[Quinny]

If low oil prices were the true harbinger of doom.

After years of thinking that oil prices would shoot up and price everyone out of the market, there are several indicators seeming to point to it simply not being worth drilling any-more. Maybe capitalism really does contain the seeds of it's own decline.

With Pops and Shortonoil falling out over ETP model, but Pops wedge theory also suggesting that we just simply cannot afford to extract the oil that's left, is it no longer worth scraping the barrel?

[dolanbaker]

Short answer is that the world won't go "cold turkey" with respect to oil, but the high cost involved appear to be a drag rather than a pull on the economy. Will economic activity decline sufficiently to allow "cheap" oil to supply all the market?

[Pops]

It would be ironic considering I've not heard one person here or anywhere say they've given up buying anything petroleum derived because it just ain't worth the trouble anymore.

/snark
Sorry

The difference between my outlook and short's is he predicts the price of oil will fall because oil no longer has value - not peak affordability but peak desire. $10/bbl by 2020 is the prediction I heard - since there is no oil anywhere that can be produced for $10, essentially there will be no oil produced within 5 years. That's some pretty cold turkey lol

My thought is people will continue to desire oil considering the world is made from it, the problem they have is ability to pay the freight due to increasing extraction costs. My guess a few years ago was $80/bbl average price in 2020 after repeated boom/bust cycles reduce ability to pay.

The big price drop is freaking people out. Everyone here is perennially on the edge of their keyboard waiting for the hammer to drop. And as we all know, when all you have is a nail, everything looks like a hammer. You'd sure expect a big thing to happen with such a big drop, Short's prediction is indeed dramatic, but I think a simpler explanation is better:
The surge in production caused the spare capacity to go up and reduced the "Risk Premium" - but then OPEC didn't defend the price like everyone expected - that was the big thing - and that freaked out speculators who cut and ran.

Speculators didn't run far, the futures market is in contango big-time, betting on $70 + a year from now and renting tankers to put their money where their mouth is. (contango is something we used to talk about to no end but not much lately.)

Demand is still increasing globally, not falling. It wasn't a huge increase last year but but the IEA, etc say it will increase with GDP this year - because of a lower price. Speaking of which, I mentioned elsewhere that Kopits' prediction is the next big thing will be a surge in demand from the low price + global QE collides with the full stop in new production along about this time next year.

I don't disagree with the idea that ERI is falling. EROI depends of course on the amount of new drilling; when demand is high and there is lots of new development ERI is lower (which we all suspect is bound to be true in the shales); and when supplies are better and drilling is lower, ERI is relatively higher. Obviously lower EROEI will affect the profits of drillers, etc and increase the cost of the marginal barrel, which of course is where the "increasing cost floor of the wedge comes from. But those are all costs that will be directly visible in drillers P&Ls, no crystal balls needed.

The thing is, like I said at the top, I've seen no evidence that demand - desire - is falling for oil - when prices were high "ability" was hurting but desire is gonna be with us for a while. I'm pretty sure this will be a short debate since I am gonna make a bold prediction that consumption goes higher in about - wait ...

(Reuters) - Motorists in California purchased more gasoline in October 2014 than any corresponding month since 2007, according to state tax records, confirming the renewed growth in U.S. fuel demand.

http://www.reuters.com/article/2015/01/ ... 7G20150128

OPEC also sees American motorists as an ally. The cartel increased its forecast for North American oil consumption by 15,000 barrels a day, a shift that translates into an increase of 20,000 barrels a day in forecast demand growth world-wide.

http://www.wsj.com/articles/demand-for- ... 1423482563

[viewcrafters]

Wouldn't it be ironic if the car companies turned out to be the anti-Christ?

[kublikhan]

Hardly the harbinger of doom. Well, unless you are one of those overleveraged guys in the oil patch or the finance minister of Venezuela. It's more like the same old same old. Just another boom bust cycle in the oil patch. Demand is not down. Demand is up. The problem is supply is up even more. And prices might be low compared to recently, but they are still high compared to their long term historic average. I'm surprised people are freaking out over an oil bust. Especially since we just had one back in 2008. I remember back in the day I saw an oil price prediction chart that was jagged like an alligator's teeth. Well, we are on the downslope now. Enjoy it while it lasts oil consumers. It will go back up, eventually. Just wait for demand to catch up to supply.

