The Oil Crash Is No Small Matter…Repurcussions Will Be Extensive

42 Comments on "The Oil Crash Is No Small Matter…Repurcussions Will Be Extensive"

Plantagenet on Mon, 19th Jan 2015 6:49 am 



The oil biz has always been subject to cycles of booms and busts.

Here we go again

Newfie on Mon, 19th Jan 2015 6:54 am 



Never ending growth is a fairy tale. It’s the central myth of the modern religion of Progress. Nature does not allow anything, no matter what, to go “up” forever. What goes up must come down. Nature makes the rules.

rockman on Mon, 19th Jan 2015 6:59 am 



And thus another chance to recycle a bumper sticker from the early 80’s: “Lord, give me one more boom and I promise not to screw it up this time”.

Unfortunately many still screw it up.

paulo1 on Mon, 19th Jan 2015 7:45 am 



re: “Even as growth in the U.S. economy is becoming more firmly entrenched, the rest of the major economic engines remain mired,”

I accept to being a bit cynical, but what is this latest meme supposed to do to help our situation? Is this simply an attempt to clothe the emperor?

We have shale collapse taking a huge amount of good jobs off the table. Mining is down. Manufacturing offshored years ago. Auto sales based on sub-prime financing up to 6 year loan terms. Chain dept stores in collapse mode. Record debt with no way for ponzi growth to pay it back. This may be a sevice economy but it must do more than “I’ll wash your dog and my kids will go to your college”.

The economy is shite, and it doesn’t matter what stats are pulled out to say otherwise. Some are doing okay, but not everyone can be a software engineer or IT specialist. Somewhere someone needs to be hired to actually make something or do something useful and needed for others. It has been so long since we have seen a vibrant economy I think we forget what it looks like. Instead, we have financialization and currency debasement. We are frogs in the pot and 2015 looks like medium heat.

westexas on Mon, 19th Jan 2015 8:07 am 



Output from existing fields around the world would decline around 9 percent per year in the absence of new drilling or other capital expenditure to increase recovery, according to the International Energy Agency’s World Energy Outlook 2013.

At a 9%/year gross decline rate from existing wells, in order to maintain current production we would have to replace the productive equivalent of every currently producing oil well in the world over the next 11 years.

Of course, existing production would be down to 37% of the current level in 11 years (at 9%/year), but if we stipulate a steady state production rate, we would be declining against the current production level, not against a declining production level.

bobinget on Mon, 19th Jan 2015 9:40 am 



From day to day, hour by hour I’ll reprint war bulletins from the many front World Oil War.

Closing in on KSA:

(Reuters) – Yemen’s powerful Houthi movement fought artillery battles with the army near the presidential palace in Sanaa on Monday, plunging the fragile Arab state deeper into turmoil and drawing accusations that the militia fighters were mounting a coup.

Explosions echoed across the city and plumes of dark smoke hung over downtown buildings as the most intense clashes since the Shi’ite Muslim Houthi movement seized the capital in September brought everyday life to a halt.

The Houthis had seized the state news agency and television station, a government minister said.

Medical sources said five people had been killed and more than 20 wounded. Final numbers were likely to be higher.

The street battles marked a new low in the fortunes of Yemen, plagued by tribal divisions, a separatist challenge in the south and the threat from a regional wing of al Qaeda, which claimed a deadly Jan. 7 attack in Paris on a satirical journal known for mocking Islam.

More> http://www.reuters.com/article/2015/01/19/us-yemen-clashes-idUSKBN0KS08K20150119

Northwest Resident on Mon, 19th Jan 2015 9:46 am 



paulo1 said: “…not everyone can be a software engineer or IT specialist.”

Being a software engineer and somewhat of an IT specialist, I can vouch for that fact. Many have tried and failed.

The software application(s) that I work on is a financial services solution. In my little corner of the software world, everything is still BAU. I already got a big pay raise this year, plus some nice bonuses and promises of much more. In the financial services world, as long as the stock market is UP, times are good!

Too bad it is all fake and totally unsustainable. Too bad that in order to maintain this comfy employment situation species must die, land water and air must be polluted, people must starve, forests must fall and mountains must be leveled.

I imagine I’ll have a good paying job until the lights go out. My analytical intuitive sense tells me that I won’t have long to wait. I expect a violent unwind to spin through the world of finance like a tornado of destruction fairly soon, leaving a massive field of debris and piles of twisted trash where BAU once stood.

Until then, I got work to do. Sad days are coming, but for now, no complaints.

shortonoil on Mon, 19th Jan 2015 9:55 am 



Output from existing fields around the world would decline around 9 percent per year in the absence of new drilling or other capital expenditure to increase recovery, according to the International Energy Agency’s World Energy Outlook 2013.

