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Softpanorama Energy Bulletin, 2015

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[Dec 31, 2015] Oil, Asia shares see subdued end to year dominated by Fed, China

Notable quotes:
"... While cheaper fuel is a boost to consumer spending power in much of the developed world, it is also a disinflationary force that reinforces bets on loose monetary policy in Europe, Japan and China, even as the Federal Reserve proceeds with glacial tightening ..."
finance.yahoo.com

While cheaper fuel is a boost to consumer spending power in much of the developed world, it is also a disinflationary force that reinforces bets on loose monetary policy in Europe, Japan and China, even as the Federal Reserve proceeds with glacial tightening.

Oil prices are ending the year how they began - under pressure.

[Dec 31, 2015] Top Wyoming oil companies write off $41 billion in assets, while capital spending drops 51 percent

See EIA Crude Oil Production . US production was surprisingly stable in 2015. Since May the figures are 9,479 (May) 9,315 (June) 9,433 (July) 9,407 (August) 9,460 (Sep) 9,347 (Oct)
Notable quotes:
"... US #crudeoil production down to 9.347mbpd in Oct15 from an upward revised 9.460 in Sep15 ..."
"... Texas #crude production down to 3391000 b/day in Oct15 from a revised down 3417000 b/day in Sep15 ..."
"... The write-offs, known officially as impairments, represent a recognition that many wells will have shorter productive lives than initially anticipated, analysts said. It also reflects an acknowledgement that companies may have to pay for the cost of plugging and abandoning wells sooner than they expected, they noted. ..."
"... Chesapeake Energy, Wyomings fourth-largest oil producer, reported impairments of $15.4 billion through the first three quarters of 2015. The Oklahoma City-based producers woes are primarily tied to natural gas. ..."
"... Oil patch bankruptcies have accelerated in the fourth quarter of 2015 as a supply glut keeps prices stuck below $40 a barrel. Ten firms, with more than $2 billion in debt, have closed their doors since October, according to the Federal Reserve Bank of Dallas. ..."
"... Capital spending has fallen 51 percent since the third quarter, the bank said ..."
peakoilbarrel.com
Dean , 12/31/2015 at 1:13 pm
Petroleum Supply Monthly is out:

TechGuy , 12/31/2015 at 2:20 pm

http://trib.com/business/energy/top-wyoming-oil-companies-write-off-billion-in-assets/article_d380f763-962e-587d-9d9a-2af39b1e166d.html
Top Wyoming oil companies write off $41 billion in assets

" The write-offs, known officially as impairments, represent a recognition that many wells will have shorter productive lives than initially anticipated, analysts said. It also reflects an acknowledgement that companies may have to pay for the cost of plugging and abandoning wells sooner than they expected, they noted. "

" Chesapeake Energy, Wyoming's fourth-largest oil producer, reported impairments of $15.4 billion through the first three quarters of 2015. The Oklahoma City-based producer's woes are primarily tied to natural gas. "

" Oil patch bankruptcies have accelerated in the fourth quarter of 2015 as a supply glut keeps prices stuck below $40 a barrel. Ten firms, with more than $2 billion in debt, have closed their doors since October, according to the Federal Reserve Bank of Dallas.

Capital spending has fallen 51 percent since the third quarter, the bank said . And the global supply glut may linger into 2017, it noted, pointing to estimates that production will outpace demand by 600,000 barrels per day through 2016."

[Dec 31, 2015] We might have a condensate glut, at least in the US, and perhaps globally.

Notable quotes:
"... I suspect that we actually have a condensate glut, at least in the US, and perhaps globally. ..."
"... Oil production is affected by geopolitics. But it is not a function of geopolitics. Oil production is a function of the cost of production versus the price of oil… but the most important function is the availability of oil in the ground to produce. If the oil is not there then geopolitics or the price of oil counts for nothing. And that is what Stavros fails to understand. ..."
"... Give me a break. Every country is producing every barrel they possibly can. Which country was holding back when oil was over $100 a barrel? Saving oil for the future? They are in recession right now. Most of them anyway. No one is hording oil. A lot of oil is not being produced because of the very low price of oil but everyone is still trying desperately to meet their budgets by producing every barrel they possibly can at the cost they can afford. ..."
Peak Oil Barrel

Jeffrey J. Brown, 12/30/2015 at 4:16 pm

I suspect that we actually have a condensate glut, at least in the US, and perhaps globally.

Javier, 12/30/2015 at 4:33 pm

The possibility of a global recession in 2016 must be taken into account in any scenario, given how weak is the economic situation of the world.

A global recession in 2016 probably means the peak [reached in] oil [ production] in 2015 will last for at least 10 years, and probably forever.

Stavros Hadjiyiannis, 12/30/2015 at 5:23 pm

Is this the 545289658th time that someone has claimed that Russian oil production has peaked?

In any case, oil production is a function of primarily price. If the price is right, then there will be oil for many decades ahead. Oil production is also a function of geopolitics. Also a function of technology and also a function of alternatives. Ron seems to be missing the point that for decades, oil rich countries have no choice but to defer to a great extent to Western oil production. Those that are included in the Western security and financial system (GCC) have an extra incentive to do so, saving their oil for the future.

Ron Patterson, 12/30/2015 at 6:31 pm

Is this the 545289658th time that someone has claimed that Russian oil production has peaked?

Don't be a fucking smart ass. Make your point without stupid exaggerations.

In any case, oil production is a function of primarily price.

Really? Look at the chart above marked "The Rest of the World". Now tell me, at what point did very expensive oil increase production.

Oil production is also a function of geopolitics.

Bullshit! Oil production is affected by geopolitics. But it is not a function of geopolitics. Oil production is a function of the cost of production versus the price of oil… but the most important function is the availability of oil in the ground to produce. If the oil is not there then geopolitics or the price of oil counts for nothing. And that is what Stavros fails to understand.

Ron seems to be missing the point that for decades, oil rich countries have no choice but to defer to a great extent to Western oil production.

What in the hell are you talking about? Since when has Saudi Arabia deferred to Western oil production?

Those that are included in the Western security and financial system (GCC) have an extra incentive to do so, saving their oil for the future.

Give me a break. Every country is producing every barrel they possibly can. Which country was holding back when oil was over $100 a barrel? Saving oil for the future? They are in recession right now. Most of them anyway. No one is hording oil. A lot of oil is not being produced because of the very low price of oil but everyone is still trying desperately to meet their budgets by producing every barrel they possibly can at the cost they can afford.

[Dec 31, 2015] From Oil Glut to Shortage Some Say It Could Happen

Such articles are just astrology of a new type. Situation is now less predictable. It is difficult to tell whether the price of oil would be up $10 or down $3 the next year. It could go either way within the next year, or even within the next month or two. Like the tip of an iceberg, the current slump in world prices sits atop a lot of unknowns. To some energy experts, the oil-price plunge proves that the free market is working and that national economies, hit by secular stagnation, can begin breathing easier. All of a sudden, people decided oil stocks were enormous and there is supply glut, while in reality it was dumping of oil prices by Saudis that lowered the prices. To most experts, ''oil glut'' looks like a very temporary phenomenon that could turn into a serious shortage in a half of a year or so. These experts warn that low prices and headlines about an oversupply of oil risk undermining the West's recent and vital commitments to increased oil exploration, energy conservation and, especially, development of alternate energy sources. many observers say that shale and tight oil are unprofitable at prices below $60 per barrel.
Any drop in oil prices reduces inflationary pressures and stimulates the economy. there in the USA there was no inflationary pressures. Still low oil prices is in effect a reduction in the taxes that all Americans have to pay to foreigners. Consequently reduced oil prices are certainly in the country's best interests. But at the same time the apparent oil glut is a passing phenomenon which must not distract attention from the risk of major supply disruptions in the near future. An Islamic revolution can topple the royal family of Saudi Arabia.
Typically when oil prices go lower, they tend to go much farther than people anticipated. The drop in oil prices is already having an impact on shale extraction and offshore drilling.
Notable quotes:
"... The price rout has caused oil companies to cut deeply into investment. With the world awash in crude, the oil industry is contemplating a new problem the oversupply could tee up: an oil shortage. ..."
Dec. 30, 2015 | WSJ

The price rout has caused oil companies to cut deeply into investment. With the world awash in crude, the oil industry is contemplating a new problem the oversupply could tee up: an oil shortage.

[Dec 31, 2015] Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

Notable quotes:
"... Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge. ..."
"... Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013. ..."
"... Figure 3. US Dollar Index from Intercontinental Exchange ..."
"... Figure 4. World liquids production (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data. ..."
"... what it costs to produce commodities, and what customers can really afford ..."
"... Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings. ..."
oilprice.com

08 December 2014 | OilPrice.com

Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant its fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.

If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.

The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.

Related: Who Comes Out On Top After Oil Pandemonium?

Offshore drilling is also being affected. Transocean, the owner of the biggest fleet of deep water drilling rigs, recently took a $2.76 billion charge, among a "drilling rig glut."

3. Shale operations have a huge impact on US employment.

Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:

Jobs With Vs Without Shale

Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.

Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.

It might be noted that even the "Non-Shale" states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market , so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar , because of the high default risk with low oil prices. Russia's Rosneft is also reported to be having difficulty with its loans .

There are many ways banks might be adversely affected by defaults, including

After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out "too big to fail" banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports , such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1

Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.

Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.

The collapse of the Former Soviet Union in 1991 seems to be related to a drop in oil prices .

Oil Production And Price In USSR

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.

Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria's economy is reported to be "tanking." Russia even has a possibility of collapse, although probably not in the near future.

Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.

Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise.

When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.

Airlines seem to be more interested in adding flights than reducing ticket prices in response to lower oil prices, perhaps because additional planes are already available. Their intent is to increase profits, through an increase in ticket sales, not to give consumers the benefit of lower prices.

In some cases, governments will take advantage of the lower oil prices to increase their revenue. China recently raised its oil products consumption tax, so that the government gets part of the benefit of lower prices. Malaysia is using the low oil prices as a time to reduce oil subsidies .

Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because the price drop is only temporary, few business people are saying to themselves, "Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil]." Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.

Issue 7. Hoped-for crude and LNG sales abroad are likely to disappear, with low oil prices.

There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil . According to this story, "There's so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore."

LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.

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Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.

Many people believe that renewables can eventually take over the role of fossil fuels. ( I am not of the view that this is possible. ) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.

Despite all of the statements made about renewables, they don't really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn't around, the biofuel production system comes to a screeching halt.

Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.

If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.

Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.

The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.

US Dollar Index

Figure 3. US Dollar Index from Intercontinental Exchange

The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.

China's yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are, no doubt, other reasons why China's growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency .

Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.

There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.

(Increasing debt is a big part of pumped up "demand" for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect).

QE doesn't work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.

As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the "uplift" needed to keep oil prices high enough to cover production costs.

World Liquids production

Figure 4. World "liquids production" (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

The sharp drop in price in 2008 was credit-related , and was only solved when the US initiated its program of QE started in late November 2008 . Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.

Part of the problem seems to be the differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.

QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.

The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don't rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.

QE allows financiers to disguise the growing mismatch between what it costs to produce commodities, and what customers can really afford . Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers' lack of income is disguised by a continued growth in debt.

Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world's ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.

Conclusion

There are really two different problems that a person can be concerned about:

1. Peak oil : the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.

2. Debt related collapse : oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil "demand" (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.

Related: A Glimmer Of Hope In Current Oil Price Slide?

The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world's financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.

At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.

Future Energy production

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Notes:

[1] There is of course insurance by the FDIC and the PBGC , but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn't be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008 . Insurance would seem to be available, but in practice, would not pay out much.

[2] LOCs are required when goods are shipped internationally, before payment has actually been made. They offer a guarantee that a buyer will be able to "make good" on his promise to pay for goods when they arrive.

By Gail Tverberg

Source - http://ourfiniteworld.com/

More Top Reads From Oilprice.com:

[Dec 31, 2015] Condensate production has one of the steepest decline rates

peakoilbarrel.com

Heinrich Leopold , 12/31/2015 at 4:10 am

... condensate has one of the steepest decline rates – at least in Texas. As November and December 2014 production has been very high, the rates are very likely much steeper in November and December 2015, reaching record decline rates of 50% (see chart below).

[Dec 31, 2015] There is no worldwide collapse of demand that justify 65-70% fall of the oil price

Notable quotes:
"... There has been a lot of talk regarding the oil glut, but according to EIA crude inventories there is only 105.1 million more barrels of crude than a year ago. That is just 6.4 days of refineries inputs. It does not seem a lot, even less to justify a 60% decrease in the oil price. Oil must be the only commodity industry where one week of extra inventory produce such a price correction. ..."
"... It is even worse if we consider that gasoline inventories are just 0.4% higher than a year ago. The most important product which represents 46% of the refineries output is at 2014 level. Where is the glut? ..."
"... There is a glut in distilite fuel oil, residual fuel oil, propane/propylene and fuel ethanol. ..."
"... I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates. ..."
"... If we had so much (generally cheaper than imported) actual crude oil on hand in the US, why are refiners importing the same amount of crude oil as they did last year? ..."
peakoilbarrel.com
Ves , 12/25/2015 at 2:23 pm
Steve,
I agree with your post about market dynamics between customers having to pay through their purchasing power in order to retire loans created by financial industry for oil companies. But there are a few things that make this oil crash little bit "strange" to say at least:

1) OPEC (and mainly Saudis + GCC) did actually something by not doing anything and that is refusing to cut their production. Well that is "man made" decision as Oman oil minister said and not decision by invisible hand of market. I interpret this mainly as political decision and not economical.

2) Second. Wall Street was pretty much shocked if not pissed by that Saudi decision. I interpret that to be political reaction as well.

3) There is no worldwide collapse of demand that justify 65-70% fall of the oil price. I am sorry but Wall Street is creating ninja loans for cars, student loans, mortgages from the thin air with the same speed in the US. I would say that is political decision as well. Worldwide collapse is not happening as of now either that would justify 65-70% drop of price. Contraction is happening in Europe but very very gradually except in some marginal countries like Greece, and war torn countries in ME and Africa. But these marginal countries did not even have any big consumption to begin with.

4) Shale oil producer based on their balance sheet were bankrupt from Day 1. Why LTO even got the loans to begin with? That is also political decision and not an economic. Why are we waiting even a year after low prices for any major mergers, buyouts or bankruptcies? I am sorry but 100% of LTO are bankrupt so why Wall Street is extending and pretending and keeping them on a life support? Well it is again political decision.

So yes there are some market dynamics around this oil crash but there are a lot of political dynamics as well.

Cacerolo , 12/10/2015 at 12:00 am
This is my first post in this blog.

There has been a lot of talk regarding the oil glut, but according to EIA crude inventories there is only 105.1 million more barrels of crude than a year ago. That is just 6.4 days of refineries inputs. It does not seem a lot, even less to justify a 60% decrease in the oil price. Oil must be the only commodity industry where one week of extra inventory produce such a price correction.

It is even worse if we consider that gasoline inventories are just 0.4% higher than a year ago. The most important product which represents 46% of the refineries output is at 2014 level. Where is the glut?

There is a glut in distilite fuel oil, residual fuel oil, propane/propylene and fuel ethanol. It seems that there is a big problem in the industrial part of the demand or maybe there is a big unbalance between what refineries can produce and what the market needs.

Warm weather promotes more driving, so we could start spring 2016 with gasoline inventories quite reduced and we could face a high gasoline price environment while we still have this huge oil glut that the media talks all day long.

I have no idea if what eia states in its inventory report as crude and other oils ( the two mayor inventory items by quantity) can be completely used as inputs to produce gasoline or if there are some technical limitations ( not any type of crude can be used to product any type of output). Maybe, and just maybe we have a glut of some types of oil and condensate that nobody needs in the quantities it has been produced since the shale boom.

Clueless , 12/10/2015 at 5:13 am
It is basic economics when it comes to any commodity. If there is a shortage, the price can rise rapidly to the amount that the most critical user will pay. Ask yourself "at what price would the hospitals, ambulances, fire trucks, police cars, offshore drilling rigs [which are being leased for up to $600,000/day], say the price is too high, we will just shut down?" With a small surplus, the price of a commodity will drop like a rock, as buyers see no need to have high inventories and shop around for the lowest price, looking for a seller that has to sell at any price.

A game analogy. Musical chairs with 20 players and only 19 chairs (only short by 1), and two other rules: The person without a chair gets killed, but there is one chair for sale and anyone can buy it to guarantee their safety. How high would the bidding go? Up to the point of the person with the most money.

Same game with 20 players and 21 chairs (only 1 extra). How high would the bidding go? Zero, as everyone can see that there is more than enough for everybody.
You can easily see this play out even more frequently by looking at charts for agricultural products such as: wheat, corn, soybeans, etc.

Prices can double quickly if there is a crop surplus, and fall by over 50% just as quickly if the next crop has a surplus.

oldfarmermac , 12/10/2015 at 7:56 am
Clueless, you are not when it comes to commodity prices. I wish I had thought of the musical chairs analogy myself. But you got in a little bit of a hurry in his last sentence and should have said prices can double quickly if there is a crop SHORTAGE.

Commodity food prices are not nearly so inelastic as oil prices, because there are generally plenty of substitutes for any GIVEN food that might be in short supply. But the price can still double in the event of a short crop, it happens.

There are NO short term substitutes for oil.

Clueless , 12/10/2015 at 4:35 pm
Thanks OFM. However, my error was not due to being in a hurry, it was due to being 4:13 am my time, and I was still half asleep.
Nick G , 12/10/2015 at 4:44 pm
There are NO short term substitutes for oil.

I know what you mean, but that's a little strong. Driving slower, driving your small car instead of your SUV, mass transit, carpooling: there are a lot of short term substitutes.

None of them are perfect substitutes for dirt cheap oil…but that's different (and, of course, dirt cheap oil doesn't really exist if we take into account externalities).

Patrick R , 12/10/2015 at 5:11 pm
The US just needs to price driving accurately and a huge amount of low value wasteful trips would suddenly become understood as unnecessary. Furthermore the uplift this would give to all alternatives; not just EVs (you guys are so stuck in autodependency), but Transit, active modes, and, most importantly of all; the rise of the local, would huge. And please note, this is not subsidy, simply user pays, just price driving for all its costs, direct and external. Sorted.

Also always remember that proximity trumps mobility; that's why cities exist!

Sprawl topia is doomed, but I guess that's hard to grasp when it's all people have ever known. And getting real about actual cost allocation is the mechanism to get North America out of the current stuck pattern. Climate change and all other pollution mitigation isn't about personal choice it's about rational cost allocation; by all means choose to stink, just actually pay the whole cost and there will be more rational actors than old contrarians.

The craziest thing is that otherwise libertarian freemarketers are violently committed to the Soviet style socialism that is your taxpayer funded driving amenity and no-price driving system. What kind of crisis will it take for reality to be grasped in this area? Cos I suspect you'll get it sooner or later.

Meantime: Keep on truckin'…

Jeffrey J. Brown , 12/10/2015 at 7:40 am

There has been a lot of talk regarding the oil glut, but according to eia crude inventories there is only 105.1 million more barrils of crude than a year ago

What the EIA calls "Crude oil" is actually Crude + Condensate (C+C).

I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates.

In any case, based on the most recent four week running average data, US refineries were dependent on net crude oil imports for 43% of the C+C processed in US refineries (7.1/16.5) versus 44% a year ago (7.1/16.2). If we had so much (generally cheaper than imported) actual crude oil on hand in the US, why are refiners importing the same amount of crude oil as they did last year?

*Most common overall dividing line between crude & condensate is 45 API

Dennis Coyne , 12/10/2015 at 9:06 am
The market for oil is a World market, look at IEA reports for a better look at the International market. Last time I checked, st0rage levels in the OECD were about 250 million barrels above the 5 year average level. There is a limited number of places to put the oil that has been produced, and storing oil costs money, so when there is an excess prices fall. In theory this should increase demand at any given level of World GDP and it should reduce supply as higher cost production is less profitable at lower prices. It takes some time for this adjustment to take place (people don't go out and buy a gas guzzler right away and oil producers try to outlast their competitors, hoping the other guy stops producing as much). So far it has been about 12 months since oil prices dropped sharply, it may take another 12 months, maybe more for production to slow down and excess inventories to be used up.

If there is not a severe recession worldwide in the next 24 months, I would be surprised if oil prices are not above $60/b, 18 months to 36 months from now, possibly they will be much higher.

It depends on how quickly the oil business can ramp back up after the downturn over the next 1 to 2 years. The longer it takes, the higher oil prices will go, but at some point there may be a major recession, due in part to inadequate oil supply two or three years in the future.

Chart below with the Reference Oil Price case for Brent Oil in 2013$ from the EIA's Annual Energy Outlook published in April 2015.

Heinrich Leopold , 12/10/2015 at 4:17 am
Given the recent discussions about where US oil and gas production is headed, I have tried to find some forward looking indicators. Well permits and well completions seem to give reasonable indicators for future production. Below chart indicates that at least Texan oil and gas production will steeply slump over the next months. Well permits declined fivefold to a six year low and well completions are not far behind. It will be interesting to see the consequences of this trend.

Dennis Coyne , 12/10/2015 at 9:10 am
The RRC Production data is very bad for the most recent 18 months. Texas output has in fact been relatively flat from Nov 2014 to Sept 2015. Perhaps the completion data suffers from the same reporting problems. Permit data is just not very useful.

[Dec 31, 2015] Why Saudis are damping oil at such a low price

Notable quotes:
"... One theory afloat is that the US and Saudi Arabia are allies in an economic and political war against their enemies. According to this narrative, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut, and sending oil prices into a tailspin, is to shipwreck the economies (and the polities) of US and/or Saudi enemies - e.g., Venezuela, Iran, and Russia. ..."
"... Saudi Arabia hasnt dramatically increased oil production. Their most recent peak in June of 2015 was only a couple hundred thousand barrels per day more than the previous peak back in mid-2013. Thats about 2-3% increase over two years. I wouldnt call that, dramatic. ..."
"... Ron is basically correct. The people who think that oil production is a function of the price are assuming that the oil is there to produce. Now, unless there are a few supergiant fields out there, already discovered and waiting for some State Oil Company or some multi-national oil company to make a Final Investment Decision, that assumption is incorrect. There is a handful of locations which could potentially have supergiant oil fields that are so far undiscovered, Im not that confident that they are there to find, since discovery in the last couple of decades has been a long way short of consumption, even after the price went sky high and everybody and their dog was spending big on exploration. ..."
"... Tight oil has been developed in the US on the basis of unrealistic projections of ongoing production, due to depletion rates being vastly higher than admitted when spruiking to investors. Sooner or later, it was bound to run into problems. These problems have arrived sooner, as opposed to later, due to OPECs price war, which is aimed at sending the tight oil industry broke. Producers have cut back on drilling and concentrated with increased intensity on sweet spots , where production is likely to be highest. They have also introduced technological progress that has cut the price of drilling substantially and thus cut the break-even price for a well of a given production level, but the industry is still losing money. A loss-making industry is unsustainable and, therefore, will not be sustained. Something has to give. ..."
"... At this point, what will be relevant is just how extensive the sweet spots in the tight oil formations are. Having been burnt once, investors will be working on much more careful examination of likely decline rates and wont support drilling wells just to keep production up, if those wells wont recover their costs within the time frame of the investment horizon. ..."
"... The $64 thousand dollar question, therefore, is how long the US tight oil industry is going to be able to keep finding sweet spots where they can extract sufficient tight oil to pay back the cost of drilling. ..."
"... I am NOT saying the Obama administration is colluding with the Saudis, secretly, to keep the price of oil down. I AM saying Uncle Sam is no doubt perfectly happy about oil selling for peanuts, because peanut oil prices are a damned good economic tonic. There must be fifty people happy about cheap gasoline for every one person hurting because he lost his ass or his job in the oil business. Fifty to one. No politician in his right mind can afford to overlook that sort of thing. ..."
"... Im ready to bet the farm that no documentation ever comes to light proving Uncle Sam is trying to force oil prices up at this time. OTOH, Uncle Sam and the Saudis share some very heavy duty common interests when it comes to Iran and Russia. ..."
peakoilbarrel.com

likbez , 12/30/2015 at 9:50 pm

Ron,

OK. Let's assume there is no geopolitics here. But then why Saudis are damping oil at such a low price.

In 2015 they exported over 7.3 Mb/d and got 118 Billions. In 2012 they exported something between 7.658 Mb/d (CIA, probably crude only) and 8.42 mb/d (Bloomberg, probably crude and refined products) and got 336.1 billion.
http://www.bloomberg.com/news/articles/2013-07-29/saudi-arabian-2012-oil-export-revenue-gained-5-as-iran-fell-12-

If they just cut 1 Mb/d and that allows to preserve 2014 average price of oil (not even 2013 average price) they would get 125 billions (and preserve 12 Mb from their depleting wells for moment of higher prices which will eventually come.)

In any case they managed to achieve almost 3 times drop of revenue from 2012. Three times --

Now they have almost $100 billion budget deficit in 2015 (and almost the same, 86 billions estimate of deficit for 2016) and only around 600 billions in reserves.

Questions:

1. Why they rocked the boat?

2. Where is the logic in their actions, unless we assume that they want to destroy Iran (and hurt Russia) ?

3. Why MSM spread all this BS about Saudis defending their market share ? Does it look like they are defending something else ?

Glenn Stehle , 12/31/2015 at 9:43 am

One theory afloat is that the US and Saudi Arabia are allies in an economic and political war against their enemies. According to this narrative, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut, and sending oil prices into a tailspin, is to shipwreck the economies (and the polities) of US and/or Saudi enemies - e.g., Venezuela, Iran, and Russia.

"Obama's foreign policy goals get a boost from plunging oil prices"
https://www.washingtonpost.com/business/economy/as-crude-oil-prices-plunge-so-do-oil-exporters-revenue-hopes/2015/12/23/ed552372-a900-11e5-8058-480b572b4aae_story.html

The war, however, is not being conducted without inflicting significant damages on US allies - e.g., Mexico, Canada, Saudi Arabia, Colombia - and domestic US production as well.

Ambrose Evans-Pritchard, for instance, published an article a couple of days ago about the immense economic damage being inflicted on Saudi Arabia's economy and polity:

"Saudi riyal in danger as oil war escalates"
http://www.telegraph.co.uk/finance/economics/12071761/Saudi-riyal-in-danger-as-oil-war-escalates.html

We'll see who blinks first, or who is left standing after all the bloodletting takes place.

Peak Signs , 12/31/2015 at 10:32 am

"According to this theory, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut…"

Saudi Arabia hasn't dramatically increased oil production. Their most recent peak in June of 2015 was only a couple hundred thousand barrels per day more than the previous peak back in mid-2013. That's about 2-3% increase over two years. I wouldn't call that, dramatic.

http://peakoilbarrel.com/opec-crude-oil-production-charts/

Glenn Stehle , 12/31/2015 at 11:00 am

I think you're arguing semantics.

Would you also argue that the Saudi response to the glut in 2009 was the same to its response to the glut in 2015?

Ablokeimet , 12/31/2015 at 3:07 am

Ron is basically correct. The people who think that oil production is a function of the price are assuming that the oil is there to produce. Now, unless there are a few supergiant fields out there, already discovered and waiting for some State Oil Company or some multi-national oil company to make a Final Investment Decision, that assumption is incorrect. There is a handful of locations which could potentially have supergiant oil fields that are so far undiscovered, I'm not that confident that they are there to find, since discovery in the last couple of decades has been a long way short of consumption, even after the price went sky high and everybody and their dog was spending big on exploration.

What interests me is the bit from the previous post, where OPEC projected prices based on their estimate of what it cost to produce the marginal barrel. I think that is a good line to take, until it reaches the point where governments of OPEC countries decide that, with Peak Oil passed and production in irreversable decline, they are going to start hoarding production and make the rest of the world go short.

The thing to realise with projecting prices based on the cost of production of the marginal barrel is that it should be taken as a tendency working on a 5 year or even decadal scale. In time periods short of that, you can get price wars sending prices down below the marginal cost and price spikes producing windfall profits even for the highest cost producers. The price wars lead to national and multi-national oil companies cutting back on capital expenditure, which eventually leads to stagnating or declining production and a recovery in prices. Price spikes lead to huge resources being spent on exploration and development as everybody wants to cash in.

OPEC's production assumptions are a lot less sensible than their price projections. They assume two things:

(a) That the oil is there to increase global production; and

(b) Most of that oil, from 2020 to 2040, will come from OPEC countries.

Conventional crude oil production is flat out right now and, as I said above, unless someone is hiding a few undeveloped supergiant fields somewhere, it's got nowhere to go but down. Let's look at unconventional sources, then.

1. Polar and deepwater oil. A huge amount has been spent exploring for this and the results have been underwhelming. Sure, they've found oil, but not in anywhere near the quantities needed. Shell recently pulled out of the Arctic because of the combination of environmental protests and poor exploration results. If they were discovering heaps, they'd just tough out the protests – as anybody who knows the first thing about corporate capitalism could tell you.

2. Canadian tar sands. Production of these has been expanding, but it hasn't been to the rate that one might imagine from the published resource data. This is because the rate of production is subject to certain limits, due to inputs. The relevant inputs in this situation are water and natural gas – and it is water which is the harder limit. Basically, they can't produce more oil from the tar sands than the rivers of the region can support. These limits will sooner or later, and I believe sooner, put a ceiling on Canadian production. Absent a huge shift in consumption caused by climate change mitigation action, it will keep at that limit for many decades to come, but it won't exceed it.

3. Venezuelan extra heavy. This is the factor about which I know least, but there doesn't appear to be a lot of it on the market yet. There seem to be a lot of obstacles in the road of high production.

4. Tight oil. One thing that everybody who is knowledgeable admits is that there is a lot of "oil in place" in this category. The question is how much of this is recoverable in a practical sense. This industry has developed in the US, primarily because it brings a number of environmental hazards with it and, outside the US, landholders are blocking exploitation because of environmental concerns. In the US, landholders have a financial interest in ignoring these concerns, because mineral royalties are vested in the landowner.

Tight oil has been developed in the US on the basis of unrealistic projections of ongoing production, due to depletion rates being vastly higher than admitted when spruiking to investors. Sooner or later, it was bound to run into problems. These problems have arrived sooner, as opposed to later, due to OPEC's price war, which is aimed at sending the tight oil industry broke. Producers have cut back on drilling and concentrated with increased intensity on "sweet spots", where production is likely to be highest. They have also introduced technological progress that has cut the price of drilling substantially and thus cut the break-even price for a well of a given production level, but the industry is still losing money. A loss-making industry is unsustainable and, therefore, will not be sustained. Something has to give.

Eventually, the price of oil will recover to be equal to or greater than the marginal cost of production. At this point, what will be relevant is just how extensive the sweet spots in the tight oil formations are. Having been burnt once, investors will be working on much more careful examination of likely decline rates and won't support drilling wells just to keep production up, if those wells won't recover their costs within the time frame of the investment horizon.

The $64 thousand dollar question, therefore, is how long the US tight oil industry is going to be able to keep finding sweet spots where they can extract sufficient tight oil to pay back the cost of drilling.

What's going to happen in other countries? Not a great deal, I predict. Opposition from the local population, led by local landholders, will delay and minimise production from tight oil reservoirs. It won't completely prevent a tight oil industry developing in many other countries, but it will ensure that it never develops the dimensions of the current oil industry. Tight oil production will be a buffer for production on the way down, but it won't counteract the declines caused by the depletion of conventional oil fields.

In summary, the price of production of the marginal barrel of oil is going to go higher – a lot higher, but the marginal barrels won't be additional ones. Rather, rising prices will cause demand destruction. It is already doing so in OECD countries, and it will start doing it in Third World countries too, as existing fields deplete and have to be replaced by new and extraordinarily expensive oil.

oldfarmermac , 12/30/2015 at 11:23 pm
Door number two looks damned good from where I sit in the audience, lol.

In addition to putting a hurting on Russia and Iran, the Saudis are also no doubt getting the message across to other exporters, in and out of OPEC, that they will not carry the load alone, if and when they eventually decide to cut.

There is little doubt in my mind that secret negotiations about cuts are going on every day, day after day, between diplomats from other oil exporters and the Saudis. When the Saudi government gets what it wants, iron clad promises of cooperation, THEN they might be more inclined to cut.Maybe.

Sometimes something that walks like a duck, and quacks like a duck , and looks like a duck, is never the less not a duck .. Sometimes the resemblance is merely coincidental. Sometimes coincidences are highly advantageous to two or more parties involved.

Consider for instance that many or most well informed people consider that the House of Saud has managed to accumulate and hang onto the biggest fortune in the world only because the country is a client state of the American empire.

Otherwise all those princes and princesses would be dead, or in dungeons, or refugees.

I am NOT saying the Obama administration is colluding with the Saudis, secretly, to keep the price of oil down. I AM saying Uncle Sam is no doubt perfectly happy about oil selling for peanuts, because peanut oil prices are a damned good economic tonic. There must be fifty people happy about cheap gasoline for every one person hurting because he lost his ass or his job in the oil business. Fifty to one. No politician in his right mind can afford to overlook that sort of thing.

I'm ready to bet the farm that no documentation ever comes to light proving Uncle Sam is trying to force oil prices up at this time. OTOH, Uncle Sam and the Saudis share some very heavy duty common interests when it comes to Iran and Russia.

Hey guys, it ain't nothing but zero's in computers, in the last critical analysis, to the House of Saud. They have more than they can spend (on themselves ) anyway.

Suppose any one of you happened to have a personal fortune of say ten million bucks, and you discover you are at high risk of having a fatal heart attack. I doubt any of you would hesitate to spend a third or even half of that fortune to avoid that heart attack. You will never have eat beans and rice unless LIKE beans and rice, so long as you still have five million bucks. ( Unless maybe your physician insists!)

In the minds of the Saudis, the Russians and the Iranians may well represent a literal existential threat .

[Dec 31, 2015] Saudi riyal in danger as oil war escalates

Notable quotes:
"... The International Monetary Fund has suggested Saudi Arabia could be running a deficit of around $140bn (£94bn). ..."
"... Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances. ..."
Telegraph

Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country's former reserve chief has warned.

"If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence," said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA).

"But if the reserves keep going down as they are now, they will not be able to keep the peg," he told The Telegraph.

His warning came as the Saudi finance ministry revealed that the country's deficit leapt to 367bn riyals (£66bn) this year , up from 54bn riyals the previous year. The International Monetary Fund has suggested Saudi Arabia could be running a deficit of around $140bn (£94bn).

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point.

Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances.

Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999.

The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat.

The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades. A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family.

Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts.

See also

Black Swan

""He is drawing on a McKinsey study – 'Beyond Oil' -
that sketches how the country can break its unhealthy dependence on
crude, and double GDP by 2030 with a $4 trillion investment blitz across
eight industries, from petrochemicals to metals, steel, aluminium
smelting, cars, electrical manufacturing, tourism, and healthcare""

McKinsey's advice to the Saudi suckers proves that global financial companies are crooks. Pray tell from where will Saudi Arabia get people to run the industries recommended by Mckinsey ? There is already global excess in the industries.

[Dec 31, 2015] Oil, Asia shares see subdued end to year dominated by Fed, China

Notable quotes:
"... While cheaper fuel is a boost to consumer spending power in much of the developed world, it is also a disinflationary force that reinforces bets on loose monetary policy in Europe, Japan and China, even as the Federal Reserve proceeds with glacial tightening. ..."
finance.yahoo.com

While cheaper fuel is a boost to consumer spending power in much of the developed world, it is also a disinflationary force that reinforces bets on loose monetary policy in Europe, Japan and China, even as the Federal Reserve proceeds with glacial tightening.

Oil prices are ending the year how they began - under pressure.

[Dec 31, 2015] Top Wyoming oil companies write off $41 billion in assets, while capital spending drops 51 percent

See EIA Crude Oil Production . US production was surprisingly stable in 2015. Since May the figures are 9,479 (May) 9,315 (June) 9,433 (July) 9,407 (August) 9,460 (Sep) 9,347 (Oct)
Notable quotes:
"... US #crudeoil production down to 9.347mbpd in Oct15 from an upward revised 9.460 in Sep15 ..."
"... Texas #crude production down to 3391000 b/day in Oct15 from a revised down 3417000 b/day in Sep15 ..."
"... The write-offs, known officially as impairments, represent a recognition that many wells will have shorter productive lives than initially anticipated, analysts said. It also reflects an acknowledgement that companies may have to pay for the cost of plugging and abandoning wells sooner than they expected, they noted. ..."
"... Chesapeake Energy, Wyomings fourth-largest oil producer, reported impairments of $15.4 billion through the first three quarters of 2015. The Oklahoma City-based producers woes are primarily tied to natural gas. ..."
"... Oil patch bankruptcies have accelerated in the fourth quarter of 2015 as a supply glut keeps prices stuck below $40 a barrel. Ten firms, with more than $2 billion in debt, have closed their doors since October, according to the Federal Reserve Bank of Dallas. ..."
"... Capital spending has fallen 51 percent since the third quarter, the bank said ..."
peakoilbarrel.com
Dean , 12/31/2015 at 1:13 pm
Petroleum Supply Monthly is out:

TechGuy , 12/31/2015 at 2:20 pm

http://trib.com/business/energy/top-wyoming-oil-companies-write-off-billion-in-assets/article_d380f763-962e-587d-9d9a-2af39b1e166d.html
Top Wyoming oil companies write off $41 billion in assets

" The write-offs, known officially as impairments, represent a recognition that many wells will have shorter productive lives than initially anticipated, analysts said. It also reflects an acknowledgement that companies may have to pay for the cost of plugging and abandoning wells sooner than they expected, they noted. "

" Chesapeake Energy, Wyoming's fourth-largest oil producer, reported impairments of $15.4 billion through the first three quarters of 2015. The Oklahoma City-based producer's woes are primarily tied to natural gas. "

" Oil patch bankruptcies have accelerated in the fourth quarter of 2015 as a supply glut keeps prices stuck below $40 a barrel. Ten firms, with more than $2 billion in debt, have closed their doors since October, according to the Federal Reserve Bank of Dallas.

Capital spending has fallen 51 percent since the third quarter, the bank said . And the global supply glut may linger into 2017, it noted, pointing to estimates that production will outpace demand by 600,000 barrels per day through 2016."

[Dec 31, 2015] Now Comes The Great Unwind - How Evaporating Commodity Wealth Will Slam The Casino

Notable quotes:
"... Submitted by David Stockman via Contra Corner blog, ..."
Zero Hedge

Submitted by David Stockman via Contra Corner blog,

...Already, investment is estimated to have dropped by 20% in 2015, and that is just the beginning.

This unfolding collapse of oil and gas investments, of course, will ricochet through the capital goods and heavy construction sectors with gale force. Eventually, annual investment may decline by $250 to $400 billion before balance is restored, meaning that what were windfall profits and surging wages and bonuses in these sectors just a year or two back will evaporate in the years ahead.

... ... ...

... as the credit bubble begins to shrink it means that profits, incomes, balance sheets and credit-worthiness are all shrinking, too. So is the related GDP.

But now the days of heady accumulation of "sovereign wealth" in Saudi Arabia, Norway, Kazakhstan and dozens of commodity producers in between is over and done. What is happening is that these funds are entering a cycle of liquidation which is unprecedented in financial history.

Indeed, the data for Saudi Arabia, Qatar, Kuwait, the UAE and other members of the Gulf Cooperation Council (GCC) is stunning. During the global credit boom they amassed sovereign wealth funds totaling $2.3 trillion. But with deficits now estimated at 13% of GDP and rising, the level of asset liquidation is soaring.

Thus, if crude oil prices recover to $56 per barrel next year, the GCC states will need to liquidate $208 billion of investments.

... ... ...

In a word, the unnatural Big Fat Bid of the sovereign wealth funds is going All Offers as oil and commodity producers struggle to fund their budgets.

... ... ...

Jack Burton

ENERGY Sector "what were windfall profits and surging wages and bonuses in these sectors just a year or two back will evaporate in the years ahead."

This is already crushing Canada and North Dakota, whose actual oil field cut backs are only now beginning as they tried to produce their way out of the debt crisis. But the hedges have run out, prices seem glued to the basement and NOW the time has come to eliminate the expeditures. That mean people losing jobs all up and down the line.

Stockman is brilliant here, as always.

I was watching "The Big Short" last night too. Excellent film. Very historic and everyone should watch it.

[Dec 31, 2015] We might have a condensate glut, at least in the US, and perhaps globally.

Notable quotes:
"... I suspect that we actually have a condensate glut, at least in the US, and perhaps globally. ..."
"... Oil production is affected by geopolitics. But it is not a function of geopolitics. Oil production is a function of the cost of production versus the price of oil… but the most important function is the availability of oil in the ground to produce. If the oil is not there then geopolitics or the price of oil counts for nothing. And that is what Stavros fails to understand. ..."
"... Give me a break. Every country is producing every barrel they possibly can. Which country was holding back when oil was over $100 a barrel? Saving oil for the future? They are in recession right now. Most of them anyway. No one is hording oil. A lot of oil is not being produced because of the very low price of oil but everyone is still trying desperately to meet their budgets by producing every barrel they possibly can at the cost they can afford. ..."
Peak Oil Barrel

Jeffrey J. Brown, 12/30/2015 at 4:16 pm

I suspect that we actually have a condensate glut, at least in the US, and perhaps globally.

Javier, 12/30/2015 at 4:33 pm

The possibility of a global recession in 2016 must be taken into account in any scenario, given how weak is the economic situation of the world.

A global recession in 2016 probably means the peak [reached in] oil [ production] in 2015 will last for at least 10 years, and probably forever.

Stavros Hadjiyiannis, 12/30/2015 at 5:23 pm

Is this the 545289658th time that someone has claimed that Russian oil production has peaked?

In any case, oil production is a function of primarily price. If the price is right, then there will be oil for many decades ahead. Oil production is also a function of geopolitics. Also a function of technology and also a function of alternatives. Ron seems to be missing the point that for decades, oil rich countries have no choice but to defer to a great extent to Western oil production. Those that are included in the Western security and financial system (GCC) have an extra incentive to do so, saving their oil for the future.

Ron Patterson, 12/30/2015 at 6:31 pm

Is this the 545289658th time that someone has claimed that Russian oil production has peaked?

Don't be a fucking smart ass. Make your point without stupid exaggerations.

In any case, oil production is a function of primarily price.

Really? Look at the chart above marked "The Rest of the World". Now tell me, at what point did very expensive oil increase production.

Oil production is also a function of geopolitics.

Bullshit! Oil production is affected by geopolitics. But it is not a function of geopolitics. Oil production is a function of the cost of production versus the price of oil… but the most important function is the availability of oil in the ground to produce. If the oil is not there then geopolitics or the price of oil counts for nothing. And that is what Stavros fails to understand.

Ron seems to be missing the point that for decades, oil rich countries have no choice but to defer to a great extent to Western oil production.

What in the hell are you talking about? Since when has Saudi Arabia deferred to Western oil production?

Those that are included in the Western security and financial system (GCC) have an extra incentive to do so, saving their oil for the future.

Give me a break. Every country is producing every barrel they possibly can. Which country was holding back when oil was over $100 a barrel? Saving oil for the future? They are in recession right now. Most of them anyway. No one is hording oil. A lot of oil is not being produced because of the very low price of oil but everyone is still trying desperately to meet their budgets by producing every barrel they possibly can at the cost they can afford.