Up until just a few months ago, things were going gangbusters in Texas. Now, with oil breaking below $45 a barrel, there's a legitimate fear the state will tumble into a recession. While the turnaround in the Lone Star state is dramatic, Texas oil veterans are well acquainted with the boom-and-bust cycle. For the better part of the last century, Texas has experienced the euphoria of high prices along with the heartache of low prices.

Denise Walker is still pained just thinking about the crash in oil prices that forced her to shut down her oilfield services company in Texas in the mid-1980s. "I've been there, done that. It's not fun, but you just have to learn how to survive," said Walker.

Back in 2008 Doug Fusilier lost his job at GE Oil & Gas when oil plummeted from nearly $150 a barrel to below $35 amid the financial crisis.

"A drastic decline in commodity prices is going to result in winners and losers. The weak get weaker and the strong get stronger." Companies that are financially irresponsible and believed the good times were "going to last forever" will be in trouble.

Employees entering the oil industry would benefit from recalling the history of boom-and-bust cycles in Texas. "Honestly, this dramatic fall in prices is something that a lot of us felt was inevitable," said one geologist in the Texas oil industry who requested anonymity. He pointed to a long history of technological advancements that lead to supply gluts and price crashes. The same can be said about today's shale boom.

Texas: America's boom-and-bust oil capital

[ROCKMAN]

k - "He pointed to a long history of technological advancements that lead to supply gluts and price crashes." I guess he and I have worked in different section of the oil patch. In my 4 decades I've never seen that happen to any significant degree. Talk about booms: how about in the boom in the late 70's when the rig count got above 4,500. Compare that to the puny numbers during the great shale boom. Yet all those rigs did little to stop the slide in US oil production. But the price spike (that led to the drilling boom) crippled the global economy and destroyed a great deal of demand...and gave us oil under $13/bbl. And we've just seen another price run up supplemented by historic debt accumulation that created a boom with the same tech we had when oil was selling for $40/bbl. And now it would appear that the high price period has finally caught up to the global economy which could no longer sustain itself at those price levels. Consider the previous bust: the world consumed more oil that averaged $98/bbl in '08 then it did in '09 when it averaged only $58/bbl. That wasn't the result of a technology induced "glut"...it was demand destruction. We'll have to wait until 1Q 2016 to see if that pattern develops again.

[KaiserJeep]

I think we just ran out. Overnight the gasoline price down on the corner went from $2.05/gallon to $2.85/gallon.

[Whitefang]

A lower oil price means lower income for our, western opponents, a strategic move to bring down the economy of Russia/Iran/Venuzuela and the like.
I think the market is not free to go up and down but controlled by those in power, FED petrodollar.

https://www.thefinancialist.com/the-eff ... onal-tour/

In Venezuela, oil sales provide both 47 percent of government revenues and the main source of foreign currency. The result: the country’s economy will suffer disproportionately from falling oil prices. By the same token, the sudden drop in crude prices has triggered a run on the Russian ruble, which has fallen 91 percent against the dollar since the beginning of June. The weak currency, in turn, is driving inflation higher and forcing Russia’s central bank to raise interest rates even as the domestic economy struggles. Credit Suisse expects the combined effect of international sanctions and energy prices to shrink domestic GDP 1.5 percent next year. In Malaysia, reduced revenues from exports will overwhelm government savings on fuel subsidies, Credit Suisse says, making spending cuts likely. The bank thus sees a downside risk to its 5 percent GDP growth forecast in 2015. - See more at: https://www.thefinancialist.com/the-eff ... Kcxr6.dpuf

Here you go:
http://www.washingtonsblog.com/2015/02/ ... otive.html

Until this week, the mainstream media dismissed the idea that the Saudis were deliberately pushing down oil prices to hurt Russia. They said the Saudis were merely trying to retain “market share” by maintaining current production levels and letting prices fall naturally. But it was all bunkum as the New York Times finally admitted on Tuesday in an article titled: “Saudi Oil Is Seen as Lever to Pry Russian Support From Syria’s Assad”. Here’s a clip from the article:

“Saudi Arabia has been trying to pressure President Vladimir V. Putin of Russia to abandon his support for President Bashar al-Assad of Syria, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices…

