[copious.abundance]

Uh, I'm sorry Pops but I think your original prediction failed to materialize. To wit:

According to the model in my brain, the economy is not able to pay above $100 for new, 'non-conventional' oil fields. This isn't written down anywhere, the number might be $120 or $80 but it seems pretty certain it's in the ballpark that correlates to 5%-10% of US GDP. On the first chart the red band around $100 is where the economy chokes, the orange, eyeballed trendline of "base" oil price seems to be entering that range now...

Basically you were saying that the $100 or so price could not be sustained because such a price would collapse the economy after some time. Only after such an economic crash would the price fall back down.

Unfortunately for your little model from 4 years ago, we have now gotten an oil price crash without it being caused by an economic crash. I don't see anything, anywhere in your first post here indicating you thought a repeat of 1985-86 would ever be possible again. But that's what we got.

[copious.abundance]

Epic fail.

we are looking at more like a sustained $150/bl to start forcing contraction.

Cool. Thanks.

[Pops]

Why didn't I think of that, oh yeah I did, yesterday in this very thread:

The thing Wedge 2011 didn't contemplate was an oil glut combined with continuing economic growth and high demand. It is a failing of my PO bias combined with my under appreciation of the potential of tight oil to (i) cause a glut "overnight" (in oil development time-scale) (ii) kill the glut "overnight" on low price.
...
Will that bubble feed an out of control volatility cycle that eventually leads to the Big One? That was my basic idea in the 2020 oil price challenge thread although I thought price would be tied more to demand than production but who to tell the difference when the outcome is as predicted?

You're right, it was a fail, contraction happened way before $150, only a few hundreds of billions of QE kept the roller coaster going.

[copious.abundance]

Fair enough. Didn't see that.

QE was going in 2011, if you think that makes a difference you should have thought of it four years ago when you made the prediction.

Not that QE makes any difference to the economy, but you can pretend it does, if you want.

[Pops]

Fair enough. Didn't see that.

QE was going in 2011, if you think that makes a difference you should have thought of it four years ago when you made the prediction.

I sure didn't see 7 years of QE and essentially zero interest rates and barely there inflation prompting investors to throw money at anything with a pulse. Yep, you got me there.

Lets see, what was my guess:



Looks like we're somewhere around the "e" in "age" – best guess I've seen. LOL

Really, you of all people should know that we just aren't finding enough cheap oil so the wedge is unlikely to fail on supply, especially LTO, not for any length of time anyway.

The only real argument with the wedge, that makes sense, is that price will fall on demand due to substitution, some kinda radical substitution, Cold Fusion In A Can or some such.

The 2 wedge rules are just those 2 lines; basic supply and demand
(i) there is a price ceiling that limits demand — i.e., this economy can never see $500 oil
(ii) there is a cost floor that limits production — the lower the price the lower the production

The conclusion that over time; conservation, efficiency and the weakening of the economy will force increased utility, more bang for the unleaded buck and at that point, not before, the price of oil will be able to exceed $100-$150.

Short of the Energy Fairy granting us a too-cheap-to-meter wish, I don't see any reason the wedge won't be right in the end.

And guess what, this ain't the end.

[copious.abundance]

There are a few possible scenarios I see:

1. Oil rebounds to, say, $70. And then it spends years, maybe decades, in some range around that number, maybe $50-$90, with maybe a brief trip above or below the range. While that may seem like a "high" number in historical terms, after a while the real (inflation-adjusted) price will be falling. IOW $70 in 2030 will be "cheaper" than $70 in 2016. But that $70 will be enough to satisfy the shale drillers and oil sands diggers of the world.

2. In part because of the price crash, shale drillers and oil sands diggers are simply forced to find more efficient and cheaper methods of extracting their oil. "Super-fracking" is perfected and becomes the norm, etc. So oil could stay around $30-$50 for years, and maybe even decades, and gradually companies will find a way to produce their oil profitably at those prices.

3. Some combination of the above two, coupled with the usual, long-term trend of using more oil efficiently, etc.

[Outcast_Searcher]

3. Some combination of the above two, coupled with the usual, long-term trend of using more oil efficiently, etc.

And in your world there is no growth in global demand from Chindia and the rest of the third world? I don't see much evidence that BAU growth is a thing of the past.

