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By Robert Rapier on Jan 22, 2015 with 71 responses

Why $50 Oil Won’t Last

In the past few weeks I have received numerous questions about the role of a “drop in demand” in the oil price decline. These questions are driven by many stories in the media that have referenced a drop in demand.

There are two primary reasons given for this so-called demand drop. One is that years of high oil prices have resulted in reductions in consumption through conservation and improvements in vehicle fleet efficiency. The second reason is due to the strengthening dollar, oil has become more expensive for many countries since oil is generally traded in dollars.

There are elements of truth behind both reasons. There has indeed been reduced oil consumption in recent years in most developed regions of the world. It is also true that the dollar has strengthened against many currencies. But despite the rationale that explains this drop in oil consumption, ultimately the data must support the narrative.

We have to keep in mind that the developed regions of the world aren’t the entire world. Despite this oft-repeated mantra about falling oil demand, there is no evidence that this is actually true. Last October, the International Energy Agency (IEA) reduced its forecast for 2014 global oil demand growth by 200,000 barrels per day (bpd). Their revised forecast was that global oil demand would only increase by 700,000 bpd from 2013.

Last week on CNBC the IEA forecast that “global growth in the demand for oil could modestly accelerate in 2015 to 910,000 barrels a day.” However, the article also noted that the World Bank had reduced their forecast for growth in the global economy for this year to 3%, down from their previous forecast of 3.4%.

What has happened is that these reductions in the forecast for oil demand growth or economic growth get mistranslated into forecasts of declining demand. I think we can all agree that if I gained 5 pounds a year each year for the past 5 years, but this year I only project that I will gain 3 pounds — I did not lose weight. I will be 3 pounds heavier than I was instead of 5 pounds heavier.

Consider that in the 5-year period of 2008-2013, the price of West Texas Intermediate (WTI) crude averaged $88/bbl. The price of Brent crude was even higher at $95/bbl over this period. These prices were much higher than the average oil price over the previous 5-year period, therefore we might expect that this had a negative impact on oil demand. This was in fact the case in the U.S. and E.U., but global demand increased, driven by increases in every developing region of the world:

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Despite much higher oil prices, global demand for oil increased by more than 5 million bpd in the past 5 years. In fact, global oil consumption has increased in 18 of the past 20 years.

Now, compare that with where most of the world’s oil production growth took place during that time period:

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This is why I maintain that oil below $50/bbl is simply not sustainable. If global demand was actually declining, it would be a different story. But with demand continuing to grow, and with the majority of the oil production added in the past 5 years coming from the shale oil fields in the U.S., there is simply not enough $50/bbl oil to meet demand. Consider the graphic from a Bloomberg story late last year that shows almost every shale play in the U.S. losing money at current oil prices:

 

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Now consider that companies in these shale plays are reducing their 2015 budgets, and layoffs are underway. The cure for low oil prices is low oil prices, and that cure will begin to take effect this year. I realize that we dropped into the $30′s in 2008, but keep 2 things in mind. Just over a year later we were back above $100/bbl, and at that time the marginal barrel was not $70/bbl shale oil. The cost to produce that last million barrels per day of demand is significantly higher than it was in 2008. Therefore oil will not — as I have seen more and more pundits predict — sink to $40/bbl and stay there. There may be a new norm for oil relative to what we have seen in the past 5 years, but it will be closer to $70/bbl than it will be to $40/bbl.

Link to Original Article: Why $50 Oil Won’t Last

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

  1. By ben on January 22, 2015 at 2:52 pm

    I couldn’t agree more. Though a price rebound will likely be much less dramatic than in 2008, an adjustment is coming and the economic impact will logically take a bit of starch out of the current (financial repression-induced) economic recovery heading into 2016. The recent relief in energy prices (a major tax cut-equivalent boost to the economy’s performance) helps offset otherwise anemic growth in household incomes notwithstanding steady job growth.

    The leading members of OPEC remain confident that world prices will rebound even as member-state production remains uneven with the ad hoc increases in supply among several temporarily non-compliant countries. The benchmark range of prices remains closer to $90 than $50 and that will presumably remain the case given the practical demands on national treasuries.

    Thanks for putting things in proper perspective. Wish we could get some of this out of Washington!

    Ben G

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    • By Ben on February 4, 2015 at 2:50 pm

      Is there anyone out there who can possibly translate what Forrest is trying to say in all rambling? For the love of God and country, I cannot grasp his method of analysis nor the clutter of broken syntax. Perhaps I lack a Rosetta Stone that unlocks the mystery of his analytic techniques that consistently yields zealous enthusiasm for grain ethanol and for renewable liquid fuels more generally.

      A closer examination of the observations of Salem el-Badri might be a decent place to distinguish between rumor and fact. The hope for sustainable levels of production and price remains the practical goal notwithstanding misrepresentations to the contrary by those looking for convenient answers or,worse yet,excuses.

      Quixote lives and windmills safely remain the province of adoration!

      Ben G

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      • By Optimist on February 4, 2015 at 7:37 pm

        In other words, Forrest is just another ethanol supporter. Maybe a paid lobbyist?