Our model shows a 13% decline rate over at least the next five years. It also indicates that the average world wide cost of production at the well head is now about $40.00/ barrel. Today WTI opened at $47.80. Depending on the shape of the distribution (which we don’t know for sure) at least 25% of the world’s producers are now underwater.

This is a situation that will only get worse over the next few years:

http://www.thehillsgroup.org/depletion2_022.htm

Oil has always been a feast, or famine business. This time, however, it looks like the banquet is going to be permanently delayed!

http://www.thehillsgroup.org/

bobinget on Mon, 19th Jan 2015 9:58 am 



http://time.com/3673156/nigeria-boko-haram-suicide-bombing-potiskum/

http://www.bbc.com/news/world-middle-east-30873402

Northwest Resident on Mon, 19th Jan 2015 10:11 am 



“The oil biz has always been subject to cycles of booms and busts.”

And it will end on a bust of epic proportions. Exactly what we are seeing now.

They squeezed one last “boom” out of the oil industry — the “shale revolution!!”. But to do it, they had to take on astronomical debt that can never be repaid to enable extraction of the slimy scum sticking to the bottom of the bucket. Some “boom”.

Now for the bust. We are watching it unfold. There are no more booms on the near or distant horizon. Nothing to give the world economy another burst of excess energy and another thrilling economic ride. From here on out it is all downhill.

marmico on Mon, 19th Jan 2015 10:53 am 



It also indicates that the average world wide cost of production at the well head is now about $40.00/ barrel.

Perfect. That’s where the price of a barrel at the wellhead should settle; the marginal cost per barrel. That means gasoline @ $2.00 per gallon USD or 25 minutes of time for the average hourly production and nonsupervisory hourly worker’s wage to buy 4 gallons which travels 100 miles with a 25 mpg vehicle. That is the lowest minutes per hour ever in the oil age.

ghung on Mon, 19th Jan 2015 10:59 am 



So marmico, are you positing that the world can keep producing 85+ mmbd at $40/barrel?

westexas on Mon, 19th Jan 2015 11:08 am 



Excluding very high decline rate US production, a doubling in annual Brent crude oil prices from $55 in 2005 to the $110 range for 2011 to 2013 inclusive corresponded to flat to declining annual global Crude + Condensate production from 2005 to 2013, versus a rapid rate of increase in production from 2002 to 2005, as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005.

And even if we include the US, it’s very likely that actual global crude oil production (45 and lower API gravity crude oil) effectively peaked in 2005.

Given these numbers, I have a hard time seeing how the global industry can maintain current production for very long.

GregT on Mon, 19th Jan 2015 11:19 am 



“That is the lowest minutes per hour ever in the oil age.”

And the cheaper it is, the faster we will waste it on unsustainable mass consumerism, and the sooner we will trigger a runaway greenhouse event.

Perfect.

ghung on Mon, 19th Jan 2015 11:35 am 



Seems the underlying question to all of this is; what is the MOL of oil consumption for the global economy before things begin to contract (de-growth)? That, of course, is a moving target, one we may have passed (need for growth and all that). Seems that economies stalled out at about 85 mmbd at @ $100. Those who suggest that we can maintain that level of gross production at $40 are either deluded, or think everyone else is.

Plantagenet on Mon, 19th Jan 2015 11:40 am 



@Marmico:

Your suggestion that oil prices should settle at $40 bbl because that is the average price of production contradicts basic economic theory.

At ca. $40/bbl about half the producers are losing money. They will stop producing. Eventually the price will have to go up.

Conventional economics holds that commodities are priced at the production of the HIGHEST PRICED producer, and that how oil has been priced for the last 5 years.

I expect it to return to $80-120 bbl when the KSA price war is over.

penury on Mon, 19th Jan 2015 11:55 am 



I do not have any idea how long the CBs and .Gov can maintain the current economy with plunging oil prices, however it is becoming more obvious by the day that the next move by .gov will be war. 5000 troops from NATO to ea.europe, U.S approval of supply of deadly force weapons, US. supplying more tanks to Iraq Congress moving to allow boots on the ground in Syria. If it looks like a duck, its a duck if the actions of the Empire appear to be an attempt to initiate a war, well it ain’t a boy scout rally. Wake up and smell the coffee people it is already too late/

marmico on Mon, 19th Jan 2015 12:12 pm 



At ca. $40/bbl about half the producers are losing money

Half of the producers by numbers may be losing money, but not half of the production by volume. OPEC produces 40% of global supply at less than $40 marginal cost. The future will determine where the marginal cost curve settles.

Get over it. There has been global per capita peak oil since 1979. I’m excited that the westexas’s of the world now have to earn their money with their skillsets at the marginal cost. It was too many years of windfall earnings for my liking.

ghung on Mon, 19th Jan 2015 12:28 pm 



Marm, I’ll repost my question: So marmico, are you positing that the world can keep producing 85+ mmbd at $40/barrel?”

marmico on Mon, 19th Jan 2015 12:42 pm 



So marmico, are you positing that the world can keep producing 85+ mmbd at $40/barrel?”

