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The global oil price drop may last for the next couple decades

The global oil price drop may last for the next couple decades thumbnail

Stanford economist Frank Wolak says the drop in oil prices and demand reflects heightened energy production in North America, better technologies and the declining market power of the OPEC countries.

Global oil prices may stay low for the next 10 or 20 years, according to Stanford economist Frank Wolak.

The most likely medium-term outcome is $50 to $70 per barrel, according to Wolak. He is the Holbrook Working Professor of Commodity Price Studies in the Department of Economics at Stanford University.

And while geopolitical and environmental issues may unexpectedly arise that turn oil prices upward, Wolak said many factors point to lower oil prices for the foreseeable future. Crude oil prices fell from a high of $115 a barrel in June 2014 to a low of $45 in January of this year. The lower prices have generated ripple effects throughout the global economy.

The primary reasons for continuing low prices include the slowing demand for oil in the industrialized world and ever-advancing technological change in the extraction and use of oil, wrote Wolak in a new policy brief for the Stanford Institute for Economic Policy Research.

In his analysis, Wolak cited seven factors driving a long-term oil price decline:

  • North American shale oil production: The shale oil and gas revolution in the United States has led to an increase of more than 4 million barrels per day in domestic oil production since 2008. Combined with an almost million-barrel-per-day increase from Canada’s Alberta tar sands, the surge has significantly reduced American demand for imported oil.
  • Declining role of OPEC: Most members of the Organization of the Petroleum Exporting Countries face massive fiscal shortfalls because of low oil prices. To avoid further domestic unrest, these 12 nations are unlikely to reduce oil output, which would lead to even larger fiscal shortfalls. This makes unlikely coordinating reductions in oil production among the OPEC countries aimed at raising the global price.
  • Standardization of oil well drilling: The share of global oil production from the OPEC countries should continue to fall as more countries make use of shale oil and gas production technology developed in the United States.
  • Cost difference between natural gas and oil: A key driver of a reduced global demand for oil is the development of technologies that are able to exploit the differential between the dollar per unit of energy price of oil versus natural gas. Even at $40 per barrel, the dollar per MMBTU (stands for one million British thermal units) price of oil is much higher than the dollar per MMBTU price of natural gas.
  • Technology innovations: A new innovation – CNG-in-a-Box technology – captures the natural gas that was formerly being flared off at the oil well and produces compressed natural gas (CNG) for use in vehicles and in drilling equipment, reducing the demand for diesel fuel. This technology makes productive use of natural gas in regions without natural gas pipeline infrastructure.
  • Shale oil and gas technology exports: Though the recent reductions in oil and natural gas prices have caused investments in oil and natural gas exploration and drilling in the United States to decline, exported natural gas prices in the remainder of the world, particularly Latin America and Asia, remain much higher. This fact and a robust global oil demand driven by China and the developing world will continue to support continued investments in oil and natural gas exploration outside the United States.
  • Oil supply curve flattening: The technology of shale oil and natural gas extraction involves much higher costs associated with the production of each barrel of oil because of the rapid rate of depletion of the resource for each shale oil or gas production rig. Conventional natural gas and oil wells have significantly slower rates of decline. This logic implies that in order to sustain production from a shale oil or gas resource, the continual drilling of new wells is necessary. As a result, it is possible to scale up and scale back shale oil and gas production more rapidly in response to demand surges, which should lessen oil and natural gas price volatility.

‘Fraught with uncertainty’

However, Wolak wrote, though all of the factors described above make the likelihood of $100 per barrel oil very unlikely, “predicting the future is always fraught with uncertainty.”

For example, an environmental disaster could arise involving shale oil and natural gas extraction that results in the banning of these activities in the affected areas. Yet Wolak noted that during each of the past five years more than 30,000 shale oil and gas wells have been drilled in the United States with only a small number of adverse environmental incidents.

