One thing we have learnt this week – falling oil prices

oil price chartWho would believe it but falling oil prices are as a big a crisis as high oil prices!  In 2008 the UK government hosted an international crisis meeting in London on the oil price (then at an all time high).  A few months later with the global financial crisis once again we had falling oil prices.  They then recovered (see graph) as a financial stimulus helped the global economy to recover and from 2011 were remarkably steady until August 2014.  Since then they have plunged and show little sign of stopping.  This week stock markets have been falling in sympathy which is the opposite to what we expect.  Various theories are being put forward to account for these almost totally unexpected falling oil prices.  Just to recap here are some of the main ones going around;

  • Global economic slowdown particularly in China has lowered demand.  This is undoubtedly true, the Euro zone inflation has gone negative this week.  Almost all the main economies in the world with the exception of the US/UK are not doing that great.  All global booms have happened at a time of low energy prices and visa versa.
  • Plenty of supply, again true.  OPEC refuses to cut production and shale oil is almost at a peak in the US.  Added to this the US will start exporting again and a whole heap of other countries are increasing their production.
  • Saudi Arabia wants to kill off fracking in the US.  Whether this is true or not – its widely believed by analysts.  Could this fracking be the next sub prime with about $200 billion in loans tied up in an industry which can now not be profitable?  Could this explain the fall in stock markets?  As evidence the Saudi’s refuse to contemplate any increase in production even though their economy needs much higher oil prices.
  • The US has persuaded Saudi Arabia to maintain production to hit Iran and Russia.  Again widely believed.  Evidence as for the last point also Ian supports Assad and the Saudi’s the Sunni opposition.
  • Peak demand – mentioned in one article this week.  Obama has mandated better fuel efficiency for US cars/trucks.  Whilst these are poor by EU standards, they along with less people driving could mean demand at least in the developed world might have peaked.  Counter argument – not so China and other BRIC’s.

Here are a few of my own relating to OPEC’s attitude.

  • What better way to knacker the crucial climate talks than to have very low energy prices…   If this theory is true we will see a cut in production in December followed by soaring oil prices.
  • Kill off electric cars.  Electric cars have three shortcomings at the moment, one of these is the price of the batteries.  This is set to plunge with massively increased battery production.
  • Just maybe Saudi Arabia knows something about its oil supply we don’t.  If production cannot be maintained much longer at current levels then killing off the alternatives and other sources of supply would be essential.  It would at least allow high oil prices to benefit Saudi Arabia for some years.  Evidence?  Thin.  Ghawar is the largest field in the world and has been in production since 1948.  It must be close to peak production.  Also the wikileaks which suggested Saudi Arabian oil would peak about now.

OPEC’s attitude is probably a mixture of the above.

What does this mean for peak oil?

  • Well first it does not mean its dead.  Oil is a finite resource (so is Uranium, natural gas and coal).  The Saudi oil minister’s comments this week that we would never see $100/barrel were in that context idiotic.
  • Falling oil prices are bad for production.  The whole oil industry is set up now for high prices.  All the cheap easy to extract fossil fuels are over.  The IEA World Energy outlook suggested a huge decline in conventional oil in 2010 that will be very difficult to make up.  Exploration will fall leading to higher prices in the long term.
  • People are focusing on production and not supply.  This is the same mistake they made when coming up against Marion King Hubbert.  He looked at where the reserves were going.  Almost all producers can increase production in the short term.  One student has forseen these falling oil prices and sees huge price increases.
  • Even at $50-69 a barrel oil prices are high by historical standards (red line on graph).
  • Peak oil theory does not discount up and downs in production and one theory on price is that we will get huge swings as demand rises and falls in response to price.

To conclude to quote the Madagascar penguins out of context, what comes down must go up.  At the moment it does not look like there is a floor under oil, so $20-30/barrel to me seem possible, although economics commentators such as Larry Elliot disagree.  Later on this year after the climate talks I think we will start to see strongly rising prices.

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