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Page added on January 26, 2015
Robert Rapier: Why $50 Oil Won’t Last
In the past few weeks I have received numerous questions about the role of a “drop in demand” in the oil price decline. These questions are driven by many stories in the media that have referenced a drop in demand.
There are two primary reasons given for this so-called demand drop. One is that years of high oil prices have resulted in reductions in consumption through conservation and improvements in vehicle fleet efficiency. The second reason is due to the strengthening dollar, oil has become more expensive for many countries since oil is generally traded in dollars.
There are elements of truth behind both reasons. There has indeed been reduced oil consumption in recent years in most developed regions of the world. It is also true that the dollar has strengthened against many currencies. But despite the rationale that explains this drop in oil consumption, ultimately the data must support the narrative.
We have to keep in mind that the developed regions of the world aren’t the entire world. Despite this oft-repeated mantra about falling oil demand, there is no evidence that this is actually true. Last October, the International Energy Agency (IEA) reduced its forecast for 2014 global oil demand growth by 200,000 barrels per day (bpd). Their revised forecast was that global oil demand would only increase by 700,000 bpd from 2013.
Last week on CNBC the IEA forecast that “global growth in the demand for oil could modestly accelerate in 2015 to 910,000 barrels a day.” However, the article also noted that the World Bank had reduced their forecast for growth in the global economy for this year to 3%, down from their previous forecast of 3.4%.
What has happened is that these reductions in the forecast for oil demand growth or economic growth get mistranslated into forecasts of declining demand. I think we can all agree that if I gained 5 pounds a year each year for the past 5 years, but this year I only project that I will gain 3 pounds — I did not lose weight. I will be 3 pounds heavier than I was instead of 5 pounds heavier.
Consider that in the 5-year period of 2008-2013, the price of West Texas Intermediate (WTI) crude averaged $88/bbl. The price of Brent crude was even higher at $95/bbl over this period. These prices were much higher than the average oil price over the previous 5-year period, therefore we might expect that this had a negative impact on oil demand. This was in fact the case in the U.S. and E.U., but global demand increased, driven by increases in every developing region of the world:
Despite much higher oil prices, global demand for oil increased by more than 5 million bpd in the past 5 years. In fact, global oil consumption has increased in 18 of the past 20 years.
Now, compare that with where most of the world’s oil production growth took place during that time period:
This is why I maintain that oil below $50/bbl is simply not sustainable. If global demand was actually declining, it would be a different story. But with demand continuing to grow, and with the majority of the oil production added in the past 5 years coming from the shale oil fields in the U.S., there is simply not enough $50/bbl to meet demand. Consider the graphic from a Bloomberg story late last year that shows almost every shale play in the U.S. losing money at current oil prices:
Now consider that companies in these shale plays are reducing their 2015 budgets, and layoffs are underway. The cure for low oil prices is low oil prices, and that cure will begin to take effect this year. I realize that we dropped into the $30′s in 2008, but keep 2 things in mind. Just over a year later we were back above $100/bbl, and at that time the marginal barrel was not $70/bbl shale oil. The cost to produce that last million barrels per day of demand is significantly higher than it was in 2008. Therefore oil will not — as I have seen more and more pundits predict — sink to $40/bbl and stay there. There may be a new norm for oil relative to what we have seen in the past 5 years, but it will be closer to $70/bbl than it will be to $40/bbl.
19 Comments on "Robert Rapier: Why $50 Oil Won’t Last"
Sugar Seam on Mon, 26th Jan 2015 6:43 pm
i always thought something was off in claims that demand was down, overall… consumption growth slowing was all. Yup
Plantagenet on Mon, 26th Jan 2015 6:58 pm
Good to see Rapier confirm what I’ve been saying all along. The oil glut has nothing to do with demand being down—-its a function of increased supply resulting from north american fracking.
Davy on Mon, 26th Jan 2015 7:02 pm
Ruff, ruff, says Planter, leave my bone alone. Ruff, ruff
shortonoil on Mon, 26th Jan 2015 7:12 pm
Well, he’s right. There is a good chance it will go all the way into the $60s by 2016. Right after 4mb/d are shut in.
http://www.thehillsgroup.org/depletion2_022.htm
It probably won’t go back into the 50’s again until 2017.
http://www.thehillsgroup.org/
Speculawyer on Mon, 26th Jan 2015 7:22 pm
I get his weight analogy but he needs to apply it to the other side as well. The local McDonalds was expanding its store in preparation to sell more hamburgers to him to supply his growing weight. And now that he is going to eat less, that McDonalds is stuck with extra hamburgers that they have to sell off at a discount.
To go back to oil . . . lots of oil producers were expecting China and Europe to continue increasing their oil usage and invested based on that. And now that their demand did not grow, they are stuck with extra capacity that was not needed. So a drop in expected demand is a real thing that has real consequences because people made investments based upon the future expected demand.