[Dec 31, 2015] From Oil Glut to Shortage Some Say It Could Happen

Such articles are just astrology of a new type. Situation is now less predictable. It is difficult to tell whether the price of oil would be up $10 or down $3 the next year. It could go either way within the next year, or even within the next month or two. Like the tip of an iceberg, the current slump in world prices sits atop a lot of unknowns. To some energy experts, the oil-price plunge proves that the free market is working and that national economies, hit by secular stagnation, can begin breathing easier. All of a sudden, people decided oil stocks were enormous and there is supply glut, while in reality it was dumping of oil prices by Saudis that lowered the prices. To most experts, ''oil glut'' looks like a very temporary phenomenon that could turn into a serious shortage in a half of a year or so. These experts warn that low prices and headlines about an oversupply of oil risk undermining the West's recent and vital commitments to increased oil exploration, energy conservation and, especially, development of alternate energy sources. many observers say that shale and tight oil are unprofitable at prices below $60 per barrel.
Any drop in oil prices reduces inflationary pressures and stimulates the economy. there in the USA there was no inflationary pressures. Still low oil prices is in effect a reduction in the taxes that all Americans have to pay to foreigners. Consequently reduced oil prices are certainly in the country's best interests. But at the same time the apparent oil glut is a passing phenomenon which must not distract attention from the risk of major supply disruptions in the near future. An Islamic revolution can topple the royal family of Saudi Arabia.
Typically when oil prices go lower, they tend to go much farther than people anticipated. The drop in oil prices is already having an impact on shale extraction and offshore drilling.
Notable quotes:
"... The price rout has caused oil companies to cut deeply into investment. With the world awash in crude, the oil industry is contemplating a new problem the oversupply could tee up: an oil shortage. ..."
Dec. 30, 2015 | WSJ

The price rout has caused oil companies to cut deeply into investment. With the world awash in crude, the oil industry is contemplating a new problem the oversupply could tee up: an oil shortage.

[Dec 31, 2015] Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

Notable quotes:
"... Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge. ..."
"... Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013. ..."
"... Figure 3. US Dollar Index from Intercontinental Exchange ..."
"... Figure 4. World liquids production (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data. ..."
"... what it costs to produce commodities, and what customers can really afford ..."
"... Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings. ..."
oilprice.com

08 December 2014 | OilPrice.com

Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant its fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.

If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.

The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.

Related: Who Comes Out On Top After Oil Pandemonium?

Offshore drilling is also being affected. Transocean, the owner of the biggest fleet of deep water drilling rigs, recently took a $2.76 billion charge, among a "drilling rig glut."

3. Shale operations have a huge impact on US employment.

Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:

Jobs With Vs Without Shale

Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.

Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.

It might be noted that even the "Non-Shale" states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market , so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar , because of the high default risk with low oil prices. Russia's Rosneft is also reported to be having difficulty with its loans .

There are many ways banks might be adversely affected by defaults, including

After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out "too big to fail" banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports , such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1

Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.

Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.

The collapse of the Former Soviet Union in 1991 seems to be related to a drop in oil prices .

Oil Production And Price In USSR

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.

Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria's economy is reported to be "tanking." Russia even has a possibility of collapse, although probably not in the near future.

Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.

Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise.

When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.

Airlines seem to be more interested in adding flights than reducing ticket prices in response to lower oil prices, perhaps because additional planes are already available. Their intent is to increase profits, through an increase in ticket sales, not to give consumers the benefit of lower prices.

In some cases, governments will take advantage of the lower oil prices to increase their revenue. China recently raised its oil products consumption tax, so that the government gets part of the benefit of lower prices. Malaysia is using the low oil prices as a time to reduce oil subsidies .

Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because the price drop is only temporary, few business people are saying to themselves, "Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil]." Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.

Issue 7. Hoped-for crude and LNG sales abroad are likely to disappear, with low oil prices.

There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil . According to this story, "There's so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore."

LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.

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Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.

Many people believe that renewables can eventually take over the role of fossil fuels. ( I am not of the view that this is possible. ) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.

Despite all of the statements made about renewables, they don't really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn't around, the biofuel production system comes to a screeching halt.

Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.

If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.

Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.

The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.

US Dollar Index

Figure 3. US Dollar Index from Intercontinental Exchange

The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.

China's yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are, no doubt, other reasons why China's growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency .

Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.

There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.

(Increasing debt is a big part of pumped up "demand" for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect).

QE doesn't work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.

As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the "uplift" needed to keep oil prices high enough to cover production costs.

World Liquids production

Figure 4. World "liquids production" (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

The sharp drop in price in 2008 was credit-related , and was only solved when the US initiated its program of QE started in late November 2008 . Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.

Part of the problem seems to be the differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.

QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.

The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don't rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.

QE allows financiers to disguise the growing mismatch between what it costs to produce commodities, and what customers can really afford . Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers' lack of income is disguised by a continued growth in debt.

Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world's ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.

Conclusion

There are really two different problems that a person can be concerned about:

1. Peak oil : the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.

2. Debt related collapse : oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil "demand" (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.

Related: A Glimmer Of Hope In Current Oil Price Slide?

The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world's financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.

At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.

Future Energy production

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Notes:

[1] There is of course insurance by the FDIC and the PBGC , but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn't be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008 . Insurance would seem to be available, but in practice, would not pay out much.

[2] LOCs are required when goods are shipped internationally, before payment has actually been made. They offer a guarantee that a buyer will be able to "make good" on his promise to pay for goods when they arrive.

By Gail Tverberg

Source - http://ourfiniteworld.com/

More Top Reads From Oilprice.com:

[Dec 31, 2015] Condensate production has one of the steepest decline rates

peakoilbarrel.com

Heinrich Leopold , 12/31/2015 at 4:10 am

... condensate has one of the steepest decline rates – at least in Texas. As November and December 2014 production has been very high, the rates are very likely much steeper in November and December 2015, reaching record decline rates of 50% (see chart below).

[Dec 31, 2015] There is no worldwide collapse of demand that justify 65-70% fall of the oil price

Notable quotes:
"... There has been a lot of talk regarding the oil glut, but according to EIA crude inventories there is only 105.1 million more barrels of crude than a year ago. That is just 6.4 days of refineries inputs. It does not seem a lot, even less to justify a 60% decrease in the oil price. Oil must be the only commodity industry where one week of extra inventory produce such a price correction. ..."
"... It is even worse if we consider that gasoline inventories are just 0.4% higher than a year ago. The most important product which represents 46% of the refineries output is at 2014 level. Where is the glut? ..."
"... There is a glut in distilite fuel oil, residual fuel oil, propane/propylene and fuel ethanol. ..."
"... I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates. ..."
"... If we had so much (generally cheaper than imported) actual crude oil on hand in the US, why are refiners importing the same amount of crude oil as they did last year? ..."
peakoilbarrel.com
Ves , 12/25/2015 at 2:23 pm
Steve,
I agree with your post about market dynamics between customers having to pay through their purchasing power in order to retire loans created by financial industry for oil companies. But there are a few things that make this oil crash little bit "strange" to say at least:

1) OPEC (and mainly Saudis + GCC) did actually something by not doing anything and that is refusing to cut their production. Well that is "man made" decision as Oman oil minister said and not decision by invisible hand of market. I interpret this mainly as political decision and not economical.

2) Second. Wall Street was pretty much shocked if not pissed by that Saudi decision. I interpret that to be political reaction as well.

3) There is no worldwide collapse of demand that justify 65-70% fall of the oil price. I am sorry but Wall Street is creating ninja loans for cars, student loans, mortgages from the thin air with the same speed in the US. I would say that is political decision as well. Worldwide collapse is not happening as of now either that would justify 65-70% drop of price. Contraction is happening in Europe but very very gradually except in some marginal countries like Greece, and war torn countries in ME and Africa. But these marginal countries did not even have any big consumption to begin with.

4) Shale oil producer based on their balance sheet were bankrupt from Day 1. Why LTO even got the loans to begin with? That is also political decision and not an economic. Why are we waiting even a year after low prices for any major mergers, buyouts or bankruptcies? I am sorry but 100% of LTO are bankrupt so why Wall Street is extending and pretending and keeping them on a life support? Well it is again political decision.

So yes there are some market dynamics around this oil crash but there are a lot of political dynamics as well.

Cacerolo , 12/10/2015 at 12:00 am
This is my first post in this blog.

There has been a lot of talk regarding the oil glut, but according to EIA crude inventories there is only 105.1 million more barrels of crude than a year ago. That is just 6.4 days of refineries inputs. It does not seem a lot, even less to justify a 60% decrease in the oil price. Oil must be the only commodity industry where one week of extra inventory produce such a price correction.

It is even worse if we consider that gasoline inventories are just 0.4% higher than a year ago. The most important product which represents 46% of the refineries output is at 2014 level. Where is the glut?

There is a glut in distilite fuel oil, residual fuel oil, propane/propylene and fuel ethanol. It seems that there is a big problem in the industrial part of the demand or maybe there is a big unbalance between what refineries can produce and what the market needs.

Warm weather promotes more driving, so we could start spring 2016 with gasoline inventories quite reduced and we could face a high gasoline price environment while we still have this huge oil glut that the media talks all day long.

I have no idea if what eia states in its inventory report as crude and other oils ( the two mayor inventory items by quantity) can be completely used as inputs to produce gasoline or if there are some technical limitations ( not any type of crude can be used to product any type of output). Maybe, and just maybe we have a glut of some types of oil and condensate that nobody needs in the quantities it has been produced since the shale boom.

Clueless , 12/10/2015 at 5:13 am
It is basic economics when it comes to any commodity. If there is a shortage, the price can rise rapidly to the amount that the most critical user will pay. Ask yourself "at what price would the hospitals, ambulances, fire trucks, police cars, offshore drilling rigs [which are being leased for up to $600,000/day], say the price is too high, we will just shut down?" With a small surplus, the price of a commodity will drop like a rock, as buyers see no need to have high inventories and shop around for the lowest price, looking for a seller that has to sell at any price.

A game analogy. Musical chairs with 20 players and only 19 chairs (only short by 1), and two other rules: The person without a chair gets killed, but there is one chair for sale and anyone can buy it to guarantee their safety. How high would the bidding go? Up to the point of the person with the most money.

Same game with 20 players and 21 chairs (only 1 extra). How high would the bidding go? Zero, as everyone can see that there is more than enough for everybody.
You can easily see this play out even more frequently by looking at charts for agricultural products such as: wheat, corn, soybeans, etc.

Prices can double quickly if there is a crop surplus, and fall by over 50% just as quickly if the next crop has a surplus.

oldfarmermac , 12/10/2015 at 7:56 am
Clueless, you are not when it comes to commodity prices. I wish I had thought of the musical chairs analogy myself. But you got in a little bit of a hurry in his last sentence and should have said prices can double quickly if there is a crop SHORTAGE.

Commodity food prices are not nearly so inelastic as oil prices, because there are generally plenty of substitutes for any GIVEN food that might be in short supply. But the price can still double in the event of a short crop, it happens.

There are NO short term substitutes for oil.

Clueless , 12/10/2015 at 4:35 pm
Thanks OFM. However, my error was not due to being in a hurry, it was due to being 4:13 am my time, and I was still half asleep.
Nick G , 12/10/2015 at 4:44 pm
There are NO short term substitutes for oil.

I know what you mean, but that's a little strong. Driving slower, driving your small car instead of your SUV, mass transit, carpooling: there are a lot of short term substitutes.

None of them are perfect substitutes for dirt cheap oil…but that's different (and, of course, dirt cheap oil doesn't really exist if we take into account externalities).

Patrick R , 12/10/2015 at 5:11 pm
The US just needs to price driving accurately and a huge amount of low value wasteful trips would suddenly become understood as unnecessary. Furthermore the uplift this would give to all alternatives; not just EVs (you guys are so stuck in autodependency), but Transit, active modes, and, most importantly of all; the rise of the local, would huge. And please note, this is not subsidy, simply user pays, just price driving for all its costs, direct and external. Sorted.

Also always remember that proximity trumps mobility; that's why cities exist!

Sprawl topia is doomed, but I guess that's hard to grasp when it's all people have ever known. And getting real about actual cost allocation is the mechanism to get North America out of the current stuck pattern. Climate change and all other pollution mitigation isn't about personal choice it's about rational cost allocation; by all means choose to stink, just actually pay the whole cost and there will be more rational actors than old contrarians.

The craziest thing is that otherwise libertarian freemarketers are violently committed to the Soviet style socialism that is your taxpayer funded driving amenity and no-price driving system. What kind of crisis will it take for reality to be grasped in this area? Cos I suspect you'll get it sooner or later.

Meantime: Keep on truckin'…

Jeffrey J. Brown , 12/10/2015 at 7:40 am

There has been a lot of talk regarding the oil glut, but according to eia crude inventories there is only 105.1 million more barrils of crude than a year ago

What the EIA calls "Crude oil" is actually Crude + Condensate (C+C).

I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates.

In any case, based on the most recent four week running average data, US refineries were dependent on net crude oil imports for 43% of the C+C processed in US refineries (7.1/16.5) versus 44% a year ago (7.1/16.2). If we had so much (generally cheaper than imported) actual crude oil on hand in the US, why are refiners importing the same amount of crude oil as they did last year?

*Most common overall dividing line between crude & condensate is 45 API

Dennis Coyne , 12/10/2015 at 9:06 am
The market for oil is a World market, look at IEA reports for a better look at the International market. Last time I checked, st0rage levels in the OECD were about 250 million barrels above the 5 year average level. There is a limited number of places to put the oil that has been produced, and storing oil costs money, so when there is an excess prices fall. In theory this should increase demand at any given level of World GDP and it should reduce supply as higher cost production is less profitable at lower prices. It takes some time for this adjustment to take place (people don't go out and buy a gas guzzler right away and oil producers try to outlast their competitors, hoping the other guy stops producing as much). So far it has been about 12 months since oil prices dropped sharply, it may take another 12 months, maybe more for production to slow down and excess inventories to be used up.

If there is not a severe recession worldwide in the next 24 months, I would be surprised if oil prices are not above $60/b, 18 months to 36 months from now, possibly they will be much higher.

It depends on how quickly the oil business can ramp back up after the downturn over the next 1 to 2 years. The longer it takes, the higher oil prices will go, but at some point there may be a major recession, due in part to inadequate oil supply two or three years in the future.

Chart below with the Reference Oil Price case for Brent Oil in 2013$ from the EIA's Annual Energy Outlook published in April 2015.

Heinrich Leopold , 12/10/2015 at 4:17 am
Given the recent discussions about where US oil and gas production is headed, I have tried to find some forward looking indicators. Well permits and well completions seem to give reasonable indicators for future production. Below chart indicates that at least Texan oil and gas production will steeply slump over the next months. Well permits declined fivefold to a six year low and well completions are not far behind. It will be interesting to see the consequences of this trend.

Dennis Coyne , 12/10/2015 at 9:10 am
The RRC Production data is very bad for the most recent 18 months. Texas output has in fact been relatively flat from Nov 2014 to Sept 2015. Perhaps the completion data suffers from the same reporting problems. Permit data is just not very useful.

[Dec 31, 2015] Why Saudis are damping oil at such a low price

Notable quotes:
"... One theory afloat is that the US and Saudi Arabia are allies in an economic and political war against their enemies. According to this narrative, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut, and sending oil prices into a tailspin, is to shipwreck the economies (and the polities) of US and/or Saudi enemies - e.g., Venezuela, Iran, and Russia. ..."
"... Saudi Arabia hasnt dramatically increased oil production. Their most recent peak in June of 2015 was only a couple hundred thousand barrels per day more than the previous peak back in mid-2013. Thats about 2-3% increase over two years. I wouldnt call that, dramatic. ..."
"... Ron is basically correct. The people who think that oil production is a function of the price are assuming that the oil is there to produce. Now, unless there are a few supergiant fields out there, already discovered and waiting for some State Oil Company or some multi-national oil company to make a Final Investment Decision, that assumption is incorrect. There is a handful of locations which could potentially have supergiant oil fields that are so far undiscovered, Im not that confident that they are there to find, since discovery in the last couple of decades has been a long way short of consumption, even after the price went sky high and everybody and their dog was spending big on exploration. ..."
"... Tight oil has been developed in the US on the basis of unrealistic projections of ongoing production, due to depletion rates being vastly higher than admitted when spruiking to investors. Sooner or later, it was bound to run into problems. These problems have arrived sooner, as opposed to later, due to OPECs price war, which is aimed at sending the tight oil industry broke. Producers have cut back on drilling and concentrated with increased intensity on sweet spots , where production is likely to be highest. They have also introduced technological progress that has cut the price of drilling substantially and thus cut the break-even price for a well of a given production level, but the industry is still losing money. A loss-making industry is unsustainable and, therefore, will not be sustained. Something has to give. ..."
"... At this point, what will be relevant is just how extensive the sweet spots in the tight oil formations are. Having been burnt once, investors will be working on much more careful examination of likely decline rates and wont support drilling wells just to keep production up, if those wells wont recover their costs within the time frame of the investment horizon. ..."
"... The $64 thousand dollar question, therefore, is how long the US tight oil industry is going to be able to keep finding sweet spots where they can extract sufficient tight oil to pay back the cost of drilling. ..."
"... I am NOT saying the Obama administration is colluding with the Saudis, secretly, to keep the price of oil down. I AM saying Uncle Sam is no doubt perfectly happy about oil selling for peanuts, because peanut oil prices are a damned good economic tonic. There must be fifty people happy about cheap gasoline for every one person hurting because he lost his ass or his job in the oil business. Fifty to one. No politician in his right mind can afford to overlook that sort of thing. ..."
"... Im ready to bet the farm that no documentation ever comes to light proving Uncle Sam is trying to force oil prices up at this time. OTOH, Uncle Sam and the Saudis share some very heavy duty common interests when it comes to Iran and Russia. ..."
peakoilbarrel.com

likbez , 12/30/2015 at 9:50 pm

Ron,

OK. Let's assume there is no geopolitics here. But then why Saudis are damping oil at such a low price.

In 2015 they exported over 7.3 Mb/d and got 118 Billions. In 2012 they exported something between 7.658 Mb/d (CIA, probably crude only) and 8.42 mb/d (Bloomberg, probably crude and refined products) and got 336.1 billion.
http://www.bloomberg.com/news/articles/2013-07-29/saudi-arabian-2012-oil-export-revenue-gained-5-as-iran-fell-12-

If they just cut 1 Mb/d and that allows to preserve 2014 average price of oil (not even 2013 average price) they would get 125 billions (and preserve 12 Mb from their depleting wells for moment of higher prices which will eventually come.)

In any case they managed to achieve almost 3 times drop of revenue from 2012. Three times --

Now they have almost $100 billion budget deficit in 2015 (and almost the same, 86 billions estimate of deficit for 2016) and only around 600 billions in reserves.

Questions:

1. Why they rocked the boat?

2. Where is the logic in their actions, unless we assume that they want to destroy Iran (and hurt Russia) ?

3. Why MSM spread all this BS about Saudis defending their market share ? Does it look like they are defending something else ?

Glenn Stehle , 12/31/2015 at 9:43 am

One theory afloat is that the US and Saudi Arabia are allies in an economic and political war against their enemies. According to this narrative, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut, and sending oil prices into a tailspin, is to shipwreck the economies (and the polities) of US and/or Saudi enemies - e.g., Venezuela, Iran, and Russia.

"Obama's foreign policy goals get a boost from plunging oil prices"
https://www.washingtonpost.com/business/economy/as-crude-oil-prices-plunge-so-do-oil-exporters-revenue-hopes/2015/12/23/ed552372-a900-11e5-8058-480b572b4aae_story.html

The war, however, is not being conducted without inflicting significant damages on US allies - e.g., Mexico, Canada, Saudi Arabia, Colombia - and domestic US production as well.

Ambrose Evans-Pritchard, for instance, published an article a couple of days ago about the immense economic damage being inflicted on Saudi Arabia's economy and polity:

"Saudi riyal in danger as oil war escalates"
http://www.telegraph.co.uk/finance/economics/12071761/Saudi-riyal-in-danger-as-oil-war-escalates.html

We'll see who blinks first, or who is left standing after all the bloodletting takes place.

Peak Signs , 12/31/2015 at 10:32 am

"According to this theory, the intent of Saudi Arabia dramatically increasing oil production during a world oil glut…"

Saudi Arabia hasn't dramatically increased oil production. Their most recent peak in June of 2015 was only a couple hundred thousand barrels per day more than the previous peak back in mid-2013. That's about 2-3% increase over two years. I wouldn't call that, dramatic.

http://peakoilbarrel.com/opec-crude-oil-production-charts/

Glenn Stehle , 12/31/2015 at 11:00 am

I think you're arguing semantics.

Would you also argue that the Saudi response to the glut in 2009 was the same to its response to the glut in 2015?

Ablokeimet , 12/31/2015 at 3:07 am

Ron is basically correct. The people who think that oil production is a function of the price are assuming that the oil is there to produce. Now, unless there are a few supergiant fields out there, already discovered and waiting for some State Oil Company or some multi-national oil company to make a Final Investment Decision, that assumption is incorrect. There is a handful of locations which could potentially have supergiant oil fields that are so far undiscovered, I'm not that confident that they are there to find, since discovery in the last couple of decades has been a long way short of consumption, even after the price went sky high and everybody and their dog was spending big on exploration.

What interests me is the bit from the previous post, where OPEC projected prices based on their estimate of what it cost to produce the marginal barrel. I think that is a good line to take, until it reaches the point where governments of OPEC countries decide that, with Peak Oil passed and production in irreversable decline, they are going to start hoarding production and make the rest of the world go short.

The thing to realise with projecting prices based on the cost of production of the marginal barrel is that it should be taken as a tendency working on a 5 year or even decadal scale. In time periods short of that, you can get price wars sending prices down below the marginal cost and price spikes producing windfall profits even for the highest cost producers. The price wars lead to national and multi-national oil companies cutting back on capital expenditure, which eventually leads to stagnating or declining production and a recovery in prices. Price spikes lead to huge resources being spent on exploration and development as everybody wants to cash in.

OPEC's production assumptions are a lot less sensible than their price projections. They assume two things:

(a) That the oil is there to increase global production; and

(b) Most of that oil, from 2020 to 2040, will come from OPEC countries.

Conventional crude oil production is flat out right now and, as I said above, unless someone is hiding a few undeveloped supergiant fields somewhere, it's got nowhere to go but down. Let's look at unconventional sources, then.

1. Polar and deepwater oil. A huge amount has been spent exploring for this and the results have been underwhelming. Sure, they've found oil, but not in anywhere near the quantities needed. Shell recently pulled out of the Arctic because of the combination of environmental protests and poor exploration results. If they were discovering heaps, they'd just tough out the protests – as anybody who knows the first thing about corporate capitalism could tell you.

2. Canadian tar sands. Production of these has been expanding, but it hasn't been to the rate that one might imagine from the published resource data. This is because the rate of production is subject to certain limits, due to inputs. The relevant inputs in this situation are water and natural gas – and it is water which is the harder limit. Basically, they can't produce more oil from the tar sands than the rivers of the region can support. These limits will sooner or later, and I believe sooner, put a ceiling on Canadian production. Absent a huge shift in consumption caused by climate change mitigation action, it will keep at that limit for many decades to come, but it won't exceed it.

3. Venezuelan extra heavy. This is the factor about which I know least, but there doesn't appear to be a lot of it on the market yet. There seem to be a lot of obstacles in the road of high production.

4. Tight oil. One thing that everybody who is knowledgeable admits is that there is a lot of "oil in place" in this category. The question is how much of this is recoverable in a practical sense. This industry has developed in the US, primarily because it brings a number of environmental hazards with it and, outside the US, landholders are blocking exploitation because of environmental concerns. In the US, landholders have a financial interest in ignoring these concerns, because mineral royalties are vested in the landowner.

Tight oil has been developed in the US on the basis of unrealistic projections of ongoing production, due to depletion rates being vastly higher than admitted when spruiking to investors. Sooner or later, it was bound to run into problems. These problems have arrived sooner, as opposed to later, due to OPEC's price war, which is aimed at sending the tight oil industry broke. Producers have cut back on drilling and concentrated with increased intensity on "sweet spots", where production is likely to be highest. They have also introduced technological progress that has cut the price of drilling substantially and thus cut the break-even price for a well of a given production level, but the industry is still losing money. A loss-making industry is unsustainable and, therefore, will not be sustained. Something has to give.

Eventually, the price of oil will recover to be equal to or greater than the marginal cost of production. At this point, what will be relevant is just how extensive the sweet spots in the tight oil formations are. Having been burnt once, investors will be working on much more careful examination of likely decline rates and won't support drilling wells just to keep production up, if those wells won't recover their costs within the time frame of the investment horizon.

The $64 thousand dollar question, therefore, is how long the US tight oil industry is going to be able to keep finding sweet spots where they can extract sufficient tight oil to pay back the cost of drilling.

What's going to happen in other countries? Not a great deal, I predict. Opposition from the local population, led by local landholders, will delay and minimise production from tight oil reservoirs. It won't completely prevent a tight oil industry developing in many other countries, but it will ensure that it never develops the dimensions of the current oil industry. Tight oil production will be a buffer for production on the way down, but it won't counteract the declines caused by the depletion of conventional oil fields.

In summary, the price of production of the marginal barrel of oil is going to go higher – a lot higher, but the marginal barrels won't be additional ones. Rather, rising prices will cause demand destruction. It is already doing so in OECD countries, and it will start doing it in Third World countries too, as existing fields deplete and have to be replaced by new and extraordinarily expensive oil.

oldfarmermac , 12/30/2015 at 11:23 pm
Door number two looks damned good from where I sit in the audience, lol.

In addition to putting a hurting on Russia and Iran, the Saudis are also no doubt getting the message across to other exporters, in and out of OPEC, that they will not carry the load alone, if and when they eventually decide to cut.

There is little doubt in my mind that secret negotiations about cuts are going on every day, day after day, between diplomats from other oil exporters and the Saudis. When the Saudi government gets what it wants, iron clad promises of cooperation, THEN they might be more inclined to cut.Maybe.

Sometimes something that walks like a duck, and quacks like a duck , and looks like a duck, is never the less not a duck .. Sometimes the resemblance is merely coincidental. Sometimes coincidences are highly advantageous to two or more parties involved.

Consider for instance that many or most well informed people consider that the House of Saud has managed to accumulate and hang onto the biggest fortune in the world only because the country is a client state of the American empire.

Otherwise all those princes and princesses would be dead, or in dungeons, or refugees.

I am NOT saying the Obama administration is colluding with the Saudis, secretly, to keep the price of oil down. I AM saying Uncle Sam is no doubt perfectly happy about oil selling for peanuts, because peanut oil prices are a damned good economic tonic. There must be fifty people happy about cheap gasoline for every one person hurting because he lost his ass or his job in the oil business. Fifty to one. No politician in his right mind can afford to overlook that sort of thing.

I'm ready to bet the farm that no documentation ever comes to light proving Uncle Sam is trying to force oil prices up at this time. OTOH, Uncle Sam and the Saudis share some very heavy duty common interests when it comes to Iran and Russia.

Hey guys, it ain't nothing but zero's in computers, in the last critical analysis, to the House of Saud. They have more than they can spend (on themselves ) anyway.

Suppose any one of you happened to have a personal fortune of say ten million bucks, and you discover you are at high risk of having a fatal heart attack. I doubt any of you would hesitate to spend a third or even half of that fortune to avoid that heart attack. You will never have eat beans and rice unless LIKE beans and rice, so long as you still have five million bucks. ( Unless maybe your physician insists!)

In the minds of the Saudis, the Russians and the Iranians may well represent a literal existential threat .

[Dec 31, 2015] Saudi riyal in danger as oil war escalates

Notable quotes:
"... The International Monetary Fund has suggested Saudi Arabia could be running a deficit of around $140bn (£94bn). ..."
"... Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances. ..."
Telegraph

Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country's former reserve chief has warned.

"If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence," said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA).

"But if the reserves keep going down as they are now, they will not be able to keep the peg," he told The Telegraph.

His warning came as the Saudi finance ministry revealed that the country's deficit leapt to 367bn riyals (£66bn) this year , up from 54bn riyals the previous year. The International Monetary Fund has suggested Saudi Arabia could be running a deficit of around $140bn (£94bn).

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point.

Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances.

Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999.

The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat.

The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades. A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family.

Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts.

See also

Black Swan

""He is drawing on a McKinsey study – 'Beyond Oil' -
that sketches how the country can break its unhealthy dependence on
crude, and double GDP by 2030 with a $4 trillion investment blitz across
eight industries, from petrochemicals to metals, steel, aluminium
smelting, cars, electrical manufacturing, tourism, and healthcare""

McKinsey's advice to the Saudi suckers proves that global financial companies are crooks. Pray tell from where will Saudi Arabia get people to run the industries recommended by Mckinsey ? There is already global excess in the industries.

[Dec 30, 2015] Oil in the $20s This pro doubts it

www.cnbc.com
James Cordier, founder of Optionssellers.com. Speaking to CNBC's "Closing Bell" on Monday, he said the summer driving season may influence the possibility of a supply cut from OPEC's de facto leader by its next meeting in June.

"Simply a 5 percent production cut could give a, say, 20 percent rise in price; that might be a trade that the Saudis might be willing to do," he said.

[Dec 30, 2015] Oil down 3 percent; Brent near 11-year low as oversupply worries return

news.yahoo.com

RMax304823

Well, glut up, price down, etc. It all look very temporary once outside of the box. OPEC has opened the floodgates to knee-cap attempts to develop shale oil and sustainable energy sources. It's working but it can't last forever.

(1) Oil is a finite resource.

(2) The developed and emerging markets are using it up at an increasing pace.

(3) We will run out.

Actually, we'll never entirely "run out" of oil. It will just reach a point at which extracting, processing, and shipping it is not worth the energy and expense of the product itself.

I hope the current glut doesn't blind us to this simple fact because petroleum gives us more than just gasoline and heating oil. We get plastics from it, and synthetic fabrics, and innumerable other goods, including the indispensable WD-40.

We really should be getting ahead of the curve on this one but there's a good deal of opposition to that because somehow oil has become defined as a political issue instead of an economic one. It's a short-sighted view. Future historians will refer to the last 200 years as The Petroleum Age.

[Dec 30, 2015] Ilargi 2016 Is An Easy Year To Predict

Notable quotes:
"... What's tragic about all this is its utter stupidity. The US economy has been marching down the road of waste and conspicuous consumption (AKA the 'American lifestyle') paved by Black Gold (oil) for more than a hundred years; the global economy for at least half that long, having destroyed itself in world wars at least twice in the last century. ..."
"... I'm not sure I buy this at all. IEA figures show a consistent growth of oil demand in China the past few years. There is certainly a question mark over whether this is 'real' demand growth or whether it is largely driven by stockpiling (I strongly suspect the latter), but whatever way you look at it, China is buying more oil consistently year on year. ..."
"... Good point. That will be the most interesting part of 2016 in oil. But is a sense price discovery for shale industry already ended. They have few chances to survive below $70-80 (if junk dent to be paid) and $50-$60 if it will be rotated or maturity extended. ..."
Dec 30, 2015 | naked capitalism
The price of oil was a big story, and China plays the lead role in that story, even if again poorly understood. All the reports and opinions about OPEC plans and 'tactics' to squeeze US frackers are hollow, since neither OPEC as a whole nor its separate members have the luxury anymore to engage in tactical games; they're all too squeezed by the demise of Chinese demand growth, if not demand, period.

Ever since 2008, the entire world economy has been kept afloat by the $25 trillion or so that China printed to build overleveraged overcapacity. And now that is gone, never to return. There is nowhere else left for our economies to turn for growth. Everyone counted on China to take them down the yellow brick road to la-la-land, forever. And then it didn't happen.

What 2015 should have made clear, and did in a way but not nearly clear enough, is that the world economy is falling apart due to a Ponzi bubble of over-production, over-capacity, over-investment, over-borrowing, all of which was grossly overleveraged. And that this now is, for lack of a better word, over.

Most people who read this will have noticed the troubled waters investment funds -hedge funds, mutual funds, money market funds et al- have recently landed in. But perhaps not many understand what this means, and where it may lead. These things tend to be seen as incidents, as is anything that diverts attention away from the 'recovery just around the corner' narrative.

Not only do the losses and redemptions at investment funds drive these funds to the brink, everything they've invested in also tumbles. Add to this the fact that most of the investments are highly leveraged, which means that typically a loss of just a few percent can wipe out all of the principal, and a notion of the risks becomes clear.

Of course, since many of the funds hold the same or similar investments, we can add yet another risk factor: contagion. Things will blow up first where the risk is highest. Then everything else becomes riskier. Low interest rates have caused many parties to chase high yields -junk bonds-, and that's where risks are highest.

This is the 2015 story of investment funds, and it will continue, and aggravate, in 2016. Ultra low interest rates drive economies into deflation and investors into ever riskier assets. This is a process of unavoidable deterioration, unstoppable until it has played out in full. A 0.25% rate hike won't do anything to change that.

Why do interest rate hikes pose such a problem? Because ZIRP has invited if not beckoned everyone to be up to their necks in debt. The entire economy is being kept lopsidedly upright, Wile. E style, by debt. Asset prices, even as commodities have now begun to fall in serious fashion, still look sort of OK, but only until you start to look at the amount of leverage that's pinning it all up.

Once you see that, you understand how fragile it all is. Go one step further, and it becomes clear that this exponentially growing 'machinery' can only be 'sustained' by ever more debt and leverage. Until it no longer can.

Commodities prices have nowhere to go but down for a long time to come. These prices have been propped up by the illusionary expectations for Chinese growth and demand, and now that growth is gone. So, too, then, must the over-leveraged over-investments both in China and abroad.

Growth that was expected to be in double digits for years to come has shrunk to levels well below that 'official' 7%. China's switch to a consumer driven economy is as much a fantasy as the western switch to a knowledge economy has proved to be. If you don't actually produce things, you're done. And producing for export markets is futile when there's no-one left to spend in those markets.

Ergo, commodities, raw materials, the very building blocks of our economies, from oil all the way to steel, are caught in a fire sale. Everything must go! Eventually, commodities prices will more or less stabilize, but at much lower levels than they -still- are at present. That we will need to figure this out in 2016 instead of 2015 is our own fault. We could have been healing, but we've yet to face the pain.

... ... ...

I was impressed with the following earlier this month from David Stockman, Reagan's Director of the Office of Management and Budget, who now seems to have firmly caught up with the deflation theme Nicole Foss and I have been warning about ever since we started writing – pre-TAE – at the Oil Drum 10 years ago. Stockman today says that we are entering an epic deflation and the world economy is actually going to shrink for the first time since the 1930s. (!)

The End Of The Bubble Finance Era

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. [..] .. there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

It's good to see people finally acknowledging this. It's still rare. But there's another, again interlinked, development that is very poorly understood. Which is that in a debt deflation, the 'money' that appears to be real and present in leveraged investments more often than not doesn't get pulled out of one 'investment' only to be put into another, it just goes POOF, it vanishes.

And though it may seem strange, conventional economics has a very hard time with that. In the eyes of that field, if you don't spend your money, you must be saving it. The possibility of losing it altogether is not a viable option. Or, if you lose it, someone else must be gaining it, zero-sum style.

But that view ignores the entire 'pyramid' of leveraged loans and investments and commodity prices, which precisely because that pyramid contained no more than a few percentage points of 'real collateral' to underpin everything it kept afloat, should have been a red flag. Because this is the very essence of debt deflation.

PlutoniumKun,

The price of oil was a big story, and China plays the lead role in that story, even if again poorly understood. All the reports and opinions about OPEC plans and 'tactics' to squeeze US frackers are hollow, since neither OPEC as a whole nor its separate members have the luxury anymore to engage in tactical games; they're all too squeezed by the demise of Chinese demand growth, if not demand, period.

I'm not sure I buy this at all. IEA figures show a consistent growth of oil demand in China the past few years. There is certainly a question mark over whether this is 'real' demand growth or whether it is largely driven by stockpiling (I strongly suspect the latter), but whatever way you look at it, China is buying more oil consistently year on year.

While certainly demand is not growing as much as the oil industry hoped, I haven't seen any evidence to contradict the general view that the core reason for the collapse in price is that the Saudi's fear their loss of influence as a result of the huge growth in unconventional oils, and have decided to kill them off by crashing prices. The desperate need by struggling oil producers to increase cash flow, and so not slow down production in response to low prices, accounts for the rest of the oil crash. I don't question the overall thesis of the article, but its not doing itself any favours by this sort of argument.

Growth that was expected to be in double digits for years to come has shrunk to levels well below that 'official' 7%. China's switch to a consumer driven economy is as much a fantasy as the western switch to a knowledge economy has proved to be. If you don't actually produce things, you're done. And producing for export markets is futile when there's no-one left to spend in those markets.

The switch to a consumer driven economy is not a fantasy, it is in fact happening and measurable, as Michael Pettis has pointed out. Anyone who keeps an eye on China knows that the CCP commitment to boosting the domestic consumer sector is real. The question is whether they are doing enough, fast enough – the answer to that (as Pettis concludes in that article) is that it is not happening fast enough. In reality, China has changed focus away from export markets and domestic investment quite significantly – but it is probably too late to prevent real disruption and internal deflation along with much slower real growth. Again, this doesn't contradict Ilargi's thesis, but he's not doing his arguments any favours by making sweeping statements like this which are only partially backed by real figures.

New Deal democrat,

In 2009, Illargi thought monthly job losses would accelerate by about 100,000 each month from 1 MILLION a month to 2 Million a month. In fact they declined by 100,000 a month to nearly zero by year's end.

On the very day of the stock market bottom in 2009, Illargi savaged Warren Buffett, who had said the stock market was making a historic low, and said anyone who took Bufffett's advice to buy stocks would be making a horrific mistake.

I collected these horrible calls in this post: http://bonddad.blogspot.com/2015/08/the-pied-piper-of-doom-and-automatic.html Those kind of gargantuan errors ought to disqualify Illargi from being taken seriously.

As to deflation in 2016, right now gas prices are down about 12% YoY, their least negative reading in over a year. They are only $.02 lower than they were at their bottom in the last week of this past January: https://research.stlouisfed.org/fred2/graph/?g=30wx

Caveat reader.

Steven,

What's tragic about all this is its utter stupidity. The US economy has been marching down the road of waste and conspicuous consumption (AKA the 'American lifestyle') paved by Black Gold (oil) for more than a hundred years; the global economy for at least half that long, having destroyed itself in world wars at least twice in the last century.

This has all been done so people with more money than they need at the moment or in several lifetimes can continue making more – 'keeping score' I believe they call it. If TPTB really wanted to 'save capitalism' they would be using their wholly owned governmental subsidies to write laws that made technologies with at least a chance of saving billions of lives, e.g. renewable energy and the electrification of transportation, profitable. (The end game is some form of 'socialism' that makes life possible for those billions while preserving the prerogatives of wealth inherited from previous generations or more recently created ex nihilo ('out of thin air') by the bankers and financiers. Remember: "Anyone can create money. The problem is getting it accepted." (Well, not really. You have to have access to credit.)

They (TPTB) have instead chosen to try to sustain the illusion their money-based wealth, i.e. money created ex nihilo – money that goes "Poof" at the end of every business cycle – first by fractional reserve bankers nominally based on gold or some other form of purported 'real' wealth and these days by bogus, impenetrable mathematics that hide the reality of "debts that can't be repaid (and) won't be" at least until the next financial crash (or world war).

The world has been marching down the wrong road for far too long – if the lives of several billion people matter – a road these days paved with the ambitions of Middle Eastern royalty mobilizing their troops with a religious fanaticism encouraging the most ruthless barbarism. It has precious little time remaining to find its direction.

likbez,

"Price discovery has already started (oil, commodities), and central banks have benched themselves. They could only re-enter the game if they quit interfering in the markets, but they're too afraid, all of them, of the consequences that might have, not even so much for their economies but for their TBTF banks. "

Good point. That will be the most interesting part of 2016 in oil. But is a sense price discovery for shale industry already ended. They have few chances to survive below $70-80 (if junk dent to be paid) and $50-$60 if it will be rotated or maturity extended.

[Dec 30, 2015] Russia mulls new tax regime to support Siberian oil production

Dec 30, 2015 | UPI.com

Russian Energy Minister Alexander Novak said oil production in Western Siberia, once a major contributor to overall output, was declining at an average rate of around 1 percent per year. Changes in a tax system, where so-called excess profits will be taxed at 70 percent, will make Western Siberia commercially viable.

Under the current tax regime, Novak said about 73 billion barrels of oil are not economic.

...Novak said a return to oil priced around $100 barrel is a long ways off. Volatility is expected to linger through the early part of 2015 before some level of balance returns to the market.

"It is unlikely there will be a sharp surge in prices," he said. "In my opinion, as of today the price of around $50 a barrel would be fair, if we proceed from economic parameters, the balance of supply and demand and the cost of oil production."

[Dec 30, 2015] IMF chief Lagarde warns of disappointing global growth in 2016

Notable quotes:
"... Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases. ..."
www.theguardian.com

The IMF managing director, Christine Lagarde, said the prospect of rising interest rates in the US and an economic slowdown in China were feeding uncertainty and a higher risk of economic vulnerability worldwide.

Added to that, growth in global trade has slowed considerably and a decline in raw material prices was posing problems for economies reliant on commodities, while many countries still had weak financial sectors as the financial risks increase in emerging markets, she said.

"All of that means global growth will be disappointing and uneven in 2016," Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis dampened growth. In October, the IMF forecast that the world economy would grow by 3.6% in 2016.

... ... ....

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases.

Lagarde warned that rising US interest rates and a stronger dollar could lead to companies defaulting on their payments and that this could "infect" banks and states.

[Dec 30, 2015] Saudi Arabia posts double-digit decline in oil revenue

Notable quotes:
"... Oil revenues are expected to reach $118 billion, a decline of 23 percent from the previous year. ..."
Dec 30, 2015 | UPI.com

The ministry reported total revenue for fiscal year 2015 at $162 billion, an estimated 15 percent decline from budgeted revenues. Oil revenues are expected to reach $118 billion, a decline of 23 percent from the previous year.

... ... ...

The Saudi government said that, because of "excessive" volatility in crude oil prices, a budget support provision of $48.7 billion was established to help finance projects designated as national priorities.

Non-oil revenue for Saudi Arabia increased 29 percent from last year to $43.5 billion.

[Dec 30, 2015] Xinhua China Sees Energy Consumption Rising In 2016

Rigzone

...China's apparent demand for crude oil will reach 550 million tonnes (11 million barrels per day) and apparent demand for natural gas will hit 205 billion cubic metres, Nur Bekri, head of the National Energy Administration (NEA), said, according to Xinhua.

...This year, China will have imported 330 million tonnes (6.6 million bpd) of oil and 60 bcm of natural gas. Installed energy capacity will have reached 1.47 billion kilowatts, up 7.5 percent.

...Crude oil production is expected to rise to 220 million tonnes (4.4 million bpd), even as global prices near 11-year lows. Natural gas production, including shale gas and coal-bed methane, is expected to rise to 140 bcm, he said.

[Dec 30, 2015] Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down

Bloomberg Business
In Kern County, California, one of the nation's biggest oil producers, tumbling energy prices have wiped more than $8 billion from its property-tax base, forcing officials to tap into reserves and cut every department's budget. It's only getting worse.

QuickTake Oil Prices

The county of 875,000 in the arid Central Valley north of Los Angeles may face another blow in January, when it reassess the oil-rich fields that line the landscape. Last year's tax bills were based on crude selling for $54 a barrel. It finished Monday at less than $37.

