Rapid drop in Petroleum prices could be a warning....

[xBiffx]

^ Nice find. Interesting data.

 

[senseamp]

My intuition is that US oil plays are more vulnerable on costs than some of the others, because oil dependent countries' currency also drops with price of oil, which reduces their labor costs. US companies don't have that benefit, dollar actually strengthens with falling oil, because it acts as a stimulus, reducing the need for Fed monetary stimulus.

 

[ralfy]

Guess what all kinds of new tech have been introduced over the past century to enhance and expand what is possible to recover.

Where would we have peaked at without offshore? or injection wells? or pump lifts? or vertical fracking? steerable bits? the list goes on....

Such technologies cannot cope with physical limitations. That's why even with advanced technologies in crude oil production we are now forced to resort to shale oil. That's also why shale oil is expected to peak after only a few years.

Meanwhile, capital expenditures driven by higher marginal costs and debt keep going up. That's not good news is prices drop because of a slight decrease in demand due to expectations of renewed economic crisis:

http://forums.anandtech.com/showpost.php?p=36956739&postcount=30

 

[ralfy]

No, he is just saying he holding on peak oil as tight as can, even when reality says something different.

Peak oil already took place. That's why we're now forced to use shale oil.

Also, if we consider global oil production per capita (which is more logical, as the oil is used by a growing global population), then that peaked back in 1979:

http://cassandralegacy.blogspot.com/2013/07/peak-oil-what-peak-oil.html

The global middle class that time was very small. It's now much larger and set to increase considerably:

http://www.bbc.co.uk/news/business-22956470

To meet continuous economic growth (which needs up to a 2-pct increase in oil demand per annum), we will need the equivalent of one Saudi Arabia in new oil every seven years. If the new oil involves low energy returns (which is the case for crude oil and unconventional), then we will need even more. If the global middle class continues to grow (which is needed by capitalist economies), then even more new oil will be needed.

Finally, the new oil entails higher marginal costs.

 

[ralfy]

Check out page 15 here: http://www.eia.gov/pressroom/presentations/sieminski_01042014.pdf

The peak for tight oil will occur fairly soon, but it will still level off at levels higher than today. Not sure how/if they take into account future, currently unforeseen technology improvements.

The bad news is that the global economy needs ever-increasing production levels to ensure economic growth. Also, it is likely that what is unexpected cannot be taken into account, and that what is unexpected can work both ways.

Given that, I'd consider what various sources have argued: we will need the equivalent of one Saudi Arabia in new oil every seven years to maintain economic growth. If the energy returns for new oil is too low, then more will be needed. If the global middle class keeps growing, then even more.

 

[ralfy]

I read an article yesterday that indicated that lots of U.S. shale oil is profitable down to $40 a barrel.

Yes, oil-related securities will suffer from extended low oil prices. But there will be major winners, too. Like pretty much anyone who drives a fossil-fuel powered car. Like pretty much anyone who directly or indirectly uses fossil fuel for electricity.

And think of Russia and Iran and Venezuela and all of those oil sheikdoms. Can it possibly be a bad thing that the leaders of those countries will get all of the blame when cheap oil (further) decimates their economies?

Unfortunately, those who invest in oil companies want higher returns, which means higher profits.

Also, oil is used not only for powering cars and for electricity but for manufacturing, food production, mining, transport of goods, etc.

Finally, a global economy involves economies coupled to each other. Disruption can lead to another global economic crisis, and given multiple problems, greater conflict.

 

[ralfy]

This is quite possibly the dumbest post ever. The large drop in 2008 wasn't because of the same reasons.

Saudi Arabia is playing hardball with competition and DELIBERATELY selling oil at extremely low prices in order to kill competition that can't afford to sell for that low. Honestly from a business perspective, smart move.

People are saying the Keystone Pipeline project to the gulf is dead thanks to the low prices it doesn't make it worth doing anymore. http://finance.yahoo.com/news/why-keystone-xl-pipeline-already-113000920.html

The problem may involve weakening demand from Europe and China due to economic crises:

http://www.eia.gov/todayinenergy/detail.cfm?id=18891

which leads to a significant drop in prices:

http://forums.anandtech.com/showpost.php?p=36956739&postcount=30

 

[ralfy]

Heres the counter opinion that its Saudis doing
http://seekingalpha.com/article/272...ast-to-2020-will-make-saudi-arabia-very-happy

Leaving aside the popular press’s antipathy to Saudi Arabia, it is eminently possible the reason oil prices finally crashed from their unreasonably high level, was not a Machiavellian scheme instigated by Saudi Arabia, and more likely had something to do with the increasing demand from U.S. shale-oil producers to hedge the part of their production that was necessary for their payback on CAPEX

The Saudis have been remarkably open and consistent about their position. For ten-years, they have been telling anyone and everyone who would listen what they think is the correct price of oil; that (NYSE:A)) their customers can afford and (B) provides a reasonable incentive for bringing-on new oil to replace what got pumped.

