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The high price of cheap oil

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The smartest insight and analysis, from all perspectives, rounded up from around the web:

“The oil industry, with its history of booms and busts, is in a new downturn,” said Clifford Krauss at The New York Times. The price of oil closed under $40 a barrel this week for the first time since 2009, a 60 percent plunge from its peak last year. The explanation “boils down to the simple economics of supply and demand.” The world is awash in crude, with U.S. oil production doubling over the past six years. Meanwhile, the economic slowdown in China, the world’s largest oil importer, and sluggish growth in other developing countries are crippling demand. There’s no end in sight for the global oil glut, said Russell Gold at The Wall Street Journal. Lower prices mean even more pressure on oil-producing countries to pump to make up for lost revenues. Saudi Arabia, Russia, and Iraq are pumping as many barrels as they can in order to defend their market share, in a battle that’s looking increasingly like “the energy-industry version of trench warfare.”

“At first blush, $40-a-barrel oil sounds like a beautiful thing,” said Andy Serwer at Yahoo. American consumers get cheaper gas, businesses benefit from lower energy bills, and automakers sell more vehicles, especially gas-guzzling trucks and SUVs. But there’s a price to pay for all this cheap oil. Employment in the 500,000-person U.S. oil and gas industry will take a hit as energy companies scale back operations. Cheap, plentiful gasoline could also derail work on alternative fuel sources like solar and wind. Jobs are already being lost in the energy industry around the world, said Debbie Carlson at The Guardian (U.K.). Last week, Royal Dutch Shell said it would eliminate 6,500 jobs worldwide in response to collapsing crude prices. Because such layoffs tend to lag market prices, “more job cuts could be on the way.”

Here in Texas, cash-strapped oil companies are already shifting into “survival mode,” said Rhiannon Meyers and Jordan Blum at the Houston Chronicle. Companies are slashing costs by putting hundreds of rigs into storage and canceling expensive projects, including deep-water drilling and oil sands extraction. “Gone are the days of frenetic growth, lavish spending, and frantic hiring sprees.” The one bright spot: Companies that survive will emerge leaner and more cost-conscious, focused on safer bets in areas with proven resources.

The most dramatic consequences of the oil bust will unfold beyond U.S. borders, said Fareed Zakaria at The Washington Post. “When a similar drop happened in the 1980s, the Soviet Union collapsed.” Countries that rely on oil revenues are “facing a fiscal reckoning” that could fuel unrest. Venezuela’s socialist government has long been propped up by oil, which makes up 96 percent of its exports. Vladimir Putin’s reign has coincided with a steep rise in oil prices, but Russia’s economy is expected to contract 3.4 percent this year. Saudi Arabia, where the royal family spends oil revenues lavishly to preserve its legitimacy, now faces massive budget deficits. Cheap oil may be a boon for consumers, but it will create more uncertainty in an already uncertain world.

the week

14 Comments on "The high price of cheap oil"

  1. Outcast_Searcher on Sun, 30th Aug 2015 11:08 am 

    Demand is NOT being “crippled”. Demand growth is slowing a bit. All one has to do is search on “global oil demand” on Google, and find lots of hits like this:

    Whether it’s gasoline, jet fuel, heating oil, etc., overall global demand is increasing.

  2. Outcast_Searcher on Sun, 30th Aug 2015 11:17 am 

    It’s not exactly economic rocket science that countries with economies highly dependent on revenue from oil production will be hurt, sometimes a lot. And that meanwhile countries that have significant oil imports will tend to be helped. Or that businesses which sell a lot of oil will be impacted.

    1). The businesses will either adapt or be sold into stronger hands. The oil may be capped until prices return to high level, but the oil isn’t going anywhere. Having it available if needed is a FAR better situation than facing supply shortfalls.

    2). For countries without big oil subsidies at the pump for consumers, clearly the longer low prices are the rule, the better for the economy in the long run. Intelligent policies to discourage the purchase of large vehicles by entities (like families that don’t need them) would be good for AGW mitigation, but intelligence and government policies aren’t generally a Venn diagram with a large intersection point. After all, self-interested politicians often run things.

    3). The worst thing about this is it makes AGW and pollution worse longer term by encouraging more FF burning in the short run since more economic growth is possible in the short run with cheaper oil (and of course, with BAU growth desirable to voters, short term economic growth is something politicians will encourage, regardless of the longer term consequences).

  3. observerbrb on Sun, 30th Aug 2015 11:30 am 


    You should rephrase your original sentence:

    “Demand growth is slowing a bit; The petroleum industry consumes more and more (extraction costs are rising and the worst oil fields that require massive water injections are being extracted), and the rest of the economy consumes less and less”

  4. Bob Owens on Sun, 30th Aug 2015 12:03 pm 

    The high price of cheap oil is a lot higher than just a few oil countries descending into chaos, of course. The FF we have already burned is destroying our planet at this very moment. Melting glaciers, California burning, Florida drowning, Methane bubbling, permafrost not so permanent. Civilization is doomed; Humans? Maybe not.