Davy on Mon, 26th Jan 2015 7:31 pm
The guy can claim growth all he wants in his claim there is no declining demand. The reality of the situation is 3% so called growth now is not the same as pre-financial repression and asset purchase growth. The current growth is occurring heavily in the digital realm not the real economy. This means you can’t compare oil demand to growth as we once did. Demand is clearly falling or why would deflation be an issue? This guy squats to pee.
shortonoil on Mon, 26th Jan 2015 7:43 pm
We have to keep in mind that the developed regions of the world aren’t the entire world. Despite this oft-repeated mantra about falling oil demand, there is no evidence that this is actually true.
Rapier seems to put a lot of weight on demand. What he seems to miss is that presently more than half the energy produced from oil is now consumed by the petroleum industry during the production process. That ensures that demand will stay strong, until production begins to decline. $46/ barrel oil ensure that is just what will happen.
http://www.thehillsgroup.org/
JuanP on Mon, 26th Jan 2015 7:54 pm
While Rapier is very right to point out the difference between demand and demand growth, he could also expand into forecasts of unrealistic expectations of future demand growth which is what those IEA and EIA words actually are. I have a very low opinion of those future production reports, they are systematically unrealistic and always get revised down as time passes. Inaccurate articles on the subject create a lot of confusion and do a lot of damage, which I guess is their true purpose.
I have been annoyed by reading dozens of articles explaining how falling demand was the cause of the oil price crash while demand is still GROWING, only not just as much as these IEA and EIA optimistic puppets expected.
Mike999 on Mon, 26th Jan 2015 10:48 pm
It’s still significant that US and European demand is down. In Europe it’s the Austerity budgeting, the deliberate slowdown of the European economy.
But, in the US it’s still the lose of 33 million jobs to China, and better fuel economy averages for new cars.
The new fuel economy trends should move to China as much of it is in new tech in engines. But, China demand should also be down because of the switch to electric bikes.
marmico on Tue, 27th Jan 2015 5:20 am
What he seems to miss is that presently more than half the energy produced from oil is now consumed by the petroleum industry during the production process.
You are an effing moron.
peakyeast on Tue, 27th Jan 2015 5:38 am
@marmico: When it comes to argumentation you sure as hell dont win any rewards here in this thread.
It is okay to come with opinions about the world – but not to attack people while ignoring the argument completely.
Davy on Tue, 27th Jan 2015 6:48 am
Rapier is not acknowledging faux growth and faux demand. Today with all the vital global statistics being corrupted by repression, manipulation, and distortions to even quote 3% is a joke. 3% for who and what? Oil demand today for today’s 3% is not what it once was. Healthy 3% growth is not today’s 3%. We know all major economies are engaged in growth padding and mal-investment. Stock buybacks are an example of these distortions. A portion of that 3% must be discounted for the above. IMA our current global economy if it is not growing above 3% it is actually descending especially with the global debt load, global deflationary tendencies, and currency wars.
The economy is clearly slipping below what is needed. The oil sector was on the other end engaged in a Ponzi scheme of QE injections. What you get is a mismatch that always appears when economic forcing, lack of transparency, and suppression of price discovery occurs and that is market dysfunction. Do you really think in a normal environment of price discovery and interest rates the Shale Bubble would have occurred to the extent it did? No. It may have gotten off the ground especially the gas sector but not to the degree it did. Those oil prices did not represent the real economy. The $100 oil prices represented a QE economy that was driving commodities higher artificially through debt, speculation, and yield seeking. There is limits to this and now we not only hit limits we hit diminishing returns to all QE. All those asset purchases are on all the central bank’s balance sheets and too many to wipe clean like the past i.e. there is no longer much room for bailouts.
The current market is extremely fragile from leverage, counterparty risk, and diminishing returns to central bank tools. The oil price and supply situation is partially a product of these central bank policies. Demand destruction has been occurring in the real economy since 08 because any growth post 08 is distorted by financial repression and artificial central bank liquidity at the top of the food chain. Now we see those central bank policies breaking down and “WALA” commodities are under pressure. Oil supply has bumped up but a sick economy can’t absorb the oil supply like in the past. This oil glut is very economic and a product of market distortions. Not completely but enough to say it is not a normal oil glut.
The economics of this glut is part of the reason it is likely both the economy and the oil sector are in a vicious cycle down. The damage has been done and there are no tool to correct the chaos introduced into the system. This financial system is heading for a break at some point. The POD and ETP of oil will be the brick wall down the road. In the meantime the financial repression can continue. Faux top of the food chain growth can be realized through triage, repression, and cannibalization. As long as the plutocrats at the top maintain their confidence in their control this broken system will limp along until it “AIN’T”. It is likely to just stop in a Minsky Moment of economic paralysis, global war, or widespread social fabric destruction.
