Home > Economics - General, Environment > The fossil fuel crash of 2014

The fossil fuel crash of 2014

December 20th, 2014

Among the unforeseen (by me, at any rate) events of 2014, the collapse in the price of crude oil may be among the most significant. Prices have fallen from more than $100/barrel in mid-2014 to around $60/barrel today. This follows a more gradual fall in the price of coal. The thermal coal price peaked at $140/tonne in 2011 and has now fallen to around $70/tonne. Prices for metallurgical coal and iron ore have also collapsed.

What should we make of this? The big questions are
(i) to what extent does the price collapse reflect weak demand and to what extent growing supply
(ii) will these low prices be sustained, and if so, what will be the outcome.

The answer to the first question seems to be, a mixture of the two, with some complicated lags. Strong demand growth (briefly interrupted by the GFC) produced high prices which made new projects appear profitable. Now the projects are coming on stream, but demand has weakened. Since both demand and supply are inelastic (not very responsive to prices) in the short run, a moderate oversupply produces a big drop in prices.

Coming to the second point, if we are to reduce emissions of CO2, a necessary precondition is that the price of fossil fuels should fall to the point where it is uneconomic to extract them. Current prices are below the level at which most new oil and coal projects are profitable, so, if they are sustained, we can expected to see a lot of project cancellations and closures (this is already happening with coal to some extent).

The big question is whether sustained low prices will lead to a recovery in demand. There are at least some reasons to hope that it won’t. There’s pressure to reduce coal and oil use coming from many directions, so, even at lower prices, I doubt that we will see a surge in investment in new coal-fired power plants* or a return to oil for uses like heating.

So, the hopeful scenario is one in which the abandonment of new projects brings us the long-awaited advent of Peak (or rather Plateau) Oil and Coal** in the not-too-distant future, giving time for policy to push the global economy in the direction of decarbonization.

* Someone will doubtless point to the case of Germany. But as far as I can tell, the plants that have opened recently were commissioned around 2006, and most proposals made since then have been abandoned.

** Of course, gas is a different story, partly because there is no global market. Gas prices are rising in some places (Australia, for example) and falling in others as trade expands.

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  1. Ikonoclast
    December 20th, 2014 at 15:28 | #1

    I will put up my hand too. I did not predict this price drop either. One person who did is Gail the Actuary. IIRC, she predicted that very significant oscillating price rises and price falls would occur post peak oil. Further, IIRC she specifically predicted price falls as the economy first contracted significantly from peak oil and knock-on effects hit consumers and reduced demand. She then said and still says that much “hard to get” oil requiring large capex (capital expenditures) will probably be left in the ground, forever basically.

    On the other hand, Gail the Actuary dismisses all renewables out of hand claiming they all have insufficient EROEI (Energy Return On Energy Invested) and are subsidised by oil. She appears to be rather derp-ish in this area never admitting any new data (or much data at all) to her analysis. However, this interpretation might just reveal my bias. I have switched from pessimism about scaled-up renewables to cautious optimism coupled with the view that it’s renewables or nothing so we have to try.

    On oil prices was Gail right for the right reasons, right for the wrong reasons or right like is a pessimist is right sometime because bad things sometimes do happen? She certainly is an outright doomster.

    I remember getting full marks in a first year uni chemistry prac exam after completely bungling a titration through total inattention, rushing it and maybe my being colour-blind (which could be an excuse for missing colour changes). Once I realised I had bungled it, I drained, cleaned and packed up the physical evidence promptly. Recorded answers were marked by tutors who had walked around and looked cursorily at some experiments in progress. I literally made up my answers with blind stabs in the dark. I might have used some general theoretical knowledge to put the stabs in the dark in the right ballpark, I forget. I got perfect marks for my “perfect results”. The probability of pulling that off must have been exceedingly low. The blindest guesses can sometimes be right.

  2. December 20th, 2014 at 15:46 | #2

    In hindsight, john, do you think it could have been predicted? Also what are the ramifications for your disagreements with the limits to growth crowd if a collapse in the commodities sector leads to a slowdown in global growth in 2015?