No, but you are self-confessed expert in household energy intensity. Buy a 40 mpg vehicle so you can bump your life style petroleum intensity.

Get over it. To put it politely, there has been global per capita peak oil since 1979 and there has been no apocalypse which presumably is at least half your lifetime.

GregT on Mon, 19th Jan 2015 12:46 pm 



“At ca. $40/bbl about half the producers are losing money. They will stop producing. Eventually the price will have to go up.”

And when the price eventually goes back up, more damage will be done to our economies, which will cause another price collapse, wash-rinse-repeat, until we get to the point that prices can no longer rise due to economic hardship, and the unaffordable oil will stay in the ground. The decline of affordable conventional oil production will continue at ~8% per year, and global chaos and civil unrest will grow exponentially. The end.

shallowsand on Mon, 19th Jan 2015 12:52 pm 



Would you all differentiate between the cost to find, drill and complete vs the cost to produce once the well has been drilled and completed? Or if you are not going to please explain why that distinction is not important.

GregT on Mon, 19th Jan 2015 12:52 pm 



“OPEC produces 40% of global supply at less than $40 marginal cost.”

Hmmm, I wonder what the world would look like with 40% of our current supply of oil? Somehow I don’t think that owning a 40MPG vehicle would really make much of a difference……

Plantagenet on Mon, 19th Jan 2015 1:14 pm 



@GregT “…when the price eventually goes back up, more damage will be done to our economies, which will cause another price collapse, wash-rinse-repeat”

Exactly right. Thats why I started this thread in post#1 by bringing up boom bust cycles.

Congrats—you finally are on the right track!

ghung on Mon, 19th Jan 2015 1:14 pm 



Thanks, Marm. I’ll let the other ~7 billion people know that their energy consumption is going to be dropping fairly dramatically, and that their consumption of all things petroleum will be significantly curtailed going forward, but that it shouldn’t be a problem. It’s not like most of their jobs depend on current levels of consumption or anything. If so, I’m sure they’ll find something else in short order.

And they shouldn’t worry about the skyrocketing debt that has been created to offset the economic impact of overall per capita energy decline since the 70s. None of this debt represents real claims on real resources that won’t really be there. Their entitlements, services, and yet-to-be-funded liabilities will be taken care of. A few minor inconveniences, but no ‘apocalypse’.

I’m sure the citizens of Planet Earth will handle it with their usual grace and cooperative sense of sacrifice.

marmico on Mon, 19th Jan 2015 1:34 pm 



Somehow I don’t think that owning a 40MPG vehicle would really make much of a difference……

Petroleum is primarily personal transportation (~65%). That’s the reason why you are still waiting since 1979 with baited breath for the apocalypse. You see, the ICE vehicle fleet can turn over annually (it’s called “petroleum intensity” for grade schoolers) sequentially from 25.0, 25.5, 26.01, 26.53, 27.06………Get it? The EV vehicle fleet is nascent but starting to ramp up.

So back of the envelope, intensity “may” increase annually, 2% ICE and 1% EV.

marmico on Mon, 19th Jan 2015 1:51 pm 



I’ll let the other ~7 billion people know that their energy consumption is going to be dropping fairly dramatically

You do that. You have been doing that since 1979, right? ROTFLMFAO

Sky rocketing debt. You wouldn’t know the difference between a stock and a flow if it struck you over the head a baker’s dozen times. You must be referring to U.S. household debt service. As the Brits would say, what a pity that it is easier to service (pay the monthly nut) a mortgage in 2015 than in 1979.

rockman on Mon, 19th Jan 2015 3:04 pm 



Shallow – Yes…contiued confusion. Often non-oil patch confuses production cost vs development cost. Most of the EXISTING producing oil wells around the world can produce at a positive cash flow at a price much lower than current levels…including those wells in the US. But to develop (i.e. to create) a significant number of new producing oil wells will take a significantly higher oil price. Just MHO but I doubt the current price, if it holds long term, will be adequate to create enough new production to offset the decline of the existing wells.

marmico on Mon, 19th Jan 2015 3:49 pm 



Poor shallowsand is bankrupt. He couldn’t figure NPV. Just business LOL.

Guess what? Shallowsand’s second cousin, three times removed, will buy his leases from the trustee in bankruptcy and the donkey oil will flow.

shallowsand on Mon, 19th Jan 2015 3:59 pm 



We will see marmico. Otoh maybe someday I will figure out where you buy gasoline and LMAO watching you to pay $5+ a gallon. Neither one of us really knows now do we?

marmico on Mon, 19th Jan 2015 4:12 pm 



I buy gasoline at a gasoline station. Where do you buy your gasoline?

