The End Of Oil

Hyperbole, but there is a lot of truth in it. The economic utility of oil (outside of its lubricant properties) is that it’s extremely portable and has high energy density. Heavier than air flight was not possible prior to the Wrights (or Gustav Whitehead depending on who you believe) because the engines and fuel were too much weight for the lift and power. There are substitutes but they’re not quite as satisfactory.

That said, once we started looking in earnest we found quite a bit of it all over the place and pretty soon to work off the glut we were doing stupid things with it, like heating, power plants, and plastics and chemicals, all of which can be done at a very small price premium using other materials provided the infrastructure and manufacturing processes are in place to do it.

But for a long time Oil was as cheap as stinky, toxic, greasy, dirt so there was no incentive.

That changed with the rise of OPEC in the 70s which, like the DeBeers Syndicate and diamonds, artificially increased the price by manipulating the supply. For a cartel they maintained admirable discipline for a very long time. The problem, as with all cartels and monopolies, is to extract the maximum amount of revenue while not making it attractive for new, uncontrolled, supplies or substitutes to be developed.

Which is what has happened in the Oil Industry. At $100+ a Barrel all sorts of other oil supplies started to make a whole lot of sense- Fracking, Deep Water and Arctic Drilling, Tar Sands. Other types of energy too, like Solar, Wind, various Hydro, and Geothermal, could become competitive producers, limited now only by battery efficiency and that not for long.

Threatened by these emergent substitutes OPEC, led by Saudi Arabia, decided to price them out by chopping their profit margins. Now for the House of Saud this wasn’t such a big deal, their oil costs very little to produce, they have a ton of money salted away, and societal needs (dividends) are pretty low. Most other OPEC members are not nearly in as good a position, they’ve been spending their petro-dollars as fast as they make them and for the most part extraction costs are higher.

Now it is true that the Saudi strategy has been largely successful and this is an unmitigated good thing. Some of the most environmentally destructive projects (Fracking, Deep Water and Arctic Drilling, Tar Sands) are no longer profitable and have stopped. They have not succeeded in restoring Oil as the premier resource for Electrical Generation, Solar, Wind, various Hydro, and Geothermal have reached a critical mass where they remain competitive even at these price levels.

Some people, including the Saudis I suspect, think that once they have achieved what is possible in terms of their goals they will be able to raise prices again. I am not so sure.

There are two factors that make this unlikely. One is that OPEC is now deeply divided over the Saudi strategy and non-Sunni Arab producers are not necessarily going to be as co-operative as they have been, Venezuela and Iran for example.

The other is that because of the collapse of the Global Financial Economy and the damage that has done to the ‘Real Economy’ that produces goods and services, there is simply not that much demand anymore. China, the ‘go to’ consumer of commodities, is so over invested that it will take years, maybe decades, to simply use the productive capacity they’ve already built. The U.S. and Europe (and Japan for that matter) seem set for similar decades of Japanese-style deflationary stagnation since they are firmly under the influence of Chicago School Neoliberal Austerians who haven’t been able to do anything except blow bubbles in 40 years of trying, a spectacular record of failure.

Russia is self sufficient, Latin America and Canada ditto. That leaves India as the only major market available, think that will do it? I don’t.

The OPEC bubble has burst. Those who will be hurt the worst are the Oil Princes and Companies who will see perhaps as much as Trillions of notional value- vanish.

POOF!

Couldn’t happen to a more deserving group of greedy assholes.

Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure
by Dan Murtaugh, Bloomberg News
December 28, 2015 — 2:10 PM EST

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50 percent price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well.
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For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes, a senior upstream analyst for Wood Mackenzie Ltd. in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great
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Producers slashed spending, idling more than 60 percent of the rigs in the U.S. They drilled and fracked faster, meaning fewer rigs and workers could make the same number of wells. They focused on their best areas and used more sand and water in the fracking process so each well gushed with more crude. By April, when the rig count had fallen in half, output was still rising.

All that effort did was push prices lower and expectations for a price recovery further out into the future. Now shale companies face a grim future, having played most of their best cards.

“There is limited scope for further production cost reductions,” Mike Wittner, head of oil-market research for Societe Generale, said in a note to clients. “While technological and efficiency improvements may continue gradually, oil company renegotiations with contractors are essentially done, and so is the rapid shift to focus only on core areas.”

Shale drillers aren’t the only ones hurting. OPEC’s strategy is causing pain for its members. Saudi Arabia is said to be considering selling stakes in state-owned companies to help stem a budget deficit that reached 20 percent of its economy. Venezuelan Oil Minister Eulogio Del Pino said the industry is “at the door of a catastrophe” if crude production outstrips storage capacity.

Even a plunge in U.S. output may not be enough to drain a global supply glut that has almost 3 billion barrels of oil and products like gasoline in developed countries’ storage tanks, according to the International Energy Agency. The world will likely be oversupplied by about 1 million barrels a day through the first half of next year before balancing, Jefferies LLC analysts including Jason Gammel said in a Dec. 18 research note.

Worst Year for Rigs in Quarter Century Closes With a Whimper
by Joe Carroll, Bloomberg News
December 31, 2015 — 2:00 PM EST

Oil explorers shut down more rigs in U.S. fields to finish out the worst year for drilling cutbacks in almost three decades.
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Drillers searching for oil this year idled the largest proportion of their rig fleet since at least 1988.
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About 70 percent of the vertical rigs in the U.S. have been dismantled this year, compared with 59 percent of horizontal drilling units, according to the report.

Two-thirds of oil rigs in the U.S. have been parked since drilling peaked in October 2014. Growing supplies of crude outpaced demand, deflating prices below $40 a barrel and forcing severe spending cutbacks throughout the industry. U.S. crude dipped below $35 — its lowest price in 11 1/2 years — earlier this month.
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Demand for the costliest rigs — those searching in deep seas for crude — is at its lowest since a 2010 federal moratorium that shut most Gulf of Mexico exploration after the oil spill disaster at BP Plc’s Macondo well.