   Will oil prices drop to $20, or will they catapult to $200? In the short-term, it is anyone's guess. In the long-term, the answer is simple -- if we use a little history and a bit of common sense. Growing up in an oil family and working within the industry for the past decade, I have experienced some interesting times. The oil and gas industry is notorious for its cyclical nature and dramatic ups and downs. And no matter how many times you go through these cycles, it seems "When it is up, we don't see how it can ever go down; and when it is down, we don't see how it can ever go up," as a good friend recently summed it up. With that said, I do not believe low commodity prices and rig counts will be here for long. Simply put, our industry rises and falls with the price of oil and gas, and two simple truths will provide upward pressure on prices for decades to come. Those truths: 1.) supply is finite, and 2.) the world population continues to grow at a tremendous rate. A FINITE RESOURCE If you look at U.S. oil production over the last 30 years, you can clearly see there is a limit to production. Even with the recent years' high commodity prices, the U.S. was only able to produce a limited amount of oil and gas relative to prior years' production levels. The U.S. is not unique in that regard. Production will inevitably decline for every country.  To find further proof that oil and gas is becoming more difficult to find, we need not look further than the offshore drilling market. What offshore rig class has a relentlessly high utilization rate (rigs under contract/rig supply) regardless of commodity price? Deepwater rigs. When oil was $20/barrel in 1999, deepwater rigs rated for 4,500+ feet of water were utilized at 85%. Today, deepwater rig utilization is 92%; and dayrates for these rigs have risen from $122k/day to $376k/day in eight years -- even as the supply of these rigs has increased.  Rigs go where the oil is, and that is now in deeper waters. There will be big finds in shallow waters, but they are diminishing in number every year. POPULATION GROWTH  World population continues to grow unfettered. In 1950, there were 2.5 billion people on the planet. Today, there are 6.7 billion; and in 2050, there will be 9 billion. A larger global population equates to more demand for energy; and while non-carbon-based energy sources will play a larger role in the future, they cannot completely satiate the world's appetite for energy. Hand-in-hand with this spike in population comes massive emerging economies. In 1978, China made several monumental policy changes that created a more capitalistic environment, which has yielded tremendous fruit for the people of China. India boasts a similar story, and surely there will be more emerging economies in the years to come. Combine population growth with an increase in the number of people capable of achieving a capitalist dream of their own, and you can see the demand-side of the picture expanding by leaps and bounds over the next 30 years. Supply is decreasing, and demand is increasing at a macro level, which can only mean one thing for long-term oil prices: They are headed up.
WHAT DO YOU THINK?
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Noise Free Investing had a convincing article last week on oil. They pointed out that the worlds supply is tied up with National Oil Companys who have different agendas.
Well worth the read if you havent seen it.
http://www.noisefreeinvesting.com/blog/?p=666
**DK** Thanks for the link P. When Warren Buffet starts buying energy at $500M/month, the investment community (and oil industry for that matter) should take notice.
Excellent commentary. I too have been in the business for a year or two (since 1973) and can state as sure as night follows day, the price will rise again. Yes, the world economy has stumbled badly but that will self correct in time and demand will return. The aspirations of many millions in China, India, Brazil, Mexico, Russia, Asia, are only on hold. In the meantime, production from current fields will decline inexorably, investment in new production capacity AND in alternative energy sources goes on hold. The situation will be made worse as the inevitable lay offs begin and the business haemorages even more experience. This will be a negative signal to the young engineers and scientists considering a career in our industry and they will react accordingly. Yes, investment in technology will continue - as long as the sevice industry can command a margin sufficient to enable the investment. This is not guaranteed; the last time oil price slumped, big oil grabbed the opportunity to squeeze the service industry with no thought given to the knock on effect on technology investment. This is the time for the leadership (?) in our industry to demonstrate vision and commitment to a future and not to listen to the clamour from the market to deliver short term returns. I suspect ExxonMobil will do just that, investing and behaving accorsingly (I am not an employee past or present) but do not have such confidence in the rest of the pack. Meanwhile in my engagements with universities, I will remain upbeat.
