Peak Oil is You

Donate Bitcoins ;-) or Paypal :-)

Page added on December 27, 2015

Bookmark and Share

The Case for $20 Oil


Oil prices have dropped to $35 a barrel, down from over $110 in 2011. The trend line does not mean much; it is just a chart. But that does not mean the causes of the trend are not obvious, and likely are also not over.

The argument for lower oil prices breaks into a very few parts. The first is that massive oil producer Saudi Arabia means to destroy the industry financially so that it can keep its long-term leverage on pricing. Its production costs are low enough that its strategy might work. But even Saudi Arabia cannot pump cheap oil forever without affecting the kingdom’s treasury, and perhaps crippling it for decades.

Another cause is fracking, an industry that bet high oil prices would last for years or even decades. It is an expensive business to get into, with somewhat new age technology, so frackers need prices well above the current ones to remain is business. Supply is ample. Funding is not. Bankruptcies are not only possible, but they already have begun. Analysts from Bloomberg recently wrote:

According to the consultancy Wood Mackenzie, about a third of oil production in the U.S. states, not including Alaska and Hawaii, comes from companies that have borrowed against their oil and gas reserves and that face redeterminations of their borrowing base. Banks recalculate the value of reserves for their oil company clients twice a year, in the spring and in the fall. Forecasts for the October redeterminations are dire. Last month, a survey conducted by the law firm Haynes and Boone predicted a 39 percent decrease in the oil companies’ borrowing ability, with 79 percent of borrowers expecting a decrease.

For financiers, better to take a beating now than a worse one later.

Finally, there is the theory that China’s economy has slowed. As the world’s largest importer of oil, it makes sense that the demand loss would take a bite out of the price of crude. On the other hand, the economies of the United States and Europe are recovering. The analysis has become a tightrope of expert forecasts.

Is past performance an indication of future results? No, as mutual funds would say. However, for oil prices that answer may be different.

24/7 wall st

9 Comments on "The Case for $20 Oil"

  1. Bob Owens on Sun, 27th Dec 2015 4:02 pm 

    This article makes no point about its title: The Case for $20 Oil. Just why is it posted here?

  2. shortonoil on Sun, 27th Dec 2015 6:07 pm 

    “The trend line does not mean much; it is just a chart.”

    The trend line does mean quite a bit if it was calculated a year ahead of the change:

    The part that the article misses is that prices can only decline to the point where the price meets the average producers’ lifting cost. Beyond that point, their cash flow goes negative, and they begin shutting in wells. That is probably somewhere between $20, and $30.

    The maximum price is show above, and it is the point where the average barrel can no longer power an amount of economic activity for the consumer which is equal to, or greater than the price. No one is going to pay $2 for oil in order to produce $1 in goods, and services.

    There are two boundary conditions for the price of oil, its maximum affordable price, and its average lifting cost. It is now below the mean of that range.

  3. Jibdul on Sun, 27th Dec 2015 6:30 pm 

    “This article makes no point about its title: The Case for $20 Oil. Just why is it posted here?” ~ Bob Owens

    You may find it in the link the bottom of article.

  4. makati1 on Sun, 27th Dec 2015 6:54 pm 

    “…the economies of the United States and Europe are recovering.”

    I pretty much agreed with the article until this sentence. Then their presentation turned into propaganda. The bullshit about two failing economies ‘recovering’. Recovering what? Memories of the Great Depression? LMAO

  5. ennui2 on Sun, 27th Dec 2015 11:06 pm 

    Just because you don’t want to believe the economy is recovering doesn’t mean it isn’t. If all you do to prove otherwise is sling words like “bullshit” and “propaganda” you’re not really worth listening to.

  6. Apneaman on Sun, 27th Dec 2015 11:48 pm 

    Government economists and statisticians can claim whatever they want to about the economic numbers and people can choose to believe it if they like. In my country I go by what I see and read from industry mixed in with a few other stats. Like the tent cities that started popping up 5 years ago and are growing, that I have never seen before in Canada in my 50 years. The line up’s outside the food banks and the people who run them saying they have never had so many people. Rising addiction and suicide numbers. Major layoffs nation wide and globally this year. Tanking commodities, shipping and retail numbers and debt debt debt. I guess as long as some abstract numbers are claimed to be up and the 1% are happy who gives a fuck if ever greater numbers of people are suffering? As long as the numbers make some people feel better – sooth their anxieties, that’s all that matters eh?. It’s kind of like drinking – artificially feels great until you wake up. Probably have to get a payday loan to afford another bottle.

  7. makati1 on Mon, 28th Dec 2015 9:22 am 

    ennui2, Real unemployment is about 22.3% (Shadowstats) which is about the same as during the Great Depression. ~47 million people on food stamps not to mention welfare and medicaid. Income purchasing power is shrinking. Personal and other debt is astronomical and never going to be repaid. Suicides are increasing. Homelessness is increasing. Etc.

    Is that a recession or a depression?

  8. freak on Mon, 28th Dec 2015 8:45 pm 

    It is a curious paradox that peak oil should manifest in the midst of over-supply and low oil prices. That is certainly not how I thought things would happen. Perceptions will change and oil-market balance will be restored in ways that few of us thought likely. Peak oil will be part of that change.

  9. JuanP on Tue, 29th Dec 2015 8:00 am 

    Saudis predict $29 oil in 2016,

Leave a Reply

Your email address will not be published. Required fields are marked *