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Page added on December 31, 2014

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Why Oil Will Probably Stay Cheap in 2015

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Making predictions about the price of oil is sort of foolish. Remember peak oil? Or all the people, myself included, who thought it was impossible for the U.S. to drill its way to lower prices? But since it’s the end of the year, which is nothing else if not a time to make assertions that will probably be proven wrong at a later date, I’m going to go ahead and say we can all look forward to a year of cheap gasoline in 2015 as the price of oil stays low.

Crude is inexpensive right now—the cost of a barrel is down about 46 percent this year—because the world has a glut of it, mostly thanks to the American fracking boom. That glut will only disappear if economic growth heats up enough to increase demand, or if drillers pull back on production enough to meaningfully decrease supply. As of now, it doesn’t look as if demand will do the trick. Much of the world is stuck in an economic muddle, and the U.S., while healthier than most countries, probably isn’t heading for some sort of breakout year. The International Energy Agency has been revising down its estimates of how much oil the globe will consume in 2015, and right now believes that, overall, its appetite will only increase by around 0.8 million barrels per day. That’s not much.

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What about supply? At the moment, there’s no clear sign it will be tightening. Oil really started crashing after Saudi Arabia—long the world’s swing producer, capable of lowering or raising its output to stabilize crude’s price—declined to cut production to put a floor under the market. Instead, the country wants to protect its market share while low prices wreak havoc on competitors, like those pesky American drillers fracking shale in Texas and North Dakota, who have higher production costs. The country’s oil minister has said he’s perfectly comfortable if prices fall down to $20 a barrel if it means curbing future drilling elsewhere. Per the Financial Times:

Although Saudi Arabia still desired higher oil prices, a period of lower prices was needed to induce demand and spur a pullback in spending and exploration from the world’s biggest oil companies, he said.

“Brazil’s sub-salt wells, west African wells and Arctic wells are high cost. So sooner or later, however much they hold out, in the end, their financial affairs will limit their production.” This would sow the seeds for a price recovery.

In other words, Saudi Arabia is going to sit tight. At the same time, it’s not clear how much, or how fast, global production will actually slow. Offshore wells in places like the Arctic and Africa are long-term investments that wouldn’t produce much crude for a while anyway. If the Saudis can put a quick dent in production anywhere, it would be in America’s shale regions, where wells deplete quickly, and companies might not choose to drill new ones if they suddenly seem unprofitable. But this month, the U.S. Energy Information Administration said it still expected U.S. output to increase next year, despite terrible prices. It might be right. It might be wrong. But the point is that all those frackers in North Dakota and Texas aren’t obviously shouting uncle yet. If Saudi Arabia is playing a waiting game, it could be a long one.

There are lots of unknowns here. For instance, there’s always a chance that instability in the Middle East will slow down the flow of oil (Libya’s production is especially vulnerable right now). Maybe the low price environment will turn so economically disastrous for Russia and Venezuela, which desperately need oil profits to stay economically afloat, that they’ll agree to cut their own production (if that happens, there’s even a chance Saudi Arabia might bend). But given what we know right now, it seems like there’s a good chance cheap oil will continue to be a happy story in the new year.

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8 Comments on "Why Oil Will Probably Stay Cheap in 2015"

  1. bobinget on Wed, 31st Dec 2014 7:08 am 

    I’ll pose a question;

    Is it ‘cheaper’ to extract oil in North America or
    spend another trillion dollars to maintain Mid-Estern imports?

    one more?

    Are North Americans are wiling to tax petroleum
    products at European rates?

    Gasoline and Diesel are ‘road taxed’ a few cents each gallon. How about a ‘oil-war’ tax of two bucks a gallon?

    Do you believe this current geopolitical state will remain static during 2015?

    US transportation gets ALL tax-payers to pay for
    oil’s ‘easy’ accessibility. IOW’s the US oil ‘defense’
    extravaganza.

