I believe the current oil price is more a function of a ongoing price war between OPEC states and declining oil consumption, and not the total amount of oil available on the planet.
Actually, this is partly the fruits of their work.
It seems like we're experiencing peak oil demand, rather than peak supply.
I'm not sure if the "peak oil prophets" considered this possibility - that their warnings will actually be heard, measures will be taken and we will avoid running out of oil.
Now that we're here, is peak demand less scary than peak supply ?
Seems like OPEC's current strategy is to dump oil onto the market for a low price.
This both makes it unsustainable for the competition to drill for oil, and creates a higher demand.
Once many of the competing (e.g. Western) oil companies goes bankrupt, OPEC can increase the prices and enjoy both higher demand and increased profit. At that point, it will take a long time before investors feel comfortable investing in oil again in fear of an identical situation. They also push renewables into a similar spot.
I was looking for a reference that shows debt vs. market cap of US oil companies, but cannot find it. It didn't look promising for the US oil companies.
Anyway, this doesn't have anything to do with peak oil, which we are likely passing these years (for conventional oil). Except we'll likely crash sooner if we increase demand.
This is just a buying opportunity for the big boys like Exxon. They'll snatch up the companies that fail and bide their time.
It's not a new strategy—the well-capitalized oil companies do this every time the industry stalls. They call it "prospecting for oil on the floor of the stock exchange."
Many shale producers will go bust but others have tightened their belt and become more efficient. The technology itself has also gotten cheaper, allowing those wells to be profitable even at depressed energy prices. More will likely fail but the shakeout will leave the remaining shale producers in a very strong place.
The idea that "OPEC can increase the prices" is farcical at this point. OPEC has been in open revolt for a long time and can no longer function as a unified front against the Western consuming countries. Smaller OPEC producers have long ignored the quotas, battling for marketshare while comfortable in the knowledge that Saudi Arabia would lower their production to maintain price targets. The Saudis have grown tired of that role—this current salvo is as much a move against their fellow OPEC members as it is new Western production.
This current situation is the Saudi's public recognition that OPEC has failed, the final culmination of a decline that began decades ago.
Saudi Arabia is facing the prospect of increased production on several fronts for both geopolitical reasons (Iran) and technological (America, deep sea, Canadian oil sands, etc). When the US tears down export barriers, their situation will become that much more dire as American shale producers will find entire new markets for their oil. Finding markets has long been as significant a task for the industry as finding oil itself.
Other investors are certainly fearful of investing in oil but I've been moving more and more of my personal portfolio into energy over the last few months. Given time, energy will rebound.
Conventional oil production peaked in 2005. That was the year ordinary oil (land and offshore) wells produced their peak quantity of crude oil and condensates.
Tar sands, deep water, synthetic fuels, coal and gas conversion, and hydraulically fractured wells have produced a few percent more lately than the plateau of total production from 2005-2011. Those methods start paying at US$70-100 a barrel. The plateau saw prices above US$100 consistently.
Demand made itself more efficient in the face of rising prices even as new expensive sources came online. Now the new sources are producing but demand has softened enough with basic efficiency measures that the new unconventional oil cannot command the high prices.
Unless things change fast, we'll see the worst of all possible effects. New oil ventures will fail and go offline. Low prices will lead to efficiency plans being cancelled. We'll have the situation of five years ago again and prices will skyrocket as demand rises and the new unconventional oil is offline.
Of course, that's exactly what OPEC and Russia are hoping for. They want new oil sources and efficiencies to go away so they can get back on the gravy train. So they're flooding the market strategically now to drive prices even lower and put new sources out of business.
Since it takes investors and technologies several years to react to changes in price, a fairly steady production could lead to accelerating resonant gyration in prices if OPEC can time it right.
It's all very exciting, but it doesn't change the reality that oil is getting harder and harder to extract. Eventually it will be too expensive to extract more.
Quasi "outages" in California refinery crackers are bucking the price decreases of gasoline in California. In 30 states, gasoline is under $2/gal but in California, it is north of $2.50, and it isn't even the expensive summer blend.
California's fuel prices will always be higher than other states because their blend is stricter than most of the rest of the nation and far fewer refineries are built to produce that blend.
