[GHung]

The price of oil is down. How should we expect the economy to perform in 2015 and 2016?

Newspapers in the United States seem to emphasize the positive aspects of the drop in prices. I have written Ten Reasons Why High Oil Prices are a Problem. If our only problem were high oil prices, then low oil prices would seem to be a solution. Unfortunately, the problem we are encountering now is extremely low prices. If prices continue at this low level, or go even lower, we are in deep trouble with respect to future oil extraction.

It seems to me that the situation is much more worrisome than most people would expect. Even if there are some temporary good effects, they will be more than offset by bad effects, some of which could be very bad indeed. We may be reaching limits of a finite world.

The Nature of Our Problem with Oil Prices

The low oil prices we are seeing are a symptom of serious problems within the economy–what I have called “increased inefficiency” (really diminishing returns) leading to low wages. See my post How increased inefficiency explains falling oil prices. While wages have been stagnating, the cost of oil extraction has been increasing by about ten percent a year, described in my post Beginning of the End? Oil Companies Cut Back on Spending.

Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:

The amount consumers can afford for oil
The cost of oil, if oil price matches the cost of production

The fact that oil prices were not rising enough to support the higher extraction costs was already a problem back in February 2014, at the time the article Beginning of the End? Oil Companies Cut Back on Spending was written. (The drop in oil prices did not start until June 2014.)

Two different debt-related initiatives have helped cover up the growing mismatch between the cost of extraction and the amount consumers could afford:

Quantitative Easing (QE) in a number of countries. This creates artificially low interest rates and thus encourages borrowing for speculative activities.
Growth in Chinese spending on infrastructure. This program was funded by debt.

Both of these programs have been scaled-back significantly since June 2014, with US QE ending its taper in October 2014, and Chinese debt programs undergoing greater controls since early 2014. Chinese new home prices have been dropping since May 2014....

more: http://ourfiniteworld.com/2015/01/06/oi ... n-2015-16/

Interesting comments at the end; Let go and Let God?

[Pops]

Gail likes to look at all the angles .

There seems to be a distinct possibility that we will be reaching the peak in world oil supply very soon–2014 or 2015, or even 2016. The way we reach this peak though, is different from what most people imagined: low oil prices, rather than high oil prices. L

I was actually thinking along similar lines this am as I lay abed. But my thought was that removing the high price constraint that has been capping consumption will accelerate depletion faster than the relative consumption plateau we've been on of late. But what makes matters worse is that high priced, short-development-cycle LTO will perhaps go offline first and what will continue to be used at the faster rate is the old conventional oil that is still the cheapest and easiest - which is exactly what KSA seems to be planning.

The upshot being that when the market returns there will be even less of the old cheap conventional oil available.

[Paulo1]

So far, it's like a slow moving train wreck, the details of which will only be clear in the rear view. I am sure there will be a few unusual details which were not anticipated, however, the trend is clear and the facts are obvious. Cheap energy fueled unimaginable development and improvements to living standards. Cheap energy, fertilizers, industrial food production including the well-meaning agri-scientists addressing Paul R. Ehrlich's Population Bomb book.....'the bomb', inconjunction with improved health outcomes etc has swelled our population to 7 bil plus. Obscene debt creation has defied common sense and has been used to offset declining energy sources. Inertia is being overwhelmed by reality and limits in our physical world. Growth is visibly slowing and changing that which we assume is our birthright and natural. All the denial and nobel prizes for economics cannot change the laws of thermodynamics and the logical outcomes of overreach.

I had hoped for a gradual decline with the western world becoming poorer and other areas of the world such as Asia improving somewhat, courtesy of globilization. This has been going on for awhile, imho. However, climate change and immoral leadership including growing wealth disparity is destabilizing this Pollyanna view. I think some areas will become very nasty, and I'm not just pointing at the usual suspects. The history of man has been strife and war. Prosperity has smoothed a little of this over, recently, with proxy wars letting off steam much like the petcock on my canner.

But we're at 15 lbs and climbing as far as I'm concerned. If the EU breaks up will centuries of war between conflicting cultures, tribes really, be forgotten? Asian animosities towards each other? Can you imagine the Chinese, Japanese, and Koreans pulling together? Indonesia? Indians and Pakistanis? Blacks and whites? Armed up folks getting poorer in a climate changing world does not make for stability.

2015 is the beginning of drastic change as far as Im concerned. Hold on and hunker down. Stay off lists, as Todd used to say.

regards

[GHung]

Paulo: "Prosperity has smoothed a little of this over, recently, with proxy wars letting off steam much like the petcock on my canner.

"But we're at 15 lbs and climbing as far as I'm concerned. "

Nice, if not alarming, analogy, Paulo. Have you ever seen a canner that got it's petcock blocked and the emergency plug blow out? First the steam, and then the jars inside explode, the contents spewing out of the vent like a highly gaseous volcano. It occurs to me that we, humans, have been blocking/bypassing the normal safety valves in our industrial/economic systems, allowing the pressure to build. We've subverted limits to growth for a long time. Question is, when will things begin to blow?

