Petrodollar collapse

Is the petrodollar about to tank the economy?

Just wanted to say, back when people were crying that Peak Oil was heralding the end of Western civilization as we know it, who would have thought that oil being too cheap and plentiful would ever be a problem again?

You sound like you’re saying that low oil prices proves that Peak Oil isn’t real. Is that what you’re trying to say? I mean, think how it sounds if you replace “Peak Oil” with “Global Warming” and “oil being too cheap and plentiful” with “winter snowstorms” and see how silly this sounds. Just wanted to say, back when people were crying that Global Warming was heralding the end of Western civilization as we know it, who would have thought that winter snowstorms would ever be a problem again? See what I mean?

Actually, that’s not a perfect analogy because climate doesn’t fight back when you try to reduce your vulnerability to it. Building sturdier houses won’t make climate angry, causing it to retaliate by sending storms at your house. But when Americans start buying fuel-efficient cars and producing too much domestic oil, OPEC is perfectly capable of retaliating by intentionally lowering the price of oil. Of course, they can’t keep it up for ever; they’re losing money on the deal. But they know it’s hurting the competition worse than it’s hurting them.

None of this has anything to do with whether Peak Oil is a real thing. There is a finite amount of petroleum in the world. It is absolutely impossible for production levels to continue increasing year after year ad infinitum. Sooner or later, production levels will have to fall. How do you get from this fact to the conclusion that oil prices have to go up and then being surprised that prices are currently down?

I didn’t; obviously there will be the usual market fluctuations. However a drop in oil prices this huge would have been considered very unlikely five years ago. Certainly I doubt anyone thought disinvesting in petroleum futures would be a good idea. I think the success of fracking and shale oil exceeded the pessimists’ expectations.

Five years ago was January of 2011. Let’s look back at what would have been considered recent history at that point. Before 2008, oil had been selling for $60-$80 per barrel. Then in 2008 it shot up to $130, then fell all way down to $45 just a few months later. During 2009, it gradually climbed back up to the $60-$80 range again, where it stayed during 2010. So, given this information in January of 2011, suppose you had asked a large group of experts if they thought someday oil might drop from $110 down to $35 in a few months. I bet the consensus would have been “Sure, we saw it happen two years ago; it could easily happen again some day”.

According to CNBC, “Early last year, Mark Yusko, founder and CEO of Morgan Creek Capital Management, predicted crude oil would approach $30 a barrel”

The success of fracking didn’t cause the low prices, not directly anyway. Some countries are capable of extracting oil for $30 per barrel (thus they can make a healthy profit selling it at $90) while other countries have to spend $50 or even $70 to extract a barrel of oil (thus they make less of a profit, but still come out ahead). When oil was above $90, fracking and shale oil looked profitable, and lots of companies invested in those technologies.

Right now, oil is selling at $33.62 which means that Saudi Arabia is more or less breaking even (giving up their usual huge profits) while the competition is losing money hand over fist and rapidly going out of business. It’s a price war. Saudi Arabia can’t keep it up forever; their economy depends on huge oil profits. But the competition (including fracking and shale oil) is dropping like flies.

None of this has anything to do with the fact that fossil fuels are a finite supply and sooner or later the global production levels must decrease. What remains to be seen is whether that transition will be easy or hard. The better prepared we are, the easier the transition will be.

Nitpick–shale oil is proving to be far more resilient than anybody anticipated. This is partly because of changes in strategy, and partly because of rapidly-advancing technology.

The end result is that US oil production, while declining over the last several months, is declining far slower than anybody thought it would.

This decrease was due to a demand crash following the Great Recession - not due to the supply glut we have today. I don’t recall reading that anyone was surprised by it.

We are obviously using oil faster than it is being replenished by natural means. The issue is whether we have enough so that oil consumption can be reduced quickly enough by technological advances to extend the time when we do run out into the distant future. Even if fracking is not profitable today it will be again if the price rises due to decreased supply.