[GHung]

$this->bbcode_second_pass_quote('', 'T')he price of oil is down. How should we expect the economy to perform in 2015 and 2016?

Newspapers in the United States seem to emphasize the positive aspects of the drop in prices. I have written Ten Reasons Why High Oil Prices are a Problem. If our only problem were high oil prices, then low oil prices would seem to be a solution. Unfortunately, the problem we are encountering now is extremely low prices. If prices continue at this low level, or go even lower, we are in deep trouble with respect to future oil extraction.

It seems to me that the situation is much more worrisome than most people would expect. Even if there are some temporary good effects, they will be more than offset by bad effects, some of which could be very bad indeed. We may be reaching limits of a finite world.

The Nature of Our Problem with Oil Prices

The low oil prices we are seeing are a symptom of serious problems within the economy–what I have called “increased inefficiency” (really diminishing returns) leading to low wages. See my post How increased inefficiency explains falling oil prices. While wages have been stagnating, the cost of oil extraction has been increasing by about ten percent a year, described in my post Beginning of the End? Oil Companies Cut Back on Spending.

Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:

The amount consumers can afford for oil
The cost of oil, if oil price matches the cost of production

The fact that oil prices were not rising enough to support the higher extraction costs was already a problem back in February 2014, at the time the article Beginning of the End? Oil Companies Cut Back on Spending was written. (The drop in oil prices did not start until June 2014.)

Two different debt-related initiatives have helped cover up the growing mismatch between the cost of extraction and the amount consumers could afford:

Quantitative Easing (QE) in a number of countries. This creates artificially low interest rates and thus encourages borrowing for speculative activities.
Growth in Chinese spending on infrastructure. This program was funded by debt.

Both of these programs have been scaled-back significantly since June 2014, with US QE ending its taper in October 2014, and Chinese debt programs undergoing greater controls since early 2014. Chinese new home prices have been dropping since May 2014....

[Pops]

Gail likes to look at all the angles .

$this->bbcode_second_pass_quote('Gail', 'T')here seems to be a distinct possibility that we will be reaching the peak in world oil supply very soon–2014 or 2015, or even 2016. The way we reach this peak though, is different from what most people imagined: low oil prices, rather than high oil prices. L

[Paulo1]

So far, it's like a slow moving train wreck, the details of which will only be clear in the rear view. I am sure there will be a few unusual details which were not anticipated, however, the trend is clear and the facts are obvious. Cheap energy fueled unimaginable development and improvements to living standards. Cheap energy, fertilizers, industrial food production including the well-meaning agri-scientists addressing Paul R. Ehrlich's Population Bomb book.....'the bomb', inconjunction with improved health outcomes etc has swelled our population to 7 bil plus. Obscene debt creation has defied common sense and has been used to offset declining energy sources. Inertia is being overwhelmed by reality and limits in our physical world. Growth is visibly slowing and changing that which we assume is our birthright and natural. All the denial and nobel prizes for economics cannot change the laws of thermodynamics and the logical outcomes of overreach.

I had hoped for a gradual decline with the western world becoming poorer and other areas of the world such as Asia improving somewhat, courtesy of globilization. This has been going on for awhile, imho. However, climate change and immoral leadership including growing wealth disparity is destabilizing this Pollyanna view. I think some areas will become very nasty, and I'm not just pointing at the usual suspects. The history of man has been strife and war. Prosperity has smoothed a little of this over, recently, with proxy wars letting off steam much like the petcock on my canner.

But we're at 15 lbs and climbing as far as I'm concerned. If the EU breaks up will centuries of war between conflicting cultures, tribes really, be forgotten? Asian animosities towards each other? Can you imagine the Chinese, Japanese, and Koreans pulling together? Indonesia? Indians and Pakistanis? Blacks and whites? Armed up folks getting poorer in a climate changing world does not make for stability.

2015 is the beginning of drastic change as far as Im concerned. Hold on and hunker down. Stay off lists, as Todd used to say.

regards

[GHung]

Paulo: "Prosperity has smoothed a little of this over, recently, with proxy wars letting off steam much like the petcock on my canner.

"But we're at 15 lbs and climbing as far as I'm concerned. "

Nice, if not alarming, analogy, Paulo. Have you ever seen a canner that got it's petcock blocked and the emergency plug blow out? First the steam, and then the jars inside explode, the contents spewing out of the vent like a highly gaseous volcano. It occurs to me that we, humans, have been blocking/bypassing the normal safety valves in our industrial/economic systems, allowing the pressure to build. We've subverted limits to growth for a long time. Question is, when will things begin to blow?

[Graeme]

Goldman's Oil Guru: The $50 Barrel Is Right on Time

$this->bbcode_second_pass_quote('', 'L')ess than a week into 2015, and already oil is down 9 percent for the year. Oil prices fell below $50 a barrel on Monday for the first time since April 2009. By Tuesday, oil traded below $48. It wasn’t that long ago that analysts were gasping at the prospect of $70 oil, a threshold oil moguls and petrostates would be relieved to be anywhere near by the end of 2015. Breaking through $60 was seen by a lot of well-paid people as a likely floor. But that was three weeks and $12 ago.