  3. John Quiggin
    December 20th, 2014 at 16:11 | #3

    A slowdown caused by a collapse in commodities prices is the exact opposite of what the limits to growth crowd are talking about. It would imply that macroeconomic/financial sector dislocations, and not resource constraints, are the big economic problem.

  4. Ikonoclast
    December 20th, 2014 at 17:05 | #4

    @John Quiggin

    I take your point but is Gail the Actuary’s scenario sequence also feasible?

    1. Limits to growth in the form of physical oil production limits are nudged or rather rubbed up against for good while. So it’s like an exogenous friction slowing the economy. Everyone is a bit desperate for oil so prices hit new highs.

    2. These new highs cause a slowing of the economy and layoffs in industries with heavy oil fuel costs or exposure to fuel costs (transport, agriculture, retail). Because of price inelasticity it takes a while for the economic slowdown to pull down prices. Prices only fall when the slowdown is well established.

    3. Now the phenomenon of hysteresis (right term?) causes a lag in recovery so low oil prices take a while to impact right through the economy and encourage an increase in business and re-hiring.

    Summary. So when an economy is hitting limits, it hits them and rebounds down, comes up again to hit them and rebounds and so on. We get an economy oscillating but osciallating with a trend downwards.

    These are all questions. I am asking if this can happen, could be feasible etc.?

  5. Jordan
    December 20th, 2014 at 17:21 | #5

    @John Quiggin
    I always imagined that limits to growth would play out as it has. It points to importance of moderate inflation (4-10%) to keep balance between economic sectors adjust as needed to keep equilibrium at the highest levels.

    Limit to growth plays out differently with moderate inflation then with no inflation or low inflation (bellow 2%). With moderate inflation, economies can have only growth of profitable sectors while declining sectors are only stagnating. Without inflation, profitable sectors will stagnate while declining have to deflate (and bring wages down) which causes loan defaults in such sectors.
    You might think that it is more of resource limits that are real limits, not monetary limits having the influence, but i know that economic activity goes where the money is moved to, not opposite. It is how Soros plays. By applying enough funds no currency can be safe. So the money is what motivates economic activity. MMT gives me such message, and i know it from experience.

    In low inflation environment peak oil causes huge imbalance in financial sector, because only energy price is going up and that drains funds from other sectors trigering deleveraging and deflation across the whole economy. This is how played out.
    With inflation, funds drain would be much much slower sufficiently enough to prevent deleveraging and deflation. There would be no such drastic oscilations in comodities and energy prices. Equilibrium would stay at the highest level.

  6. John Chapman
  7. hc
    December 20th, 2014 at 19:23 | #7

    The claims that we were running out of oil (and that peak oil is just around the corner) are just as foolish as those suggesting we are awash in oil. The current oil glut is temporary. We have seen it all before many times. Some shale oil producers will go out of business and, once things hurt enough, OPEC will cut quotas. Demand will pick up for coal and oil products as prices dip and as we are assured it is different this time. This pattern has repeated itself a half dozen times during the 20th century.

    I am interested that EXXON did not go into large alternative energy sources because it always argued that oil prices would crash. They were right.

  8. Donald Oats
    December 20th, 2014 at 21:28 | #8

    Are the current low prices for all oil, or just for some oil?

  9. December 20th, 2014 at 21:54 | #9

    Hc, I don’t think peak oil is just around the corner. I think we hit it a few weeks ago. I doubt oil production will go higher than it is now and even the current peak is only a few percent higher than it was in 2004. So really we’re at plateau oil and have been for a decade. And even if the current production isn’t the peak, I’m willing to bet production will never be more than 5% higher than what it is at the moment.

  10. December 20th, 2014 at 21:58 | #10

    What do I think? Well, I’m not surprised by the fall in the price of oil. It’s a cycle that has occurred a number of times before, it’s just the when which is really hard to pick. And I’m am also optimistic about the price of oil not going past it’s previous peak of $147 a barrel in real terms in the absence of war/political arm twisting/major oil field disaster type stuff going on. But the reason I think that is not because I believe supply will go up but because demand destruction will continue to march on. While a decrease in oil prices to only twice what they were in real terms only 10 years ago doesn’t help the elimination of oil from transportation, major developed economies generally have improving fuel efficiency standards that they are not about to abandon. For example, by 2020 the average new car in the EU will be 33% more fuel efficient. In Japan 17%, the US 14%, and China 38%. And Australia? Australia may actually get fuel efficiency standards. Pretty astounding, huh?