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  2. By Tom G. on January 22, 2015 at 3:53 pm

    Hi Ben:

    Well there is nothing stopping us from sending Mr. Rapier to Washington as a representative of “we the people” :-)

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    • By JonathanMaddox on January 22, 2015 at 9:55 pm

      Election generally requires a willing victim.

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    • By Robert Rapier on January 23, 2015 at 11:29 am

      Except for my unwillingness to go. As my wife always says, I am a terrible liar. My face flushes red, I look away, and I lick my lips. Those are not traits that could get a politician elected.

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      • By Tom G. on January 23, 2015 at 4:57 pm

        Robert: A quick trip to Hollywood for some acting lessons might just be the ticket; of course the real sticking point is your “unwillingness” to serve. However, people do change over time so I will check back in 5 years or so ;-) In the meantime I guess we will be stuck with those that have currently mastered the technique.

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    • By Optimist on January 23, 2015 at 6:51 pm

      He’s way to reasonable to get either party interesting in funding a campaign.

      Remember, these days it’s all about the tin-foil-hat base.

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    • By MikeH123 on February 4, 2015 at 6:27 pm

      I am very impressed with the integrity of Robert Rapier. Every article I have written on other web sites has either been blocked, butchered or deleted.

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      • By Tom G. on February 4, 2015 at 11:20 pm

        Yes have been following him for a couple of years now. A really nice individual.

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  3. By Forrest on January 22, 2015 at 4:22 pm

    Factors in the mix. Germany announced quantitative easing (Poof more electronic money). The investor crowd raced to Swiss franc to avoid eventual bubble burst of currency worth. Japan has ten year and counting experiment upon Keynesian government debt. How is that working for them. U.S. has growing economy and has spotlighted to world the wrong solution to financial woe per our string of QE efforts. The U.S. economy has a huge advantage, a few of which are energy development and safe harbor status of wealth. China, Brazil, Russia, Japan, Europe, are so bad we look good. Were not on the cusp of international wealth and economic growth. Were dangerously close to international implosion of economies. Money people are guessing U.S. is the place to be for countries ability to maintain. The global economic system will experience what Japan has suffered, long term slog of anemic economy. We have to pay the piper for borrowing the future. To that effect what SA is communicating, $100/ barrel oil is long gone. Just a few minutes ago heard that U.S. has huge oil storage, comparable to the 30′s heyday. Also, another analysis claimed three years for the oil glut to work it way out. The future MPG standards for vehicle fleet are amazing and on the path to double. Technology is already advancing at a rate to easily adapt. Think of clever cell phone company Ober that makes car ownership optional. Also, car share for city dwellers. Auto sensor and programming logic will make accident risk vanish as well as heavy low MPG cars. Safety dictated not by crash worthiness (airbag deployment), but by computer and sensor logic. Biofuel production will steadily increase as well as battery capability. But, to the bigger question of your post, yes, oil consumption will continue as the world has enormous investment upon the energy source. No one will give up paid for production solutions. So, oil will keep the equipment running, but slowly price themselves to lower production. Alternative energy and efficiency will minimize the oil cartel ability to stiff consumer per the heyday of no competition. This is actually a good thing for U.S. on both sides.

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    • By Forrest on January 22, 2015 at 4:49 pm

      BTW, the one disruptive energy source that has been long forecast, hydrogen, is ever present threat to business as usual. Engineers as far back as 60′s thought hydrogen would eventually dominate. Nowadays, with the hype of CO2 emissions and excitement of wind and solar energy with ensuing problems of energy storage, directs one to the solution. Not least the manufacturing of lower cost fuel cells. Fork lift market is already expected to be dominated by fuel cell. Remote wind power as well as low load base power a prime candidate for hydrogen production. Coal gasification technology as well as nuclear currently being evaluated for the cause. This energy source could develop quickly and may blind side the prognosticators.

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      • By David L. Hagen on January 23, 2015 at 1:30 pm

        No threat until the cost of hydrogen is driven down to the price of oil by cheap massive volume production. Distribution challenges suggest it is far more likely to make liquid fuels from hydrogen.

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        • By Gary Bridge on January 23, 2015 at 2:23 pm

          Ohhhh, hydrogen hallucinations once again. Even IF Hydrogen were free, it is far too dangerous for the transportation sector. H2 must be compressed to 10,000 to 15,000 psi in order carry enough of it to travel a couple hundred miles. Ever heard of the Hydrogen Bomb?

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          • By Optimist on January 23, 2015 at 6:49 pm

            Yeah – he’s a bit of a slow learner, our Forrest. It has remained but a dream since the 60s for a reason. Actually several reasons that any competent engineer should be able to list in his sleep…

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          • By JonathanMaddox on January 27, 2015 at 4:03 pm

            Hydrogen bombs are nuclear weapons involving doping of plutonium bombs with heavy hydrogen isotopes to give a dirty fusion boost on top of the fission explosion. They have precisely nothing to do with the use of hydrogen as a fuel.