**DK**
Thanks Iain. Challenging times for the oil companies. Fortunately they have been blessed with world-record earnings so things are not dire at this juncture... or so my oil company colleagues to me.
Since 1998, oil prices have increased nine years out of ten, at an average 10 year rate of increase of about +20%/year, within a yearly range from -16%/year to +45%/year. The 2008 rate of increase was +32%/year, to an average annual price of about $100.
If oil prices average $50 in 2009, they will have increased at about +12%/year in the 11 years since 1998. Over this same time period, GM stock has fallen at about -30%/year.
I concur. My opinions were shared in this months edition of World Oil. Its always good to see confirmation from another writer. I think well see a stabilization of oil prices in the $75-80 range by mid-year, with a return to a robust, but not frenetic, activity level for the remainder of the year. That assumes, of course, that the Operators and drilling contractors dont lay off too many of their staff with fear and trembling to allow this activity level to be realized.
Good article.
Les
**DK**
Thanks Les.
If you go back thirty to forty years and look at general trend of oil price vs inflation, then perhaps +/-US$100/bbl at present is not unreasonable??
Matthew Simmons recently predicted that by 2015 the worldwide liquid oil production from all sources would, at best, be no more than 65mbpd.
In a startlingly short amount of time the industrialized countries of the world will be fighting for access to petroleum for their very SURVIVAL. As this unfolds the world will begin to coalesce into defensible contiguous REGIONS that will be defended against outside and far distant powers and the increasingly precious fossil fuels increasingly conserved for use within the region they a located in.
This bodes poorly for the future prosperity of America.
Simple arithmetic. Why is it so seldom used?
Today, our middle case is that in the next 10 years, the top five net oil exporters--Saudi Arabia; Russia; Norway; Iran & the UAE--will have collectively already shipped about 80% of their post-2005 cumulative net oil exports. I estimate that our #3 source of imported oil, Mexico, has already shipped about 80% of their post-2004 cumulative net oil exports.
For more info, do a Google Search for Jeffrey Brown + Net Oil Exports.
1. Production in the 1000 largest fields in the world is declining at around 7-8% annually. Demand destruction is currently at around 2.5% and has been predicted to go as high as 6-7%...the math is simple...except
2. The worldwide economic crisis has stopped most projects dead in their tracks...first to go was tar oil which is marginally profitable at around $60...then came the salt layer encased deeper fields and the Caspian fields..$70 BARELY covers expenses there.
3. The rigs are going to Mexico??? Mexican production is falling off a cliff..and their constitution still disallows field sharing agreements. In 2 years in house needs will shut exports completely down..so the third largest US supplier is gone. The Dakotas..please.
Why is the term production used when it is clearly depletion/extraction of a non-renewable resource.
The other point is that you say mordern land rigs are more "productive", does this mean they are better at extracting URR oil in less time or they significantly increase the amount of URR.
SA
ps when is America due to finish they socialist programme of nationalising their industry (after the banks, car industry etc will oil also be on the list):))
Having the oil price manipulated up or down excessively affects the stability of the world and will lead to other countries setting their own pricing policies.
Sure we can all agree on the basic principals of a finite resource, peak oil, etc.. etc.. I am a firm believer in these ideas. But to say that oil is going to go up soon is pretty silly. Its going to take more than a few months, probably a couple of years before we see any kind of substantial recovery in oil.
What isnt mentioned in this article is that:
- IEA was reporting a demand destruction in world oil consumption when prices were going up.
- The amount of money in the oil futures market balooned from 15 billion to over 300 billion in 2 years. Speculation drove the recent jump in prices, NOT supply and demand. 27 barrells of oil were traded for every barrell actually physically delivered.