Alaska, Louisiana and Oklahoma have seen tax collections diminished by the rout, which has put pressure on credit ratings and led investors to demand higher yields on some securities. In Texas, the largest producer, the state's sales-tax revenue dropped 3 percent in November from a year earlier as the energy industry exerted a drag on the economy.

Further west, Colorado's legislative forecasters on Dec. 21 estimated that the state's current year budget will have a shortfall of $208 million, in part because of the impact of lower commodity prices. In North Dakota, tax collections have trailed forecasts by 9 percent so far for the 2015-2017 budget.

"The longer it goes the more significant it gets," said Chris Mier, managing director with Loop Capital Markets in Chicago.

[Dec 29, 2015] Where actually is that much-hyped global oil glut?

crudeoilpeak.info
matt , December 29, 2015
The media is full with news that there is a global oil glut.

There are now more than 3bn barrels of excess oil in the world

13/11/2015
http://www.telegraph.co.uk/finance/oilprices/11993687/There-are-now-more-than-3bn-barrels-of-excess-oil-in-the-world.html

Record oil glut stands at 3bn barrels

13/11/2015
http://www.bbc.com/news/business-34808487

It was parroted by the Australian public broadcaster ABC TV, using this (unsuitable) opportunity to take a swipe at peak oil:

Peak oil losing credibility as renewables shift accelerates

24/12/2015
"With the world awash with too much crude oil at the moment, the fear of an economic catastrophe when fossil fuels start running out is quietly fading in the background."
http://www.abc.net.au/news/2015-12-24/peak-oil-losing-credibility-as-shift-to-renewables-accelerates/7052196

These stories go back to the IEA's Monthly Oil Market Report (OMR), November 2015 which reads:

"Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil."
https://www.iea.org/oilmarketreport/reports/2015/1115/

So how much is 3 bn barrels?

Let's have a look at the statistics in the latest IEA OMR of December 2015. It's only about OECD stocks, not the whole world.

[Dec 29, 2015] Where actually is that much-hyped global oil glut?

crudeoilpeak.info
matt , December 29, 2015
The media is full with news that there is a global oil glut.

There are now more than 3bn barrels of excess oil in the world

13/11/2015
http://www.telegraph.co.uk/finance/oilprices/11993687/There-are-now-more-than-3bn-barrels-of-excess-oil-in-the-world.html

Record oil glut stands at 3bn barrels

13/11/2015
http://www.bbc.com/news/business-34808487

It was parroted by the Australian public broadcaster ABC TV, using this (unsuitable) opportunity to take a swipe at peak oil:

Peak oil losing credibility as renewables shift accelerates

24/12/2015
"With the world awash with too much crude oil at the moment, the fear of an economic catastrophe when fossil fuels start running out is quietly fading in the background."
http://www.abc.net.au/news/2015-12-24/peak-oil-losing-credibility-as-shift-to-renewables-accelerates/7052196

These stories go back to the IEA's Monthly Oil Market Report (OMR), November 2015 which reads:

"Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil."
https://www.iea.org/oilmarketreport/reports/2015/1115/

So how much is 3 bn barrels?

Let's have a look at the statistics in the latest IEA OMR of December 2015. It's only about OECD stocks, not the whole world.

[Dec 29, 2015] Why Energy Investors Are Hoping Saudi Arabia And Irans Oil Price Forecasts Are Dead Wrong

The sooner those oil sheiks sell their oil at rock bottom price, the sooner the end of their kingdoms arrive. In this sense this is not a bad development after all.
Dec 29, 2015 | Zero Hedge
Yesterday, when Saudi Arabia revealed its "draconian" 2016 budget, boosting gasoline prices by 40%, while trimming welfare programs after forecasting a collapse in oil revenue (even while allocating the biggest part of government spending in next year's budget to defense and security)

Bloomberg reported that "the kingdom's 2016 budget is probably based on crude prices of about $29 a barrel, according Riyadh-based Jadwa Investment Co."

Clueless, 12/30/2015 at 7:26 pm
With regard to peak oil, I have always [perhaps incorrectly] put most of the weight on the charts/graphs of "new discovery quantities" by year, for the past 80 years.

Put those graphs against consumption graphs for those same 80 years. Looking at those two in conjunction should give pause to most people.

Unless they believe that there dozens of elephant fields out there somewhere that have not been discovered and which will be economic at some price below $75.

The fact that Saudi can produce oil at $5 per barrel is meaningless, since they have created a country with a growing population that needs over $75 per barrel to survive as a country.

[Dec 29, 2015] Falling knives and dead cats When will the oil slump end

This is kind of fact-free reporting. Without new capital investment world production should shrink around 6% (rate of wells national decline) and that's around 5 Mb/d. As capital investment did not stop completely let's assume 2% drop. that's still around 2 Mb/d. new production is less then that.
Notable quotes:
"... New data showing a deeper or more definitive decline in output could give bulls a reason to pile back in. ..."
"... Non-OPEC investment has been cut by around $130 billion this year from about $650 billion in 2014, OPEC Secretary General Abdullah al-Badri said in October. ..."
"... In the United States, the oil rig count just keeps falling. Last week it dropped for the 14th of the last 15 weeks, to 524, a third of what it was a year ago. A Barclays survey found that North American oil firms could cut investment by up to $19 billion next year after slashing it by $68 billion this year. ..."
"... Tehran has said it is gearing up to pump an extra 500,000 bpd of crude as soon as mid-year as sanctions are eased within months. If those exports do not materialize or are delayed, bulls may be emboldened to charge in. ..."
"... For all the talk of oversupply, it may not be as big as many think. Global markets are only oversupplied by about 1 million bpd, according to a report from Citi analysts on Tuesday, and a bridging of the gap is already under way. With incomplete and often lagging data, any sudden sign that the supply excess is diminishing more quickly than expected could ignite buying. ..."
Dec 29, 2015 | Reuters

U.S. oil production has fallen by about 200,000 barrels per day since an over four-decade high in April, a decline that's been far shallower than many expected. Non-OPEC annual supply growth shrank to below 300,000 bpd in November from 2.2 million at the start of the year, according to the International Energy Agency. New data showing a deeper or more definitive decline in output could give bulls a reason to pile back in.

... ... ....

If any one thing points to the dangers of a supply shortfall in the future, it's a lack of investment. As ex-BP chief Tony Hayward told a conference in New York this year, if the money doesn't go into the ground, the oil won't come out. Non-OPEC investment has been cut by around $130 billion this year from about $650 billion in 2014, OPEC Secretary General Abdullah al-Badri said in October.

In the United States, the oil rig count just keeps falling. Last week it dropped for the 14th of the last 15 weeks, to 524, a third of what it was a year ago. A Barclays survey found that North American oil firms could cut investment by up to $19 billion next year after slashing it by $68 billion this year.

... ... ...

One major factor weighing on oil markets is the expected reemergence of Iran as an exporter next year after sanctions are lifted. Tehran has said it is gearing up to pump an extra 500,000 bpd of crude as soon as mid-year as sanctions are eased within months. If those exports do not materialize or are delayed, bulls may be emboldened to charge in.

... ... ...

For all the talk of oversupply, it may not be as big as many think. Global markets are only oversupplied by about 1 million bpd, according to a report from Citi analysts on Tuesday, and a bridging of the gap is already under way. With incomplete and often lagging data, any sudden sign that the supply excess is diminishing more quickly than expected could ignite buying.

[Dec 29, 2015] Oil Bankruptcies Mark Devastating End Of The Year For U.S. Drillers

Notable quotes:
"... The shale sector is now being financially stress-tested, exposing shale's dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow, ..."
"... Of course this all worked out fine in an environment characterized by relatively high crude prices and ultra-accommodative monetary policy. The cost of capital was low and yield-starved investors were forgiving, allowing the US oil patch to keeping drilling and pumping long after it should have been bankrupt. Now, the proverbial chickens have come home to roost. ..."
"... "the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis; sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries." ..."
"... as many as a third of energy companies will default over the next three years. ..."
"... This week's gains notwithstanding, and a likely misguided assumption about the impact the lifting of America's crude export ban will have on WTI aside, the fundamentals here are a nightmare. Iraq is pumping at record levels, Iranian supply is set to ramp up starting next month, once sanctions are lifted, and OPEC is completely disjointed. Furthermore, producers are bumping up against the limits of how many jobs they can cut and how much capex can be slashed (ultimately, you have to retain enough human capital and capacity to remain operational). The takeaway: the bankruptcies are coming. ..."
"... As the Dallas Fed notes in its latest quarterly energy outlook, bankruptcies in the space are now at their highest levels since the crisis and things look bleak going forward. ..."
Dec 29, 2015 | OilPrice.com
...uneconomic producers in the US are almost entirely dependent on capital markets for their continued survival. "The shale sector is now being financially stress-tested, exposing shale's dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow," Citi wrote in September. Here's a look at what the bank means:

... image deleted (see original post for it)...

Of course this all worked out fine in an environment characterized by relatively high crude prices and ultra-accommodative monetary policy. The cost of capital was low and yield-starved investors were forgiving, allowing the US oil patch to keeping drilling and pumping long after it should have been bankrupt. Now, the proverbial chickens have come home to roost. In the wake of the Fed hike, HY is rolling over and as UBS noted over the summer, "the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis; sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries."

As Bruce Richards, chief executive officer of Marathon Asset Management told Bloomberg last week, "the price of a barrel of oil could fall below $30 due to a "glut of supply," and as many as a third of energy companies will default over the next three years."

"This is the worst non-recessionary year we've ever had for high yield," Richards said. New York-based Marathon has added to short positions on energy bonds, he said.

This week's gains notwithstanding, and a likely misguided assumption about the impact the lifting of America's crude export ban will have on WTI aside, the fundamentals here are a nightmare. Iraq is pumping at record levels, Iranian supply is set to ramp up starting next month, once sanctions are lifted, and OPEC is completely disjointed. Furthermore, producers are bumping up against the limits of how many jobs they can cut and how much capex can be slashed (ultimately, you have to retain enough human capital and capacity to remain operational). The takeaway: the bankruptcies are coming.

As the Dallas Fed notes in its latest quarterly energy outlook, bankruptcies in the space are now at their highest levels since the crisis and things look bleak going forward. Below, find excerpts from the report.

* * *
From The Dallas Fed

West Texas Intermediate (WTI) crude oil prices have fallen around 23 percent so far in the fourth quarter. Expectations have shifted toward a weaker price outlook because sanctions against Iran are likely to be lifted in early 2016, the Organization of the Petroleum Exporting Countries (OPEC) has scrapped any pretense of a production ceiling, and U.S. production declines have slowed. Supply Glut Drives Oil Prices to 10-Year Lows The imbalance in global supply and demand has led oil prices to slump to levels last seen over 10 years ago.

World petroleum production will exceed consumption by an average of 1.7 million barrels per day (mb/d) in 2015, according to December estimates by the Energy Information Administration (EIA). This excess supply is higher than during the Asian financial crisis and the Great Recession. OPEC supply has bloated markets with nearly 1 mb/d more this year than what the EIA initially predicted in November 2014. In 2016, global supply is expected to exceed demand by 0.6 mb/d on average (Chart 1).

[Dec 29, 2015] In The Year When Nothing Worked, This Handful Of Traders Made Billions

This is a casino, not a real market. And oil price reflects that unconstrained gambling with excessive leverage...
"... Mr. Armitage's $15 billion London firm quietly booked the $1.5 billion profit with its bearish energy wagers and overall pivot to safer markets in the U.S. and Europe. ..."
"... Reading stories like these makes me think of 'Fast Eddie' Felson...nowadays the markets are pure gambling with the central banks as Minnesota Fats... ..."
"... Using 8x leverage doesn't impress me. If she'd have gotten that call wrong she'd be a bum right now. ..."
"... I don't care how smart you are or what info you have, the market is not 100% predictable and the impact of her risk is devastating even if she exited early. ..."
Zero Hedge

In the words of BMO's Lowell Yura, "this year is a wake-up call to think about lower returns for the next several years," warning that "investor expectations for both equities and bonds have been [mistakenly] elevated by recent history." Jim Bianco added that 2015 could be the worst for asset allocation funds since World War I: "for the first time since 2001, none of the major asset-classes returned more than 10%."

...Mr. Armitage's $15 billion London firm quietly booked the $1.5 billion profit with its bearish energy wagers and overall pivot to safer markets in the U.S. and Europe.

JoeTurner

Reading stories like these makes me think of 'Fast Eddie' Felson...nowadays the markets are pure gambling with the central banks as Minnesota Fats...

Exalt

Using 8x leverage doesn't impress me. If she'd have gotten that call wrong she'd be a bum right now. I guess if people want to throw their lives away on trades like that, that's their business. I wonder if she came up the ranks with that strategy and if she will continue making those ballsy and downright stupid plays or quietly exit now having won the lottery basically.

I don't care how smart you are or what info you have, the market is not 100% predictable and the impact of her risk is devastating even if she exited early.

[Dec 29, 2015] US natural gas production is down nearly 10 percent year over year

peakoilbarrel.com

Heinrich Leopold, 12/29/2015 at 9:45 am

According to the latest top stories of http://www.bentekenergy.com (Production revisions bring year to date low), US natural gas production fell to the lowest in over one year to 68.1 bcf/d and nearly down 10% year over year. Texas production fell to 18.3 bcf/d, nearly 25% down from last year (see below chart). These numbers are staggering and come despite vast pipeline expansions over the fall/summer and very high demand of 92.4 bcf/d and falling inventories. As we have not yet seen a shale gas correction, the slowdown could be far steeper than many expect.

[Dec 29, 2015] $10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC

Notable quotes:
"... The industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016 ..."
"... the industry is massively underinvesting ..."
"... recent efficiency gains notwithstanding, marginal costs have generally increased over time. Low-cost production depletes, and the industry becomes more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending. ..."
"... In many cases, these sorts of projects are not profitable at today's prices. The price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future. OPEC could be a bit too sanguine with its call for $95 oil in 2040. ..."
finance.yahoo.com

OPEC also issued a word of caution in its report. While oil markets experience oversupply in the short- to medium-term, massive investments in exploration and production are still needed to meet demand over the long-term. OPEC believes $10 trillion will be necessary over the next 25 years to ensure adequate oil supplies. "If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices," OPEC concluded. About $250 billion each year will have to come from non-OPEC countries.

In a similar but more disconcerting conclusion, the Oslo-based Rystad Energy recently concluded that the current state of oversupply could be "turned upside down over the next few years." That is because the drastic spending cuts today will result in a shortage within a few years. To put things in perspective, Rystad says that the oil industry "needs to replace 34 billion barrels of crude every year – equal to current consumption." But as a result of the collapse in prices, the industry has slashed spending across the board and "investment decisions for only 8 billion barrels were made in 2015. This amount is less than 25% of what the market requires long-term," Rystad Energy concluded. The industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016. The latter figure did not take into account the recent decision by OPEC to abandon its production target, which sent oil prices falling further.

So what are we to make of this? There could be plenty of oil supplies in the future, but as it stands, the industry is massively underinvesting? This illustrates a troubling tension within the oil industry. Oil prices will be set by the marginal cost of production, and recent efficiency gains notwithstanding, marginal costs have generally increased over time. Low-cost production depletes, and the industry becomes more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending.

In many cases, these sorts of projects are not profitable at today's prices. The price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future. OPEC could be a bit too sanguine with its call for $95 oil in 2040.

At the same time, future price spikes set up the possibility of much greater demand destruction, especially if alternatives become more viable. This is the difficult balancing act that the industry must pull off over the next few decades.

[Dec 28, 2015] A Breakdown of the 2016 Saudi Budget and Its Implications -

Does this mean that Saudis expect low prices to persist all the 2016?
Notable quotes:
"... The Ministry of Finance said its 2016 budget is based on "extremely low oil prices" that prompted Gulf states to cut spending. ..."
www.bloomberg.com

Bloomberg Business

Economy Minister Adel Fakeih said Monday that 20 billion riyals of this year's spending overshoot was due to increased military and security spending related to the military operation against Shiite Houthi rebels in Yemen.

The Ministry of Finance said its 2016 budget is based on "extremely low oil prices" that prompted Gulf states to cut spending.

SHORING UP FINANCES

The government, headed by King Salman bin Abdulaziz Al Saud, pledged to take action to shore up public finances, including the possible sale of government entities and the revision of fuel, water and power subsidies over the next five years.

It immediately rolled out the first batch of revisions after the budget announcement, raising the prices of water and electricity supplied to households and the cost of gasoline, ethane and gas. The revisions focused on "directing subsidies to those who really deserve it," Fakeih said.

[Dec 28, 2015] Saudi Arabia responsible for oil market destabilization – Russian energy minister

Notable quotes:
"... This year Saudi Arabia has ramped up production by 1.5 million barrels per day, which in fact destabilized the situation on the market, ..."
"... What is now emerging, especially clear since the Turkish deliberate ambush of the Russian SU-24 jet inside Syrian airspace, is that Russia is not fighting a war against merely ISIS terrorists, nor against the ISIS backers in Turkey. Russia is taking on, perhaps unknowingly, a vastly more dangerous plot. Behind that plot is the hidden role of Saudi Arabia and its new monarch, King Salman bin Abdulaziz Al Saud, together with his son, the Defense Minister, Prince Salman. ..."
www.rt.com
Saudi Arabia has destabilized the crude market while increasing its oil output by 1.5 million barrels a day, said Russia's Energy Minister Aleksandr Novak.

"This year Saudi Arabia has ramped up production by 1.5 million barrels per day, which in fact destabilized the situation on the market," Novak told Rossiya 24 TV channel.

According to him, the balance of oil supply and demand could be achieved in 2016. Iran's return to the global energy market could also affect oil prices, Novak added.

Dec 28, 2015 | RT Business

Nonyank

The world saw this behavior from the Saudi's in 1975 and 1978 when they created oil shortages to gain market share just as they are doing today, sacrificing fellow members of OPEC for their own greed.....we have seen this dumb show before and yet the world allows it to continue.

Tom Brite > Greg G1

Greg G
Saudi Arabia responsible for oil market destabilization. Russia seems to be doing so as well. Just wait till Iranian oil hits the market!

vann tedd > nikko sharkenstein

nikko sharkenstein

Kathryn Roston

What is now emerging, especially clear since the Turkish deliberate ambush of the Russian SU-24 jet inside Syrian airspace, is that Russia is not fighting a war against merely ISIS terrorists, nor against the ISIS backers in Turkey. Russia is taking on, perhaps unknowingly, a vastly more dangerous plot. Behind that plot is the hidden role of Saudi Arabia and its new monarch, King Salman bin Abdulaziz Al Saud, together with his son, the Defense Minister, Prince Salman.

The Saudi monarchy is determined to control the oil fields of Iraq and of Syria using ISIS to do it. They clearly want to control the entire world oil market, first bankrupting the recent challenge from US shale oil producers, then by controlling through Turkey the oil flows of Iraq and Syria.

If we strip away the phony religious cover, what emerges is a Saudi move to grab some of the world's largest oil reserves, those of the Sunni parts of Iraq, and of Syria, using the criminal Turkish regime in the role of thug to do the rough work, like a bouncer in a brothel.

It's the monarchy of King Salman and his hot-headed son, Prince Salman. For decades they have financed terrorism under a fake religious disguise, to advance their private plutocratic agenda. It has nothing to do with religion and everything to do with money and oil. A look at the ISIS map from Iraq to Syria shows that they precisely targeted the oil riches of those two sovereign states. Saudi control of that oil wealth via their ISIS agents, along with her clear plan to take out the US shale oil competition, or so Riyadh reckons, would make the Saudi monarchy a vastly richer state, one, perhaps because of that money, finally respected by white western rich men and their society.


http://journal-neo.org/2015/12/08/what-stinks-in-saudi-aint-the-camel-dung/

What Russia is facing is an indirect soft war from United States. in at least 3 fronts, in Ukraine, in Syria and on its Economy. but also it could be said in IRAQ too, since just like Syria and IRAN, IRAQ is the other of the few countries in middle east that Americans do not fully control, and that cooperates with Russia and buys a lot of military hardware from them. Saudi king, Turkey, US and ISrael are the lifeline of ISIS and Alqaeda. This is why is impossible to completely defeat the organization as long those countries continues recruiting terrorist, and aiding terrorism with money and weapons.

And logistics and training. It could be said that well organized terrorism, but also ultra radical right wing nazis like in Ukraine and baltic states are groups that Americans Government as a policy, helps to organize and to become more powerful, simply because they can be used to fight Russia. The major world conflict in the world today, the major wars, are all caused by Americans with the aim to weaken and isolate Russia. We are effectively in a "Cold war 2.0", that Americans began against Russia, and forcing them to defend itself before the problem grows too much (what Americans wants) and affect directly the security of Russia directly and its long term economic interest.

[Dec 28, 2015] Secular Stagnation

Notable quotes:
"... General Theory of Employment, Interest and Money ..."
"... Wall Street Journal ..."
"... Secular Stagnation: Facts, Causes and Cures ..."
Dec 28, 2015 | Monthly Review
... ... ...

Summers's remarks and articles were followed by an explosion of debate concerning "secular stagnation"-a term commonly associated with Alvin Hansen's work from the 1930s to '50s, and frequently employed in Monthly Review to explain developments in the advanced economies from the 1970s to the early 2000s.2 Secular stagnation can be defined as the tendency to long-term (or secular) stagnation in the private accumulation process of the capitalist economy, manifested in rising unemployment and excess capacity and a slowdown in overall economic growth. It is often referred to simply as "stagnation." There are numerous theories of secular stagnation but most mainstream theories hearken back to Hansen, who was Keynes's leading early follower in the United States, and who derived the idea from various suggestions in Keynes's General Theory of Employment, Interest and Money (1936).

Responses to Summers have been all over the map, reflecting both the fact that the capitalist economy has been slowing down, and the role in denying it by many of those seeking to legitimate the system. Stanford economist John B. Taylor contributed a stalwart denial of secular stagnation in the Wall Street Journal. In contrast, Paul Krugman, who is closely aligned with Summers, endorsed secular stagnation on several occasions in the New York Times. Other notable economists such as Brad DeLong and Michael Spence soon weighed in with their own views.3

Three prominent economists have new books directly addressing the phenomena of secular stagnation.4 It has now been formally modelled by Brown University economists Gauti Eggertsson and Neil Mehrotra, while Thomas Piketty's high-profile book bases its theoretical argument and policy recommendations on stagnation tendencies of capitalism. This explosion of interest in the Summers/Krugman version of stagnation has also resulted in a collection of articles and debate, edited by Coen Teulings and Richard Baldwin, entitled Secular Stagnation: Facts, Causes and Cures.5

Seven years after "The Great Financial Crisis" of 2007–2008, the recovery remains sluggish. It can be argued that the length and depth of the Great Financial Crisis is a rather ordinary cyclical crisis. However, the monetary and fiscal measures to combat it were extraordinary. This has resulted in a widespread sense that there will not be a return to "normal." Summers/Krugman's resurrection within the mainstream of Hansen's concept of secular stagnation is an attempt to explain how extraordinary policy measures following the 2007–2008 crisis merely led to the stabilization of a lethargic, if not comatose, economy.

But what do these economists mean by secular stagnation? If stagnation is a reality, does their conception of it make current policy tools obsolete? And what is the relationship between the Summers/Krugman notion of secular stagnation and the monopoly-finance capital theory?

... ... ...

In "secular stagnation," the term "secular" is intended to differentiate between the normal business cycle and long-term, chronic stagnation. A long-term slowdown in the economy over decades can be seen as superimposed on the regular business cycle, reflecting the trend rather than the cycle.

In the general language of economics, secular stagnation, or simply stagnation, thus implies that the long-run potential economic growth has fallen, constituting the first pillar of MISS. This has been most forcefully argued for by Robert Gordon, as well as Garry Kasparov and Peter Thiel.6 Their argument is that the cumulative growth effect of current (and future) technological changes will be far weaker than in the past. Moreover, demographic changes place limits on the development of "human capital." The focus is on technology, which orthodox economics generally sees as a factor external to the economy and on the supply-side (i.e., in relation to cost). Gordon's position is thus different than that of moderate Keynesians like Summers and Krugman, who focus on demand-side contradictions of the system. In Gordon's supply-side, technocratic view, there are forces at work that will limit the growth in productive input and the efficiency of these inputs. This pillar of MISS emphasizes that it is constraints on the aggregate supply-side of the economy that have diminished absolutely the long-run potential growth.

The second pillar of MISS, also a supply-side view, goes back at least to Joseph Schumpeter. To explain the massive slump of 1937, Schumpeter maintained there had emerged a growing anti-business climate. Moreover, he contended that the rise of the modern corporation had displaced the role of the entrepreneur; the anti-business spirit had a repressive effect on entrepreneurs' confidence and optimism.7 Today, this second pillar of MISS has been resurrected suggestively by John B. Taylor, who argues the poor recovery is best "explained by policy uncertainty" and "increased regulation" that is unfavorable to business. Likewise, Baker, Bloom, and Davis have forcefully argued that political uncertainty can hold back private investment and economic growth.8

Summers and Krugman, as Keynesians, emphasize a third MISS pillar, derived from Keynes's famous liquidity trap theory, which contends that the "full-employment real interest rate" has declined in recent years. Indeed, both Summers and Krugman demonstrate that real interest rates have declined over recent decades, therefore moving from an exogenous explanation (as in pillars one and two) to a more endogenous explanation of secular stagnation.9 The ultimate problem here is lack of investment demand, such that, in order for net investment to occur at all, interest rates have to be driven to near zero or below. Their strong argument is that there are now times when negative real interest rates are needed to equate saving and investment with full employment.

However, "interest rates are not fully flexible in modern economies"-in other words, market-determined interest rate adjustments chronically fail to achieve full employment. Summers contends there are financial forces that prohibit the real interest rate from becoming negative; hence, full employment cannot be realized.10

Some theorists contend that there has been demographic structural shifts increasing the supply of saving, thus decreasing interest rates. These shifts include an increase in life expectancy, a decrease in retirement age, and a decline in the growth rate of population.

Others, including Summers, point out that stagnation in capital formation (or accumulation) can be attributed to a decrease in the demand for loanable funds for investment. One mainstream explanation offered for this is that today's new technologies and companies, such as Google, Microsoft, Amazon, and Facebook, require far less capital investment. Another hypothesis is that there has been an important decrease in the demand for loanable funds, although they argue this is due to a preference for safe assets. These factors can function together to keep the real interest rate very low. The policy implication of secular low interest rates is that monetary policy is more difficult to implement effectually; during a recession, it is weakened and can even become ineffectual.

Edward Glaeser, focusing on "secular joblessness," places severe doubt on the first pillar of MISS, but then makes a very important additional argument. Glaeser rejects the notion that there has been a slowdown in technological innovation; innovation is simply "unrelenting." Likewise, he is far less concerned with secular low real interest rates, which may be far more cyclical. "Therefore," contends Glaeser, "stagnation is likely to be temporary."

Nonetheless, Glaeser underscores secular joblessness, and thus the dysfunction of U.S. labor markets constitutes a fourth pillar of MISS: "The dysfunction in the labour market is real and serious, and seems unlikely to be solved by any obvious economic trend." Somehow, then, the problem is due to a misfit of skills or "human capital" on the side of workers, who thus need retraining. "The massive secular trend in joblessness is a terrible social problem for the US, and one that the country must try to address" with targeted policy.11 Glaeser's argument for the dysfunction of U.S. labor markets is based on recession-generated shocks to employment, specifically of less-skilled U.S. workers. After 1970, when workers lost their job, the damage to human capital became permanent. In short, when human capital depreciates due to unemployment, overall abilities and "talent" are "lost" permanently. This may be because the skills required in today's economy need to be constantly practiced to be retained. Thus, there is a ratchet-like effect in joblessness caused by recessions, whereby recession-linked joblessness is not fully reversed during recoveries-and all this is related to skills (the human capital of the workers), and not to capital itself. According to Glaeser, the ratchet-like effect of recession-linked joblessness is further exacerbated by the U.S. social-safety net, which has "made joblessness less painful and increased the incentives to stay out of work."12

Glaeser contends that, if his secular joblessness argument is correct, the macroeconomic fiscal interventions argued for by Summers and Krugman are off-base.13 Instead, the safety net should be redesigned in order to encourage rather than discourage people from working. Additionally, incentives to work need to be radically improved through targeted investments in education and workforce training.14 Such views within the mainstream debate, emphasizing exogenous factors, are generally promoted by freshwater (conservative) rather than saltwater (liberal) economists. Thus, they tend to emphasize supply-side or cost factors.

The fifth pillar of MISS contends that output and productivity growth are stagnant due to a failure to invest in infrastructure, education, and training. Nearly all versions of MISS subscribe to some version of this, although there are both conservative and liberal variations. Barry Eichengreen underscores this pillar and condemns recent U.S. fiscal developments that have "cut to the bone" federal government spending devoted to infrastructure, education, and training.

The fifth pillar of MISS necessarily reflects an imbalance between public and private investment spending. Many theorists maintain that the imbalance between public and private investment spending, hence secular stagnation, "is not inevitable." For example, Eichengreen contends if "the US experiences secular stagnation, the condition will be self-inflicted. It will reflect the country's failure to address its infrastructure, education and training needs. It will reflect its failure to…support aggregate demand in an effort to bring the long-term unemployed back into the labour market."15

The sixth pillar of MISS argues that the "debt overhang" from the overleveraging of financial firms and households, as well as private and public indebtedness, are a serious drag on the economy. This position has been argued for most forcefully by several colleagues of Summers at Harvard, most notably Carmen Reinhart and Kenneth Rogoff.16 Atif Mian and Amir Sufi also argue that household indebtedness was the primary culprit causing the economic collapse of 2007–2008. Their policy recommendation is that the risk to mortgage borrowers must be reduced to avoid future calamities.17

As noted, the defenders of MISS do not necessarily support a compatibility between the above six pillars: those favored by conservatives are supply-side and exogenous in emphasis, while liberals tend towards demand-side and endogenous ones. Instead, most often these pillars are developed as competing theories to explain the warrant of some aspect of secular stagnation, and/or to defend particular policy positions while criticizing alternative policy positions. However, the concern here is not whether there is the possibility for a synthesis of mainstream views. Rather, the emphasis is on how partial and separate such explanations are, both individually and in combination.

Hans G. Despain teaches political economy at Nichols College, where he is the chair of the Department of Economics.

[Dec 28, 2015] Things to Celebrate, Like Dreams of Flying Cars

Looks like Paul Krugman is simply incompetent when he is taking about fracking and space exploration. As somebody have said, racking is actually not a revolution, it is a retirement party. Fracking probably release more methane into atmosphere that it saves greenhouse gases. It also produces sustained environmental damage. Methane is 20 times worse than carbon dioxide.
Notable quotes:
"... The biggest effects so far have come from fracking, which has ended fears about peak oil and could ..."
"... Until the government spends money on renewable energy instead of wars and oil, we will not see much progress in cleaning up our world or even surviving as a species. Yes, it is politics, but it is mostly MONEY in politics. But first let's break up the banks, and do some serious anti-trust enforcement, and we might be able to undo citizens united. That's the politics that really is holding us back now. GO BERNIE SANDERS!! ..."
"... Ultimately, we need to move toward societies that are less dependent on cheap energy for everything. We've abandoned farms because it's cheaper to transport foods from around the world. Consider the insanity of the modern practice of raising chickens in the US, then shipping them to China for processing and then shipped back for sale in our supermarkets. ..."
"... Consider how we worry about obesity while building suburban developments where you have to drive to go anywhere. Their design actively discourages walking and bicycling as an everyday activity. ..."
"... Unfortunately, though fracking produces oil, it produces methane and more damaging gases. Methane is 20 times worse than carbon dioxide. Therefore, fracking will worsen global warming. Unless the energy industry eliminates the destructive bi-products of fracking, we can kiss humanity goodbye. ..."
"... The continued acceleration of changes affecting humanity and the planet is coupled today with a more intensified pace of life and work which might be called 'rapidification.' Although change is part of the working of complex systems, the speed with which human activity has developed contrasts with the naturally slow pace of biological evolution. Moreover, the goals of this rapid and constant change are not necessarily geared to the common good or to integral and sustainable human development. Change is something desirable, yet it becomes a source of anxiety when it causes harm to the world and to the quality of life of much of humanity. ..."
"... Ridiculous and possibly Republican free cheese is more dangerous than climate change is a willful grasp for any straw that will permit privilege. The top marginal rates prior to the 1957 Sputnik refute musings about the good old days of the private sector producing wonders. ..."
Dec 25, 2015 | The New York Times

But now we're witnessing a revolution on multiple fronts. The biggest effects so far have come from fracking, which has ended fears about peak oil and could, if properly regulated, be some help on climate change: Fracked gas is still fossil fuel, but burning it generates a lot less greenhouse emissions than burning coal.

The bigger revolution looking forward, however, is in renewable energy, where costs of wind and especially solar have dropped incredibly fast.

Carolyn Egeli, Valley Lee, Md December 25, 2015

Merry Christmas everyone! And for sure have Happy Holidays! Here's to the New Year with more renewable energy and far less fossil fuel consumption! Even though the rest of the world is quickly moving away from fossil fuel consumption to even 100% renewable energy in more than a couple of countries, we lag at 13% renewable in the U.S. Why? Because we are controlled by the fosil fuel companies, including natural gas, which is the biggest boondoggle we've gotten involved in yet. It doesn't help us, it pollutes us.

While other countries are nearing 100% renewable sources for energy around the world, we have let the foxes guard the henhouse of possibilities in nearly every way, from banks controlling the fed (whose worth and assets are so completely tied up in unburned fossil fuels) to wars for those assets. Wars burn fuel, and wars need weaponry.

Until the government spends money on renewable energy instead of wars and oil, we will not see much progress in cleaning up our world or even surviving as a species. Yes, it is politics, but it is mostly MONEY in politics. But first let's break up the banks, and do some serious anti-trust enforcement, and we might be able to undo citizens united. That's the politics that really is holding us back now. GO BERNIE SANDERS!!

lgalb, Albany December 25, 2015

Americans have been enamored with the notion that we can solve our problems by converting from fossil fuels to renewable energy. That may be substituting one addiction for another.

Ultimately, we need to move toward societies that are less dependent on cheap energy for everything. We've abandoned farms because it's cheaper to transport foods from around the world. Consider the insanity of the modern practice of raising chickens in the US, then shipping them to China for processing and then shipped back for sale in our supermarkets.

Consider how we worry about obesity while building suburban developments where you have to drive to go anywhere. Their design actively discourages walking and bicycling as an everyday activity.

Transitioning to renewable energy is only a first step. Ultimately, we need to pay more attention to sustainable living that does not treat energy as an infinite resource that costs nothing to consume.

dbsweden, is a trusted commenter Sweden December 25, 2015

Unfortunately, though fracking produces oil, it produces methane and more damaging gases. Methane is 20 times worse than carbon dioxide. Therefore, fracking will worsen global warming. Unless the energy industry eliminates the destructive bi-products of fracking, we can kiss humanity goodbye.

Happy Holidays.

Karen Garcia, New Paltz, NY December 25, 2015

Merry Christmas, everybody.

In the encyclical Laudato Si', Pope Francis wrote:

"The continued acceleration of changes affecting humanity and the planet is coupled today with a more intensified pace of life and work which might be called 'rapidification.' Although change is part of the working of complex systems, the speed with which human activity has developed contrasts with the naturally slow pace of biological evolution. Moreover, the goals of this rapid and constant change are not necessarily geared to the common good or to integral and sustainable human development. Change is something desirable, yet it becomes a source of anxiety when it causes harm to the world and to the quality of life of much of humanity."

Progress proceeds with the speed of blight. While a billionaire sends his rockets into space, and fellow billionaires wait in line to be space tourists, the number of refugees displaced by the technologies of war has now surpassed a million. Pope Francis is also right in calling the catastrophe "a piecemeal World War III."

While international bigwigs are patting themselves on the back for agreeing to agree at the Paris climate summit, Congress has quietly lifted the ban on exporting domestic oil. The miracle of fracking has created quite the glut. Instead conserving, we're urged to gas up and go, go, go.

In our haste to extract huge pieces of the earth, we seem to have forgotten all about Peace on Earth.

http://kmgarcia2000.blogspot.com/

Joseph Huben, Upstate NY December 25, 2015

Ridiculous and possibly Republican "free cheese" is more dangerous than climate change is a willful grasp for any straw that will permit privilege. The top marginal rates prior to the 1957 Sputnik refute musings about the good old days of the private sector producing wonders. The only wonders the private sector ever produces occur on roads, railroads, the sea and in the air that have been secured by government and the industrial might that government commissioned.

Elon Musk has triumphed in producing a vehicle that will enable travel to the government space station. All of the preliminary work was accomplished with government programs. The people of the United States welcome the entrepreneurs to travel on the roads that we have all built.

Edward Corey, Bronx, NY December 25, 2015

When Sputnik was launched, the rich paid their fair share of taxes. The social safety net was much larger, the roads and other infrastructure were in much better shape, and CEOs' compensation was a lot closer to that of workers. Deterioration began with the Republican hegemony initiated by the election of Richard Nixon.

Capt Planet, Crown Heights Brooklyn December 25, 2015

I'm a firm believer that the real challenge lies not in outer space but inner space. How can we think about Elon Musk's accomplishments when we have mass terror threatening our sense of comfort and well-being? We need to get along with each other and the rest of creation before we start running off to outer space. To not do that will mean just more wasted energy on false solutions. We're the real problem.

Rima Regas, Mission Viejo, CA December 25, 2015

Professor Joseph Stiglitz' work, Rewrite The Rules, at the Roosevelt Institute examines precisely the issues you raise here. It's highly recommended reading. I greatly miss reading him in the NYT.

http://rooseveltinstitute.org/rewrite-rules/

[Dec 28, 2015] Saudi Arabia projects $87B deficit amid low oil prices

Notable quotes:
"... The government announced its budget on Monday, projecting spending of $224 billion (840 billion riyals) in 2016 versus $137 billion (513 billion riyals) in revenue. ..."
finance.yahoo.com

The government announced its budget on Monday, projecting spending of $224 billion (840 billion riyals) in 2016 versus $137 billion (513 billion riyals) in revenue.

Trav

Don't underestimate the Saudi's. They've gutted the oil market to the point that it's hurting U.S. oil companies and more importantly the U.S. economy. Once that's accomplished they can cut off the flow of oil and hurt us even more. They're not losing money without a purpose and their purpose is likely to eventually hurt us.

backahead

Pikers. Obama banging the drums cause we just had our best year ever with him as President...only $450Billion more debt this year. Hey, least it's no longer $1Trillion/yr. Record revenues collected too.

JET

I would gladly pay more for my fuel if it meant putting the thousands of oil workers back to work. It costs US taxpayers millions if not billions to unemployment, food stamps, renal assist and the other social support programs for our unemployed people.

[Dec 28, 2015] Will oil continue to drive volatility in 2016

finance.yahoo.com

...Wolff continued, "although I do think you start to see a bottom in and a rebuild going into the second half of 2016."

For Societe Generale macro strategist Larry McDonald, "the consistent relationship between lower oil prices and higher U.S. equity market volatility" has been "the story of 2015."

Any rally in equities is "suspect" without "a follow-through in oil," said McDonald. "So if oil doesn't follow equities higher and rolls over, get long volatility and short the S&P 500 (INDEX: .SPX)."

[Dec 28, 2015] OPEC $95 Oil, But Not Until 2040

Notable quotes:
"... It also sees the current trend of lower spending and therefore lower production by non-OPEC producers eventually cutting into the supply of oil, increasing demand and thereby raising prices. ..."
"... there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices ..."
OilPrice.com
It also sees the current trend of lower spending and therefore lower production by non-OPEC producers eventually cutting into the supply of oil, increasing demand and thereby raising prices. One chart in the report shows an expectation that non-OPEC production will rise from 57.4 million barrels per day in 2015 to 61.5 million barrels per day in 10 years, then decline to 59.7 million barrels per day by 2040.

But all this depends on capital spending by oil companies. If it doesn't increase, OPEC Secretary-General Abdallah el-Badri wrote in the report's foreword, "there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices."

While OPEC expects the demand in many Western countries is likely to decline between now and 2040 due to "energy efficiency improvements and climate change mitigation policies. … However, oil demand in developing countries is expected to increase significantly (by almost 26 mb/d) to reach 66.1 mb/d at the end of the forecast period. Finally, demand in Eurasia is estimated at 5.8 mb/d in 2040."

The key, then, is for oil companies to maintain balanced investments in exploration, infrastructure and production, according to el-Badri. "In the current market environment, what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supplies," he wrote. "This balance is essential in making sure the necessary future investments are made."

[Dec 27, 2015] Top 10 Oil And Gas Stories Of 2015

OPEC forecast is around %50 average in 2016. that means that half of the month it should be over60 to achive that if the start point is $38 and q1 might see futher drop. So it is probably somewhat optimistic. But the US shale companies are now in real trble and that card will play in 2016 inthe second half of the year.
Notable quotes:
"... Production has declined from a peak of 9.6 million barrels per day (mb/d) in April, to 9.3 mb/d in September, although weekly estimates suggest output is somewhere around 9.1-9.2 mb/d currently. ..."
"... The shale boom is over, but production has not fallen fast enough to warrant a rebound in prices. More declines should be expected throughout 2016, but a key question remains: how far and how fast? ..."
Dec 27, 2015 | OilPrice.com

6. Falling U.S. output. U.S. oil production is perhaps the most-watched figure in terms of market analysts trying to gauge when the rebound will come. Production has declined from a peak of 9.6 million barrels per day (mb/d) in April, to 9.3 mb/d in September, although weekly estimates suggest output is somewhere around 9.1-9.2 mb/d currently.

The shale boom is over, but production has not fallen fast enough to warrant a rebound in prices. More declines should be expected throughout 2016, but a key question remains: how far and how fast?

[Dec 27, 2015] Forget About Junk Bonds, This Is the New Credit-Equity Disconnect Investors Should Be Watching

Dec 27, 2015 | Bloomberg Business

Because of methodological challenges involved in making direct comparisons between high-yield bond spreads and the Standard & Poor's 500-stock index, the pressing concern for equity investors is how much the current weakness in junk bonds infects the market for investment-grade bonds sold by companies with healthier balance sheets (on the eve of a potential rate hike from the Federal Reserve, no less).

The "new divergence" highlighted by Goldman Sachs-a burgeoning disconnect between weaker investment-grade credit spreads and relatively stronger equities in December-is a potential risk to the performance of the S&P 500 in the short term, the strategists note.

[Dec 27, 2015] What Me Worry About Peak Oil

The author ignores the role of Wall Street in the current oil prices slump.... Also there can be geopolitical dimension in Saudis behaviour.
Notable quotes:
"... Easy money caused over-investment in the oil business. Over-production and weakened demand resulted in the collapse in world oil prices. OPEC's reaction and decision to produce at maximum rates have created the "perfect storm" for peak oil production several years before it would have occurred otherwise. ..."
"... All oil producers are losing money at current prices but companies and countries are producing at high rates. Indebted conventional and unconventional players need cash flow to service debt so they are producing at high rates. ..."
"... Everyone is acting rationally from their own perspective but from a high level, it looks like they have all lost their minds. ..."
"... Despite a popular belief that tight oil is price-competitive with conventional oil production, it is not ..."
"... WTI oil is $38.10, whereas the global benchmark Brent oil is about $37.89, or slightly cheaper. Trying to make a profit by paying to ship a more expensive commodity abroad is a fine trick if you can figure out a way to make it work. This is especially so when both grades are selling at a huge loss on their production cost. ..."
"... A lot of US refineries were tuned to heavy Mexican crude, and there's maybe more of that coming to market some day soon. But you are awash in condensate. Perhaps this explains more than anything the WTI Brent spread. ..."
"... Far Eastern refineries are tuned to light oil – Boney Light – so let them have it while you buy heavy crude form Saudi and UK. The WTI – Brent spread disappeared in a flash. Does this solve the oil price crash crisis? I don't think so. The IEA has Nov US, global and OPEC production all up. ..."
Art Berman

It's not important whether this is the final, maximum world production peak or not. It is a signal about a trend that needs to be acknowledged and incorporated into our evolving paradigm about oil supply.