            Hydrogen as a fuel is not really too dangerous for transportation at all. It isn’t very much more flammable or explosive than the liquid fuels we already use in vast quantities today. There are other conceivable reasons why hydrogen might not prove commercially viable in the long run, such as competition from battery-electric vehicles, adoption of heavier and more convenient synthetic fuels such as ammonia, methanol or synthetic alkanes in place of hydrogen, and/or improved consumption efficiency of liquid fuels.

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        • By As Aha on January 25, 2015 at 4:40 pm

          hydrogen is NOT fuel, it’s simply very ineffective way to store energy

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          • By David L. Hagen on January 26, 2015 at 12:15 pm

            As Aha Foolishness wastes time. http://bit.ly/1ym1It2

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            • By As Aha on January 26, 2015 at 1:26 pm

              ok for mentally challanged: hydrogen is not SOURCE of fuel you cant mine it, you have it to make with other source of fuel, so why to make fuel which is terrible storage characteristics?

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            • By David L. Hagen on January 27, 2015 at 9:54 am
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            • By As Aha on January 27, 2015 at 12:43 pm

              ok hydrogen is fuel but not primary fuel ie not energy source. now happy? are semantics ok now?

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            • By David L. Hagen on January 27, 2015 at 1:31 pm

              Aha
              You’re learning. Next, make every word count and worth reading.

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        • By Forrest on January 26, 2015 at 7:03 am

          Until then, but the hydrogen solution has many “go” signals. Consider, while the battery car will be cost effective in inner city travels, the car is expected to only be 10% of light vehicles fleet. The BEV cost of recharging stations and grid adaptation is extreme. Hydrogen refueling is quick and easily adapted by current refueling stations. Carbon wrapped high pressure tank technology is safe and mature technology. Pump technology is more efficient. Citizens attitude and thinking of hydrogen is stuck in 80′s. A Rip Van Winkle awakening might be needed as the energy source is quietly improving the technology. Range between refueling can be pass gasoline, i.e. 500 miles. Refueling takes minutes. Hydrogen storage equal to natural gas and can utilize oil well or underground caverns. Piping with plastic coating has low leak rates. Fuel cells can be scaled to any HP need. A car ferry was recently converted. They expect the energy storage capability of hydrogen will solve remote green energy problems as well as balance grid power needs. Very attractive to keep grid at max efficiency and base load plants level load. CHP fuel cell is expected to make inroads as truly capable to stand alone power and heat of households without grid hookup. Every player within the energy field appears to be quietly developing hydrogen solutions. Coal gasification generates a large portion of hydrogen that is attracting federal grants. High temperature hydrolysis appears to be efficient generator with CHP of power plants.

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      • By Forrest on January 23, 2015 at 2:41 pm

        An alternative vehicle technology analysis surprised me with info that China plans on replacing their metro car fleet with battery car, to solve their horrible air pollution problems. Since they are the main driver of increase consumption of crude oil products this may have a dampening effect? I would guess this will happen in our cities as well for air pollution concerns and the short daily commute of most. Infrastructure also a bit friendlier or easier to accommodate the car in metro areas. Ultra small particulates are a new found health hazard and could present diesel engine pollution as extremely unattractive. Also, cities are just beginning to appreciate higher ethanol blended fuel for the same cause. But, as you post this all may be just to stem the growth of crude oil consumption.

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  4. By Russ Finley on January 22, 2015 at 5:41 pm

    …good analogy. Some people have a hard time understanding the difference between demand growth and declining demand.

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    • By Forrest on January 23, 2015 at 2:41 pm

      Much like unemployment vs employment of citizens. In theory we all could be out of work and enjoy zero unemployment. How about national debt vs deficit data and tax savings wherein politicians count decreasing the rate of spending as savings.

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  5. By Rich on January 22, 2015 at 8:04 pm

    sweet opinion Robert, some nice ideas here, a bloody great read in fairness thanks, however, i was thinking that due to the…………………………………………………….. A-efficiencies of now B-the introduction of green energy C- the new players back into the markets old and knew D- the dollar grows a prickly pair……………….. reviewing these above results, provides a more vivid behind the scenes of the unutterable, ineffable consciousness within an organization that is the most corrupt industry ever, and we have all learned attitudes in companies filter down, lead by example, good CEO’s good companies, staff happy, and growth is achieved easily. So bearing all this in mind and that the mindset of oil giants who , not to many years ago either, silenced people that got in the way. those old beliefs still exist within these elements of “giants” in the oil biz. and have we to continue be sheeple and say nothing, while individuals clean out millions a week, nothing against making money, but hoarding it is the foundations of bad mindsets, especially in the vast quantities some have, with great wealth comes great responsibility, there are 2 roads ahead of us, as life would have it, globally of course, the reigns of integrity, with the governance of moral universalism need to be firmly cemented into the ground, solid foundations this time. to spring board from, with ease…. Instead of the stupid sanction economic shows, staged propaganda battles which its only purpose is instill “fear” and that clearly broadcasts to a more docile person, “the sheeple” still a majority unfortunately