[Graeme]

Goldman's Oil Guru: The $50 Barrel Is Right on Time

Less than a week into 2015, and already oil is down 9 percent for the year. Oil prices fell below $50 a barrel on Monday for the first time since April 2009. By Tuesday, oil traded below $48. It wasn’t that long ago that analysts were gasping at the prospect of $70 oil, a threshold oil moguls and petrostates would be relieved to be anywhere near by the end of 2015. Breaking through $60 was seen by a lot of well-paid people as a likely floor. But that was three weeks and $12 ago.

I was in Houston the day oil first fell below $60, at a Chamber of Commerce lunch heralding the strength of the local economy—40 percent of which is based on oil. Despite the Texas-size grins, you could sense the panic starting to creep in.

Talk to a commodity analyst these days, and you’ll probably hear about the “commodity supercycle,” a wonky term to describe the way supply and demand for such things as oil and copper move in a slow, decadeslong dance that eventually repeats itself. As supply moves from periods of scarcity to surplus, prices rise, fall, and then rise again, killing demand before fueling more of it along the way.

Jeff Currie, head of commodity research at Goldman Sachs (GS), pays particular attention to this interplay. He says that over the past century, the average length of an oil supply cycle is about 25 to 30 years. That puts the current selloff right on time, considering it’s coming almost exactly 29 years after the oil bust of 1985-86. Both selloffs are the result of too much supply: In the 1980s, it was the Saudis who flooded the market, while this time around it’s frackers in the U.S. pouring millions of new barrels onto the market.


The market has reached what Currie calls the “exploitation phase” of the oil cycle, when years of investments fueled by high prices have unlocked a long-term supply. This is essentially the reward. After the crash in the mid-1980s, oil prices stayed low for more than a decade, helping fuel a sustained period of economic growth. With any luck, the same will happen this time around.


“High yields are the markets telling the world to quit using capital in this way,” says Currie. Now that capital will search for a new, safer home.

businessweek

[PeakOiler]

I think GS is full of it. I quoted Goldman Sachs in the 2015 PO.com Oil Price Challenge thread:

Goldman analysts said in a report released late on Sunday that it expects U.S. benchmark West Texas Intermediate crude to fall to $75 a barrel and Brent to $85 a barrel in the first quarter of 2015, both down $15 a barrel from its previous forecast.

WTI could fall as low as $70 in the second quarter and Brent as low as $80, when oversupply would be the most pronounced, before returning to first-quarter levels, Goldman said.

Yeah, right….

[Pops]

The difference between now and '80-something is newly minted north slope wells depleted at 2 or 3% percent per year while newly fracked Bakken wells deplete at 2 or 3% per week.

[rockdoc123]

The difference between now and '80-something is newly minted north slope wells depleted at 2 or 3% percent per year while newly fracked Bakken wells deplete at 2 or 3% per week.

There is a difference, but just as important is we might have seen tens of north slope wells compared to the thousands of shale wells we have seen. A couple hundred wells producing 50 bbls per day (once they have gone through the steep early phase decline) is not dissimilar to some of the best wells drilled in the north slope according to my memory. And someone will say yes but they are spending so much money on those shale wells but the facts are that an individual shale well has twice or three times the rate of return of a conventional well and pays out in months versus several years (I just recently saw an analysis to that effect, just can't find it at the moment).

You can't look at any one piece of the puzzle and guess at the whole picture without having a lot of luck.

[Plantagenet]

The biggest difference between the last oil bust in 85 and this one is that Ghawar in KSA in peaking soon

Once Ghawar peaks then KSA and world oil production peaks and it will be game over for BAU

[rockdoc123]

The biggest difference between the last oil bust in 85 and this one is that Ghawar in KSA in peaking soon

Actually if you use the term Peak to mean the maximum of production then Ghawar peaked a long time ago. It has been cruising along (according to Aramco) at a relatively flat rate with them having managed the water cut problems with MRC wells. It is past 50% recovery of ultimate in place according to Aramco, they think it will get to slightly greater than 70% based on their full field models.

If you suggest it will start to decline soon, that is , of course, likely but the rate has to be such that it isn't offset by production increases elsewhere.

[Plantagenet]

If you suggest it will start to decline soon, that is , of course, likely but the rate has to be such that it isn't offset by production increase elsewhere

Yes Ghawar production will very soon start to decline by ca 5-7% per year. The water cuts are already up to 70% in some wells

Watch for it.

[joyfulbozo]

Going into 2015, my economic outlook is not optimistic on stocks. I don’t expect to see key stock indices perform anywhere close to how they did in 2014 or recent previous years. In fact, it wouldn't be a surprise to me if we see them decline for the first time since 2009. I say this because there are many negative factors at play for stocks. The Federal Reserve has told us it will raise interest rates in 2015 and 2016. The Fed has stopped printing paper money.Stock Market Forecast

[Pops]

So doc, how much of that long tail do you expect to last as long as Alaska? It was what, a couple million per day at the peak and a million for 30 years?

