Gwynne Dyer: How far will oil prices collapse—and for how long?

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      “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.

      Since June, the cost of a barrel of Brent crude, the benchmark for world oil prices, has fallen by almost a quarter, from around $110 a barrel (where it was stuck for the past four years) to just above $80 a barrel. Last month, for the first time in decades, Nigeria exported no oil at all to the United States. Even at a big discount, Americans just don’t need it. And the main reason for all that is fracking.

      American production has almost doubled in the past five years thanks to the new drilling technologies, and the United States overtook Russia last year to become the world’s largest producer of oil and gas combined. (Saudi Arabia comes a distant third.)

      With production soaring and world demand for oil stalling due to slow economic growth, a collapse in prices was inevitable. The question is how far they will collapse, and for how long.

      The answer is probably not much further, for the moment—but they could easily stay down in the $75 to $85 range for a couple of years. The reason for that is that the “swing” producers (mostly Arab), who could theoretically push prices back up by cutting their own production, have clearly decided not to do so.

      Their concern is for the long-term power of the OPEC cartel, which used to be strong enough to set the price of oil. That never will be true again unless they can drive the (mainly American) frackers who are causing the over-supply of oil out of business.

      Saudi Arabia and its allies are hoping that a prolonged period when the price of a barrel of oil is lower than the cost of getting that barrel out of the ground by fracking will ruin this new industry and bring back the Good Old Days. Dream on.

      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.)

      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.

      So this is not a transient event; it’s a revolution. The Organisation of Petroleum-Exporting Countries (OPEC) came into its own when the United States ceased to be the dominant global producer in the early 1970s. With the re-emergence of the United States as the biggest producer, OPEC’s clout is bound to shrink—so oil prices will probably stay well below $100 a barrel for the foreseeable future.

      This will be a great boon for countries that depend heavily on imported oil, like India and China. It may eventually liberate the United States from its compulsion to intervene repeatedly in Middle Eastern disputes that are really none of its business. And it may be a disaster for repressive and/or corrupt regimes in countries like Russia (break-even price $105 per barrel), Nigeria ($119), Venezuela ($121), and Iran ($140).

      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.

      Of course, a broader view of our situation would find little reason for rejoicing in all this. Our global civilization depends on fossil fuels for 85 percent of its energy, and our annual emissions of carbon dioxide and other greenhouse gases are still rising.

      Just another 25 years of that will deliver us to the “point of no return”: 450 parts per million of CO2 equivalent in the atmosphere. That would raise the average global temperature by 2 degrees C, and trigger natural sources of warming that it will be impossible for us to turn off again.

      Runaway warming is not a happy prospect, so it is unseemly to celebrate the news that we have even more oil to burn—and cheaper oil, at that.

      On the other hand, it would be entirely appropriate to celebrate the news that other new technologies may open up a better escape route from fossil fuels.

      Solar power, wind power, nuclear fission, and hydro power all have a role to play in that task, but the Holy Grail for half a century has been fusion power. It may be much closer than we thought.

      Comments

      15 Comments

      Bruce

      Oct 20, 2014 at 3:06pm

      "..No it won’t, and neither will Russia, Iran, or Nigeria"

      ...or Alberta.

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      S H

      Oct 20, 2014 at 4:11pm

      "... but the Holy Grail for half a century has been fusion power. It may be much closer than we thought."

      Well that's rather ominous - tell us, where is it!

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      P.Peto

      Oct 20, 2014 at 6:14pm

      There are 3 possible reasons for the precipitous fall in oil prices.
      1.Increased supply due to fracking and lower demand due to slowing down of the world economy.
      2.A price war between Kuwait and Saudi Arabia for greater future market share.
      3.A conspiracy by the US and Gulf States to drive down prices so as to reduce oil revenues in Russia, Venezuela, Iran and Nigeria IN ORDER to strain the social budgets of these countries. Using oil as a weapon against these countries may weaken their predominantly oil exporting economies and perhaps generate internal dissent when people are forced into austerity. The Russians have plenty of foreign reserves to make up the budget shortfall for a while and if they devalue the Ruble relative to the petrodollar they can raise their oil revenues in rubles. Time will tell which explanation will prevail. If it stays low for a long time then Canadian oil sands and oil shale production will also suffer. It may also signify the onset of a global depression as countries race to the bottom through currency wars. STAY TUNED!

      Fusion

      Oct 20, 2014 at 6:28pm

      Its a new proposed fusion reactor design out of Lockheed Martin's Skunkworks program. And it seems very credible and cost effective un-like the previous Soviet tokamak design. They think they can have a prototype in under 5 years and be commercial in 10 building reactors that can power a small city with a generation unit the size of a shipping container. It would use deuterium (heavy water) as a fuel and would not pose the same environmental risk of fission reactors which use plutonium or uranium.

      http://sploid.gizmodo.com/lockheed-martins-new-fusion-reactor-might-chan...