    Anyway my point being we lose nothing ever, its unlimited supply around us , new frontiers like space, new jobs, the ocean, more jobs, obvious sectors can could stimulate many economies, and allow people live in synergy , servicing each other and that can easily stimulate an economy iinto to better being, there is no other game to play, oil will fall below $30, the days of the $10 are upon us, the fact that the giants are seeing there oil going down the drain, is a time well over due as it will become obsolete in the future, For example wouldnt you want to sell as much as you can before that happens, bet your ass you would. So as the struggle for “world energy powers” raves on , with the ” so called educated peers of the world, as they bicker among themselves, they pass on the drama at the top, down the ladder and the “sheeple” suck it up. Our peers of now, should be ashamed of how they are “raping” the youth and the retirement of tomorrow. for what ? the mighty dollar, the might euro, a few numbers on a piece of paper, all for an idea called money, its a great idea in my opinion, as democracy is an infertile itself, ignorance does not suit us ANYMORE. Anyway, just my opinion of-course.

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    • By Optimist on January 23, 2015 at 6:43 pm

      The idea that all that is wrong in the world can be blamed on Big Oil (and the Liberal Media) is a bit… Rich…

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  6. By Tesla_X on January 23, 2015 at 11:03 am

    Well,

    Lets look at a couple of other metrics:

    Vehicle miles driven
    http://www.ssti.us/2014/02/vmt-drops-ninth-year-dots-taking-notice/

    Labor force participation rate
    http://www.tradingeconomics.com/united-states/labor-force-participation-rate

    Both headed the wrong direction for a growing economy.

    When china stops buying and stockpiling cheap oil, the drop may resume in earnest.

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    • By Robert Rapier on January 23, 2015 at 11:28 am

      Or when their >1 billion people decide they don’t really need a car after all. :)

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      • By Civilitas on January 23, 2015 at 2:03 pm

        I just read a statistic that car ownership in Beijing and the other most prosperous regions of China is about 200 cars per 1000 people. In the lower income areas of China it is between 25 and 100 cars per 1000 people. By comparison, in Europe it is 600 cars, and in North America closer to 800 cars per 1000 people. Even if China never reaches European or North American car ownership levels, they probably have some way to go before ownership levels flatten out… In the past 10 years, growth of auto sales in China has averaged about 30% per year, which reinforces the point that demand for gasoline/oil will continue to grow substantially. [Oh, and by the way, India, Indonesia, Malaysia, etc., etc.]

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  7. By armchair261 on January 23, 2015 at 12:31 pm

    I was just looking at SPR stocks – essentially unchanged for 10 years. Why doesn’t the US government use this opportunity to add to the reserves?

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  8. By David L. Hagen on January 23, 2015 at 1:38 pm

    Agree. ZeroHedge explains super-contango with future oil prices than spot is driving as much crude into storage as possible. http://oilprice.com/Energy/Oil-Prices/What-King-Abdullahs-Passing-Means-For-The-Oil-Markets.html

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  9. By ben on January 23, 2015 at 2:58 pm

    Rep. Rapier? Ah, please show some discretion while bearing in mind that RR has a wife and children to protect from such denigration! Now, as a cabinet department asst. sec’y (policy) for a few years, well, that might minimize any enduring injury. I’m penciling him in for 2017, even if he gets dragged along kicking and screaming ;)

    Q: Is the bloom finally off the rose for federally-subsidized renewable transportation fuels or will the GOP-controlled Congress give lip-service to “policy reform” given the relentless influence of the farm lobby/agribusiness interests?

    Taking any bets on this one??

    Ben G

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    • By Russ Finley on January 23, 2015 at 3:24 pm

      My guess ….they will continue to subsidize their constituents in the farm belt.

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      • By Optimist on January 23, 2015 at 6:36 pm

        I agree with Russ.

        For all their fervor in blaming the “Tax & Spend” party, the GOP has become the “Borrow & Spend” party. Fiscal conservatives? Where?

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  10. By Jortiz3 on January 23, 2015 at 5:26 pm

    “Demand has dropped” is just another way of saying “demand forecasts have dropped”, but its always amazing when people think something else.

    Are there any charts like your last one here “Breakeven…for Oil Projects” that are normalized by production volume?

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  11. By Doggydogworld on January 23, 2015 at 11:46 pm

    Great article. The markets agree with you about $50 oil — futures are $60+ next year and E&P stock prices reflect $60-80/bbl.

    Here’s the rub on demand growth – it has almost all come from China and the oil exporters. China is slowing for demographic reasons. That +500k bpd each year will be more like 200-300k. And oil exporters are hurting, they’ll be cutting back instead of growing.

    Oil importers could respond to lower prices by consuming more, but Europe and Japan have flat-to-declining populations and a strong focus on CO2. The USA will respond, but even here demand growth will be muted due to new CAFE rules and an aging population driving fewer miles.

    It will be interesting to watch the shale drillers. Everyone says they lose money below $70 (or $80 or $100 or whatever) but they said the same thing about shale gas below $5/mcf.

