Peak Oil is You
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Page added on February 23, 2016
Peak Oil: Get Ready for What Comes Next
Recently, I had to plunk down money on a new car. The old one was, well, pretty much ancient.
When I bought it new for cash, Bill Clinton had just survived impeachment, gold was $300 an ounce, the Dow was at 9,000 and “Google” was not yet a verb. That was 17 years, two clutch replacements (I love manual shift transmissions), a second paint job and 250,000 miles ago.
What did my wife and I choose as our next vehicle?
We considered at a lot of different types: a few luxury sedans, a couple of crossovers, SUVs, you name it. But when it came for a final decision, we looked at today’s “oil glut” headlines, along with sub-$2 per gallon gasoline, and made what I’m sure you’ll agree is the obvious choice…
We bought a fuel-sipping, 40 mpg subcompact econobox.
Now, I know what you’re saying…
“JL, get a grip. Polyester, leisure suits and disco all went out of style with Jimmy Carter. And so did caring about your car’s fuel mileage.”
I was the one who recently wrote about Saudi Arabia and its ginormous 350-story Kingdom Tower as a monument marking “the ‘long goodbye’ of oil as the world’s dominant fuel source in the 21st century.”
So what gives?
Out of Sync Oil = Profits
Let me put it this way: In a world economy that burns 96 million barrels of liquid fossil each day, supply and demand rarely match up in perfect order.
One zigs while the other zags.
Revving economies, wars — like the one that seems to be steadily widening around Syria — and the wax-and-wane of the oil industry’s own investment cycles all play a role.
So, while oil is slowly becoming less important to the 21st-century global economy, we still have 84 years’ worth of booms and busts left to go.
That leaves a lot of money to be made for anyone interested in looking beyond the recent spectacle of analysts falling all over themselves to predict $10 a barrel or $20 a barrel oil.
Maybe they ought to be analyzing something called “spare capacity.”
Back in September, one such analyst at the oil and gas consulting firm Rystad Energy did just that, and concluded: “The oil market is at risk of price spikes despite the focus on oversupply.”
The reason? Saudi Arabia has very little ability to quickly ramp up production.
“Current spare capacity,” wrote the analyst, “is far lower than the 2.1 million barrels a day the Kingdom held in 2009, when the oil market last demonstrated a significant misbalance in supply and demand.”
What about U.S. and Russian oil filling the gap?
Rystad’s analyst believes the Russians are likewise pumping all-out — the Putin regime needs all the cash it can get. U.S. producers, on the other hand, could bring a lot of oil online quickly. But we’re talking about “hundreds of companies making individual production decisions.”
After the bust of the last two years, it’s doubtful they’ll all immediately jump on any opportunity to pump more oil.
Even using the word “glut” may no longer apply in a handful of months.
BP’s top executive recently predicted, with some hyperbole, there’s so much oil right now that “every tank and swimming pool in the world” is going to fill up with the stuff. But in the same sentence, he went on to say that “…fundamentals are going to kick in. The market will start balancing in the second half of this year.”
In other words, get ready for higher prices.
“Max Gasoline Mode”
Here’s where the whole thing of mismatched supply and demand really comes into play over the long term…
America: The vehicles we drive may have a lot less chrome and a lot more plastic and silicon, but America’s long-running love affair with the automobile is far from over.
Not by a Texas mile (or a New York minute).
As 2015 drew to a close, U.S. demand for gasoline hit its highest peak in eight years. And no wonder, with prices of less than $2 a gallon in much of the country.
Early this month, two of the largest independent refiners, Valero Energy and Phillips 66, said they are in “max gasoline mode.” They can’t make enough of the stuff.
Phillips’ CEO told analysts his company exported less gasoline to overseas markets because it had so much homegrown business.
It’s not just Americans, either.
China: Despite a contracting economy, Chinese consumers bought a record 25 million vehicles last year, a 4.7% increase from 2014 levels (Americans, for comparison, purchased 17 million cars and trucks last year).
To be fair, a chunk of those sales occurred in the fourth quarter thanks to a well-timed government tax cut. OK, fine.
But with the headlines about China’s declining GDP, you’d think oil consumption was way down too.
Wrong! Gasoline demand rose 9% last year, and jet fuel consumption jumped by 15%. Chinese use a lot of propane to heat their homes in the winter — consumption of that fuel (technically, it’s LPG — liquid petroleum gas) rose more than 20%.
All those categories, say independent analysts, should rise by similar amounts or more in 2016, while China’s overall oil demand rises a none-too-shabby 3%.
India: Let’s face it. When most of us think about India, we think of massively congested streets in its major cities. Those are the images buried in our minds from news reports. So it’s easy to assume there’s little interest in buying a new car.