      As a side note, there is also a Vancouver based company that is also moving forward on a fusion reactor in Burnaby! They are very real and if readers check the board of directors and shareholders you would see that it is very serious.
      http://www.generalfusion.com/

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      I Chandler

      Oct 20, 2014 at 7:19pm

      "DYER:"How far will oil prices collapse"

      The oil industry has been plagued with (over) supply problems for almost a hundred years.
      Market manipulation is nothing new - The Connally Hot Oil Act was enacted to protect the industry( corporations ) from independents ( producing (contraband?) oil And was mainly a way of cartelizing the industry to stabilize falling prices. The new law reestablished the NIRA's original provision that violators would receive a maximum jail sentence of six months: http://en.wikipedia.org/wiki/Connally_Hot_Oil_Act_of_1935

      DYER: "And it may be a disaster for repressive and/or corrupt regimes in countries like (break-even $price ), Venezuela ($121), and Iran ($140)."

      Venezuela’s UN Seat illuminates US Hypocrisy and describes how the term “human rights violations” refers to events in which a country commits violations that the United States does not.
      It also uses some human-rights metrics - death penalty, health care , extrajudicial violence , press freedom and access to water:
      http://whowhatwhy.com/2014/10/17/what-venezuelas-un-seat-illuminates-abo...

      "Samantha Power’s diplomatic rhetoric is to be expected, and hypocrisy is part of the game in such a setting. What is more telling is the American media’s complacency with a double standard that pretends to objectivity where there is none."

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

      Yes - Obama’s New Oil War describes how the US tested out the "oil weapon" against Iraq with devastating effect back in the 1990s. Washington seeks to exploit this weapon by selectively denying access to world oil markets, whether through sanctions or the use of force, and so depriving hostile producing powers of operating revenues. Obama has put pressure on oil-importing countries, including China, India, South Korea, and the European powers, to reduce or eliminate their purchases from Iran. Obama has bombed refineries in Syria and Libya:
      http://www.tomdispatch.com/post/175905/tomgram%3A_michael_klare%2C_washi...

      Astro

      Oct 20, 2014 at 7:41pm

      Fusion power is in there centre of the sun (and all other stars) as well as in hydrogen bombs.
      Wejust have to learn how to control it!

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      I Chandler

      Oct 20, 2014 at 9:04pm

      DYER: "before they face riots in the streets."
      NED rents rioters? GlenGreenwald describes a most revealing account of the meaning of “democracy” is the still-remarkable 2002 New York Times Editorial on the US-backed military coup in Venezuela, which temporarily removed that country’s democratically elected (and popular) president Chávez. Rather than describe the coup as an attack on democracy by a foreign power – the Times, in the most Orwellian fashion, literally celebrated the coup as a victory for democracy:

      "With yesterday’s resignation of President Hugo Chávez, Venezuelan democracy is no longer
      threatened by a would-be dictator. Mr. Chávez, a ruinous demagogue, stepped down after the
      military intervened and handed power to a respected business leader, Pedro Carmona. "

      Thankfully, said the NYT, democracy in Venezuela was no longer in danger . . . because the democratically-elected leader was forcibly removed by the military and replaced by an unelected, pro-U.S. “business leader.” The Times then demanded a ruler more to their liking: “Venezuela urgently needs a leader with a strong democratic mandate to clean up the mess, encourage entrepreneurial freedom and... More amazingly, the Times editors told their readers that Chávez’s “removal was a purely Venezuelan affair,” even though it was quickly revealed that the CIA/NED played a central role. Upon Chávez’s death, the Times editors admitted that “the Bush administration badly damaged Washington’s reputation throughout Latin America when it unwisely blessed a failed 2002 military coup attempt against Mr. Chávez” [the paper forgot to mention that it misled its readers about that coup].

      If you think The Times editorial page has learned any lessons from that debacle, you’d be mistaken. Today they published an editorial expressing grave concern about the state of democracy in Latin America generally and Bolivia specifically. The cause of this concern? The election victory of Morales.

      The Times nonetheless see Morales’ election to a third term not as a vindication of democracy but as a threat to it.” The reason the NYT so vehemently dislikes elected leaders and views them as threats to “democracy” becomes crystal clear toward the end of the editorial:"This regional dynamic has been dismal for the US...
      https://firstlook.org/theintercept/2014/10/17/democracy-really-means-u-s...

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      Hey Alberta!

      Oct 20, 2014 at 9:13pm

      All you Bitumen Bitches in your Big Boy trucks better run for the hills.

      james

      Oct 21, 2014 at 12:54am

      RE: break even price >>> below are spot prices for brent
      1990 $20~/barrel >>> 2000 $20~/barrel >>> 2012 $100+/barrel >>> 2014 $80/barrel
      "break even price" is PR fluff

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      McRocket

      Oct 21, 2014 at 4:34am

      For once (and with great respect), Mr. Dyer has not done his homework on this one, imo.

      U.S. shale oil reserves appear to be far less then originally thought

      http://www.theguardian.com/environment/earth-insight/2014/may/22/two-thi...

      Plus, fracking oil/gas wells appear to deplete REALLY fast.

      http://www.zerohedge.com/news/2014-08-13/wall-streets-shale-fraud-exposed

      Maybe the U.S. is on to an oil/gas boom...or maybe it is not.

      But it seems all is not rosy in fracking land.