- 4 years ago when oil was 30/barell, OPEC was producing 25 million barrells/day. If you believe in the balance of supply and demand, and when those two forces are in equilibrium we find the market price, we have a lot further to go on the downside. After the proposed* OPEC production cuts, they will still be producing more than 25 million/day, *IF they actually follow through with it.
- Countries and investors are hording oil at these prices because they believe prices are going up. Well guess what, this is increasing the supply of easy oil and any interruption of supply due to middle east tensions/other interruptions that would usually drive the price up, can be easily met by these tankers full of oil floating off shore and petroleum reserves.
The price of oil is a leading economic indicator. Now guess where the economy is going.
Love, Jeanne
Below is a comment by Albert Bartlett about the need to address population growth:
Many journalists look to the scientists for advice. The scientists wont talk about overpopulation, so the journalists and the reading public can easily conclude that overpopulation is not a problem. As a result, we have things such as the cover story in TIME Magazine, April 9, 2007, "The Global Warming Survival Guide: 51 Things You Can Do to Make a Difference." The list contained such useful recommendations as "Build a Skyscraper," (No. 9, Pg. 74) but not one of the 51recommendations deals with the need to address overpopulation!
Whats one to do when scientists and political leaders demonstrate their understanding of the fact that overpopulation is the main cause of these gigantic global problems, yet the scientists recommendations for dealing with the problems never call for addressing overpopulation?
Just a plug for the "little guy".
**DK**
Lynn, The short-term is anyone’s guess. If anyone can predict the short-term market movements, then I hope they are commenting from their private island. Cheers.
**DK**
EJ, That is solid reasoning. Another factor is technology. A land rig built today can be twice as productive as a land rig built twenty years ago. Oilfield service companies like Halliburton, Schlumberger, and Baker Hughes are continually innovating and releasing new technology to make the acquisition of oil and gas more profitable. Let’s hope they can keep it up.
**DK**
Adam Smith and I agree with you.
**DK**
Jimmy, I can understand your frustration. I agree with your point that higher commodity prices will foster the growth of alternative energy sources. It's a pretty good argument for allowing the “market” to work itself out with minimal government intervention.
**DK**
Robert, Seems logical to me.
**DK**
Thanks Paul.
**DK**
Richard, I like nuclear as an energy source as well. Regulation and oversight are hurdles but not insurmountable for that industry. On the bright side of a downturn is the opportunity created. If you believe we will recover, then you would rather be a "buyer" than a "seller" right now.
**DK**
Interesting insight Robert. I take it you are not a casual observer. Maybe one of our readers can shed light on this question.
**DK**
Rick, As Mr. Greenspan might say, "Welcome to the Age of Turbulence."
However, even when US$200bbl might not be justified, it is clear that commodity price floors should start around the US$80-90 bbl.
For GR: Developing "..shale..domestic oil...ANWR...coal to liq.. nuclear..." in many cases will require that oil be much more expensive than it is now. Whether it has to get to $200 first, is anyones guess. I did some rough calculations and came up with 1400 new nuclear plants to replace our current oil consumption. IT all comes down to scale and the huge volume we consume.
**DK**
Thanks Hacker.
**DK**
Bruce, Good point. As long as we don't have market manipulation occuring then speculation is a good thing. The more players in the marketplace, the more accurate the pricing.
**DK**
Thanks Paul.
Your comments are sound both with respect to very short term and intermediate term outcomes. My question is more to the longer term when hydrocarbon prices rise high enough to make alternative energy sources not only viable but highly attractive economically. We used to say that 50 USD/bbl oil would open the door to many alternative energy sources. I sense that 100+ USD/bbl oil over a longish period would result in considerable switching to other sources. So would 150-200 USD/bbl oil ultimately spell the beginning of the end for oil?
**DK**
Thanks DMS. I agree with you. The higher the price of oil the larger the incentive for developing alternative solutions. That is the beauty of the free market. Every industry undergoes radical change over time but I don't see the end of oil for at least a century.