Peak oil production was accelerated by a confluence of factors. Zero interest rates in the U.S. and Middle East supply interruptions before 2014 caused high oil prices. Easy money caused over-investment in the oil business. Over-production and weakened demand resulted in the collapse in world oil prices. OPEC's reaction and decision to produce at maximum rates have created the "perfect storm" for peak oil production several years before it would have occurred otherwise.

All oil producers are losing money at current prices but companies and countries are producing at high rates. Indebted conventional and unconventional players need cash flow to service debt so they are producing at high rates. OPEC is producing at high rates to maintain or gain market share. Everyone is acting rationally from their own perspective but from a high level, it looks like they have all lost their minds.

Peak oil is not about running out of oil. It is about what happens when the supply of conventional oil begins to decline. Once this happens, higher-cost, lower-quality sources of oil become increasingly necessary to meet global demand.

Those secondary sources of oil include unconventional (oil sand and tight oil) and deep-water production. The contribution of unconventional and deep-water production has grown from about 15% in 2000 to approximately one-third of total supply today, and it will probably represent more than 40% by 2030.

Despite a popular belief that tight oil is price-competitive with conventional oil production, it is not

The economics of tight oil plays require spot oil prices that are double and wellhead prices that are triple current face values. Excluding new SAGD projects, tight oil is the world's most-expensive and, therefore, marginal barrel of oil and its cost of production today is more than $70.

Roger Baker, December 27th, 2015 at 1:02 pm

So Congress finally got around to legalizing the export of our unrefined U.S. domestic crude oil production? However this comes at a time when today's market price of our domestic WTI oil is $38.10, whereas the global benchmark Brent oil is about $37.89, or slightly cheaper. Trying to make a profit by paying to ship a more expensive commodity abroad is a fine trick if you can figure out a way to make it work. This is especially so when both grades are selling at a huge loss on their production cost.

Euan Mearns, December 27th, 2015 at 1:55 pm

Art, throughout the history of the North Sea, the UK has had a vibrant export / import trade in crude, even since we became a net importer. The reason being to match the refining spectrum to the crude available.

A lot of US refineries were tuned to heavy Mexican crude, and there's maybe more of that coming to market some day soon. But you are awash in condensate. Perhaps this explains more than anything the WTI Brent spread.

Far Eastern refineries are tuned to light oil – Boney Light – so let them have it while you buy heavy crude form Saudi and UK. The WTI – Brent spread disappeared in a flash. Does this solve the oil price crash crisis? I don't think so. The IEA has Nov US, global and OPEC production all up.

[Dec 27, 2015] The Crude Oil Export Ban--What, Me Worry About Peak Oil by Art Berman

Notable quotes:
"... Congress' decision to lift the 40-year U.S. ban on crude oil exports reflects the same misinformed and distorted thinking that declares that the world's highest cost producer–tight oil–can somehow also be the world's swing producer . ..."
"... The same thinking concludes that because oil markets are over-supplied by about 1.5 mmbpd today, prices will remain low for years if not decades. Although there is certainly a rationale for low prices based on fundamentals of supply and demand in the near term, the longer view is shaped largely by perception. ..."
"... Despite the recent trend toward price capitulation since late November, there is a certain potential energy in the market to find excuses to raise prices or to at least establish a bottom. For example, this week, U.S. crude oil stocks declined by 5 mm barrels and WTI futures increased $3.36 per barrel. We are in the winter de-stocking period so a withdrawal from inventory is normal but the previous week saw an addition to stocks that made this withdrawal seem somehow more important. A price increase of that magnitude makes no sense especially since U.S. stocks are more than 125 mm barrels above the 5-year average. That is the power of perception. ..."
"... The prevailing perspective–lower for longer–is that oil prices will remain low for many years. This is reasonable based on vital signs. The global over-supply of oil persists after a year-and-a-half of lower prices. Iran and Libya could potentially add another 1-2 mmbpd to the existing over-supply. U.S. production has not declined as much as most experts anticipated, and there is considerable if unknown spare capacity in drilled, uncompleted wells. China's economic growth has slowed and the global economy is weak. Demand for oil will continue to grow but at a slower rate than in 2015. ..."
"... The bleeding in the oil patch will get worse and prices will plunge again. ..."
"... The lower-for-longer perception will begin to change in 2016 barring a global economic collapse. It is, after all, founded on the simultaneous occurrence of every possible negative outcome. The long-awaited response in the economy to lower oil prices will begin to emerge. Demand for oil will increase. Concern about lower growth in China is largely accepted already. U.S. production will continue to fall 100,000 barrels per day every month as predicted, just later than expected. Drilled uncompleted wells will not deliver as much new oil as many now fear. ..."
"... None of this will happen overnight. Market balance will likely return more slowly than it unravelled. ..."
"... Energy is the economy. Lower oil and gas prices will be a huge benefit to the global economy but that takes time also. And the longer prices are low the better, although it doesn't feel that way in the oil business right now. ..."
"... Tight oil has bought the U.S. another decade or so of additional oil supply but, as peak oil predicted, at a cost. The technology behind tight oil has also made it the world's most expensive barrel. As all of this sinks in, perception will start to change. Analysts and investors will begin to see that data points more toward long-term scarcity than toward long-term abundance of oil supply. ..."
"... The U.S. is far more economically vulnerable and dependent on foreign oil today than when crude oil export was banned 40 years ago. The world has finite oil resources and the production party of the last 5 years has accelerated the timing of peak global production. A shooting war in the world would bring all of this into instantaneous focus if the data presented here has not. ..."
"... 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. ..."
Dec 27, 2015 | Forbes

... ... ...

Perception is Everything

Congress' decision to lift the 40-year U.S. ban on crude oil exports reflects the same misinformed and distorted thinking that declares that the world's highest cost producer–tight oil–can somehow also be the world's swing producer.

The 1975 export ban was enacted because of the disastrous economic consequences of becoming dependent on imports following the peaking of U.S. oil production in 1970. Now that oil production is again close to peak levels, we have apparently forgotten that imports were the problem then and that we import twice as much today as in 1975.

The same thinking concludes that because oil markets are over-supplied by about 1.5 mmbpd today, prices will remain low for years if not decades. Although there is certainly a rationale for low prices based on fundamentals of supply and demand in the near term, the longer view is shaped largely by perception.

Oil prices (Brent) rallied, after all, to $65 per barrel in May when the market was more over-supplied (2.25 mmbpd) than it is today. That was based on perception that falling rig counts in the United States and withdrawals from oil-storage inventories would bring less supply. Neither perception was correct in the short term but it didn't matter. Prices rose. There were, of course, other factors including concerns about the growth of the Chinese economy, the Greek debt crisis, and renewed Iranian exports.

Despite the recent trend toward price capitulation since late November, there is a certain potential energy in the market to find excuses to raise prices or to at least establish a bottom. For example, this week, U.S. crude oil stocks declined by 5 mm barrels and WTI futures increased $3.36 per barrel. We are in the winter de-stocking period so a withdrawal from inventory is normal but the previous week saw an addition to stocks that made this withdrawal seem somehow more important. A price increase of that magnitude makes no sense especially since U.S. stocks are more than 125 mm barrels above the 5-year average. That is the power of perception.

Energy and oil in particular underlie everything in our global economic lives. Oil prices reflect our collective emotional response to the circumstances of the world. Fundamentals are the vital signs of oil price's body but perception is the key to its psyche.

The more-than $3 per barrel increase in WTI prices last week is an example of a very short-term reaction to some event or circumstance. Oil prices also reflect longer-term longer term price responses that involve considerable lags. For instance, a global production surplus appeared in January 2014 and continued for 6 months before prices responded downward.

... ... ...

The prevailing perspective–lower for longer–is that oil prices will remain low for many years. This is reasonable based on vital signs. The global over-supply of oil persists after a year-and-a-half of lower prices. Iran and Libya could potentially add another 1-2 mmbpd to the existing over-supply. U.S. production has not declined as much as most experts anticipated, and there is considerable if unknown spare capacity in drilled, uncompleted wells. China's economic growth has slowed and the global economy is weak. Demand for oil will continue to grow but at a slower rate than in 2015.

What Lies Ahead in 2016

In another week, the world will go back to work after the holidays. The bleeding in the oil patch will get worse and prices will plunge again. Year-end results for oil and gas companies will be the worst so far. The Federal Reserve Bank and Standard & Poor's have issued warnings about bad debt in the U.S. oil and gas business. The tight oil companies have put the best face they can on a desperate situation.

But investors and their bankers should be out of patience. They should be tired of phony economics and tall tales about giant new reserves when the companies they invested in are losing billions of dollars every quarter.

The lower-for-longer perception will begin to change in 2016 barring a global economic collapse. It is, after all, founded on the simultaneous occurrence of every possible negative outcome. The long-awaited response in the economy to lower oil prices will begin to emerge. Demand for oil will increase. Concern about lower growth in China is largely accepted already. U.S. production will continue to fall 100,000 barrels per day every month as predicted, just later than expected. Drilled uncompleted wells will not deliver as much new oil as many now fear.

None of this will happen overnight. Market balance will likely return more slowly than it unravelled. The oil bubble took 5 years to inflate but the world is impatient and expects a quick return to normal. All of the signs are right–lower rig counts, distress for overly leveraged companies, lower budgets for crucial exploration and development projects–but it all takes time.

Energy is the economy. Lower oil and gas prices will be a huge benefit to the global economy but that takes time also. And the longer prices are low the better, although it doesn't feel that way in the oil business right now.

Tight oil has bought the U.S. another decade or so of additional oil supply but, as peak oil predicted, at a cost. The technology behind tight oil has also made it the world's most expensive barrel. As all of this sinks in, perception will start to change. Analysts and investors will begin to see that data points more toward long-term scarcity than toward long-term abundance of oil supply.

The U.S. is far more economically vulnerable and dependent on foreign oil today than when crude oil export was banned 40 years ago. The world has finite oil resources and the production party of the last 5 years has accelerated the timing of peak global production. A shooting war in the world would bring all of this into instantaneous focus if the data presented here has not.

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.

Art Berman
Petroleum Geologist and Professional Speaker
Visit my website for more information: artberman.com

[Dec 26, 2015] In todays dollars (adjusted for inflation) annual average oil prices have not been below $20 since 1998

Notable quotes:
"... Everything is possible in the world where the price of oil is determined by Wall Street (despite some people having illusions about supply and demand equilibrium; this is just a factor and probably not the decisive factor). ..."
"... In this sense EIA prediction of $50 average in 2016 does not look completely outlandish. But to achieve such average from low start of $38 per barrel and typically low prices in the Q1 you need at least half of the months to be above $50 by $10. Thats looks less probable now. ..."
"... Unlike $35-40, $20/barrel is below cash operating costs for many conventional producers worldwide.That means that, at that price, not only upstream investments would be severely cut, but also a large number of the currently producing wells will be idled. ..."
"... Oil price may temporarily touch $20, as Goldman predicts (although this is not their base scenario), but it will not stay at these levels for long term. ..."
"... The key consideration here is that the Wall Street instruments create a strong positive feedback loop that destabilized the system and amplifies any price movements. So oscillations became more and more powerful creating more and more moments with absurd prices. Right now on the down side. $20 per barrel is such an absurd in the current circumstances price, but it is not that outlandish estimate of a short time minimum possible in the destabilized system, especially in Q1. ..."
peakoilbarrel.com
AlexS , 12/26/2015 at 2:27 pm
$15-20 for a long period of time?

Let's look at it from a historical perspective.

In today's dollars (adjusted for inflation) annual average oil prices have not been below $20 since 1998 ($18.5), and below $15 since 1972.

Brent oil price in 2014 dollars, 1970-2015

Source: BP Statistical Review of World Energy June 2015, my estimate for 2015

likbez , 12/26/2015 at 2:43 pm
Everything is possible in the world where the price of oil is determined by Wall Street (despite some people having illusions about supply and demand equilibrium; this is just a factor and probably not the decisive factor).

But I think even at $40 per barrel the US shale production will be decimated in a year or two. They managed to get financing for 2016, but that's about it. And that's over 3 Mb/d. Additional cars that were bought in the US, India and China in 2015 will be on the road for another 10 years or so.

In this sense EIA prediction of $50 average in 2016 does not look completely outlandish. But to achieve such average from low start of $38 per barrel and typically low prices in the Q1 you need at least half of the months to be above $50 by $10. Thats looks less probable now.

AlexS, 12/26/2015 at 3:04 pm

Unlike $35-40, $20/barrel is below cash operating costs for many conventional producers worldwide.That means that, at that price, not only upstream investments would be severely cut, but also a large number of the currently producing wells will be idled.

$20 is almost twice as low as the current price, and supply-side response will be much stronger than what we are seeing now.

Oil price may temporarily touch $20, as Goldman predicts (although this is not their base scenario), but it will not stay at these levels for long term.

likbez, 12/26/2015 at 4:19 pm

"Oil price may temporarily touch $20, as Goldman predicts (although this is not their base scenario), but it will not stay at these levels for long term."

Thank you. That's exactly my point.

The key consideration here is that the Wall Street instruments create a strong positive feedback loop that destabilized the system and amplifies any price movements. So oscillations became more and more powerful creating more and more moments with absurd prices. Right now on the down side.

$20 per barrel is such an absurd in the current circumstances price, but it is not that outlandish estimate of a short time minimum possible in the destabilized system, especially in Q1.

[Dec 26, 2015] 2016 oil outlook: will an equilibrium price be found

Dan Dicker of MercBlock reveals his 2016 outlook for oil. He thinks that 2016 might be only marginally better. Oil prices might rise in the third quarter ..."
He made the following points:
-- Oil producers never have seen in equilibrium price. They knows nothing but spike down and spikes up. But is we can talk about this mythical Equilibrium oil price I guess is around $80 but it might not be achieved in 2016.
2016 we will see many defaults, bankruptcies and restructures in 2016 and consolidation of the players. When any company in any industry runs cash flow negative, one of two things inevitably occurs … they get better or they are gone.
Big names (Exxon, Chevron, BP) can now be used as bond equivalents for dividends they produce. Use them as holding boxes in your energy portfolio. That's how I use them.
Notable quotes:
"... "Its always tough because the oil market has never really seen an equilibrium price - its nothing but spikes up and spikes down and I think it will continue to do that," Dicker says in the attached video. That being said, Dicker says getting to that equilibrium price entails figuring out the price of extracting the 'marginal' barrel of oil out of the ground, meaning that last barrel that would fill demand. ..."
"... "You've got to get that marginal barrel out of the ground." he says. "That doesnt equate to breakeven points for any particular player, but if you have 92 million barrels a day of oil that's in demand, to get an equilibrium price youve got to pay [for] that last hundred thousand barrels to to meet demand - and everybody gets priced off of that last piece of the puzzle and thats thats closer to about $80." ..."
finance.yahoo.com

Dan Dicker of Merc-block and author of the book "Shale boom, shale bust: The Myth of Saudi Arabia" peered into his crystal ball to see if the commodity get back to an equilibrium price sometime in the near future.

"It's always tough because the oil market has never really seen an equilibrium price - it's nothing but spikes up and spikes down and I think it will continue to do that," Dicker says in the attached video. That being said, Dicker says getting to that equilibrium price entails figuring out the price of extracting the 'marginal' barrel of oil out of the ground, meaning that last barrel that would fill demand.

"You've got to get that marginal barrel out of the ground." he says. "That doesn't equate to breakeven points for any particular player, but if you have 92 million barrels a day of oil that's in demand, to get an equilibrium price you've got to pay [for] that last hundred thousand barrels to to meet demand - and everybody gets priced off of that last piece of the puzzle and that's that's closer to about $80."

Although there will be some shakeout, Dicker does believe some names - small and large, in the energy sector will survive and do well. To hear more about those, watch the rest of the video above.

[Dec 26, 2015] Why some companies just keep drilling wells in spite of the very low oil prices

Notable quotes:
"... If you have or can raise the cash, it makes sense to drill now and produce a year or two down the road-IF you believe prices will be up. According to what I read here, the costs of drilling a well may be down by a third, due to so many men and machines and so much steel and sand etc , "looking for a home". ..."
"... Most LTO companies don't have cash. Most have a gob of debt. I don't think sinking cash into wells that will generate $0 revenue for a year or two is a good idea, especially given the financial shape LTO is in already. ..."
"... So they are strictly gambling that oil prices will rise steeply in the next couple years? Is that a good business strategy for multi-billion dollar corporations to undertake, especially when the futures market says otherwise? ..."
"... The size of the gamble is offset by the size of the potential winnings. ..."
"... Someone come on here and explain how drilling, but not completing 13,000 horizontal wells that won't cum. 100,000 BO in 40 years makes one lick of sense? ..."
peakoilbarrel.com
Ron Patterson, 12/26/2015 at 8:51 am
Here is an interesting article that tries to explain why some companies just keep drilling wells in spite of the very low oil prices.

Hoping for a Price Surge, Oil Companies Keep Wells in Reserve

Their well, one of hundreds drilled by Anadarko Petroleum in eastern Colorado's Wattenberg field this year, could someday gush as many as 800 barrels of crude oil a day. But Anadarko is not planning to produce a drop of crude from the well for at least another year because the price of oil is now so pitifully low.

The well here is just one of more than 4,000 drilled oil and natural gas wells across the country producing nothing, but ready to be tapped quickly

……….

But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, about the same amount of oil that Iran is expected to add to the glutted global market after it complies with the recent nuclear deal by the end of next year.

Some analysts say oil companies like Anadarko, EOG Resources and Continental Resources may collectively risk suffocating the very price revival they anticipate by releasing abundant new supplies once prices inch up. Others say the eventual impact would be small and short-lived, but since the industry has never used this strategy before, no one can be sure……….

On the completion side, fracking crews are easier to come by and their contracts tend to be more fluid. Now those completion costs have also come down - meaning that the uncompleted wells will eventually be brought on line at a lower cost, executives say.

shallow sand, 12/26/2015 at 9:24 am
Well that's just great.

The article touts how smart this strategy is.

The company focused on, Anadarko, lost $2.2 BILLION last QUARTER.

oldfarmermac, 12/26/2015 at 9:39 am
Hi SS,

If you have or can raise the cash, it makes sense to drill now and produce a year or two down the road-IF you believe prices will be up. According to what I read here, the costs of drilling a well may be down by a third, due to so many men and machines and so much steel and sand etc , "looking for a home".

I don't know if this is "one third off" drilling sales event is totally for real, it might be only a quarter or a fifth off. Hopefully somebody who crunches tight oil numbers will have something to say about it.

Tight oil production brought on by drilling now and producing later is not going to noticeably affect the price later.

Ron Patterson, 12/26/2015 at 9:49 am
Tight oil production brought on by drilling now and producing later is not going to noticeably affect the price later.

By what logic did you arrive at that conclusion?

The article states: But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, …

Now I think an extra half a million barrels per day would noticeably affect the price.

oldfarmermac, 12/26/2015 at 3:46 pm
A half a million barrels WOULD be enough to influence prices. An individual company does not expect it's OWN production to influence the market price- unless maybe the company is a REALLY big one maybe.

If any given company drills say fifty such wells, that would be only twenty thousand barrels a day, maybe less -- most definitely not enough to move the market price needle. It's not the industry as whole, but individual companies that make the decision.

I DID not go into Christmas trees, personally, for fear the industry was setting itself up to CHOKE itself on excess production. I was wrong about that, I could have made a LOT of money in Christmas trees, not enough people took the gamble to glut the market.

Wine grape growers took the gamble and are asshole deep in grapes that won't sell for enough to cover production costs in a lot of places these days, including my neighborhood.

shallow sand, 12/26/2015 at 10:56 am
OFM.

What you say may make sense of you are using cash and have little to no debt. It may make sense for ExxonMobil.

Most LTO companies don't have cash. Most have a gob of debt. I don't think sinking cash into wells that will generate $0 revenue for a year or two is a good idea, especially given the financial shape LTO is in already.

Also, the entire premise is that there will soon be a steep rise in the price of oil. That is a total crap shoot.

So they are strictly gambling that oil prices will rise steeply in the next couple years? Is that a good business strategy for multi-billion dollar corporations to undertake, especially when the futures market says otherwise?

Ask Harold Hamm how easy it is to predict the future price of oil.

oldfarmermac, 12/26/2015 at 4:21 pm
Hi SS,

I am not an expert, but I HAVE read a representative sample of the books you read to get your MBA. Read me for insight, or comic relief, but DON'T bet more than beer and cigarette money on MY opinions.

Things DON'T always make sense. Under their suits and hats, corporate managers are just naked apes.

Since you are a hands on guy, I expect at some point you have gotten into some soft ground off the highway with a truck, and realized you are were in trouble and that IF YOU STOPPED, you would be walking out for SURE.

SO – you put the pedal to the metal, and hopefully got thru. If not, you were STUCK ANYWAY.

This could be thought of as a NO DOWNSIDE BET-IF you are convinced you are apt to go broke anyway.Win, you get to keep it all, lose, you are not going to pay ANY OF IT back anyway, it's somebody else's money, and your company is in bk court.

The size of the gamble is offset by the size of the potential winnings.

shallow sand, 12/26/2015 at 1:08 pm
I looked up Anadarko on CO state website. Operate under Kerr McGee. Assuming 4,800 operated wells, by my math the average well is producing 23 barrels of oil and 112 mcf of gas per day, gross.

Assuming 25% royalty burden, and remembering the basis spread in CO for both oil and gas is horrible, it looks like GROSS revenue per well at current price would be in the neighborhood of $200K per year.

I keep begging, and will again. Someone come on here and explain how drilling, but not completing 13,000′ horizontal wells that won't cum. 100,000 BO in 40 years makes one lick of sense?

AlexS, 12/26/2015 at 1:23 pm
shallow sand,

I agree with you. There is no sense in drilling but not completing wells, especially as they are spending borrowed money.

[Dec 26, 2015] Be A Pig And Make It Big... With Commodities!

Dec 25, 2015 | Zero Hedge
Now, more importantly, back to the commodity supply side. The table below shows an extract from a recent Americas Metals & Mining report by Deutsche Bank. Commodity producers are cutting their CAPEX in a huge way. Globally, we see the same picture across the board. That's your pork cycle at work right there. We are once again setting ourselves up for future commodity shortages.

commodities_DB

watmann

Interesting article that I suggest you ignore. If you follow ZH you have been killed. Even two weeks ago ZH predicted a calamity when the capital markets were going to get killed when the Fed increased rates and a lot of liquidity was removed from the market. This never happened. What this article misses is that as worldwide artificial demand created by 0 interst rates the glut of increased capacity created without real long term demand caused a commidity price crash. What we are seeing is not cyclical, rather its structural created by unwarranted capacity creation by quants who only saw upward demand and 0 based rates. ZH is wrong. The facts I see them are that a commidity price drop of 80% are just the real market coming. The excess liquidity will soon drive equity prices into the tank the same way that they did to commidity prices. ZH micro manages things to fill a web site to sell advertisers. Its a simple as this.

Uchtdorf , 12/25/2015 - 23:19 | 6964374

From the article:

"For example, in 2011, nobody was yet aware of fracking. We now know this new technology turned the oil market upside down."

From Wikipedia:

"Hydraulic fracturing began as an experiment in 1947, and the first commercially successful application followed in 1950. As of 2012, 2.5 million "frac jobs" had been performed worldwide on oil and gas wells; over one million of those within the U.S.[3] Such treatment is generally necessary to achieve adequate flow rates in shale gas, tight gas, tight oil, and coal seam gas wells.[4] Some hydraulic fractures can form naturally in certain veins or [5]"

From a novel by Orson Scott Card, written in 1987:

"'You can bet they're making gasoline out of shale oil,' Tina said." >

[Dec 26, 2015] Oversupply vs annual decline of oil wells which is 6% or more

Notable quotes:
"... Just because Saudi Arabia has increased production in order to meet their budget does not mean the world will increase production because of cheap oil. (Iraq would have increased production regardless.) ..."
"... No, upstream investment will, or has, dropped dramatically. This will cause production decline down the road. ..."
"... If the world is 2 Mbbl/day oversupplied right now, and decline rates are 6%, and there is only minimal new oil wells. (so, overall decline rate is 2% ?). We should see the oversupply disappear in a year or so. ..."
"... I don't think the oversupply is 2 mm. My guess it's less than 1.2 mm in December. ..."
peakoilbarrel.com

Ron Patterson, 12/21/2015 at 10:49 am

So as the price of oil continues lower, oil production will continue to increase.

Oh don't be silly. Just because Saudi Arabia has increased production in order to meet their budget does not mean the world will increase production because of cheap oil. (Iraq would have increased production regardless.)

No, upstream investment will, or has, dropped dramatically. This will cause production decline down the road.

Arceus, 12/21/2015 at 10:56 am
Yes, I should have added "in the short term" to that, but then it wouldn't have sounded as glib.
canabuck, 12/21/2015 at 3:49 pm
And what is "short term"?
12 months, or maybe 3-4 years.

If the world is 2 Mbbl/day oversupplied right now, and decline rates are 6%, and there is only minimal new oil wells. (so, overall decline rate is 2% ?). We should see the oversupply disappear in a year or so.

Huckleberry Finn, 12/21/2015 at 6:35 pm
Looks closer to 10% in some cases. From previous thread.

The low prices are taking their toll.
http://www.newswire.ca/news-releases/ecopetrol-announces-us48-billion-investment-plan-for-2016-561775541.html

Ecopetrol, the largest Colombian producer announced that it will produce 755,000 barrels a day in 2016 vs 760,000/day in third quarter of 2015.
That does not sound like much a of drop, until you realize that Ecopetrol will be taking over the Rubiales field from a joint venture by not extending their partners contract.That will add 70,000 barrels a day to their production.Or about 35,000 barrels day annualized since it happens mid-year. So adjusted for this their production will decline from 795,000 barrels to 755,000 barrels per day, or a drop of 5%. And that is after spending 4.8 Billion USD. So I am guessing their base decline rate is closer to 10%

Fernando Leanme, 12/23/2015 at 8:46 am
I don't think the oversupply is 2 mm. My guess it's less than 1.2 mm in December.

[Dec 26, 2015] When peak cheap oil moment occurred: 2005 or 2015?

Notable quotes:
"... I would say 2015 has been peak "cheap" oil, though some may claim the condensate should not be counted, we do not have good international data on the condensate output so we can only speculate on that. ..."
"... I refer to the 2005 plateau as "peak cheap oil". Today's current price certainly does not reflect today's marginal cost of supply already built into the production stream. ..."
peakoilbarrel.com

Javier, 12/21/2015 at 10:25 am

2005: Peak Conventional Oil
2015: Peak Oil

We should look not at the consequences of Peak Oil, but to Peak Oil as a consequence of the underlying economical and financial global situation. Peak Oil is going to make sure we never recover during the cyclical upswings. We have found the limits to growth, and those limits are going to be getting smaller with time.

Matt White, 12/21/2015 at 12:36 pm
So are you denying this:

http://euanmearns.com/a-new-peak-in-conventional-crude-oil-production/

I know a lot of people in the peak oil scene keep clinging to that 2005 date, might be time to let it go.

Marcus, 12/21/2015 at 1:11 pm
Matt,

As per your link Euan Mearns sites 73.2 Mbpd in 2005 vs 74.28 Mbpd in December 2014 according to the EIA. The problem is that the figures from JODI, IEA, EIA & BP etc are not all in perfect agreement and I don't think we can definitively say that world production is "x' amount with that degree of accuracy especially since the numbers are often revised up or down a year or two down the line.

What we can do is look at the general trend over several years & its clear that 2005 marked a point where conventional oil production either peaked or at best grew very slowly within the context of a rather bumpy plateau.

So the highest oil prices in history failed to significantly increase conventional production and low oil price environment is unlikely to be conducive to new sources of unconventional production. I would suggest on that basis that the future does not look too rosy.

Dennis Coyne, 12/22/2015 at 7:31 am
Hi Matt,

In 2015 C+C output will be about 79.4 Mb/d, the data is not perfect but output will not be revised down by 6 Mb/d.

As far as 2005 being peak "cheap" oil, the lowest monthly oil price was about $46/b in Jan 2005 and for the year oil was $59/b (all prices in Dec 2015$).

For 2015 the average oil price will be about $49/b and the lowest monthly price was about $42/b in Nov 2015. I would say 2015 has been peak "cheap" oil, though some may claim the condensate should not be counted, we do not have good international data on the condensate output so we can only speculate on that.

tahoe1780, 12/21/2015 at 1:12 pm
So what are we calling "oil" nowadays? http://resourceinsights.blogspot.com/2012/07/how-changing-definition-of-oil-has.html Can anyone provide a graph of the ratio change between crude and condensate over the years? http://www.aogr.com/magazine/editors-choice/growing-condensates-require-optimized-designs-for-gathering-processing
Dennis Coyne, 12/22/2015 at 7:38 am
There is not good data on international condensate output, the only decent data we have is on crude plus condensate ( and that data is not great, but the best we have).

Crude output has always included some condensate output in the data reported and few nations separate the crude and condensate data.

OPEC, Canada, Russia, and the US do, and that is a lot of World output, we can assume the ratio of condensate to crude is the same for the rest of the World and make an estimate of the crude divided by C+C. I have not done so, but I believe others have.

Javier, 12/21/2015 at 1:14 pm
No. That in 10 years production has managed to temporarily increase by 1.5%, when in the previous 10 years it grew by 18% fits my concept of Peak Conventional Oil. Conventional oil got to a bumpy plateau in 2005. A bumpy plateau is by definition bumpy. We are in a bump. If production keeps increasing, it will negate the Conventional Peak Oil. If it falls back it will not.
DougT, 12/21/2015 at 1:54 pm
I refer to the 2005 plateau as "peak cheap oil". Today's current price certainly does not reflect today's marginal cost of supply already built into the production stream.
coffeeguyzz, 12/26/2015 at 5:13 pm
Sarko

When any company in any industry runs cash flow negative, one of two things inevitably occurs … they get better or they get gone.

In the US unconventional field, the 'get gones' are lining up at the exit doors with their list of assets to sell to the 'get better', who are in the process of emerging from this downturn with a ferocious degree of resilience that will shock many, especially the far off be-robed sheiks who will be fortunate to not have their own heads lopped off as well as worldwide idealogues pining for an emergence of their 'inner peasants' (h/t to Fernando for that apt phrase).

As for future reserves, see my response below to shallow re the Riverview well, and apply the principal to hydrocarbon bearing shales and 'tight rocks' on a global scale.

coffeeguyzz, 12/26/2015 at 5:31 pm
Shallow

I'm having a hard time posting on my 'stupid phone'.

Some responses …

I have no financial interest of any kind in any company whatsoever – oil/gas or otherwise.

The operational and technical advances have indeed played a major role in the current situation as a quick glance at any production chart shows huge increases.
You well know, I hope, that I have always questioned the financial underpinnings of these operators vis-à-vis their motives/goals with their continual drilling despite horrific price realizations. (Oilandgas360dotcom has an excellent article, dated Dec 23 3015 called "Why Drill?". It picks seven Appalachian operators and describes the motives/circumstances of each. Info filled piece).

I mention the Riverview well in response to Dennis' comment re lack of recovery improvement. Actually, the Riverview may be far more significant, akin to the Jake well in 2009 (by EOG), the Renz well (2004, Range), and the recent Scotts Run well (2015, EQT) in opening up to he Niobrara, the Marcellus, and the Deep Utica.

The particulars of the Riverview's completion (previously displayed in the EF) will not only be emulated by other operators, it will INCREASE the number of wells per section providing far more resource recovery.

shallow sand, 12/26/2015 at 6:19 pm
Coffee, I know where you are coming from. I do agree that drilling two miles down and two miles out and doing all those frac stages can be pretty cool.

I have made known several of times I am biased against shale, because it rained on my parade. So anything I post should be viewed in that light. It makes a huge difference if one has a financial motive or not. If I had sold out in 2013 like maybe I should have, I would not give a crap about shale and like 99.5% of the US, would be loving $1.75 gasoline at the pump.

Heck, I get a charge out of filling up my truck for $35 even though it is hurting on the other end. That is one place where we are seeing a reduction in OPEX, fuel cost for trucks and other equipment. Way down.

My friend who owns a trucking company is making record profits. They are adding more trucks. I suspect demand growth of 1.2 million bopd in 2016 is on the low side. I doubt $30 oil was utilized in making those predictions.

However, I do try hard to stick to facts. I also am most focused on economics, because no well IMO should ever be drilled without economics in mind.

A small segment of the US economy is being hurt by low oil and gas prices. However, the vast majority is taking off because of it IMO, just like the late 1980s and 1990s.

The same cannot be said for Russia and OPEC, no matter how they try to spin it. Low oil prices hurt FSU and the Middle East in the 1990s and it is again.

As long as GCC can't get along with Iran, Iraq and Russia, US will be happy about oil prices. Non-oil people I talk to here think that the lack of cooperation on the part of those countries is great for the US.

Gasoline is not a huge part of families' budgets in the US. Housing, including utilities, is way more. So is healthcare. So is secondary education for those who go to college. We spend more on food than fuel.

So if the oil exporters want to keep digging and bury themselves, the populace in the West says more power to them.

coffeeguyzz, 12/26/2015 at 5:46 pm
Shallow

Re Anadarko

Several thousand of those wells are legacy vertical wells from their 2000/2006 acquisitions from Union Pacific Resources and Kerr McGee.

Anadarko's output from 2010 thru 2015 (not full year), 7.1Mmbo …8 Mmbo …10.8 Mmbo …16.8 Mmbo …27.9 Mmbo … 26.9 Mmbo

Gas output doubled from 80 Bcf to 152 Bcf (not full year).

Virtually all Anadarko's holdings are Land Grant given to the Union Pacific railroad 150 years ago. I do not know the precise impact on royalty payments, it is a significant reduction. (Several Appalachian Basin operators have similar leasing circumstances).

These Niobrara guys are popping in wells at $3 million per … including completions. Still, $35 WTI would seem to be way low to be feasible.

shallow sand, 12/26/2015 at 6:26 pm
Coffee. I recall Enno Peters recently did an analysis on CO LTO recently. As I recall the wells have a steeper decline than Bakken, are more gassy, and EUR is much less. I am sure you are correct, that they are cheaper.

I agree with you on current economics too.

shallow sand, 12/26/2015 at 1:08 pm
I looked up Anadarko on CO state website.

Operate under Kerr McGee.

Assuming 4,800 operated wells, by my math the average well is producing 23 barrels of oil and 112 mcf of gas per day, gross.

Assuming 25% royalty burden, and remembering the basis spread in CO for both oil and gas is horrible, it looks like GROSS revenue per well at current price would be in the neighborhood of $200K per year.

I keep begging, and will again. Someone come on here and explain how drilling, but not completing 13,000′ horizontal wells that won't cum. 100,000 BO in 40 years makes one lick of sense?

AlexS, 12/26/2015 at 1:23 pm
shallow sand,
I agree with you. There is no sense in drilling but not completing wells, especially as they are spending borrowed money.

[Dec 26, 2015] The fallacy of the idea that Saudis are dumping oil to preserve their market share

Notable quotes:
"... The literature on perceptions suggests that, however they come to be formed, the beliefs of national leaders (including their beliefs about the relative power of states in the international system) are slow to change. ..."
"... This blip period where oil prices are very low are just consequences of geopolitical war that you describe where everybody produce maximum regardless of profit in order to undercut the competition. ..."
peakoilbarrel.com
Stavros H, 12/21/2015 at 10:23 pm
@Ron Patterson

You continue to ignore the role of geopolitics in setting the tone for the global oil market, and especially the current oil market.

KSA have not been pumping oil at a record pace in order to cover their budget (which is simply impossible at current prices without a massive devaluation of their currency which will annihilate their trade position, since KSA cannot feed or clothe itself) KSA have been doing what they are doing because they are in a shooting war with Russia. The Syrian Arab Army, the Iraqi Shia militias, the Shia-dominated Iraqi government, Iran itself, as well as Hezbollah are Russia's allies in a grand regional struggle against NATO-GCC across the Middle East. The battlefield includes Syria, Iraq and Yemen. East Ukraine is a derivative or diversionary front in what some people describe as the First Global Hybrid War.

Russia, Iraq and Iran have massive oil (and gas) reserves that can be brought into production in the future. Something similar applies to Venezuela (but I reckon that Venezuela's reserves will be more expensive in relative terms) This potentiality threatens the global balance of power, as western oil & gas output is destined to decline (as well as output by countries under western domination) and the potential oil production of Russia, Iran & Iraq becomes a necessity for the global economy.

This is one of the two main reasons (the other being the potential routes of gas pipelines) why we now have an extremely dangerous (media and political leaders vastly understate the true extent of brinkmanship currently ongoing) process of escalation in the Middle East.

What you fail to acknowledge in your articles, is that NATO-GCC have as a strategic imperative to strangle Russia, Iran & Iraq in any which way they can. This includes the imposition of sanctions, military pressure and all other kinds of sabotage one can think of. What we are now witnessing in the global oil (and gas) markets is that excess investment has been ongoing in places such as the US, Canada, the North Sea (as well as several offshore locations, performed by western majors) etc while there is an under-investment in places such as Russia, Iran and Iraq (also Libya & Venezuela) The latter group of countries is much less capital rich than the NATO-GCC countries (and their proxies) and less proficient technologically, hence my firm belief that their production is well below potential.

NATO-GCC's calculation once they embarked on their oil-price war more than a year ago, was that the combination of sanctions, a crushed oil price and loss of trade with Ukraine would have pummeled Russia into submission, hence ending that country's support for the Syrian Arab Army, Iran and Iraq. Simply put, if Russia falls, then the Middle East will be at the mercy of the NATO-GCC-Israel alliance (the world's dominant group of countries) One can also imagine what that would entail for China's position on the world stage.

As for Russia's oil output in 2016, I cannot say very much. There are so many factors at play (price, sanctions, unknown Russian technological capabilities) but even if there is a considerable fall, then it will have nothing to do with Peak Oil (in the traditional sense) finally hitting Russia, but with NATO-GCC pressure bearing some fruit.

In conclusion, my point is that several countries with vast oil & gas reserves, have been intentionally starved of investment due to geopolitical factors, NOT economic ones. As for Russia in particular, I am guessing you have been in the business of monitoring the global oil industry for many years now, how many times have you heard/read western "experts" claim that any minute now, Russian oil production will be entering terminal decline? I can attest that I have been coming across such claims since the day I started following such things, more than a decade ago.

Iran & Iraq also have mythical reserves of oil still untapped. Libya, once stabilized (probably under a NATO-puppet government) can also boost its oil production significantly.

Jimmy, 12/22/2015 at 12:37 am
NATO didn't do so shit-hot in Afghanistan. The days of anybody being at the mercy of NATO are long over. If NATO learnt anything in Afghanistan it's to stay out of land wars in Asia. This has been the case since Alexander the Great but great powers seem to need a reminder every century or so.

I suggest USA is no longer a dominant power. Preeminent yes but not dominant. 25 years ago anybody who defied the USA was in trouble. They'd fly half way around the world and kick your ass. On a Tuesday if they wanted. For 5 billion dollars.

Today we see that Russia, Iran and China have joined together to defy USA/NATO policy in Syria and they're doing rather well. It'll be along time until USA fights any winning battles anywhere in Asia.

Glenn Stehle, 12/22/2015 at 8:55 am
The literature on perceptions suggests that, however they come to be formed, the beliefs of national leaders (including their beliefs about the relative power of states in the international system) are slow to change.

Kenneth Boulding argues that such adjustments occur rarely, if at all, while John Stoessinger asserts that change is possible only as a consequence of some monumental disaster.

The precise point at which the scales of power turn…is imperceptible to common observation…some progress must be made in the new direction, before the change is perceived. They who are in the sinking scale…do not easily come off from the habitual prejudices of superior wealth, or power, or skill, or courage, nor from the confidence that these prejudices inspire. They who are in the rising scale do not immediately feel their strength, nor assume that confidence in it which successful experience gives them afterwards. They who are the most concerned to watch the variations of this balance, midjudge often in the same manner, and from the same prejudices. They continue to dread a power no longer able to hurt them, or they continue to have no apprehension of a power that grows daily more formidable.

–EDWARD VOSE GULICK, Europe's Classical Balance of Power

Glenn Stehle, 12/22/2015 at 8:40 am
Stavros H,

Thank you so much.

Your narrative is at least as plausible as the narrative that KSA is pumping oil at a record pace in order to cover their budget.

The narrative put forth by Ron and Rockman defies reality and common sense because, as Peter notes below, "Saudi Arabia is making half as much now producing 10 million than they were producing 8 million per day."
http://peakoilbarrel.com/all-roads-lead-to-peak-oil/comment-page-1/#comment-551980

Saudi Arabia appears to have other motives besides maximizing its income from oil sales. Its motives are not stricly economic, and waging war is never without cost.

Again, I don't claim to know what Saudi Arabia's motives are, but your explanation seems as plausible as any.

One thing we can be sure of, however, is that the balance of power which attained after 1989 is now very much in flux, and is very much being challenged.

Ves, 12/22/2015 at 10:31 am
Stavro,

The big picture that you describe is somewhat on the money but the devil is in the details. And when you look at these details from different frame of mind you will get different picture.

1) If you use terms like NATO, GCC, EU, IMF you have to be aware that these are just labels that are representing cartels. In North America they like to talk about OPEC cartel but not so much about other cartels. If you don't talk about them than we pretend they do not exist. Main purpose of NATO is not to fight the war with "enemies" but to collect a money racket from the "allies". Country A is in the NATO, regardless if it likes it or not, has to have 3% of budget spent on military. That 3% is your racket. And that racket has to be collected every year. And you can only spend it on hardware from NATO catalogue. No free market there even if there are cheaper and better options. The more countries join the cartel the more money is in the pot. Small countries – no problem, they can join. Poor countries – no problem, they can join too. You can always extract something. In military sense these countries are useful as much as your Facebook friends (practically not friends at all) but what it does it keeps money trickling to the core.

2) Second note is about the fine print of the notion how much some country can produce oil. There is misconception in the discussion that certain country has huge X amount reserves and it will produce huge X amount of oil in the future. Country A with supposedly huge reserves, if assume it has sovereign elite, will produce just enough that suits their economic development and no more. It is as simple as that. The notion that Russia or Iran or whoever will produce so much that European elite can entertain themselves with Formula 1 races every weekend is pretty much nonsense that is result of 50 year of propagandazition. If American elite wants to piss their remaining shale oil on NASCAR races or 20 miles drive to the nearest Wal-Mart for jug of milk, or to keep military bases around the world, well, that is their choice. But eventually it will come to the point where this way of life is not possible and you have to adapt to a new circumstance. This blip period where oil prices are very low are just consequences of geopolitical war that you describe where everybody produce maximum regardless of profit in order to undercut the competition. If you don't have domestic source of oil then you can't play empire games anymore. You have to be "normal" country again. And that is not that tragic because if you ask 99% that question if they would like to be a "normal" country again they would take that in a heartbeat.