It's probably good enough for consumer finance sites, but they should really factor in inflation. Inflation has been below average recently, so the margin of error is not that large, but still ~1.015^10=1.16 which means that price drop is steeper than reported.
Stone is literally more expensive than oil. Note that at $2.00 / gallon, gasoline (refined oil) is twice as cheap as bottled water. At $35 / barrel (ie: $35 per 55-gallon drum), crude oil is literally cheaper than a huge number of commodities.
Crude Oil is roughly $0.65 per gallon. Definitely cheaper than stone by every measurement.
Not to step on the general point you are making, but a barrel of oil is 42 gallons[0], so $0.83/gal. Also, I get spring water from a ~local spring for $0.85/gal.
The barrel is not included in the price, though, whereas it's included in the price of bottled water. The better comparison is tap water, which I get for $0.0089/gal.
Stones can be found just lying around on the ground all over the world. I don't care how cheap oil is, it's not cheaper than "you can bend down and pick some up."
Cheaper than bottled water? No it's not. You can find some bottled water that's more expensive, sure, but you can find bottled water that's cheaper too. I'm sure you can find some oil somewhere that's more expensive than good champagne, too.
Bottled water is a terrible comparison anyway, because most of what you're paying for is the "bottled." Oil is not cheaper than water in most places. Can you imagine paying 65 cents/gallon for your shower?
The stones you can pick-up from the ground aren't much use in construction other than for rubble-fill, which requires quantities vastly greater than available in free [position] material.
To gather them in kilotonnes you'll need to remove and sift the regolith layer. A lot more expensive than 'pick some up'.
> > "The [bottled water] industry grossed a total of $11.8 billion on those 9.7 billion gallons in 2012, making bottled water about $1.22/gallon nationwide
My point is that bottled water prices vary enormously, because it's pretty much a pure convenience and branding product. Looking at the average is meaningless, and comparing it with oil is silly. Look at the price of the underlying commodity (water) and see what that costs.
> Bottled water is a terrible comparison anyway, because most of what you're paying for is the "bottled."
I was under the understanding that you're paying for a purified chemical compound with Bottled Water. Very similar to Gasoline actually. Its a purified chemical that matches specific specs.
One is a chemical that you drink, the other is a chemical your car drinks. Beyond that, the effect is the same.
If you don't think Bottled Water is a good example, then I'll change the analogy to Gatorade.
Most bottled water is just tap water from whatever local service the bottling plant has. How much do you pay for water at your house? That's how much the "purified chemical compound" actually costs.
"Many consumers have enjoyed the falling price of fuel in the form of lower petrol prices; several UK supermarkets have begun selling petrol at below £1 per litre - which they last did in 2009."
It feels as though prices haven't fallen relatively here in Canada, at least not on the west coast.
1.00 CAD in the east, gasoline should be around 0.80 now but because of weak loonie, oil refineries being in the US and Americans driving more, thus increasing the demand for gas, prices are what they are.
Don't get used to it. The low oil prices are a result of the Saudis not reducing production and continuing full steam ahead regardless of profitability in order to drive other producers and sources such as North American fracking out of business.
Most mom and pop oil companies have already been bought or have gone bankrupt as they were not profitable under $50/barrel. Supermajors will begin to go bankrupt and survival mode at $20-25/barrel. As soon as we see supermajors going under the Saudis will roll back their production in order skyrocket prices. It takes AT LEAST 18-24 months to get new wells and unconventional sites online and that's if the entire ecosystem is operational.
What are they going to do? Reduce production? They'd have to slash it to the bone to materially affect oil prices right now and the benefits of any rise would be realized by the other producers. Their reduced sales would offset any price rise.
OPEC just doesn't control enough production capacity to dictate to the market any more. All the producers have become so dependent on oil revenue their response to falling prices has been to increase production as much as possible. They can't afford to cut production and thus cut their revenues without massively exacerbating the damage to their economies.
Do you think this is part of a larger plan to get as much cash before they switch over to some other industry? I know they've been working on solar and other renewables, but are they investing in any firms outside of Saudi Arabia in that regard? I mean building a few solar plants is not much compared to say owning a specific share of a solar panel producer or its equivalent.
