Peak Oil is You
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Page added on October 24, 2013
Crude oil: another collapse ahead?
In January 2008, I was writing on the blog of ASPO-Italy that, “...[oil] prices could very well increase over $100 per barrel and even much more, but will continue to be extremely volatile. A temporary collapse would be nothing to be surprised about, in which case everyone will say that the oil crisis was a hoax. For a while.” (translated from Italian)
As you can see in the graph below (from Stuart Staniford’s “Early Warning” blog), I was right: I had foreseen both the price spike and the subsequent collapse. I was right also in several other predictions about the oil market that I made in early 2008 (as reported here, in Italian).
After the big spike, the oil market managed to rebound; prices returned to high levels and production reached new highs. During the past few years we saw the development a nearly static situation in which oil producers managed to obtain profits high enough to keep production increasing- but not at prices so high to bankrupt their customers (not right away, at least). But how long can this stasis last? Not forever, because resources are being gradually depleted and production costs can only keep increasing.
That is true also for the “non conventional” fossil resources, which have been the main factor that has permitted to the industry to avoid a decline in production. These resources are expensive to produce and their booming phase may be already over. This is almost certainly the case for shale gas (see here, and here) and possibly also for shale oil (see here). With several of the world’s economies in deep trouble, today we have the right conditions for a collapse of the demand that would lead to another collapse of oil prices. That, in turn, would lead to reduced investments in new resources and to a decline in production. It would be 2008 again and this time a rebound to high productive level would be much more difficult.
Is the recent decline in oil prices a symptom that this scenario is unfolding right now? It is still too early to be sure, but we can be 100% sure that if we see prices collapsing people will say – again – that the oil crisis was a hoax.
5 Comments on "Crude oil: another collapse ahead?"
Dave Thompson on Thu, 24th Oct 2013 10:52 pm
The only hoax is on the TV,radio, newspaper,”mainstream” news reports fed to the consumers between dancing with the stars, football games, Christmas season,just keep shopping folks all’s well and except the government sucks the market will always make it right.
BillT on Fri, 25th Oct 2013 3:06 am
This is only the evidence that we have passed the peak. The ups and downs are to be expected with the downs being prevalent. As prices drop, more and more expensive wells will be ‘shut-in’ until the price comes back up. If the price doesn’t come back, the decline will accelerate until it bottoms out at no oil or only enough for necessities, of which personal vehicles is not one.
J-Gav on Fri, 25th Oct 2013 9:23 am
Welcome to the new paradigm. If prices fall, many new drilling projects become unprofitable, production stalls and the global economy stagnates. If prices rise, more and more oil importers are priced out of the market … and the global economy stagnates. As our MSM talking heads prattle on about “win-win” projects, this situation looks much more like “lose-lose.”
shortonoil on Fri, 25th Oct 2013 3:33 pm
“Oil prices and production, as in all markets, are determined by the interaction of offer and demand.”
Oil prices are controlled (long term) by the $ equivalent production energy needed to produce it. This trend has continued for as far back as we can get reasonably accurate data. It also goes through a 28.6 year rate of change price cycle. Fortunately, we are now in a down cycle, and will be until 2027; although overall prices will still be increasing (just not as fast).
Short term variability, like major geopolitical events, can swing the market for periods (up to 5 years) by as much as 20%. But, those prices eventually always pass back through the curve, and have for almost a century. Short term variability is the bread and butter of traders, but it has almost no effect on the long term general economy. Don’t be fooled by predictions of lower petroleum prices. It may happen for a brief period; but long term: “it ain’t going to happen”!
Stilgar on Fri, 25th Oct 2013 11:25 pm
Don’t be fooled by predictions of lower petroleum prices. It may happen for a brief period; but long term: “it ain’t going to happen”!
If oil was an infinite resource the usual supply & demand dynamic would be in effect. But it is finite and as more gets extracted the remaining sources become more expensive to extract with a price limit to what the economy can handle. I agree with the post. At some point many marginal sources will be closed in and we’ll have to make due with those sources that remain economical to extract.
As an aside, I keep seeing these articles and comments that say oil price ‘has to’ remain at the current level to provide incentive to extract higher priced sources, but such comments do not make it so. It’s like the UFC fighter that says my wife and I have 3 kids, so I have to win this fight. But that comment does not guarantee victory. Nothing matters except what actually happens.