Oil Prices – what’s going on?

The oil industry went into a panic when prices dropped to a 13-year low of $26.02 per barrel in February 2016 (from $107 in July 2014). But, as the chart below shows, oil prices have been volatile for some time.

oil prices chart

In fact, from 1970 until 2003, oil averaged $25 per barrel. Then in 2004, prices suddenly doubled and then more than doubled again – reaching a record high of $141 in June of 2008.  These increases were due to a series of global events: a significant increase in global oil consumption among developing nations and a reduction in supply due to – Hurricane Katrina in the Gulf of Mexico (2005); reduced production by Iran due to their geo-political issues; and the war in Iraq. Then in late 2008 the global financial crisis severely reduced demand and oil fell dramatically only to recover to $100+ within 12 months.

But, since August 2014 oil prices have been on a steady decline. The reasons are many:

  • Oil consumption (demand) did not increase to anticipated  levels, particularly in China and Europe.
  • North American production increased by 70% from 2008-2015. Hydraulic fracking of shale oil was a major factor.
  • Other forms of energy (wind, solar) were beginning to become main-stream options.
  • Despite lower demand, increased supply and lower prices, OPEC refused to cut back their production – something they had done consistently in the past to manage prices.

So, a lower demand with increased supply meant that prices had to drop until existing inventories were reduced, high-cost oil production operations (shale) shut down thereby no longer adding to the supply and low-cost production countries (OPEC) started considering production cut-backs. In other words, the market would correct itself when cost of production was much higher than the price. By March 2016 that became the reality and many high-cost producers shut down thereby reducing the new supply of oil. As a result prices recovered to $50 by June 2016.

Nobody really knows what oil prices will be in the future but some experts believe that we should prepare for oil to hover around $50 per barrel for the foreseeable future. Here’s why this makes sense:

  • In January 2016, the USA lifted the 40-year ban on exporting US oil thereby increasing the global supply
  • Shale oil production can come back on-stream quickly as inventories are depleted
  • China and Argentina are now developing their own shale oil production capabilities
  • To compete with shale drillers, conventional oil players are improving their field productivity by focusing their resources on more easily recoverable reserves (thereby lowering their production costs).
  • The rise of electric cars, which do not burn gasoline, could negate the historical 1% organic growth rate in oil demand.
  • Even if OPEC countries decide to reduce production to manage prices, the US and other shale-oil producing countries will increase production to fill the gap.

The bottom line is that we now have more global supply options than ever before.

$50 oil puts some producing countries under considerable stress as they grapple with less oil revenue in their national budgets. Venezuela, Nigeria, Iraq, Iran, and Russia could be forced to address substantial budget deficits within the next five years.   Gulf Council producers such as Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar have amassed considerable wealth during the past decade through cash reserves and sovereign wealth funds, but even these countries could come under stress in the next decade because they have committed to significant infrastructure and social spending programs that are heavily dependent on their oil revenues.

But $50 oil also has some major advantages:

  • Consumers are paying a lot less for a gallon of gasoline thereby increasing their overall spending power
  • Industries which are heavily dependent on oil – airlines, trucking and farming – are also benefiting from reduced costs
  • Countries which must import oil (India, European nations) are saving tens of billions annually and can deploy this cash to other deserving projects.

For decades we debated when the world would eventually run out of oil. That is no longer the question. Instead, the issue now become who will control oil’s future and how and when will the world transition away from it. The impact of this disruptive force on the earnings of companies that produce oil, and those that consume it, is likely to be substantial and sustained.

 

Oil – are we running out? … Part 1

oil

Oil has been with us, in various forms, for thousands of years.  Extracting and refining oil became a serious business with the invention of the internal combustion engine in the 1850s.  Since then, the demand for oil (primarily for use in cars, trucks, buses, ships and airplanes) has risen steadily.  Companies who took advantage of this trend evolved to become the biggest and riches firms in the world (Exxon, Chevron, Shell, BP).

Countries where oil was discovered (Saudi Arabia, United Arab Emirates, Kuwait, Brunei, Venezuela, etc) were initially dependent on the multinational oil companies for the skills involved in exploration and production.  Over time, these countries acquired the necessary skills and then nationalized their oil industry. Now these NOCs (National Oil Companies) control approximately 70% of the world’s oil reserves and production (Saudi Aramco; Gazprom – Russia; NIOC – Iran; PetroChina etc).  With their relatively new oil-based riches, these countries have been investing in additional exploration, increasing their military strength and improving the quality of life of their citizens.  These developments have catapulted them to positions of significant financial and military strength.  To protect their new position, they carefully manage the world’s oil supply by increasing or decreasing production to keep the price per barrel at or above $100.  So, with the amount of money at stake and the consequences of that wealth, it’s not surprising that oil rights have been at the center of geopolitics for much of the 21st Century (e.g. the US decisions to partner with Saudi Arabia and then to defend Iraq and Afghanistan were largely aimed at protecting western oil interests from religious/terrorist groups in the Middle East.)

There’s little doubt that for the last 100 years, oil has been the world’s most important natural resource.  Without it our lives would be considerably less comfortable.  But despite the fear that we are depleting the world’s oil reserves (which culminated in the “oil crisis” in the 1970’s), there is no danger that we will run out of oil.  In fact, for the last 10 years, US oil reserves have been growing at the rate of 5-6% per year.  (In the Gulf of Mexico alone, 1 billion barrels of new oil have been found in each of the last 25 years.)   Furthermore, the USA, which consumes 22% of the world’s annual production, is steadily decreasing its oil consumption as alternate forms of energy are being made available (shale gas, solar power etc).

The bottom line is that for some time now the world has been finding more oil than we are consuming.  While control of oil reserves and production has changed hands thereby re-shaping world dynamics, the fact is that the world’s current oil reserves will last us 100+ years. (see chart below for year’s supply of oil by country) 

 

Top oil countries for reserves and   production:  2013
Reserves and production in billions of   barrels. 
Years of supply = reserves / current rate of   annual production
 

 

Annual  

Years   of

Country

Reserves

Production

Supply

Venezuela

297.6

0.88

339.7

Saudi Arabia

267.9

4.20

63.8

Canada

173.1

1.39

124.8

Iran

154.5

1.28

120.9

Iraq

141.3

1.06

133.5

Kuwait

104

1.02

101.8

United Arab Emirates

97.8

1.17

83.7

Russia

80

3.80

21.1

Libya

48

0.55

87.7

Nigeria

37.2

0.91

40.8

 
 
USA

30

4.38

6.8

source:     USA Energy Information Association 2013

Note:  the world’s leading consumers of refined oil are the USA, which consumes 7 billion barrels per year (22% of the world’s annual production) and China which consumes about 15%.  Projections are that China and India will eventually outpace the USA in terms of consumption.

 

 

Water is the new oil

image_1174476908

THIS POST IS INCOMPLETE

 

While there have been numerous conflicts over water (think wild west movies where the bad guys steal water rights for their cattle from the local farmers),  the issues have not escalated to the same scale and water has not had the same impact as oil on geopolitics or global economics.  That could change very soon and here’s why:

Without oil we would be inconvenienced, but our species would survive – as we did for centuries before oil was discovered.  Without water, the average human being would perish after 3 days.  (You can survive without food for almost 3 weeks, but water is essential to our existence because humans are xx% water and without it we  xxxx).

 

Who has the water?

Who needs the water?

Does desalination work?