Nick G, 12/22/2015 at 10:33 am
This potentiality threatens the global balance of power, as western oil & gas output is destined to decline (as well as output by countries under western domination) and the potential oil production of Russia, Iran & Iraq becomes a necessity for the global economy.

It's certainly time to put the era of the "great prize" of oil behind us, and transition to new forms of transportation and energy.

If that were to reduce the chances for this kind of senseless conflict, that would be enormously valuable.

[Dec 26, 2015] Why is $38 WTI and $2 Henry Hub so devastating?

Notable quotes:
"... If the tech is working wonders, why is $38 WTI and $2 Henry Hub so devastating? ..."
"... I wish you would at least focus on the whole of well productivity, and not just the record setting stuff. ..."
"... Per NDIC, the highest Bakken per well barrels of oil per day field wide was 11/08 at 146. 143 per day was achieved 10/12. 10/15 it is now down to 108. ..."
"... Say you borrowed $5 million of the cost of this average well at 6% interest. It comes due in 2020. $300K interest. You now have $102,000 left to put towards principal of $5 million. Thus far, you likely haven't put any of that meager amount towards principal, if you are US shale. You are still putting it towards trying for a record setting well. ..."
"... You have likely sold your conventional production for 1/3 of what it would have brought in 2013, also to achieve said record setting well. ..."
"... I also hope you understand why those of us who actually own an interest in US oil production grow tired of hearing about the supposed technological wonders. ..."
peakoilbarrel.com
Sarko, 12/26/2015 at 6:16 am
Technology is great but what happened with technology development when companies are cash flow negative? True, most of today fracking technology come online during 2003-2008 period, when price go from $25 to $140 per barrel.

Also, do you believe is there over 100 billion barrels in US oil reserves? I don't know, i ask you, because i see you are in industry on some way and OPEC and EIA future projections for production in mb/d suggest just that.

shallow sand, 12/26/2015 at 9:21 am
Coffee.

We've discussed tech v economics a lot, of course. If you have answered this before, and I have forgotten, I apologize.

Do you own an interest in any oil and/or gas wells? Do you own any stocks or bonds in any E & P companies?

If the tech is working wonders, why is $38 WTI and $2 Henry Hub so devastating?

I wish you would at least focus on the whole of well productivity, and not just the record setting stuff.

Per NDIC, the highest Bakken per well barrels of oil per day field wide was 11/08 at 146. 143 per day was achieved 10/12. 10/15 it is now down to 108.

108 x .75 = 81. 81 x 365 = 29,565 barrels of oil per year to the WI owners.

29,565 x $28 = $827,820.00.

Subtract $82,782 for production taxes. Subtract $268,000 for OPEX. Subtract $75,000 for G & A.

The average well nets $402,000 in the above scenario.

Say you borrowed $5 million of the cost of this average well at 6% interest. It comes due in 2020. $300K interest. You now have $102,000 left to put towards principal of $5 million. Thus far, you likely haven't put any of that meager amount towards principal, if you are US shale. You are still putting it towards trying for a record setting well.

You have likely sold your conventional production for 1/3 of what it would have brought in 2013, also to achieve said record setting well.

Coffee, I hope someday you realize that high IP is really not that important.

I also hope you understand why those of us who actually own an interest in US oil production grow tired of hearing about the supposed technological wonders.

[Dec 26, 2015] Russian budget assume base scenario $50 for 2016

peakoilbarrel.com
Sarko, 12/25/2015 at 8:47 am
No way that oil price will be average $60 per barrel in 2016. Russian budget assume base scenario $50 but they will lower on $40-45 average in 2016. Russians said they not expected that average oil price be over $60 till 2018, they are very pessimistic on oil price.
I have one question: what is really number for LTO reserves in USA(USGS and EIA) on price around $60-70(in 2015 $)? Because, if it is around 30-35 billion barrels this all charts(not only OPEC but EIA) for US LTO production are mathematically impossible. They have average US LTO production on 4-4.5 mb/b but when you calculate that on 25 years period reserves need are around 40 billion barrels.
4.25mb/d x 365 days=1.55 billion barrels per year
1.55 barrels/year x 25 years=38.7 billion barrels.
I'm something miss or badly calculate?
likbez, 12/25/2015 at 11:31 am
"Russians said they not expected that average oil price be over $60 till 2018, they are very pessimistic on oil price."

They don't. My impression is that most Russian analysts expect mass bankruptcy of shale companies in the USA and $50-$60 on average in 2016

Google translate is your friend...

Sarko, 12/25/2015 at 12:07 pm
It is not government prediction but private funds and Lukoil, biggest private oil company in Russia. This is official government prediction, unfortunately it is on Russian.

http://i73.fastpic.ru/big/2015/1201/b8/df6cd754ec0dc3da1e6480127c206fb8.png

First row is projections of price, two scenarios:

Base price for Ural (around $2 discount on Brent)

2016: $50
2017: $52
2018: $55

Pesimistic

2016-2018 average price $40.

All budget plans, GDP, CPI are project on this oil price projections in Russia. So Russian government don't see oil price on brent over $60 in 2018. And if i'm correct, Russian Central Bank and finance/economic minister now make plans for $30-35 average price for 2016.

I just see official numbers of EIA for LTO reserves in USA and that is around 14 billion, if that is true all predictions about US LTO production on 4mb/d in next 25 are impossible, they even impossible if there is increased of 200% in LTO reserves from today level.

AlexS, 12/25/2015 at 12:27 pm
Russian oil company, Gazpromneft, recently said that their current operations will remain profitable at $15 per barrel, and at $20 they will drill new wells

[Dec 26, 2015] Why some shale companies just keep drilling wells in spite of the very low oil prices

Notable quotes:
"... Well that's just great. The article touts how smart this strategy is. The company thry focused on, Anadarko, lost $2.2 BILLION last QUARTER. ..."
"... Most LTO companies don't have cash. Most have a gob of debt. I don't think sinking cash into wells that will generate $0 revenue for a year or two is a good idea, especially given the financial shape LTO is in already. ..."
peakoilbarrel.com
Ron Patterson , 12/26/2015 at 8:51 am
Here is an interesting article that tries to explain why some companies just keep drilling wells in spite of the very low oil prices.

Hoping for a Price Surge, Oil Companies Keep Wells in Reserve

Their well, one of hundreds drilled by Anadarko Petroleum in eastern Colorado's Wattenberg field this year, could someday gush as many as 800 barrels of crude oil a day. But Anadarko is not planning to produce a drop of crude from the well for at least another year because the price of oil is now so pitifully low.

The well here is just one of more than 4,000 drilled oil and natural gas wells across the country producing nothing, but ready to be tapped quickly……….

But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, about the same amount of oil that Iran is expected to add to the glutted global market after it complies with the recent nuclear deal by the end of next year.

Some analysts say oil companies like Anadarko, EOG Resources and Continental Resources may collectively risk suffocating the very price revival they anticipate by releasing abundant new supplies once prices inch up. Others say the eventual impact would be small and short-lived, but since the industry has never used this strategy before, no one can be sure……….

On the completion side, fracking crews are easier to come by and their contracts tend to be more fluid. Now those completion costs have also come down - meaning that the uncompleted wells will eventually be brought on line at a lower cost, executives say.

shallow sand, 12/26/2015 at 9:24 am
Well that's just great. The article touts how smart this strategy is. The company thry focused on, Anadarko, lost $2.2 BILLION last QUARTER.
oldfarmermac, 12/26/2015 at 9:39 am
Hi SS,

If you have or can raise the cash, it makes sense to drill now and produce a year or two down the road-IF you believe prices will be up. According to what I read here, the costs of drilling a well may be down by a third, due to so many men and machines and so much steel and sand etc , "looking for a home".

I don't know if this is "one third off" drilling sales event is totally for real, it might be only a quarter or a fifth off. Hopefully somebody who crunches tight oil numbers will have something to say about it.

Tight oil production brought on by drilling now and producing later is not going to noticeably affect the price later.

Ron Patterson, 12/26/2015 at 9:49 am
Tight oil production brought on by drilling now and producing later is not going to noticeably affect the price later.

By what logic did you arrive at that conclusion?

The article states: But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, …

Now I think an extra half a million barrels per day would noticeably affect the price.

shallow sand, 12/26/2015 at 10:56 am
OFM.

What you say may make sense of you are using cash and have little to no debt. It may make sense for ExxonMobil.

Most LTO companies don't have cash. Most have a gob of debt. I don't think sinking cash into wells that will generate $0 revenue for a year or two is a good idea, especially given the financial shape LTO is in already.

Also, the entire premise is that there will soon be a steep rise in the price of oil. That is a total crap shoot.

So they are strictly gambling that oil prices will rise steeply in the next couple years? Is that a good business strategy for multi-billion dollar corporations to undertake, especially when the futures market says otherwise?

Ask Harold Hamm how easy it is to predict the future price of oil.

[Dec 25, 2015] OPEC's 2015 World Oil Outlook is too optimistic as for the USA oil production

Notable quotes:
"... OPEC expects light tight oil to increase in 2016. They only show a slight uptick in LTO in 2016 but an uptick nevertheless. I just don't believe that is possible. ..."
"... In this Outlook, the price of the ORB is assumed to average $55/b during 2015 and to resume an upward trend in both the medium- and long-term. The medium-term foresees a $5/b increase each year so that a level of $80/b (nominal) for the ORB is reached by 2020, reflecting a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market. This, in turn, will provide support to prices. Translated into real prices, the oil price is assumed to be $70.7/b by 2020 (in 2014 prices). ..."
"... The long-term price assumption is based on the estimated cost of supplying the marginal barrel which will gradually move to more expensive areas. This continues to be the major factor in the period through to 2040. The price of the ORB in real terms is assumed to rise from more than $70/b in 2020 (in 2014 prices) to $95/b in 2040 (in 2014 prices). Correspondingly, nominal prices reach $80/b in 2020, rising to almost $123/b by 2030 and more than $160/b by 2040. It should be noted that these are not price forecasts, but working assumptions to guide the development of the Reference Case scenario. ..."
"... If the cost of producing that extra barrel is, say $80 a barrel, but only 80 million barrels can possibly be produced and the world could use 90 million barrels, then the price will rise to a lot higher than $80 a barrel. ..."
"... What they call "OPEC crude supply" is not projected actual production, but "the requirement for OPEC crude", i.e. global demand less non-OPEC supply. OPEC NGLs and OPEC other liquids (mainly GTL). ..."
"... at $55 demand should grow in excess of 1 million barrels per day per year. ..."
"... At $55 half the OPEC members get bankrupt in 5 years, including Saudi Arabia. ..."
"... I think once December 31st passes OPEC might cut. Why December 31st? That is the price the auditors will use to assess the value of the oil in the ground for US shale companies. A low price then assures they will not get any credit increases till December 2016 even if the price rebounds. ..."
"... If they are going to cut, it will be after December 31st. ..."
peakoilbarrel.com

Peak Oil Barrel

It is with the US and Canada where OPEC is most optimistic. They see US and Canada liquids production continuing onward and upward with not much of a pause.

OPEC expects light tight oil to increase in 2016. They only show a slight uptick in LTO in 2016 but an uptick nevertheless. I just don't believe that is possible.

But what about prices. Are not prices killing production in the oil patch, especially in the USA? Well the 2015 World Oil Outlook does not present any price charts or tables. But they do tell us what prices need to do in order for their reference case predictions to be fulfilled, all on page 8. Bold mine.

In this Outlook, the price of the ORB is assumed to average $55/b during 2015 and to resume an upward trend in both the medium- and long-term. The medium-term foresees a $5/b increase each year so that a level of $80/b (nominal) for the ORB is reached by 2020, reflecting a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market. This, in turn, will provide support to prices. Translated into real prices, the oil price is assumed to be $70.7/b by 2020 (in 2014 prices).

The long-term price assumption is based on the estimated cost of supplying the marginal barrel which will gradually move to more expensive areas. This continues to be the major factor in the period through to 2040. The price of the ORB in real terms is assumed to rise from more than $70/b in 2020 (in 2014 prices) to $95/b in 2040 (in 2014 prices). Correspondingly, nominal prices reach $80/b in 2020, rising to almost $123/b by 2030 and more than $160/b by 2040. It should be noted that these are not price forecasts, but working assumptions to guide the development of the Reference Case scenario.

They are saying that if prices increase by $5 a barrel a year, from $55 a barrel that they assume will be the 2015 average, then all will be well after only a slight dip in production in 2016 and 2017. So in 2016 we should see prices averaging $60 a barrel if they get their "Reference Case" started off on the right foot.

Glenn Stehle, 12/25/2015 at 10:10 am

Could this be a head fake on the part of OPEC, an attempt to appeal to the wishful thinking of Western policy makers (e.g., the sublime promises coming out of Cowboyistan and Planet Green) and to lure them into believing they have OPEC by the short hairs?

If so, OPEC has plenty of takers, such as Anatole Kaletsky:

Assuming that a combination of shale development, environmental pressure, and advances in clean energy keep the OPEC cartel paralyzed, oil will now trade like any other commodity in a normal competitive market, as it did from 1986 to 2005. As investors appreciate this new reality, they will focus on a basic principle of economics: "marginal cost pricing."

In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity. This means that all the reserves in Saudi Arabia, Iran, Iraq, Russia, and Central Asia would have to be fully developed and exhausted before anyone even bothered exploring under the Arctic ice cap or deep in the Gulf of Mexico or hundreds of miles off the Brazilian coast….

[W]ith OPEC on the ropes, the broad principle applies: ExxonMobil, Shell, and BP can no longer hope to compete with Saudi, Iranian, or Russian companies, which now have exclusive access to reserves that can be extracted with nothing more sophisticated than nineteenth-century "nodding donkeys."….

For Western oil companies, the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing ("fracking") to oil-producing countries….

There are two reasons why this has not happened – yet. Oil company managements still believe, with quasi-religious fervor, in perpetually rising demand and prices. So they prefer to waste money seeking new reserves instead of maximizing shareholders' cash payouts. And they contemptuously dismiss the only other plausible strategy: an investment shift from oil exploration to new energy technologies that will eventually replace fossil fuels.

Redirecting just half the $50 billion that oil companies are likely to spend this year on exploring for new reserves would more than double the $10 billion for clean-energy research announced this month by 20 governments at the Paris climate-change conference. The financial returns from such investment would almost certainly be far higher than from oil exploration….

As long as OPEC's output restrictions and expansion of cheap Middle Eastern oilfields sheltered Western oil companies from marginal-cost pricing, such complacency was understandable. But the Saudis and other OPEC governments now seem to recognize that output restrictions merely cede market share to American frackers and other higher-cost producers, while environmental pressures and advances in clean energy transform much of their oil into a worthless "stranded asset" that can never be used or sold….

OPEC seems finally to have absorbed this message and realized that the Oil Age is ending. Western oil companies need to wake up to the same reality, stop exploring, and either innovate or liquidate.

https://www.project-syndicate.org/commentary/marginal-pricing-end-of-western-oil-producers-by-anatole-kaletsky-2015-12

Ron Patterson, 12/25/2015 at 10:40 am

Quoting Anatole Kaletsky:

In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity.

No, that is simply not so. I have heard this claim made many times in the last 15 or so years. That is the claim is that: "Oil is priced on the margin." That is, as Kaletsky believes, the price of oil is set by the cost of producing the highest price barrel. And every time that is proposed, it gets shot down by people a lot smarter than me.

If the cost of producing that extra barrel is, say $80 a barrel, but only 80 million barrels can possibly be produced and the world could use 90 million barrels, then the price will rise to a lot higher than $80 a barrel.

Oil, just like everything else in the world, is priced by supply and demand and not what it costs to produce the highest priced barrel to produce.

Note: There are a few exceptions to the supply an demand rule. Rationing for example. Or price controls… or if you can corner the market on any one product like a life saving drug. Or another example: Congress says Medicare is not allowed open bidding for drugs but must pay the price that big Pharma asks. Big Pharma bought your congressman and demanded that the "no bid" clause be wrote into the bill. They did as they were told by the money that bought them their election.

The Veterans Administration is allowed to bid for the lowest price on drugs and as a result they get their drugs at a far cheaper price than does Medicare.

AlexS, 12/25/2015 at 10:28 am

Ron,

What they call "OPEC crude supply" is not projected actual production, but "the requirement for OPEC crude", i.e. global demand less non-OPEC supply. OPEC NGLs and OPEC other liquids (mainly GTL).

Actual OPEC crude production will most likely be higher (Iran, Iraq, Lybia)

Huckleberry Finn, 12/25/2015 at 11:56 am
So I think this is a brilliant report.

Anyone in OECD holding out for higher prices makes decisions based on this then even the 3 million barrels of additional supply, which is 600,000 barrels per day per year, will not happen.

Even if that does, at $55 demand should grow in excess of 1 million barrels per day per year.

The best part about this is if SA has the biggest hand in getting this report done, and I have no reason to believe otherwise, all OPEC members should be ready to cooperate with cuts.

At $55 half the OPEC members get bankrupt in 5 years, including Saudi Arabia.

I think once December 31st passes OPEC might cut. Why December 31st? That is the price the auditors will use to assess the value of the oil in the ground for US shale companies. A low price then assures they will not get any credit increases till December 2016 even if the price rebounds.

If they are going to cut, it will be after December 31st.

[Dec 25, 2015] Does a barrel of NGL have the same BTU as a Barrel of Crude or Condensate?

Due to higher percentage of light crude, the net energy available on a per barrel basis is falling off significantly. One barrel of condensate contain only 60% or energy of the barrel of regular oil. In other words it is almost equal to gasoline as for energy contained.
Notable quotes:
"... Of course, what the EIA calls "Crude oil" is actually Crude + Condensate (C+C), and condensate can't be used to meet crude oil contractual obligations at Cushing. I assume that the listed value for gasoline, 5.2 MMBTU, is a pretty good approximation for an average value for condensate. ..."
"... For the first nine months of 2015, the EIA estimates that the ratio of US Lower 48 condensate* to US Lower 48 "Crude oil" Production, i.e., C+C, was 22%, or 2 million bpd of Lower 48 condensate production: ..."
"... My premise was and is that we have been on an "Undulating plateau" in actual global crude oil production, while global natural gas production and associated liquids, condensate and NGL, have so far continued to increase: ..."
"... The actual net energy available on a per barrel basis, the way the accounting is done, including ever higher percentages of very light oil, condensate, natural gas liquids, etc, MUST be falling off significantly. ..."
peakoilbarrel.com
Huckleberry Finn, 12/25/2015 at 8:32 am
Does a barrel of NGL have the same BTU as a Barrel of Crude or Condensate?
If not, converting all into BTU would show whether total BTUs provided are increasing or static.
Ron Patterson, 12/25/2015 at 9:06 am
Rune Likvern says: NGLs have around 60 – 70% of the volumetric energy (heat) content of crude oil.

However peak oil will happen when oil peaks, not NGLs. Liquid transportation BTUs should not be mixed with other types of BTUs. Otherwise we would need to count BTUs from coal as well.

Jeffrey J. Brown, 12/25/2015 at 10:05 am
Some EIA million BTU (MMBTU) conversion factors:

https://www.eia.gov/forecasts/aeo/pdf/appg.pdf

Of course, what the EIA calls "Crude oil" is actually Crude + Condensate (C+C), and condensate can't be used to meet crude oil contractual obligations at Cushing. I assume that the listed value for gasoline, 5.2 MMBTU, is a pretty good approximation for an average value for condensate.

For the first nine months of 2015, the EIA estimates that the ratio of US Lower 48 condensate* to US Lower 48 "Crude oil" Production, i.e., C+C, was 22%, or 2 million bpd of Lower 48 condensate production:

https://www.eia.gov/todayinenergy/detail.cfm?id=23952

These numbers are consistent with some estimates that I used in the following comment, where I tried to come up with an estimate of actual global crude oil production (45 API and lower crude oil, i.e., the stuff that corresponds to the global price indexes), versus global condensate production, using the only available data, some EIA API gravity estimates and EIA/OPEC data.

My premise was and is that we have been on an "Undulating plateau" in actual global crude oil production, while global natural gas production and associated liquids, condensate and NGL, have so far continued to increase:

http://peakoilbarrel.com/jean-laherreres-bakken-update/comment-page-1/#comment-534101

*Condensate with API gravity of 45 degrees or more

Ovi, 12/25/2015 at 9:14 am
Ron I note that in the post, some places use the word Supply and in others, Production. In OPEC terminology, Supply adds processing gains to Production. Could this be part of the difference you mention between EIA and OPEC?
Ron Patterson, 12/25/2015 at 10:06 am
No, I don't think so. In the charts that I copied and pasted, they say supply and, in this case anyway, they mean total production. And I was comparing only the supply marked as "crude". This does not include anything except crude. OPEC's total "crude" is way less than the EIA's or even JODI's "crude + condensate".
World crude oil production according to the EIA, JODI and OPEC in million barrels per day.
	2014	 2015	
EIA  	77.9  	79.7 	  Avg. 1st 6 Months
JODI	74.1 	76.1	  Avg. 1st 10 Months
OPEC	72.7 	74.2	
oldfarmermac, 12/25/2015 at 9:52 am
The actual net energy available on a per barrel basis, the way the accounting is done, including ever higher percentages of very light oil, condensate, natural gas liquids, etc, MUST be falling off significantly.

How we should account for this loss in energy density is debatable, in terms of the peak oil debate. But in the real 3D world, it is no doubt already a big enough loss that it should be accounted for in forecasting future consumption measured in barrels.

If oil production is going to actually increase , for another couple of decades, in the face of the depletion of today's legacy oil fields, then the exploration guys are going to have to work some miracles, finding oil in substantial amounts, in places that have been combed over multiple times already. And the production guys are going to have to come up with some miracles too, in order to keep the per barrel cost in constant money below a hundred bucks.

Now being a practical old farmer, I do believe in " miracles", having witnessed half a dozen or so over my life time,for example cell phones, no till planting, genetic engineering, etc. But I don't believe in PREDICTING they will come to pass within any given field, within any given time frame.

I am with Ron, I believe all these rosy forecasts are nothing less than ridiculous, in terms of increasing total production annually going forward, especially at the prices mentioned.

[Dec 24, 2015] Egypt budget and current account deficits – can Saudi Arabia bail out Cairo

crudeoilpeak.info
JEDDAH: Custodian of the Two Holy Mosques King Salman has ordered that Saudi Arabia's aid and investment package to Egypt should be increased to SR30 billion (US$ 8 bn) in the next five years.

The announcement was made by Deputy Crown Prince Mohammed bin Salman at a meeting with Egyptian Prime Minister Sherif Ismail in Cairo on Tuesday, said SPA (Saudi Press Agency)

Prince Mohammed said at the start of the meeting that King Salman ordered the increase in the package - to contribute to Egypt's oil needs for five years and for an increase in traffic for Saudi ships in the Suez Canal.

According to a report in Bloomberg quoting Egyptian Investment Minister Ashraf Salman on Wednesday, the investment of SR30 billion would be through Saudi Arabia's public and sovereign funds, with inflows beginning immediately. Egypt is also set to renew a deal to import Saudi oil products for five years on favorable terms, Ismail said."

http://www.arabnews.com/featured/news/851651

This follows pledges of US$ 12.5 bn aid by Saudi Arabia, Kuwait, the UAE and Oman in March 2015, at an economic conference (EEDC) in Sharm el-Sheikh.

Will that be enough to rescue Egypt?

Let's have a look at Egypt's budget. In the previous post we found that Egypt's oil production peaked in 1993. Declining and now stagnating oil production against an ever-growing oil demand of a ballooning population meant that Egypt is a net-oil importer since 2010. How did that impact on the budget? We use IMF data available from this website: http://www.imf.org/external/country/egy/index.htm

[Dec 24, 2015] Egypt budget and current account deficits – can Saudi Arabia bail out Cairo

crudeoilpeak.info
JEDDAH: Custodian of the Two Holy Mosques King Salman has ordered that Saudi Arabia's aid and investment package to Egypt should be increased to SR30 billion (US$ 8 bn) in the next five years.

The announcement was made by Deputy Crown Prince Mohammed bin Salman at a meeting with Egyptian Prime Minister Sherif Ismail in Cairo on Tuesday, said SPA (Saudi Press Agency)

Prince Mohammed said at the start of the meeting that King Salman ordered the increase in the package - to contribute to Egypt's oil needs for five years and for an increase in traffic for Saudi ships in the Suez Canal.

According to a report in Bloomberg quoting Egyptian Investment Minister Ashraf Salman on Wednesday, the investment of SR30 billion would be through Saudi Arabia's public and sovereign funds, with inflows beginning immediately. Egypt is also set to renew a deal to import Saudi oil products for five years on favorable terms, Ismail said."

http://www.arabnews.com/featured/news/851651

This follows pledges of US$ 12.5 bn aid by Saudi Arabia, Kuwait, the UAE and Oman in March 2015, at an economic conference (EEDC) in Sharm el-Sheikh.

Will that be enough to rescue Egypt?

Let's have a look at Egypt's budget. In the previous post we found that Egypt's oil production peaked in 1993. Declining and now stagnating oil production against an ever-growing oil demand of a ballooning population meant that Egypt is a net-oil importer since 2010. How did that impact on the budget? We use IMF data available from this website: http://www.imf.org/external/country/egy/index.htm

[Dec 24, 2015] The Fallacy Of Peak Oil Demand

The fallacy of peak oil demand is mainly due to the fact that it limit itself to the G7. which might well exprence peak demand soon. Demand will be growing with the growth of world population and the number of cars on the roads, which continue to increase. The main drivers will be India and China but Arab countries also experience explosive demand. Generally Muslim world will grow oil demand faster then the rest of the world as growth of population is concentrated predominantly in those countries.
Notable quotes:
"... Biofuels are certainly not growing at a fast enough rate to meet world demand – much less cut into petroleum's dominance. Further, there isn't enough available arable land in the world for biofuels to ever make more than a tiny contribution to the world's oil supply. Advanced biofuels which many advocates assured us could deliver us from our oil dependence have failed to deliver. ..."
"... According to Inside EVs, a website that reports on EV sales, through the first 11 months of 2014 there were 110,011 EVs sold in the U.S. This year, sales in the first 11 months have fallen to 102,898 vehicles - a decline of 6.5%. Annual EV sales did grow rapidly from 2011 to 2013, but haven't grown much beyond 2013 s 97,507 vehicles sold. ..."
"... According to Automotive News, the first 11 months of 2014 saw overall vehicle sales in the U.S. of 15,015,434 automobiles (cars, light-duty trucks, and SUVs). ..."
"... Thus, in one year the number of cars sold in the U.S. has increased by 811,200 vehicles. ..."
"... That's a one-year increase that's more than double the total EV sales of the past 5 years - and almost all of those vehicles run on petroleum. ..."
www.forbes.com

What about biofuels? The world currently consumes about 92 million barrels of oil per day. The world produces about 1.5 million barrels of oil equivalent (BOE) of biofuels per day. Since 2005, biofuel production in the world has grown by 1 million barrels a day, while crude oil production has grown by nearly 7 million barrels a day. Biofuels are certainly not growing at a fast enough rate to meet world demand – much less cut into petroleum's dominance. Further, there isn't enough available arable land in the world for biofuels to ever make more than a tiny contribution to the world's oil supply. Advanced biofuels which many advocates assured us could deliver us from our oil dependence have failed to deliver.

That brings me to the other primary contender often mentioned as a crude oil killer: the electric vehicle (EV). In theory, as the world switches to EVs, our crude oil consumption will peak and fall. But what is actually happening?

According to Inside EVs, a website that reports on EV sales, through the first 11 months of 2014 there were 110,011 EVs sold in the U.S. This year, sales in the first 11 months have fallen to 102,898 vehicles - a decline of 6.5%. Annual EV sales did grow rapidly from 2011 to 2013, but haven't grown much beyond 2013′s 97,507 vehicles sold.

But 100,000 vehicles per year is nothing to sneeze at, right? Well, let's compare that against overall vehicle sales. According to Automotive News, the first 11 months of 2014 saw overall vehicle sales in the U.S. of 15,015,434 automobiles (cars, light-duty trucks, and SUVs). That means that electric cars sales accounted for about 0.7% of the market. But what's much more revealing is that overall vehicle sales in the U.S. this year through November were 15,826,634 automobiles. Thus, in one year the number of cars sold in the U.S. has increased by 811,200 vehicles.

That's a one-year increase that's more than double the total EV sales of the past 5 years - and almost all of those vehicles run on petroleum.

...there is still nothing on the horizon that signals even the beginning of the end of the oil age.

[Dec 24, 2015] The U.S. oil production miracle continues

Notable quotes:
"... According to today's EIA inventory report, U.S. production was up another 1 kb/d this week. ..."
peakoilbarrel.com
Ovi, 12/23/2015 at 10:20 pm

The U.S. oil production miracle continues today. According to today's EIA inventory report, U.S. production was up another 1 kb/d this week. Added September US production from the EIA monthly International Stats to the attached chart. From September 4 (8,683 kb/d) to Dec 18 (8,653 kb/d) lower 48 production has only dropped by 30 kb/d.

[Dec 24, 2015] In June 2015 Steven Kopits was predicting $85 oil by the end of the third quarter. He might be right of figure but made a timing error by one year.

Notable quotes:
"... Steven Kopits is predicting $85 oil by the end of the third quarter [of 2015]. ..."
"... Based on the 2005 to 2013 rate of decline in the ratio of Saudi production to consumption, I estimate that Saudi Arabia may have already shipped more than 40% of their post-2005 CNE (Cumulative Net Exports). ..."
"... The key question about tight/shale plays is whether plays like the Bakken – with an average per well production rate of a little over 100 bpd, with a median production rate of less than 100 bpd, with an overall very rapid decline rate – will work in higher operating cost areas around the world. ..."
econbrowser.com
Jeffrey J. Brown

Steven Kopits is predicting $85 oil by the end of the third quarter [of 2015]. Here's the link to the recent interview with Steven on CNBC:

http://video.cnbc.com/gallery/?video=3000384466

So far, monthly Brent crude oil prices are recovering at about twice the rate of increase that we saw following the December, 2008 monthly low in Brent prices. From January, 2015 to May, 2015, monthly Brent price increased at an annualized rate of about 90%/year. Monthly Brent prices rose at an annualized rate of 43%/year from December, 2008 to February, 2011.

Regarding Saudi Arabia, their post-2005 annual net exports (total petroleum liquids + other liquids, EIA data) have been substantially below (their recently revised upward) 2005 level of 9.5 MMBPD (million barrels per day) for nine straight years. Based on the 2005 to 2013 rate of decline in the ratio of Saudi production to consumption, I estimate that Saudi Arabia may have already shipped more than 40% of their post-2005 CNE (Cumulative Net Exports).

The key question about tight/shale plays is whether plays like the Bakken – with an average per well production rate of a little over 100 bpd, with a median production rate of less than 100 bpd, with an overall very rapid decline rate – will work in higher operating cost areas around the world.

In addition, not all shale plays are commercial in the US, and those that are commercial tend to very much gas prone.

[Dec 24, 2015] Refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity)

Lifting of export ban solved this problem and now such crude can be exported to refineries which are tunes to lighter sorts of oil. that might mean that the USA glut is over.
"... I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates. ..."
peakoilbarrel.com
Jeffrey J. Brown, 12/10/2015 at 7:40 am

There has been a lot of talk regarding the oil glut, but according to eia crude inventories there is only 105.1 million more barrils of crude than a year ago

What the EIA calls "Crude oil" is actually Crude + Condensate (C+C).

I suspect that most of the 2015 build in US and global C+C inventories consists of condensate, and I frequently cite a Reuters article earlier this year that documented case histories of refiners increasingly rejecting blends of heavy crude and condensate that technically meet the upper API limit for WTI crude (42 API gravity*), but that are deficient in distillates.

In any case, based on the most recent four week running average data, US refineries were dependent on net crude oil imports for 43% of the C+C processed in US refineries (7.1/16.5) versus 44% a year ago (7.1/16.2). If we had so much (generally cheaper than imported) actual crude oil on hand in the US, why are refiners importing the same amount of crude oil as they did last year?

*Most common overall dividing line between crude & condensate is 45 API

[Dec 24, 2015] US banks hit by cheap oil as Opec warns of long-term low

Notable quotes:
"... Banks including Wells Fargo have recently spoken about the dangers of low oil prices that could make exploration companies and oil producers unable to pay their loans. ..."
"... There are now five times as many oil and gas loans in danger of default to the oil and gas sector as there were a year ago, a trio of US regulators warned in November…. ..."
Dec 24, 2015 | ft.com

US banks face the prospect of tougher stress tests next year because of their exposure to oil in a sign of how the falling price of crude is transforming the outlook not just for energy companies but the financial sector….

Banks including Wells Fargo have recently spoken about the dangers of low oil prices that could make exploration companies and oil producers unable to pay their loans.

There are now five times as many oil and gas loans in danger of default to the oil and gas sector as there were a year ago, a trio of US regulators warned in November….

"It's the fact that they have 28 negative things hitting you at once that makes them challenging," said Mr Goldberg.

[Dec 24, 2015] Oil above $37 as U.S. supply tightens, still near 11-year low

Lifting export ban eliminates the gap between WTI and Brent which is positive for ETNs based on WTI...
Notable quotes:
"... The lifting of the ban on U.S. exports will provide some underlying support for U.S. crude. ..."
"... at current prices, demand is going to remain strong next year ..."
"... ...Crude inventories, which were expected to rise, fell 5.88 million barrels, the Energy Information Administration said. ..."
"... ...Baker Hughes reported that U.S. oil drillers cut rigs for a fifth week in the last six, a sign that low prices are curbing activity and could slow output. ..."
finance.yahoo.com

"The lifting of the ban on U.S. exports will provide some underlying support for U.S. crude. Oil demand in 2015 was exceptionally high and at current prices, demand is going to remain strong next year," said Olivier Jakob, analyst at Petromatrix.

...Crude inventories, which were expected to rise, fell 5.88 million barrels, the Energy Information Administration said.

...Baker Hughes reported that U.S. oil drillers cut rigs for a fifth week in the last six, a sign that low prices are curbing activity and could slow output.

TUSC

Different whats being said elsewhere, Oil [slump is] based on the USA dollar creep up. WTI went above Brent Oil prices for the first time in years.

Saudi Oil is running out, they are producing a little bit less than they did this time last year and that is with more new oil wells and pumps, Saudi King as issued a statement for its country to move away from the dependence on oil. That's a sure sign oil stocks in Saudi Arabia have started to fall.

[Dec 24, 2015] Electrical vehicles sales are stagnant without government subsidies but even with them they are tough sell

Notable quotes:
"... electric vehicles are still a tiny minority of all vehicles and the solar panels that exist are not close to being sufficient to meet the electrical needs of residents and businesses. ..."
"... The subsidies were insufficient to create widespread adoption when energy prices were high; today it's an even tougher sell. ..."
"... the bottom line is that it's really hard to compete with an energy source as energy-dense, portable, and cheap as oil - especially at today's prices ..."
"... Unless one believes that inexpensive oil will last forever, a transition must take place. In my opinion, that transition will fall somewhere on a continuum from immediate economic collapse to a slower economic collapse. ..."
"... So hooray for government subsidies. They do very little harm and create some small measure of good. They cost a lot less than bombs and bank bailouts. ..."
peakoilbarrel.com
Silicon Valley Observer, 12/24/2015 at 10:58 am
I live in an area that could be considered ground zero for renewable energy activism. Electric vehicles are commonplace in Silicon Valley - especially in the Whole Foods parking lot. Solar panels are also found many places - on homes, on office buildings, on the structures that shade the parking lot at my son's high school. Just a short drive up the road Tesla is cranking out electric status symbols that herald a new era.

Even so, electric vehicles are still a tiny minority of all vehicles and the solar panels that exist are not close to being sufficient to meet the electrical needs of residents and businesses. There are those on this forum who are more than happy to point out that all of this probably wouldn't be happening without government subsidies. And that is largely true. And some of the subsidies are truly silly. For example, I had a solar powered skylight installed in my house and, just because it had a solar panel, it qualified for a generous tax subsidy - even though the electricity it saves is minuscule.

The subsidies were insufficient to create widespread adoption when energy prices were high; today it's an even tougher sell. There would always be enthusiasts who would ignore the economics because they can afford to and it does buy a certain cache in Cupertino. But there aren't enough Apple and Google engineers to make a difference. The cashier at my local Walmart isn't going to spend an extra $10K to $20K on a Nissan Leaf over an economical ICE vehicle; and there are a lot more people like her than like the Apple/Google engineers.

To me, the bottom line is that it's really hard to compete with an energy source as energy-dense, portable, and cheap as oil - especially at today's prices. But whereas some people, even on this forum, would take some pleasure in pointing out the inadequacies of electric vehicles and their associated subsidies and, I assume, argue for their elimination, I do not.

Unless one believes that inexpensive oil will last forever, a transition must take place. In my opinion, that transition will fall somewhere on a continuum from immediate economic collapse to a slower economic collapse. Collapse is inevitable because no energy source can replace oil and oil underlies our entire economy. In this viewpoint, whether or not we have electric vehicles will make little difference. We won't have jobs to drive to. We won't have products in the stores to buy even if we can drive to them. Yes, there will be a small portion of the population who will do better than most - Silicon Valley will probably be one of those places for quite a while - and for them electric vehicles will provide some value. But not for the vast majority.

So hooray for government subsidies. They do very little harm and create some small measure of good. They cost a lot less than bombs and bank bailouts.

Will they make a meaningful difference in the broad arc of history? I think not. But I have been wrong before. To those who would criticize them I ask you to take the longer view and tell me, what is your vision of the future?

Merry Christmas

[Dec 24, 2015] Dicker Oil isn't going anywhere in 2016

Notable quotes:
"... 2016 might be only marginally better. Oil prices might rise in the third quarter ..."
finance.yahoo.com

Dan Dicker of MercBlock reveals his 2016 outlook for oil. He made the following points

[Dec 24, 2015] California Gas Leak Now Being Called Worst Catastrophe Since BP Spill Zero Hedge

Notable quotes:
"... Gas is escaping through a ruptured pipe more than 8,000 feet underground, and it shows no signs of stopping, as according to the California Air Resources Board, methane - a greenhouse gas 72 times more impactful in the atmosphere than carbon dioxide - has been escaping from the Aliso Canyon site with force equivalent "to a volcanic eruption" for about two months now. ..."
"... So far, the total leaked gas measures somewhere around 100,000 tons - adding "approximately one-quarter to the regular statewide methane emissions" during that same time frame. ..."
"... Officials and experts are concerned, and they can't recall another leak of this magnitude in decades - if ever. "I asked this question of our staff of 30 years," said Steve Bohlen, who recently left his position as state supervisor of oil and gas. "This is unique in the last three or four decades. This is an unusual event, period." ..."
"... no one really knows the potential long-term side effects of benzene and radon, the carcinogens that are commonly found in natural gas. ..."
"... In fact, there are some 300 such depleted subterranean oil fields being employed this way around the United States ..."
"... Aliso Canyon, a natural gas storage site since the 1970s, has one of the largest capacities: 86 billion cubic feet. During the summer, gas earmarked for winter heating is pumped into these underground cavities by SoCalGas - and the process is reversed with the turn of the seasons. ..."
www.zerohedge.com
Since initially reporting on California's Alison Canyon gas leak, more details have emerged on the scale (and potential for no solution) of the problem as the infamous Erin Brockovich writes, "the enormity of the Aliso Canyon gas leak cannot be overstated. Gas is escaping through a ruptured pipe more than 8,000 feet underground, and it shows no signs of stopping," as according to the California Air Resources Board, methane - a greenhouse gas 72 times more impactful in the atmosphere than carbon dioxide - has been escaping from the Aliso Canyon site with force equivalent "to a volcanic eruption" for about two months now.

New infrared footage exposes the massive leak..

Infographic of leak (and potential solution)

As TheAntiMedia.org's Claire Bernish details, methane gas continues spewing, unchecked, into the air over southern California from a fractured well to an underground storage site - at such an alarming rate that low-flying planes have necessarily been diverted by the FAA, lest internal combustion engines meet highly volatile gas and, well, blow the entire area to hell.

This is, indeed, the biggest environmental catastrophe since the BP Deepwater Horizon oil rig exploded in the Gulf of Mexico in 2010; and for now, there is no way to stop it.

This methane disaster is worse than can be sufficiently described in words, because while it's estimated well over 100,000 pounds of methane spew into the atmosphere every hour, the leak can't be halted, at least until spring. Even then, that stoppage depends entirely on the efficacy of a proposed fix - which remains a dubiously open question.

According to the California Air Resources Board, methane - a greenhouse gas 72 times more impactful in the atmosphere than carbon dioxide - has been escaping from the Aliso Canyon site with force equivalent "to a volcanic eruption" for about two months now. So far, the total leaked gas measures somewhere around 100,000 tons - adding "approximately one-quarter to the regular statewide methane emissions" during that same time frame.

"The relative magnitude of emissions from the leak compared to other sources of methane in the State underscores the urgency of stopping the gas leak. This comes on top of any problems caused by odor and any potential impacts from exposure," states the initial report on the Aliso leak by air quality officials.

"The enormity of the Aliso Canyon gas leak cannot be overstated. Gas is escaping through a ruptured pipe more than 8,000 feet underground, and it shows no signs of stopping. As the pressure from the weight on top of the pipe causes the gas to diffuse, it only continues to dissipate across a wider and wider area," explained Erin Brockovich, who spent time in nearby Porter Ranch investigating the leak.

Officials and experts are concerned, and they can't recall another leak of this magnitude in decades - if ever. "I asked this question of our staff of 30 years," said Steve Bohlen, who recently left his position as state supervisor of oil and gas. "This is unique in the last three or four decades. This is an unusual event, period."

Though methane, itself, has no odor, the addition of odorants methyl mercaptan and tetrahydrothiophene - a safety measure to alert people by smell to the presence of natural gas - has made the enormous methane seepage impossible to ignore. Thousands of households have evacuated the area, despite little help, much less information, from the gas company about when they might be able to return. As reported by the Los Angeles Times, SoCalGas spokesperson Michael Mizrahi claimed the company had paid to relocate and house 2,092 households - but that effort is severely lacking, says Los Angeles City Attorney Mike Feuer.

Yesterday, the city attorney's office sought a restraining order to mandate SoCalGas relocate residents in the affected area within 48 hours of their request; and it is also seeking a "special master" to oversee the entire relocation operation, which is currently being handled by the gas company. Not only does the present relocation lack speed and coordination, but a housing crunch has resulted in surrounding areas - in some cases landlords, who prefer year-long leases to shorter terms, have driven rent as high as $8,500 per month. Hotels are operating at capacity, and in "some of those hotel rooms there are not enough beds for the people who are being moved," explained chief deputy to the city attorney, James P. Clark.

"It's time Porter Ranch residents had direct and complete answers about all facets of this leak," Clark continued, "including what caused it, how to stop it, and what will be done to assure it never happens again. They should receive better, quicker, and completely adequate relocation assistance."

On Thursday, Los Angeles Unified School District board members voted unanimously to close two Porter Ranch schools and relocate their 1,900 students and staff to different locations for the foreseeable future. A local emergency has been declared by the Los Angeles County Board of Supervisors.