Davy on Tue, 27th Jan 2015 8:00 am
Some morning reinforcement for the above comment:
http://www.zerohedge.com/news/2015-01-27/who-could-have-possibly-anticipated-caterpillars-disastrous-earnings-and-guidance
shortonoil on Tue, 27th Jan 2015 8:43 am
As long as the plutocrats at the top maintain their confidence in their control this broken system will limp along until it “AIN’T”.
This system will limp along until the Laws of Physics says it can’t. The plutocrats who believe that they are in control are deluding themselves. Many are already planning on abandoning the ship. It seems that hedge managers have recently developed an attraction for farm land in New Zealand.
The fall in oil prices that we are witnessing is not the cause of the problem, it is the effect. The last 20% of the world’s remaining petroleum reserve is increasingly susceptible to the ongoing depletion event. The $trillions that have been wiped off the asset side of the ledger sheets of the industry since this price decline began is proof of it.
The propensity for a more autocratic, repressive, and outwardly aggressive government is an indication that the power elite are becoming ever more insecure in their role. Their positions are certainly not enviable; the impact of the contraction will be proportional to the wealth and power held by the individual. The final stages of the petroleum depletion event will be unique in the history of civilizations. Never before has the entire world been held together by one unique commodity. Never before has one commodity so rapidly disappeared.
The true situation will be denied, obfuscated, subverted, papered over, and lied about. We are already seeing most of these methods being used. The rate of decline, however, will be so fast that these attempts to hide the final result will soon be as as effective as attempting to hide an elephant with a postage stamp. The plutocrats you refer to will soon have a closer resembles to rats leaving a sinking ship, than masters of the world!
Davy on Tue, 27th Jan 2015 9:06 am
My thoughts exactly Short but the reality is there is momentum and collective resistance from the top in a state of peak resources appearing to just be starting the tip into a zone of macro descent. Until this strong human nature trend breaks it is the controlling factor. IMA this situation is all the more reason to be nervous as an individual and local. We are totally naked to the global like babies suckling on a mother’s breast. We are talking nothing more than human will and irrational confidence holding this rusty spaceship together. Natural fundamentals of growth appear to be over anything that fights that is irrational and will only produce dysfunction.
Dragon Oil on Tue, 27th Jan 2015 12:44 pm
Oil exoloration in the U.S. can be divided into 3 groups. 1)The “bottle rocket” crowd. This group emereges in every industry when prices are too high and shortages(?) are percieved. This group only stays around under “panic” conditions. When prices fall due to over production, they move on to the next over priced industry. This results in the over priced housing industry, cars, cattle, etc. 2)The bottom feeders. People borrow money to get in on a bottle rocket industry due to overly high product prices. When prices collapse due to over production and debt can’t be serviced, these folks surface and buy the product for pennies on the dollar so the producer can avoid bankruptcy. These guys will never drill anything, just produce what they just bought and look for the next falling bottle rocket. 3)These folks are the bone and muscle of any industry. They avoid debt and buying into tempory shortages. They will drill high quality reserve opportunities and produce them at reasonable rates, regardless of the product, be it oil, houses, sugar, cattle, copper wire, wind turbines, or paint. Currently the bottle rockets are all fizzleing out and the bottom feeders are emerging. Shortly thereafter the the reasonable producers will re-emerge and stabilixe any industry. Like it or not, this is what Saudi is doing, and they are right.
GregT on Tue, 27th Jan 2015 3:03 pm
“Shortly thereafter the the reasonable producers will re-emerge and stabilixe any industry”
Only as long as the resources remain that the market can afford to buy.
peakyeast on Wed, 28th Jan 2015 12:42 pm
I actually have a feeling that the extraction of fossil fuels will continue even in the face of economic losses. –
The only real hindrance will be EROEI = 1 and perhaps even further down due to momentum – until we get close to this the rest of society will be cannibalized – losses shuffled around, poor people will be further impoverished and so forth.
Davy on Wed, 28th Jan 2015 1:21 pm
Peaky, I am with you on that. Short will disagree with us but I see a negative ETP POD situation still producing oil. The descent will likely be characterized by dysfunction networks, irrational policies, and economic abandonments. Yet, there will be dysfunctional economic abandonment be which there will be uneconomic activity activity.
We have little idea what economic arrangement may develop out of a sharp economic fall. I imagine there may be a command control economy maybe with martial law. These TPTB may use people and resources in ways that are uneconomic in a macro sense but still produce resouces for these TPTB.
Wealth transfer and social canibalization, and economic triage can all be used to deliver high quality energy to a narrow segment of society. We will in effect have a narrow segment of society practicing salvage of the majority of the population with what little resources are left economic or not. We mayy return to serfs, nobles, and soldiers with a small artisan and skilled force that serve the nobles and soldiers.