    Again, lower fuel prices don’t help the electrification of transportation, but it will continue. Thanks to taxation the price of oil falling by one third doesn’t translate into petrol being one third cheaper at the pumps. In China I believe the price stays the same and the government pockets the difference. If our government had enacted emergency legislation when the price of oil dropped we could have done the same. But I guess our government doesn’t care as much about budget “repair” as they say they do. Anyway, electric car production will continue. As will self driving cars, which may (note the may) be only five years away. With autonomous electric taxis doing the driving for us range no longer becomes an issue. Taxis will charge themselves and if the one you are in does run low on charge it will pull over and you’ll step into a fully charged one. This means much less oil burned and also less raw materials will be required as we’ll only need one tenth the number of passenger cars we currently have. It is probably a good thing Australia got out of the auto industry when it did.

    Another thing that could rock oil’s socks is if Japan adopted incentives for electric cars similar to Norway’s. While this is not something that looks like it will happen straight away (Toyota is still babbling about hydrogen fuel cells), it would result in considerable demand destruction. And Nissan apparently is ready to announce a longer range Leaf, quite possibly with solid state batteries and Tesla is building a giga-battery plant and working on a more affordable electric vehicle than its current sports cars.

    And carbon pricing? That’s not going to go away either. In fact, I’m pretty certain it’s going to come back in Australia.

    So barring wars and such I think there’s a reasonable chance we’ve seen the highest oil prices in real terms we will ever see thanks to continuing demand destruction and oil will continue to used for applications such as air travel and some chemical feedstocks. After all, a trickle of oil will continue to be produced by many existing wells for hundreds of years and what with all the existing infrastructure it may be easier to make use of what will be extremely cheap oil for some purposes and then capture and sequester the carbon dioxide released than to develop substitutes.

  11. December 20th, 2014 at 22:01 | #11

    @Donald Oats
    Donald, all oil is down. There are still minor differences in price due to quality, but if one region starts producing more oil it will drop oil prices around the world.

  12. Ikonoclast
    December 20th, 2014 at 22:36 | #12

    @Ronald Brak

    I tend to agree with all you have said there. It looks like the way things will go. I still have some worries about how well renewables will scale up. I suspect some new limits may affect some renewables. At the same time, renewables are our only chance so we have to make them work as best we can. I still have quite a few worries about waste sinks as opposed to resource limits. AGW look baked in to some extent and some real damage to the economy look highly likely. The oceans are dying, the forests might follow and the greatest and fastest (fastest by several orders of magntiude) mass extinction in earth’s history is happening right now. Huge disruption has occured to the earth’s nitrogen cycle… and some other cycles.

    The future still looks very concerning and I think a New Frugality as Hermit termed it will be a new civic virtue forced on us by circumstances in the Age of Consequences.

  13. James Wimberley
    December 21st, 2014 at 06:51 | #13

    JQ:” Coming to the second point, if we are to reduce emissions of CO2, a necessary precondition is that the price of fossil fuels should fall to the point where it is uneconomic to extract them.”

    There seem to be a few unstated assumptions floating round here. One is that the energy transition must leave very large volumes of technically extractable fossil fuels in the ground. Fine. Another is that the transition has to be driven by markets and prices not by regulation. Reasonable but not axiomatic.

  14. Ron E Joggles
    December 21st, 2014 at 10:30 | #14

    @Ikonoclast
    “a New Frugality … will be a new civic virtue forced on us”.
    I’ve thought the same for 30 years! But selfishly, I want to have a little fun before I die, so next year I’m buying a motorbike.