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  12. By Earl Mardle on January 24, 2015 at 4:39 pm

    I agree that, at some point the price will return to a rise, very possible a sharp one. But what I don’t get is this; your charts show that the increase in oil consumption is a tad over 5 MBPD but the change in oil production is a fraction under 4MBPD.

    To use your analogy, if I exercise like crazy and burn an extra 5000 calories a day but increase my consumption by only 4000 calories per day, I am 1000 calories per day in deficit; ie, I will be losing weight.

    In this scenario, the price of oil, using exactly the same market forces you and I agree will drive up the price at some point in the future, there is still, currently NO explanation for why the price of oil has halved in 6 months.

    If it is not a fall in consumption, if the production increase is not outrunning the consumption growth which WOULD imply a falling price, what the hell IS it that is so spectacularly driving down the price? Where does Occam’s razor fall?

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    • By Robert Rapier on January 24, 2015 at 5:01 pm

      The supply/demand imbalance is actually a function of the way BP measures production and consumption. The former is just oil and natural gas liquids, while the latter includes biofuels. So the imbalance isn’t as severe as it seems.

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      • By Earl Mardle on January 24, 2015 at 5:26 pm

        I accept your superior knowledge, still, you seem to imply that there IS an imbalance, and if that imbalance was small, we might expect some commensurate increase in the cost of energy in general and oil in particular.

        But the shortfall, however small, has resulted in a massive fall in price. To achieve that takes a great deal of force and implies that there is something very non-linear going on. The global economy is the traditional supertanker, supposedly full of momentum and hard both to stop or turn, yet here we are with a small deficit in the growth rates between production and consumption and a collapse in the price of the oil.

        Can you please explain, in layman’s terms what is going on? How does that small deficit leverage itself into such a huge change, and above all, a change in what would appear to be the wrong direction. What is the mechanism at work here?

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        • By Robert Rapier on January 25, 2015 at 2:51 am

          There always seems to be a disproportionate response when oil supply and demand are out of balance. At the moment they are; supply is growing faster than demand and so a cushion is building. But traders look forward and they often overreact.

          That’s why a small shortfall in 2006-07 caused oil prices to run up to ~$150 by mid-2008, plummet to $30 by the end of 2008, but then back up over $100 15 months later. Those aren’t supply/demand fundamentals; that’s panic buying and selling. So what you might see given that dynamic is a 10% shortfall causing a 100% increase in the price of oil.

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          • By Earl Mardle on January 25, 2015 at 4:36 am

            Yup. Its looks to me that where supply is relatively inelastic the potential for panic is exaggerated, which seems to be a recent phenomenon since 2004 when the conventional oil peaked. That would account fo the leverage because where supplies cannot respond to market signals in any ‘normal” time frame, the potential for imagination or fear would naturally increase.

            You say that “At the moment … supply is growing faster than demand and so a cushion is building.” which would, given the above, tend to cause steep falls in price, but then you say “But traders look forward and they often overreact” so that would imply that, looking forward, traders are expecting that cushion to grow and for demand to continue to lag.

            But as you point out, the break-even for shale plays is already mostly under water, which should mean that traders looking forward would see a contraction in supplies to a rate below the growth in demand and futures would show the expected rise. Is that the case and how for out does it bet that prices will rise?

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            • By Forrest on January 25, 2015 at 5:19 am

              Don’t forget the graphs are for five year average, so up to the minute evaluation of market conditions are not revealed. Past records good for detecting a trend, but those setting on trade purchase button more concerned of future events. Panic selling is a learned behavior, meaning these traders understand the history of market and act accordingly. They know the ship takes a long time to react and wish not to be on board. This is emblematic of consumers trouble in that they rely to heavily on the commodity and have no alternatives to walk to. This the reason economist studies have ethanol fuel saving consumers a big price tag at pump, skimming off the gasoline spikes. It may be (does anyone know?) why gasoline is so cheap yet diesel fuel remains much higher (not enough market impact from biodiesel yet). So, best for oi supply market to dampen regulations that work to increase flex vehicle production, gut the RFS, and popularize notion of domestic ethanol is hurting starving children and wrecking weed whackers. The voting public should be alarmed with such antics of crony politics and be informed that these politicians are not working for public good. Note your imbalance and what Robert refers to, U.S. ethanol production alone is close to one Mpd. Add in Brazil production and budding international production, it makes a difference and would shoot that graph above demand.

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            • By Robert Rapier on January 25, 2015 at 10:31 am

              Traders know that this price isn’t sustainable, but they also know people can stay panicked for a while. At some point the expectations that this can’t last start to overtake the panic and then you start to see the bottom. I think we are there. One of the predictions I made this year was that oil wouldn’t drop to $40. That was pretty bold considering we were already around $46 and falling fast. But I based on that on the idea that greed would soon overtake fear because almost everyone knows that the marginal barrel costs a lot more than $40 to produce.

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  13. By ben on January 24, 2015 at 7:08 pm

    Optimist,

    Regrettably, Forrest is more than a slow learner, he is impetuous and therein lies a critical distinction. Small wonder he volunteers such inchoate theories bearing little relationship to practical solutions involving the economic and geopolitical challenges at hand. Hey, at least his tire spinning trails off into cyberspace rather than further muddying the waters of public policy. Lord knows we get enough of that meaningless nonsense out of the politicians!

