Would like to hear from someone who can explain why the cost of a barrel of oil has gone down lately. I have read about many reasons but wonder what the real reason is.
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Cost of oil
- Thread starter Merrill
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nwdiver
Well-Known Member
The reason is somewhat simple... The US has dramatically increased production due to fracking; OPEC members recently refused to reduce production. More Supply + roughly the same demand = Lower prices. However the current cost of oil is near the production cost of many countries including fracking in the US so it's unlikely to last. The estimate I heard last night was ~6 months.
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Thanks, still wonder why this has just happened recently. We have reduced our fuel consumption in the US by at least 15% since 2005 and increased our production of oil so based on this assumption we should have had lower cost of oil several years ago.
The Saudis have engineered a reduction in global oil prices in a war for market share. Other energy producers including U.S. oil shale, Canadian oil sands, as well as conventional oil in Russia, Iran, Iraq, and elsewhere have reduced Saudi market share and clout.
The Saudis are counting on a temporary period of reduced global oil prices to stimulate global oil demand and reduce oil production from their higher cost competitors. This should be no surprise, the Saudis have done this before.
Right on cue, U.S. SUV and pickup sales are up, and hybrid sales are down. Many U.S. buyers are unaware that the Saudis are manipulating them to increase consumption, using temporary low gasoline prices. Demand in China and other nations is also likely to increase with the oil lower prices.
Meanwhile, the Saudis' competitors who have higher production costs are already starting to cut back 2015 oil exploration and production budgets that cannot be supported at $70 a barrel oil.
When they have regained sufficient market share, when enough of their competition has been driven out, the Saudis will throttle back production to increase prices once again.
http://www.reuters.com/article/2014/11/28/us-opec-meeting-shale-idUSKCN0JC1GK20141128
Oil price tumbles to four-year low as Saudis resist OPEC cut - Business News - Business - The Independent
Saudi Arabia, OPEC And The Price Of Oil - Business Insider
The Saudis are counting on a temporary period of reduced global oil prices to stimulate global oil demand and reduce oil production from their higher cost competitors. This should be no surprise, the Saudis have done this before.
Right on cue, U.S. SUV and pickup sales are up, and hybrid sales are down. Many U.S. buyers are unaware that the Saudis are manipulating them to increase consumption, using temporary low gasoline prices. Demand in China and other nations is also likely to increase with the oil lower prices.
Meanwhile, the Saudis' competitors who have higher production costs are already starting to cut back 2015 oil exploration and production budgets that cannot be supported at $70 a barrel oil.
When they have regained sufficient market share, when enough of their competition has been driven out, the Saudis will throttle back production to increase prices once again.
http://www.reuters.com/article/2014/11/28/us-opec-meeting-shale-idUSKCN0JC1GK20141128
Oil price tumbles to four-year low as Saudis resist OPEC cut - Business News - Business - The Independent
Saudi Arabia, OPEC And The Price Of Oil - Business Insider
There are all kinds of "theories". Some say that OPEC is trying to drive some of the fracking companies in the USA out of business. The conspiracy theorists claim that this is an attempt to bankrupt Russia as retaliation for their intervention in Ukraine.
The biggest factor is that the world demand for oil is getting uncomfortably close to the maximum rate of world production of oil. When you're in that regime you're inevitably looking at large price spikes and crashes - relatively modest changes in production rates or consumption have an outsized effect on the prices. If the situation gets worse we'll be in a regime where demand outstrips supply, prices spike forcing a global recession, causing a drop in oil prices, resulting in a surge in the economy, lather rinse repeat. Fracking and other uncoventional oil is holding us off from the worst of that. Hopefully the advent of EVs will relieve the pressure.
Meanwhile high oil prices will be back. Maybe not for a year or two - no one can predict when - but they'll be back.
The biggest factor is that the world demand for oil is getting uncomfortably close to the maximum rate of world production of oil. When you're in that regime you're inevitably looking at large price spikes and crashes - relatively modest changes in production rates or consumption have an outsized effect on the prices. If the situation gets worse we'll be in a regime where demand outstrips supply, prices spike forcing a global recession, causing a drop in oil prices, resulting in a surge in the economy, lather rinse repeat. Fracking and other uncoventional oil is holding us off from the worst of that. Hopefully the advent of EVs will relieve the pressure.
Meanwhile high oil prices will be back. Maybe not for a year or two - no one can predict when - but they'll be back.
Thanks for everyone's input, this makes sense. To bad most of the car buying public do not know about this, even more reason to get off oil.
Disregard at your peril a far more dangerous - and much closer to home - set of fears within the House of Saud that impels them to keep Saudi production up and prices down:
1. the proxy war being played out in Syria is between two implacable intra-Islam foes: the Wahhabi Sunnis, led by the Saudi royal house; and the Shias, whose stronghold is amongst the non-Arab Iranians.
