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Oil prices keep going down, but this is not good news

There is plenty of movement in the oil world: after five years of relatively stable prices, the legendary barrel” is coming down from over $ 100 to under 90, and it looks like it will keep falling. What’s happening? Has anyone found new resources? Or is it Saudi Arabia using the “oil weapon” to bring down Russia, the heir of the old “evil empire”?

In reality, it is nothing like that. There are no major new discoveries of oil in the world and the Saudi oil weapon is much less fearsome than it is normally described in the media. But, then, why are prices going down? There are good reasons, but we need to understand them and, more importantly, to explain why the likely future drop in oil prices would NOT be a good thing; indeed it could be a planetary disaster.

First of all, we should take into account that oil is a finite resource, but also that it is subject to the laws of supply and demand; it cannot escape the control of the entity we call “the market. So, we are seeing two contrasting trends in the oil market. One is the gradual depletion of the so-called “conventional” oil; that is liquid oil extracted at relatively low cost from wells. As a consequence, the production of conventional oil is static or declining almost everywhere. The other trend is the increase in the production of “unconventional” oil, that is combustible liquids which are obtained, for example, by treating oil sands, or biofuels, or “oil shale,” the kind you obtain by means of the fracking” process. 

Up to now, the rapid development of the production of unconventional oil especially shale oil in the United States has compensated ​​the worldwide decline in the production of conventional oil; it has, in fact, allowed production to keep growing. At the same time, many of the major economies are in recession and are reducing their energy demand. Italy, for example, has lost 25% of its oil consumption over the last five years, and the descent continues. Other economies, such as in Germany, are in trouble, even if not yet in recession. This causes a decrease in the world demand. 

So, the two factors increase in supply and decrease in demand go in the same direction: the market wants the price of oil lowered, and it goes down. We should also take into account that these phenomena are often heavily influenced by the perceptions of financial operators: if everyone thinks that the price of oil should fall, then it will fall. In practice, we risk to see not just a drop in oil prices, but also a true meltdown of the oil market, like that witnessed in 2008-2009.  

Many people would be tempted to believe that lower oil prices are a good thing, but it is not so. If we will see a repetition of the scenario of 2008-2009, the result can only be a disaster (as it was at that time). The problem is that oil resources are not all the same: to produce certain types of oil is very expensive. Extracting from tar sands or from oil shales, for example, is more expensive than extracting from traditional wells. So what happens if prices go down? It happens that extracting and marketing certain types of oil does not generate a revenue anymore. Then, those types of oil are not produced any more. Who would ever want to produce at a loss?  

In practice, if prices decrease, the world’s oil production decreases: have you ever eard of peak oil”? It is just this phenomenon: “peaking” does not mean running out of oil; absolutely not. It means that producing more oil is not as convenient as it was before, hence less is produced. Therefore, we see a peak in the production curve. That’s peak oil.

And that’s exactly what may happen in the near future. Oil at over $ 100 a barrel allowed the industry to maintain a fairly constant production – actually even to increase it slightly over the past few years. Oil at significantly lower prices does not allow it anymore, and it forces the industry to reduce production. This leads, among other things, to the closing of many refineries, as is happening in Italy.

In the end, it is perfectly possible that oil will cost less in the future, but also that we won’t have the money to pay for it. There is nothing to do about that: it is the market, baby! But above all, the troubles come from our attitude that continues to make us believe that oil will last forever. It is not possible. Let’s start thinking about that!

Cassandra’s legacy by Ugo Bardi 



34 Comments on "Oil prices keep going down, but this is not good news"

  1. Perk Earl on Tue, 21st Oct 2014 12:40 am 

    Great article!

  2. meld on Tue, 21st Oct 2014 5:27 am 

    frackles go pop

  3. Norm on Tue, 21st Oct 2014 5:43 am 

    Suppose that NASA proposes to bring back oil from the moon Titan. The oil goes to market at $800 per barrel. They got into such a scheme, because conventional oil had peaked.

    And for awhile, people pay it, because they want oil. What’s next? Gee the price of oil goes down from $800, because the high price cannot be afforded by society. And also, the rockets stop flying to Titan, so production declines. Isn’t that a match to oil price trend, right now?

