Demand For Oil Rises Inexorably
By Paul Homewood
There’s a couple of interesting stats in today’s article from Ambrose Evans-Pritchard in the Telegraph.
It is commonly asserted that the drop in oil prices in the last year has been much due to falling demand, as Chinese growth slows. As AEP points out, this is not the case:
While there are signs that oil production may be starting to drop, it seems that demand is only going one way:
On the other side of the ledger, Chinese oil demand is booming. Barclays said it has jumped by 600,000 b/d over the past year, double the previous growth rate even after stripping out strategic storage. The country has added 20m cars to its national fleet in 12 months.
The paradox of the oil market is that a glut disguises the tightest balance of supply and demand in modern peacetime history.
It is a fact that commodity markets tend to swing from one extreme to another. Low oil prices force the closure of uneconomic fields, whilst discouraging new investment. As a consequence, supply starts to get tight again, prices rise, investment piles in, and we end up going round the same circle again.
But underpinning all of this is ever growing demand.
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NOT A LOT OF PEOPLE KNOW THAT 
Stockpiling particularly Chinese strategic reserves distort this though so do we really know how much is genuine long term demand?
In the States, oil prices have been dropping dramatically due to fracking. I remember a couple years ago paying almost $4 per gallon for gasoline. A couple days ago, I paid $1.75 per gallon.
The big suppliers are artificially lowering the prices by increasing output in order to try and kill the Fracking and oil shale booms here in the US and Canada. It also has the effect of hurting Iran’s economy very badly and the Arabs fear the Persians far more than anyone else.
This trend has to end by it’s own inertia eventually and the new sources, many of which are laying idle right now here in N. America will be able to fire up operations and growth again. Oil won’t be as cheap as it is now, but its price won’t skyrocket for long before it settles back down to the $50.00 a barrel level again.
At least that is the impression I have gotten from my reading on the subject.
Have looked at this in some detail. Except in the Permian Basin (where infrastructure exists from conventional fields) the needed price for US fracked oil is between $60 and $80/bbl. The needed price for deepwater (Brasil subsalt, GoM) was between $85 and $100 three years ago. Ditto for Yamal giants in Russia. As a result, it is deepwater and Yamal being halted/curtailed. I predict two things. First, $80 by ye 2016 as frack decline curves set in with rig counts halved. Second, price back above $100 in 2-3 years. Two rewsons. 1.Venezuela, Iran, Iraq collapse otherwise. Even Saudi is feeling the financial strain and on present trends woild exhaust all foreign currency reserves in about another 3 years. 2. The massive 2008 IEA survey of ~fields comprising over 60% of world production were declining output at 5-7% annually (past peak). That means a loss of (~0.6 * [1-0.06]^3) 16%of global production capacity by YE 2018. US shale will not be able to make up the deficit. For example, estimated US shale TRR is 12-15Bbbl. Remaining US conventional TRR is 245Bbbl. (2015 EIA). So deepwater and Yamal will need to be brought on line, and that requires a price above $100.
It is more complicated than a simple war on US fracked shale oil.
Or build four, count em four, one million barrel per day pipelines to add new Canadian oil, from existing fields, to the export market. Which is just short of Irag and Iran exports combined. Two pipeline’s to the West coast, one to the East coast and one through America to the Gulf coast refineries. Profitable at about sixty dollars U.S. per barrel at tide water.
At thirty dollars a barrel, forget it. With the current political climate in North America, forget it at any price.
Thanks, Paul.
According to http://www.oil-price.net WTI petroleum is today at $35.62, a 5-years low.
The IEA’s view
https://www.iea.org/oilmarketreport/omrpublic/
and a report on OPECS view
http://oilprice.com/Energy/Crude-Oil/OPEC-Sees-Oil-Demand-Grow-But-Not-Enough-To-Jolt-Prices.html
It is interesting that the two countries that have stopped oil prices growing are the USA and Saudi Arabia. The USA changed the world oil-balance by becoming a serious exporter a couple of years ago.
While Iran is a target for Saudi, it seems to me that the USA decided to target Russian growth a few years ago and has stopped the growth in EU trade with Russia. This is probably another example of the inscrutable / unintelligible American foreign policy: they will suddenly notice that China has occupied (imperially) most of Africa and then we will see the sparks fly!
I’m in the oil and gas exploration business. The new pools referenced above require oil prices of between $US60 – UA70/bbl to justify drilling. Simple operations cost $35/bbl for pump jacks, treaters, pipelines, service personnel. The fracking boom is expensive and the resultant wells have very high decline rates. Wells are commonly $10US million each to drill.
There are two problems we didn’t used to face that require high oil prices (in real terms). Expensive wells and high decline rates. Although they might come on at 1500+ bond, within a year they can be 500 bond. But to keep the company growing – even stable – the drilling and completion costs have to be regained by the time the declining production is not too low. Which means, these days, within roughly 18 months. (You have to factor in failures and their costs, not just the costs when you have successes.)
An expensive well that declines fast, but requires a fast payout needs high prices. If the price is low, the payout time is long and your overall production as a company falls faster than you can replace it. The solution in the past was to not drill such expensive wells. Now there is no choice – the cheap stuff isn’t around anymore (it got carpet bombed back in the ’90s).
The oilsands, although near surface and accessible with power shovels and dump trucks, are exceedingly expensive to upgrade to usable quality (“cracking”). Those are fixed costs, again in the $50/bbl range. There the problem is not decline rate (you can get more power shovels) but the inherent cost of operation per bbl. Unless you are significantly over the operating and upgrading costs, you don’t make a profit. Which pushes the bottom line of the oilsands also into the $70/bbl range (don’t forget depreciation and environmental reclamation requiring an off-side fund).
The Saudis still have costs of $5/bbl. Their problem is budgetary – they spend too much per year. They need high oil prices because their production levels and production costs, though wonderful, are dwarfed by their national spending on free stuff for their citizens, themselves and their military. Though not as desperate as the Venezuelans, they can’t balance their budget with $35US/bbl oil. How long can they hold out? With the oil-in-the-ground recognized reserves, and the attitude of the rest of the world on deficit financing, they could hold out a long, long time. Quarterly market reviews are not, you know, important to them.
But even for the Saudis, low prices are annoying. OPEC lost almost all of its exports to the US when the shale boom took off. But non-US demand rises by almost 3%/year. And the US boom is certainly a bubble – the North Dakota fields were drilling 30% of their entire producing well number each and every year just to avoid production going backward. That’s a limited time offer situation.
What’s the real deal? Only the power brokers know. The I-shall-hurt-my-potential-enemy-Iran (or let him know I can hurt him at a moment’s notice) is part of it. Maybe all of it. Maybe keep Iran poor until Saudi can complete its acquisition of American military gear the US has promised it. That would be unfortunate, as you know how long the military take to get upgraded.
The only thing we know for sure is that low oil prices are artificial. Making subsidies for the renewables more ridiculous are not the issue – renewables compete with natural gas and coal anyway, not oil (both continent restricted, pipeline-accessed, not shipped as with liquid oil). If we were to decarbonize our energy sources, we would still need oil/gas for plastics and fertilizers. And at a level we could “subsidize” their production and use internal sources. That would put the mid-East in a bind, but, again, low oil prices now wouldn’t affect that later situation.
When something doesn’t make sense, it invariably means you haven’t been told something else that is important, that would bring logic into the situation. Not necessarily smarts or fairness, but logic. We’re missing something crucial.
Excellent comment.
I am new to this blog and so it is refreshing to see threads where everybody has something constructive to say about energy.