What’s interesting about this article is the way it conflicts with previous pieces in the Times. For example, just two weeks ago, in an article titled “Who Will Rule the Oil Market?” the author failed to see any political motive behind the Saudi’s action. According to the narrative, the Saudis were just afraid that “they would lose market share permanently” if they cut production and kept prices high. Now the Times has done a 180 and joined the so called conspiracy nuts who said that prices were manipulated for political reasons. In fact, the sudden price plunge had nothing to do with deflationary pressures, supply-demand dynamics, or any other mumbo-jumbo market forces. It was 100 percent politics.

http://www.zerohedge.com/news/2015-02-0 ... ing-russia

While the markets are still debating whether the price of oil is more impacted by the excess pumping of crude here, or the lack of demand there, or if it is all just a mechanical squeeze by momentum-chasing HFT algos who also know to buy in the milliseconds before 2:30pm, we bring readers’ attention back to what several months ago was debunked as a deep conspiracy theory.

Back then we wrote about a certain visit by John Kerry to Saudi Arabia, on September 11 of all days, to negotiate a secret deal with the now late King Abdullah so as to get a “green light” in order “to launch its airstrikes against ISIS, or rather, parts of Iraq and Syria. And, not surprising, it is once again Assad whose fate was the bargaining chip to get the Saudis on the US’ side, because in order to launch the incursion into Syrian sovereign territory, it “took months of behind-the-scenes work by the U.S. and Arab leaders, who agreed on the need to cooperate against Islamic State, but not how or when. The process gave the Saudis leverage to extract a fresh U.S. commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority.”

[sjn]

Pops, the idea that it's not worth producing the theoretical barrel with costs above the nominal value returned on economic activity - which is essentially what shortonoil is saying (I think), is entirely dependent on the structure of the "politico-economic system". That is, at a lower level of complexity, there is again economic value in producing oil, but that is only after the requisite structural change, aka "Demand Destruction". How much demand destruction is needed is perhaps pertinent, and at what point can that be described as "Doom".

[Observerbrb]

The thing is, like I said at the top, I've seen no evidence that demand - desire - is falling for oil - when prices were high "ability" was hurting but desire is gonna be with us for a while. I'm pretty sure this will be a short debate since I am gonna make a bold prediction that consumption goes higher in about - wait ...

(Reuters) - Motorists in California purchased more gasoline in October 2014 than any corresponding month since 2007, according to state tax records, confirming the renewed growth in U.S. fuel demand.

http://www.reuters.com/article/2015/01/ ... 7G20150128

OPEC also sees American motorists as an ally. The cartel increased its forecast for North American oil consumption by 15,000 barrels a day, a shift that translates into an increase of 20,000 barrels a day in forecast demand growth world-wide.

http://www.wsj.com/articles/demand-for- ... 1423482563

I think we should consider that consumers will always have the desire to buy oil, but the discussion is: At what price? As you pointed out, the "ability" to buy oil and its derivates weakens when the price is at 100 $ per barrel. Imagine that we artificially keep the price of the oil barrel at 100 $ without injecting such amounts of debt into the system, do you think that demand will be maintained after, for example, 5 or 10 years?

The bottom line is that high prices destroy demand, and therefore, the economy becomes smaller, so prices have to go down in consequence. In order to boost the GDP of our societies and expand our economies, we need plenty of cheap oil. But the last is not there anymore, so in order to extract and maintain an increasing supply consisting of more expensive oil (shale, depleting conventional fields, deep oil,etc), and be able to pay for it afterwards, vast amounts of debt have been injected into the system. I think you're leaving the last part out of your analysis, because this is what is determining the decreasing ability of the end-consumer to pay for oil at its true cost of extraction - even if he has the willingness to pay for it, but not at any cost.

[americandream]

With most of the MEs oil now brought to market and out of the clutches of nationalists (Libya etc) this was only to be expected.

[sjn]

The thing is, like I said at the top, I've seen no evidence that demand - desire - is falling for oil - when prices were high "ability" was hurting but desire is gonna be with us for a while. I'm pretty sure this will be a short debate since I am gonna make a bold prediction that consumption goes higher in about - wait ...

(Reuters) - Motorists in California purchased more gasoline in October 2014 than any corresponding month since 2007, according to state tax records, confirming the renewed growth in U.S. fuel demand.

http://www.reuters.com/article/2015/01/ ... 7G20150128

OPEC also sees American motorists as an ally. The cartel increased its forecast for North American oil consumption by 15,000 barrels a day, a shift that translates into an increase of 20,000 barrels a day in forecast demand growth world-wide.

http://www.wsj.com/articles/demand-for- ... 1423482563

I think we should consider that consumers will always have the desire to buy oil, but the discussion is: At what price? As you pointed out, the "ability" to buy oil and its derivates weakens when the price is at 100 $ per barrel. Imagine that we artificially keep the price of the oil barrel at 100 $ without injecting such amounts of debt into the system, do you think that demand will be maintained after, for example, 5 or 10 years?