· When it shot to $145 in 2008…..They said the correct price was $75

· When it plunged to $35 in 2009…..They said the correct price was $80

· When it jumped to $85 in 2010…..They said that’s about right

· When it rocketed to $110…..They said the correct price was $90

· Now….. They are saying the correct price is $95

It is (perhaps) reasonable to ask, “If the Saudis think the correct price of oil today is $95 then why is it $65?” The reason is that four-years of prices being higher that what Warren Buffet calls the intrinsic value, accountants call Fair Value, and others call the Fundamental, leads like day follows night to what the Austrian Economists call malinvestment.

From what I know, Saudi Arabia has not allowed for external audits of their reserves. But at least we are aware that they have been focusing on other energy sources:

http://www.forbes.com/sites/jamesconca/2014/09/08/saudi-arabia-fast-tracks-nuclear-power/

 

[charrison]

Not yet? Really? because:



http://theadvocate.com/news/10825248-123/falling-oil-prices-may-spark

There is a difference between having to recalibrate and being in financial trouble.

 

[charrison]

Peak oil already took place. That's why we're now forced to use shale oil.

Yet production keeps going higher. We have not hit a peak, because technology keeps improving our ability to produce. Even when a well gets plugged we are lucky to have extracted 1/2 of what is in that reservoir. Technology changes what is possible and what is economical.

 

[charrison]

Peak oil isn't a theory its fact, its simple, flow rates from conventional oil will peak to a maximum , they have in 2005 or 2008 depending on who you read, everything else added has been substitution,
Just because shale oil is adding to the lower 48 production how's Alaska doing? North Sea? Mexico? Canadian conventional and on and on, its global and that has hit maximum flow

Peak oil is a term that misused. A reservoir will have a peak production, but technology can change how much oil is extracted. At the current pace, Texas may pass its prior peak production set in the 70s. This is because technology has made more extraction possible.

You right, many countries have declining production including mexico. But here is a tip, the eagleford shale does not stop at the Texas border. It is only a matter of time before Mexico's production starts to rise because of this. There are shale formation all over the world, the US was just the first to exploit them. Shale will very likely be exploited worldwide in the near future.

 

[Zorkorist]

It is a scary time, as people in America that rape the earth for fossil fuels, aren't making money.

They'll cry to Government, and Government will give them money, Government doesn't have.

It's a vicious cycle.

-John

 

[Zorkorist]

Meanwhile, we could have cool, clean, nuclear power.

-John

 

[OverVolt]

Sooo... If you took out a loan in an oil based economy at $100/barrel and then oil goes to $60/barrel aren't you screwed on the deflation? Is this what keeps leading to an economic crash after an oil crash?

FWIW its not like economics considers oil anything other than a commodity, but the economy truly is oil based at the moment. If you buy capital goods at $100/barrel energy prices with your loan and it goes to $60/barrel you got ripped off as well. Talking like, manufacturing equipment, R&D, whatever. Tesla Gigafactory? :hmm:

Any big infrastructure projects over the last couple years at higher prices are probably doomed to fail financially. Dams, bridges, etc.

 

[Zorkorist]

The oil pigs were making $40/ barrel when oil was $100/barrel. But at $60/barrel, they are breaking even. At $59/per barrel, they are losing money, and of course they stop.

And all the jobs stop.

etc.

-John

 

[Zorkorist]

I can remember Bush or Obama asking for greater taxes against oil companies, when oil was $100/barrel.

Gravy train.

Keep in mind, these are people that are burning our natural resources for energy.

-John

 

[Zorkorist]

The same natural resources (petroleum) we use to make rubber, polyester, etc.

They are burning it up!

-John

 

[Zorkorist]

Sooo... If you took out a loan in an oil based economy at $100/barrel and then oil goes to $60/barrel aren't you screwed on the deflation? Is this what keeps leading to an economic crash after an oil crash?

FWIW its not like economics considers oil anything other than a commodity, but the economy truly is oil based at the moment. If you buy capital goods at $100/barrel energy prices with your loan and it goes to $60/barrel you got ripped off as well. Talking like, manufacturing equipment, R&D, whatever. Tesla Gigafactory? :hmm:

Any big infrastructure projects over the last couple years at higher prices are probably doomed to fail financially. Dams, bridges, etc.

Everything should lose, to cool, clean, Nuclear Energy.