  4. shortonoil on Tue, 21st Oct 2014 8:10 am 

    “The price of petroleum can not exceed the value of the energy it supplies.”

    There is a limit to the price of oil, and that limit can be found in the statement above. Oil is a real substance with a specific energy content. No amount of financial wizardry can change its physical properties.

    http://www.thehillsgroup.org/

  5. penury on Tue, 21st Oct 2014 9:45 am 

    There are a number of people, (Economists, politicians, and ordinary people who should be forced to re=read this article until they honestly understand that, it takes energy to produce, trade or consume everything and that FF is currently the only energy source which will allow the continuation of BAU. The end may not be nigh,but by careful evaluation, one can discern the presence of the end.

  6. JuanP on Tue, 21st Oct 2014 10:59 am 

    “Oil shale” is Kerogen shale, not shale oil as the article implies.
    I got through the first three paragraphs and already several mistakes and many opinions presented as facts. I will continue reading because I liked the title.

  7. JuanP on Tue, 21st Oct 2014 11:02 am 

    I forgive the above mentioned mistake because this has been translated from Italian, and it is a language, not knowledge issue. I know Ugo Bardi undestands the difference.
    But this is further confirmation of how confusing and annoying the terms shale oil and oil shale are.

  8. JuanP on Tue, 21st Oct 2014 11:12 am 

    Interesting article. It will be interesting to see whether oil prices remain where they are, keep going down, or go back up. My gut tells me they will go back up, but I understand many here agree with Bardi’s conclusion that prices are headed permanently down because of diminishing returns.
    Time alone, time will tell. I have been wrong before, and I may be wrong on this, too.

  9. Davy on Tue, 21st Oct 2014 11:33 am 

    Juan, if we could predict oil prices we would be on a level our buddy NOo is on…grin

    Juan, I see us at an inflect point. The central banks are clearly faced with an addicted patient:
    http://www.zerohedge.com/news/2014-10-21/magic-number-revealed-it-costs-central-banks-200-billion-quarter-avoid-market-crash
    We also know there is ample indications the central banks are running out of gas with their QE policies. Diminishing returns have hit this central bank effort. It has clearly been seen when the central banks try to reduce QE related polices economic activity threatens to tank. It is not apparent currently if this dilemma can be managed down. QE cannot expand without consequences and unintended consequences at this point. It is my thought the Fed will want to have some control rather than continue on with the potential of a loss of control. The economy has not achieved a breakout from QE. The global economy is weak and lacks overall health. Debt levels are unhealthy and sovereign nations have debt service issues. Everywhere we look we have fundamentals that are unhealthy. We also know we are well into the business cycle to a point where traditionally recessions occur. We know interest rates cannot go much lower. That is a long story to say that oil prices may come back up but they most likely will follow the economy down through demand destruction. Clearly deflation is rearing its ugly head. I have no idea where an oil price floor would be but I see a gradual decline within the market peaks and troughs following an economy down.

  10. Northwest Resident on Tue, 21st Oct 2014 11:42 am 

    There is good reason to suspect that inflated oil and stock prices are totally dependent on liquidity injections by the central banks.

    If the Fed and central banks pump extra trillion$ into the economy, prices will rise to reflect that extra cash surge.

    When the money pump tapers off, oil and stock prices will drop accordingly.

    There is no “market” any more in the sense we used to think of it. Today, understanding “the market” requires knowing the answer to only one question: Are the central bank liquidity spigots turned on, or off?

    ht tp://www.zerohedge.com/news/2014-10-21/magic-number-revealed-it-costs-central-banks-200-billion-quarter-avoid-market-crash

  11. Northwest Resident on Tue, 21st Oct 2014 11:43 am 

    Davy — You dirty dog! You beat me to it! Needless to say, I totally agree with your POV on the subject… 🙂

  12. tahoe1780 on Tue, 21st Oct 2014 11:50 am 

    I’m really getting tired of hearing “production is increasing” and “the U.S.’s production is equivalent to Saudi Arabia’s”. It just seems, like so many other MSM messages these days, that its just so dumbed down. Production of what? (Quality) Gross or Net? (EROEI) So what if we produce as much (equivalent quality?)as the Saudis, they’re exporters, we’re importers! Sheesh!