    Ben G

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  14. By John Williams on January 26, 2015 at 12:45 pm

    Very logical….therefore you will loose half of the folks that should read this article! Thanks for the insight and back up data

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  15. By Gene Frenkle on January 26, 2015 at 12:49 pm

    What about Iraq?? In 5 years Iraq could add 3 million barrels per day and in 10 years they could add another 3! Once oil prices start rising again North America will begin moving towards natural gas for transportation which means less demand and more exports.

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    • By Re on February 8, 2015 at 7:47 am

      Well, in Iraq it is impossible to plan for anything at all. Right now oil companies are shutting down exports because they never get paid. They live in some kind of Sovjet environment there…

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  16. By valwayne on January 26, 2015 at 5:35 pm

    Duh! Prices go up and we found more supply until prices go down. Prices go down and excess supply dries up. So betting at some point that prices will increase again is a pretty good bet. I think when I took economics in University they called it “Supply and Demand”! At some point technology will also make Nuclear, Wind, Solar, Hydrogen, and others sources cheaper, and increased oil prices will make them more competitive so that they start replacing Hydrocarbons as our main energy source. That’s still quite a ways in the future. In the meantime if morons like Obama would get out of the way and let “Supply and Demand” work the period when we all have to suffer from higher prices would be less prolonged. Had Obama not blocked the Keystone XL Pipeline and Development of Energy on Federal Lands we could have been enjoying the lower prices with all they mean for the economy 2 or 3 years ago. Instead million of American have suffered loss of jobs, and/or income, or just paid higher price instead of spending the money on their families because we elected a socialist President who is an idiot when it comes to economics.

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    • By Robert Rapier on January 26, 2015 at 8:34 pm

      It’s more subtle than that. A number of pundits have suggested that these low oil prices could be around a while. Almost all of the Bakken producers are in the red now, and layoffs are underway. People who buy and sell oil realize this. That’s why oil prices won’t hang around this level for very long. I am addressing the notion that they will, a position that even a number of major brokerages have taken.

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  17. By Forrest on January 27, 2015 at 7:16 am

    Levi Tillerman recently published a book about car companies experiment to capture car of the future. I can relate to this guy, his family and life experiences. He has a unique life experience of auto business and is able to open the window to let public understand where the auto market is headed. One meeting with Ford executives changed his life’s work, convinced himself to go back to school for Phd. The top executives said they had no interest in new engine technology as they have the EccoBoost engine which would suffice as the needed stop gap for MPG concern. The electric car is the future. This author has a good no nonsense evaluation without the usual hype. I think he is on target . This will have dramatic affect on oil market. First the author states the BEV offers no environmental advantage per GW concerns. The battery is very harsh on environment as the average grid power. But, the grid will slowly improve as will the battery construction and performance. So, old BEV will realize slowly improving carbon foot print as opposed to old ICE engine that emissions increase per worn parts. The main market drivers expected to empower electric car are what Calif already applies to market. Remember how effective the RFS was to budding alternative fuel market. Calif utilizes the same approach to auto market, which will be adapted across country. Electric cars will be regulated to popularity and sustainability. Also, the biggest factor for purchasing public to embrace these vehicles. The technology and mechanics of ICE operation are a nightmare when consuming public demands quality perfection. The public hates maintenance and repair ripoffs that is the main profit generator of current automotive business. EV technology as compared is less complicated and much more robust per quality. These cars should be able to perform per spec for multiple lifespans as compared to ICE with minimum repair and maintenance. Also, the acceleration just the ticket from addicted public thrill seekers. I believe now the EV is poised to relatively quickly capture the light vehicle fleet. It is, however, a mix of battery for short trip inner city and a majority of fuel cell electric powering the rest of transportation needs. This last part is speculative, but given the huge investment Toyota applied to battery technology and given this company leadership position within battery technology, they chose not to bring the technology to market. They pivoted to fuel cell. What does this company know?

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  18. By TimC on January 27, 2015 at 6:00 pm

    Regressing BP’s “Total World” oil consumption data from 1983 to 2013 gives a linear correlation coefficient of 0.992 and an upward slope of 1.13 million BPD per year. But I bet there was at least one expert in every one of those thirty years who predicted that the peak was near, just as there are experts presently telling us that “Everything Has Changed,” that the end of OPEC and the end of the age of oil are at hand. Extrapolating to 2020 shows that we will be consuming close to a hundred million barrels per day by then. This trend of steadily increasing consumption can’t go on forever, but it can go on long enough to leave us in a world of trouble when it ends.