I was in Houston the day oil first fell below $60, at a Chamber of Commerce lunch heralding the strength of the local economy—40 percent of which is based on oil. Despite the Texas-size grins, you could sense the panic starting to creep in.

Talk to a commodity analyst these days, and you’ll probably hear about the “commodity supercycle,” a wonky term to describe the way supply and demand for such things as oil and copper move in a slow, decadeslong dance that eventually repeats itself. As supply moves from periods of scarcity to surplus, prices rise, fall, and then rise again, killing demand before fueling more of it along the way.

Jeff Currie, head of commodity research at Goldman Sachs (GS), pays particular attention to this interplay. He says that over the past century, the average length of an oil supply cycle is about 25 to 30 years. That puts the current selloff right on time, considering it’s coming almost exactly 29 years after the oil bust of 1985-86. Both selloffs are the result of too much supply: In the 1980s, it was the Saudis who flooded the market, while this time around it’s frackers in the U.S. pouring millions of new barrels onto the market.


The market has reached what Currie calls the “exploitation phase” of the oil cycle, when years of investments fueled by high prices have unlocked a long-term supply. This is essentially the reward. After the crash in the mid-1980s, oil prices stayed low for more than a decade, helping fuel a sustained period of economic growth. With any luck, the same will happen this time around.


“High yields are the markets telling the world to quit using capital in this way,” says Currie. Now that capital will search for a new, safer home.

[PeakOiler]

I think GS is full of it. I quoted Goldman Sachs in the 2015 PO.com Oil Price Challenge thread:

$this->bbcode_second_pass_quote('', 'G')oldman analysts said in a report released late on Sunday that it expects U.S. benchmark West Texas Intermediate crude to fall to $75 a barrel and Brent to $85 a barrel in the first quarter of 2015, both down $15 a barrel from its previous forecast.

WTI could fall as low as $70 in the second quarter and Brent as low as $80, when oversupply would be the most pronounced, before returning to first-quarter levels, Goldman said.

[Pops]

The difference between now and '80-something is newly minted north slope wells depleted at 2 or 3% percent per year while newly fracked Bakken wells deplete at 2 or 3% per week.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'T')he difference between now and '80-something is newly minted north slope wells depleted at 2 or 3% percent per year while newly fracked Bakken wells deplete at 2 or 3% per week.

[Plantagenet]

The biggest difference between the last oil bust in 85 and this one is that Ghawar in KSA in peaking soon

Once Ghawar peaks then KSA and world oil production peaks and it will be game over for BAU

[rockdoc123]

$this->bbcode_second_pass_quote('', 'T')he biggest difference between the last oil bust in 85 and this one is that Ghawar in KSA in peaking soon

[Plantagenet]

$this->bbcode_second_pass_quote(' ', '
')
If you suggest it will start to decline soon, that is , of course, likely but the rate has to be such that it isn't offset by production increase elsewhere

[joyfulbozo]

Going into 2015, my economic outlook is not optimistic on stocks. I don’t expect to see key stock indices perform anywhere close to how they did in 2014 or recent previous years. In fact, it wouldn't be a surprise to me if we see them decline for the first time since 2009. I say this because there are many negative factors at play for stocks. The Federal Reserve has told us it will raise interest rates in 2015 and 2016. The Fed has stopped printing paper money.Stock Market Forecast

[Pops]

So doc, how much of that long tail do you expect to last as long as Alaska? It was what, a couple million per day at the peak and a million for 30 years?

LTO growth is slowing and we'll be seeing decline within a couple of years, or next week if the price stays low, LOL. 80-90% of drilling now is required to keep up with decline, take away the short term incentive to drill and poof. So if LTO is 5mbd at the peak and it drops off fairly fast the tail is 1mbd in 10 years?

Has anyone seen any new indications of the shape and duration of the tail?

[GoghGoner]

I haven't seen a Peak Oiler estimate of future energy production in awhile. Wow, she has us living like cavemen by 2035. I think the low oil price is an overall positive for the global economy so my estimate of future energy supplies would be much, much different (but since I don't own a crystal ball and nothing is really linear...). Gail's focus is more on the demand-side of the equation which I think is on the right track.

[ROCKMAN]

Pops - "Has anyone seen any new indications of the shape and duration of the tail?" . I pointed out the character of the Eagle Ford Shale in another post to you. I've lost track of it so I don't know if you responded. But your thought that an ultimate slow decline from a 25% level of the initial production rate seems overly optimistic based upon the numbers I pulled up...such as 20% of the EFS well completed in one year were producing ZERO BOPD in just 3 years They were plugged and abandoned. Kinda like a burned down bordello...not much tail there. LOL

[rockdoc123]

$this->bbcode_second_pass_quote('', 'S')o doc, how much of that long tail do you expect to last as long as Alaska? It was what, a couple million per day at the peak and a million for 30 years?