Multiple lawsuits have now been initiated against SoCalGas and/or its parent company, Sempra Energy. A Los Angeles firm representing three of the families, who filed their suit Friday, described in a statement that the well has been "leaking noxious odors, hazardous gases, chemicals, pollutants, and contaminants due to a massive well failure and blowout. However, SoCalGas failed to inform residents of neighboring communities of the disastrous gas leak in a timely manner, putting the health and well-being of thousands of families in jeopardy." Those suits allege "negligence, strict liability of ultra-hazardous activity, private nuisance, inverse condemnation, and trespass."

A class-action lawsuit has also been filed on behalf of the Save Porter Ranch group; and City Attorney Mike Feuer filed a civil suit earlier this month due to the leak's continued threat to residents' health and damage to the environment, alleging failure by SoCalGas to prevent the leak and further exacerbation of "the effects of that failure by allowing the acute odor and health problems faced by the community to persist for more than one month, to say nothing about the indefinite time it will persist into the future," state the court documents. "No community should have to endure what the residents of Porter Ranch have suffered from the gas company's continued failure to stop that leak," Feuer stated.

SoCalGas insists there will be no long-term health effects resulting from the persistent leak; but as Brockovich pointed out, "no one really knows the potential long-term side effects of benzene and radon, the carcinogens that are commonly found in natural gas." In an email to the Los Angeles Daily News, SoCalGas stated they were "providing air filters for people's homes" and "have established a claims process for those who feel they may have suffered harm or injury. And our top priority remains stopping this leak as quickly and safely as possible.

"While the odor added to the leaking gas can cause symptoms for some, the gas is not toxic and county health officials have said the leak does not pose a long-term health risk."

But what's making this massive leak so difficult to stop pertains to the storage 'container,' itself. "We have the largest natural gas storage system in the world," boasts Chris McGill, vice president of the American Gas Association. In the United States, old underground oil fields are often put to use as storage vessels for natural gas - because, hey, that geology worked just fine to hold oil for millions of years, so why not natural gas?

In fact, there are some 300 such depleted subterranean oil fields being employed this way around the United States.

Aliso Canyon, a natural gas storage site since the 1970s, has one of the largest capacities: 86 billion cubic feet. During the summer, gas earmarked for winter heating is pumped into these underground cavities by SoCalGas - and the process is reversed with the turn of the seasons. However, this year, workers encountered what quickly became evident was anything but a typical hiccup. As Wired reported:

"On October 23, workers noticed the leak at a 40-year-old well in Aliso Canyon. Small leaks are routine, says Bohlen, and SoCalGas did what it routinely does: put fluid down the well to stop the leak and tinker with the well head. It didn't work. The company tried it five more times, and the gas kept leaking. At this point, it was clear the leak was far from routine, and the problem was deeper underground."

Beginning December 4th, SoCalGas crews began drilling a relief well to intercept the fissured pipe. Cement will then be poured into both to seal the wells permanently. Of course, for this to work, crews must locate that original pipe, which is a mere seven inches in diameter, thousands of feet underground - without accidentally creating any sparks, whatsoever. Work near the leak site, therefore, has been prohibited after nightfall, when lighting equipment could potentially cause such a spark; though drilling for the relief well is situated far enough away to continue nonstop.

Flaring, or setting a deliberate fire to burn off excess gas, simply isn't an option. The mammoth scope of this leak means a flare would ultimately complicate matters even further.

"There is no stone being left unturned to get this well closed," Bohlen stated. "It's our top priority."

In the meantime, it will be months without any possibility of halting this disaster-in-motion. Sickened, uprooted, and furious residents can rest assured, though, because even as methane spews nonstop into the air, SoCalGas did have this consolation:

"We are deeply sorry for the frustration."

See also

[Dec 24, 2015] Low oil prices destroy and delay investment in new supplies, slow down efficiency gains, encourage consumption and sow the seeds of the next big boom in prices

Notable quotes:
"... "Around $200 billion of investments in energy have been canceled this year, with energy companies planning to cut another 3 to 8 percent from their investments next year," Abdulaziz said. "This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years." ..."
"... He said the capital spending cuts would defer projects capable of producing nearly 5 million barrels a day, about 5 percent of world consumption. The Standard and Poor's global oil index is down 25.4 percent over the past year. ..."
"... The major banks, including Wells Fargo, have also set aside additional reserves in case some domestic oil and gas producers need to defer - or default on - loan payments. ..."
"... the domestic U.S. industry will cut budgets another 20 to 30 percent in 2016.In an email, he said that there would also be more layoffs on top of 250,000 people laid off already. ..."
"... ...Abdulaziz ... warned that too much reduction in world supplies could cause a snapping back of prices. ..."
"... the average fuel efficiency of new passenger vehicles in November was 25 miles per gallon, below the 25.7 mpg level reached in May 2014, ..."
"... Low prices are "going to destroy and delay investment in new supplies, slow down efficiency gains, encourage consumption and sow the seeds of the next big boom in prices," McNally said. "And boom-and-bust oil prices are bad for everybody." ..."
"... And they see, at least temporarily, low oil prices as aligning with their foreign policy goals in the Middle East, i.e., make the Iranian regime suffer whenever possible. ..."
"... We could have placed FREE solar panels on every home and business in the south and southwest for a fraction of the cost of the Iraq war. ..."
"... Fracking's role in the larger policy issue is so minor as to hardly merit mention. The total cost of fracking, not including the price to be paid later for reclamation, at the wellhead is so far above the spot as to make it economically unviable. That fracking is now on the downturn and headed toward extinction is both economically sound and socially responsible. ..."
"... If you believe this was not a part of Obama's early calculus in his repeated negotiations with the Saudis, you're not a deep thinker. ..."
"... The US Federal Government funded the basic research for hydraulic fractionating, to the tune of about $150 million. A GREAT investment and one that the Feds can assert has dramatically changed global markets and the politics that have resulted. So yes indeed Obama HAS done a LOT for the industry. Now Sylendra, and some of the renewable energy failures, are Federal disasters. The record is mixed, not always/absolute win or lose. ..."
"... First, the monopolist, once he's sure the competition is destroyed, immediately raises prices; seeking to accomplish two objectives, (1) to "claw-back" foregone profits of the commodities sold at a loss; or at negative profit margins; and (2) to establish a successor price equilibrium point higher than historical norms; and staves off competitors, for generations into the future. ..."
"... And the prior post is correct. We need to do something about oil speculation. The main reason for the futures market is hedging costs and liquidity. There are no issues with liquidity. Those hedging should be required to take delivery on their futures. Speculators can't take delivery. We'll have a much more stable market without them. ..."
"... Anyone that thinks that this just a fluke, doesn't understand the back end work of the much maligned US Govt. These were strategic moves to thwart Russian and Iranian aggressions. The ricochet effect is that others that depended on high priced oil revenues, like Brazil, Cuba, Libya, Venezuela, Nigeria, etc, etc, also get pinched. The net effect is that those countries now have suffering economies and populations who are clamoring for and instituting change. ..."
The Washington Post

Obama's foreign policy goals get a boost from plunging oil prices by Steven Mufson

At a conference in Doha in early November, Prince Abdulaziz bin Salman al Saud, Saudi Arabia's vice minister of petroleum and mineral resources, explained the depth of the global impact.

"Around $200 billion of investments in energy have been canceled this year, with energy companies planning to cut another 3 to 8 percent from their investments next year," Abdulaziz said. "This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years."

He said the capital spending cuts would defer projects capable of producing nearly 5 million barrels a day, about 5 percent of world consumption. The Standard and Poor's global oil index is down 25.4 percent over the past year.

...The major banks, including Wells Fargo, have also set aside additional reserves in case some domestic oil and gas producers need to defer - or default on - loan payments.

...the domestic U.S. industry will cut budgets another 20 to 30 percent in 2016.In an email, he said that there would also be more layoffs on top of 250,000 people laid off already.

"The oil industry is being dismantled," he said, noting that the loss of workers to other industries would make it "hard for industry to respond quickly when an oil shortage occurs."

...Abdulaziz ... warned that too much reduction in world supplies could cause a snapping back of prices.

...U.S. gas consumption is up 3 percent this year, and the average fuel efficiency of new passenger vehicles in November was 25 miles per gallon, below the 25.7 mpg level reached in May 2014, according to the University of Michigan's Transportation Research Institute.

Low prices are "going to destroy and delay investment in new supplies, slow down efficiency gains, encourage consumption and sow the seeds of the next big boom in prices," McNally said. "And boom-and-bust oil prices are bad for everybody."

UJ, 10:18 AM EST

At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration's foreign policy goals: pressuring Russian President Vladi­mir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue. At the same time, it is pouring cash into the hands of consumers, boosting tepid economic recoveries in Europe, Japan and the United States.
--------------
That's not an accident or a coincidence. That's Democratic policy and Obama policy in particular, that's causing all that.

baltic wolf, 10:35 AM EST

I would also add that the Saudis have in the past demonstrated that they will do what they can to prevent us from reducing our imports from their country----as they did in the early 1980's when we introduced CAFE standards for automobiles. They responded by ramping up production which reduced the incentive to drive more gas efficient cars.

And they see, at least temporarily, low oil prices as aligning with their foreign policy goals in the Middle East, i.e., make the Iranian regime suffer whenever possible.

Manchester0913, 10:43 AM EST

If you're trying to claim that this administration hasn't been friendly to the fracking industry, it's time to turn off faux news and pay attention.

4blazek, 10:15 AM EST

"There's no way to quantify whether cheap oil is good for us, because the bad guys lose and good guys win," Hochstein cautioned. "It doesn't work that way. There are winners and losers all across the board." anyone that believes Hchstein's words is a moron as is his words. America is in the process of changing the world energy hierarchy. We are recovering reserves larger than that of the Middle East and it is all right here!. Our challenge is to migrate both power generation and state and federal transportation over to natural gas, which will do several things: 1) reduce US emission to levels to targets 75 years in advance, 2) reduce demand and hence retail price of both gasoline and diesel fuel, 3) have the critical mass of CNG powered vehicles to get the auto industry to offer these vehicles ready to go, without conversion, 4) put a nail in the coffin of those nations using oil receipts to fund terror activities, and 5) lower state and federal spending on fuel for transportation. And who has the courage to get this done? TRUMP...

Publius38, 10:14 AM EST

So why then is Big Oil pushing now to make the USA an oil exporter?

Warwick71, 10:09 AM EST

Because not all oil is the same. Oil produced in various parts of the world contain contaminants at varying levels which must be removed in the refining process. Much of US refining capacity is built to handle imported oil; switching to a different source can't be done without major mods to the refinery, or even building new capacity entirely. Building new capacity is virtually impossible due to restrictive permitting requirements. It's all market driven.

Last Gasp, 10:15 AM EST

Why is this a bad thing?

4blazek, 10:18 AM EST

Because natural gas prices are artificially depressed because of the the export restrictions. Higher NG prices make their way into the hands of Landowners across America from where these resources are being recovered. Instead of making the Saudis rich, we are making fellow Americans better off. Our family farms are right in the Utica play, I can see it first hand...

Skeptical 0bserver, 10:10 AM EST

At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration's foreign policy goals: pressuring Russian President Vladi­mir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue.
************************
Barry must have personally attended to the oil prices drop...

ParFore, 9:51 AM EST

Interestingly, the House Freedumb Caucus believes it is so unimportant that it's now time to sell-off the strategic oil reserves ...at great loss. Could be the fracking folks were hoping for a golden parachute.

irisiri, 9:53 AM EST [Edited]

Oil is a commodity that's why. The only national interest implication here is that we insist on getting involved in wars due to this product. We should be using so many other sources of energy that oil would be only ONE of the commodities we need. We could have placed FREE solar panels on every home and business in the south and southwest for a fraction of the cost of the Iraq war.

baltic wolf, 9:45 AM EST

Here's an interesting link for those who advocate we accelerate our investment and reliance on wind and solar: http://www.pbs.org/newshour/bb/how-building-a-bett...

Essentially it was saying that we're already producing lots of energy through wind and solar, but we don't have adequate ways to store the power.
In SoCal for instance, the utility there is using lithium batteries to store the energy generated by wind turbines----a necessity because wind speeds and thus energy output is greatest at night but energy demand is greatest during the day.

There are promising new technologies emerging to store the energy more reliably than in lithium batteries (which have a relatively short life span) but they are in their infancy, so it's not reasonable to expect that they will be used widely anytime soon.

edbyronadams, 9:50 AM EST

When Diablo Canyon, one of the last nuclear power projects in the country was built, a twin project called the Helm's Creek project was built in the Sierra where a reservoir stored pumped water during non peak demand times since nuclear piles run at steady output. Standard hydro generation from the project was turned on during peak demand times.

Chortling_Heel, 9:41 AM EST

"U.S. gas consumption is up 3 percent this year, and the average fuel efficiency of new passenger vehicles in November was 25 miles per gallon, below the 25.7 mpg level reached in May 2014 . . . "
______________________________

People love their inefficient SUVs and 'Cross-overs" . . . .

ParFore, 9:40 AM EST

Fracking's role in the larger policy issue is so minor as to hardly merit mention. The total cost of fracking, not including the price to be paid later for reclamation, at the wellhead is so far above the spot as to make it economically unviable. That fracking is now on the downturn and headed toward extinction is both economically sound and socially responsible.

If you believe this was not a part of Obama's early calculus in his repeated negotiations with the Saudis, you're not a deep thinker.

Bresponsible, 9:19 AM EST

Producing and exporting oil at the current price is IMHO very, very short term thinking and long term stupid. We can not compete with Saudi production capability.

More important, fracking is last life effort and can be done only a limited number of times per well. Producing and exporting oil at these prices is economic suicide -- again IMHO.

When we have fracked every well -- and we have no alternate energy alternatives to turn to -- we must return to the market and pay the price. Watch our economy tank when that happens.

centex1, 9:00 AM EST

can anyone explain why we are now going to export our precious oil seeing we have just regained some degree of energy independence from Middle Eastern oil......big oil's greed will yet again paint us in a corner .....offshore bank accounts, shell corporations and now this.......maybe "nationalization" isn't such a dirty word after all.....the American public are but pawns to their unquenchable greed.

Giedi Prime, 8:48 AM EST

"The reason for the deep drop in oil prices continues to be Saudi Arabia's refusal to cut its oil exports in order to prop up prices."

And that's why POTUS stopped in to meet the new King on the way home from India this year. Because in the long game, the Saudis keeping the pumps wide open was more powerful than any bomb or bullet in checking Putin's goals.

edbyronadams, 8:52 AM EST

Is the quid pro quo a promise to protect the House of Saud from the Shia hordes by putting US troops in between?

Manchester0913, 8:55 AM EST

No. But strange that you wing-nuts have a problem with that, but not about putting troops in Syria. Hypocrite much?

Hermitian Operator, 8:32 AM EST

Why are those countries listed as America's "adversaries"?

Why don't the Global Cop elites in Washington allow the Venezuelans to figure things out for themselves? And the Russian people too. What happens in Ukraine is a European problem. Let the Europeans handle it. Same thing with the dystopian Middle East. Let those countries fish or cut bait with ISIS.

The U.S. hyper-interventionist government is the 800 pound Global Cop Gorilla that wrecks just about everything it touches. Why should we be surprised that the arrogant but stupid Power Elites in Washington have created a litany of "adversaries"? Cheered on of course by the Neoconned MSM sycophants like the Washington Post.

And all of that stupidity costs the taxpayers TRILLIONS. But what the heck? From the Elites' PoV, it ain't their money. And OBTW, they always walk away personally rich from the wreckage they create.

P.S. Merry Christmas...

Hermitian Operator, 8:56 AM EST

The U.S. is up against a severe shortage of the primary care physicians. Partly because of the lack of residency slots, (funded by Medicare.) Obama flushed $500,000,000 of American Green down the toilet in sending weapons to "moderate" jihadists in Syria.

Ask the American people if they'd want that money to be stuffed into the pockets of Islamic lunatics in the Middle East or used to train up more doctors here at home.

Plenty more examples of the economic wreckage hatched by the Elites including Obama and his cast of arrogant, cronied-up mediocrities.

CharlesRoy, 9:00 AM EST

The US Federal Government funded the basic research for hydraulic fractionating, to the tune of about $150 million. A GREAT investment and one that the Feds can assert has dramatically changed global markets and the politics that have resulted. So yes indeed Obama HAS done a LOT for the industry. Now Sylendra, and some of the renewable energy failures, are Federal disasters. The record is mixed, not always/absolute win or lose.

onegenius, 8:06 AM EST

The most worrisome issue is the greed of the oil speculators who siphoned $billions$ in profits and cause the wild swing in oil prices. Take them out of the equation and much of the problem goes away. Congress out to pass a law that when you buy oil you are required to take delivery of it, weeding out the pure greedy speculators.

rc115RogerThat, 7:54 AM EST

This Zionist menace and propagandist may think that cheerleading for the Zionist war against the Tsars and other alleged enemies of the Zionist state is a good thing. But it is in fact, very near treason. The destruction of the domestic US energy infrastructure (by collapsing global prices for fossil energy) is an unqualified act of economic warfare, that the US should be respond to in-kind; by the threat of our military abandonment of the Saudi despotism to ether the tender mercies of Iran; or the other nations of the Middle East, who have never benefited from non-existent pan-Islamic largess of Saudi royal family. Worst of all, the article completely overlooks the consequences of a monopolist's successful destruction of his competitors (in and outside of his industry) through under price-fixing.

First, the monopolist, once he's sure the competition is destroyed, immediately raises prices; seeking to accomplish two objectives, (1) to "claw-back" foregone profits of the commodities sold at a loss; or at negative profit margins; and (2) to establish a successor price equilibrium point higher than historical norms; and staves off competitors, for generations into the future.

This is exactly what we have witnessed. Saudi Arabia's destructive under price-fixing of the early 1980s collapsed the price of oil, destroyed the US Savings & Loan industry, and put off modernization of oil and gas exploration technologies in the US (and the rest of the mature producing world), for 30 years.

When those new technologies began to again emerge again (in the early 2000s) in the form of fracking for gas; and oil-shale extraction, the monopolist, and his fellow-traveling traitors struck again. And as for the technologies of alternative energy sources and techniques, their destruction is merely a collateral damage benefit achieved by the Saudi's overall strategy.

LunaTics, 8:06 AM EST

Going with the word "Zionist" three times in the first sentence is a bold choice.

wingerone, 7:49 AM EST

Many weaker oil producers will fail. The stronger producers will weather this, buy the assets and equipment of the weaker producers at bargain basement prices and their cost of production will plummet. They will continue to pump oil as long as it is profitable. Oil prices will remain low longer than most expect and could drop further.

Yes, there eventually will be a snap back. It will be a great investment opportunity. Keep your power dry and be patient. Your return won't be in percentages, it will be in multiples. Look for good companies that bought up cheap assets.

And the prior post is correct. We need to do something about oil speculation. The main reason for the futures market is hedging costs and liquidity. There are no issues with liquidity. Those hedging should be required to take delivery on their futures. Speculators can't take delivery. We'll have a much more stable market without them.

onegenius, 7:33 AM EST

The most worrisome issue is the greed of the oil speculators who siphoned $billions$ in profits and cause the wild swing in oil prices. Take them out of the equation and much of the problem goes away. Congress out to pass a law that when you buy oil you are required to take delivery of it, weeding out the pure greedy speculators.

WhiskeyTangoFoxtrot1, 5:29 AM EST

There's a lot of take away to this story, the main thing I see is it's mostly about Saudi Arabia's foreign policy. In the short term, it's in their geopolitical interests to keep oil prices low because of the effect on their adversaries; namely Iran. An Iran with less money won't be as well armed and will be less able to foment problems in places like Yemen. This policy also maintains Saudi Arabia market share and helps their long-time strategic ally, the United States, by driving down the primary revenue sources in places where we have adversarial relations with countries such as Russia, Iran, ISIS, and Syria.

edbyronadams, 6:35 AM EST

Russia has gone all in for the Shia for some time now.

That alone is enough for the Saudis to want to punish them. They have to pay for their military adventure in Syria some other way.

Marla Burke, 4:01 AM EST

Steven Mufson writes for the business section of the Post and he doesn't seem to know that falling oil prices have made America's energy independence a fading dream, cost 200,000 American oil workers their jobs and has been the boon for folks like me. http://www.nytimes.com/2013/09/02/opinion/drilling... Thanks Steve.

Alfak9, 3:40 AM EST [Edited]

Anyone that thinks that this just a fluke, doesn't understand the back end work of the much maligned US Govt. These were strategic moves to thwart Russian and Iranian aggressions. The ricochet effect is that others that depended on high priced oil revenues, like Brazil, Cuba, Libya, Venezuela, Nigeria, etc, etc, also get pinched. The net effect is that those countries now have suffering economies and populations who are clamoring for and instituting change.

Thanks Obama!

Jesus in Jerusalem, 12:35 AM EST

Steven Mufson has the story of the year. It is the story of 2016.

Will Russia and Iran coerce - with threats and demonstration of force -
Saudi Arabia to cut production? Gulf oil ports are indefensible. Or will President Obama deter the Russian and Iranian missiles and air force with a powerful threat that they take seriously?

Right now an Obama red line is visible only with infra-red glasses. But give Secretary of Defense Ashton Carter another few weeks in Iraq with the allied taking of Ramadi... and an assurance of another eight years as the strategic military leader of the United States - no matter who gets elected - and the US credibility with the Russians and Iranians will be restored. Putin and Lavrov know who Ash Carter is... with his 1984-2016 detailed understanding of nuclear forces and military capabilities. You can't bluff Ash Carter with one submarine in the Mediterranean Sea and fifty jets in Syria. He is on record saying we can take Iran's air defenses in one night; let's hear what he has to say about deterring a Russian threat to Saudi Arabia.

Michel de Montaigne, 2:55 AM EST

From your vantage point in a very very tiny country, I can understand your comment.
We others do not share these apocalyptic games.

Marla Burke, 4:07 AM EST

High oil prices were needed or the hydraulic Fracturing industry could not turn a profit - that's why 200,000 American oil workers lost their jobs this year . . . And, the Saudi's turned up their oil production quotas

Ben Jarvis, 12/23/2015 11:20 PM EST

"This year, the Russian government was forced to tap its reserve fund to balance the federal budget and will undoubtedly do so again." ----- reserve fund? remember when the u.s.a. had one of those, until george w. bush & dick cheney (mr. "deficits don't matter") gave it all away in that huge, insane tax rebate scheme?

Giantsmax, 12/23/2015 10:25 PM EST

I hope countries take advantage of the cheaper oil and build up some domestic industry. I wonder how the low oil costs will effect this climate change agreement, what if the greener energies now costs I don't know---20% to 200% more than these low oil costs. How do some countries trying to build up their economies decide what to import or produce???

danstrayer, 12/23/2015 9:51 PM EST

Today was a good example of why higher oil prices are not only tolerable but necessary for world economies, with some exceptions. Stocks were up strongly across the board. Generally higher commodities would benefit much of the world,and they will follow oil.

big billy g, 12/23/2015 9:45 PM EST

"And boom-and-bust oil prices are bad for everybody."

Wall street speculators beg to differ..

[Dec 24, 2015] European Leaders Cry Foul Against Germany's Support for Gas Pipeline

Dec 21, 2015 | OilPrice.com
There is a growing chorus in Europe against Germany's support to expand a major natural gas pipeline from Russia over fears that it will leave Europe more dependent on their eastern neighbor.

The Nord Stream 2 would build on the existing Nord Stream pipeline, a conduit that delivers Russian natural gas to Germany via the Baltic Sea. Crucially, the project cuts out Ukraine, a key strategic objective for Russia since the original project's inception.

The latest $11 billion expansion would double the pipeline's current capacity of 55 billion cubic meters of gas per year. From Russia's perspective, the project will increase market share and gas sales; from Germany's point of view, the project increases sources of supply. Nord Stream 2 was originally conceived of years ago, but in June 2015 Gazprom signed a memorandum with Royal Dutch Shell and OMV to move forward.

Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1

[Dec 24, 2015] America's Top Shale Gas Basin in Decline

Notable quotes:
"... The supply overhang will likely linger with storage levels at such highs. There is just too much gas, ..."
Dec 22, 2015 | OilPrice.com

...Reuters recently reported that new drilling permits for the Marcellus declined to just 68 in October, which was a dip from the 76 issued in September. But, those figures are vastly down from the peak of 600 per month routinely seen at the height of drilling five years ago.

... ... ...

Prices are so low that drillers are shutting in production, a once unfathomable development. This suggests that prices could be at an absolute bottom. Still, that is not to say that prices will rebound substantially anytime soon. The supply overhang will likely linger with storage levels at such highs. "There is just too much gas," Justin Kastner of Global Land Partners, a company that finds oil and gas leases for drillers, told Reuters. "I expect to see a downturn for the next two years."

Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1

[Dec 24, 2015] Obama's foreign policy goals get a boost from plunging oil prices

Notable quotes:
"... At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration's foreign policy goals: pressuring Russian President Vladimir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue. At the same time, it is pouring cash into the hands of consumers, boosting tepid economic recoveries in Europe, Japan and the United States. ..."
The Washington Post

Plunging crude oil prices are diverting hundreds of billions of dollars away from the treasure chests of oil-exporting nations, putting some of the United States' adversaries under greater stress.

After two years of falling prices, the effects have reverberated across the globe, fueling economic discontent in Venezuela, changing Russia's economic and political calculations, and dampening Iranian leaders' hopes of a financial windfall when sanctions linked to its nuclear program will be lifted next year.

At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration's foreign policy goals: pressuring Russian President Vladimir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue. At the same time, it is pouring cash into the hands of consumers, boosting tepid economic recoveries in Europe, Japan and the United States.

"Cheap oil hurts revenues for some of our foes and helps some of our friends. The Europeans, South Koreans and Japanese - they're all winners," said Robert McNally, director for energy in President George W. Bush's National Security Council and now head of the Rapidan Group, a consulting firm. "It's not good for Russia, that's for sure, and it's not good for Iran."

... ... ...

In Iran, cheap oil is forcing the government to ratchet down expectations.

The much-anticipated lifting of sanctions as a result of the deal to limit Iran's nuclear program is expected to result in an additional half-million barrels a day of oil exports by the middle of 2016.

But at current prices, Iran's income from those sales will still fall short of revenue earned from constrained oil exports a year ago.

Moreover, low prices are making it difficult for Iran to persuade international oil companies to develop Iran's long-neglected oil and gas fields, which have been off limits since sanctions were broadened in 2012.

"Should Iran come out of sanctions, they will face a very different market than the one they had left in 2012," Amos Hochstein, the State Department's special envoy and coordinator for international energy affairs, said in an interview. "They were forced to recede in a world of over $100 oil, and sanctions will be lifted at $36 oil. They will have to work harder to convince companies to come in and take the risk for supporting their energy infrastructure and their energy production."

Meanwhile, in Russia, low oil prices have compounded damage done by U.S. and European sanctions that were designed to target Russia's energy and financial sectors. And when Iran increases output, its grade of crude oil will most likely go to Europe, where it will compete directly with Russia's Urals oil, McNally said.

Steven Mufson covers the White House. Since joining The Post, he has covered economics, China, foreign policy and energy.

[Dec 24, 2015] Is The Russian-Turkish Standoff An Opportunity For The West

Notable quotes:
"... apparently, two USAF F-15C Eagle air superiority fighters (which had been deployed to Incirlik Air Force Base, Turkey, in November 2015) were in the air as back-up to the Türk Hava Kuvvetleri (Turkish Air Force: THK) F-16s, one of which shot down the Su-24. ..."
"... At best, Russia may now move to cover its tactical operations in northern Syria more effectively by offering its own deterrence of top cover by advanced fighters while the ground attack aircraft, such as the Su-24s, do their job. It is also clear that any further Turkish incursions into Syrian airspace were now at-risk, but the Turks already knew that. ..."
Dec 14, 2015 | OilPrice.com

It was, in this latest incident, Turkey, working with the U.S. Government of President Barack Obama, which planned and executed the November 24, 2015, interception of the Russian Air Force Su-24. The event was not a spontaneous occurrence, and, apparently, two USAF F-15C Eagle air superiority fighters (which had been deployed to Incirlik Air Force Base, Turkey, in November 2015) were in the air as back-up to the Türk Hava Kuvvetleri (Turkish Air Force: THK) F-16s, one of which shot down the Su-24. USAF sources subsequently said that the U.S. was taken by surprise when the THK shot down the Sukhoi, but that hardly squares with the historical Turkish practice of coordinating such actions with Washington. Moreover, the Turkish narrative that it "warned" the Russian aircraft several times over a period of five minutes before the THK F-16 shot it down also does not square with reality.

And in this particular ground attack operation, the two Su-24s - including the one which was destroyed - were engaged on missions which did not require them to enter Turkish airspace, even though an acci-dental entry into it was conceivable. Their targets were in the area of northern Syria: pro-Ankara Turkmen militia engaged in supporting the massive cross-border operations of ISIS (asad- Dawlah al-Islamiyah fi al-'Iraq wash-Sham, or Islamic State) moving oil, fighters, and weapons across the Syria-Turkish border.

Dave Majumdar, Defense Editor at the U.S. blogsite, The National Interest, on December 7, 2015, noted: "The United States and Turkey are working on an agreement that would allow the US Air Force F-15Cs to defend Turkish airspace. However, the precise rules of engagement and procedures have yet to be ironed out." It is possible that Turkey wanted to illustrate to the US that its airspace was, in fact, threatened. But what has been clear is that no credible Russian military threat to Turkey existed.

At best, Russia may now move to cover its tactical operations in northern Syria more effectively by offering its own deterrence of top cover by advanced fighters while the ground attack aircraft, such as the Su-24s, do their job. It is also clear that any further Turkish incursions into Syrian airspace were now at-risk, but the Turks already knew that.

Recently-retired U.S. Defense Intelligence Agency Director Lt.-Gen. Michael Flynn publicly said in Moscow on December 10, 2015, that there was no possibility that the Turkish shootdown was undertaken without the express permission and direction of "the highest authority" in Turkey.

Indeed, Turkey has traditionally played the role of aggressor in terms of airspace violation. Not only did the THK lose an RF-4E Phantom II reconnaissance aircraft well into Syrian airspace on June 22, 2012, as a result of surface-to-air missile fire, it continues to consistently invade the airspace of fellow NATO member and neighbor Greece in a manner far more hostile than the penetration of Turkish airspace it alleged Russia undertook (for 17 seconds). THK F-16s entered Greek airspace some 2,200 times in 2014 alone. Moreover, Turkey consistently has violated Cypriot air-, sea, and land-space since its 1974 invasion and occupation of the northern 37 percent of Cyprus.1

So Turkey is hardly the victim. [Indeed, by deliberately starting the "civil war" to remove Pres. Bashar al-Assad from power in Syria, Turkey only incurred a "refugee problem" as a result of its own actions, and has subsequently sought to push those refugees onward into Europe as quickly as possible, seeking political rewards from Europe as the only power capable of stopping the refugee flows.]

In any event, Pres. Erdogan, three years ago said that "a short- term border violation can never be a pre-text for an attack". But that, of course, was when a THK aircraft was shot down by Syria when the THK F-4E deliberately and for some time penetrated Syrian airspace on a mission against Syria.

... .... ....

Turkey, too, will not remain inactive. It will resume its support for anti-Russian terrorism, including support for jihadist movements in the Caucasus. These have included such groups as Kvadrat (Quadrant), a Bos-nia-based Wahhabist unit, which had "laundered" its operations through Turkish-occupied Northern Cy-prus, thence into Turkey and on into the Russian Caucasus.4 But the reactivation of Turkish-backed terror-ism in the Russian Caucasus will be far wider than just Kvadrat: Turkey works extensively, even now, with Chechen and other Caucasus groups inside ISIS and in the jihadi operations in Syria.

Significantly, by early December 2015, President Erdogan assumed that the crisis had passed sufficiently for Turkey to expand its activities in the area. There was no indication that Turkey and ISIS had diminished their extensive and integrated operations in terms of oil transactions, the supply of weapons to ISIS via Turkey, and the use of Turkey as a medical support arena for ISIS wounded. But Turkey went further and deployed Turkish Army troops into northern Iraq near the ISIS-held city of Mosul in early December 2015. Iraqi Prime Minister Haider al-Abadi led calls for Turkish troops to be withdrawn immediately; they had not been withdrawn by the time this report went to press.

... ... ...

The path, however, is open for a great Russian cooperation with the Kurdish forces, as well as with other regional allies which are concerned about Turkey's strategic adventurism. The Kurds, particularly those led by the majority Kurdish force (under the PKK: Partiya Karkerên Kurdistan, the Kurdish Workers' Par-ty), are now well underway in responding to Ankara. The civil war is underway inside Turkey, and it re-mains literally out-of-bounds to the international media. What is significant is that the Kurds have thus far not agreed to cooperate with Russia, but are awaiting a nod from their principal ally, Israel, before trust-ing Russia.

Thus Israel's position becomes critical in this debate.

Much of the Israeli leadership still hopes that a rapprochement might be achievable with Turkey, but that hope is fading. On the other hand, Israeli planners have to consider whether a broken Turkey - perhaps replaced by a patchwork of states, and with no non-Arab player other than Iran to monitor the region - is worse than a troublesome Turkey. There is also the question of whether unqualified Israeli support for the Kurdish "big push" against Turkey would then jeopardize Israeli strategic relations with Saudi Arabia, which is apparently undecided on whether, or how much, it favors a continuation of the Turkish state.

Without Turkey, according to the Saudi rationale, who would be the counterweight to Iran?

Israel is also not immune to this argument, although for Israel the prospect exists for an eventual reunion with Tehran, after the clerical leadership goes, or modifies.

So Russia is left with three potential regional allies - apart from Syria, Iraq, and Iran - against Ankara: Greece, Egypt, and Jordan. And Cyprus and Armenia to the limited extent that they can assist.

... ... ...

Articles 10 to 18 are the articles which allow for various states, including Russia, to transit military ships through the straits. In short, if Turkey invoked either Article 20 or Article 21, Russia would be legally blocked from moving any naval vessel through the Straits.

Moscow has clearly long gamed out this scenario, which accounts for President Putin's commitment to a measured response to Ankara. Thus it must be a proxy response, for the most part, as well as an economic one. But while it demonstrates the delicacy needed by Moscow, it also demonstrates the reality that Russia cannot continue to be strategically constrained by an increasingly hostile and ambitious Turkey.

So where Turkey is vulnerable is in its economy.

The effects of Russian economic embargoes against Turkey are far more significant than would seem to be the case because the Turkish economy is more vulnerable than it has been portrayed. It is far more leveraged with borrowings than at any time in the recent past. It has a discreet outflow of domestic capital and is heavily reliant on discreet financial injections, probably coming from Qatar, and possible Saudi Arabia. But Saudi Arabia's ability to prop up Turkey is becoming limited.

...while Turkey may not be regarded as an entirely stable partner for the PRC in the region, Beijing would be wary of acting precipitously against it.

...Iran - like Russia - is constrained to act cautiously and indirectly against Turkey. Moreover, Iran cannot risk that its own Kurdish population could join with Syrian, Iraqi, and Turkish Kurds to form a new Kurdish state.

...And in the short-term, this all has hardened Ankara's position on remaining in control of the northern 37 percent of Cyprus, which it has occupied militarily since 1974.

...There is no doubt that Pres. Erdogan believes that continued brinkmanship will be possible, although he is not perhaps aware that he is losing the information war, or the psychological war.

Amvet on December 15 2015 said:

Thank you Mr. Copley for a well researched, honest, and very interesting article. Any chance of getting this published in any US mainstream
newspaper or magazine ?? .

Jim on December 15 2015 said:

...Nice information actually, most mainstream media doesn't even come close. Thanks. definitely a deliberate and pre-approved escalation of the conflict, pointing fingers back to Washington, D.C.

Chris on December 15 2015 said:

A great article that brings together much of what has been reported and provides a coherent framework for understanding it. This piece should be in a general interest publication such as the NY Times so that more Americans could understand what is really going on in the Middle East.

[Dec 23, 2015] OPEC bashes prospects for electric cars

Notable quotes:
"... battery-powered electric cars will capture just 1% of global vehicle sales by 2040. ..."
"... ...It says hybrids will capture 14% market share by 2040. ..."
"... over 40% of global oil demand comes from road vehicles ..."
money.cnn.com

OPEC is predicting that 94% of cars on the road will still be powered by oil-based fuels in 2040.

"Without a technology breakthrough, battery electric vehicles are not expected to gain significant market share in the foreseeable future," the organization said in its annual World Oil Outlook.

The group predicts battery-powered electric cars will capture just 1% of global vehicle sales by 2040.

...It says hybrids will capture 14% market share by 2040.

The OPEC report says that over 40% of global oil demand comes from road vehicles. That's not expected to change over the next 25 years.

[Dec 23, 2015] Developing countries car fleet and oil consumption are quicky rising and the US consumers are switching to SUVs

Low oil prices has a negative effect of switching to more efficient cars in the USA and elsewhere. It looks like it's not only going to be a hard candy Christmas in Cowboyistan, but in the Green Utopia as well.
Notable quotes:
"... A problem is the big surge in oil use is in developing countries. Animals are being replaced by tractors, motor bikes are being replaced by autos or small trucks, etc. In China the increase in auto numbers and in auto size is amazing. ..."
"... In November, fuel efficiency of vehicles purchased fell sharply to 25 mpg – down 0.8 mpg from a peak in August 2014, said University of Michigan researcher Michael Sivak, who tracks fuel efficiency. ..."
"... Nearly 59 percent of U.S. vehicle sales this year have been of sport-utility vehicles, pickup trucks or other larger vehicles, up from 54 percent last year, according to industry consultant Autodata Corp. ..."
"... Toyota Motor Corp says within two years its RAV4 SUV will displace the Camry mid-size car as its top-selling model in the United States…. ..."
"... "There is a huge gap looming between government projections and consumer purchases of highly fuel-efficient vehicles," said Gloria Bergquist, a spokeswoman for the Alliance of Automobile Manufacturers – the trade association representing major automakers. ..."
peakoilbarrel.com

Amvet, 12/22/2015 at 4:27 am

A problem is the big surge in oil use is in developing countries. Animals are being replaced by tractors, motor bikes are being replaced by autos or small trucks, etc. In China the increase in auto numbers and in auto size is amazing.

So, my guess is any reduction in oil use in industrialized countries will be buried in the increase from developing countries.

Electric cars in many developing countries have little chance because of the shortage of electricity there. Will they get new electricity from, hydro, coal, NG, or nuclear?

Glenn Stehle, 12/21/2015 at 8:04 pm
Arceus,

In fact, it seems like the world is moving in exactly the opposite direction.

Los Amigos de la Tierra called the COP21 conference in Paris a "farse," and Vía Campesina, the worldwide coordinator of campesino movements , was equally as severe.
http://www.jornada.unam.mx/2015/12/20/opinion/020a1mun

The New Internationalist blasted the Paris deal as an "epic fail on a planetary scale."
http://newint.org/features/web-exclusive/2015/12/12/cop21-paris-deal-epi-fail-on-planetary-scale/

And back home, due to consumer behavior, the push is underway to roll back the CAFE mandates:

Surging demand for trucks and SUVs fueled by cheap gasoline is holding back improvements in U.S. fuel economy and greenhouse gas emissions, a government report due out on Wednesday is expected to show.

The disconnect between consumer demand for larger, less efficient vehicles and the Obama administration's climate goals sets up a clash between the auto industry and federal regulators.

Mark Rosekind, who heads the National Highway Traffic Safety Administration, said in a Reuters interview last week the administration will consider automakers' arguments that the shift away from cars makes it harder to hit the 2025 fleet average fuel economy target of 54.5 miles (87.7 km) per gallon….

Consumers are responding to signals from gas pumps, where a combination of relatively low taxes – federal gasoline taxes have not gone up since 1993 – and oil unleashed by hydraulic fracturing or fracking have pushed U.S. gasoline prices to an average of just over $2 a gallon – the lowest level in six years.

In November, fuel efficiency of vehicles purchased fell sharply to 25 mpg – down 0.8 mpg from a peak in August 2014, said University of Michigan researcher Michael Sivak, who tracks fuel efficiency.

Nearly 59 percent of U.S. vehicle sales this year have been of sport-utility vehicles, pickup trucks or other larger vehicles, up from 54 percent last year, according to industry consultant Autodata Corp.

Toyota Motor Corp says within two years its RAV4 SUV will displace the Camry mid-size car as its top-selling model in the United States….

"There is a huge gap looming between government projections and consumer purchases of highly fuel-efficient vehicles," said Gloria Bergquist, a spokeswoman for the Alliance of Automobile Manufacturers – the trade association representing major automakers.

http://www.reuters.com/article/us-autos-emissions-idUSKBN0TZ0HY20151216?feedType=nl&feedName=domesticNews

So mark one up for Team Carbon, because the public has tuned out the warnings of peak oil and global warming prognosticators.

Arceus, 12/21/2015 at 8:12 pm
Yes, but that is because oil is so cheap right now. I do not think it can remain this inexpensive. When gas hits $4 per gallon, you will see more people getting interested in EVs (assuming they continue making them as a severe recession might entail some big cutbacks to EV model lineups.)
likbez, 12/23/2015 at 12:36 pm
"There is a possibility that a supersized battery and electric motor will cost LESS in ten years than a conventional engine, transmission , and all the related engine accessories such as gasoline tank, exhaust system, etc."

I am all for electrical cars, but neither technology nor infrastructure (charging stations) are present. And probably you need not $4 per gallon gas but much higher for the switch to materialize. Probably close to $8 per gallon (European price before oil price slump)

Right now they are limited to home owners who can install special charging sockets. For apartment dwellers they are out of reach. And the most attractive use is as the second car for short commutes (for example daily commute to work or train) when you own a regular car, or SUV, or truck for other needs.

With the current cost of rare metals and copper you might be right as far the gap between the costs or regular drivetrain and electrical drivetrain, but costs of rare metals and copper can increase dramatically in 10 years.

The EV battery is a very expensive proposition. The cost of replacing batteries in Prius is $3,000. Leaf battery is around $5,500. Also some cells are dying during normal exploitation period (10 years I think for Prius). Regular gas engine and transmission last longer. Assuming 10K miles per year they can probably last 20 years (200K total).

If we assume $5000, then most probably for next decade small car drivetrain complete rebuild costs less. Actually for $6000 you can buy a decent three years old Chevy Spark with, say, less then 50K mileage now.

[Dec 23, 2015] Saudi Arabia Said to Weigh Selling State-Run Entities Stakes

Bloomberg Business

...the kingdom may raise domestic energy prices, privatize and tax mines and consider taxing cigarettes. Like other Gulf Cooperation Council members, it's also plans to implement a value-added-tax.

In November 2013, the Arab world's biggest economy took action against illegal workers as it pushed to create more private-sector jobs for its citizens. At that time, unemployment was about 12 percent. The official data show joblessness at 11.6 percent for the first half of this year. Youth unemployment is almost 30 percent, according to World Bank data.

[Dec 23, 2015] Saudi Crude Exports Rose in October to Most in Four Months

Dec 20, 2015 | Bloomberg Business

Saudi shipments rose to 7.364 million barrels a day in the month from 7.111 million in September, according to the latest figures from the Joint Organisations Data Initiative. The monthly exports were the most since June and 7 percent higher than in October 2014, the data released on Sunday showed. JODI is an industry group supervised by the Riyadh-based International Energy Forum.

Saudi Arabia produced 10.28 million barrels a day in October, up from 10.23 million in September, the JODI figures showed.