The bottom line is that high prices destroy demand, and therefore, the economy becomes smaller, so prices have to go down in consequence. In order to boost the GDP of our societies and expand our economies, we need plenty of cheap oil. But the last is not there anymore, so in order to extract and maintain an increasing supply consisting of more expensive oil (shale, depleting conventional fields, deep oil,etc), and be able to pay for it afterwards, vast amounts of debt have been injected into the system. I think you're leaving the last part out of your analysis, because this is what is determining the decreasing ability of the end-consumer to pay for oil at its true cost of extraction - even if he has the willingness to pay for it, but not at any cost.

What's more, it's the current complexity and scale which makes high cost oil possible in the first place. A shrinking economy or reduction in exergy reduces the capability to engage in such activities, the consequences of running up against the limits of growth mean it was always unsustainable.

[Quinny]

@ Pop - following your 'wedge' theory. What happens 'outside' the wedge?

I can see if oil is too expensive for the economy to afford then prices will fall, but what about when the lines cross and the 'cheapest' in terms of cost of extraction is more than the economy can afford?

It's OK saying the oscillating plateau will carry on, but for how long?

[Pops]

I think we should consider that consumers will always have the desire to buy oil, but the discussion is: At what price? As you pointed out, the "ability" to buy oil and its derivates weakens when the price is at 100 $ per barrel. Imagine that we artificially keep the price of the oil barrel at 100 $ without injecting such amounts of debt into the system, do you think that demand will be maintained after, for example, 5 or 10 years?

Hi brb, going on 5 years ago I noticed a "wedge" shape in the oil price chart, I eventually called the descending line forming the top of the wedge the "price ceiling" and the bottom, rising line the "cost floor." I wondered what would happen when the ceiling and floor came together, which way would the price go? My WAG was that since price could not go above the affordability ceiling for long nor below the production cost floor for long, it would begin to oscillate.

Each price cycle from glut to bust would weaken the economy, reduce "ability to pay" and cause the average oil price to fall over time. Only after some unknown number of iterations, once enough waste had been wrung from the system, only then would oil be able to rise above the "ceiling" permanently. We would use less oil but we would get more utility from what we did use so we could pay more.
"use less to pay more."

This was early 2010:


2011


2012, showing that the cost floor was rising at exactly the same rate post crash as pre-crash:



Ah ha! The cost floor increasing at just the same rate must be The PO Constant!


And finally my late 2012 WAG after the price broke out of the wedge on both the upper and lower bounds:

The bottom line is that high prices destroy demand, and therefore, the economy becomes smaller, so prices have to go down in consequence. In order to boost the GDP of our societies and expand our economies, we need plenty of cheap oil.

Yes but the economy doesn't just shrink in a nice straight line, just as the price of oil can't go down in a straight line because of the cost floor. The economy falters and recedes then clears overinvestment somewhat and grows again. That is the oscillation and increasing volatility.

But the last is not there anymore, so in order to extract and maintain an increasing supply consisting of more expensive oil (shale, depleting conventional fields, deep oil,etc), and be able to pay for it afterwards, vast amounts of debt have been injected into the system. I think you're leaving the last part out of your analysis, because this is what is determining the decreasing ability of the end-consumer to pay for oil at its true cost of extraction - even if he has the willingness to pay for it, but not at any cost.

True, I didn't account for debt specifically, who knew what governments would do - or will do? I also didn't need to directly guess or incorporate ERI simply because the rising cost floor IS decreasing EROI - but also increasing depletion, increasing "desire", increasing scarcity, increasing global political tension, etc, etc. That is the whole point of the chart; decreasing availability vs decreasing ability to pay.

I make no claim that it is a statement if immutable laws of thermodynamics, LOL. The beef I have with short's model aside from his claim to precision and immutability, isn't that it is based on a ERI way lower than any other that I've seen, it is that he attempts to prove its precision by fitting a backcast to nominal dollars. I'm no economist but I'm pretty sure that if a model only works by ignoring inflation then something is wrong.