Another factor that could lead to higher oil prices in the range of $100 per barrel could be the inability of the natural gas and oil sector to master the geology of economical production of shale oil and natural gas outside of the United States, according to Wolak.

Another uncertainty concerning global oil prices is whether the United Nations’ international climate policy process will put in place a credible and stable price of carbon, he said.

“As long as this price of carbon is not so high as to make all fossil fuels uneconomic, this action could further spur the demand for natural gas, as more countries attempt to switch from coal to less greenhouse-emissions-intensive energy sources, such as natural gas,” Wolak wrote.

Stanford Report    



35 Comments on "The global oil price drop may last for the next couple decades"

  1. Plantagenet on Mon, 30th Mar 2015 7:59 pm 

    Its hard to believe this oil glut is going to go on for decades into the future.

    I would normally expect a Stanford Ph.d. economist to have a firm grip on reality, but this projection of low oil prices for decades to come seems utterly unrealistic to me.

    Cheers!

  2. Newfie on Mon, 30th Mar 2015 8:12 pm 

    Um… T Boone Pickens predicts $100 in six months. Uh ?

  3. eugene on Mon, 30th Mar 2015 8:16 pm 

    One thing I’ve learned in life is education does not, necessary, indicate intelligence or ability to reason. In fact, I’ve found, far too often, the ability to reason/think is a definite threat in educational settings.

  4. Apneaman on Mon, 30th Mar 2015 8:17 pm 

    Lil Planter, you normally expect explanations of reality Ph.d. economist.
    There’s you trouble.

  5. penury on Mon, 30th Mar 2015 8:19 pm 

    As is too common with Econ writers is they only consider the supply side of the equation, demand seems only to exist as a mirror image of supply and not something to be considered along side. I think at the moment the demand side is actually driving the low price. Until industrial production increases the world will see a “glut” of oil, which will continue to depress prices.

  6. Makati1 on Mon, 30th Mar 2015 8:29 pm 

    Another guess about the future. Not any more likely because of the ‘college’ degrees of the writer and probably less so.

    As penury said, the cost of oil will be determined by the ability of the consumer to pay it. Not how much it costs to recover and refine. A loaf of bread may cost $1 but if you only have 50 cents…

  7. American Idiot on Mon, 30th Mar 2015 9:14 pm 

    But the Sixth Extinction continues…

    At this point, the real problem is water and overpopulation.

  8. Keith_McClary on Mon, 30th Mar 2015 11:45 pm 

    The vast Arctic and deepwater resources and Kashagan, formerly the Cornie poster children, are not even mentioned. I guess we don’t need these – they can be mothballed for 20 years.

  9. Hugh Culliton on Tue, 31st Mar 2015 5:27 am 

    Eugene: you make an excellent point. In addition, unless you buy into the dominant educational idea d’jour, you can expect to be shunned and marginalized. And, all of a sudden, all the wonderful words like “learning community” and character education” and individual learning environment”, disappear, your bosses become “concerned” and you find yourself being “supported” in a way that feels an awful lot like being shunned, disciplined and hounded.

  10. Davy on Tue, 31st Mar 2015 6:11 am 

    “Stanford economist Frank Wolak says the drop in oil prices and demand reflects heightened energy production in North America, better technologies and the declining market power of the OPEC countries.” Well this guy gets off to a poor start. How is heightened production, technology, and declining opec power of oil reflected in drop in demand? According to these econ-wonks low oil prices should be lifting demand considerably and it isn’t.

    No, what happened is real economic demand the kind that manufactures and builds things is stagnant. The faux demand econ-priestesses like to talk about includes the financial casino activity of global BAU. The central Bank injection of debt and repression of rates allowing a fiesta of arbitrage for the 1%ers to get rich at everyone else’s expense then call it growth. How is wealth transfer and cannibalization real growth? Lots of faux digital wealth moving around. Allot of 1%er doing wonderfully and allot of the rest languishing.

