Prehaps you could tell us what you think the article is saying and why that supports your opinion.
Although the oil price dropped due to excess capacity, the first thing to get cut was exploration and reserve additions,the oil however is still there.
Due to massive reduction in activity the costs of drilling and completion activities have dropped through the floor, and those who funded high cost leases have taken a bath. People have picked up leases for pennies on the dollar, along with rig rental and frac fleet rental
If the price picks up , expect drilling and DUC work to pick up with it. The world will continue.
The article refers to diminishing returns and supports my argument concerning peak oil. Peak oil refers to a peak in production due to the fact that oil is a limited resource. References to reserves don’t reverse that point as the energy cost of obtaining oil that is deeper is higher, and thus negates whatever gains are achieved from extracting it. That’s why even with “vast” reserves of crude oil we are still resorting to shale.
The costs have not dropped at all, which is why oil has has to go up (as pointed out in your last paragraph). The catch is that the global economy needs low oil prices, not high. Otherwise, it has to incur more debt, which leads to the threat of another financial crisis.
Another problem is that the oil industry also needs to borrow more money each time in exchange for less new oil produced. That’s why it has to make debt repayments of over half-a-trillion dollars during the next five years:
And for that to happen, prices have to go up. To increase oil production further to meet the demands of a growing global middle class
it will have to borrow even more money, and prices have to go up further. Again, this is an example of diminishing returns which is explained here:
(video and PDF presentation included)
That is, more money needed each time for less new oil needed. The global economy needs the opposite of that in order to thrive.
Thus, the world will continue. It’s just it won’t continue in the way most imagine. In order to support that growing global middle class which everyone needs (including all forum members who earn from wages from businesses that engage in competition and that need to satisfy investors or who earn from investments and want the best deals), more cheap oil will be needed. But that’s not what we’re seeing.
It’s not just a glut but a glut of expensive oil. New development also requires increasing debt (and high prices) to get new oil. A global capitalist economy needs the opposite of that in order to thrive.
What we need is cheap oil. By that, I don’t mean oil at lower prices, but oil produced at low energy costs because it is readily available and near the surface. In short, light crude like that from Texas and Saudi Arabia decades ago, not oil from Manifa or deep sea or shale, biofuels, etc.
What we are seeing now is a combination of problems including and connected to peak oil. That is, peak oil has taken place because production costs have gone up. A world already saturated with credit creates even more to fund production of more expensive oil, but increased debt also leads to financial crashes. Thus, we have crashes with oil prices for oil that is more expensive because of peak oil.
Meanwhile, oil companies have to keep selling at lower prices because they have to keep paying for debt and operating costs. Will investors who were promised high returns for investments in shale continue to lend?
[QUOTE=ralfy]
Another problem is that the oil industry also needs to borrow more money each time in exchange for less new oil produced. That’s why it has to make debt repayments of over half-a-trillion dollars during the next five years:
[/QUOTE]
From your link (do you actually read any of these things??):
This is just a BBC article on the global middle class. They don’t seem to take the same gloom and doom view that you do, however. It’s also an article that over 3 years old (and still the world hasn’t ended or even substantially declined…and that global middle class is, you know, still growing. Even on ‘expensive’ oil, which has glutted the market).
This is a link to two videos which I’m not inclined to watch, especially as the site is flagged questionable where I’m at right now. If someone else wants to slog through them and see if they back up Ralfy’s assertion I’ll leave that to them…I’m not sanguine though, based on the past history, including the overall theme which seems to me to be contridicated by his first link and seems based more on his own theories of capitalism than any sort of reality. It seems in his world view the price of oil can never go up or the entire economy fails, so he’s shifted the goal posts from ‘we are running out of oil!!’ to ‘we are out of cheap oil and the expensive kind doesn’t count, so doom is on the way!’.
It’s ridiculous to say that without cheap oil the world economy is going to collapse. As has been stated many times in the life of this thread.