**DK**
Mr. Kelley, Agreed. Asian markets are one thing but when Africa takes off we are really going to see demand for energy sky rocket. It took China 25 years to go from minority energy player to one of the most dominant. How long will it take African nations? Could be 25 years or less.
**DK**
Thanks Jack. Tricky indeed.
Every Nation in the whole world needs to adopt a 2 child per family policy, as a maximum, and in higly over populated countries they need to adopt a similiar policy to China, a mandatory 1 child per family policy. The stigma of what gender is born must be removed from all cults and religions throughout the world.
Then our energy needs will reduce to what is sustainable, including with the emerging renewable energy resources. Fix the Culture, Teach the People, Preserve the World.!!
Cheers
Gary Cooper
Perth, Western Australia
**DK**
Gary, Howdy from Texas. I imagine population control will be a huge topic in the decades to come. Some countries are actually seeing a decrease in their population but Africa and Asia are exploding.
Fasten your seat belts, were in for a bumpy ride.
**DK**
Edgy, Thanks for your comments. I agree that a new balance will be struck and I also think the oil industry will be the ones to help strike that balance. Look at the investments that BP, Chevron, and others are making in the realm of alternative energies.
**DK**
Bill, Good point. The forecasts are for an active year. CSU did a pretty good job of predicting last year's activity. Let's see if they can nail it again.
On this basis, I dont expect the price to exceed 100 dollars for the next 2 years as the new discoveries come on stream.
**DK**
Thanks John. We will keep our eye out for discoveries in 2009.
**DK**
Ramadan, Thanks for your thoughts. A fossil fuel free based economy would be nice but I don't see it happening in our life times. We need to use what we have more intelligently. There are also numerous ways to protect Mother Nature during this transition period. Just a few additional thoughts on the matter.
**DK**
John, Thanks for your comments. Oil companies definitely have some tough decisions to make. The national oil companies are continuing to forge on with their projects and would be more than glad to take talented folks from the international oil companies. Another factor is the "big crew change". There is still a pretty good-size generational gap in our industry that needs to be dealt with. It would be interesting to see some analysis on this topic. Maybe someone from the Rigzone Career Center can help here...
As you stated, shallow finds will eventually exhaust themselves and as long as our domestic economy deals in carbon based energy... then our foreign suppliers economies are going to revolve around that demand. But, imagine if you will what would happen to foreign economies if the west suddenly dropped oil for a alternative energy supply. I mean completely dropped it to a level were domestic oil could meet demand for the next century. Countries whose entire GNP is oil would suddenly find themselves sitting on empty and I sincerely dont see that happening in the near future
**DK**
Rob, Thanks for your comments. It is interesting to ponder the implications of an alternative to petroleum that could hit the NOCs so heavily. I really don't see anything on the horizon capable of doing this.
**DK**
Bert, Sorry to here you were recently unemployed. Your business will recover. Hang in there.
**DK**
MD, Thanks for your insight. It will be interesting to see how demand moves in the first quarter of 2009.
So, I believe in a repetition of the facts for several times in the future. There will be always wars and economical crisis in the world helping and helping the prices go up and down.
**DK**
Thanks Diogo.
**DK**
MJK, The U.S. desire for energy independence adds an interesting element into this discussion. Government has a big impact on the market. We will see what happens in 2009 with new legislation.
2. Why is our industry not screaming to the media and Washington the point that few if any ever received $147 per barrel? Most of us are paid on a monthly index basis. My particular crude received WTI minus about $6 during the higher prices. Today, we lag about $9 behind WTI. (Once again, see the table at the middle right of page 6 in this months JPT magazine to see the monthly WTI average. It was never very close to $147.)
3. It is only a matter of months (or weeks now) before SEC rules dictate that reserve estimates be adjusted to reflect current pricing. The credit crunch will curtail industrys ability to finance acquisitions. It really doesnt matter that the likes of XOM et al presently have vast amounts of cash on hand, the cash burn rate will lead to layoffs within a few months if prices continue to decline. The service sector is already seeing layoffs.