They've all been sinking money into sovereign wealth funds, and Dubai has been spending big on expanding it's airlines, promoting its airport as a global hub and developing a tourist industry. They're attempting to diversify their economies but whether or not any of that turns out to be sustainable without massive subsidies from oil profits is dubious.
They've got about 5 years of cash left. They can play chicken for a while yet.
They're better capitalized than almost every oil producer in America for sure. Even once prices go back up again the memory of all of the bankruptcies is still going to linger on and drive up the cost of capital.
I doubt as many investors going to be willing to go all in on a second round of chicken with the Saudis.
Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors. Meanwhile Iraq, Iran and others are ramping up production right now. We're going to see further oil price fluctuations over the coming decades for sure, but I don't think we'll ever see $100+ per barrel oil again.
>Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors.
Oil that can't be pumped profitably at < $80 / bbl isn't going to be magically become profitable when a better capitalized investor steps in.
A lot of the cost comes from CAPEX at the front end of the life cycle of the well. There are a lot of wells out there that can produce a marginal barrel of oil for <$20. Once the companies get recapitalized or go through bankruptcy that is the new cost that will need to be looked at.
No, but it means that the Saudis can't raise prices much past $80/bbl. And I'm not sure that $80 is the right number for a lot of the fracking wells - the number that I seem to recall is $50. (I freely admit that I'm working from vague memory here, and could easily be wrong...)
You're not technically wrong but think about the entire oil and gas production ecosystem. A supermajor outsources the vast majority of their work to services firms. The seismic is shot by one company, analyzed by another. A land company then obtains the rights to do the drilling on behalf of an oil company. Then the drilling is performed by another company who had all of their tools made by about 20 different companies. Once raw crude is out of the ground/rocks/whatever another company trucks or ships it to a storage facility run by yet another company. It is then refined (usually by a supermajor) and distributed.
Think about what will happen when 98% of the companies have gone bust. How quickly will you get the tools and more importantly people back into the industry once the Saudis have run the price of oil up to $300/barrel?
So we'll just see vertical integration of previously separate firms into well capitalized monoliths again. This might take a but of time, but I can't see why big investors would not do it.
> but I don't think we'll ever see $100+ per barrel oil again.
It would just take a small scale war in the Persian Gulf (KSA vs Iran) for the crude oil barrel to pierce through the $100 dollar level and soar even further.
The conspiracy side of me wonders if this move was completely of the Saudis engineering. Imagine if you're on the Obama administration, you're having problems with Putin, and you're looking to gain a legacy with major climate legislation.
If I was Obama circa several months ago, i'd send Kerry over to the Saudis, i'd say "I intend to do everything I can to reduce carbon emissions, people want me to do it, and it needs to be done. There's maybe 20 or 30 real good years left. Who owns those years is up for grabs, but you're in the best position. Here's how we can solve both of our problems."
I used to think this also, that they would eventually turn down production and raise prices. But now I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable.
>> I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable.
They've been talking about the regime imploding for practically 30 years now. Robert Baer predicted the collapse of the regime over a decade ago:
>They've been talking about the regime imploding for practically 30 years now.
With what's happened in Northern Africa in the last few years and real elections next door in Iraq (and probably Syria within the next couple years) the Saudi people have to be on the brink. Saudi Arabia already has a defense budget the size of Russia's just to keep the country peaceful.
It's important to distinguish marginal cost vs profitability. A company can be operating at a loss for years (if not decades) as long as marginal cost of the product doesn't exceed their marginal revenue. To bring this in the context of oil prices: cost of extraction of conventional oil is around $3-5 dollars. This is how much it costs to operate a well with some minimum maintenance. However, this dismisses the cost of development of the well, i.e. of R&D. If you count that in you get closer to $15-$30 depending on the oil field. Higher for offshore, and higher for shale still. Cost of extraction for fracking is around $15 a barrel, but the R&D costs are much higher, to the tune of $40-60 total. Companies can sustain sunk R&D costs for a long time as long as they are maintaining healthy marginal profit. They will naturally not invest into new fields but that cushion can take years to have effect on the prices.
57 comments
[ 0.20 ms ] story [ 108 ms ] threadIt seems like we're experiencing peak oil demand, rather than peak supply.
