[AdamB]

This entire thread is off-topic. This is just another lightly disguised ETP shilling thread...

No, it is not. This thread is about how oil prices will never recover. The Etp model should obviously be on topic, since it has been forecasting the oil price decline for more than 2 years with amazing accuracy.

If that were true, that what's his name wouldn't have tucked tail and run like a coward when it was revealed to be the same sort of spurious relationship as margarine sales and teen drownings.

[SumYunGai]

by the way, oil is falling very hard today. More than a 3.67% decline. 
After topping out at $47.71, it suddenly falls back to a $45 handle again. WTIC $45.81.
And the DOW is tanking as well. It is down to 18,160.91. -319.00 (-1.73%)

Dollar stronger today, profit taking after a big run-up yesterday equals rationale for a price drop in oil today.

I do not agree with your rational on this. And your explanation explains nothing. What caused the dollar to rise? I think today's oil price drop caused the dollar to rise, not the other way around. As far as the cause of the oil price drop, I think that is related to the fact that the oil price has been in a very consistent declining channel for the last 21 months or so. The oil price reached the top of that channel and then naturally fell back against strong resistance.

Two days, and one thread page ago, I used my observation of this declining pattern to make a precise prediction:

If this same pattern holds up in the coming months, OIl prices will surely recover (though I wouldn't hold my breath for it ).

The oil price has been unable to rise above $15 below the Etp Maximum Oil Price Curve for more than 21 months. If this pattern holds, the current small price rise will not exceed about $48-$49. Then, the oil price will fall again.



Any bets? This should be exciting.

No one took the bet. Good thing for them. It turns out I was exactly right!

Here is a close up view of what happened:



I made my prediction when oil was strongly on the way up at $46.12. I said the price was about to top out and would not exceed about $48-$49. Two days later, the oil price topped out short of $48, at $47.71, and then fell sharply to close at to $45.73 for a loss of nearly 4% (3.97%)!

I think we are reaching a critical phase. The oil price has been averaging in the mid 40s for quite a while without being able to sustain a push past $50. The oil price cannot drop too much from here or it will be a giant disaster for the oil companies and the general economy as well. The problem is that the inexorable oil price decline rate is averaging almost $1 per month and now the current effective price limit (the Etp max price curve -$15) is dropping below $48 per barrel, crowding the oil price downward. Once the oil price is forced back into the 30's, I think the banks will begin to capitulate en mass.

[Plantagenet]

What caused the dollar to rise?

Didn't you notice that the stock market fell almost 400 points? Heres what happened: One of the dovish people on the Fed board changed his views and came out in favor of a fed rate increase. An increase in the Fed rate makes stocks less attractive and the dollar more attractive to investors.

I think we are reaching a critical phase. The oil price has been averaging in the mid 40s for quite a while without being able to sustain a push past $50. The oil price cannot drop too much from here or it will be a giant disaster for the oil companies and the general economy as well. The problem is that the inexorable average decline rate is almost $1 per month and now the current effective price limit (the Etp max price curve -$15) is dropping below $48 per barrel, crowding the oil price downward. Once the oil price is forced back into the 30's, I think the banks will begin to capitulate en mass.

Two questions, if you please:

1. How does the ETP curve force the oil price downward?

2. If a shooting war between Saudi and Iran broke out and oil shipments from KSA and Iran were curtailed would oil prices rise dramatically, or do the you think the ETP curve would still somehow put an upper limit on the price of oil?

Cheers!

[SumYunGai]

An increase in the Fed rate makes stocks less attractive and the dollar more attractive to investors.

An increase in interest rates also makes oil less attractive to investors. And it makes credit less available to oil producers. Low interest rates are what gave us the fracking boom. But with the price of oil refusing to rise sufficiently, the FED and the banks cannot keep the easy money flowing much longer. The financial tide is starting to turn. That is what I mean when I say we are at a critical phase right now when it comes to financing oil production. We are on the verge of a catastrophe.