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    • By Forrest on January 31, 2015 at 5:39 am

      The price collapse of crude oil per over supply conditions was triggered by a relatively slight over supply vs demand. So, this may be a harbinger of future in which the oil titian’s control of the market may be ending. The losing of hostage capability of international oil cartel upon our economies would be a welcomed event. History not a valuable analyst tool under such conditions. If one accepts that crude oil is entering into a new era with competition at hand, the development of alternative fuel plays, indeed, a big role and champions such effort as well as alternative oil harvesting abilities and alternative power. Might this be the reason powerful and influential International oil has their daggers pointed at biofuel, shale, and oil sand? For one example, oil companies “doth protest to much” on biofuel, if what they say “the fuel is not worthy and puny production”, is true, why so much blather and effort to harm the fuel supply image? Why so much crony capitalism efforts to sway politicians to axe the RFS? If they believed their own rhetoric they should not be so concerned.

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    • By Ben on January 31, 2015 at 9:11 am

      This might be true but for a couple of assumptions about how the next twenty years is likely to be different than the two previous decades; there is not likely be another China-equivalent scale economy roaring on to the global scene with a nearly insatiable appetite for oil, even as the advent of new technologies, to include a modest role for alternative fuels, contribute incrementally to additional supply while significant fuel-switching activities and continued improvement with energy-efficiency measures offer some relief.

      Is such an understanding the basis for celebration? Hardly. Rather, this is merely a sober judgment hinting that the road ahead could prove a bit bumpy. To borrow a title from an old geography professor, we may find ourselves “muddling our way to frugality.” At a minimum, we may end up muddling our way toward convergence. That may well prove to be as unsettling, as it is interesting.

      The artificial high accompanying today’s quantitative easing by the central bankers, and the attendant financial repression, will prove unsustainable. When today’s policies no longer yield their temporary effects, we will witness systemic adjustments as to what the inevitable realignment of the global economy will demand in the years ahead.

      Ben G

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  19. By Richard Ha on January 30, 2015 at 3:58 pm

    I come to the same conclusion. The US shale folks have a fast turnaround time. Every time the Saudi’s want to go higher than $70, we will pump more.

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    • By ben on January 30, 2015 at 7:13 pm

      Hmm, and the price stayed around $100 for the past couple of years because we were not pumping shale oil? Wish the global oil market worked nearly so dependably, but there are many factors influencing pricing that extend beyond simple supply/demand measurements.

      In some respects it is the role of expectations, and a determination of whether the influences on price are either “forward” or “backward” looking; something that ultimately effects the level of prices and interest rates through countless transactions of market activity and, of course, the management of monetary policy by the central banks.

      I share RR’s views on the likely rebound in prices. Such an adjustment will be attributable to unrelenting demand from all corners of the globe, even as supply disruptions will presumably occur with about the same level of frequency as they have in recent years. One need not embrace a conspiratorial view to account for the disruptions to production that accompany the rise and fall of prices let alone the ebb and flow of
      geopolitical tensions/conflicts.

      Ben G

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  20. By Ehab A on February 2, 2015 at 12:34 am

    Great article, however, you did not take the political aspect of the deliberate declining of oil prices into account; the weakening of the Iranian and Russian economies. As this is currently the primary focus of the Saudis, they are willing to lose a projected 50 billion in revenues this year just to achieve it.

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  21. By Forrest on February 3, 2015 at 7:59 am

    Hmmm dramatic increase in oil production, loss of OPEC control of market, shale oil production increase, dramatic efficiency gains in utilization, steady increase in production of alternative fuels. The headwind is strong in preventing a go back to old days of no competition oil supply with shrinking production. Most say a new paradigm is upon us and price of oil is drifting around attempting to level with demand. Think of the doubling of fuel efficiency expected in vehicle transportation. Reference the “Super Truck” development work that will quickly be absorbed in production. Millions of semi’s that typically get 5-6 mpg zoom to 11 mpg. Use of heat recovery Organic Rankin cycle power recovery from hot exhaust and turbo’s that in addition to pumping air are mechanically attached to dump extra power into engine. These engines run at 50% thermal efficiency and reduce carbon emissions 48% per mile as result. Consider the E85 Cummings engine ups this to 80% with their delivery van engine.

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  22. By Forrest on February 4, 2015 at 7:31 am

    Well, OPEC’s Secretary General is proposing oil will zoom to $200/barrel if supplier’s follow their lead to curtail production behind inelastic demand for their product. The oil suppliers need to slow investment in oil development to push demand price of crude oil. He makes the case that $50/ barrel oil is not attractive when the collusion of supply market could easily push the commodity to $200/barrel and enjoy tremendous return on investment.
    All, consumers on the planet (not invested) must be on high alert to maximize production of alternative fuel for competition and open market choice. We should not allow being taken hostage by the petrol supply industry. Trade partners are attempting control of international critical supplies. While, the U.S. petrol business will benefit from such as well as investor crowd, I think it is a bit immoral for economies benefiting from such to set still and allow the process. We should not attempt to stymie alternative energy market. Ethanol production is sitting in strong position to offer competition given it’s ability to be a substitute. This energy sector should be encouraged to maximize production. Regulations should continue to flatten obstacles to fuel supply problems thrown up by petrol as well as increase opportunities of supply chain efficiency of this fuel per long term need. Best to follow RFS lead to increase cellulosic. Best to facilitate fast adaption of mid grades of ethanol blends and limit the cost of compliance per hyper expensive EPA conformance costs. Change vehicle fleet efficiency measures away from MPG to miles per pound carbon emission. Base road tax on same. Improvise clever methods to promote rapid adaption of the blender pump as well as separate tanks within gas station suppliers.

