[copious.abundance]

Uh, I'm sorry Pops but I think your original prediction failed to materialize. To wit:
$this->bbcode_second_pass_quote('Pops', 'A')ccording to the model in my brain, the economy is not able to pay above $100 for new, 'non-conventional' oil fields. This isn't written down anywhere, the number might be $120 or $80 but it seems pretty certain it's in the ballpark that correlates to 5%-10% of US GDP. On the first chart the red band around $100 is where the economy chokes, the orange, eyeballed trendline of "base" oil price seems to be entering that range now...

Epic fail.
$this->bbcode_second_pass_quote('Pops', '')$this->bbcode_second_pass_quote('', 'w')e are looking at more like a sustained $150/bl to start forcing contraction.

[Pops]

Why didn't I think of that, oh yeah I did, yesterday in this very thread:

$this->bbcode_second_pass_quote('Pops', 'T')he thing Wedge 2011 didn't contemplate was an oil glut combined with continuing economic growth and high demand. It is a failing of my PO bias combined with my under appreciation of the potential of tight oil to (i) cause a glut "overnight" (in oil development time-scale) (ii) kill the glut "overnight" on low price.
...
Will that bubble feed an out of control volatility cycle that eventually leads to the Big One? That was my basic idea in the 2020 oil price challenge thread although I thought price would be tied more to demand than production but who to tell the difference when the outcome is as predicted?

[copious.abundance]

Fair enough. Didn't see that.

QE was going in 2011, if you think that makes a difference you should have thought of it four years ago when you made the prediction.

Not that QE makes any difference to the economy, but you can pretend it does, if you want.

[Pops]

$this->bbcode_second_pass_quote('copious.abundance', 'F')air enough. Didn't see that.

QE was going in 2011, if you think that makes a difference you should have thought of it four years ago when you made the prediction.

[copious.abundance]

There are a few possible scenarios I see:

1. Oil rebounds to, say, $70. And then it spends years, maybe decades, in some range around that number, maybe $50-$90, with maybe a brief trip above or below the range. While that may seem like a "high" number in historical terms, after a while the real (inflation-adjusted) price will be falling. IOW $70 in 2030 will be "cheaper" than $70 in 2016. But that $70 will be enough to satisfy the shale drillers and oil sands diggers of the world.

2. In part because of the price crash, shale drillers and oil sands diggers are simply forced to find more efficient and cheaper methods of extracting their oil. "Super-fracking" is perfected and becomes the norm, etc. So oil could stay around $30-$50 for years, and maybe even decades, and gradually companies will find a way to produce their oil profitably at those prices.

3. Some combination of the above two, coupled with the usual, long-term trend of using more oil efficiently, etc.

[Outcast_Searcher]

$this->bbcode_second_pass_quote('copious.abundance', '
')3. Some combination of the above two, coupled with the usual, long-term trend of using more oil efficiently, etc.

[copious.abundance]

I've no doubt there will be demand growth in China and elsewhere, but it will likely be tempered by reduced demand elsewhere, particularly in Europe and maybe other parts of Asia. Maybe even the US will continue to flat-line (see first link in sig, for example).

But don't forget that the US and Canada aren't the only ones with large shale deposits. There's no shortage of the oily stuff.

[ennui2]

"There's no shortage of the oily stuff."

I would agree. We may have a sharp cliff if some of the rhetoric about shale depletion rates is true, but we've got another round of happy-hour in store first.

[Tanada]

$this->bbcode_second_pass_quote('Pops', '[')img]http://i62.tinypic.com/jsn95f.jpg[/img]

Thought I'd post the WTI chart showing the price going through the "cost floor" - you all remember what happened last time. Wonder what will happen this?

[Pops]

Sorry T, I laid that spreadsheet off onto a backup somewhere and to be honest don't remember how I guessed tight oil back then (2013 I think).

But there is lots of stuff on cost vs price out there nowadays, everyone has a Wedgie!

Here is Matt's (CrudeOilPeak.info) plot of incremental production increases - it's still mostly N. America (little Libya and Iraq for a minute there) and still mostly unconventional...






The IMF takes a guess at costs and surprise! it still costs a whole lot to extract unconventional...


Seems some good analysis too...

View from the bank:




That last chart looks like you can cover cost @ $35-40 for 90mbd — but that leaves no return on investment. Which just means producers lose their investment when the next deep pocket comes along and scoops them up. It takes at least a $60 price to justify new production (to replace declines in existing wells) — that is your key number, how much it costs to offset declines. If you can't do that, production falls...


Obviously investors are leery to make loans at these prices...



But happy to scoop up the remains (likely for the value of reserves, the sunk costs are just a loss...

[Keith_McClary]

If world GDP growth goes back up to 5%, how long will it take to burn through the glut?

[Pops]

The thing about global GDP is that a strong dollar (mostly due to fewer petrodollar exports) makes the 9 trillion in US dollar denominated loans made overseas since '09 harder to repay. C H Smith, OfTwoMinds blog, says
$this->bbcode_second_pass_quote('', 'A') funny thing happened on the way to permanently expanding global markets: unintended consequences. Borrowing cheap, abundant U.S. dollars seemed like a good idea when the dollar was declining, and few voiced any concern when $9 trillion was borrowed in USD-denominated debt around the world in the years since 2009.

Few saw the possibility of the USD rising, or that if it did appreciate against other currencies, that the blowback would destabilize the global economy.

[JV153]

$this->bbcode_second_pass_quote('copious.abundance', 'E')pic fail.
$this->bbcode_second_pass_quote('Pops', '')$this->bbcode_second_pass_quote('', 'w')e are looking at more like a sustained $150/bl to start forcing contraction.