  15. December 21st, 2014 at 12:32 | #15

    I see very few ill effects from the rise of shale oil. Lowering the price of oil mostly hurts people whom it is fun to see hurt – Putin, the Sauds, various warlord blaggards – and I suspect the scaremongering around the environmental problems around fracking are about as overblown as the wars against GM food or windmills.

    Shale oil is more expensive to extract than traditional sources, so lowering the price makes marginal shale projects less attractive. I would hope that iteration of shale extraction technology eventually closes the gap somewhat, though.

    I would expect shale oil to slowly realign global politics away from protection of bad actors sitting on oil deposits, which is a good thing, but inevitable price spikes will encourage a shift to low-carbon alternatives over the longer term. The advantage of sunlight as an energy source is that we all get pretty much the same amount of supply everywhere, so supply shocks are fairly hard to imagine (Krakatoa notwithstanding).

    @hc I would venture that OPEC’s power is a lot weaker now than in the 20th century, which is kind of the point of assessing the change from shale.

  16. December 21st, 2014 at 13:08 | #16

    I find it astounding that in light of this year’s temperature trend, and Putin’s actions in Ukraine, people can be sanguine about either a glut of shale oil or “hurting” Putin. I’m also interested to know who these “warlord blaggards” are – to the best of my knowledge Venezuela, Iran, Kuwait and Saudi Arabia haven’t invaded anyone in quite a long time, and the only serial warlords who are currently producing lots of oil are the USA.

    And as for hoping that the world can produce more oil …

  17. December 21st, 2014 at 14:33 | #17

    Ikonoclast, environmental damage caused by global warming and other planetary insults is certainly cause for concern. However, I don’t see how we can end up with a “new enforced frugality”. We know how to acquire energy with minimal greenhouse gas emissions and we know how to use energy more efficiently than we currently do. So if we find ourselves short of energy we knowledge and our ability to do things to get more.

    If Zorg the Destroyer embroils the oil exporting nations of the world in war then in the short term we will make more use of public transport and drive and fly less. In the longer term we will buy more electric cars and some people will convert existing cars to electricity and after a while demand destruction lowers the price of oil and the problem goes away.

    If Zorg the Destroyer is successful in his/her struggle to become dictator of the world and then places a carbon price equal to the long term cost of removing emissions from the atmosphere of say $100 a tonne (Zorg is very enviromentally conscious) then in the short term we would have the inconvenience of having to pay a few cents more a kilowatt-hour for electricity and we’d have to reduce our internal combustion engine drivng and scrap our worst fuel guzzlers, and we’d eat less meat, but we would convert coal plants to burn biomass, build more wind turbines, install more rooftop solar and purchase electric cars and after a period of adjustment electricity costs and transportation costs will be back to where they were and then they will fall below that since wind and solar tend to push wholesale prices down and electric vehicles should be cheaper to run than oil powered ones. And while a sudden $100 a tonne carbon price would be a bit of a shock, remember Zorg is totally down with the revenue collected by it being used to ease the transition to a carbon neutral economy. There is no need for Hermit’s fear of vast numbers of elderly people dying from heatstroke because they are too cheap to turn on the air conditioner to come true. In fact, Zorg the Destroyer will destroy people who allow that to take place. Spankings may even be administered. It may sound cruel, and it will be, but you don’t get a name like Zorg the Destroyer by playing nicey nice all the time.

  18. December 21st, 2014 at 14:45 | #18

    @Ron E Joggles
    Ron, why don’t you consider buying an electric motorbike? Current models give internal combustion motorbikes a run for their money on performance and with some solar panels on your roof you can charge with little or no addition to the average number of Bangladeshi children Australia drowns each year. And you’ll decrease the chance that you or your children or just random people you happen to like will have to suffer “enforced frugality” in the future.

  19. hix
    December 21st, 2014 at 15:15 | #19

    The post about German coal power plants is very misleading since the nuclear phaseout decission was made far earlier than 2011 and just speed up afterwards, which the author of the blog post does know as evident by his response to a comment. On the other hand, the decissions to build those coal plants (a) turned out to be a commercial disasters (b) were by no means a “pure market* outcome. Why argue misleading when just representing a realistic picture works just as well to your advantage, ill never understand it.