  13. nemteck on Tue, 21st Oct 2014 12:09 pm 

    “The price of petroleum can not exceed the value of the energy it supplies.”

    Yes it can if it is vital for survival. The price paid for oil is determined by the product made from it or by its usage. For example, the US military will buy oil no matter what it costs. Plastics, cosmetics, medicine have a much higher value than the energy content of the oil they use. Therefor one can overpay on oil.

  14. JuanP on Tue, 21st Oct 2014 12:44 pm 

    Davy, I agree that a recession is coming and oil prices will collapse as a consequence of crashing demand. My doubt about oil prices is whether they will recover after the coming recession is finished, or whether neither the economy nor oil prices will ever recover again.
    I was convinced in 2006-2007 that the coming crash would be permanent to a degree, but things worked out better for BAU than I had imagined possible, thanks to QE and ZIRP. I am more uncertain about the outcome this time, in spite of the fact that a permanent contraction is increasingly likely.

  15. shortonoil on Tue, 21st Oct 2014 1:15 pm 

    “Yes it can if it is vital for survival.”

    If it is vital for survival, and its cost exceeds the value of the energy it supplies, the end result is that you die. At that point you have no economy to draw the funds to buy it from. Production has collapsed, the monetary system has collapsed, and the government is gone! The military can not use oil that does not supply energy; ever try to push a tank. This all boils down to why the end of the oil age is going to be a rather “BIG” deal.

    The FED prints currency, they do not print money. They do not print goods, and services and they do not print energy. When the oil age ends, modern civilization ends, and all of your connections to it ends. There are no magic bullets to repair petroleum depletion. Just because petroleum is necessary for your survival is in no way a guarantee that it will be there for you to use.

    When the oil age ends, it will end rapidly. It is like pouring water out of a bucket. When its empty, its empty. When oil can no longer supply energy, it will no longer be able to supply energy! You had better have a plan B, because A looks like it is going to be a bit of a wake up call.

  16. Davy on Tue, 21st Oct 2014 1:36 pm 

    Short, I see your point and fully agree. A point Nem and I have is related to irrational human behavior in descent. We should expect dysfunction. We will most likely see a extreme hesitation with oil’s economic abandonment. This will mean quicker economic starvation as TPTB demand uneconomic liquid fuels at the expense of the bottom productive class. Oil being in a class all it’s own will maintain its hold over the economy until the bitter end IMHO. IMA oil will trump humans in importance and surely will regulate many to a de facto slavery in the name of maintaining industrial society.

  17. nemteck on Tue, 21st Oct 2014 1:48 pm 

    “The price of petroleum can not exceed the value of the energy it supplies.”

    Almost no one disputes that we exit the hydrocarbon bubble with all the complications (famine, resource wars, economic disasters). But in the transition period, where government try to hold on to BAU, oil could become expensive. Take for example today’s new clip reporting that in Fallujah the price of a bottle liquid gas for cooking exceeds 40,000 Iraqi Dinars (27 Euro), nine times the normal price. Here the price exceeds the energy content of gas.

  18. Northwest Resident on Tue, 21st Oct 2014 2:05 pm 

    nemteck — I see your point, and sure, in a collapse scenario there may be a few gallons of gasoline laying around and somebody might be willing to pay “anything” to get that gasoline.

    But I think your argument is relative only to special case, one-off scenarios, and definitely not to the economy as a whole.

    Oil extraction as you know is a major operation that requires finance, debt, armies of highly trained and experienced individuals all on deck and ready to roll, vast fleets of specialized equipment and transport, huge volumes of diesel and NG and whatever other FF are used to do the extraction — and in the case of fracking also great quantities of readily available water. And it needs infrastructure fully functioning, and refineries ready to process — the list is endless. All of that falls apart when the price needed to maintain it all is greater than what consumers can pay. The militaries and governments of the world can of course extract wealth from their citizens and pull together enough cash to pay the excessively high price, but not for long because in so doing they destroy their citizens’ ability to buy it, and to survive, the oil industry needs a lot more buyers than just governments and militaries.