LTO growth is slowing and we'll be seeing decline within a couple of years, or next week if the price stays low, LOL. 80-90% of drilling now is required to keep up with decline, take away the short term incentive to drill and poof. So if LTO is 5mbd at the peak and it drops off fairly fast the tail is 1mbd in 10 years?

Has anyone seen any new indications of the shape and duration of the tail?

[GoghGoner]

I haven't seen a Peak Oiler estimate of future energy production in awhile. Wow, she has us living like cavemen by 2035. I think the low oil price is an overall positive for the global economy so my estimate of future energy supplies would be much, much different (but since I don't own a crystal ball and nothing is really linear...). Gail's focus is more on the demand-side of the equation which I think is on the right track.

[ROCKMAN]

Pops - "Has anyone seen any new indications of the shape and duration of the tail?" . I pointed out the character of the Eagle Ford Shale in another post to you. I've lost track of it so I don't know if you responded. But your thought that an ultimate slow decline from a 25% level of the initial production rate seems overly optimistic based upon the numbers I pulled up...such as 20% of the EFS well completed in one year were producing ZERO BOPD in just 3 years They were plugged and abandoned. Kinda like a burned down bordello...not much tail there. LOL

[rockdoc123]

So doc, how much of that long tail do you expect to last as long as Alaska? It was what, a couple million per day at the peak and a million for 30 years?

The shape of the curve has been well documented in most of the shale wells with a history of 5 years or more. What isn’t known for absolute certainty is the length of time over which that flat production continues. What we do know is that shale production from the Antrim has been flat at low rates for decades. As well the theory based on knowledge of fracture and matrix permeability and fluid flow has been fairly well established by Terry Engelder and that theory replicates the observed rapid decreases and leveling off but also predicts a long flat production. When I was still working in the industry and we were getting heavily involved in the shales (this was at a point where it wasn’t fashionable yet) it was the flat tail of the production curve that drove our investment strategy. The flush high production was only interesting in that it sped up payout of the wells and drove the good economics if you could manage costs….it was the number of wells you drilled and what the stacked flatish production would look like that made the business interesting. It became much more predictable and scalable than conventional. There still is some debate as to what happens after a decade or so of the flat production tail, just not enough history in the new completion technology to make comment about it (remembering every reservoir will be slightly different).

It's not as if this is new information. From Stuart Staniford's oildrum piece back on 2007. SA has been skimming the top of their reservoir with horizontal production for more than a decade. Ghawar decline will make Bakken look like a snooze in the grass.

Calculations based on area and reservoir properties suggest that a conservative original oil in place number for Ghawar is 190 Gbbls. As of 2008 66 Gbbls had been produced according to the 2008 World Energy Outlook so if you say 5 MMbbl/d over 6 years that leaves us with about 76 Gbbl having been produced meaning it is past 50% ( a number that jives with a couple of published papers on Ain Dur and Shedgun from the northern part of Ghawar). The laboratory and full field modeling conducted by Aramco (published in SPE a number of years ago) suggested ultimate recovery from Ghawar of around 73%. If that is all true then that means there is still approximately 60 Gbbls of recoverable reserves left. One has to remember that you cannot willy nilly apply a typical decline curve to Ghawar for a couple of reasons…firstly it has a strong primary water drive and secondly it has been under water injection sweep for many years. The MRC (maximum reservoir contact wells) are effective at limiting water cut for a couple of reasons. The numerous long horizontal fishtail sections of the well bore mean that overall Kh (permeability times height) is very high which means the effective draw down pressure is low which in turn means water coning is managed (remember that Aramco has kept water cut at a fairly stable rate of 30% for that last decade). As well the use of 4D seismic has allowed them to avoid drilling laterals anywhere near natural fractures which provide direct high permeability conduits to the water leg (an issue they had in the eighties and nineties). Finally the use of SMART completions coupled with expandable liners allows them to monitor water production from each lateral in a given MRC well, if it increases rapidly they shut-in that lateral and drill a new one using the expandable liner (which means there is no case of tubing constrained flow rate).
What does all this mean? It means that saying Ghawar will suddenly collapse makes no sense given the way they are developing it. It also means that guessing at an oil production decline rate is very difficult. At some point as they move through the remaining recoverable reserves declining oil production will occur (they can only keep it at 5 MMB/d for so long. A 10% decline rate would equate to about 500 Kbpd output decrease. If there are no other places that can offset that rate through increased production then it is a significant impact remembering that currently the world has about 1.5 MMb/d surplus over demand. That being said Iraq, Kuwait, Libya and Iran are all wanting to increase production (at the right price of course). As a consequence I think too much is made of the singular importance of Ghawar in the short term, it is important but there are other moving parts to the equation.