  5. jjhman on Sun, 30th Aug 2015 12:06 pm 

    @observ: I’ve seen the thesis before that most of the increased consumption is in the oil industry itself. I’m not sure where you could find data supporting that but I think that the theoretical work by The Hills Group has the same conclusion.

    However, I keep being suprised by the resourcefulness of the oil industry. I was running around shouting “Peak Oil” five years ago. I speak more softly about resource limits now. It still seems credible to me that sub-forty dollar oil is not economic to produce. It seems to have taken a while at over $100 to create the boom in fracking, which is the father of the current glut. It remains to be seen whether the financing is available to continue pumping at sub-sixty dollars. We should know some time next year where the geologic and financial aspects actually fit together. I think that Rockman has said that today’s production is supported by financing and hedging put together when prices were crazy high. That financial tom foolery is supposedly maturing in the last quarter of this year, which could crash much of the fracking industry, but as I said the industry resilience continues to be a suprise.

    Interesting times.

  6. shortonoil on Sun, 30th Aug 2015 12:12 pm 

    “The explanation “boils down to the simple economics of supply and demand.”

    Beleive that at your own peril:

  7. GregT on Sun, 30th Aug 2015 1:41 pm 

    Peak oil was never about running out of oil. When the oil age comes to an end there will be plenty of oil available, it just won’t be affordable to our economies. The demand will always be there, and while it might be possible to meet that demand on the supply side, if the price of that oil is too high, economies will slow down, contract, and then go into irreversible decline.

    It is not the volume of oil available that matters, it is the cost to produce that oil, and the price that the economy can afford to pay. Our economies have been built on, and need, oil in the 20 something per dollar price range. Anything higher than that has always caused economic downturns. Oil at current prices is still too high to allow the continuation of growth necessary to keep our ponzi schemed economic and financial systems alive.

    On the other side of the equation we have the irreversible damage that we are inflicted on the Earth by continuing to burn fossil fuels. So even at 20 dollars per barrel, oil is unaffordable to the well being of our species, and all life as we know it on this planet.

  8. BobInget on Sun, 30th Aug 2015 4:58 pm 

    Before The Saudis went on a multi year, one hundred billion dollar weapons buying spree, KSA had the lowest cost oil extraction bill.

    This cannot be the case today as Saudi Oil is government owned. Saudi Arabia is fighting wars on two fronts it has internal conflicts as well.

    KSA, IRAQ, IRAN, SYRIA, YEMEN, the Gulf states, Nigeria, Venezuela,
    totally oil dependent government owned.
    Except for Venezuela all of the above are involved in one or more wars.
    Every dollar pissed away killing folks, gets deducted from ‘productive activities’.

  9. rockman on Sun, 30th Aug 2015 5:50 pm 

    Everyone, in addition to the Rockman, here that signs invoices for fuel used to drill and produce fossil fuels raise your hands. Hmm…that’s what I thought. LOL. Everyone can beleive whatever cooked numbers they want. But the Rockman, as VP Operations actually signs the checks, And has signed checks for more than $400 million in drilling activity over the last 5 years. Bottokm line: compared to just about every economic aspect of this country the oil patch utilizes relatively little energy. That fact is difficult for those unable to accept the FACT that EROEI isn’t today (nor ever has been) a deciding factor in what gets drilled. Typically energy represents less than 10% of the total drilling costs.

  10. onlooker on Sun, 30th Aug 2015 6:17 pm 

    was not these wild swings in the oil price predicted by many including author Richard Heinberg in the book “The Party is Over”. It makes sense as the interactions in both supply and demand affect price which in turn affect production/output which then in turn affect prices and so forth.

  11. Makati1 on Sun, 30th Aug 2015 7:57 pm 

    observer, You are correct. Comparing today’s oil numbers is like comparing
    40% alcohol vodka with the local 8% beer.

    NET energy, at the user point, is the real stat that should be posted, not barrels of liquids that vary in ‘energy’ like the alcohols we consume.

    But, that would point out the drastic decline in the amount of energy the world has to do work with today. We are consuming more and enjoying it less.

  12. zoidberg on Mon, 31st Aug 2015 8:39 am 

    Everybody is being surprised. Almost everyone was betting on lower dollar and higher oil. We Cant all be on the same side of the trade and expect to win, but yet we always go with the latest trend as a herd. Here wall street China it’s all the same.

    The bubble in debt is crushing the economy. Jobs are being lost and wealth burned and people can’t bid for the oil they dearly want. That’s why prices are lower. Rock man I’d stop writing cheques your customers won’t bail you out they’re broke.

  13. Richard on Mon, 31st Aug 2015 10:23 am 

    GregT You are more or less correct on that fact about energy, it isn’t the running out of the black stuff. It is the economics of it and quality that makes our societies tick over like a V8 engine. vroom vroom!

  14. onlooker on Mon, 31st Aug 2015 10:28 am 

    Especially in the context of our economic system dependent upon continuous growth and lending.

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