    *not just talking about externalities here, rather thinking about direct coal subsidies (albeit those i think were not a factor for most projects, maybe for none to be fair) and the political decission makeing within the energy companies (consider for example that RWEs shares with voting rights are ~50% owned by government bodies friendly with coal miner unions/friendly to coal identity politics)

  20. John Quiggin
    December 21st, 2014 at 16:54 | #20

    @hix

    You’re misinterpreting me here, hix. I wasn’t talking about the nuclear phaseout (which, BTW, I oppose). Rather I was anticipating, and trying to refute in advance, the suggestion that the new power stations were a response to falling coal prices.

  21. December 21st, 2014 at 17:27 | #21

    @Ronald Brak

    You rather fill me with hope for the future. I can’t wait for Zorg to take charge!

  22. rog
    December 21st, 2014 at 20:53 | #22

    As a large proportion of the price if oil is speculation it will be interesting to see how many hedge funds survive the current cycle. Similarly, how many hedge funds successfully subscribe to the EMH?

    GMO argue that at any price fossil fuels hold back economic growth.

  23. December 21st, 2014 at 22:03 | #23

    @faustusnotes
    Oil’s direct contribution to CO2 emissions is not the only variable. Cheap energy is an almost perfectly positive factor for general development of society. It slows the transfer of funds from poor countries to oil barons and sheiks, and allows them economic confidence to stop ruining their own environments. Its beneficial effects outweigh the emissions, in the medium term.

    I have no truck with the theory that we need an economic crisis with widespread pain to force change. That is also the theory of the right, as seen with Abbott manufacturing panic over his silly budget emergency. Change can happen without crisis; in fact, that should be the primary calling cry of the left IMO. We don’t need an energy shock to force us to convert to renewables.

    In referring to blaggards, I was thinking of half of the top 10 oil producing nations being in the ME, including Iraq where Islamic State has gained funds by selling oil. And don’t tell me Saudi Arabia, UAE and Kuwait are filled with completely virtuous elites.

  24. December 21st, 2014 at 22:42 | #24

    m0nty, it is well established that most of the oil and coal in the ground has to stay there. To the extent that cheap oil and coal encourage its use, we have a problem. Cheap energy is not a perfectly positive factor for China, which is suffering major health consequences from pollution related to coal and diesel, and the infrastructure requirements of major coal-fired power make it a very expensive development path for other low-income countries. It’s not an unalloyed good, and cheap energy is not the be-all and end-all of development, nor is it always only achieved through fossil fuel.

    I’m also not advocating a crisis, simply pointing out that at some point very soon the world has to stop using fossil fuels. Frakking and cheap Iraqi oil do not contribute in any way to that mission, and anyone who is relaxed about the time frames required to achieve it is, quite frankly, either ignorant or stupid.

    And you didn’t just say “blaggards.” You said “warlord blaggards,” of which amongst oil producers there are precisely two: the USA and Islamic state. Given that oil is a windfall for Islamic state and even at a dollar a barrel a profit for them (since they didn’t invest in the production facilities, and don’t give a toss about economic development or sustainability), I can’t really see what on earth you were talking about. Your point wasn’t that the oil producers are full of non-virtuous elites, but that they were “warlord blaggards.” which they clearly aren’t.

  25. December 22nd, 2014 at 01:06 | #25

    @faustusnotes

    I’m not sure there have been any official sightings of blaggards since the 1920’s…

  26. Debbieanne
    December 22nd, 2014 at 14:33 | #26

    My Google skills are not good, so- could someone please tell me what we were paying/l of fuel when last a barrel was this low? Thanks

  27. Matt Hardin
    December 22nd, 2014 at 16:44 | #27

    @debbieanne. It was about the same $1.25 or so.

  28. December 22nd, 2014 at 18:37 | #28

    @faustusnotes
    I am with you all the way on coal, no question. I would argue that petrol is different, though.

    Petrol is not as damaging as coal, and if there has to be a transitional phase from fossil fuel reliance to a renewable-based economy – which I agree in the long term is optimal – then cheap oil in the short term has many other positive effects such as removing the perceived need by superpowers to arrange global politics around defending scarce sources of oil.