The assumption couldn’t be more wrong. Car sales rose 10% last year, and hit a record high of more than two million vehicles.
Like the China, and the U.S. before it, India is finally embracing the “Field of Dreams” policy when it comes to highways and cars: “If you build it, they will come.”
After years of stagnation and foot-dragging, road building has a major priority from the national government. The country’s national highway authority awarded nearly 5,000 kilometers (about 2,800 miles) worth of roadbuilding contracts last year, with a goal of laying 30 kilometers a day (or nearly 7,000 miles a year). That may not sound like much for a subcontinent-sized country, but then again the historical average was a paltry two kilometers a day (a meager 450 miles a year).
So it’s no wonder that India’s oil consumption is on a sharp curve higher. This year, economists expect it to grow by another 300,000 barrels a day, surpassing for the first time even China’s considerable demand growth.
The main point here is something that our Jeff Opdyke harps on all the time (and for good reason): Don’t get used to low energy prices — as a motorist (or investor).
Low energy prices are creating economic and business risks that we’ll all have to adjust to when the oil market rebalances. But it also creates opportunities for investors (Jeff has a number of energy stock plays in Total Wealth Insider, if you’re a subscriber). Oil prices run in long up and down cycles; this current one will pass soon enough. And as it does, so will a prime investing opportunity.
17 Comments on "Peak Oil: Get Ready for What Comes Next"
rockman on Tue, 23rd Feb 2016 4:42 pm
The oil market is perfectly balanced right now: every bbl oil the companies are producing is being sold despite near record high rates by most of the major producers. And that includes nearly every bbl being put into storage because those bbls are BEING BOUGHT from producers by those speculating on future oil prices. And the market is equally balanced on the buyers side of the fence: every buyer that can afford $30/bbl oil has all they want.
So no glut or shortage of oil: a balanced market.
shortonoil on Tue, 23rd Feb 2016 4:51 pm
Another barrel counter? So why has price declined by 70%, and demand has hardly budged. Inventories have gone up for the last two years, and no one sees a break on the horizon. Counting barrels doesn’t answer those, does it?
ennui2 on Tue, 23rd Feb 2016 5:27 pm
It’s a glut.
sunweb on Tue, 23rd Feb 2016 5:30 pm
1991 Honda CRX HF 240000 miles 46 miles mpg.
Originally had 1990 Honda CRX HF bought it new, got 58 mpg, it rusted out her in MN. Got the 91 off the internet in 2002 for $2500 delivered to me on a trailer from Seattle because the guy was from Minneapolis and coming home for Thanksgiving. Had the 91 undercoated immediately. Hatchback – people joke it is my pickup truck – carry all kinds of stuff.
Apneaman on Tue, 23rd Feb 2016 5:57 pm
What comes next it more bankruptcies – lots of them starting in April.
Goldman Sachs Says 40% of Its Oil, Gas Lending to Junk Firms
http://www.bloomberg.com/news/articles/2016-02-22/goldman-sachs-says-40-of-lending-to-oil-and-gas-firms-is-junk
adonis on Tue, 23rd Feb 2016 6:23 pm
i think ill invest in bicycles when this oil glut turns into oil shortages
makati1 on Tue, 23rd Feb 2016 6:51 pm
What to believe. Today at Ricefarmer:
“Iraq On The Brink Of Chaos As Oil Revenues Fall”
“Moody’s: Gulf banks pressured by oil”
“The Danger Of Low Oil Prices For The Global Economy”
“Desperate Oil Giant Pemex Makes a Deal with KKR”
“IEA: Slashed spending by drillers could lead to price spike”
“As U.S. shale sinks, pipeline fight sends woes downstream”
“Firesale In Energy Assets”
“ExxonMobil’s New Reserves Fall Short For First Time In 22 Years”
“North Dakota rig count testing new bottom”
“Billions In Debt Fall Due Soon For Shale Drillers”
“Oil’s Slump Is Scattering The Workforce And Supply Chain”
http://ricefarmer.blogspot.fr/
And, no, I do not read all of those. More writing for money. I observe what is happening in my neighborhood, East Asia, not what is happening across the globe unless it impacts my neighborhood in a way that may affect me. I read maybe 15-20 articles on an average day and skim the headlines of maybe another 100. That is my typical morning. Nice to be retired.
Banal on Tue, 23rd Feb 2016 7:51 pm
Alright, here are the projections of what happens when you take oil out of an economy, or at the very least, run it at 10% of current consumption rates.
If governments plan ahead, oil is rationed solely for military and agricultural usage. But this is the United States, with freewheeling capitalism and zero oversight of what the government does, so things will be a little different, but just bear with me for a moment.
Electrical costs surge for the consumer; so much so that the internet gets turned off, computers stop being used, and we revert to a much, much simper neo-medieval economy.