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    • By Forrest on February 4, 2015 at 7:44 am

      Cellulosic is rapidly becoming cost competitive with grain. Small improvements stack on top of each other as predicted by industry leaders will lift the boat, past the value of petrol, especially petrol appearing on the horizon. Indiana University just discovered a substitute bacteria for the alcohol conversion process that works quicker and achieves higher conversion efficiency. Also, the bacterium works with N2 supplement that must be added to the mix in lieu of expensive alternatives such as corn steep liquior. Cellulosic sugar stock is deficient in nitrogen as compared to grain and must be added for bacteria growth. N2 is readily processed at the plant for low cost. Saving expected over one million annually per plant.

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      • By Optimist on February 4, 2015 at 7:36 pm

        Yeah, if I had a penny for every this-changes-everything discovery announced by some clever and well-meaning research group…

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    • By Optimist on February 4, 2015 at 7:34 pm

      Best to kill RFS. Long overdue, I might add. Do your bit here: http://smarterfuelfuture.org/

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      • By Forrest on February 5, 2015 at 7:17 am

        Ah, just think of the good old days of total dependence on crude with the few international corporations and OPEC in control of U.S. crucial energy supply. Those were the days of spiking fuel prices and CEO’s reporting to Capital Hill they were not responsible. The feigning emotions upon Bush occupancy of high prices and following posts of current occupant has no control upon even higher prices. Funny, how comments claim corn farmers are making to much money on ethanol, yet good for the country to go back to days of government subsidized farming by changing laws that would hopefully kill ethanol development and this some how would increase food supply? On one hand ethanol is of no concern per energy supply and on the other hand it’s of primary concern to kill any artificial support that would attract capital investment for added production.

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        • By Optimist on February 5, 2015 at 2:07 pm

          Ah, yes, the shameless opportunism of the ethanol supporters – no wonder you guys do so well in Washington. Let’s look at some of the (inconvenient) facts, shall we?

          According to BP’s statistical review the US consumed 58.6 million tonnes of oil equivalent renewable fuels in 2013, out of a total oil consumption of 831.0 million TOE, or ~7%. Of course, producing ethanol also consumes a lot of fossil fuels, including diesel that drives the farming equipment, oil that produces the fertilizers and natural gas used for distillation, to name a few. So it is not exactly a 7% reducing in oil consumption. But even if we ignored all the fuel used to produce ethanol, I find it hilarious that you and other ethanol cheerleaders would claim that ethanol had any hand in reducing oil prices. And shameless.

          Thanks to fracking US oil production went from 6.8 million bpd in 2008 to 10.0 million bpd in 2013 (an increase of almost 50%) or 446.2 million tonnes in 2013. In other words, almost 8 times the entire renewable fuel use.

          Quite obviously the renewable fuel boondoggle contributes a rounding error to low oil prices. But Forrest is determine not to let the facts get in the way of a good story.

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  23. By Re on February 8, 2015 at 7:41 am

    Strange you don’t mention shale oil and the fact US, worlds biggest oil consumer, is geting self-sufficient.

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    • By Re on February 8, 2015 at 7:51 am

      I mean, among the primary reazons, of course.

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    • By Robert Rapier on February 8, 2015 at 11:11 am

      We are still a very large net importer of oil. We are moving in the direction of self-sufficiency, but to continue in that direction will require oil prices above $50/bbl.

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  24. By Forrest on February 17, 2015 at 8:26 am

    On the top side $50/barrel won’t last, but on the bottom side $50/barrel won’t last. The cost of production when accounting for liability is accelerating. First the carbon footprint cost will increase. Second, liability insurance will rise dramatically as states and countries are demanding upfront insurance of potential disaster. This accounting often goes unpaid or the allotment to future value is missing upon decision making process. Give you a few examples. Michigan haters of petrol, now utilizing politics and lawyer force in attempt to pass legislation for pipeline liability and need of maximum coverage for destruction scenario coverage. Contrary, when petrol haters evaluate pipeline benefits they omit the death, destruction, and environmental cost upon alternative transport. Refer to Balkin crude oil rail car accidents. How about when Environmentalist bestow benefits to forestland, they omit the fire and bug infestation damage as well as decomposition costs. Meanwhile they turn their head and not recognize that these conditions very rare within field harvest for biofuel production. How, about the risk of off shore oil rigs, underwater pipelines, super tanker transport, and enriching Middle East cauldron of bad actors. We witness on TV more frequent train wrecks with crude oil and don’t give credit to alternative fuel such as ethanol that recently experienced a tanker car accident. The news of disaster team couldn’t detect damage to water within river spill zone and recognized the benefit of rapid evaporation and water dilution with little environmental impact. Also, raw material for biofuel rated very low risk and upon very short transport. The production within a zone of low risk of radical empowerment.

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