People in the US will enjoy the cheap oil while they have it. In fact, as Pops correctly mentioned, they already are via buying larger cars and driving more (instead of, say, saving for the future).

I'm certainly no doomer, but your blissful assumption that all will be an oil paradise since the last move was down seems to err on the rose-colored-glasses side. Pops' wedge model sure seems to make a lot more sense (and no, I have no idea what the short term shape will be, but human nature says we'll burn what we have until it is "too expensive" again).

[copious.abundance]

I've no doubt there will be demand growth in China and elsewhere, but it will likely be tempered by reduced demand elsewhere, particularly in Europe and maybe other parts of Asia. Maybe even the US will continue to flat-line (see first link in sig, for example).

But don't forget that the US and Canada aren't the only ones with large shale deposits. There's no shortage of the oily stuff.

[ennui2]

"There's no shortage of the oily stuff."

I would agree. We may have a sharp cliff if some of the rhetoric about shale depletion rates is true, but we've got another round of happy-hour in store first.

[Tanada]

Thought I'd post the WTI chart showing the price going through the "cost floor" - you all remember what happened last time. Wonder what will happen this?

Pops now that August is ending is there any chance you could update the above graphs to reflect what has been going on the first half of 2015?

[Pops]

Sorry T, I laid that spreadsheet off onto a backup somewhere and to be honest don't remember how I guessed tight oil back then (2013 I think).

But there is lots of stuff on cost vs price out there nowadays, everyone has a Wedgie!

Here is Matt's (CrudeOilPeak.info) plot of incremental production increases - it's still mostly N. America (little Libya and Iraq for a minute there) and still mostly unconventional...






The IMF takes a guess at costs and surprise! it still costs a whole lot to extract unconventional...


Seems some good analysis too...

View from the bank:




That last chart looks like you can cover cost @ $35-40 for 90mbd — but that leaves no return on investment. Which just means producers lose their investment when the next deep pocket comes along and scoops them up. It takes at least a $60 price to justify new production (to replace declines in existing wells) — that is your key number, how much it costs to offset declines. If you can't do that, production falls...


Obviously investors are leery to make loans at these prices...



But happy to scoop up the remains (likely for the value of reserves, the sunk costs are just a loss...

[Keith_McClary]

If world GDP growth goes back up to 5%, how long will it take to burn through the glut?

[Pops]

The thing about global GDP is that a strong dollar (mostly due to fewer petrodollar exports) makes the 9 trillion in US dollar denominated loans made overseas since '09 harder to repay. C H Smith, OfTwoMinds blog, says

A funny thing happened on the way to permanently expanding global markets: unintended consequences. Borrowing cheap, abundant U.S. dollars seemed like a good idea when the dollar was declining, and few voiced any concern when $9 trillion was borrowed in USD-denominated debt around the world in the years since 2009.

Few saw the possibility of the USD rising, or that if it did appreciate against other currencies, that the blowback would destabilize the global economy.

Kind of the dark cloud within the silver lining of LTO fracking.

As well, Cunningham of OilPrice quotes IHS as saying a good part of the ongoing oversupply, especially from small independents, is financed by filling hedged contracts from last year and thinks they will still be propping up production through the end of the year ...

As time passes, more and more hedges are expiring, leaving oil companies fully exposed to the painfully low oil price environment. “A lot of these smaller guys who had bad balance sheets have pretty good hedge books through full-year 2015,” Andrew Byrne, an analyst with IHS, told the Houston Chronicle. “You can't say that about 2016.”
... IHS estimates that smaller companies had about half of their production hedged at a median oil price of $89.86 per barrel in 2015.

IOW, the price crash hasn't actually filtered down even yet.

[JV153]

Epic fail.

we are looking at more like a sustained $150/bl to start forcing contraction.

Cool. Thanks.

http://www.c2es.org/publications/option ... carbon-tax

Where would the IMF's 'subsidies' fall ?
http://www.telegraph.co.uk/finance/comm ... -seem.html
http://www.brettonwoodsproject.org/2015 ... te-change/