Some people have this sort of quasi-mystical belief that the world economy is completely and inextricably liked to energy. Shovel more energy in one end, get more economic output out the other end. And if the flow of energy slows even by a little bit the whole system grinds to a halt in an out-of-control feedback loop of destruction.
Except that turns out not to be the case. If I want my house to be warmer, I can crank up the furnace and burn more sweet sweet energy. Or I can install insulation and consume less energy. But consuming less is impossible! Less energy use can only mean lower quality of life! Except when it doesn’t.
We’re going to eventually have to get used to paying higher prices for liquid fuels. That doesn’t seem likely to happen in the next few years though, since oil producers have to pay the bills, and lower prices seem to mean they have to produce even more oil to make their budgets.
One of the reasons why the global economy crashed in 2008 and experienced slow growth to the present is high oil production cost. That was coupled with increasing debt, which led to financial crashes for various countries, volatile commodity markets, a major drop for the BDI, and weak global trade.
The need for energy in the global economy is not an “quasi-mystical belief” but based on common sense. Many goods that we use require extensive supply chains across mining, manufacturing, and shipping, and these require significant amounts of oil, iron ore, copper, phosphorus, and many other resources, not to mention the energy to obtain them.
Here’s a lengthy but very detailed explanation for mining from a mining professional:
The gist is that like many other aspects of business, mining faces diminishing returns. In the case of copper, decades ago one could find nuggets of high-grade copper in river beds. Now, heavy equipment has to be used to find less copper at lower grade. That's diminishing returns: increasing amounts of energy needed to extract less resources each time.
The same can be seen in oil:
It’s also a lengthy lecture but detailed and includes a PDF presentation. The gist is that the oil industry has to spend increasing amounts of money and energy to find less new oil each time. Again, that’s diminishing returns.
Why is that bad for the global economy? Because the same economy is capitalist, which means it can only thrive if it keeps growing, and given not only a growing population but a growing global middle class:
“The rise of the global middle class”
Everyone who is part of that global economy is dependent on growth, and that growth means increasing consumer markets for goods and services, especially given competition. Those increase in wages, those great deals in investment, those new jobs for every batch of graduates (yes, our children and grandchildren), and more are dependent on increasing wealth each time, and ultimately just increasing credit won’t cut it. More people worldwide will want cars, houses, appliances, medical equipment and services, and more. And all of those things will obviously not be created out of thin air.
The problem is that even more energy and material resources will be needed to manufacture increasingly complex goods and services for growing number of people. Just think of the difference between horse and buggy more than century ago and passenger vehicles with computer components today. And then consider the global population back then and the population today. Given that, it is painfully obvious that incredible amounts of resources and energy will be needed to sustain not just a growing human population but one becoming more prosperous.
That’s why we need cheap oil: the global capitalist economy in which we live requires it. Simply increasingly credit won’t help, as more money will obviously not defy physics.
For anyone following along but who hasn’t slogged through this over a decade old thread, these are the same arguments Ralfy has been making, literally, for years now (this does not include Ralfy, since he has stated I’m on his ignore :p). They have all been addressed up thread, and, frankly, they looked better years ago than they do today.
[QUOTE=ralfy]
One of the reasons why the global economy crashed in 2008 and experienced slow growth to the present is high oil production cost. That was coupled with increasing debt, which led to financial crashes for various countries, volatile commodity markets, a major drop for the BDI, and weak global trade.
[/QUOTE]
But, as with most of what you say (when it isn’t flat out wrong), you are spinning things here. Sure, it’s ONE reason…but it wasn’t the primary reason. The primary reasons were that too much money was created, loaned out (mainly in the housing sectors) and that the loans weren’t secured, creating a debt bubble that eventually burst. Compounding all of this you had banks swing totally the other way and stop making any loans or even transfers, causing a liquidity crisis. Trillions were lost. Somewhere in all of that you had the price of oil over $100 a barrel which had some impact on all of this…but the impact was tangential at best, and really was more a factor of exacerbating the crisis, not a prime cause. Since you’ve been through this dance previous and since better posters than I have pointed all of this out I’m sure this is nothing new. You just keep bringing it up, I presume, hoping for posters who haven’t slogged through a thread started in 2003 and seen these exchanges already.
