Opinion: Why We'll See $200 Oil Soon

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.


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.

Monthly U.S. Crude Oil Field Production

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.   

Monthly U.S. Crude Oil Field Production

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.


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.



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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Dominic | Jan. 21, 2009
I live in northeast British Columbia. I have worked for pipeline companies for years now. It used to be the "Oil\gas rush" up here, but this year it's slowing down, everybody is on standby mostly. And today in fort mcmurray Alberta, 9000 person got laid off at Suncore... Oil price must go up, or the industry will stop new projects.

P | Jan. 20, 2009
Great post.

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.


**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.
Graeme Scott | Jan. 19, 2009
Great Article, puts the issues firmly in perspective. I agree that we will see oil prices up over 145 USD the question is how soon.

Ian T | Jan. 19, 2009
Im not "in" the business, but i am an investor , and what i see (short term) is oil getting pushed down (manipulated) below $10, smaller oil cos going under and Big Oil cos snapping them up (with their up and running fields) at bargain prices. Big Oil increase their reserves very cheaply investors buy in and the wheel spins round again, its called the business cycle and its how money is made like it or not. One day oil will be a thousand dollars a barrel (long term), maybe because the dollar collapses or because of a middle eastern war, or because of demand supply imbalance, but as you've put in your article oil is a finite resource and one day it will take more energy to extract it than it is worth. We'd better have some thing else in place by then.

Iain | Jan. 18, 2009

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.

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.
Jeffrey J. Brown | Jan. 18, 2009
One other point about the increase in oil prices. It has been a long term trend, since hitting an average annual recent low of $14 in 1998.
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.

Les Skinner | Jan. 18, 2009
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.

Thanks Les.
Paul King | Jan. 18, 2009
One point that does not seem to be addressed is : "How much of the recent price rise was due to speculation on price by traders and how much due to consumption increase??" It seems unlikely that consumption can rise and fall so quickly as to cause such a spectacular increase/decrease in the price of oil.

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??

Rolando Charcos Canseco | Jan. 18, 2009
In the years to come I believe more renewable energy sources would have been developed and I only hope that dependence on oil will be halved at least by 2020 with the other half supported by renewable energy.

Richard Beeson | Jan. 17, 2009
While I agree with the Peak Oil concept and that oil will return to $200 per bbl within the next two years, I think the wild fluctuations in prices are controlled by those greedy brokerage houses, who we the taxpayers are currently bailing out. You see the old Eddy Murphy moving "Trading Places" fits the situation quite well, instead of collecting their trading fees, the brokerage houses decided they could make the market move and really make money, much more than collecting trading fees. So they do not care how much supply and demand affects the market, they just want it to move, and if they leverage their holdings they can create multiple trades on the same barrel of oil in either direction, up or down. All is well and they get their million plus dollar bonuses and trades until something as dramatic as the credit crisis makes the financial institutions call in all the debt associated with those leveraged trades. Oops, sell, sell, sell to pay those debts or better yet call the government and ask for a nice little bailout. Enough said.

spigzone | Jan. 17, 2009
The IEA november report, based on the most comprehensive survey of the worlds oils fields ever undertaken, predicts a 7 to 9% annual decrease in conventional oil from existing mature fields that account for some 40% of worldwide oil production. 8% x 8 = 64%. That is the ballpark decrease in conventional crude production from the worlds major oil fields by the end of Obamas second term. In 12 to 18 months, depending on how deep the worldwide recession/depresion gets, that annual decrease in worldwide production will equal the demand destruction from the bubble pricked worldwide economic collapse and the price will start again start rising in earnest. What will demand destruction consist of when the world economy is already in a depression?

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?

Jeffrey J. Brown | Jan. 17, 2009
One thing to keep in mind about the US production graph is that we went from a leading oil exporter to net importer in just a few years. More than 20 years before our production peaked, we became a net importer (in the late Forties).

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.

Greg Pinelli | Jan. 17, 2009
If anything your summary is very moderate...oil production in 2005-2006 remained virtually flat despite upward demand pressures. All those people in emerging countries are not interested in living in mud huts without the benefits of electricity and heating any longer..and most want cars or trucks..not bicycles. The simple facts are these...

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.

SteveA | Jan. 17, 2009
While I agree with much of what is said, theres a couple of things that really need clarification.

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.


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):))

Richard | Jan. 17, 2009
I have been in the oilfield since 1974. I have seen the markets go up and down. I have been down to my last 50 cents in my pocket during these times. Yes, I believe that oil will go back up when this recession we are in is over. It is like any other commodity, demand causes and increase in price. What really bothers me now that the price is down and people are not driving as much, the federal gov. is going to put more tax per gallong on road fuel to offset their loss of revenue for roads and bridges. Now, does that really make sense, people quit buying because of the price, so raise the price so people will quit buying more?

