In a continuation of our series on the state of the oil industry we look at some of the other ramifications of what we are labeling the Oil Renaissance in the US, and around the world for that matter. This phrase was first proposed regarding the potential Nuclear turnaround here in the US, where companies like NRG Energy, Toshiba and many more players all along the supply chain were positioning themselves for the Nuclear Renaissance of cheap, and abundant Nuclear energy for the next 50 years.
The oil industry is much more scalable from a cost standpoint, and once these upfront costs have been committed, the size of the industry and scalability means that projects can continue and be highly profitable even with much lower oil prices.
I previously have thought that this technology would suffer as prices drop, but I am rethinking this assumption with natural gas as my guide in a much less scalable industry. So I now believe that this technology and these projects will continue and be cost effective even with oil dropping to $45 a barrel for both Brent and WTI.
It won`t happen overnight, but under one scenario prices will just steadily trend down like natural gas prices, and before we realize it we have the equivalent of $2 natural gas prices for the oil industry.
The China Factor: Use less Commodities for Next Decade
My assumption about the trajectory of oil prices also relies on the China factor that many analysts have been toying with for the last couple of years, but the IMF and others have done some nice research on and applied some hard numbers to the conceptual idea that China has overinvested for the last decade by a large degree, and most of the previous forecasts for China`s growth trajectory from an infrastructure standpoint for the next 10 years are far too optimistic.
My conclusion is that China will use far less commodities than they did the past decade going forward for the next decade. They are coming into the constraints of large numbers where you have built for the sake of building, and you can no longer build another large new city every year because the demand just isn`t there. Basically, the easy, low hanging fruit has been eaten. Most of the new project benefits will not justify the cost based upon infrastructure constraints, logistical incongruities, and actual demand & societal need for said projects.
So how low can prices go? Let`s just say that the Renaissance in oil is going to be good for the global economy, just back in 2003 gasoline prices were $1.60 a gallon in the US and oil was trading around $30 a barrel.
It is not unreasonable to think if the Oil Renaissance takes the path that it is capable of that Oil globally trades all the way down to the $45 area.
What Price do the Saudi`s Really Need? Need & Want Confused
And those that think that OPEC would need $75 to keep up production, remember that OPEC still kept pumping oil only four years ago with $33 oil in 2008. Furthermore, OPEC countries still need the overall revenue not the price per say.
Accordingly, you could very easily have a scenario where prices go lower and they pump more, violate reduction quotas because they all want the revenue net of volume and price, not just less volume but slightly higher prices.
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