How low can the oil price go? This is the question on many peoples lips at the moment. After an extraordinary 15 year upward trend interrupted only by the financial crisis the oil price has been falling for over a year and currently shows no signs of stopping. An oil price of $10/barrel looks quite possible. A price at which almost no oil can be removed from the ground at a profit. Is peak oil dead or merely sleeping?
I heard Sir Ian Wood of the Wood group interviewed on BBC radio 4 today programme. He was quite hawkish on the oil price. What he said was something we tend to forget (I had) and that is masked by the current production glut. That is underlying production is falling at 10% a year. The graph shows what this would mean going forward from 2014 production.
Of course that assumes absolutely no increases in production, which is unrealistic, nevertheless it does show us the challenge of replacement. Last year only non-OPEC and OECD countries (excluding Europe) managed significant increases in production, all other regions were in decline or production increases were minimal. The overall global increase in production was 2.3%. Rarely (if ever) has global oil production achieved a 10% in a year . Of course at the moment shale oil has arrived on the scene and there is plenty of oil swilling around. Going forward though there are plus and minuses on the oil price which make it difficult to call.
On the doveish side…
- Oil and gas demand is falling in OECD countries and may have peaked in China.
- The global economy and particularly the Chinese economy looks terrible.
- A climate change agreement was reached in Paris which should cut demand over the medium term.
- Electric car sales are soaring – albeit from very low levels.
- Iran is increasing production
- There are huge stocks of oil building up. Even if there is a crisis in production its effects will be lessened by these stocks.
On the hawkish side…
- Apart from OPEC conventional oil fields and regions are almost all in decline.
- Demand in some parts of the world is still increasing (or would be if the global economy wasn’t tanking). Watch out for Africa and India as they get wealthier. China’s car demand cannot have peaked.
- There have to be questions over OPEC reserves.
- US shale oil production is set to peak in 2018.
Where is the oil price going, who knows? but peak oil is only sleeping since there are obviously geological limits to production.