    How exactly were you expecting the world to stop using fossil fuels? Were you hoping for Peak Oil, and wishing for increasing price shocks to discourage exploration and extraction? Do you not realise how many would suffer, especially the poor? That scenario would lead to a lot of bad economic, social and environmental outcomes. I would prefer a future where energy is cheap enough to continue the uplifting of developing economies to work on third world poverty, but we in the West choose to change our economies peacefully. That is not to deny the sword of Damocles hanging over us, but to maximise economic as well as environmental wellbeing.

    As for blaggards: Iraq, Iran, Kuwait, UAE, Saudi Arabia… largely controlled by families, factions or former freedom fighters whose full histories include a lot of warlording across generations.

  29. nom de plume
    December 22nd, 2014 at 22:39 | #29

    @Ikonoclast

    ‘I will put up my hand too. I did not predict this price drop either. One person who did is Gail the Actuary.’

    Sounds like Gail had been reading Nicole Foss at the Automatic Earth, who has been banging on about this big drop since she began to blog in early 2008. Here she is at the Business Insider in Jul 2012:

    http://www.businessinsider.com.au/theres-something-much-worse-than-an-oil-price-spike-2012-7

    ‘In the case of oil, the effects of phase II of the financial crisis, and the coming demand crash, on oil prices will be exacerbated by a major shift in the perception of supply – from scarcity to glut, as a result of the unconventional oil fantasy’

    When Glenn Stevens opined a few years ago that no-one could have seen the crisis coming he was forgetting or ignoring not just economists like Steve Keen but experts in other fields like Foss, who worked in energy and edited Oil Drum before blogging and lecturing. She says the light went on for her – i.e., she realised that the sums didn’t add up and the entire system was unsustainable and would collapse – in 2004, so she is in Taleb and Engdahl territory, though they were looking more at housing’s nexus to finance rather than energy’s.

    faustusnote, you will appreciate (if you’ve not already done so) her piece from January where she covers this issue tangentially in a critique of David Holmgren’s thought (she is in general agreement).

    http://www.theautomaticearth.com/crash-on-demand-a-response-to-david-holmgren/

    ‘The future still looks very concerning and I think a New Frugality as Hermit termed it will be a new civic virtue forced on us by circumstances in the Age of Consequences’

    Ikon, you might find it interesting too. TAE is as focussed on remedies (or at least mitigating strategies) as it is accurate doomer prognostications. To that end Foss is becoming a permaculture maven.

    Some people make you feel tired just reading about them…

  30. December 23rd, 2014 at 13:22 | #30

    I don’t see how we could end up with a new “enforced frugality” as some people envisage it, but I guess if you look at it we do have a new kind of frugality being enforced on us, but this is a groovy kind of frugality that no one notices and which benefits everyone. We already have stealth frugality built into our new appliances. A LED TV uses about as much electricity as a much smaller cathode ray TV and weighs less too and is far more efficient than a plasma screen. A new fridge can use a quarter of the electricity of an old clunker, a new laptop uses a fraction of the energy of an old desktop and a Nissan Leaf uses 20% of the energy an average Australian passenger car does per kilometer. Improved efficiency is a major reason why grid demand for electricity has fallen by about 8% since 2010 in Australia, despite a growing population. Since we’re not personally responsible for improving energy efficiency standards around the world I guess it could be said this new frugality is enforced from outside, but it’s not a problem. We’re still getting what we want, we’re just getting it at a lower cost in energy.

  31. Peter
    December 24th, 2014 at 13:29 | #31

    @Ronald Brak Isn’t Capitalism great!

  32. Hermit
    December 24th, 2014 at 15:46 | #32

    Next week liquefied gas (not propane/LPG) will be exported from the Australian east coast for the first time in the bubble boat “Methane Rita”. According to AEMO’s website the current wholesale spot price for piped gas is $4 per GJ but the Japanese have paid $19 and more for liquefied gas. Australia exports about 24 Mt of liquid gas from WA and NT, domestically uses a similar amount of piped gas but the plan is to get up to 60 Mt a year of exports overtaking Qatar as the no.1 liquid gas exporter.