  2. rockman on Wed, 31st Dec 2014 8:47 am 

    “Crude is inexpensive right now…”. Bullsh*t. It isn’t “inexpensive”…it’s less expensive than it was 6 months ago. When the price of oil doubled from 2002 to 2005 when it reached $60/bbl no one was claiming oil was “inexpensive” at the time. Just as when prices fell from $100/bbl in 2008 to $58/bbl in 2009 it wasn’t “inexpensive”…it was just less expensive at $58/bbl but still twice as high as it was selling for just 7 years earlier.

    “…because the world has a glut of it, mostly thanks to the American fracking boom. That glut will only disappear if economic growth heats up enough to increase demand.” Two problems with this bullsh*t. First, the world (and the US shale players) is essentially producing the same amount of oil as they were earlier this year when oil was bouncing around $100/bbl. According to the EIA global oil production increased by 0.93% from 2Q2014 to 3Q2014. So the world goes from having just enough oil to being “flooded” with a glut of oil by a 0.93% increase??? And the US shales? Again according to the EIA in July 2014 all US production, including the shales, accounted for 11.70% of world production. By Oct 2014 it accounted for 12.13% of world production. So the US, with the “great” shale plays and our huge Deep Water GOM fields, added about 1% to global production from the period when oil was selling for $95+/bbl to the current price around $60/bbl.

    Second: “..growth rate heats up enough to increase demand”. The current world demand is at an all-time high…as it has been all year. Every bbl of oil in the market place is being bought today.

  3. penury on Wed, 31st Dec 2014 9:46 am 

    It wold be nice if the author was right about low oil prices. However unless the FED steps in to backstop the loans I am afraid that the world is in for higher oil prices, higher food prices, less income and more war. The U.S. dollar strength is destroying the economies of the third world who are dependent upon dollar loans,So yes I hope the author is correct because I very badly want my survey of economic reality in the world to be wrong.

  4. Nony on Wed, 31st Dec 2014 9:58 am 

    US production was an important wedge in 1986 for the price drop. Similar now. I remember arguing the potential of this even back in 2005 (not even knowing about fracking).

    The issue is that much of the high price has to do with OPEC, not with depletion. There are huge amounts of cheap oil in the Middle East. If we had Texas oilmen drilling it and competing to sell it, price would crash to 20 (and would have been there last few years). Much of what we had in the last 10 years for high price was OPEC regaining control because of the China demand.

    It’s not just about the absolute barrels themselves but about the threat to the cartel. For this reason, the author is very wrong when he says offshore and ANWAR drilling would not help. The market would see the future production and the impact on OPEC.

  5. Kenz00 on Wed, 31st Dec 2014 12:45 pm 

    Bring on the competition to oil…….. any additional competition helps to diversify our choices……..

    Walking and bicycling need to become a more common option by having cities provide more safe, clean paths for children and adults to ride to school, work, homes and business.

    Mass transit needs to become a more common option…… before cars took over there once were trollies that ran thru the center of towns providing safe, easy and convenient transportation.

    Electric, flex-fuel, hybrid, CNG and LNG all need to become a more common option. Fueling stations need to provide a mix of transportation fuels.

    The fossil fuel industry hates competition……. and will do all they can to try stop the competition.

    Rise Of Bike Trains A Win For Children’s Health, Environment

    http://www.huffingtonpost.com/2014/12/22/bike-trains-children-health-environment_n_6368308.html?utm_hp_ref=green

  6. SugarSeam on Wed, 31st Dec 2014 2:20 pm 

    Slate stopped being a serious source of informed journalism 3-4 years ago when it became a mecca for click bait. The author is likely some sub-contracted hipster who scans teh Googlez for a few hours, and hammers out what he derives from it.

  7. Nony on Wed, 31st Dec 2014 2:37 pm 

    Can someone enter my 2015 price prediction on the forum?

    High: 73
    Low: 38
    Close: 53

    P.s. I really think only the close predictions are relevant. But that’s a story for another day.

  8. pat on Thu, 1st Jan 2015 5:21 am 

    really see a major event in 2015 and the oils collapse just looks tip of iceburg. It was the fed which held the world but soon it will be prepare from patience. God bless

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