Finally, in defense of the "Wedge" I will say that we are right between the "g" & "e" in "age" on that last chart and it looks like it is right on - just luck of course but I haven't seen a better 3 year old guess.

[Paulo1]

Just like 'Ghostbusters'!! "Don't cross the streams, whatever you do, don't cross the streams."

What happens when the wedge lines cross as the oscillations narrow?

[Pops]

It's OK saying the oscillating plateau will carry on, but for how long?

Hi Q, I think I answered your other questions but I really have no idea how long. I think the whole economic situation is terribly precarious since little of the bad investment from before '08 was cleared - bank investment I'm talking, consumers were cleared out pretty good! But that really isn't anything the ole Wedge can suss out.

I guess as brb said it has to do with how governments react - LTO probably would not have taken off like it did without lots of cheap credit for example. I've made different guesses at the price ceiling, sometimes I think it will stay nominally constant (inflation) sometimes I think it will fall with a declining economy. Obviously the ceiling determines what kind and how much we can afford.

This is the breakeven price vs total available according to these folks:



Here is the breakeven cost range of new production for 2020 put out by Citi recently:



Everyone seems happy at $50/bbl at the pump but man, that corresponds with maybe 50mmbopd! Less than Almost half current consumption. OTOH, we probably would like to consume 100mmbopd which corresponds with over $100

So there is your range, nice and simple, a buck gets you a million barrels a day:
$50/50mmbopd
$100/100mmbopd

.

[Pops]

Just like 'Ghostbusters'!! "Don't cross the streams, whatever you do, don't cross the streams."

What happens when the wedge lines cross as the oscillations narrow?

LOL
Increasing Boom/Bust as the floor and ceiling diverge?

Here's a new scribble:

[Pops]

Just like 'Ghostbusters'!! "Don't cross the streams, whatever you do, don't cross the streams."

What happens when the wedge lines cross as the oscillations narrow?

LOL
Increasing Boom/Bust as the floor and ceiling diverge?

Here's a new scribble:

ETA: The reason price has fallen like a rock is KSA didn't cut back on production to defend price, rather it maintained production to defend market share. OPEC has been the "swing producer" stabilizing the market since the US peak took that responsibility out of the hands of the Texas Railroad Commission. US producers have no limit on what they extract so they do what all good capitalists do and overproduce at every opportunity in order to get the last drop of profit - like a bulimic gorging on a chocolate cake just knowing it is gonna come back around.

I think that change in KSAs position is The Big Thing we've all been looking for - turns out to be Price War on the global scale.

[Quinny]

Pops I sorta can see your graph to a certain extent supporting the ETP model. The disconnect of money and reality via the 'corporatist command economy' might be the only thing that allows us to 'cheat' the 'market' and the 2nd law. Can't see it being cheated for long though. You lot are pushing my doom meter up on a daily basis!

[Pops]

Pops I sorta can see your graph to a certain extent supporting the ETP model. The disconnect of money and reality via the 'corporatist command economy' might be the only thing that allows us to 'cheat' the 'market' and the 2nd law. Can't see it being cheated for long though. You lot are pushing my doom meter up on a daily basis!

Short said

By using the inflation adjusted price it is saying that a barrel of oil delivered more energy in 2012 than it did in 1975. That, unfortunately, violates the Second Law, which says that is impossible.

LOL, according to the ETP model, inflation violates the Second Law of Thermodynamics and is therefore impossible. I'm neither a physicist nor an economist but I kinda think that the problem is not with inflation nor thermodynamics but the particular application wrt the model.

Using the nominal price of oil the ETP says ERI was 2:1 in 2012 (correct me if wrong) - no other study is close to that - the lowest number I've seen was 11:1 (Hall et al) at the height of the E&P binge.

So the two main assumptions are at least controversial, which admittedly is a draw for some.


Finally, I came to PO initially with the "environmentalist" attitude that geology & ERI trump everything and economists were full of it. I studied every plot of Campbell and especially Laherrere but all the "Hard Science" geo-whatever guys in general because I thought they knew the score. Turns out that to a man they were wrong in their predictions - although later forecasts by Laherrere show he learned the lesson of low precision. It finally dawned on me that oil extraction is an economic venture, it is about making money not energy. While geology and physics and engineering may set the outer bounds of what is possible, the day-to-day is about economics.

Which isn't to say that I pay attention to economists! They are merely politicians that campaign for contributions with equations rather than platitudes, LOL