I'm not sure if the "peak oil prophets" considered this possibility - that their warnings will actually be heard, measures will be taken and we will avoid running out of oil.
Now that we're here, is peak demand less scary than peak supply ?
Yes, much, because the world's economies don't grind to a halt. They become more efficient and keep running. That's a much better outcome.
This both makes it unsustainable for the competition to drill for oil, and creates a higher demand.
Once many of the competing (e.g. Western) oil companies goes bankrupt, OPEC can increase the prices and enjoy both higher demand and increased profit. At that point, it will take a long time before investors feel comfortable investing in oil again in fear of an identical situation. They also push renewables into a similar spot.
I was looking for a reference that shows debt vs. market cap of US oil companies, but cannot find it. It didn't look promising for the US oil companies.
Anyway, this doesn't have anything to do with peak oil, which we are likely passing these years (for conventional oil). Except we'll likely crash sooner if we increase demand.
It's not a new strategy—the well-capitalized oil companies do this every time the industry stalls. They call it "prospecting for oil on the floor of the stock exchange."
Many shale producers will go bust but others have tightened their belt and become more efficient. The technology itself has also gotten cheaper, allowing those wells to be profitable even at depressed energy prices. More will likely fail but the shakeout will leave the remaining shale producers in a very strong place.
The idea that "OPEC can increase the prices" is farcical at this point. OPEC has been in open revolt for a long time and can no longer function as a unified front against the Western consuming countries. Smaller OPEC producers have long ignored the quotas, battling for marketshare while comfortable in the knowledge that Saudi Arabia would lower their production to maintain price targets. The Saudis have grown tired of that role—this current salvo is as much a move against their fellow OPEC members as it is new Western production.
This current situation is the Saudi's public recognition that OPEC has failed, the final culmination of a decline that began decades ago.
Saudi Arabia is facing the prospect of increased production on several fronts for both geopolitical reasons (Iran) and technological (America, deep sea, Canadian oil sands, etc). When the US tears down export barriers, their situation will become that much more dire as American shale producers will find entire new markets for their oil. Finding markets has long been as significant a task for the industry as finding oil itself.
Other investors are certainly fearful of investing in oil but I've been moving more and more of my personal portfolio into energy over the last few months. Given time, energy will rebound.
OPEC is effectively dead.
Tar sands, deep water, synthetic fuels, coal and gas conversion, and hydraulically fractured wells have produced a few percent more lately than the plateau of total production from 2005-2011. Those methods start paying at US$70-100 a barrel. The plateau saw prices above US$100 consistently.
Demand made itself more efficient in the face of rising prices even as new expensive sources came online. Now the new sources are producing but demand has softened enough with basic efficiency measures that the new unconventional oil cannot command the high prices.
Unless things change fast, we'll see the worst of all possible effects. New oil ventures will fail and go offline. Low prices will lead to efficiency plans being cancelled. We'll have the situation of five years ago again and prices will skyrocket as demand rises and the new unconventional oil is offline.
Of course, that's exactly what OPEC and Russia are hoping for. They want new oil sources and efficiencies to go away so they can get back on the gravy train. So they're flooding the market strategically now to drive prices even lower and put new sources out of business.
Since it takes investors and technologies several years to react to changes in price, a fairly steady production could lead to accelerating resonant gyration in prices if OPEC can time it right.
It's all very exciting, but it doesn't change the reality that oil is getting harder and harder to extract. Eventually it will be too expensive to extract more.
Last Christmas prices dropped significantly. There were $2.25 to $2.50/gal in California, but almost $1.20/gal in Arizona and New Mexico.
California has another $0.30-$0.50/gal in taxes that other states don't have. The price will always be higher.
I sincerely hope it's true, but it's one of those snide comments that attempts to make legitimate concerns look stupid.
Stone is literally more expensive than oil. Note that at $2.00 / gallon, gasoline (refined oil) is twice as cheap as bottled water. At $35 / barrel (ie: $35 per 55-gallon drum), crude oil is literally cheaper than a huge number of commodities.
Crude Oil is roughly $0.65 per gallon. Definitely cheaper than stone by every measurement.