2. the wild card that is the combination of Al Qaeda and ISIS, now rampant throughout much of Syria AND Iraq and each of whom separately could be the undoing of ibn-Saud's descendants.
In keeping at bay both of the above, the US and the Saudis share an absolute common goal, but while the ultimate victory of either/both Al Qaeda & ISIS would be merely an immense problem for the US, it would be utter Armageddon for the House of Saud...or however you say that in the Islamic world. Regardless, looking at the situation only from the US point of view, the dual benefits that lower crude prices bring of (1) inflicting damage to Qaeda and ISIS and (2) enhancing US household spending and reducing our merchandise trade imbalance FAR MORE than overcome the pain such prices will bring to the US oil patch.
1. the proxy war being played out in Syria is between two implacable intra-Islam foes: the Wahhabi Sunnis, led by the Saudi royal house; and the Shias, whose stronghold is amongst the non-Arab Iranians.
2. the wild card that is the combination of Al Qaeda and ISIS, now rampant throughout much of Syria AND Iraq and each of whom separately could be the undoing of ibn-Saud's descendants.
In keeping at bay both of the above, the US and the Saudis share an absolute common goal, but while the ultimate victory of either/both Al Qaeda & ISIS would be merely an immense problem for the US, it would be utter Armageddon for the House of Saud...or however you say that in the Islamic world. Regardless, looking at the situation only from the US point of view, the dual benefits that lower crude prices bring of (1) inflicting damage to Qaeda and ISIS and (2) enhancing US household spending and reducing our merchandise trade imbalance FAR MORE than overcome the pain such prices will bring to the US oil patch.
scottf200
Well-Known Member
Various interesting articles on the oil export ban as well. Imagine if completely lifted ... do you think it would be exported to places that will give them more profit?!?
oil embargo export ban - Google Search
oil embargo export ban - Google Search
More investors are beginning to worry that a large fraction of still-in-the-ground fossil fuels will become "stranded assets" due to the adoption of stricter climate policies:
Oil Investors at Brink of Losing Trillions of Dollars in Assets. Gore: It's That Road Runner Moment - Bloomberg
Interestingly, in their public statements, the large petroleum companies appear to be in denial.
Oil Investors at Brink of Losing Trillions of Dollars in Assets. Gore: It's That Road Runner Moment - Bloomberg
Interestingly, in their public statements, the large petroleum companies appear to be in denial.
I empathized with a dweeb'ie analyst the other day, when he commented that "its just .7 billion barrels" that were causing the price move. I think what he was getting at is appreciating not just supply/demand, but by how little supply needs to move to effect a new place along a nearly vertical, or inelastic, demand curve.
When you can't shorten your trip to work, or don't wish to live at 60 degrees, you tend to buy the stuff anyway. BEVs/EREVs/PHEVs may have reached 100k annually, but there is still a lot of wood to chop (there's a pun in there, somewhere).
When you can't shorten your trip to work, or don't wish to live at 60 degrees, you tend to buy the stuff anyway. BEVs/EREVs/PHEVs may have reached 100k annually, but there is still a lot of wood to chop (there's a pun in there, somewhere).
adiggs
Well-Known Member
I read the linked article abasile - thank you for posting that. Whether Gore's comments prove to be actually true or not, we only need investors to begin thinking they're true to start a massive shift of assets away from the sector. There's an interesting dynamic there that I've never thought about before. If it's actually the case that you're an energy company and you have this massive valuation based on assets in the ground, and then it turns out that public policy and behavior is going to result in being able to pump and sell 30% of those assets, suddenly your enterprise value is a whole bunch lower.
And it gets worse - in an orderly market, everybody would continue pumping at the same rate, and everybody would get their 30% value on their assets, and no great additional problem.
But many organizations will look at that, and realize that if they pump their assets faster and sell them as soon as possible, then selling 80% of their assets at 50% of the price gets them more money in absolute terms than they can otherwise get (especially if they don't pump faster, and somebody else does pump faster). For Saudi Arabia, they might just drive the price of oil well below what anybody is talking about right now, not to cause Russia problems or put the US shale oil plays out of business, but for the simple reason that their perishable asset is perishing, and the sooner/faster it's pumped, the sooner it generates money of any amount.
In this dynamic, new exploration for oil grinds to an almost immediate halt worldwide, so we'd see the first impact among those companies.
Also in this dynamic, companies and organizations will put all sorts of public spin on what's going on. But the behavior will be full speed ahead pumping all the oil they can, as fast as they can. Also in this dynamic, I don't think $60/bbl is a floor or a stopping point. In this dynamic, there may be just about no price too low to pump oil from already drilled wells. At the very least, you keep pumping as long as the marginal value of a pumped barrel of oil is higher than the marginal cost of pumping that barrel of oil, and that threshold is going to be REALLY low (as exploration costs are now a sunk cost, and irrelevant to the decision to pump or not to pump).