Two questions, if you please:

1. How does the ETP curve force the oil price downward?

The Etp maximum oil price curve represents the thermodynamic price limit. The end consumers of oil cannot pay more than is what is affordable. Consumer oil affordability is determined by how much economic activity oil use can generate. In 2012, we reached the energy halfway point of the entire oil production system (including production, refining, and transportation), when it took more than the energy contained in one barrel to produce two. Because the cost of oil production keeps rising, the general economy keeps getting less and less energy, and, thus, consumer oil affordability is falling rapidly. Whenever the price of oil gets anywhere near the Etp maximum oil price curve, it naturally meets very strong resistance and the price falls. This has been going on for the past 21 straight months.

2. If a shooting war between Saudi and Iran broke out and oil shipments from KSA and Iran were curtailed would oil prices rise dramatically, or do the you think the ETP curve would still somehow put an upper limit on the price of oil?

Good question. I think it would be possible for some sort of supply emergency to cause a temporary price spike. But that price increase could only be very temporary. It would cause grave economic damage, and the inevitable reversion to the mean would be hell. We are essentially locked into our current trajectory by the laws of physics. There is simply no way to avoid the Etp forecast.

[ROCKMAN]

"...when it took more than the energy contained in one barrel to produce two." A rather remarkable claim. I'm sure we would all love to see the actual data supporting that calculation. Along with the links, of course.

Let's look at a modest well that made only 50,000 bbls. So it took 25,000 bbls of oil. Actually we don't use oil...we use diesel but we'll stick with that number. So 25,000 bbls = 1,050,000 gallons. In my 41 years I've not seen one well burn 1 million gallons and I've drilled many expensive deep wells. Recently I drilled and completed three 17,000' wells in Mississippi and none took more then 300,000 gallons. And all three will EACH produce a hell of a lot more Btu's then one would get from 25,000 bbls. And while decent wells they really aren't much to brag about.

It will be very interesting to find out the total amount of diesel burned by the oil patch in 2012. And what was the total amount of oil discovered by all the wells drilled in 2012. Especially since many are still producing and would thus requiring calculation of their future URR. Personally I have no idea where I could find any of that information.

[kublikhan]

It will be very interesting to find out the total amount of diesel burned by the oil patch in 2012. And what was the total amount of oil discovered by all the wells drilled in 2012. Especially since many are still producing and would thus requiring calculation of their future URR. Personally I have no idea where I could find any of that information.

Here's some data for you:

US Oil Industry diesel consumption
2009 760,877,000 gallons per year or 49,633 bpd
2010 951,322,000 gallons per year or 62,056 bpd
2011 1,381,127,000 gallons per year or 90,093 bpd
2012 1,710,513,000 gallons per year or 111,579 bpd
2013 1,751,162,000 gallons per year or 114,231 bpd
2014 2,105,058,000 gallons per year or 137,316 bpd

Sales of Distillate Fuel Oil by End Use

US oil production:
2009 5,350,000 bpd
2010 5,482,000 bpd
2011 5,645,000 bpd
2012 6,497,000 bpd
2013 7,441,000 bpd
2014 8,653,000 bpd

International Energy Statistics

US total completed wells
2011 46,177
2012 43,669

Oil & Gas Journal Well Forcast For 2012
Oil & Gas Journal Well Forcast For 2013

The average estimated ultimate recovery (EUR) of wells drilled during 2008-13 in the Eagle Ford shale in South Texas was 168,000 bbl/well.

EIA estimates average Eagle Ford EUR at 168,000 bbl/well

A REALITY CHECK ON U.S. GOVERNMENT FORECASTS FOR A LASTING TIGHT OIL & SHALE GAS BOOM

US Wells drilled
year total oil gas dry footage
2010 36,611 15,753 16,696 4,162 239,247,000 feet

Crude Oil and Natural Gas Exploratory and Development Wells

In 2011 and 2012, more than 50% of new wells produced both oil and natural gas. Despite this phenomenon, many traditional methods for estimating oil and natural gas production attempt to track the development of oil and natural gas as separate rather than joint activities. The analytical framework of EIA's new Drilling Productivity Report (DPR) accounts for integrated production of natural gas and liquid hydrocarbons.