Given that we have a medium population density for the amount of arable land, combined with tonnes of preexisting capital; American living standards become like the average Chinese, The Chinese become like the Indians; and chaos and mayhem happens in the rest of the world.
The West, with its medium sized population, is *just* fine provided we manage to get a handle on the current crisis of mass migration of people out of other areas.
Europe’s currently doing it, and i’m sure America will swing around to doing it as well.
But this type of scenario is at minimum 2 decades off, so nothing to worry about just yet.
basil_hayden on Tue, 23rd Feb 2016 8:46 pm
Sold the 08 Fit with 195k miles and scooped up a sweet 2016 F150 that will not see $3 gasoline in its lifetime. The 10k mile road trip last fall was incredible. Enjoy it while you can, like for a generation or three.
Truth Has A Liberal Bias on Tue, 23rd Feb 2016 11:47 pm
Short, so let me get this straight; you don’t understand why cheap oil prices don’t cause an increase in demand? Do you think people just leave their car running in the driveway 24 hrs a day cuz oil is cheap? Do you know what inelastic demand is? And what’s with this BS you keep spouting about $35 a barrel is so high a price it breaks the laws of thermodynamics? I don’t think you know what thermodynamics is if you think the price of a commodity is controlled by it.
Northwest Resident on Wed, 24th Feb 2016 1:24 am
“I don’t think you know what thermodynamics is if you think the price of a commodity is controlled by it.”
Perhaps shortonoil is making the point that $35 per barrel oil is insufficient to support the oil industry because their direct costs combined with additional costs they foist onto society (roads, education, infrastructure, pollution clean-up, etc…) are far greater than what $35 per barrel oil can pay for?
If so, then shortonoil would be correct, and Truth Has A Feeble Mind would be just an inferior intellect looking to pick a fight over absurd points conjured out of nothing but his own lame misinterpretations or purposeful distortions. Or he would be a troll attempting to discredit shortonoil’s basic message, which is, the oil industry is dying because their end product is providing insufficient energy compared to how much energy is required to produce it — energy in produces insufficient energy out, a thermodynamics problem. Any idiot can understand that basic concept, except perhaps “Truth”.
Northwest Resident on Wed, 24th Feb 2016 1:40 am
Anyway, shortonoil is just asking a question: why has price declined by 70% and demand has hardly budged? That is a question that Truth Has A Liberal Bias appears desperate to evade and divert attention away from. Probably because the answer points to a shocking TRUTH that “Truth” is commissioned to deny and suppress.
Just an observation: The handle “Truth Has A Liberal Bias” seems truly Orwellian to me, given the bullshit that “Truth” regularly posts on this site. Probably a more accurate handle would be “Lies Have A Conservative Spin”.
Ralph on Wed, 24th Feb 2016 3:58 am
Demand has hardly budged because the world is still in the economic imbalance triggered in 2008 by runaway debt that is unpayable. 8 years of QE and ZIRP sustained Chinese oil demand growth by ramping up debt to meaningless levels. As soon as QE ended so did economic growth. The global imbalance between rich and poor has now reached a level where neither the rich or poor can consume more, the poor cannot afford it and the rich have run out of new ideas for consumption.
Of course, if the economy was rebalanced, oil prices would shoot up and we would be back into Rockman’s POD.
Nony on Wed, 24th Feb 2016 6:15 am
1. Rock, first comment, is correct.
2. The lack of spare capacity concern is not so serious as it ignores the large storage overhang. This storage would be tapped in the event of a supply disruption.
marmico on Wed, 24th Feb 2016 7:10 am
The quart shy of oil is a fuctard.
Global petroleum consumption increased by 1.4 mb/d in 2015.
https://www.eia.gov/forecasts/steo/report/global_oil.cfm
If the asshole had a clue he would know that over the last 35 years petroleum consumption is tightly correlated with population growth.
http://tinyurl.com/gvcsed3
Nonetheless, the fucking retard will blabber that the wellhead to gasoline tank EROI is 2, effective 2012.
geopressure on Wed, 24th Feb 2016 7:20 am
You have no idea what is in storage… That’s the issue with believing that everything is balanced…
Why can’t refineries in Yemen & Nigeria, etc buy any crude to process?
Because there is not enough to go around…
Apneaman on Wed, 24th Feb 2016 8:02 am
marmi, what’s the difference between estimated inventory builds and actual consumption?
“Global Petroleum and Other Liquids”?
Other liquids=horse piss
marmi, for some reason, I’m just not all that impressed with EIA estimates like you are.
UPDATE 2-U.S. EIA cuts recoverable Monterey shale oil estimate by 96 pct
http://www.reuters.com/article/eia-monterey-shale-idUSL1N0O713N20140521