You are such a novice. Hopefully, you protected some of your personal assets from your corporate creditors. I doubt it as you strike me as a penny wise dollar foolish person.

ghung on Mon, 19th Jan 2015 4:25 pm 



Marm – Hopefully you have assets other than monetary digits in the cloud, though, considering your level of hubris and pathological blind faith in the soulless markets, I doubt it.

You provide an uncanny reminder of my last boss who left his investors millions of dollars in the hole as he moved on to the next big thing, smiling all the way; “It’s just business”. Funny that he dares not show his face in his home town these days. Probably too busy losing his ass other peoples’ money in North Dakota.

shallowsand on Mon, 19th Jan 2015 4:26 pm 



I must have arrived on this site as marmico is attacking me now.

As happy as you are w cheap gasoline marmico you must be in the transportation industry.

alokin on Mon, 19th Jan 2015 4:32 pm 



Thanks rockmann for bringing some sense in this discussion.
“The oil biz has always been subject to cycles of booms and busts.” Don’t you think that this is a bit more of boom and bust than usual? How does the oil biz deal with this increased boom and bust cycle?
I still don’t know weather the $40 cost refer to the costs at the well head or does it include transportation, refinery transport to the petrol station and to pay the petrol station? If you look at other goods, price difference from factory door or farm to end producer is more than 50%.

marmico on Mon, 19th Jan 2015 4:42 pm 



As happy as you are w cheap gasoline marmico you must be in the transportation industry

I’m not and have never been in the transportation sector. Did you protect your personal assets? It’s not likely since bankers like personal guarantees for donkey wells.

Big house, big mortgage, zero income in Texas in 2015 is not a good recipe. 🙂

marmico on Mon, 19th Jan 2015 5:09 pm 



“It’s just business”.

That’s rockman, not me. I’m making a joke but you don’t get nuance in Appalachia. You see, in 2014 it was just business that I’m paying through the nose for gasoline while rockman is laughing all the way to the bank. Now the table is reversed in 2015.

No let’s go back to empirical Tverbergian debt shall we? Ready, set…give me something to ponder other than that credits equal debits.

shallowsand on Mon, 19th Jan 2015 5:35 pm 



Ok. Wrong guess on my part. What do you do that makes you so sensitive to high cost gasoline?

shortonoil on Mon, 19th Jan 2015 5:44 pm 



But to develop (i.e. to create) a significant number of new producing oil wells will take a significantly higher oil price

Any company in the extractive resources industry that is not replacing its reserves, or at least setting aside money to do so, is not an extractive resource company. They are in the scrap business! To continue to produce oil in the world today requires an average price of $40/barrel. You have to find it, before you can pump it. That means that if prices don’t increase within the near future there will soon be a lot of these outfits who are no longer going to be with us. Since the world’s economy absolutely depends on oil for its existence, if prices don’t increase, things are going to go from bad, to terrible!

We project prices in the $60/barrel range by late 2016. Never the less, there will be a lot of firms that aren’t going to make it. Regardless of what Wall Street thinks is a good economy, growing unemployment lines are a sign that things are deteriorating.

marmico on Mon, 19th Jan 2015 5:54 pm 



No problem on the guess.

There are producers and consumers. When I’m a consumer (of petroleum) I want the lowest price. When you are a producer (of petroleum) you want the highest price. You and I are consumers. But only you are a producer. Producers won at the gasoline pump for 10 years. Now its time (regression to the mean) for consumers to win at the pump. Pretty simple exposition of markets, eh?

Plantagenet on Mon, 19th Jan 2015 7:12 pm 



@Alokin:

Your suggestion that this is “more of a boom and bust cycle then usual” doesn’t match the facts.

Look at the year 2008-9. Oil went from $148/bbl to down in the 30s. Thats a much bigger cycle then this one.

This boom bust cycle seems pretty typical to me, the only unusual thing is that some of the oil in this oil glut is coming from fracking tight US oil shales.

alokin on Mon, 19th Jan 2015 8:00 pm 



I actually count the 2008-09 cycle as now. I was asking about what was before 2008 to now compared to what was before.

rockman on Tue, 20th Jan 2015 7:50 am 



Marm – “You see, in 2014 it was just business that I’m paying through the nose for gasoline while rockman is laughing all the way to the bank. Now the table is reversed in 2015.” I usually have a smile on my face regardless of the price of oil. I’m smiling pretty good these days. Back in the mid 80’s when the inflation adjusted price of oil fell from $107/bbl to under $20/bbl I had 3 of my most personally profitable years up to that time.

Making a profit in the oil patch is never a function of the price oil/Ng sells for. It’s always has been and always will be a function of what it costs to develop it. When NG was selling for less than $1/mcf on the late 80’s I was developing for less the $0.20/mcf. My investors liked me a whole lot. LOL.