How far will oil prices collapse

Posted on October 22, 2014

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Alexander Crawford has asked for my views on Gwynne Dyer’s article on the fall in the oil price, “How far will oil prices collapse”. Dyer begins his article with the following assertion:

“The price of oil will hit its floor and it will rise again,” President Nicolas Maduro assured Venezuelans, whose shaky economy depends critically on a high oil price. “Venezuela will continue with its social plans. Venezuela will move forward. No it won’t, and neither will Russia, Iran, or Nigeria. The only major oil exporters that are not in deep trouble are the Arab countries, whose governments have some room for manoeuvre because of low production costs, relatively small populations, and big foreign currency reserves.”

Some of these ideas are included in my article in the Focus column of Svenska Dagbladet. Dyer means that there is a kind of “chicken race” where Saudi Arabia is prepared to produce oil even at a price lower than $70 per barrel. He believes that the price of oil can be stabilised at around $75 per barrel for many years.

The following text from Dyer is interesting to analyse:

The Saudi strategy won’t work because some 98 percent of U.S. crude oil and condensates has a break-even price of below $80 per barrel. Indeed, 82 percent of American production would still be turning a profit at $60 per barrel. Even with its massive foreign currency reserves, Saudi Arabia probably cannot afford to keep the oil price low enough for long enough to break the American frackers. (Its own break-even price for conventional oil is $93 per barrel.)

When he says that Saudi Arabia’s break-even price is $93 that is not the price for the oil production itself but what Saudi Arabia calculates it needs to be paid for its oil in order to balance its national budget. The break-even price for the production itself is between $5 and $15 per barrel. His assertion that US fracking will be profitable even at a price as low as $60 per barrel is not realistic in from a longer-term perspective. At the moment the Americans are pumping fracking oil from so-called “sweet spots” but production from existing wells will decrease by 80% over the next two years. New wells will require a higher oil price if they are to be profitable.

”And the Iranians, Nigerians, Venezuelans, and Russians, who depend on oil revenues for at least half of their national budgets, will be screaming for higher prices before they face riots in the streets.”

The USA will also need higher prices if their fracking industry is to be profitable.

Finally Dyer brings Peak Oil into the discussion:

“It also means that worries about “peak oil”, and the underlying calculation that the world had only about 40 years’ worth of proven oil reserves left, can be set aside for a while. We are already up to 53 years of reserves, and we are finding new oil faster than we are using existing reserves.”

Here we have yet another person discussing the size of the tank rather than the size of the tap. In recent years a reclassification of reserves has occurred and the reality is that the newest reserves are less than the volume we are using. When Dyer writes of 53 years of reserves remaining he is saying that during the next 53 years we could maintain constant production and that the production in year 54 would then be zero.

Such comments leave me with only one recommendation and that is to read my book, “Peeking at Peak Oil”.

(Swedish)

Alexander Crawford har bett att få mina synpunkter på Gwynne Dyers kolumn om prisraset på olja, “How far will oil prices collapse“. Dyer börjar sin kolumn med följande påstående:

“The price of oil will hit its floor and it will rise again,” President Nicolas Maduro assured Venezuelans, whose shaky economy depends critically on a high oil price. “Venezuela will continue with its social plans. Venezuela will move forward.” No it won’t, and neither will Russia, Iran, or Nigeria. The only major oil exporters that are not in deep trouble are the Arab countries, whose governments have some room for manoeuvre because of low production costs, relatively small populations, and big foreign currency reserves.” En del av dessa tankar finns med i min artikel på Svenska Dagbladets Brännpunkt.

Han antyder att det pågår någon slags ”Chicken race” där Saudiarabien är beredd att producera olja även om prisnivån är under 70 dollar per fat. Han tror att oljepriset kan stabiliseras runt 75 dollar per fat under många år.

Följande avsnitt är intressant att analysera:

The Saudi strategy won’t work because some 98 percent of U.S. crude oil and condensates has a break-even price of below $80 per barrel. Indeed, 82 percent of American production would still be turning a profit at $60 per barrel.

Even with its massive foreign currency reserves, Saudi Arabia probably cannot afford to keep the oil price low enough for long enough to break the American frackers. (Its own break-even price for conventional oil is $93 per barrel.)

Då han säger att Saudiarabiens break-even pris är $93 per fat så gäller det inte själva produktionen utan vad man räknar med att få betalt för oljan så att deras budget kan balanseras. Själva produktionskostnaden varierar mellan 5 och 15 dollar per fat. Hans påstående att amerikansk fracking kommer att vara lönsam ända ner till $60 per fat så stämmer det inte på lång sikt. Just nu pumpar man frackingolja från så kallade ”sweet spots”, men produktionen från dessa brunnar kommer att minska med 80% under två år. Nya brunnar kommer att kräva ett högre oljepris för att bli lönsamma.

”And the Iranians, Nigerians, Venezuelans, and Russians, who depend on oil revenues for at least half of their national budgets, will be screaming for higher prices before they face riots in the streets.” USA behöver också högre priser om deras frackingindustri skall vara lönsam.

Så kommer tillslut Peak Oil in i diskussionen:

“It also means that worries about “peak oil”, and the underlying calculation that the world had only about 40 years’ worth of proven oil reserves left, can be set aside for a while. We are already up to 53 years of reserves, and we are finding new oil faster than we are using existing reserves.”

Här har vi ytterligare en person som diskuterar tankens storlek och inte kranens storlek. De senaste åren har det skett en omklassificering av reserver och verkligheten är att riktigt nya reserver är mindre än den volym som vi använder. Då han nämner 53 år så menar han att vi de närmaste 53 åren kan ha konstant produktion och att produktionen år 54 skall vara noll.

Just nu finns det bara en rekommendation, läs min bok ”Peeking at Peak Oil”.

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