I agree (though ironically you’ll never know since I’m on ignore :p)…there certainly is a correlation between the global economy and the price and availability of energy. It’s just not the 1 for 1 correlation you try and push. Certainly the price and availability of energy has an impact on the global economy, but you can have positive economic growth with high energy prices.
Yeah, I’ll let someone else slog through it. Just based on your previous ventures into drive by links the only fun I’d derive is if, once again, the linked video either doesn’t have anything to do with your point or contradicts you.
And yet, the real price of copper in adjusted dollars has actually gone down 50% over the past 100 years, and the global demand for copper is actually down right now. It’s part of the reason there isn’t a lot of extensive exploration for new copper sources. Old mines might be playing out, though still operating because they are still economically viable, but copper is also a material that can, is and has been heavily recycled.
Except the price of energy is only one factor in the global economic equation and that capitalism itself has mechanisms (those ‘market’ thingies) that factor in those changing prices. As to the ‘global middle class’ (a theme that, again, you’ve been on about for years) it continues to, you know, grow.
Well, let’s think of them. When we were in the horse and buggy days and oil was first being discovered and methods to extract it were first being developed to today we’ve had many instances where there were fears that oil would run out. The early technology used for extraction and production weren’t viable, economically, when the first fields began to diminish in productivity. Instead, new technology was needed to refresh those fields, discover new ones and exploit resources that weren’t viable at the earlier price points. This has been the trend literally since the first wells. Many untapped resources were left in the ground, either undiscovered or basically not economically viable for extraction. As prices and demand changed, however, those resources that were un-viable before become viable…and as the prices rise there is more funding for R&D and for new exploration. This opens up new resources. Of course those resources cost more to extract and process…that’s natural. But as long as the market can bear the costs it’s not a major issue. Eventually, what will happens is that the cost will rise to a point where it’s price point exceedes that of alternatives that we already have but aren’t used, or are niche products…making those alternatives viable for a more mass market and distribution.
Your assumptions and assertions defy standard economics. Capitalist economies do not require cheap oil or they collapse.
So after Alpine High led the way with oil running out with 3billion bbls contributing to the end of the oil era, the USGS announces another step closer to peak oil
I think I read it correctly.
We are doomed.
Although by we I mean anyone hoping for >60$/bbl oil.
Yeah, but what about the capex?? The money to exploit this sort of discovery doesn’t grow on trees, you know??? Plus…have you read back through the Ralfster’s previous drive by posts with links?? There is undoubtedly something in there that says that, though the estimates on this are 20 billion barrels and 16 trillion cubic feet of natural gas, this is UNCONVENTIONAL oil, so it doesn’t count. Oh, plus we will only be able to take a thimble full at a time out due to…well, shale deposits and…rise of the global middle class! To paraphrase Monty Python: Look, that rabbit’s got a vicious streak a mile wide! It’s a killer!..He’s got huge, sharp… er… He can leap about <-------------->. Look at the bones, man!
The end is nigh…repent, repent! The price of oil is set to skyrocket (for certain definitions of ‘skyrocket’) in 2017 as oil producers are going to be in deficit production territory, according to the IEA! Read the whole story to see how, once again ralfy predicted all!
Er…well, ok, that doesn’t sound too bad. But it’s a deficit in production! This could be a new trend in ever skyrocketing price and higher and higher demand that just can’t be met by the oil producers leading to dogs and cats living together as human societies collapse and we go back to the joys of hunting and gathering!
I just keep bumping this thread for my own amusement and just to keep it current with the happenings. My apologies if this is annoying anyone. At any rate, the irony factor in this is just too good to pass up. Basically, OPEC, after several years spent trying to crush US oil production, has now asked (politely it seems) for US producers to please, please ramp back production as the glut of oil on the market continues and the prices have, once again, started to drop (this is only temporary I’m sure, Ralfy! The end is nigh, I’m sure).
