We appear to be living in rather peculiar and unsettling times. A year ago, discussions and fears were over the high price, which until September 2014, had been above $100 a barrel (1). The rose to $115 in June 2014, but has subsequently plummeted, with West Texas Intermediate (WTI) falling to $43 and North Sea Brent Crude to $47 earlier in the week. Today, both have rallied marginally to around $48, with an untypical mere 21 cents between them. Since Brent typically trades at several dollars above WTI, any apparent synchrony between the two tends to reflect price-volatility, as indeed is the case now. It is fair to say that the crash in was not anticipated by most people who keep an eye on the supply situation, and accordingly, its cause is a matter of intense speculation, and the likely prognosis even more so. Among the various factors that have been brought culpable for it (2), we may list: a slowing of the Chinese economy, and little recovery in Europe, so that demand has fallen, and that moreover, supply of crude has soared ahead of expectation. The latter is accounted for by supplies of returning from Iraq and Libya, and overwhelmingly, the ramping-up of oil-production in the USA, principally released from impermeable shale-formations by hydraulic fracturing (fracking). While the USA is not a major exporter of oil, the increase in its own domestic production has reduced the amount of it needs to import, so leaving a bigger surplus on the global market. Saudi Arabia produces around 10 million barrels a day, or one-third of the output from OPEC, which has refused to cut back on production primarily to avoid losing its market share (3). Thus the result is overproduction against demand, leading to a glut of oil, and this has pushed the down markedly. Although, from the perspective of price at the pump, a low is widely being seen as positive, i.e. sales of Hummers have increased (4), and the British Prime Minister has promised that cheap and gas will lead to reduced energy bills (5), there are various reasons to infer that the situation is but metastable and temporary. The main factor is that the world's currently producing fields are showing a production decline of 4.1% per annum, meaning that year on year we need to find another 3.5 mbd (6), or the equivalent of the production from Saudi Arabia about every 3 years. This surely will eat into the glut, and in addition, we are already seeing companies pull back on investment in new production to the tune of $150 billion in 2015 (7), because the they can sell for is less than the breakeven (how much it costs to produce it). Any failure to inaugurate new production now must reduce the supply of a year or more down the line, and it is unlikely that US shale output, impressive though it has been (now providing 30% of US domestic production (8)), can grow in perpetual step, to offset the decline from existing fields. Indeed, along with deepwater production, it is the relatively expensive shale projects that are vulnerable to a curtailing of new investment in them. It is speculated too, that the resurfacing of troubles in Libya will reduce its exports of (9), further attenuating overall global supply. Once the supply surplus is reduced against demand by these combined forces, the will go back up: it has to, in line with true and rising production investment costs, and the real speculation is only over when. This may well sound like the bones of a peak oil argument, which will be laid bare once more, as the surplus which has veiled them drains away, but the technical and economic viability of production may not be its limiting element. Rather, the determinant of how much (and other fossil fuels) we can produce may be the amount of carbon dioxide that we are allowed to release into the atmosphere if we are to keep the mean global temperature from exceeding another 2[degrees]C warmer than it is now, which is predicted to drive catastrophic climate change. …
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Apr 1, 2024
Nazym Akhmadiyeva + 4
Open Access