4. I agree with supply and demand function but dont forget the bulging storage problem we have today (auxillary supply). At some point, that crude will come onto the market and could erase price increases that would otherwise be realized from shut-ins or production cuts.
5. It certainly worth mentioning that the oil & gas royalty received from BLM lands, the Gulf of Mexico, and other US offshore areas is the largest, non-tax based source of revenue that the US Government has. The severe loss of royalty revenue to the government due to the oil price collapse is going to significantly delay or cancel many of the incoming presidents plans for social programs. A healthy (not obscene) oil price pays for many things that a large percentage of Americans voted for back in November.
6. Lastly, with talk about the government nationalizing assets, lets not forget what a joy it was to have Uncle Sam as a working interest partner in the Elk Hills field prior to its acquisition by OXY. Nuff said on that.
**DK**
Bill, You know your stuff. I particularly like your point about a "healthy oil price". Many are quick to judge oil companies when the prices are high but we should not forget that higher corporate incomes means more tax revenue.
Iran and Israel will cause a big spike up before April 1st.
Fools day is coming for all of us. Supply and demand correlation will come to play next year. God help us. I hope that I am wrong.
I live in Indonesia. The oil industry and government here have being saying oilfields here are old and worn out, as there have been active oilfields here for more than 100 years . I think people in Texas have been saying this for 100 years and yet produce more oil each year!
Yes, with investment, there will be oil profits for many years to come.
Oil price is a balance between demand and production rates... or at least should be without speculation.
A low oil price does affect the economies of those oil producers that have full dependency on oil price.
A too high price will drastically reduce the demand and help sinking down our and their economy.
Putting fires on the global economic depression would sink also their economies...directly or indirectly.
For ages the cost of the barrel was below $40...and the producers and investors (the Bigs) have found worth to invest in research of new projects and to exploit them. The recent $150/barrel was pure Wall Street speculation...see the price now...
Do not believe that oil price will ever reach $300/barrel...IF so then it is worth to invest in alternative energy sources.
Now, were you one of the guys that said we'd never ever, ever never see $75 again? Or $1.00 gas? If you did, you are a total fool that cost lots of people lots of money. If they were dumb enough to listen to you. NOT listening to people like you saved me and some of my bright friends tens of thousands of dollars.
Currently there is no shortage of this plentiful and, more importantly, controlled product. Oil drillers/producers and green energy tools want everyone to think there is, but there simply isn't. We keep finding access more and more each day. The problem is we limit who can dig and where. Besides, when we get to $200 oil it wont matter because someone will invent a better widget and oil will cease to be of the value it was prior..... And guess what... the value will come down. This will happen until we abandon oil as a energy source.
To my most important point; experts prove their worth by predicting what will happen in the SHORT term, not the long term. And right now it seems to me the experts should be cleaning toilets not discussing money or where oil will go in the future. And many of the stock brokers and pointy-headed economists are.
**DK**
Jimmy, I can understand your frustration. I agree with your point that higher commodity prices will foster the growth of alternative energy sources. It's a pretty good argument for allowing the “market” to work itself out with minimal intervention.
I find that the U.S. expecting the price of oil to go to 25$/barrel is unrealistic just as $140/barrel was unrealistic a little over five months ago. The world is no different in its consumption because we are a growing world. China and India are not slowing down at such a drastic rate to quantify such a low demand; and even if the world slowed down 20% as a whole, this is not going to belie the fact that we are still short on oil, and it will become harder and harder to find, hence the deepwater operations.
It almost seems as if the U.S. government is hoping that oil per barrel comes down to $25/barrel to stimulate the economy. The truth, though, is it will cause a greater loss of income and expenditure in the U.S. and hurt the economy further. Oil related companies and operations is probably the last area that has not been affected as per the job scenario etc in the U.S.
I would think that a reasonable value for oil is $90/barrel, and should be around this mark at this point and time.