I’m sure shale oil is, as predicted in this thread, just about to dry up (it’s unconventional, after all), but seems that the attempt by OPEC to drive them out of business has only made them more efficient.
Anyway, just wanted to update and share. Be sure to click like and subscribe to The Oil Drum, who will be vindicated in the end!
Reserves are based on price. Increase the price of oil, and there are more reserves available. That’s because the oil that needs to be extracted is deeper or requires more processing.
The problem is that the world can’t afford high prices in the long run. It can do so in the short run by creating more credit, but doing so leads to greater financial instability and debt. Because of that, credit has to be decreased.
That is what we are currently facing. Oil discoveries are now at a 70-year low. The more expensive oil requires $50-90 to access and process, and oil from areas like Manifa $150. In order to access that oil, the industry had to take on up to $3 trillion in debt. It has to pay $500 billion of that during the next few years, and to do that it had to lay off thousands of workers, give up over $1 trillion in investments, and use up more of its cash flows. If oil prices don’t go up, things will get worse.
But higher oil prices will require more credit, and that means the opposite of plans to raise interest rates. That may lead to lower credit levels but also lower investments for all other businesses as well as more expensive debt.
All of these could have been avoided given cheap oil, but that’s not going to happen for painfully obvious reasons. The fact that oil discoveries have been dropping and oil production costs have been going up due to lower energy returns is proof of such.
[QUOTE=ralfy]
That is what we are currently facing. Oil discoveries are now at a 70-year low.
[/QUOTE]
I’m not sure whether Ralfy here is being deliberately obtuse or disingenuous, but this is the same theme he’s been on. Basically, say something that is true (sort of…at least, in this case, in 2016) but don’t provide the details so that it sounds scarier than it is. It’s true that in 2016 oil discoveries were at a 70-year low…but the reason for that is because the price of oil was so low that oil companies cut exploration down to the bone. From here:
It’s another instance of using the truth to obscure the reality and try and paint a picture through misdirection that conforms to your narrative. The rest of his post is much the same thing. I notice he didn’t address the fact that oil prices continue to be extremely low, or that US shale companies have continued to produce at a profit in current price structure…because these things don’t conform to his narrative so should be ignored or de-emphasized.
It’s funny that he comes back to the thread and tries this stuff when much of it’s been addressed already to debunk his narrative or at least to shed light on what he’s trying to do. Almost like he doesn’t see the posts.
Maybe it’s just me, but the irony of these two sentences sort of sum up this thread and Ralfy’s participation in it.
In short, what’s recoverable is based on prices. If prices go up, then more oil can be accessed. But the global economy needs cheap oil.
“The Mighty U.S. Shale Oil Industry To Lose Another $20 Billion In 2017”
“WARNING: The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive”
Exxon and others gave similar conclusions years ago. Also, consider the comments in the articles that you shared.
Here’s what I’ve gathered so far:
According to the BIS, the oil and gas industry has debts of up to $3 trillion, and has to make debt payments of over $500 billion during the next few years. It has been making payments so far by selling off assets, burning more of its cash flows, laying off thousands of workers, and letting go off around $1 trillion in investments to profit. That explains why they are profiting even with low oil prices.
Oil prices have to go significantly for them to survive in the long term, especially given diminishing returns on capex (i.e., increasing levels of investments in return for lower increases in production), but higher oil prices have a negative effect on the global economy. That’s why global growth remained weak compared to the previous decade.
Meanwhile, consumption has not gone up considerably even with oil prices plummeting, and financial problems persist due to high levels of debt, in turn prompting calls for interest rate hikes.
Oil discoveries are at a 70-year old. If any, that shows that what we are seeing is not a mere bump in the road. In addition to that, oil production per capita has never recovered after peaking back in 1979. If any, these two points alone discount any claims debunking peak oil. I just wanted to add the rest of the points above to show its effects. In this case, we are seeing the effects of peak oil and high levels of debt needed to maintain production.
