Oil Prices, Production, Politics

[Aggie]

Note: I'm just parking a few articles here for the moment until I can comment on them, but feel free to discuss...

Interesting fact: The US is now the world's largest oil producer, eclipsing Saudi Arabia
http://www.cbc.ca/news/business/canadian-dollar-sinks-below-88-cents-as-saudis-cut-oil-to-77-a-barrel-1.2822955
http://www.cbc.ca/news/business/loonie-oil-prices-could-fall-much-further-don-pittis-1.2799880


http://www.economist.com/news/leaders/21582516-worlds-thirst-oil-could-be-nearing-peak-bad-news-producers-excellent

The world's thirst for oil could be nearing a peak. That is bad news for producers, excellent for everyone else

THE dawn of the oil age was fairly recent. Although the stuff was used to waterproof boats in the Middle East 6,000 years ago, extracting it in earnest began only in 1859 after an oil strike in Pennsylvania. The first barrels of crude fetched $18 (around $450 at today's prices). It was used to make kerosene, the main fuel for artificial lighting after overfishing led to a shortage of whale blubber. Other liquids produced in the refining process, too unstable or smoky for lamplight, were burned or dumped. But the unwanted petrol and diesel did not go to waste for long, thanks to the development of the internal-combustion engine a few years later.

Since then demand for oil has, with a couple of blips in the 1970s and 1980s, risen steadily alongside ever-increasing travel by car, plane and ship. Three-fifths of it ends up in fuel tanks. With billions of Chinese and Indians growing richer and itching to get behind the wheel of a car, the big oil companies, the International Energy Agency (IEA) and America's Energy Information Administration all predict that demand will keep on rising. One of the oil giants, Britain's BP, reckons it will grow from 89m b/d now to 104m b/d by 2030.

Scraping the barrel

We believe that they are wrong, and that oil is close to a peak. This is not the "peak oil" widely discussed several years ago, when several theorists, who have since gone strangely quiet, reckoned that supply would flatten and then fall. We believe that demand, not supply, could decline. In the rich world oil demand has already peaked: it has fallen since 2005. Even allowing for all those new drivers in Beijing and Delhi, two revolutions in technology will dampen the world's thirst for the black stuff.

The first revolution was led by a Texan who has just died (see article). George Mitchell championed "fracking" as a way to release huge supplies of "unconventional" gas from shale beds. This, along with vast new discoveries of conventional gas, has recently helped increase the world's reserves from 50 to 200 years. In America, where thanks to Mr Mitchell shale gas already billows from the ground, liquefied or compressed gas is finding its way into the tanks of lorries, buses and local-delivery vehicles. Gas could also replace oil in ships, power stations, petrochemical plants and domestic and industrial heating systems, and thus displace a few million barrels of oil a day by 2020.

The other great change is in automotive technology. Rapid advances in engine and vehicle design also threaten oil's dominance. Foremost is the efficiency of the internal-combustion engine itself. Petrol and diesel engines are becoming ever more frugal. The materials used to make cars are getting lighter and stronger. The growing popularity of electric and hybrid cars, as well as vehicles powered by natural gas or hydrogen fuel cells, will also have an effect on demand for oil. Analysts at Citi, a bank, calculate that if the fuel-efficiency of cars and trucks improves by an average of 2.5% a year it will be enough to constrain oil demand; they predict that a peak of less than 92m b/d will come in the next few years. Ricardo, a big automotive engineer, has come to a similar conclusion.

Not surprisingly, the oil "supermajors" and the IEA disagree. They point out that most of the emerging world has a long way to go before it owns as many cars, or drives as many miles per head, as America.

But it would be foolish to extrapolate from the rich world's past to booming Asia's future. The sort of environmental policies that are reducing the thirst for fuel in Europe and America by imposing ever-tougher fuel-efficiency standards on vehicles are also being adopted in the emerging economies. China recently introduced its own set of fuel-economy measures. If, as a result of its determination to reduce its dependence on imported oil, the regime imposes policies designed to "leapfrog" the country's transport system to hybrids, oil demand will come under even more pressure.

A fit of peak

A couple of countervailing factors could kick in to increase consumption. First, the Saudis, who control 11% of output and have the most spare capacity, may decide to push out more, lowering prices and thus increasing demand. Then again, they might cut production to try to raise prices, thereby lowering demand further. Second, if declining demand pushes down the oil price, drivers may turn back to gas-guzzling cars, as they did when oil was cheap in the 1990s. But tightening emissions standards should make that harder in future.

If the demand for oil merely stabilises, it will have important consequences. The environment should fare a little better. Gas vehicles emit less carbon dioxide than equivalent petrol-powered ones.

The corporate pecking order will change, too. Currently, Exxon Mobil vies with Apple as the world's biggest listed company. Yet Exxon and the other oil supermajors are more vulnerable than they look (see article). Bernstein, a research firm, reckons that new barrels of oil from the Arctic or other technologically (or politically) demanding environments now cost $100 to extract. Big Oil can still have a decent future as Big Gas, but that will not prove as profitable.

The biggest impact of declining demand could be geopolitical. Oil underpins Vladimir Putin's kleptocracy. The Kremlin will find it more difficult to impose its will on the country if its main source of patronage is diminished. The Saudi princes have relied on a high oil price to balance their budgets while paying for lavish social programmes to placate the restless young generation that has taken to the streets elsewhere. Their huge financial reserves can plug the gap for a while; but if the oil flows into the kingdom's coffers less readily, buying off the opposition will be harder and the chances of upheaval greater. And if America is heading towards shale-powered energy self-sufficiency, it is unlikely to be as indulgent in future towards the Arab allies it propped up in the past. In its rise, oil has fuelled many conflicts. It may continue to do so as it falls. For all that, most people will welcome the change.