    However we import about 65% of our crude oil and refined fuel needs; some say we pay for it with coal. A massive switch to compressed or liquefied gas (CNG, LNG) as a diesel substitute could require perhaps another 10 Mt domestically. About 21% of Australia’s electricity is created by burning gas, notably in times of peak demand. Fertiliser maker Incitec Pivot is building its new Haber process ammonia plant in Louisiana fearing Australian gas will be too expensive

    So far the beneficiaries have been workers on the liquefaction plants. In future there will be some government and farmer royalties but the profits will go to the export companies. If the domestic piped gas price goes up dramatically everybody else loses out by paying more. Several factors may suppress the price including new PNG exports, reduced Japanese demand and oil linked contract prices. However the oil price will one day rebound and the reserves will steadily deplete. Where will we get gas from then? Can’t happen?…it’s already happened to the UK.

  33. December 24th, 2014 at 22:06 | #33

    @Peter
    Peter, when I look around at the state of capitalism in the world today I feel saddened by the fact that people other than myself still have any money whatsoever. Fortunately, despite governments interferring with the free market by not altering it to my benefit, I still manage to fatten myself on the riches of the world while less fortunate people who were born without my advantages starve and die or merely get by. Lesser capitalists than myself may complain about such things as government imposed improved energy efficiency standards, but to the truly enlightened selfish individual, all these things are just trees in the forest on which I can dab my urine of ownership.

  34. Hermit
    December 25th, 2014 at 09:32 | #34

    This article opines that the US fracking boom will peak 2016-2017
    http://www.resilience.org/stories/2014-12-24/fracking-fracas-the-trouble-with-optimistic-shale-gas-projections-by-the-u-s-department-of-energy
    followed by a steep decline, see Figure 9. That’s oil and gas combined. It suggest the US Energy Information Administration has created false optimism and encouraged myopic investment in new industries, including gas fired power stations and possible LNG export. On the latter fools rush in (eastern Australia) where angels (US) fear to tread.

    It should be pointed out Australia’s east coast gas exports will be mainly based on coal seam gas rather than conventional or tight gas associated with light oil as in the US. All gas types are at least 80% methane by composition. On checking image files I see the gas ship Methane Andrea Rita now docked at Gladstone doesn’t have hemispherical tanks above deck.

    If crude oil can go from $100 (WTI) to $60 a barrel perhaps that means it can rebound from $100 to $140 just like it did before the 2008 GFC.

  35. BilB
    December 30th, 2014 at 06:59 | #35

    The steepness of the oil price drop is a product of a few things. The main ones are the oversupply and the inelasticity of demand. But the other key factor that influences price is the amount of product storage available at any one time, which for oil is tank storage plus ships in transit.

    The US recently announced, I believe, that their strategic reserve was full. This reserve and others can be used to manage short term production surges or demand spikes, but a sustained overproduction rate can only be cause rapid price fluctuation.

  36. rog
    December 30th, 2014 at 08:58 | #36

    Deutsche Bank getting excited about solar, according to Bloomberg

    Because of solar’s small market share today, no matter how quickly capacity expands, it won’t have much immediate impact on the price of other forms of energy. But soon, for the first time, the reverse may also be true: Gas and coal prices will lose their sway over the solar industry.

  37. Hermit
    December 30th, 2014 at 11:47 | #37

    The need to clear inventories rather than price elasticity seems a better explanation for recent oil price movements. A temporary 2% blip in world oil production causing a 40% price drop seems odd otherwise.

    Deutsche Bank and many other major players seem to have drunk the Kool Aid, probably via newly minted MBAs fresh from their six month courses. Even some power utility execs are talking about a ‘utility death spiral’. Fear not with 1.5% of electricity and 0% of transport from solar there’s a way to go yet. Only a year or two ago coal execs were lauding carbon capture and storage. Since that didn’t work out perhaps they moved to banking.