Drilling often results in both oil and natural gas production

I'll let you digest the full data. But I made a few quick calculations below if it's helpful. I'm not sure what value to use for EUR. The values seem to range from a low of 50,000 barrels in Niobrara to 500,000 for Eagle Ford. Although the EIA gives a much lower value of 168,000 barrels for Eagle Ford. I'll just use the EIA figure for Eagle Ford.

2012
US oil industry diesel consumed: 40,726,500 barrels
US total O&G wells drilled: 43,669
EUR per well = 168,000 barrels
EUR of 2012 wells drilled = 43,669 * 168,000 = 7,336,392,000 barrels
40,726,500 / 7,336,392,000 = 0.6% of the ultimately produced oil was consumed by the oil industry to produce that oil
40,726,500 barrels / 43,669 = 933 barrels of oil consumed per well(or 39,170 gallons of diesel)

[ennui2]

We are essentially locked into our current trajectory by the laws of physics. There is simply no way to avoid the Etp forecast.

Famous last words.

[SumYunGai]

2012
US oil industry diesel consumed: 40,726,500 barrels
US total O&G wells drilled: 43,669
EUR per well = 168,000 barrels
EUR of 2012 wells drilled = 43,669 * 168,000 = 7,336,392,000 barrels
40,726,500 / 7,336,392,000 = 0.6% of the ultimately produced oil was consumed by the oil industry to produce that oil
40,726,500 barrels / 43,669 = 933 barrels of oil consumed per well(or 39,170 gallons of diesel)

Long posts with lots of data don't prove anything if it is all the wrong data. Why are you talking about the amount of diesel fuel used just to drill oil wells in the US? It is not relevant at all. The Etp model is concerned with the total amount of energy used to produce, refine, and distribute the WORLD'S oil.

I get that people don't want to believe that the energetic cost of the world's oil production could be so high that it now takes more than the energy in one barrel of oil to produce two barrels of oil. But your argument over diesel fuel use in the US really has nothing to do with anything.

We are essentially locked into our current trajectory by the laws of physics. There is simply no way to avoid the Etp forecast.

Famous last words.

You wish. Here are some more words:

"...when it took more than the energy contained in one barrel to produce two." A rather remarkable claim. I'm sure we would all love to see the actual data supporting that calculation. Along with the links, of course.

Let's look at a modest well that made only 50,000 bbls. So it took 25,000 bbls of oil. Actually we don't use oil...we use diesel but we'll stick with that number. So 25,000 bbls = 1,050,000 gallons. In my 41 years I've not seen one well burn 1 million gallons and I've drilled many expensive deep wells. Recently I drilled and completed three 17,000' wells in Mississippi and none took more then 300,000 gallons. And all three will EACH produce a hell of a lot more Btu's then one would get from 25,000 bbls. And while decent wells they really aren't much to brag about.

It will be very interesting to find out the total amount of diesel burned by the oil patch in 2012. And what was the total amount of oil discovered by all the wells drilled in 2012. Especially since many are still producing and would thus requiring calculation of their future URR. Personally I have no idea where I could find any of that information.

The Etp model is based on readily available yearly oil production data that is input through the Entropy Rate Balance Equation for Control Volumes. The Etp model outputs the total energy used to produce, refine, and distribute all the oil produced in the world in a given year. You are just adding up the amount of diesel fuel needed to drill a single conventional oil well. Apples and oranges.

Your incomplete anecdotal observations are the basis for your argument from astonishment at the high energetic costs of oil production. This is not surprising considering that the oil industry is concerned only with the amount of money to be made, not the energetic costs. Have you ever attempted to calculate the actual EROEI of a even single oil well?

[BahamasEd]

Well, I hate to talk about the ETP model in the "Oil Prices will never Recover Pt.3" thread so I will keep it short.

Rockman and Kublikhan, nice points but if you had read and understood anything of the ETT model you would know that it has nothing to do with any of your points.

Drilling a well and pumping out the oil is only a very small part of the process of getting oil from where it is, to where it's burned.

I could understand your arguments if you where attacking the math of the ETP model but to attack it just because you don't understand it is something else.

I'll leave the rest for the ETP model thread.