[Dec 23, 2015] WTI Crude Runs To $37

Well permits and well completions seem to give reasonable indicators for future production. Now it is clear that at least Texan oil and gas production will steeply slump over the next months.
Notable quotes:
"... we are more and more convinced that we've seen the lows in crude and we do not make that statement lightly ..."
Dec 23, 2015 | Zero Hedge

From $35.35 lows (in Feb contract) on Monday, WTI crude has extended its overnight post-API inventory gains, pressing up to $37...

Can it continue? Who knows... well one person does...

Gartman: "we are more and more convinced that we've seen the lows in crude and we do not make that statement lightly."

[Dec 23, 2015] 2015 LTO output output might be surpassed by 2018 with a final peak between 2020 and 2025

Notable quotes:
"... The Rest of the World(ROW) declines by 484 kb/d each year (2420 kb/d over 5 years) so we have a 4500 kb/d increase minus a 2420 kb/d decrease for a net of 2080 kb/d above 2015 C+C output in 2020 ..."
"... If the increasing countries are flat as a group in 2016 (due mostly to decreases in US output) and the increase is linear over the next 4 years, then the 2015 "peak" might be surpassed by 2017 (but barely, only 157 kb/d higher). For that reason my expectation is that 2015 output will be surpassed by 2018 with a final peak between 2020 and 2025. ..."
Dec 23, 2015 | Peak Oil Barrel

Dennis Coyne, 12/23/2015 at 8:43 am

Hi Ron,

The LTO plays in the US (Bakken, Eagle Ford, and Permian) will probably be able to ramp up to 750 kb/d above 2015 levels by 2021, Canadian oil sands will be able to increase by about 1 Mb/d, Brazil may be able to increase by 500 kb/d, China by 250 kb/d, Russia will hold steady, KSA steady, Iran 250 kb/d, and Iraq 500 kb/d, all above 2015 levels of output by 2021. If the rest of the world continues its linear decline of about 480 kb/d per year and all of these guesses for Brazil, Canada, China, Iran, Iraq, Russia, Saudi Arabia, and the US are correct then World output peaks in 2019 at 370 kb/d above 2015 output.

Looking at the charts for Brazil, Canada, China, Iran, Iraq, Russia, Saudi Arabia, and the US, I am a little more optimistic. I will keep the 750 kb/d increase for the US and KSA remains flat, Russia and China I expect about a 250 kb/d increase over 5 years, Iran, Iraq, and Canada I expect about 1 Mb/d from each, and Brazil I expect 250 kb/d increase over 5 years. The Rest of the World(ROW) declines by 484 kb/d each year (2420 kb/d over 5 years) so we have a 4500 kb/d increase minus a 2420 kb/d decrease for a net of 2080 kb/d above 2015 C+C output in 2020.

If the increasing countries are flat as a group in 2016 (due mostly to decreases in US output) and the increase is linear over the next 4 years, then the 2015 "peak" might be surpassed by 2017 (but barely, only 157 kb/d higher). For that reason my expectation is that 2015 output will be surpassed by 2018 with a final peak between 2020 and 2025.

[Dec 23, 2015] Important geopolitical dimension of oil counsumption growth in a world of peak oil

Notable quotes:
"... ...India is importing 100% of oil consumption in a world where trade is no longer growing and available world net exports of oil has declined significantly ..."
"... the US cannot permit China's oil imports to persist at a level at, or above, that of the US with available global net oil exports falling and peak global oil production per capita. ..."
"... The condition, should it persist, poses a regional geopolitical threat to US hegemony ..."
peakoilbarrel.com
BC, 12/22/2015 at 2:10 pm
...India is importing 100% of oil consumption in a world where trade is no longer growing and available world net exports of oil has declined significantly since 2005-08 and will continue declining hereafter. India is 40-45 to 80-100 years too late to industrialization.

Moreover, the US cannot permit China's oil imports to persist at a level at, or above, that of the US with available global net oil exports falling and peak global oil production per capita.

The condition, should it persist, poses a regional geopolitical threat to US hegemony, which is among many reasons why trade, diplomatic, and geopolitical tensions are increasing between the US and China, and why there has been the "Pivot to Asia" and expansion of Africom by the Anglo-American imperial military.

[Dec 23, 2015] What is behind Saudi strategy of dumping oil on the market

Great question: Why would a country drive down the price to maintain market share when they know they will lose market share due to declining production.
Notable quotes:
"... According to you Saudi Arabia were doing everything possible in Jan 2013 just to stop decline. ..."
"... Yet here we are 3 years on and they are producing 1mmbld more and flooding the market. Please explain. Why would a country drive down the price to maintain market share when they know they will lose market share due to declining production. ..."
"... Peter, the only reason I can figure out is that the Saudis bought into the hype being peddled by Team Carbon (see graph below from https://www.eia.gov/conference/2015/pdf/presentations/hamm.pdf ), and wanted to stop "the Great American Shale Revolution" in its tracks. ..."
"... Could the Saudis be that stupid, to believe the hype? I doubt it. ..."
peakoilbarrel.com
Peter, 12/21/2015 at 2:15 pm
Ron

According to you Saudi Arabia were doing everything possible in Jan 2013 just to stop decline.

http://www.theoildrum.com/node/9798

Yet here we are 3 years on and they are producing 1mmbld more and flooding the market. Please explain. Why would a country drive down the price to maintain market share when they know they will lose market share due to declining production.

Ron Patterson, 12/21/2015 at 3:12 pm
According to you Saudi Arabia were doing everything possible in Jan 2013 just to stop decline.

And they did. In addition to dramatically increasing infill drilling in their old fields, they brought Khurais on line, then increased water injection in Khurais and in 2013 they brought Manifa on line ahead of schedule.

Saudi Aramco Starts Pumping From Manifa Oil Field Ahead of Plan

April 15, 2013
Saudi Arabian Oil Co. started producing crude from Manifa, the world's fifth-largest oil field, on April 10, three months ahead schedule.

Saudi Aramco, as the state-owned producer is known, said today the field will produce 500,000 barrels a day of Arabian heavy crude by July and it will reach 900,000 barrels a day by end of next year.

And they are still working desperately to stem the decline in their old giant fields.

Saudi Aramco to expand Shaybah, Khurais oil output in 2016-17

"This will bring it up to a million barrels (per day). We're in the process of awarding the contract in the next few days," he said, adding that an ongoing project at Shaybah will also add 250,000 bpd of natural gas liquids output in end-2014.

The Khurais expansion project was at the front-end engineering stage and the expansion to increase the field's output by 300,000 bpd to 1.5 million bpd should be completed by 2017, he said.

Khurais, Shaybah and Manifa are all very old fields that, for various reasons, were mothballed years ago. But now they are called into service to to stem the decline in their other old giants.

Saudi intends to hold production at current levels for several more years. How successful they will be remains to be seen. But they have not and will not dramatically increase production.

Glenn Stehle, 12/21/2015 at 5:29 pm
Peter said:

Why would a country drive down the price to maintain market share when they know they will lose market share due to declining production.

Peter, the only reason I can figure out is that the Saudis bought into the hype being peddled by Team Carbon (see graph below from https://www.eia.gov/conference/2015/pdf/presentations/hamm.pdf ), and wanted to stop "the Great American Shale Revolution" in its tracks.

Could the Saudis be that stupid, to believe the hype? I doubt it.

I suspect that the Saudis and Russians have other reasons for wanting the price of oil low, reasons which folks like Rockman cannot even conceive of.

We are wandering about in a wilderness of unknowns, but that doesn't stop the speculation.

[Dec 23, 2015] Peak oil is price depedent and at $40 we did reached peak oil in 2015

Notable quotes:
"... I doubt that the Saudis are pumping full out to increase their revenue, they could easily cut back production (along with the rest of OPEC) and make more revenue with lower output. Their aim is to hurt other oil producers such as the Russians and Americans (and perhaps the Iranians) with low prices. ..."
"... As to whether the peak is here in 2015, I think a rise in oil prices in 2017 will bring about higher output with a peak sometime after that (maybe 2018 to 2022), ..."
"... Watcher is correct that nobody knows how much oil will be produced, what the oil price will be or the eventual URR for oil will be. All of it is just guesses. ..."
"... Dennis, so higher prices will bring higher output. And just where is this higher output going to come from? That is higher output that overtakes all declines between now and then and continuing that decline even then? Where Dennis, just which countries are you talking about? Who will supply all this oil? ..."
"... Economics is politics. War is politics with other means. War is the business of empire. War is good business for imperialists. Therefore, economics is politics is the legal, moral/amoral, and intellectual rationalization for the business of empire, i.e., war, which is the use of state violence to expand business, expropriation of resources, exploitation of cheap labor, and the resulting ecocide and genocide in the process. ..."
"... To paraphrase Carl Von Clausewitz 'war is politics by other means'. I'll go two further. Politics is economics by other means, and economics is ecology by other means. Roughly speaking anyway. ..."
"... Ron, first I would say that if oil remains below $40 per barrel, then I would agree with you that 2015 will likely be the year of peak oil. However, I believe that oil will rise to at least $80 in the coming years and may go as high as $150 depending on the strength/weakness of the dollar. ..."
"... I believe most of the oil in the coming years will continue to come from the Middle East and while Saudi seems to be peaking, Iran, Iraq, Libya are not. ..."
"... I do not believe Russia has peaked if oil reaches $80 plus per barrel. Even the U.S. may be able to coax more oil out of the Gulf, Alaska and shale plays if there is money to be made (finding capable, experienced oil field workers may be a problem though). There is oil in Brazil, Canada, Kazakstan, various spots in south america, off-shore africa, etc. ..."
"... I don't believe any of the sources for future oil production increases will offset decline. Unless peace breaks out in Libya I'd suggest they're a write off. Canada conventional peaked and now all they can ramp up on is Bitumen. Maybe we'll get another million a day out of Canadian bitumen but it won't be very soon or very cheap. I believe the infill drilling in KSA will lead to a steep decline before 2022. KSA is taking their last kick at the can as is evidenced by their current desperate policy manoeuvres. ..."
"... Ron – I believe it is clear that all those prognosticators, including the "transition to renewables crowd, are also predicting a future where everyone is wealthy and can afford the much more expensive … EVERYTHING! ..."
peakoilbarrel.com
Dennis Coyne 12/21/2015 at 4:20 pm
Hi Ron,

I doubt that the Saudis are pumping full out to increase their revenue, they could easily cut back production (along with the rest of OPEC) and make more revenue with lower output. Their aim is to hurt other oil producers such as the Russians and Americans (and perhaps the Iranians) with low prices. They are certainly having that effect on American oil producers, another 6 months and they won't need to cut back as the US output may have fallen by then as the financing for drilling unprofitable wells will have dried up (if oil prices remain under $35/b).

As to whether the peak is here in 2015, I think a rise in oil prices in 2017 will bring about higher output with a peak sometime after that (maybe 2018 to 2022),

Watcher is correct that nobody knows how much oil will be produced, what the oil price will be or the eventual URR for oil will be. All of it is just guesses.

Chart below is another wag, for a medium URR (2800 Gb C+C less extra heavy+600 Gb oil sands) which peaks in 2023 at 80.1 Mb/d after a 2016 decline of 700 kb/d. Chart below.

Ron Patterson, 12/21/2015 at 4:56 pm
I think a rise in oil prices in 2017 will bring about higher output with a peak sometime after that (maybe 2018 to 2022),…

Dennis, so higher prices will bring higher output. And just where is this higher output going to come from? That is higher output that overtakes all declines between now and then and continuing that decline even then? Where Dennis, just which countries are you talking about? Who will supply all this oil?

Dennis, as the thug said to Dirty Harry, "Hey… I gots to know!"

 photo Non-OPEC less US amp Russia_zpsbsam9g3d.jpg

BC, 12/21/2015 at 4:24 pm
https://www.youtube.com/watch?v=kgig1QVU2lY

Economics is politics. War is politics with other means. War is the business of empire. War is good business for imperialists. Therefore, economics is politics is the legal, moral/amoral, and intellectual rationalization for the business of empire, i.e., war, which is the use of state violence to expand business, expropriation of resources, exploitation of cheap labor, and the resulting ecocide and genocide in the process.

Happy Xmas and New Year to all.

Jimmy, 12/21/2015 at 5:36 pm
To paraphrase Carl Von Clausewitz 'war is politics by other means'. I'll go two further. Politics is economics by other means, and economics is ecology by other means. Roughly speaking anyway.
Richard, 12/21/2015 at 4:50 pm
HI: I look forward to the day oil will not be burned but will be used only to make great products like super strong polymers that can be used to build cars, boats, airplanes, houses, etc. Yes, peak production of oil may be upon us, but peak use of oil could be on us as well.
Ron Patterson, 12/21/2015 at 5:09 pm
> People:…. All you prognosticators out there who are picking the peak somewhere in the distant future, please tell me where all this increase in oil production is going to come from?

I have explained, in post after post, and especially this one, why I think the peak will be 2015. But some of you say My own feeling is that oil will peak sometime between 2020 and 2030,… and others say: "I agree with that prediction too,…"

Well hell, that's all well and good. But there must be a reason you think the peak will hold off for another ten years or so. Just who is going to produce all this oil. I have shown that Non-OPEC, less US and Russia, is clearly in decline in spite of oil prices being above $100 a barrel for five years. Okay… are you saying they are going to turn that around? That this time around $100 oil will do the trick where it clearly failed before, before they clearly declined for another ten years?

Hey, if you have an opinion, there must be a reason for that opinion? Otherwise you are just blowing smoke.

Arceus, 12/21/2015 at 5:32 pm
Ron, first I would say that if oil remains below $40 per barrel, then I would agree with you that 2015 will likely be the year of peak oil. However, I believe that oil will rise to at least $80 in the coming years and may go as high as $150 depending on the strength/weakness of the dollar.

I believe most of the oil in the coming years will continue to come from the Middle East and while Saudi seems to be peaking, Iran, Iraq, Libya are not.

I do not believe Russia has peaked if oil reaches $80 plus per barrel. Even the U.S. may be able to coax more oil out of the Gulf, Alaska and shale plays if there is money to be made (finding capable, experienced oil field workers may be a problem though). There is oil in Brazil, Canada, Kazakstan, various spots in south america, off-shore africa, etc.

Yes, it is getting more difficult to and expensive to get oil out of the ground, but these things play out longer than most people expect. Would you believe 15% of computers still use Windows XP or earlier as their operating system?

Jimmy, 12/21/2015 at 5:41 pm
I don't believe any of the sources for future oil production increases will offset decline. Unless peace breaks out in Libya I'd suggest they're a write off. Canada conventional peaked and now all they can ramp up on is Bitumen. Maybe we'll get another million a day out of Canadian bitumen but it won't be very soon or very cheap. I believe the infill drilling in KSA will lead to a steep decline before 2022. KSA is taking their last kick at the can as is evidenced by their current desperate policy manoeuvres.
Jef, 12/21/2015 at 5:41 pm
Ron – I believe it is clear that all those prognosticators, including the "transition to renewables crowd, are also predicting a future where everyone is wealthy and can afford the much more expensive … EVERYTHING!

[Dec 23, 2015] Iraqi production could face decline in 2016….they simply cannot pay their bills; US shale capex cuts will bite in 2016

peakoilbarrel.com
John, 12/21/2015 at 11:27 am
Iraqi production could face decline in 2016….they simply cannot pay their bills even with emergency loans from world bank…

Only OPEC [countries that have] increase 2015 was Iraq and SA….SA going full out and Iraq declining.

Russia full out….Iran…who would invest there with $35 oil?

US shale capex cuts will bite and declines will increase in 2016.

[Dec 23, 2015] The first US crude export since the new law was signed

This is a light crude that is sold to foreign refineries because it can't be processed in the USA. Most probably it is sold at discount to production cost.
peakoilbarrel.com
AlexS, 12/23/2015 at 1:15 pm
OPEC estimate of WTI breakeven prices by play ($/boe)
2011 2012 2013 2014 2015
Bakken 64.1 71.0 65.3 58 46.4
Eagle Ford 101.1 75.2 73.7 61 48.8
Permian Delaware 85.5 70.2 65.6 49.9 40.0
Permian Midland 145.0 107.1 85.3 91.3 73.0
Niobrara 94.5 69.9 52.0 55.0 44.0

coffeeguyzz, 12/23/2015 at 2:20 pm

Alex

Platts is running a story that a 600,000 barrel shipment of US oil is due to leave a Texas port in two weeks' time … the first US crude export since the new law was signed.

Should be interesting to see how much impact this new environment will have on US oil industry.

[Dec 23, 2015] Black box hedge funds lead winners from oil collapse

Notable quotes:
"... So after crude lost 46 percent in 2014, they were already betting strongly at the start of this year that the trend would continue, largely through oil futures and other energy derivatives markets. ..."
"... By the laws of economics, the oil market will turn back up at some point and trend-following funds may struggle then. But in the meantime, some are producing impressive returns. Millburn Commodity Program, for instance, was up 25.3 percent in the year to Dec. 15, performance data seen by Reuters showed. ..."
"... But Lawler said they typically cut their negative bets when crude fell below $40 a barrel this month, believing the market had hit its floor. Instead it kept falling to around $36 on Tuesday, showing how hard it is for flesh-and-blood traders to get their timing right in a rumor-fueled market. ..."
"... Taylor Woods Capital, for example, rode the oil market down for a third straight year of double-digit percentage gains and its best since 2013. However, oil trader Andy Hall's Astenbeck Capital Management stands to lose hundreds of millions of dollars from his so far failed bet on a crude price recovery. ..."
"... On average, energy-focused hedge funds have risen 3.6 percent in the year to November, trumping their commodity peers which have fallen 2.4 percent, HFR data showed. The average fund of any strategy, meanwhile, is up 0.3 percent. ..."
"... Andurand - who achieved a return of 210 percent in 2008 after correctly calling an oil price jump and subsequent collapse - told investors recently that crude may fall below $25 in the first quarter of next year, and he was using options to benefit from the move. ..."
"... There is certainly still a chance of lower prices in the next month or so, but weighing that possibility against the virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market . ..."
finance.yahoo.com

LONDON/NEW YORK (Reuters) - To make money from the sharp fall in oil prices this year, it helped if you weren't human.

While a handful of big name traders have profited from some of oil's 35 percent plunge, it has been computer-based or "systematic" funds which have captured much of the spoils.

These black box funds use programs to follow various asset classes and look to latch on to market trends. So after crude lost 46 percent in 2014, they were already betting strongly at the start of this year that the trend would continue, largely through oil futures and other energy derivatives markets.

Apart from a modest recovery early this year, crude prices have mostly been a one-way bet and now languish 66 percent below their levels around $115 a barrel 18 months ago.

"The main beneficiaries have been the systematic, or trend-following guys," said Anthony Lawler, head of portfolio management at investor GAM. "The stronger the trend, the bigger the position ... Since the middle of 2014, oil's been trending lower, so that's quite a long trend. As a result, they have meaningful exposure in energy."

By the laws of economics, the oil market will turn back up at some point and trend-following funds may struggle then. But in the meantime, some are producing impressive returns. Millburn Commodity Program, for instance, was up 25.3 percent in the year to Dec. 15, performance data seen by Reuters showed.

"Discretionary" funds - those where a living person pushes the trading button - can come into their own when the market turns.

But Lawler said they typically cut their negative bets when crude fell below $40 a barrel this month, believing the market had hit its floor. Instead it kept falling to around $36 on Tuesday, showing how hard it is for flesh-and-blood traders to get their timing right in a rumor-fueled market.

The fall has hit funds of all stripes holding energy stocks and debt, and buoyed those which invest in firms that are large consumers of energy and have therefore benefited through lower costs. Energy-focused discretionary funds have been the purest play on the move, and their performances vary considerably.

Taylor Woods Capital, for example, rode the oil market down for a third straight year of double-digit percentage gains and its best since 2013. However, oil trader Andy Hall's Astenbeck Capital Management stands to lose hundreds of millions of dollars from his so far failed bet on a crude price recovery.

On average, energy-focused hedge funds have risen 3.6 percent in the year to November, trumping their commodity peers which have fallen 2.4 percent, HFR data showed. The average fund of any strategy, meanwhile, is up 0.3 percent.


WINNERS, LOSERS

Taylor Woods, run by former Credit Suisse traders Beau Taylor and Trevor Woods, posted a 20 percent gain in the year to mid-December. The Greenwich, Connecticut-based hedge fund started the year with about $1 billion in assets and could make $200 million in profit if it maintains its performance to the end of the year, people familiar with its funding and returns said.

Investors stuck by the fund even when crude prices unexpectedly jumped 25 percent in April during the short-lived rally. "They had low volatility in some of the most challenging times," an industry source said, noting withdrawals that month had been a relatively modest 5 percent of the total sum invested. "That sort of risk management was rare this year."

Taylor Woods declined comment when contacted by Reuters.

Just behind lies the $615 million London-based Andurand Capital, run by former Vitol oil trader Pierre Andurand, which is up 8 percent in the year to Dec. 11.

Andurand - who achieved a return of 210 percent in 2008 after correctly calling an oil price jump and subsequent collapse - told investors recently that crude may fall below $25 in the first quarter of next year, and he was using options to benefit from the move.

Andy Hall has been one of the most successful fund managers of the last decade but this year Astenbeck is among the worst performers. The fund, based in Southport, Connecticut, lost 26 percent in the year to November as he stuck to his conviction that oil prices would recover. This year's decline is the largest ever for Astenbeck, which manages more than $2 billion and was launched by Hall in 2008. Its biggest annual drop before this was 8 percent in 2013. Hall did not respond to requests for comment. But in a letter to investors earlier this month he refused to back down from his conviction. "There is certainly still a chance of lower prices in the next month or so, but weighing that possibility against the virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market".

Other laggards include New York-based BBL Commodities, down more than 10 percent in the year to November after beginning the year with more than $550 million, market sources said. Run by ex-Goldman Sachs trader Jonathan Goldberg, it was one of the best performing energy funds in 2014, gaining 51 percent. Goldberg declined comment.

London-based Merchant Commodity Fund has also failed to maintain its strong 2014 performance. It lost 8 percent up to November, after a near 60 percent gain in 2014.

Assets at Merchant declined from nearly $290 million in January to around $210 million, a note circulated by the fund to investors and seen by Reuters showed.

[Dec 22, 2015] JODI numbers interpretation

Notable quotes:
"... the difference is this is Crude + Condensate and does not include Natural Gas Liquids. ..."
"... The EIA has world crude plus condensate at about 80 million barrels per day. The EIA has production of Crude Oil, NGPL, and Other Liquids at 93,770,000 barrels per day in June 2015. That was a jump of about one and one quarter million barrels per day from May. Somehow I just don't really think that was the case. ..."
peakoilbarrel.com

dclonghorn, 12/21/2015 at 12:10 pm

Thanks for the post. I find it very informative. One question I have is why the JODI totals are around 75 million bopd, when world production is often discussed as being around 90 million bopd. I suspect the difference is in how condensate and bitumen are counted, but I would like to know what the differences are.
Watcher, 12/21/2015 at 12:22 pm
Ron's actually on top of these little variances in oil stats from various sources. He juggles the secondary sources choice with gov't reported and the issue of C+C vs just C. The choices always look rational to me.

As to what leads to decline in output when, it's pretty amazing to me that people still try to predict this stuff. I can find you distinguished analysts saying opposite things, and you can find them too, and without much effort. The odd part of this is the reluctance of people to recognize none of them know anything.

One other thing worth thinking about. There is no long run. The long run is now, because now was the long run a year or five ago. No one is allowed to say such and such is true today "but in the long run" something else will be true. What's true now is true in the long run.

Ron Patterson, 12/21/2015 at 1:06 pm
DC, the difference is this is Crude + Condensate and does not include Natural Gas Liquids. The 90 million bpd you quoted does include natural gas liquids. That said however the JODI numbers are somewhat less than the EIA numbers because the EIA counts OPEC condensate while JODI does not. Also there may be a few very small producers that does not report to JODI.

The EIA has world crude plus condensate at about 80 million barrels per day. The EIA has production of Crude Oil, NGPL, and Other Liquids at 93,770,000 barrels per day in June 2015. That was a jump of about one and one quarter million barrels per day from May. Somehow I just don't really think that was the case.

[Dec 22, 2015] USA will be exporting light oil to world market while importing heavier brands

I think the real reason is that US refiner does not want light oil form shale, but there are refiners win other part of the globe thaat dependon such oil. Also restarting a shale well is like restarting a rusted tractor. It take time and cost money.
peakoilbarrel.com
Glenn Stehle, 12/21/2015 at 7:54 pm
And this from the Cowboyistan Ministry of Truth, from John's link above:

http://peakoilbarrel.com/all-roads-lead-to-peak-oil/comment-page-1/#comment-551941

Saudi Arabia is likely afraid to find out how quickly U.S. shale output will rise when oil prices creep up. And now that U.S. exports are in play, everyone wonders how quickly American entrepreneurs will capture markets that, until now, have seen little competition. For OPEC, it's better to put the day of reckoning off as long as possible.

But the radically different characteristic of the new oil era is not so much that America has emerged as a big source of swing supply. That of course was a surprise to many, and the central fact animating Congressional action. The single difference that really frightens OPEC and Russia the most can be captured in a single word: velocity.

Shale technology allows astonishingly fast increases in production and at volumes that can move global markets; furthermore, U.S. capital markets are inherently flexible, fast and have plenty of capacity to fuel shale expansion almost overnight if prices, and profits, creep back up.

In addition, in the shale fields of America, drillers can get permits in weeks on private and state lands, as opposed to years for both U.S. federal lands and those of other nations. Then, shale wells can be drilled and completed in weeks not years.

Every single metric associated with shale drilling and production has not only improved radically in the past half-dozen years, but continues to do so at stunning speeds. The combination of experience (it is, after all, a very new industry) and technology progress (which is propelled by pressures on profit margins) is yielding ever more efficiency gains.

http://www.forbes.com/sites/markpmills/2015/12/21/shale-wars-round-two-congress-acts-on-exports-russia-capitulates-on-price-and-opec-blinks/2/

SW, 12/21/2015 at 9:28 pm

Plus, they can do all of this with an unlimited supply of free money! It is a story that makes that hippie with the loaves and fishes look like an amateur.

likbez , 12/22/2015 at 9:09 pm
That's a very weak article. One thing is this persistent talking about oil glut. EIA figures for world production probably have margin of error well above 1%. That means plus/minus 1 Mb/d. So when they are talking about 1 Mb/d extra production this is within the margin of error of their measurements. So the glut might exist but it well might be not.

I think redistribution of oil production facilities is what in play now. Which started with Iraq and Libya wars and continued with Syria war. Kind of "Disaster capitalism" translated into oil dimension (http://www.amazon.com/The-Shock-Doctrine-Disaster-Capitalism/dp/0312427999). Who do you think will own Venezuela fields in two or three years?

How about predatory pricing with the effect deliberately multiplied via HFT and hedge funds mechanism? Right now Saudis are engaged in predatory pricing. That's an established fact. Actually the hypothesis that Saudis want to hurt US shale industry is extremely weak: Saudis are the USA vassal state and are in principle incapable of such action without prior approval of the US government. So it looks like the USA shale industry is just a collateral damage of this bombing. Real target of this bombing lies elsewhere.

It will be interesting to see how long prices below $40 persist. At this price level most producers have losses and somehow the situation continues. My impression is that the mechanism to force producers to endure such losses is Saudis + stock exchange HFT and futures.

In any case current low prices is a sign how dysfunctional the international finance system has become.

[Dec 22, 2015] Oil is an irreplaceable commodit which now due to low prices burned in excessive quantities

Notable quotes:
"... IMHO the current lows in oil prices were caused more by algorithmic trading and hedge funds then fundamentals so predicting anything in this environment requires being an insider. ..."
peakoilbarrel.com
wimbi, 12/22/2015 at 2:29 am
As a mere dude sitting on the fence watching this oil-price rodeo, I keep wondering why none of you fancy rope slingers is giving any attention at all to some of the biggest bulls in the paddock.

1) Paris says we WILL cut back on carbon
2) Pope says we SHOULD cut back
3) Science says we MUST cut back.
4) Probability says we are gonna be FORCED to cut back.

And each and all of these don't have any effect on your thinking on the price of oil???

Dennis Coyne, 12/22/2015 at 12:16 pm
Hi Wimbi,

I would think that over the short term oil prices will increase, both due to reduced supply and possibly due to increased carbon taxes. Eventually this may lead to lower prices as people reduce their demand for fossil fuels, but it will probably be 2050 or so before we get there, I would like it to be sooner, but I am not that much of an optimist.

likbez , 12/22/2015 at 1:03 pm
Saying is not doing. There are powerful forces that will prevent any significant progress in lowing carbon emissions.

Even a minor change in oil consuming industries takes decades. Look at the pace of introduction of hybrid cars in the USA as an example. And you might better understand the future of cutting carbon emissions.

Oil is an irreplaceable commodity. And it is sad that with current low prices it will be burned at higher pace then it would otherwise for several years.

IMHO the current lows in oil prices were caused more by algorithmic trading and hedge funds then fundamentals so predicting anything in this environment requires being an insider.

But that does not change the total irrationality of the current situation (and international financial markets).

So for the price of oil the best answer was given long ago by JP Morgan: When asked what the stock market will do: It will fluctuate. Now we probably are close to trend reversal but when it will come is anybody guess. But if it come there is a guarantee that it will overshoot.

So there is no guarantee that the current irrationality with low oil prices will not reoccur in the future.

All this deregulation under casino capitalism and financialization of everything (it would be nice to hang a couple of oil traders who try to short non-existent oil like in good old times ) made the system unstable.

[Dec 22, 2015] A note on wells annual decline rate

peakoilbarrel.com
Amvet, 12/22/2015 at 4:15 am
... I have two examples to add to the discussion:
(1) The 2014 IEA study of 1,600 oil fields that supply 70% of global oil showed a decline rate of 6.2%.
If this is true, the globe needs, including demand growth, over 4 million bpd of new production per year to stay even. 100K bpd new production makes the news. Where is 4 million?
(2) The classic example of "in the ground does not mean in the barrel": Kazakstan´s Kashagan giant Oil Field. Discovered 2000, 45 API oil, 19% H2S, 11,168 psi. Shallow water in the Caspian. Stormy weather.
So far less than one month production. Latest problem, pipe corrosion. Next year (or later) starting production of 180K bpd. Planned max production 370K bpd. Cost around $190 billion
Dennis Coyne, 12/22/2015 at 12:01 pm
Hi Amvet,

See

http://www.theoildrum.com/node/4763

where they estimate around 4.5% annual decline rate for World output in Nov 2008. It is possible this has increased since then, but assuming it has not, then at least that amount of output has been developed each year because output in 2015 will be about 6.5 Mb/d higher than in 2008. So roughly 4.2 Mb/d of new output was added each year on average from 2009 to 2015, if the decline rate was 4.5%/year on average each year from 2009 to 2015. Eventually a peak will be reached, when that will be is hard to say with confidence.

[Dec 22, 2015] How oil could go even lower--commentary

Notable quotes:
"... The most vulnerable producers are U.S. stripper wells. Totaling at least 700,000 barrels per day, these small wells would begin to shut down if crude ranged around $35 for at least six months. ..."
"... Other candidates are Canadian tar sands; North Sea and Russian brownfield supply (which depends on continuous capex to arrest steep decline rates); and of course shale oil output, which is in the process of rolling over, with declines likely to accelerate. ..."
"... Some 5 million b/d of supply has been deferred or canceled. This means supply that had previously been expected to become available in 2018 or 2019 will not be there. ..."
Dec 18, 2015 | cnbc.com

...The most vulnerable producers are U.S. stripper wells. Totaling at least 700,000 barrels per day, these small wells would begin to shut down if crude ranged around $35 for at least six months. However, stripper well owners are likely to continue pumping until a maintenance issue arises that would force a shut down. Significant shut-ins would only appear after months-to-quarters of lower prices. More often than not, stripper well shut-ins are permanent due to various geological and mechanical factors, reinforcing their owners' reluctance to shut them off. Other candidates are Canadian tar sands; North Sea and Russian brownfield supply (which depends on continuous capex to arrest steep decline rates); and of course shale oil output, which is in the process of rolling over, with declines likely to accelerate.

...In July, Wood Mackenzie reported oil and gas companies have delayed some $200 billion of investment in more than 45 projects, exclusive of U.S. shale, due to the price slump. More than half of affected reserves are in deep-water projects, and nearly 30 percent are in Canadian oil sands. In September, Wood Mackenzie predicted 140 of the 330 fields in the UK North Sea could close in the next five years, even if oil prices recover to $85 a barrel. Some 5 million b/d of supply has been deferred or canceled. This means supply that had previously been expected to become available in 2018 or 2019 will not be there.

Commentary by Robert McNally, founder and president of The Rapidan Group, an independent energy-consulting and market advisory firm based in the Washington, DC, area. From 2001 to 2003, Mr. McNally served as the top international and domestic energy adviser on the White House staff, holding the posts of Special Assistant to the President on the National Economic Council and, in 2003, Senior Director for International Energy on the National Security Council.

[Dec 22, 2015] Oil Bears Exit Market Too Soon as Prices Slide to Another Low

Notable quotes:
"... Speculators' short positions in WTI fell by 15,224 contracts to 166,625 futures and options ..."
"... Net-long positions rose by 15,280 to 95,754. ..."
Dec 16, 2015 | Bloomberg Business

Money managers' short position in West Texas Intermediate crude fell 8.4 percent from an all-time high in the week ended Dec. 15, data from the U.S. Commodity Futures Trading Commission show. Net-long positions rose 19 percent.

Speculators' short positions in WTI fell by 15,224 contracts to 166,625 futures and options, CFTC data show. Shorts in the prior week were the most in records dating back to 2006. Longs increased by 56. Net-long positions rose by 15,280 to 95,754.

"This is all short covering," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "It's not a bet that prices will rise, it's a wager that prices might not continue lower."

Traders reduced their bullish stance in Brent crude during the period. Speculators reduced net-longs to 171,834 contracts, according to data from ICE Futures Europe.

[Dec 22, 2015] It has been many months since we have seen rigs on the North Dakota rig page as "stacking". Last week we saw the first, today we have another

peakoilbarrel.com

Toolpush, 12/22/2015 at 1:38 pm

It has been many months since we have seen rigs on the North Dakota rig page as "stacking". Last week we saw the first, today we have another. I believe this will be the beginning of the response to the decreasing oil price, and the restricted 2016 capex budgets of the oil companies.

Strangely enough, one is from XTO, and the other from EOG, both strong players. I would have expected the weaker player to cut back first, but then again, maybe they can't afford to!

BC, 12/22/2015 at 2:17 pm
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2R6J

Economic indices imply a worst recession in ND than in 2007-09, and the worst in 25 years.

Mass out-migration as typically occurs and an aging population will tend to prevent the U rate from spiking, however.

[Dec 22, 2015] The global oil production glut might not exist

If global daily consumption is around 94 Mb/d and error in its measurement is over 1% (discrepancies between various agencies are even higher) how they can talk about "glut" with a strait face. They should talk about "dumping" by Saudis with full support of Wall Street sharks and HFT mechanisms.
Notable quotes:
"... Are massive futures trades and a bit of theater causing the glut? What is your opinion? ..."
"... But in reality, only a few countries have actually increased production since then and it was not by a huge amount. ..."
"... At the same time, rig counts have fallen dramatically as have investments in new oil projects. It would seem, viewed in a certain light, that oil would be ready to rebound and fairly quickly. ..."
"... The world is swimming in debt and this limits economic growth which in turn limits demand for oil. Also there are Iran, Iraq, Libya, Russia and Venezuela – all of which likely have the potential to increase oil production. ..."
"... None of these countries, quoting you: likely have the potential to increase oil production. Every one of these countries are currently producing every barrel of oil they possibly can. Libya and Iran will likely have that potential sometime in the future, but not today. By how much is just not known at this point. ..."
peakoilbarrel.com
Amvet, 12/21/2015 at 3:15 pm
Ron, I suspect that the global oil production glut does not exist.
Some of the reasons given to support the glut are interesting:
  • The Saudis cut prices to protect market share.
  • The price went down.
  • US storage increased after imports surged.
  • The Saudis, OPEC, Russia, refused to cut production.
  • Industrialized countries storage increased.
  • Tankers are lined up to unload.

Are massive futures trades and a bit of theater causing the glut? What is your opinion?

Regards.

What is your opinion?

Ron Patterson, 12/21/2015 at 4:31 pm
No, I do not think futures traders can cause a glut and certainly not the appearance of a glut if none exist. Glut may be too strong a word but there definitely was an oversupply as evidenced by the storage levels, not just in the US but all over the world.

US storage increased after imports surged. The Saudis, OPEC, Russia, refused to cut production. Industrialized countries storage increased. Tankers are lined up to unload.

That is the very definition of an oversupply, and perhaps even a glut.

Arceus, 12/21/2015 at 5:03 pm
There is something of a case to be made for that (no glut)…

It goes something like this – oil production has been declining since the Sauds and Opec decided not to cut production. But in reality, only a few countries have actually increased production since then and it was not by a huge amount.

At the same time as production has leveled off, demand for "cheap" oil has been increasing steadily. Moreover, most oil production is measured in boe or barrel of oil equivalents (not all of it is crude oil), and so crude oil production may have actually decreased more than many believe.

At the same time, rig counts have fallen dramatically as have investments in new oil projects. It would seem, viewed in a certain light, that oil would be ready to rebound and fairly quickly.

But not so fast. There are many more things to consider, and here are just a few. Look at natural gas and how it has declined for a very long time, and it is not hard to imagine oil doing the same thing. Also, the dollar has been strengthening (which is a negative for all commodities) and Yellen and company appear to want to keep it that way.

The world is swimming in debt and this limits economic growth which in turn limits demand for oil. Also there are Iran, Iraq, Libya, Russia and Venezuela – all of which likely have the potential to increase oil production.

Unemployment seems to be growing – this subdues demand for oil. Anyway, just a few things off the top of the head…

Ron Patterson, 12/21/2015 at 5:39 pm
Also there are Iran, Iraq, Libya, Russia and Venezuela – all of which likely have the potential to increase oil production.

None of these countries, quoting you: likely have the potential to increase oil production. Every one of these countries are currently producing every barrel of oil they possibly can. Libya and Iran will likely have that potential sometime in the future, but not today. By how much is just not known at this point.

Venezuela has very serious political problems and their production is far more likely to go down than up. But if you think Russia has the ability to increase production you need to explain why your prognostications are better than just about everyone else in the world who are predicting Russia will decline.

Iraq is a big question mark. I don't think they have much ability to increase production. And their political problems are likely to get a lot worse instead of better.

As for there being no glut, there is a very definite oversupply at the moment. Otherwise supply and demand is a myth. And it most definitely is not.

[Dec 22, 2015] Recapping reality of oil consumption

peakoilbarrel.com

Watcher, 12/22/2015 at 11:02 am

Recapping reality.
  1. China and India have oil consumption growth that is exploding. US conservation just pours more oil in their tanks.
  2. Price is not compelling. This is why God gave us subsidies. No candidate who says "it's good price rose to crush your oil consumption and degrade your life" is going to win vs a candidate who says "this oil spike must be stopped and it is the role of government and its central bank to stop it and reduce the burden on the citizenry".
  3. Y'all left wing folks don't really care about people driving F150s, with which they can carry things around. You want to command people how to live, but you're not willing to take up arms to mow them down if they don't obey.
  4. China has a moral responsibility to continue their growth of oil consumption to AT LEAST the US levels of per capita consumption. China has no Social Security. No other pension plan. No other array of safety nets funded in the US by GDP. They have to get their consumption up RIGHT NOW in order to fulfill responsibility to their people. Not gradually and drawn out. Not waiting for imaginary replacements for oil. RIGHT NOW. And if they do, global supply has to be something like 130 million bpd. It can't get there. China HAS to take it from someone else, the first being those 4+ million bpd in tankers heading north along the Shanghai coast to Japan. Just confiscate that.
  5. India is burning over 4 mbpd now. sashay over to mazamascience.com/OilExport to see the black consumption line for each country. 45 degree slope for India, just a few degrees less than China's slope. KSA's slope looks early exponential. No reason why it shouldn't be. It's their oil.
  6. This stuff about giving up . . . why do you want to give up. Fund weapons to prepare to TAKE what you must have.

[Dec 22, 2015] Oil market to correct in 2016 Harold Hamm

Notable quotes:
"... Hamm said the price of oil will return to $40 to $50 in the first half of 2015 ..."
"... The volumes of oil output will be going down, and as a result, its price will be climbing back, but that will happen during the mid term ..."
www.cnbc.com

...Hamm said the price of oil will return to $40 to $50 in the first half of 2015. He also expects the gap between Brent and U.S. crude to narrow following the lifting last week of a 40-year-old ban on exporting crude oil from the United States.

Allowing producers to export U.S. crude will help the product find a market in countries with refineries capable of processing it, Hamm said, noting that foreign acquisition of U.S. refineries has reduced capacity for American oil.

Vagit Alekperov, CEO of Russian oil giant Lukoil, told CNBC on Monday the oil market will be able to sustain $40 to $50 per barrel next year.

"The current purchases taking place in the industry do not incentivize the development of new exploration projects. … The volumes of oil output will be going down, and as a result, its price will be climbing back, but that will happen during the mid term," he said through an interpreter.

[Dec 22, 2015] More pain for oil Hofmeister

In this video former Shell Oil President John Hofmeister, expects more pain in the oil and gas industry in the first quarter of 2016 before recovery will start. there is light in the end of the tunnel.
Notable quotes:
"... But once a correction occurs, Hofmeister said, he is concerned the oil market will not achieve equilibrium, but instead enter a period of undersupply, ultimately resulting in a price spike. ..."
"... That is because producers are destroying value as they race to cut costs to offset declining revenues, he said. The industry is cannibalizing parts from idled rigs and equipment, laying off workers and reducing inventories, leaving companies ill-prepared for an uptick in demand, he added. ..."
"... Further, Hofmeister believes U.S. drillers will have a tough time borrowing money to fund new production. ..."
"... The turning point in the supply-demand imbalance may be the decline in high-cost U.S. crude production, which is expected to fall by about 500,000 barrels per day next year, he said. ..."
finance.yahoo.com
The recent leg lower in crude prices is no surprise, and market watchers should expect the oil rout to get worse before it gets better, former Royal Dutch Shell President John Hofmeister said Tuesday.

"I think the first quarter of next year is going to be probably the roughest quarter that the oil and gas industry has seen really in a long time," he told CNBC's "Squawk on the Street."

... ... ....

The current price environment will continue for some time so long as top oil exporter Saudi Arabia continues to tap its extensive reserves and borrow money to fund its policy of keeping oil production roughly steady, Hofmeister said.

Oil markets can only achieve a more rational level of production when state-owned companies bring output in line with slower global fuel demand, he said.

But once a correction occurs, Hofmeister said, he is concerned the oil market will not achieve equilibrium, but instead enter a period of undersupply, ultimately resulting in a price spike.

That is because producers are destroying value as they race to cut costs to offset declining revenues, he said. The industry is "cannibalizing" parts from idled rigs and equipment, laying off workers and reducing inventories, leaving companies ill-prepared for an uptick in demand, he added.

Further, Hofmeister believes U.S. drillers will have a tough time borrowing money to fund new production.

The turning point in the supply-demand imbalance may be the decline in high-cost U.S. crude production, which is expected to fall by about 500,000 barrels per day next year, he said.

The U.S. Energy Information Administration projects the country's output will decline through the third quarter of 2016.