    Later in the article the priestess says “As a result, it is possible to scale up and scale back shale oil and gas production more rapidly in response to demand surges, which should lessen oil and natural gas price volatility.” What about the huge scale up and scale backs of the capex necessary to drive this shale production? He fails to connect the dots of POD, ETP, and goldilocks price range. Capex will not be there if the economy is not healthy and oil prices are not properly positioned in a healthy economy.

    The priestess mentions “Another uncertainty concerning global oil prices is whether the United Nations’ international climate policy process will put in place a credible and stable price of carbon, he said.” What a joke. Has anything at all of substance ever come out of this process except the huge burning of carbon by all the participants jetting all over the world to meet and have cocktails. Lies, jokes and fantasies of the BAUtopians complete with ample hopium and feel goodism. Typical econ-priestess talk from spoiled over paid under worked academia.

  11. rockman on Tue, 31st Mar 2015 6:45 am 

    “The global oil price drop may last for the next couple decades”. How about the same story with a different title: “The global oil price may continue at the current level which has held for decades.”

  12. shortonoil on Tue, 31st Mar 2015 8:09 am 

    “When your only tool is a hammer, every problem looks like a nail.” When you have never climbed out of an Econ 101 text book every problem looks like a supply/ demand curve. The author has obviously never studied engineering, or worked in the extractive resources industry. Chance are the only contact Wolak has had with the word “depletion” had to do with his check book.

    We have depleted out the high quality reserves of crude oil, and have tried to compensate with any old hydrocarbon that could be found laying around. Of course, that has not worked out very well, and it has merely resulted in $1 trillion in debt that can not be re-payed. Economists thought it was a great idea to have the FED print up a big batch of counterfeit money, and use it to produce a big batch of counterfeit crude. It shouldn’t be surprising that it turned out to be crude that no no could use. Now they want to blame the cost difference between natural gas, and oil as the culprit for lower prices. Cinderella had one of those moments when she confused a pumpkin for a carnage.

    Depletion is a very real natural event, and it occurs when all natural resources are extracted. The Romans knew about it, and the Greeks knew about it 2000 years ago. Wolak should study a little history to go along with his economic enlightenment! The price of oil is going down because the world’s crude oil reserves are depleting out; as they do they become less, and less valuable. As it becomes less valuable, its cost of production goes up. It is just the way nature does things.

    Mother Nature only made so much high quality crude, and that is the problem we are presently facing. If she had done that with all the things that She created we would have been a lot better off. Unfortunately, She seems to have made an unlimited supply of idiots!

    http://www.thehillsgroup.org

  13. Kenz300 on Tue, 31st Mar 2015 8:48 am 

    Buy a bicycle….. worry less about the price of oil.

  14. ghung on Tue, 31st Mar 2015 8:51 am 

    No real mention of the greater economy and credit markets which are driving production. All debt has eventual costs, and raising debt costs without raising demand and the ability to repay the debt will eventually slam demand to the floor; the death-spiral of feedbacks. Trying to predict the effects of central banks inflating markets (central banks’ balance sheets have grown at multiples of GDP, inflation and real production and it’s global this time) is just more insanity.

    What we’re seeing today is the effect of artificially stimulating production that has nowhere to go. For that reason, prices will be suppressed until production crashes. After that, all bets are off, and it won’t be just the oil markets.

  15. shallow sand on Tue, 31st Mar 2015 9:36 am 

    ROCKMAN. If the price holds for two decades, US oil production will really take it on the chin.

    Appears from EIA data, 1/15 dropped about 200,000 bopd in US, if you factor in 87K drop that TX reported after EIA data. EIA showed a small gain, but that was an estimate based on an older TX estimate. RRC now says there was a drop in both crude and natural gas.

    One month does not make a trend, but IMO US cannot maintain, let alone grow oil production with well head prices in 30s and 40s.