[kublikhan]

BahamasEd, It was not the point of my post to provide an entire energy analysis of the petroleum industry. I was responding to a query by Rockman and earlier correcting an erroneous post by whatever. However I have in the past posted such energy analysis of the petroleum industry. Pstarr and whatever should know this already as they both commented on them. I will repost it here since everyone apparently forgot about it:

We're not as close to using all the oil in the world to make all the oil in the world as ETP's bogus statistics says we are, period.

How the hell do you know that?

Energy consumed by the oil & gas industry is reported to the International Association of Oil & Gas Producers (OGP). You can then use their total energy produced to calculate how much of energy they consume per unit of output. Turns out, the oil & gas industry only uses about 8%-18% of the energy it produces. The remaining 82% of the energy is used by consumers:

Oil and gas companies have a strong financial incentive to save energy, because of the large share of energy in the overall cost of operating their facilities. Efficient energy use reduces costs along the whole supply chain and makes energy more affordable to consumers. In fact, the industry manages to keep energy consumption from production and supply of a standard gasoline or diesel product to less than 18%* of that consumed throughout their life (N.B. efficiency per unit of output, a broader term for all petrochemicals produced, is greater still). the remaining 82% is consumed by end use. For example, a 10% improvement in the efficiency of oil use in transport and other end uses would save the equivalent of one-half of all the energy used by the oil and gas industry worldwide.

IMPROVING ENERGY USE FROM PRODUCTION TO CONSUMER

We focus on total energy expended, i.e. all the energy, regardless of its origin. The unit used is MJ expended total energy per MJ finished fuel (LHV basis). For example a figure of 0.5 means that making the fuel requires 50% of the energy that it can produce when burned. This total energy figure gives a truly comparable picture of the various pathways in terms of their ability to use energy efficiently.

WELL-TO-WHEELS ANALYSIS

[BahamasEd]

Yes Kublikhan, but you can't do it that way.

How much energy does it take to build a Very Large Crude Carrier? Or the other millions of items that the oil systems buy every year?

How much energy does it take to keep Saudi Arabia at peace so they can keep pumping oil?

How much energy does Rockman use in a year? Every other worker who has anything to do with finding/producing/refining and getting the end product to someone that's not involved in oil?

The numbers can't be added up so you have to use MATH and a MODEL to try and get a fair understanding of it.

Your trying to tell me I'm not looking at an Elephant because all you can describe is a small part of him.

[SumYunGai]

Well, I hate to talk about the ETP model in the "Oil Prices will never Recover Pt.3" thread so I will keep it short.

It is sad that you feel inhibited in this discussion. The Etp model is the best argument for why oil prices will never recover. I believe oil prices will never recover. It seems like you do, too. Why shouldn't we be able to offer the best argument in this debate? Do we have to pretend that that such an argument doesn't even exist?

Perhaps Tanada could clear up some of this confusion. Tanada, is it okay to to offer arguments based on the Etp model in this thread?

I'll leave the rest for the ETP model thread.

The Etp model has a great many far reaching implications that naturally tend to come up in many discussions here. The Etp model thread was set up for BWHill to answer questions about the Etp model. If all discussion of Etp must take place only there, the thread would basically explode.

[rockdoc123]

The Etp model is based on readily available yearly oil production data that is input through the Entropy Rate Balance Equation for Control Volumes. The Etp model outputs the total energy used to produce, refine, and distribute all the oil produced in the world in a given year. You are just adding up the amount of diesel fuel needed to drill a single conventional oil well. Apples and oranges. 

How does it account for the fact that much of the energy used on production platforms is supplied by wind or that much of the energy consumed in the oil industry in places like Texas is delivered by wind or the fact that coal supplies the energy to create much of the steel used in tubulars (casing, drill pipe) and oil field equipment (drill bits, rig steel, holding tanks etc etc) or that natural gas supplies a lot of the energy needed to power facilities, rigs, some field vehicles. How does it account for the fact that much of these materials are recycled or reused (i.e. one rig might drill hundreds of wells before it is decommissioned)?