  19. JuanP on Tue, 21st Oct 2014 3:07 pm 

    Short “If it is vital for survival, and its cost exceeds the value of the energy it supplies, the end result is that you die.”
    While I understand the thermodynamic point you are trying to make. I’ll make it back. Don’t we live already in a world were our food “is vital for survival, and its cost exceeds the value of the energy it supplies, the end result is that you die”?
    The way I see it, we die either way. We are already doomed in a world where every calorie of food we consume contains who knows how many calories used to make it embedded in it.
    The point of no return was crossed decades or even a century ago when our food system went from being energy positive to being energy negative as it was mechanized, and also as chemical pesticides and fertilizers were introduced later on.

  20. shortonoil on Tue, 21st Oct 2014 5:43 pm 

    “The point of no return was crossed decades or even a century ago when our food system went from being energy positive to being energy negative as it was mechanized, and also as chemical pesticides and fertilizers were introduced later on.”

    Certainly can’t argue with that! Basing ones’ food supply on a deplete-able resource has not been one of humanities brightest achievements. Good old Homo sapiens may just not be the sharpest tack in box. This could start a rather extended discussion about what is meant by “intelligence”.

  21. Perk Earl on Tue, 21st Oct 2014 5:47 pm 

    nemteck wrote:

    “Yes it can if it is vital for survival.”

    shortonoil replied:

    If it is vital for survival, and its cost exceeds the value of the energy it supplies, the end result is that you die.

    Perk Earl added:

    So not only can someone be wrong, they can also die, like the person that uses their mouth to melt snow for drinking water, in a survival situation high in snowy mountains. Too much energy out for what is returned. Sleepy time – frozen.

  22. marmico on Tue, 21st Oct 2014 7:27 pm 

    The point of no return was crossed… decades or even a century ago

    Not only you are a quart shy, you are a wacko.

    U.S. agriculture is 0.8 quads of 35 quads of petroleum consumption.

    There are more transportation trucks burning distillate passing by the interstate “breadbasket” farmlands every day than farm tractors or crop drying burn in a month.

  23. Davy on Tue, 21st Oct 2014 7:32 pm 

    Now Marm, you are eating crow this time. It is a well proven fact that we use 10 calories of food to yield one calorie for consumption. Add to that dismal number the huge water usage, massive ecosystem destruction, dangerous climate change, and horrible habitat loss.

  24. Northwest Resident on Tue, 21st Oct 2014 8:18 pm 

    “U.S. agriculture is 0.8 quads of 35 quads of petroleum consumption.”

    Just curious. Does that 0.8 quads of 35 quads include the petroleum used to manufacture the fertilizers, pesticides and other chemicals that big agriculture uses? Does it include the harvesting, storage, delivery to processing plants, the processing done at those plants to package and preserve the food?

    Also, where do you get the 0.8 quads of 35 quads statistic? I only ask because searching for “how many quads of petroleum does agriculture use” gives me a list of links to 4-wheelers and other non-related links.

    BTW, I agree with the statement that “the point of no return was crossed decades or even a century ago” in terms of food production. You would too if you considered the fact that without petroleum and petroleum products and all the manufacturing and petroleum that enables big agriculture to feed 7 billion people is in the end unsustainable. How can you argue with that fact?

  25. marmico on Tue, 21st Oct 2014 8:27 pm 

    Are you a quart shy? Food (grain) will be grown in the U.S. (Australia, Argentina, Canada etc., down the alphabetical list) with negative petroleum EROI. Live cattle not so much. As the quart shy says: “The price of petroleum can not exceed the value of the energy it supplies.” Food will always exceed petroleum.

    So tell me about the global ratio of petroleum food to petroleum consumption and then hone in on the contribution of the Ozarks, Davy-boy.! Will the Jersey bros lend you money to buy a Deere or a Kubota?

  26. marmico on Tue, 21st Oct 2014 8:36 pm 

    Also, where do you get the 0.8 quads of 35 quads statistic?

    I get it from the intertubz etherealness. Same as the quart shy guy. Ooopsie.

    Well, actually,….

    Natty gas for fertilizer and pesticide is extra.

  27. Northwest Resident on Tue, 21st Oct 2014 8:37 pm 

    Not willing to answer the question of where you get the 0.8 quads of 35 quads statistic? Just making it up? Where’s the link? Where’s the official data? I know you’ve got it in your file somewhere. Please share the source of your most excellent statistic.