    As you know, there is lag time. January numbers probably reflect November, 2014 rigs and prior at best. Given the fact the rig count looks like the trajectory of a brick dropped from the fifth floor, I will be surprised if we see production in US go up more or even stabilize in 2015.

    Price may stay low 10+ years per 1986-1999, but US production will drop even harder than it did then, IMO, given shale high decline.

  16. tk on Tue, 31st Mar 2015 9:55 am 

    It is an eCONomy, made-believe BS on a global scale:

    ECONOMIC THEORY FOR SCIENTISTS AND ENGINEERS:

    http://www.jayhanson.org/oldindex.htm#economic_theory_for_scientists_and_engineers

    And from a scientific/technical point of view:

    http://www.technocracy.org/its-the-stupid-economy/

  17. Perk Earl on Tue, 31st Mar 2015 10:04 am 

    It really is amazing how difficult it is to get a person to look directly at a problem. People are very good at viewing things from advantageous, yet unrealistic perspectives. It’s like they’re trying to bend a problem through a personal interest prism to fit their needs.

  18. tk on Tue, 31st Mar 2015 10:14 am 

    Here’s your “economy”:

    citation:

    Even Nobel-prize winning economists believe that money creates resources:

    “…the world can, in effect, get along without natural resources… at some finite cost, production can be freed of dependence on exhaustible resources altogether.”
    —Nobel winner Robert Solow, 1974

    – any questions?

  19. tk on Tue, 31st Mar 2015 10:19 am 

    Another “great” citation:

    Here Nobel Prize-winning economist Milton Friedman demonstrates his duplicity in an interview:

    Ravaioli: But there are many other environmental problems…

    Nobel Laureate Friedman: Of course. Take oil, for example. Everyone says it’s a limited resource: physically it may be, but economically we don’t know. Economically there is more oil today than there was a hundred years ago. When it was still under the ground and no one knew it was there, it wasn’t economically available. When resources are really limited prices go up, but the price of oil has gone down and down. Suppose oil became scarce: the price would go up, and people would start using other energy sources. In a proper price system the market can take care of the problem.

    Ravaioli: But we know that it takes millions of years to create an oil well, and we can’t reproduce it. Relying on oil means living on our capital and not on the interest, which would be the sensible course. Don’t you agree?

    Nobel Laureate Friedman: If we were living on the capital, the market price would go up. The price of truly limited resources will rise over time. The price of oil has not been rising, so we’re not living on the capital. When that is no longer true, the price system will give a signal and the price of oil will go up. As always happens with a truly limited resource.

    Ravaioli: Of course the discovery of new oil wells has given the illusion of unlimited oil …

    Nobel Laureate Friedman: Why an illusion?

    Ravaioli: Because we know it’s a limited resource.

    Nobel Laureate Friedman: Excuse me, it’s not limited from an economic point of view. You have to separate the economic from the physical point of view. Many of the mistakes people make come from this. Like the stupid projections of the Club of Rome: they used a purely physical approach, without taking prices into account. There are many different sources of energy, some of which are too expensive to be exploited now. But if oil becomes scarce they will be exploited. But the market, which is fortunately capable of registering and using widely scattered knowledge and information from people all over the world, will take account of those changes. [ p. 33, ECONOMISTS AND THE ENVIRONMENT, Carla Ravaioli; Zed, 1995]

    (In fact, none of the Club of Rome’s predictions has failed. Economists like Friedman routinely lie to further their global political agenda.)

  20. tk on Tue, 31st Mar 2015 10:28 am 

    Economy is not science:

    https://www.youtube.com/watch?v=4NiauhOCfsk

    You can like him or not, WHAT he says is true!

  21. tk on Tue, 31st Mar 2015 10:40 am 

    And those are intelligent fools on the greatest scale possible:

    https://www.youtube.com/watch?v=kFQJNeQDDHA

  22. tk on Tue, 31st Mar 2015 10:55 am 

    https://www.youtube.com/watch?v=DvbhzMFWLk0

    “…it gotta be the most bizarre delusion in history of human thought.”