[Sibling Zono (anon1mat0)]

Just at a glimpse hybrid car sales' have been inverse mirroring the price of gas, at least in the US, not surprisingly considering that the US is the lowest ranking in a recent poll about anthopogenic climate change at 54%, with Australia and the UK (64%) below Russia at 67%!

As bad things go it may help dissuade further exploitation of the oil sands in Alberta but considering that fracking releases enormous amounts of methane as part of the process it may be actually worse.

In a country like the Netherlands only 44% of the population think is anthropogenic and 57% perceive it as a threat, even here in FL 55% think is anthropocentric. If those with the most to lose don't think this is a problem, oil prices going down really doesn't help things at all.

[Griffin NoName]

the US is the lowest ranking in a recent poll about anthopogenic climate change at 54%, with Australia and the UK (64%) below Russia at 67%!

Nicely put except I can't get my head round the embeded covert double negative.

Do 64% of UK people tend towards such things as approving or disapproving fracking?

My anecdotal belief is it's only the govt. that wants it, and the industry of course. Ordinary people seem either disinterested or against it.

[Sibling Zono (anon1mat0)]

What I meant was that only 54% of Americans, 64% of Brits and Aussies and 67% of Russians believe that global warming/climate change is man made, that is a majority but not a substantive one, and the lowest levels of all the polled countries. If I use the list from the wiki the numbers are worse (see here).

[Aggie]

It's a double edged sword, oil prices.  Low oil prices make the high-technology, high-polluting projects uneconomical, but encourage consumption and global trade.  I've been through an oil-price spike in the patch, and that actually blocks new development of oil sands projects too, because of the high price of diesel and gasoline.  The entire support / service industry starts adding hefty fuel surcharges, which can get significant. 

High oil prices encourage production, but also encourage faster development of alternative energy systems, which become economically competitive on a per-joule basis. They also serve to dramatically increase shipping costs, which potentially helps countries find a domestic market for their own products.  Energy costs for fossil fuels are much more egalitarian on a global basis than labour costs, so when the energy cost of a product becomes much larger than labour, there is less of an incentive to produce it in a low-wage economy.

A beneficial side effect of the development of new energy technologies may be a race to the bottom in energy prices.  If / when we reach a peak in demand for petroleum, and therefore an excess supply, producers will be motivated to keep lowering prices to stay one step ahead of the electrical energy economy (which looks to soon include hydrogen, possibly produced from natural gas and still producing CO₂ as a storage medium). This may prolong the use of oil, but also will provide an impetus for reductions in cost for green energy systems.

[Sibling Zono (anon1mat0)]

Oil prices have an enormous impact on so many things, like day to day prices in the 3rd/developing world (provided oil isn't subsidized), on the politics of those who derive their income from oil (like the Saudis, Venezuelans, Russians, etc), on the ability to support questionable errands from Al Qaeda to the Iraq war, and on the ability of producing countries to artificially sustain their their populations triggering unrest (like the Arab spring).

To me it's surprising how insulated is the American (and to a lesser extent the developed world) population from said impact. Yes, people started buying Priuses when the gallon of gas went up to $4 (which I know is cheap for European standards), but in general consumer prices weren't affected that much by the obvious 100% jump in price in a relatively short period of time. Things south of the border are very different, as the profit margins are significantly smaller every product feels the impact, and in direct consequence the people feel's the impact in a very direct way.

I would hope that that is the silver lining here, but I know first hand it doesn't work that way, in Colombia for instance, prices never went down despite the obvious change, as the Government controls the price and keeps the margin as taxes. I wouldn't be surprised if that is a common occurrence in the developing world.

OTOH, there are voices claiming that fracking is a fad creating a[n unsustainable] bubble, that the rate of production drops quite quickly and that the boom will necessarily will be follow by a bust. Somehow that one sounded quite right when I heard it, so who knows, the prices may be going down for now, but may go up again in a not so distant future.

[Aggie]

I think if we're talking shallow natural gas plays via fracking, it's probably correct.  I anticipate that over the short term (this decade) there will be a lot of manufacturing, power generation and vehicles (especially long-haul and public transit) switching to LNG to take advantage of the near-ubiquity of natural gas thanks to the new technology, but this source isn't generally held in large reservoirs the same way that 'old' methane is.  The environmental advantage (which is pretty much nullified by the fracking process) is that it's also probably not associated with salt water from ancient seabeds to the degree that traditional deep-gas reservoirs are. Traditional gas wells are, on the whole, a much cleaner business than oil wells.  I've done environmental inspections on hundreds of the things, and normally the worst impact from sweet gas extraction is spilled compressor lubricating oil from compression stations; wellsites tend to be pretty clean and low-impact once drilled.  Minor but persistent oil leaks are ubiquitous around oil pumpjacks.

Incidentally, natural gas is used heavily in steam generation for in-situ bitumen extraction (and probably for processing open-pit mined tarsands too), so cheap gas makes hard-to-extract dirty oil more viable as well.

Food prices here are definitely somewhat higher than they used to be, but you're correct; despite transportation being a major factor in produce pricing, it really hasn't jumped up that much. I personally don't mind seeing imported produce prices jump a bit, but that's because I'm from a food producing region and try to buy local as much as possible.  Higher industrial food prices from California or Florida acts as a bit of a trade equalizer with the local organic produce I'd rather buy.