    How do you know that food — of which grain is a portion — will be grown in the U.S. with negative petroleum EROI? Where did you get THAT shocking detail from?

    So, you’re saying it doesn’t take any energy to grow the fields of wheat and corn or to process those crops and deliver them to market?

    I guess I am a quart shy of understanding how you come to your bold assertions, and I’m a few gallons shy of believing the statistics and data you’re asserting are anything more than the negative EROI pile of manure that cattle produce daily.

  28. Northwest Resident on Tue, 21st Oct 2014 8:41 pm 

    Oh, from “the intertubz etherealness”. Then it must be fact, and of course you being the expert on all things that you are, I’ll trust you on that. So, your point is valid, your argument is sounds, your characterization of the other poster as “whacko” is well substantiated based on your amazing statistic which, you claim, comes from “the intertubz etherealness”. How could I ever have doubted you? 🙂

  29. marmico on Tue, 21st Oct 2014 8:56 pm 

    NWR, you couldn’t argue your way out of grammer school debating class even if your parents had the wherewithal to send you to finishing school. Stick with seeds.

  30. Northwest Resident on Tue, 21st Oct 2014 9:08 pm 

    Whatever you say Marmico. I’m not trying to argue with you, just asking where you get your detailed stats from. You know as much about me and my schooling and debating abilities as you know about everything else. I’ll look forward to your next set of compelling statistics found on the intertubz etherealness.

  31. JuanP on Tue, 21st Oct 2014 9:23 pm 

    Marm, I was referring to the whole food system as Davy and NR pointed out, not just the liquid fuels used directly by farmers at the farm exclusively to produce food. That does not include food selection, food processing, food packaging, food preservation, food distribution, food storage, and cooking and table waste.
    Now, even food grown at home is unsustainable the way we do it today. These are well established facts. In this particular case, this isn’t just my opinion.

  32. marmico on Tue, 21st Oct 2014 9:29 pm 

    Okay, no problemo, NWR.

    I view the EIA data posted yesterday which I linked upthread. The best I can determine is that U.S. agriculture petroleum consumption is a little shy of a quad.

    You should already know that the U.S. consumes about ~100 quads of energy annually, without delving into the details, of which petroleum is ~35 quads.

  33. marmico on Tue, 21st Oct 2014 9:58 pm 

    Now, even food grown at home is unsustainable the way we do it today

    Permaculture is bullshit in the U.S. (Canada, Australia, etc.) Look, I can grow 5% of my annual sustenance on the balcony of my 17th floor in Des Moines (Calgary, Perth, etc.)!

  34. Davy on Wed, 22nd Oct 2014 7:16 am 

    Marm, I don’t even need to link my support to tell you our food system as-is is an energy sink in regards to sustainability and resilience. IOW remove industrial inputs and economic structures and we quickly fall back to early 19 century food production levels and population. There are so many weak links. Have you ever heard of an individual named Liebig? We have trade/exchange and distribution complexity that is extremely energy intensive. Our choice based food sourcing is complex and energy intensive. These economic realities are complex and dangerously exposed to systematic risk. You have all the FF inputs of propane, gas, oil, and electricity. You need the mined minerals of P&K. The manufactured fertilizers and chemicals. Once the food is produced it must be industrially processed. Think all that packaging and refrigeration. Then the final stage is the end use preparation. There is the large cost in water and energy to cook, clean, and dispose of the waste. Marm, compare that to growing your own food locally, preparing the food for storage or immediate use at home, then final preparation of cooking on let’s say a wood fire. Then disposal as compost to be fed to the pigs or garden. The production using fertilizer from the animals. All this done in seasonality and symbiosis with the land. Water gained locally from sources within walking distance. If you want to be even more productive you jump all the way down to hunting and gathering. My point here Marm is not to bore you with what I know is redundancy. My point is to contrast technology and complexity with sustainability and resilience. Our industrial food system is so far in the red that we are dangerously exposed. Our food system has the added problem of soil loss and water stress. One other thing Marm, I raise cattle. I had a 1000 acre corn and soy row crop farm in the early 2000’s. I know my shit up close and personal unlike you and your net surf. Marm, climb back in your hole dude you got your cocky clock cleaned. Yes Sir, I am a quart shy and proud of it.

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