    – Prof John McMurtry
    Fellow of the Royal Society of Canada

    https://www.uoguelph.ca/philosophy/people/john_mcmurtry

  23. tk on Tue, 31st Mar 2015 11:17 am 

    Thought exercise, just for fun:

    Imagine an economy without money.

    (yeah, yeah I know)

    Just try it.

    And NOW you might BEGIN to see in what position the human species has outmaneuvered itself.

    A REAL economy CANNOT be based on a BELIEF (money!)

    A currency, if necessary, HAS TO be measured in energy units, and NOTHING else!
    Because energy can be used to do work, money(fiction) cannot do work.

    THIS point is really crucial to understand!
    When I got to this point of understanding, I got “cognitive dissonance” with a literally gut-wrenching state of several days.

  24. rockman on Tue, 31st Mar 2015 11:47 am 

    “ROCKMAN. If the price holds for two decades, US oil production will really take it on the chin.” Of course it will. Just as the $20/bbl to $40/bbl price levels caused US oil production to decline from around 9 million bopd to 5 million bopd by 2009 when oil. I see little reason to expect much of a change in those same dynamics. Thanks to global depletion and increased consumption the low price cycle probably won’t last 35 years or so as the las one. Global economic growth (or lack thereof) will play a factor in the timing. All you and I can is sit back and survive…again.

  25. tk on Tue, 31st Mar 2015 12:16 pm 

    What price?
    There is no market anymore!!

    Look at the comments of the traders on zerohedge, most of them probably in “financial jobs” for decades!

    Read on a regular basis…then you get “insights” to the “markets”.

    You will find “Sarcynirony” beyond Huxley-Orwell-Malthus-Darwinism!!

  26. Bob Owens on Tue, 31st Mar 2015 1:51 pm 

    No one, not even the Pope, foresaw the drop in oil prices. Now, here we are, projecting the low prices forward for the next 2 decades! God, I love it! Forecasting the future price of oil is a fool’s errand. Wait until a few rockets and truck bombs hit SA oil production. The West will will be in the stew then. The world is slowly turning to solar. Nothing better shows this than the quiet uptake of some solar by electric utility companies. Once they figure out it is cheaper than fossil fuels, the race will be on (I hope).

  27. Speculawyer on Tue, 31st Mar 2015 2:26 pm 

    LOL. Honestly, no one knows where oil prices will go. And he does seem to admit that.

    But I think he’s very wrong. I think T.Boone is right. We’ll be back up NEAR $100/barrel within a year or so. Perhaps in the $70 to $90 range.

    Between the shale rig count dropping like a rock and turmoil in the mid-east, I just don’t think it will stay low. The current low prices will also cause economic expansion which will increase demand.

  28. yoananda on Tue, 31st Mar 2015 2:36 pm 

    I think price will stay low for the next two centuries !!!

    lol

  29. ghung on Tue, 31st Mar 2015 2:52 pm 

    tk: “Imagine an economy without money.”

    Wampum was probably the closest thing that Native Americans had to money, though it was (is) much more than simple currency.

    http://en.wikipedia.org/wiki/Wampum

    Of course, European settlers screwed that up:

    “Wampum are traditional shell beads of the Eastern Woodlands tribes of the indigenous people of North America. Wampum include the white shell beads fashioned from the North Atlantic channeled whelk shell; and the white and purple beads made from the quahog, or Western North Atlantic hard-shelled clam.

    Wampum were used as money[1] by the Native Americans, and were kept on strings like Chinese cash. European colonists adopted wampum as their own currency; however, the Europeans’ more efficient production of wampum caused inflation and ultimately the obsolescence of wampum as currency. The slang phrases “clams” and “shelling out” come from wampum.”

    Interesting article, and interesting comparison to fiat currency; more like gold/silver due to scarcity and the labour involved (until the white folks f’ed it up).