I thought Obama was going to be an advocate of Nuclear Energy, but no.

-John

 

[Bitek]

When HP was at the bottom of the hill trading at ~$11 from it's peak of $50 a couple years ago, was there anywhere to go but up? It's up to $38 as of today. It's not exactly rocket science. I honestly wish I had the money to invest at the time.

I completely disagree. If you pay attention to the news, if you watch what you buy and when you buy, it's not hard. There are also plenty of safe bets that you can buy for the sake of dividends as well.

But yes, individual stocks should be on the basis of money you don't mind losing. Just ask Enron folks whom invested their entire retirement into company stock.

This. Don't say never, but know what you are buying into. It's still better than gambling add losses are tax deductible Don't play with what you are not willing to lose.

What I have played with has done really well since the crash, consistently doing better than my index and managed funds year over year. It's true odds are against this over the long run. They are volatile and risky, so plan appropriately.

 

[fskimospy]

Sooo... If you took out a loan in an oil based economy at $100/barrel and then oil goes to $60/barrel aren't you screwed on the deflation? Is this what keeps leading to an economic crash after an oil crash?

FWIW its not like economics considers oil anything other than a commodity, but the economy truly is oil based at the moment. If you buy capital goods at $100/barrel energy prices with your loan and it goes to $60/barrel you got ripped off as well. Talking like, manufacturing equipment, R&D, whatever. Tesla Gigafactory? :hmm:

Any big infrastructure projects over the last couple years at higher prices are probably doomed to fail financially. Dams, bridges, etc.

Are you talking about shorting oil futures? You would lose a lot of money. If not, are you saying our country depends on high oil prices? If so, that's not true. There are certain sectors that definitely benefit from high oil prices, but there are far more sectors that benefit from low ones.

The only downside to lower oil prices right now is that we are trying to increase inflation in the US overall right now.

 

[Bitek]

This is what I am wondering too, if the price war is sustained for very long. The current oil boom has been great for a lot of states, I also know a lot of people working in the oil industry. We have also seen this game from OPEC so many times, dump oil, destroy competition, restrict supply, rinse, repeat that I'd really hope we would be smart enough to protect ourselves from it again, even if it meant slightly higher gas prices today.

Even if we don't, you have think there will be a response from all the other oil products that count on oil for national budgets. It could be seen as SA launching an e economic war, and there will be retaliation if it goes on too long

 

[JTsyo]

The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months. Well, now it is happening again, but this time the stakes are even higher.
When the price of oil falls dramatically, that is a sign that economic activity is slowing down.

This is just nonsense. It's a supply side cause not demand. The economy is doing pretty good, at least in the US.

 

[ralfy]

Yet production keeps going higher. We have not hit a peak, because technology keeps improving our ability to produce. Even when a well gets plugged we are lucky to have extracted 1/2 of what is in that reservoir. Technology changes what is possible and what is economical.

That's total production. Crude oil production peaked almost a decade ago.

If we consider global oil production per capita (which is more logical because oil is used by a growing population), that peaked back in 1979.

For the new oil, marginal costs are much higher. Capex is also rising for less new oil each time:

https://www.youtube.com/watch?v=dLCsMRr7hAg

Thus, technology employed isn't leading to more improvement, and costs are rising.

U.S. shale oil is expected to peak by 2020, much shorter than what took place for U.S. crude oil production.

Finally, lower oil prices are not helping at all, as new oil production requires higher prices.

 

[ralfy]

Peak oil is a term that misused. A reservoir will have a peak production, but technology can change how much oil is extracted. At the current pace, Texas may pass its prior peak production set in the 70s. This is because technology has made more extraction possible.

You right, many countries have declining production including mexico. But here is a tip, the eagleford shale does not stop at the Texas border. It is only a matter of time before Mexico's production starts to rise because of this. There are shale formation all over the world, the US was just the first to exploit them. Shale will very likely be exploited worldwide in the near future.

Technology can increase production, but what is being employed has been known since the 1980s. In fact, shale oil is being used now not because it is a newly discovered resource but because crude oil production costs are now as high as that of shale oil.

If it is true that technology will help, then we should be seeing crude oil production ramped up considerably and marginal costs dropping. Neither is taking place. In fact, crude oil production barely went up even as oil prices tripled.

Finally, peak oil isn't about reserves but the effect of the cost of production. That's why even with large reserves of crude oil, we are now resorting to shale oil.

 

[ralfy]

Meanwhile, we could have cool, clean, nuclear power.

-John

Nuclear power has low energy returns and quantity:

http://www.theoildrum.com/node/3786

and isn't a source of petrochemicals, which we also need.