    As we speak the MSM is urging us to applaud the start of coal seam gas exports in liquefied form. Price aside we haven’t got enough for ourselves for even the medium term. This market economics works in strange ways.

  38. rog
    December 30th, 2014 at 16:37 | #38

    Don’t forget a % of $oil is speculation, if traders fear a loss they will pull out.

  39. rog
    December 31st, 2014 at 04:09 | #39

    Goldman Sachs estimate speculation adds $23.39 per bbl and Pollin & Heinst from Umass Amherst put it at 83c per US gallon of fuel at the pump.

  40. Hermit
    December 31st, 2014 at 05:45 | #40

    What I fear is that if the oil price can swing from ~$100 per barrel to $60 it could just as easily rebound to $140 as it did in 2008 when the GFC hit.

  41. Ikonoclast
    December 31st, 2014 at 07:33 | #41

    The oil price swings illustrate something interesting and fundamental about claimed oil reserves (or any claimed mineral reserves). At prices over say $100 a barrel, Canada has the world’s largest economically recoverable oil reserves. At prices of $65 a barrel, all of Canada’s tar sand oils become unrecoverable economically and Canada slips well down the oil reserves totem pole. We already know that Canada’s tar sand oils are unrecoverable if you want to retain a viable, liveable world climate for homo sapiens.

    In other words, “Reserves aint reserves!”

    It illustrates again that claimed “recoverable reserves” is a meaningless concept without considering many other factors.

    The oil market has many manipulators, speculators and inside traders.

    “Some thirty barrels of oil are traded for every barrel produced(“Policy Brief #25 United Nations Conference On Trade and Development” 09.12), a staggering differential that has converted the oil market from actual real barrels of product production and sales to a financial paper market of oil derivatives, leaving the determination of prices to those who have the vested interest and moneyed means to manipulate the trading of oil and oil product futures to their enormous benefit at the expense of the economy and the public at large.” – Huffington Post.

    The likely cause of the oil price drop in this instance is either it was manipulated to attack Russia (most likely) or it was manipulated to attack unconventional oil production (less likely).

    In recent years we have seen LIBOR and Forex rigging proved against major corporations. To believe oil prices are not rigged would be the height of naivety.

  42. December 31st, 2014 at 12:13 | #42

    Australia is supposed to have about 90 days of oil use stored, although apparently it dropped to only 3 weeks in 2008, which makes a lot of sense given that oil prices shot up to $147 a barrel and then plunged. Not much point in having oil reserves if one never uses them. However, 90 days is huge amount by oil storage standards, so I suspect this includes Australia’s own oil production to stretch out the number of days. The US is only supposed to have about 60 days storage including their own production although that figure is proably dated. But it does seem odd as they are much more likely to murder people with bombs than we are, but their oil production is also much higher and unlike Australia their oil use has decreased. Of course, probably the most effective form of storage is to leave oil in the ground. OPEC used to do this which caused Americans to complain. However, they are not doing it now, which has caused Americans to complain. (You can’t please some people.)

    Anyway, the point I want to make is there is limited room for speculation to increase the average price of oil on the market. Speculators like to buy low and sell high, but rather than pushing up the average price, that just tends to reduce volitility. The people who do pay a premium to speculators are people who are willing to pay for the advantage of being able to get oil at a set price. Basically they are paying for insurance, which I guess is fair enough. So while oil storage facilities have to be paid for, we’d still have such facilities even if there were no such things as oil futures, so we’re probably not paying much for speculation. We’re just either suffering from less volitility when things work as they are supposed to, or we suffer from more volitility when things don’t work as they are supposed to, which is often because while we are smart monkeys we’re not very smart at this sort of thing.

  43. Hermit
    January 1st, 2015 at 14:51 | #43

    Some conjecture as to whether 2014 will turn out to be the all time peak year for liquid fuels
    http://www.resilience.org/stories/2014-12-31/the-peak-oil-crisis
    That’s a volumetric peak currently around 90 million barrels a day. However the mainstay fuel conventional (vertically drilled) crude oil peaked several years ago and some newer fuels like ethanol and tar sands have less net energy after deducting input effort. Don’t buy that V8 just yet.

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