  30. tk on Tue, 31st Mar 2015 4:25 pm 

    @ghung

    https://www.youtube.com/watch?v=BkO_EUhdJ6I

    I wouldn’t say the whites fucked it up, they perfected it.
    That is THE underlying mechanism of all:
    http://t.co/iDhiSZPrhh

    But what has evolved during that millennia stretching ponzi scheme is the scientific method not rooted in myths.(falsification!)

    That’s why this would have worked, if we had it applied BEFORE we wasted the ecosphere:
    https://www.youtube.com/watch?feature=player_detailpage&v=K9FDIne7M9o#t=254

    My guts and logic tell me that last backstop point of human survival was crossed with the establishment of nuclear power for energy creation!
    http://www.hubbertpeak.com/hubbert/1956/1956.pdf

    Here another nice vid to get the “train of thought”, pure applied logic:

    https://www.youtube.com/watch?v=KEC0GT_8l_I

  31. Nony on Tue, 31st Mar 2015 4:49 pm 

    Then there’s James Hamilton (econopeaker professor, macro-weenie who doesn’t use econ 101 insights) who predicted 100 dollars to stay in a paper last summer.

    Got his ASS KICKED by the price drop. and has NOT manned up and done an I was wrong column.

    What a macro weasel.

  32. tk on Tue, 31st Mar 2015 5:19 pm 

    Go short oil and go long nuclear apocalypse, bitchez!
    (I hope that was the right “trader phrase”?)

  33. Makati1 on Wed, 1st Apr 2015 3:35 am 

    Perk, I found this quote and feel it is appropriate.

    “You can’t convince a believer of anything; for their belief is not based on evidence. it’s based on a deep seated need to believe.” Carl Sagan

    It seems that some here have so much invested in BAU or a very slowly declining life style to a still decent life for themselves and their progeny, that they cannot entertain anything else or they might have a nervous breakdown or go ‘postal’. Too bad.

  34. rockman on Wed, 1st Apr 2015 7:55 am 

    As far as no one predicting the oil price drop that’s true…and it isn’t. Every oil patch hand the Rockman knows expected the drop. But that was a butt simple call for us to make. The tough call was the timing of the drop. Let’s focus on the big shale players…the pubcos. Those folks certainly knew it was coming as shown by how hard they pushed their drilling programs. Why do you think they borrowed hundreds of $billions to accelerate those drilling programs? Because they thought the shale plays would last for decades just as some of the inexperienced cornies did? You have to remember the ages of the managers who were pushing the shale plays so hard. They weren’t 20 and 30 somethings…they were 50 somethings like the Rockman.

    Again, let me be very blunt: those managers for the most part didn’t give a sh*t about their companies’ futures much more than a few years out. I eat lunch with those folks on occasion. None are shy about expressing such opinions…as long as no outsiders are listening. Their goal was maximizing their stock positions as fast as possible. You need to remember that virtually all the pubco managers, just like the Rockman, went thru the 80’s bust. Do you think those horrible days were ever far from their thoughts? I can’t name one oil patch manager that thought the shale boom was going to last more then a few years. Some weren’t even that optimistic: Petrohawk sold out their Eagle Ford Shale position years ago for $15 billion. Had they waited about 2 years they could have gotten closer to $25 billion based upon sale prices at that time.

    It’s no different than the stock market today IMHO. I doubt there are any experienced traders that aren’t expecting a major correction/crash in the market. But just like expecting a crash in oil prices, that’s the easy part. Getting the timing right is another matter. BTW: if you’re interested go find the sites that record the history of the inside trades by managers of oil patch pubcos and check out when many started selling their stock or exercising their stock option. IOW check out the difference between what they were telling their shareholders compared to what they were doing with their stock positions. Last time I checked was last spring. And guess what? There was a noticeable trend of insiders monetizing their gains from the shale boom almost a year ago…about the time the oil price slide began. Probably just a coincidence.

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