[0]https://en.wikipedia.org/wiki/Barrel_%28unit%29#Oil_barrel
Cheaper than bottled water? No it's not. You can find some bottled water that's more expensive, sure, but you can find bottled water that's cheaper too. I'm sure you can find some oil somewhere that's more expensive than good champagne, too.
Bottled water is a terrible comparison anyway, because most of what you're paying for is the "bottled." Oil is not cheaper than water in most places. Can you imagine paying 65 cents/gallon for your shower?
To gather them in kilotonnes you'll need to remove and sift the regolith layer. A lot more expensive than 'pick some up'.
http://www.businessinsider.com/bottled-water-costs-2000x-mor...
> > "The [bottled water] industry grossed a total of $11.8 billion on those 9.7 billion gallons in 2012, making bottled water about $1.22/gallon nationwide
Parent post says
> > > Crude Oil is roughly $0.65 per gallon.
I was under the understanding that you're paying for a purified chemical compound with Bottled Water. Very similar to Gasoline actually. Its a purified chemical that matches specific specs.
One is a chemical that you drink, the other is a chemical your car drinks. Beyond that, the effect is the same.
If you don't think Bottled Water is a good example, then I'll change the analogy to Gatorade.
It feels as though prices haven't fallen relatively here in Canada, at least not on the west coast.
(112.9c CAD / litre in Victoria, BC)
Most mom and pop oil companies have already been bought or have gone bankrupt as they were not profitable under $50/barrel. Supermajors will begin to go bankrupt and survival mode at $20-25/barrel. As soon as we see supermajors going under the Saudis will roll back their production in order skyrocket prices. It takes AT LEAST 18-24 months to get new wells and unconventional sites online and that's if the entire ecosystem is operational.
Where can you publicly determine the barrel price that the supermajors will bust at?
OPEC just doesn't control enough production capacity to dictate to the market any more. All the producers have become so dependent on oil revenue their response to falling prices has been to increase production as much as possible. They can't afford to cut production and thus cut their revenues without massively exacerbating the damage to their economies.
They're better capitalized than almost every oil producer in America for sure. Even once prices go back up again the memory of all of the bankruptcies is still going to linger on and drive up the cost of capital.
I doubt as many investors going to be willing to go all in on a second round of chicken with the Saudis.
Oil that can't be pumped profitably at < $80 / bbl isn't going to be magically become profitable when a better capitalized investor steps in.
Think about what will happen when 98% of the companies have gone bust. How quickly will you get the tools and more importantly people back into the industry once the Saudis have run the price of oil up to $300/barrel?
It would just take a small scale war in the Persian Gulf (KSA vs Iran) for the crude oil barrel to pierce through the $100 dollar level and soar even further.
Never say never.
Come next year, Iranian Oil will join the world market and drive prices lower.
If this is going to bankrupt the Wahabi and terrorism sponsoring House of Saud, I'm all for it
If I was Obama circa several months ago, i'd send Kerry over to the Saudis, i'd say "I intend to do everything I can to reduce carbon emissions, people want me to do it, and it needs to be done. There's maybe 20 or 30 real good years left. Who owns those years is up for grabs, but you're in the best position. Here's how we can solve both of our problems."
They've been talking about the regime imploding for practically 30 years now. Robert Baer predicted the collapse of the regime over a decade ago:
http://www.theatlantic.com/magazine/archive/2003/05/the-fall...
With what's happened in Northern Africa in the last few years and real elections next door in Iraq (and probably Syria within the next couple years) the Saudi people have to be on the brink. Saudi Arabia already has a defense budget the size of Russia's just to keep the country peaceful.
It's important to distinguish marginal cost vs profitability. A company can be operating at a loss for years (if not decades) as long as marginal cost of the product doesn't exceed their marginal revenue. To bring this in the context of oil prices: cost of extraction of conventional oil is around $3-5 dollars. This is how much it costs to operate a well with some minimum maintenance. However, this dismisses the cost of development of the well, i.e. of R&D. If you count that in you get closer to $15-$30 depending on the oil field. Higher for offshore, and higher for shale still. Cost of extraction for fracking is around $15 a barrel, but the R&D costs are much higher, to the tune of $40-60 total. Companies can sustain sunk R&D costs for a long time as long as they are maintaining healthy marginal profit. They will naturally not invest into new fields but that cushion can take years to have effect on the prices.