Your incomplete anecdotal observations are the basis for your argument from astonishment at the high energetic costs of oil production. This is not surprising considering that the oil industry is concerned only with the amount of money to be made, not the energetic costs. Have you ever attempted to calculate the actual EROEI of a even single oil well?

The reason the industry looks at economics rather than EROEI is that expected monetary value is the only reason oil is extracted in the first place. From the very first player in the chain, the companies who extract minerals that are used to make steel they would not be doing so if it were not profitable. Whatever they expend to get it out of the ground they are making more selling the minerals. And on it goes up the chain, the companies who build drill pipe, casing etc only do so if the money they paid for the minerals and the energy required to create the steel is offset by a profit made in selling the end product to the oil industry and the oil industry only drills so long as what they pay to suppliers is much less than what they make by selling crude to refineries and refineries only keep producing product as long as they are making profit. Money is what drives the industry, it always has and it always will.

So if everyone is making money all along the chain the only way for your suggestion of energy costing more to produce than it is worth is if somewhere along the chain some of the energy used for oil extraction is free. And if it is free why should we care?

[BahamasEd]

RockDoc123, that's almost a winner, you where doing great until you came to the end

So if everyone is making money all along the chain

But for the last 21 months they haven't been making money, and I would guess, looking at the debt they have piled up, for a lot longer then that.

Everyone is still in business I'm just not sure their making money.

So yes, the price of oil has to recover if we want to keep getting it. BUT WHAT IF IT DOESN'T? That's the question the ETP model is putting forward to me.

The producers can ask for $100 for a barrel of oil and the refiners can ask for $5 a gallon of gasoline because that may be what it takes to cover their cost and make a profit. But it looks like the world can not afford to pay that price so we have a glut. When the glut is gone I'm sure the price will spike for a while and then we'll be back to a glut and below the ETP price point again.

[SumYunGai]

The Etp model is based on readily available yearly oil production data that is input through the Entropy Rate Balance Equation for Control Volumes. The Etp model outputs the total energy used to produce, refine, and distribute all the oil produced in the world in a given year. You are just adding up the amount of diesel fuel needed to drill a single conventional oil well. Apples and oranges.

How does it account for the fact that much of the energy used on production platforms is supplied by wind or that much of the energy consumed in the oil industry in places like Texas is delivered by wind or the fact that coal supplies the energy to create much of the steel used in tubulars (casing, drill pipe) and oil field equipment (drill bits, rig steel, holding tanks etc etc) or that natural gas supplies a lot of the energy needed to power facilities, rigs, some field vehicles. How does it account for the fact that much of these materials are recycled or reused (i.e. one rig might drill hundreds of wells before it is decommissioned)?

What difference does it make if some of the energy is supplied by wind, coal, or whatever? That energy is not free. The total energetic costs still have to be paid by the end consumers of oil. It still takes some total amount of energy to run the worlds oil production system. The Etp model accounts for the total amount of energy from all sources used to produce, refine, and distribute the worlds oil. That total energy is derived from the yearly oil production data using the Entropy Rate Balance Equation for Control Volumes. The total energy needed to produce oil is what matters.

Your incomplete anecdotal observations are the basis for your argument from astonishment at the high energetic costs of oil production. This is not surprising considering that the oil industry is concerned only with the amount of money to be made, not the energetic costs. Have you ever attempted to calculate the actual EROEI of a even single oil well?

The reason the industry looks at economics rather than EROEI is that expected monetary value is the only reason oil is extracted in the first place.

I did not ask you for the reason that the oil industry looks at economics and not EROEI. The reason makes no difference to this discussion. We both agree that the oil industry only cares about money, not EROEI.

So if everyone is making money all along the chain the only way for your suggestion of energy costing more to produce than it is worth is if somewhere along the chain some of the energy used for oil extraction is free. And if it is free why should we care?

Energy is not free. Everyone along the chain is not really making money. Massive debt is what is keeping the game going at the moment. And if you have no experience in energy analysis and you don't really care what the EROEI is as long as you can make money, why should we listen to your opinion of what you guess the total EROEI might be?

[rockdoc123]

But for the last 21 months they haven't been making money, and I would guess, looking at the debt they have piled up, for a lot longer then that.