[Dec 22, 2015] I Know Of No One Who Predicted This Russian Oil Production Hits Record As Saudi Gambit Fails

Zero Hedge

But not everyone agrees that this is sustainable. Some say efforts to improve efficiency have run their course and with financing for exploration scarce, further gains may be hard to come by. Interestingly, Bloomberg also notes that because Moscow takes "nearly everything above $30-$40 a barrel" on exports, producers won't feel the impact of low prices until crude falls substantially below those levels.

The takeaway here is that the Saudi gambit failed to wrench market share away from the Russians and between the conflict in Syria, Moscow's closer ties with Beijing, and Riyadh's move to antagonize The Kremlin by encroaching on Russia's eastern European market share, one shouldn't expect Putin to back down any time soon. In short, if John Kerry and Riyadh did in fact plan to bankrupt the Russians by tanking crude prices, the effort was a miserable failure that resulted not only in a 20% fiscal deficit for the Saudis, but also in the destruction of American jobs in the oil patch.

MalteseFalcon

Peak oil is sometimes qualified as peak cheap oil.

If the Saudi's are at peak oil it's because the Saudi "cost structure" is too high and includes generous welfare to keep their over-procreating rabble from revolting, expense accounts for over 100 "princes", funding for extreme Islamic radicals all over the globe, a war in Syria and a war in Yemen.

In a word: bullshit.

Gregory Poonsores

Found it a bit weird myself.

Most of the increases by Russia would have been baked in before the price fell, so I don't understand the song a dance about it.

I mean the Saudis were already on a massive infill drilling program which boosted their output this year.

Of course this presupposes the Russians are actually increasing production or just trying to spook the Saudis whose production is dropping again anyway. Besides, all OPEC increases seem to be coming from Iraq now.

Seer

When everyone is backpedaling/contracting I'd think that any increase, even a "paltry" 3-4%, is fairly significant. Think Caterpillar wouldn't want that? (hell, they' probably love to be able to maintain, rather than DROP, production).

Again, for those that don't have a clue about the business world, when things are really tight ANY gains are HUGE. Seeing as most of the West's bankers are force-feeding inflation at 2% (figure it as faked "growth") that 3-4% could be seen as 5-6%,

For the mathematically-challenged, this exponentially pencils out to a DOUBLING of production in only 11 1/2 to 14 years.

The point isn't to show off how much you can produce, it's about out-lasting your competition.


[Dec 22, 2015] Iran and Saudi Arabia to Increase Crude Oil Production in 2016

finance.yahoo.com

Iran crude oil production

Iran's Ministry of Petroleum reported that its oil sanctions might be removed by the first week of January 2015. The easing of sanctions would mean Iran could scale up crude oil production by 0.5 MMbpd (million barrels per day) to 1 MMbpd in the next six months to one year.

...Iran has the lowest production cost at just $10–$15 per barrel. It also has the lowest break-even cost in OPEC and in the world. Iran's strategic location allows it to transport vast amounts of crude oil.

[Dec 21, 2015] Oil Prices Slump to 11-Year Lows in Asia and Europe

Notable quotes:
"... supplies from outside of OPEC will decline next year. ..."
"... Production in the United States remains strong, as higher production from projects in the Gulf of Mexico offsets declines in shale oil production on shore ..."
"... In a recent report, the International Energy Agency said it expected global inventories to keep growing at least until late 2016, although at a much slower pace than this year. "As inventories continue to swell into 2016, there will still be a lot of oil weighing on the market," the agency said. ..."
Dec 21, 2015 | The New York Times

...the International Energy Agency, the Paris-based monitoring organization, forecasts that supplies from outside of OPEC will decline next year.

Still, those prospects have not been enough to shore up prices. Production in the United States remains strong, as higher production from projects in the Gulf of Mexico offsets declines in shale oil production on shore, where low prices have discouraged some energy companies from investing in new drilling. Russia, meanwhile, is essentially shrugging off the impact of Western sanctions over Ukraine and is still producing at high levels.

In a recent report, the International Energy Agency said it expected global inventories to keep growing at least until late 2016, although at a much slower pace than this year. "As inventories continue to swell into 2016, there will still be a lot of oil weighing on the market," the agency said.

[Dec 21, 2015] America cannot do away without Russian oil

Fort Russ

The income changed accordingly. In 10 months of the year it amounted to $35,209 billion for gas, which is a 25,65% decrease from the same period in 2014, according to the data of the Federal Customs Service. Our country received 1.75 times less from oil exports in January-October of 2015 compared to the same period of last year - $76,738 billion.

There are also issues with exports. Despite the slowdown in the global economy (according to different estimates it amounts to less than 3%), energy resources remain the "blood" of the modern world order. Therefore it is reasonable to think about the potential for the export of Russian hydrocarbons and new areas of cooperation.

Here assessments are also different. For example, "Transneft" predicts the decline of Russian oil exports in 2016 to 210 million tons from 222 million tons in 2015. This was announced by first vice-president Maxim Grishanin.

The head of the Energy Ministry of Russia, Alexander Novak expects Russian oil exports at the level of 237 million tonnes a year in 2015 and 2016. According to the Ministry of Economic Development, Russia will sell 227,5 million tons of "black gold" abroad in 2016

According to the forecast of the Ministry of Economic Development gas exports will amount to 174,7 billion cubic meters in 2016.

Operational statistics are not sufficient for the forecast to be more or less reliable, thinks the leading expert of the Union of Oil & Gas Producers, Rustam Tankaev. However, he says some assessments can be made.

...This year one of unexpected destinations for the exports of "black gold" became the US, reminds Rustam Tankaev. "Apparently, this market will continue to grow next year, especially as shale oil production in the New World is gradually declining due to low prices," - he suggests.

[Dec 21, 2015] Iran expecting to produce 4 million barrels of oil per day

EIA estimated that an increase in Iranian crude oil production in 2016 will be around 600,000 barrels per day and is likely to occur in the second half of the year . Richard Nephew, program director for Economic Statecraft at Columbia University and former sanctions coordinator at the U.S. State Department, said in a research brief that larger volume of oil will flow from Iran in 2016, but likely not at the levels that optimists predict.
UPI.com

TEHRAN, Sept. 2 (UPI) -- Iranian oil production by the end of 2016 will be in excess of 4 million barrels per day, more than in the pre-sanctions era, the nation's oil minister said.

Iranian Oil Minister Bijan Zangeneh said the country will increase net oil production by more than 1.5 million barrels per day, bringing total production for the Islamic republic to just over 4 million bpd.

"Around the end of next year, we will be close to this figure," he said in an interview broadcast by CNN.

Zangeneh said his country could become the second largest producer in the Organization of Petroleum Exporting Countries, after Saudi Arabia, within seven or eight months of sanctions relief. Production during the pre-sanctions area was around 3 million bpd.

[Dec 21, 2015] Oil Price Scenarios for 2016

Notable quotes:
"... mature fields would decline at 9% naturally without infield capex, mitigated decline, (such as infill wells, sidetracks, recompletions, acid wash, debottlenecking, new compressors etc) would slow the decline to 6.4%, Current decline including newer fields is about 3.1 % – lowered capex would increase decline rate ..."
"... 300 mb would be gone within one year at the rate of 1 mb/d for OECD countries. ..."
"... FWIW, my own outsider's 'guess' for YE 2016 is around $75-80/bbl. That puts most US shale back in business ..."
"... I think perhaps you overestimate the role of stocks. Oil in storage is owned by somebody, usually oil traders, and their #1 priority is to get the maximum price when they sell. Balancing the market is of no concern to them at all. If prices are rising, they will buy more. ..."
"... The oil stocks do NOT serve to balance the market, outside the SPR they are largely owned by speculators. ..."
Dec 21, 2015 |

Let's cut to the quick. My forecast for Brent at around this time next year in my BAU (business as usual) scenario is $37. This is grim reading for all those involved in and around the oil industry. Worse still, I think there is high probability that we see sub-$20 oil before the first quarter is out. But this is great news for consumers. The reason is gross over-supply sustained throughout 2016, helped by Iran coming back to full market with an additional 800,000 bpd.

Aslangeo, December 16, 2015 at 8:43 am

an interesting point of view from nawar alsaadi – http://m.authorstream.com/presentation/nawar295779-2683608-2014-2015-oil-crash/

I do not know who he is but he feels that prices are likely to increase in the longer term as production form existing fields declines and is not adequately replaced due to Capex cuts

Slide 26 "mature fields would decline at 9% naturally without infield capex, mitigated decline, (such as infill wells, sidetracks, recompletions, acid wash, debottlenecking, new compressors etc) would slow the decline to 6.4%, Current decline including newer fields is about 3.1 % – lowered capex would increase decline rate"

Javier, December 17, 2015 at 10:16 am

Euan,

You know better than anybody that world crude increase since 2010 has come from the shale revolution. But the shale revolution ended the day prices crashed. Investor gullibility, hedges, and inertia sustained production for a year. Investors don't want to know anything with shale oil anymore (bond interests spiking, companies stocks cratering), hedges have expired, and inertia is over and now works against a recovery.

Now the rest of the world has to increase production to compensate for the sinking shale that could easily lose 1 mbpd in 2016, plus to increase world production. And it is just not happening. Since August world production is going down, and it is likely to accelerate its decline in the first months of 2016.

What happens next is anybody's guess, but it would be a pity that after so long you would go to miss Peak Oil just when it is taking place.

After all Peak Oil has to take place with maximal production and moderate to low oil prices, since high prices are conductive to increase production.

Stay well.

Huckleberry Finn, December 17, 2015 at 1:22 am

Pretty funny stuff. You should do stand up.

5 Million cut??????
Over the last year inventories have built at less than 1 million barrels per day. And you espouse 5 Million barrels cut for $100 oil????

And then your 3 Billion barrel 1000 day draw down.

Wow just wow. You expect people to draw down this stuff to zero? We have had 300 Million barrel build. If we were 300 Million below the 5 year average we would be at $150.

Don't take the IEA for gospel. 250% increase in SUV sales in China year on year will not result in 200,000 barrel increase in demand unless you blow your hot air in them.


Huckleberry Finn, December 17, 2015 at 3:56 pm

Ok. You kinda implied the 1000 day drawdown.
Now, When you say considering the inventories built, nowhere in your model do you put that into context.
For example if we have a 3 day extra in inventory versus 3 day less surely the price is different, but where do you get that in the model?
Like I said, this excess supply is a myth. We have a 1 million oversupply currently.
We built inventories by 1 million barrels a day in 2015.

Time will tell.
Peace.

Euan Mearns, December 17, 2015 at 7:54 pm

Huckleberry, via email I've also been pulled up on not placing inventories in context and that is valid criticism. On the size of surplus going to storage. I'm simply taking the IEA numbers. I stopped following the EIA when they fell 150 years behind 😉

The trouble with the IEA is that all the data needs to be transcribed by hand from the OMRs. Its about time this was all available on XL, bang up to date. What are the IEA thinking about, an OECD institution, no doubt funded by us, trying to give competitive advantage to the rich by drip feeding data into public domain.

The supply demand price model is all I have to go on to try and convert market dynamic to price. Phil Hart, who I think founded the concept, based this on volume produced not volume consumed. So there is no doubt room for refinement, but it means transcribing years of data by hand from OMRs – a task I'm going to hand over to Luis who has made a habit of telling me what I should be doing.

Reply

mushalik (@crudeoilpeak), December 18, 2015 at 3:34 am

That 3 Gb comercial inventory number is from the IEA November OMR report

https://www.iea.org/media/omrreports/fullissues/2015-11-13.pdf

Have a look at the graph on page 4. The 5 year OECD inventory average is between 2,600 – 2,800 mb. So can we consider this as a "normal operating condition"?

Therefore, 3,000 mb has to be compared with, say, 2,700 mb which is around 10% more. Not really much. 300 mb would be gone within one year at the rate of 1 mb/d for OECD countries.

If inventories were to go below the lower bound, say 2,500 mb, the IEA would certainly issue a warning

Euan Mearns, December 18, 2015 at 10:34 am

I concede that I got the emphasis wrong on stock levels.

ristvan, December 17, 2015 at 8:53 pm

Euan, there are some background factors that could be added to your overall analysis.

1. Roughly 40% of Saudi output is from Ghawar. In 2010, after reworking the sourthern Haradh section for secondary water flood, they said Ghawar could produce for another 38 years (watercut is already 55%) iff production was continually cut back from the then 5.1mbpd. So their price war is to some extent hurting their own production future. Plus, their social spend drew down foreign currency reserves by about $100 billion in 12 months, in addition to withdrawing $70 billion from asset managers. iMF says the deficit is about 20% of GDP. At that rate, they run out of surplus cash in (650/[100+70]) three and a half years. Even the Saudis cannot afford to keep this going for long.

2. The 2008 IEA survey of ~800 major fields (including all giants and supergiants) which produced over 60% of that years crude showed an average annual decline rate of 5.1%. it would be more by now. That means the world has to add (0.051*0.6) about three percent additional capacity each year just to stay even. If demand growth is 1.5% as you estimate, that net new capacity has to be about 4.5% annually just to remain in balance. You estimate demand at 96mbpd 2h2016 in fig. 3. That means about 4.3mbpd of new capacity by YE 2016. Iran says it can increase exports 0.5mbpd in 2016 after sanctions are lifted. That leaves 4mbpd to be made up by the undeferred portion of the new capacity pipeline next year. That is quite a lot.

I think that the Saudis figured all this out, and that the price war will be over before YE2016. Even the Saudis cannot afford it to go on longer, and it does not take much to bring demand and supply back into balance. Just cutting back Ghawar to prevent field damage would almost do the trick; in 2012 Ghawar alone was 6.1% of total world crude production excluding NGL.

FWIW, my own outsider's 'guess' for YE 2016 is around $75-80/bbl. That puts most US shale back in business, but does not enable new deepwater (BP and Chevron estimate a minimum $85/bbl, and Brazil is in turmoil) or the discovered Yamal giants in Russia lacking infrastructure (estimate $100/bbl needed.)

Then within 2 more years, back over $100 because Brazil's subsalts and the Yamal fields will be needed to replace the annual decline in other conventional oil (defined as API>10, reservoir porosity >5%, reservoir permeability > 10 darcies).

mushalik (@crudeoilpeak), December 18, 2015 at 2:13 pm

There can be no doubt that crude oil production started to peak in 2005. The response of the system to this event was quantitative easing and unconventional oil which brought about an increase in crude oil production from US shale oil and Canadian tar sands 5-6 years later.

http://crudeoilpeak.info/latest-graphs

The 2005 WEO is here:
http://www.worldenergyoutlook.org/media/weowebsite/2008-1994/weo2005.pdf

It predicted 105 mb/d by 2020 (p 90), including processing gains. By latest OMR numbers we are now at 97 mb including 2.6 mb/d biofuels

According to table 3.5 of the WEO 2015, shown here by ASPO Germany on slide 3
https://drive.google.com/file/d/0B9AZj5ZYb55NdlBtQTRWZlVPZ28/view?pli=1

2020 production would be 95.9 mb/d or 9 mb/d less than estimated 10 years earlier.

IEA did not foresee shale oil but thought much higher supplies would come from from OPEC

It only shows how difficult is to predict future supplies.

Stuart , December 17, 2015 at 9:17 pm

Euan,

I think perhaps you overestimate the role of stocks. Oil in storage is owned by somebody, usually oil traders, and their #1 priority is to get the maximum price when they sell. Balancing the market is of no concern to them at all. If prices are rising, they will buy more.

The oil stocks do NOT serve to balance the market, outside the SPR they are largely owned by speculators.

[Dec 21, 2015] $100 barrel oil Gazprom predicts Russia's rebound

Notable quotes:
"... According to Dyukov, currently there is shorting game . One of the reasons is the expectation of a rate increase by the Fed. For now the price has stabilized. Theoretically, if the shorting game will continue, the price may get lower but it is obvious that this decline will be short-term, - said Alexander Dyukov. ..."
"... If you removed 1.5 to 2 million barrels of oil from the market, it would bring oil prices to 65 dollars per barrel, guaranteed ..."
"... The extraction of unconventional hydrocarbons in North America is likely to decline, which will balance supply and demand in the medium term. This will lead to higher prices. The lifting of the embargo on oil exports from the United States, according to Dyukov, will not have a significant impact on the global market. ..."
December 21, 2015 | Fort Russ

Orginally publushed by Rossijskaya Gazeta. Translated from Russian by Kristina Rus for Fort Russ

Global oil prices could sink below the current level of 36 dollars per barrel, but it will not last long, says general director of "Gazprom Oil," Alexander Dyukov.

"No matter what, in the medium or long term the rates will begin to return to the level that is just and right for consumers and producers. I'm talking about the price of 90-100 dollars per barrel", - he declared in an interview with TV channel "Russia 24".

According to Dyukov, currently there is "shorting game". One of the reasons is the expectation of a rate increase by the Fed. For now the price has stabilized. "Theoretically, if the shorting game will continue, the price may get lower but it is obvious that this decline will be short-term," - said Alexander Dyukov.

However, reaching the level of $90-100 per barrel may take a few years. The head of "Gazprom Oil" called the current situation not the most favorable.

"It will have long term implications not just for oil companies but for the consumers," - he said. Dyukov also believes that Russia should not change the strategy on the global oil market in an attempt to maintain global oil prices.

"We don't feel the weakest in this game, we have a serious margin of safety. I don't see any point for us to change the strategy that was chosen by the Russian Federation. If we talk about this competition - we won't lose it for sure. It's a game of nerves, who'll blink first, but Russia is absolutely prepared for this game. In production costs we are not far behind the Middle East, maybe even better off in some ways," - he said.

The lost balance of supply and demand in the oil market could be restored by OPEC and Saudi Arabia.

"But Saudi Arabia is currently fighting for the market share, in addition to increasing its share it is trying to take over expensive projects from many investors. If you removed 1.5 to 2 million barrels of oil from the market, it would bring oil prices to 65 dollars per barrel, guaranteed", - said Dyukov.

The extraction of unconventional hydrocarbons in North America is likely to decline, which will balance supply and demand in the medium term. This will lead to higher prices. The lifting of the embargo on oil exports from the United States, according to Dyukov, will not have a significant impact on the global market.

[Dec 21, 2015] Iraq Sees Crude Oil Prices Rising on Strong Fundamentals

Notable quotes:
"... Crude prices are set to rise from current "very low" levels that are hurting producers, Iraq's Oil Minister Adel Abdul Mahdi said after a meeting of Arab petroleum-exporting nations. ..."
Dec 20, 2015 | Bloomberg Business

Crude prices are set to rise from current "very low" levels that are hurting producers, Iraq's Oil Minister Adel Abdul Mahdi said after a meeting of Arab petroleum-exporting nations.

Abdul Mahdi, whose country is the second-biggest producer in OPEC, didn't forecast when prices would rebound from an almost seven-year low for Brent, the benchmark for more than half of the world's oil. Qatar's Energy Minister Mohammed Al Sada told reporters before the meeting in Cairo there was no need to be pessimistic about prices.

"There is no doubt that oil prices will rebound," Abdul Mahdi told reporters Sunday after the meeting of the Organization of Arab Petroleum Exporting Countries. "This current level is too low, and it's affecting oil producers. I think economic factors and fundamentals are still strong."

[Dec 20, 2015] History repreats: Shale junk bonds were offloaded by Wall Street firms to public investors

Notable quotes:
"... A reminder that a few weeks or months ago at a JP Morgan investment meeting, maybe even annual, a question was posed to management about their exposure to high yield bonds from shale. The answer was "we have offloaded that risk to public investors". ..."
"... JPM will have managed accounts. They are authorized to trade client money without informing the client of what has been done for each trade, and of course the theory would be that if the client doesn't benefit then they will pull their money from the account. ..."
"... Well, the account managers are trained and polished in selling ice cream to eskimos. They are professionals at persuading money to stay within the Assets Under Management umbrella and the client is not professional at countering those persuasion techniques. ..."
"... It's a new world out there. In 2007 hedge funds and Goldman cooperated in arranging short positions in mortgage backed securities and then spread the word those securities were non performing mortgages, DESPITE the fact Goldman had put clients into them to offload their own risk. Do not believe these guys will place client interests above their own. hahahah how absurd would that be. ..."
"... Methinks a lot of pension funds are facing some pretty large losses on oil and gas bonds. ..."
peakoilbarrel.com
Watcher, 12/20/2015 at 12:44 pm
A reminder that a few weeks or months ago at a JP Morgan investment meeting, maybe even annual, a question was posed to management about their exposure to high yield bonds from shale. The answer was "we have offloaded that risk to public investors".

What you may not understand is what that can mean in terms of awareness. JPM will have managed accounts. They are authorized to trade client money without informing the client of what has been done for each trade, and of course the theory would be that if the client doesn't benefit then they will pull their money from the account.

Well, the account managers are trained and polished in selling ice cream to eskimos. They are professionals at persuading money to stay within the Assets Under Management umbrella and the client is not professional at countering those persuasion techniques.

The point being, this lending money to shale (in that meeting it was done to service loans already made to shale and keep them current) can be with Other People's Money and those people may not know, and probably don't know.

It's a new world out there. In 2007 hedge funds and Goldman cooperated in arranging short positions in mortgage backed securities and then spread the word those securities were non performing mortgages, DESPITE the fact Goldman had put clients into them to offload their own risk. Do not believe these guys will place client interests above their own. hahahah how absurd would that be.

And so, stop thinking that pre 2007 Normal in the world still applies. It doesn't. There are no precedents to what is happening in many things. At the core of the reasons why . . . is scarcity.

Jeffrey J. Brown, 12/20/2015 at 12:51 pm
Methinks a lot of pension funds are facing some pretty large losses on oil and gas bonds.

[Dec 20, 2015] The low prices are taking their toll

Notable quotes:
"... Ecopetrol, the largest Colombian producer announced that it will produce 755,000 barrels a day in 2016 vs 760,000/day in third quarter of 2015. That does not sound like much a of drop, until you realize that Ecopetrol will be taking over the Rubiales field from a joint venture by not extending their partners contract. ..."
"... So I am guessing their base decline rate is closer to 10% ..."
peakoilbarrel.com
Huckleberry Finn, 12/20/2015 at 12:32 pm

The low prices are taking their toll. http://www.newswire.ca/news-releases/ecopetrol-announces-us48-billion-investment-plan-for-2016-561775541.html

Ecopetrol, the largest Colombian producer announced that it will produce 755,000 barrels a day in 2016 vs 760,000/day in third quarter of 2015. That does not sound like much a of drop, until you realize that Ecopetrol will be taking over the Rubiales field from a joint venture by not extending their partners contract.

That will add 70,000 barrels a day to their production. Or about 35,000 barrels day annualized since it happens mid-year. So adjusted for this their production will decline from 795,000 barrels to 755,000 barrels per day, or a drop of 5%.

And that is after spending 4.8 Billion USD. So I am guessing their base decline rate is closer to 10%

[Dec 20, 2015] When Will Oil Prices Turn Around

OilPrice.com

For the first half of 2015, the tight oil-weighted E&P companies that I follow spent about $2.20 in capital expenditures for every dollar they earned from operations (Figure 5).

[Dec 20, 2015] Forecast of Crude Oil Prices

useconomy.about.com

Energy Information Administration (EIA) forecasts that WTI futures contracts for March 2016 delivery will rebound to $44/b. However, it warns that volatility makes this forecast uncertain. It noted that commodities traders said prices could be anywhere between $30/b and $63/b.

That's much lower than EIA's July forecast for October delivery. That averaged $59.45/b. Traders said there was only a 20% chance it would go below $50/barrel.

They said prices would remain above $41/b in December. Instead, WTI for January delivery plummeted to $37.51 a barrel on the New York Mercantile Exchange. (Source: Market Prices and Uncertainty Report, EIA, July 7, 2015).

... ... ...

It accurately predicted that global Brent crude oil would drop to a level of $49/b in early 2015. It wrongly said prices would rebound to between $56/b to $60/b by year end. Inventories and production remained higher than expected. Inventories rose 1.8 million b/d in the first three-quarters of 2015.

... ... ...

Why Are Oil Prices So Volatile Right Now?

...many producers had to keep pumping oil, once the wells were opened. Capping off a well is expensive.

Second, forex traders drove up the value of the dollar by 15% in the last six months of 2014. Since all oil transactions are paid in dollars, this offset and possibly even caused 15% of the decline in the price of oil for exporting countries.

[Dec 20, 2015] This is what will happen when U.S. oil producers start to export

I agree that the effect of lifting the US export ban will be limited. Basically, the current spread between WTI and Brent will be largely eliminated.
Notable quotes:
"... If oil rises above $50, however, the picture could change. And the higher prices go, the stronger the incentive will be for U.S. producers to crank up drilling and send the crude overseas. ..."
finance.yahoo.com

If oil rises above $50, however, the picture could change. And the higher prices go, the stronger the incentive will be for U.S. producers to crank up drilling and send the crude overseas.

"With higher prices, U.S. producers would produce more again," says analyst Mark Broadbent of research firm Wook Mackenzie. "In a stronger price environment I'd expect to see more exports and producers eager to ramp up prices."

[Dec 20, 2015] Vultures start circling shale companies

Notable quotes:
"... I would guess that by now, most can see what is happening and therefore, what is going to happen in the future since the model has been established. The banks are not going to take serious hits. Re: Magnum Hunter and New Gulf Resources. ..."
"... I remember seeing some vulture investor discussions back in 2009. They were stating that they would never buy equity in failing companies: they would take control thru the debt. Much more upside possible. ..."
"... The investment/hedge funds step in. They can buy $1 billion of debt for $300 million or less, and the are praying that the company does go belly up. If it does, they get 100% of the equity, and agree to put in another $200 million to ride out the storm. A totally non-contested, prearranged bankruptcy. If things come back [even partially], they might own a company worth $2 billion for their $500 million investment. ..."
"... The vultures give the unsecured bond holders the option of taking pennies on the dollar or becoming subordinate the vultures on all the debt the vultures are able to trade out. ..."
"... In any event, after burning several million dollars, the sold the assets and I am sure took a big loss. ..."
peakoilbarrel.com

Clueless, 12/19/2015 at 10:40 pm

I would guess that by now, most can see what is happening and therefore, what is going to happen in the future since the model has been established. The banks are not going to take serious hits. Re: Magnum Hunter and New Gulf Resources.

I remember seeing some vulture investor discussions back in 2009. They were stating that they would never buy equity in failing companies: they would take control thru the debt. Much more upside possible. So, a company with $1 billion in debt has its bonds trading at say 70 cents on the $ and it is rated junk. The bond funds that hold the debt [their covenants prohibit them from holding "bankrupt" rated debt] sells to novice speculators. Then the debt plunges to 10- 30 cents on the dollar.

The investment/hedge funds step in. They can buy $1 billion of debt for $300 million or less, and the are praying that the company does go belly up. If it does, they get 100% of the equity, and agree to put in another $200 million to ride out the storm. A totally non-contested, prearranged bankruptcy. If things come back [even partially], they might own a company worth $2 billion for their $500 million investment.

shallow sand, 12/19/2015 at 11:20 pm
Clueless. You are correct. I might add that the vultures do not appear to be just purchasing the debt. They are trading unsecured debt for second lien debt. I am not sure how this works, but from what I have read, the unsecured bonds have very weak covenants. The vultures give the unsecured bond holders the option of taking pennies on the dollar or becoming subordinate the vultures on all the debt the vultures are able to trade out.

The vultures better be pretty sharp, however. 1st, they better have a good handle on the assets they are trying to acquire. Second, they better have a good team put together to operate the assets. Third, they better have a better handle on future oil and gas prices than schmucks like me.

I saw something similar to this up close in the aftermath if the 1998-99 crash. An investor group bought the bad debt from a bank for pennies on the dollar, took assignment of the liens and foreclosed.

The investor group found out in a hurry that they didn't quite know what they had bought, and that it wasn't easy to manage from 1000+ miles away. They had a hell of a field superintendent, but of course they thought they were smarter than him, despite him having grown up in the middle of the field.

In any event, after burning several million dollars, the sold the assets and I am sure took a big loss. They also screwed up on timing the sale. Had they held on for about 3 more years they could have at least quintupled the sale proceeds. But they knew about as much as I, or really any of us, know about where oil prices are headed.

I am sure these distressed buyers are real sharks. But sharks can die too.

[Dec 20, 2015] Report Eagle Ford Shale Has Peaked, Lifting of Oil Export Ban Could Drain Field More Quickly

Notable quotes:
"... As a result, the drilling treadmill - seeking out new locales to frack in order to keep productivity rates flat - continues apace. The problem, Hughes points out, is that there isn't anywhere left to turn. ..."
"... "This is somewhat counterintuitive as conventional wisdom suggests that companies are focusing drilling efforts on their best acreage, which is in top counties such as Karnes, and withdrawing from more marginal parts of the play in order to maximize economics in a low oil price environment," he writes. "The reason for the steeper decline in Karnes County is likely that it is the most heavily drilled and high quality locations are running out." ..."
"... The hype surrounding tight oil as a means to bolster global oil production over the long term is not justified. Geological fundamentals clearly show that high decline rates, limited sweet spots, and finite numbers of drilling locations will limit long term contributions to production ..."
"... The optimistic tight oil forecasts of the EIA, and even more optimistic forecasts of some industry watchers, are unhelpful abstractions in developing energy policy for a more sustainable future ..."
Dec 18,2015 | naked capitalism

A new report published by the Post Carbon Institute concludes that Texas' Eagle Ford Shale basin, the most prolific shale oil basin in the U.S., has peaked and reached terminal decline status.

... ... ...

As a result, the drilling treadmill - seeking out new locales to frack in order to keep productivity rates flat - continues apace. The problem, Hughes points out, is that there isn't anywhere left to turn.

"This is somewhat counterintuitive as conventional wisdom suggests that companies are focusing drilling efforts on their best acreage, which is in top counties such as Karnes, and withdrawing from more marginal parts of the play in order to maximize economics in a low oil price environment," he writes. "The reason for the steeper decline in Karnes County is likely that it is the most heavily drilled and high quality locations are running out."

These drilling trends are also mapped out for readers to see what the drilling treadmill and sweet spots looks like in action.

... ... ...

Hughes closes the report by suggesting that U.S. energy policy (and thus global energy policy) is dictated by a drilling technique that has already eclipsed peak production mode just over a half decade after its birth.

"The hype surrounding tight oil as a means to bolster global oil production over the long term is not justified. Geological fundamentals clearly show that high decline rates, limited sweet spots, and finite numbers of drilling locations will limit long term contributions to production," wrote Hughes.

"The optimistic tight oil forecasts of the EIA, and even more optimistic forecasts of some industry watchers, are unhelpful abstractions in developing energy policy for a more sustainable future."

PlutoniumKun

This is pretty much exactly as the geologist Arthur Berman (and others) predicted quite a few years ago. Extrapolations from the outputs existing shale oil wells ignored the fact that experienced drillers don't drill randomly – they know what they are doing and usually are very good at hitting the sweet spots. Add in the strong incentive drillers have to exaggerate their success rate and you have a recipe for over optimistic predictions and over investment. The nature of tight oil is such that a decline is likely to be very rapid after the peak is hit as established techniques for drawing out the life of a conventional well (such as fracking around an oil bearing void or pumping in seawater/CO2) can't be used.

night-Train

Agreed. I am doubtful of secondary and tertiary recovery processes as used in conventional oil fields being effective in tight oil bearing formations. These plays and their ability to make the US an energy independent nation have been over sold to the American public. Now, allowing for these finite resources to be exported is foolish and will prove to be the height of political folly. If we are to move forward with it, we should remove all Federal subsidies and tax breaks to the industry. Let the industry sink or swim on its own dime. If it isn't a strategic resource for this country, as a country, we have no imperative to support it more than any other commodity or enterprise.

ambrit

Your comment highlights one of the 'hidden' developments of the modern political economic landscape: Internationalism, or Globalization.
Properly speaking, those who 'manage' the resources have become 'equal partners' with the National governments. Something very akin to the old Robber Barons has arisen; a new Oligopoly. I hesitate to say that the old version of the film "Rolerball" was prescient, but, there it is. Rather than teams sponsored by and representing Industries we have stadia doing that job. Would that I live long enough to see the Army Navy game played in the "Military Industrial Complex Stadium!"
Hail Hydra! Let's do the Strut.

James Levy

Likely accurate and therefore devastating. I still don't know how the fracking industry is surviving, as every barrel they pump is a loss–under no model I have ever seen is fracking economical at $40 a barrel and dropping. And the dropping is hiding in plain sight the significant (massive?) contraction of the global economy. Growing economies do not use fewer inputs of energy and raw materials. This is so obvious it's amazing that it goes unreported (are people blind to the big picture, swallowed up in the minutiae, or just whistling past the graveyard?).

As with the banks, the government is setting things up for the Oligarchs to make One Last Killing on fossil fuels. The aftermath is not going to be pretty.

Carla

This post sent me looking for the origins of a famous quote, which may first have been uttered by Native American Alanis Obomsawin, "an Abenaki from the Odanak reserve, seventy odd miles northeast of Montreal."

"Canada, the most affluent of countries, operates on a depletion economy which leaves destruction in its wake. Your people are driven by a terrible sense of deficiency. When the last tree is cut, the last fish is caught, and the last river is polluted; when to breathe the air is sickening, you will realize, too late, that wealth is not in bank accounts and that you can't eat money."

http://quoteinvestigator.com/2011/10/20/last-tree-cut/

The sentence "Your people are driven by a terrible sense of deficiency" just nails it, does it not?

different clue

I remember reading that a Pacific Northwest Nations person is supposed to have said something similar.

" When the last salmon has been fished from the last river, then the White Man will learn that he can't eat money."

One could update it this way: "When the last can of cat food is gone from the last shelf in the last WalMart, then the White Man will learn that he can't eat money."

Reply

PlutoniumKun

My understanding is that they can keep going partly because the marginal cost of keeping existing wells going is very low (i.e. if you pretend there wasn't a heavy upfront investment) and that many operators were heavily hedged (showing that their investors aren't complete fools). Of course, that raises the question of who is making the hedging losses.

But as Wolf has pointed out, the hedges will likely run out early 2016, at which point the naked swimmers will be all too visible.

different clue

I remember reading that a Pacific Northwest Nations person is supposed to have said something similar.

" When the last salmon has been fished from the last river, then the White Man will learn that he can't eat money."

One could update it this way: "When the last can of cat food is gone from the last shelf in the last WalMart, then the White Man will learn that he can't eat money."

Reply

PlutoniumKun

My understanding is that they can keep going partly because the marginal cost of keeping existing wells going is very low (i.e. if you pretend there wasn't a heavy upfront investment) and that many operators were heavily hedged (showing that their investors aren't complete fools). Of course, that raises the question of who is making the hedging losses.

But as Wolf has pointed out, the hedges will likely run out early 2016, at which point the naked swimmers will be all too visible.

Reply

PlutoniumKun

James – partly it comes down to a different investment model in commodities and base products. It is always assumed if you invest in those that there will be periods where the market price is well below what is profitable. You lose when oil prices are low, you gain when they peak. So investors are conditioned to gritting their teeth when prices are low. What is important to the producers is that the price can cover running costs – which is why sometimes oil supply increases when prices are low – existing wells raise production to keep a cash flow going. Quite simply, investments on this scale are made on 20-25 year timescales, they will assume (or hope for) sufficient super-profitable peaks to tide over the low periods. And of course wiser investors will have hedged anyway so they may not be feeling the pain as much as you might think.

Of course, there is also the 'sunk cost fallacy' at work – having put billions into oil, many investors feel they have no choice but to keep the operators going in the hope that somehow a war somewhere will lead to a spike that will rescue them. Hence there is a bit of a 'too big to fail' mentality at work, nobody wants to start a panic by being the first one to move to wind up loss making operators, its easier to make sub contractors suffer by cutting costs to the bone, up production in existing wells to keep some cash flowing, and hope for the best.

different clue

If you borrow that billion dollars in the form of re-sellable loan instruments, and then you sell those interest-bearing instruments to some greater fool before you have begun spending down the billion, then you do not worry about going bankrupt. Some Greater Fool gets to worry about going bankrupt.

You get to skim off just enough money from that billion dollars so that when the rest of it is gone, the factory shuts down and you declare "bankruptcy". But you haven't lost anything. The people you sold the debt-repayment-instruments to are the people who lose everything. You walk away with whatever survival-money you quietly skimmed off the billion while operating your factory at a visible loss with the rest of the billion till the rest of the billion is gone.

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Crazy Horse

Nice synopsis of the Private Equity model as practiced successfully by vampires like Mitt Romney.

Oildusk

Why didn't you note that the number of drilling rigs in the Eagle Ford has gone from about 250 in late 2015 to 47? Perhaps that had something to do with the decline rate? The Eagle Ford has considerably more potential than you suggest and your graph would look considerably different if 247 rigs were still active there – as will happen when oil prices rebound back in the next year or two.

Eliminating the Oil Export Tax on oil is long overdue. It will close the gap between Brent and WTI – so that at least US oil producers aren't having to sell oil produced in the US for less than oil produced by OPEC. It will also eliminate the economic wastage of U.S. produced light oil being sold to U.S. refineries who buy it so cheaply that they substitute it for medium grade oil in their refinery processes. Keeping my fingers crossed that this law gets eliminated next week.

Crazy Horse

Multiply known depletion rates of individual wells by lower productivity per new well as the sweet spots are all tapped and the mathematics are so simple that even a Texan should be able to understand them. 247 rigs or 2,000 rigs drilling holes with production rates that fail to recover their capital costs won't do much for reversing oil field senility.

But I'm sure changing the tax policy is the solution. Perhaps having the Government just pay for all drilling costs would do the trick- at least long enough to create a few more Koch dynasties.

... ... ...

night-Train

CH – your are raining on the "Shale Miracle". For it to work, we must all believe, believe with all our hearts. It's like Tinkerbell. All it needs to succeed is unquestioning belief and $100/bbl oil.

Bubba Gump

"Why didn't you note that the number of drilling rigs in the Eagle Ford has gone from about 250 in late 2015 to 47?"

I could entertain this idea. Figure 1 would be more informative if it had a rig count as well as an active well count. It's clear to see that the leveling off of the active well count takes place at or just after the peak production. If the rig count dropped off at the same time I think the phenomenon it actually illustrates is just how drastic the depletion rate is for fracked wells especially at this point in the development of this field. I would take that as reinforcing the study's point, not opposing it.

[Dec 19, 2015] The situation of shale drillers is extreme and is getting worse

Notable quotes:
"... If 98% of Permian is uneconomic at $30, I would be surprised as I would think 100% should be. ..."
"... these fast talking, wheeler-dealer promoter types in the oil and gas business and their cohorts on Wall Street have been throwing out highly inflated reserve figures for quite some time now. ..."
"... And an "as-yet-unreleased study" of the Barnett Shale by the Bureau of Economic Geology at the University of Texas at Austin, which looked at the performance of 16,000 wells through June 2011, projected an average lifetime production of 1.44 BCF ( ..."
"... Chesapeake claimed that the Barnett Shale wells on their DFW Airport Lease would produce for "At least 50 years." At least 50 months" would have been more accurate. Five years after the initial wells were drilled and completed, about half of that initial group of wells were already plugged and abandoned. ..."
"... Pricewise we are past the point of arguing about economics. ..."
"... This is extreme, and is only getting worse. People who are about to BK are usually in denial. ..."
peakoilbarrel.com
coffeeguyzz, 12/19/2015 at 11:01 am
John, Shallow, Mr. Stehle

You folks may want to recognize the analytical process that Art Berman uses in this piece closely resembles numerous others who were consistently shown wrong when early on looking at the Bakken. Please Google back a few years' predictions to verify this.

If 98% of Permian is uneconomic at $30, I would be surprised as I would think 100% should be.

However, all you folks who chart the numbers should see that the big push towards horizontal drilling just started to get underway relatively recently in the Permian, yet Mr. Berman uses the earlier, learning phase wells to make his overall projections.

These wells will continue to increase in productivity as the costs to drill/complete come down. (Monobore wells alone should show significant improvements).

30 bucks per [barrel] is squat. Tens of billions of barrels of recoverable resource is not.

Glenn Stehle, 12/19/2015 at 12:07 pm
coffeeguyzz,

Well I certainly hope you're right. But these fast talking, wheeler-dealer promoter types in the oil and gas business and their cohorts on Wall Street have been throwing out highly inflated reserve figures for quite some time now.

For instance, in 2013 the Fort Worth Star Telegram wrote an article titled "Report questions long-term productivity of gas wells in Barnett Shale."

Back in the heyday of the Barnett Shale (2005 – 2008) the financial reports of companies active in the Barnett Shale routinely threw out average EURs of 5 BCF(Billion Cubic Feet) per well.

By the time of the writing of the Star Telegram story in 2013 they had lowered their sites a little bit: to an average of 3 BCF per well.

However, a study conducted by the U.S. Geological Survey the year before had pegged average EURs in the Barnett Shale at only 1 BCF per well.

And an "as-yet-unreleased study" of the Barnett Shale by the Bureau of Economic Geology at the University of Texas at Austin, which looked at the performance of 16,000 wells through June 2011, projected an average lifetime production of 1.44 BCF ((Billion Cubic Feet) per well.

Undaunted by all this, the article quotes Gregg Jacob, Devon Energy's unit manager for the Barnett Shale, as saying "Devon expects its 4,800-plus wells in the Barnett Shale to produce the equivalent of 3 billion cubic feet of gas, natural gas liquids and oil over their lives."

Jeffrey J. Brown, 12/19/2015 at 3:11 pm
Chesapeake claimed that the Barnett Shale wells on their DFW Airport Lease would produce for "At least 50 years." "At least 50 months" would have been more accurate. Five years after the initial wells were drilled and completed, about half of that initial group of wells were already plugged and abandoned.
shallow sand, 12/19/2015 at 12:27 pm
Coffee. It is tough to analyze the Permian, at least compared to Bakken and EFS. Many different zones. I have seen tremendous wells and wells that wont have cumulative production of 100K BO. Look at the energy net auction site.

Look at my post above about Pioneer's 2015 hedging gains.

Remove those and plug in $18 per BOE, which is where they are today. Pioneer hemorrhages cash at $18 BOE.

Pricewise we are past the point of arguing about economics. Plug in todays oil, NGL and gas prices into any company's PDP PV10. See if you can find one US public E&P, outside maybe XOM, that has greater PDP PV10 value than long term debt. If $50 WTI and $2.75/nat gas dropped CLR from $22 billion to $9 billion, where does $34 WTI and $1.75 gas put it?

This is extreme, and is only getting worse. People who are about to BK are usually in denial.

[Dec 19, 2015] Over 1 trillion in oil related equity losses, 500bn in bond devaluation including a 10 pecent loss in high yield bonds

Notable quotes:
"... I doubt even those prices will be enough to remove all rigs from the Bakken. ..."
"... However, the fierce battle for market share comes at a price for the US economy. Over 1 trillion USD in oil related equity losses, 500bn in bond devaluation in oil related bonds including private equity bond losses as well as a 10% loss of the general high yield bond market. So, in my estimate the US economy has lost already over 2 trn USD so far. Most of it are paper losses, yet the impact is huge. ..."
peakoilbarrel.com
KL, 12/19/2015 at 8:19 am
Shale Oil Production in Bakken, Eagle Ford Held Steady in November: Platts Bentek
http://www.platts.com/pressreleases/2015/121815b/no?hootpostid=7da8c0be16213d5c336d783ed00ab303
shallow sand, 12/19/2015 at 10:43 am
It appears I am onto something. Most of the US drop in oil production will be due to drops in US conventional oil.

It is all about financing, IMO. How about this scenario, if