I think I like this world view, whether it actually comes to pass or not. The thing to keep an eye on the next few quarters is exploration.
That's an interesting perspective.
My hope is that humanity can avoid tapping the most marginal and/or risky reserves such as the tar sands, deep undersea formations, and others. Low oil prices should help with this. On the other hand, reducing production in North America and depending on the Middle East for a greater portion of our needs is unappealing. I'm also skeptical that the voting public here in the US and elsewhere will be willing to make sacrifices to keep global temperatures in check for future generations. In our country it's difficult enough to raise fuel taxes to adequately pay for our roads, let alone discourage the use of fossil fuels.
The only realistic way forward, in my opinion, is to make EVs and renewable energy better and cheaper so that no "sacrifices" are needed; fossil fuels will become obsolete. Elon Musk, Tesla Motors, SolarCity, and many others understand this well. If this transition can happen quickly enough, then fossil fuels will indeed be left in the ground even in the absence of government mandates.
My hope is that humanity can avoid tapping the most marginal and/or risky reserves such as the tar sands, deep undersea formations, and others. Low oil prices should help with this. On the other hand, reducing production in North America and depending on the Middle East for a greater portion of our needs is unappealing. I'm also skeptical that the voting public here in the US and elsewhere will be willing to make sacrifices to keep global temperatures in check for future generations. In our country it's difficult enough to raise fuel taxes to adequately pay for our roads, let alone discourage the use of fossil fuels.
The only realistic way forward, in my opinion, is to make EVs and renewable energy better and cheaper so that no "sacrifices" are needed; fossil fuels will become obsolete. Elon Musk, Tesla Motors, SolarCity, and many others understand this well. If this transition can happen quickly enough, then fossil fuels will indeed be left in the ground even in the absence of government mandates.
dhrivnak
Active Member
I do not see how it can go much lower. Basically we had the run up in price from $20/barrel in 2000 to $140 in 2008 because conventional oil peaked in 2005 at about 80Mbbd. Demand kept growing and suddenly the price spiked as supply could not keep up. At north of $75/barrel we have plenty of oil as both the Canadian tar sands and the US shale plays become profitable. But even with fast tracking we are talking years to bring significant new supply on the market.
So I see us oscillating between $70 the point where shale and tar sands become uneconomic, and $150 where people can't afford to buy. I see us in this range for 5 - 15 years when even the expensive plays begin to peak out. Then we have huge problems as a society as nearly all goods are moved by oil and nearly all goods MUST be transported.
So I see us oscillating between $70 the point where shale and tar sands become uneconomic, and $150 where people can't afford to buy. I see us in this range for 5 - 15 years when even the expensive plays begin to peak out. Then we have huge problems as a society as nearly all goods are moved by oil and nearly all goods MUST be transported.
There's one wild card there: some (many?) of the fracking companies aren't really in the oil & gas business. They're in the land-flipping business -- the business of pulling one over on major oil companies by selling them unprofitable wells at high prices. I figured this out after studying some of their annual reports.
I expect the fracking companies to come out with announcements claiming that their wells are profitable at $50/bbl, and surely one of the majors would like to buy the wells now, claiming that the wells are only being offered for sale due to a temporary cash shortage... you know, typical slick salesman talk. It'll all be nonsense of course -- the wells will be unprofitable at $70/bbl -- but they'll CLAIM they're profitable much cheaper. Watch for it.
Because of this dynamic, I'm not at all sure they'll withdraw their unprofitable production within 6 months. They would if they were in the oil & gas business. But when you're in the land-flipping business, you want to make the well "look good" for the buyer, regardless of current profitability. They may instead keep on producing, unprofitably, in an attempt to sell off the wells, until they run out of cash and go spectacularly bankrupt. This could take a year or two.
The Saudis can keep up high production for well over two years, they have huge cheap reserves.
The payback on exploration is already appallingly low (there've been a bunch of articles about this) so that'll probably happen fairly soon regardless... though again, it's taking far too long for the major oil companies to figure this out, so they keep throwing investors' money down the rathole of exploration, despite getting no return on it.
(*This* is actually why I sold off my oil stocks. A far-seeing oil company CEO would have, in 2008, ended all funding for exploration and spun out the profits from selling the oil in the old cheap fields as dividends -- put an oil company into wind-down mode, and it could be spectacularly profitable. Instead, because they are "oilmen" and can't conceive of a future without oil, they are burning stockholders' money on pointless exploration which finds nothing. This is the reason the oil companies are bad investments -- they're wasting their profits.)
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