Everyone is still in business I'm just not sure their making money.

Well first off public growth companies in this industry are expected to take on debt by the investment community, having debt doesn't speak to their profitability. If they don’t take on debt their growth trajectory is too slow and hence less attractive to investors who are looking for a quick turn around. But even if you look at the largest debt holder CHK (who was in debt to the tune of ~$20 billion at one point) their EBITDA after debt financing and continual retirement schedule was still in the billions of dollars. There are still companies making money at these prices, especially since the price recovered to the mid-forties range. Costs were cut, G&A trimmed, loans renegotiated. As I posted elsewhere the all-in breakeven cost in much of the shales is now below $40, which means just to produce what they have already drilled and completed is indeed profitable. It certainly isn’t as profitable as it was but prices will rise. And for those who think “this time is different”, it certainly isn’t so far. In fact the pace and amount of recovery is almost exactly the same as we saw in 2009. In 2009 price recovered from its low to 50% of its high in 6 months time, had a 15% correction and then moved back to the 50% level and then higher. This time around it took 6 months time for price to recover to 50% of its high before the crash and was followed by a short term 20% correction and then rose back to that 50% level as of late. The similarity is actually striking especially considering the driving mechanisms behind the price fall were completely different.

The producers can ask for $100 for a barrel of oil and the refiners can ask for $5 a gallon of gasoline because that may be what it takes to cover their cost and make a profit. But it looks like the world can not afford to pay that price so we have a glut

As I’ve shown a number of times for 3.5 years Brent hovered around $100/bbl and demand was continuing to rise (and still is). If no one could afford to pay that price demand would have dropped significantly and it did not. What happened was that although demand continued to climb it was outpaced by the amount of supply coming from North American unconventional, Russia and Saudi Arabia once it abandoned a price protection policy in favor of a market share protection policy. Too much supply caused the glut not a lack of demand. If supply had been curtailed (less drilling in the US or Saudi Arabia controlling production and sales) we would be still be in the $80 to $100 price band.

[kublikhan]

The producers can ask for $100 for a barrel of oil and the refiners can ask for $5 a gallon of gasoline because that may be what it takes to cover their cost and make a profit. But it looks like the world can not afford to pay that price so we have a glut

As I’ve shown a number of times for 3.5 years Brent hovered around $100/bbl and demand was continuing to rise (and still is). If no one could afford to pay that price demand would have dropped significantly and it did not. What happened was that although demand continued to climb it was outpaced by the amount of supply coming from North American unconventional, Russia and Saudi Arabia once it abandoned a price protection policy in favor of a market share protection policy. Too much supply caused the glut not a lack of demand. If supply had been curtailed (less drilling in the US or Saudi Arabia controlling production and sales) we would be still be in the $80 to $100 price band.

+1
BahamasEd, I think you are forgetting that we had oil at $100 for years and yet demand not only did not fall, it rose. Sure it may have fallen a bit in developed countries. But this was overwhelmed by the rising demand from developing countries. Developing countries have much lower per capita oil consumption and their oil consumption levels are less sensitive to oil price swings. They just kept right on buying more oil despite the high price level:

Over just the past decade global oil consumption increased by an average of 900,000 bpd each year, and consumption has risen in 18 of the past 20 years. If we look back 30 years, global oil consumption increased by an average of 1.1 million bpd annually. Demand did decline in member countries of the Organisation for Economic Co-operation and Development (OECD) — the grouping of the world’s developed countries. But demand growth in developing countries overwhelmed the declines in the developed world. In just the past five years, demand in developing countries has increased by an average of 1.6 million bpd annually, and now exceeds OECD demand.

Note that there was hardly any negative impact on demand in developing countries even with oil prices at $100/bbl. What drives consumption in these countries is a very large number of people using just a little bit more oil than they did before. High oil prices will do little to dissuade them from buying a little bit more when it can make such a big impact on their lives, especially when incomes are rising.

This is why, in my opinion, oil can’t go to $20/bbl. Despite very vocal predictions of much lower oil prices, many people are aware of the dynamics I have laid out here.

Why the $20 Oil Predictions are Wrong