**DK**
Thanks Brian. $90 is not far from where we are... all things considered.
The chance of sustainable peace in that part of the world is zero while the chance of conflict is 100%.
**DK**
BP, Thanks for the feedback. I hope there is peace in the Middle East but it is hard to see how that will occur in the short-term.
**DK**
Thank Sachin. China and India are definitely on the move and will require energy for their growth plans. It will be interesting to watch those markets and the timing of their recoveries.
Why the oil price is still being rated based on "supply and demand" method. It is lot better to work out oil price based on conventional method like steel and many other products. Oil price has to be derived from its production cost, overheads and profit. "Yes, we can," and make oil producing community and oil using community live in harmony.
**DK**
Rajan, Thanks for your comments. I think your model of supply and demand and production costs work hand-in-hand. If oil or gas becomes to expensive to produce relative to market prices operators will stop producing and drive down supply.
**DK**
Mr. Wylie, You are right. Much is riding on the actions of our government. Fortunately, the main thing we need is optimism. As someone wiser than myself once said, "Smile when it hurts the most."
**DK**
Donaho, I like it. Plain and simple economics. When price goes down, demand goes up. Then the question becomes what is the price elasticity? How quickly will demand come back based on the lower prices? Just as a reference the EIA shows gas prices up to 1.80 for the week of Jan 12th which is higher than the previous 5 weeks. Prior to 2008, miles driven in the US rose by 3% per year for 17 years. We will need some time to see how folks react to lower prices but I suspect you will see a rebound in miles driven.
**DK**
Mr. Himel, Valid point. High oil prices definitely put a damper on consumption.
**DK**
Keep your head up. The oil business has been cycling up and down for over a century. Recessions are always followed by a recovery. Hang in there.
**DK**
Demand will come back in the near future. By laying down rigs the industry effectively reduces supply. As incomes begin to grow in the recovery, demand will come back. At that point, you will see the rig count rebound.
**DK**
G R, While certainly not the entire cause of the run up to $147, the weak dollar definitely played a role. A quick search on Google for "weak dollar and oil prices" yields a myriad of articles on the topic. Regardless, I like the way you are thinking... shale, domestic oil, ANWR, and nuclear have to be part of the solution.
I guess the reasoning of this article is based on PEAK OIL.
It is nothing new.The low crude oil prices are manipulated by the rushing of crude oils at Cushing, Oklahoma which sets the price of WTI, which, in turns, affects the price of Brent at ICE.
Oil coming from Canadian oil sands and Bakken oilfield (USA & Canada) is overwhelming the oil storage facilities in Cushing. Hence, the price of WTI. I strongly believe that, after taking office on 20 January, 2009, Obama MIGHT release parts of SPR to ensure price of oil in the United States to remain low during the his first two years. If a family saves US$100 per week in gas expenses, it means US$400 a month, which can buy a lot of food.
In 2008 through 2009, 1.3 million barrels/day of refining capacity will be added in Asia. Asia will consume more oil ang natural gas in future years. Demand will come from there and NOT Europe and USA.
One should watch developmemnts in Asia, particularly Mainland China and India.Those Asian Dragons are posed to take off in oil consumption, particularly Taiwan, South Korea and Thailand. Japan is in decline as far as energy goes. Hail the Pacific Century! Regards, CC Tam
**DK**
Mr. Tam, Very interesting insight on the relationship between WTI, Brent, and Canadian/US supply. I agree completely that Asia will drive the demand this year and in years to come. Historically, oil consumption rises with income.
**DK**
Tom, 8 years ago the price of oil was $20 and it rose to almost $150. A 750% jump. A similar jump from $40 would make the price $300. It is within the realm of possibility.
**DK**
DW, That is an interesting point. Throughout the media I have read of the declining dollar and its impact on oil prices. There was talk of pegging oil to a different currency at one point but that talk has apparently subsided in the wake of $40 oil.