the good ship BAU is sinking fast and it really doesn’t matter what price gets charged for oil because NOTHING is going to rescue BAU from Davy Jones’ Locker, nor the majority of its passengers. Oil price falling is just a result of the fact that the economy is contracting, there aren’t enough resources left to exploit on planet earth to turn a lousy profit, the amount of energy required to extract a barrel of oil is insufficient to continue our wasteful consumption economy. In the epic battle with Mother Nature, finite resources is winning, and is about to do an epic Coup De Grace on BAU. When that head falls into the basket, you better be ready.
Northwest Resident on Sun, 16th Nov 2014 11:44 am
I meant: the amount of energy left over after extracting a barrel of oil is insufficient to continue our wasteful consumption economy
Apneaman on Sun, 16th Nov 2014 1:15 pm
Norm, lol. You made me think of my old mans ride from the late 1970s – 1976 AMC Matador Brougham Coupe. We used to call it “The Beast”.
steve on Sun, 16th Nov 2014 1:29 pm
What is going to happen to the shale companies in the U.S? I mean how much longer will they continue to produce with low prices? Or do they have to keep producing because you can’t stop a moving train on a dime so to speak….When the oil companies come back to frack after stopping will the easy money from the FED still be there?
rockman on Sun, 16th Nov 2014 3:44 pm
Steve – “I mean how much longer will they continue to produce with low prices?”. Typically in the face of falling prices companies continue to produce as long as cash flow is positive. Production costs are much lower then most believe: companies will keep producing even with $20/bbl or less.
So I suspect you’re referring to drilling new wells vs producing existing wells. Every potential drill site (shale, conventional, Deep Water) has its unique price requirement. The lower the price the fewer wells drilled. There is no single price at which any play stops developing. So no: the shale players “won’t stop drilling” at $X/bbl.
But there are other limits. Many of the shale players are using borrowed capex to drill in addition to their cash flow. Typically a company’s borrowing ability is based upon the value of its reserve base. But even if that reserve base stays unchanged a lower oil price will reduce its value. And that will reduce a company’s credit line decreasing its capability to drill wells that still might be viable targets at the lower oil price. And obviously those lower prices will also reduce free cash flow. Bottom line: smaller drilling budgets…less drilling.
So lower oil prices will reduce drilling by not only eliminating margin drill sites but also reducing the monies available to drill. Including wells that might still be economic at the lower oil prices.
Nony on Sun, 16th Nov 2014 11:36 pm
I know some sweet spots will keep on drilling. and some iffy spots will stop. But my question is overall, is this price low enough so that the Bakken output turns down? Eagle Ford? Permian?
shallowsand on Mon, 17th Nov 2014 3:56 pm
Nony. It has surprised me how much shale drillers have been able to borrow already. If this price drop is temporary, won’t be a big deal, especially since most are hedged.
If low prices persist for two years, I think the drop in output will be dramatic. When reserves value drops, as ROCKMAN says, will lower further borrowings. CLR total liabilities went from 1.3 billion at end of 2009 to 10 billion at end of 3q 2014. Clear they need to keep borrowing do fund drilling program. Cannot do it all with cash flow, especially given well head price in Bakken around $60.
Kenz300 on Tue, 18th Nov 2014 12:25 am
How much oil will be developed in Canada at these lower prices? Will investments and capital spending be reevaluated?
Will the companies that stuck their necks out betting on $150 oil go broke…………..
How much coal will be developed in Australia with more competition from lower oil prices and lower costs for alternative energy sources like wind and solar with storage.
All these fossil fuel investments require huge amounts of capital………… Wind and solar can be done on a smaller more local scale that is affordable.
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New Cost Analysis Shows Unsubsidized Renewables Increasingly Rival Fossil Fuels « Breaking Energy – Energy industry news, analysis, and commentary
http://breakingenergy.com/2014/09/25/new-cost-analysis-shows-unsubsidized-renewables-increasingly-rival-fossil-fuels/