Jane | Jan. 17, 2009
The current forecast is that well drop to using 85.3 million bpd (from 88 million bpd) but we still only find an average of 15 million bpd to add to our reserves and so I personally feel that the oil price is currently too low.

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.

Geoff Snicer | Jan. 16, 2009
Oil will hit 27 dollars before it oges back to 70.
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.

Jeanne Perdue | Jan. 16, 2009
Youre right on, David. This low price scenario is quite temporary due to the finite resource and growing population that wants a good lifestyle. Barring any disruptive technology, now is a good time to buy oil company stocks, as they are all "on sale" !!!
Love, Jeanne

Hivoltage | Jan. 16, 2009
I agree with what you say . Oil is too cheap now and replacement production with deepwater fields or oilsands certainly doesnt make sense at these price levels . Yet this is where most of the new production must come from in the next few years . Saudi Arabia is the key bellweather to future prices . They have the cheap oil and spare capacity for the moment but there WILL come a time where either geologic or above ground realities will cause a real shock to our cheap oil world . My concern is we will see real hardship before we can solve this looming crisis .

David Hines | Jan. 16, 2009
We do need to see oil stabilize. I work in the Permeium Basin. I have seen good times and bad times. This is just another cycle to bring cost back into line. The only thing is that out in this part of the country we cannot afford for it to stay down long because to many service companies have invested money in new equipment, and with out work they will go belly up. With out sufficent service companies to handle the volume of work, the cost for drilling a well will shoot back up and you wont be able to justify drilling a well at 75.00 oil in this part of the country. Hopefully something will give soon and give us all some stability before we end up in a bigger mess.

Edward A. Nieto | Jan. 16, 2009
I agreed with other colleagues statements on to keep oil prices from hitting $150 pb or higher and consequently US economic from collapsing further. Alternative energy thoughts are vital elements to be considered on a long term policy plan, but we have to concentrate now on domestic oil, ANWR, shale oil sands, coal to liquid, nuclear, etc. These are part of an inmediate solution. oil price on the rise from current levels ($40-$50 pb)is not a possibility, it is a reality.

Don Westlund | Jan. 16, 2009
I agree with all of your comments especially about population growth. There is so much data to look at now that I dont know how a rational person can come to any other conclusion.

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?

Mark White | Jan. 16, 2009
Forget about $147 oil, that was a false market brought on by 2 factors and 2 factors only. Speculators and the govt doing nothing to stop the speculators. Nobody ever talks about how much money our govt makes from high prices of energy. The tax dollars the govt rakes in from high energy prices is more money than all the oil companies make combined. The real cure to our energy problems are NG (cheap,abundant and clean burning), nuclear,wind and solar. Until our country jumps in head first into these types of energy solutions, we will always be at the mercy of the countries that dont even like us.

Cole Hickman | Jan. 16, 2009
I totally agree with DK. If it were not for the service companies risking large dollars, then we would not be as advanced as we are today. I disagree on one point, the large service companies are not the only ones riskibng their futures,. At Impact Guidance Systems, they have spent millions to develope revolutionary datas aquistion tools, ones that no one has to vthis day.

Just a plug for the "little guy".

Kyle Bedell | Jan. 16, 2009
So how is then that Goldman Sachs can so easily manipulate the price of oil ? ;-)

Lynn | Jan. 16, 2009
I think all your deductions are correct. The same arguemnets could have and were made from 1985 to 1999. "Long Term" should be looked at in terms of 15 to 20 years, not in 12 to 24 months. Hang on, the ride is longer and bumpyer than you can imagine.

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.
EJ | Jan. 16, 2009
One of two things will happen. Oil prices will rise as global demand resumes a growth pattern (we get past the recession). Or, oil prices will remain relatively low $30-$40 for longer than expected and the U.S. will continue to purchase more supply from foreign sources - which, has two more important ramifications. First, the U.S. would be purchasing oil from other countries for a lower price, comparably, than what we can produce it for in the U.S. (sound familiar car manufacturers?). However, and secondly, the U.S. would be purchasing and using "other peoples oil" until prices return to an economically producible level here in the states, thereby, at some point, supply produced in the U.S. will get more dollars for the buck when prices finally go back up...

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.
Jim Bural | Jan. 16, 2009
In 38 years in the patch, Ive seen 4 downturns that brought the day rates back in line. This is just another realignment process.

Adam Smith and I agree with you.
Jimmy | Jan. 16, 2009
You need to write an article titled, oil will keep going up until it doesnt now, were you one of the guys that said wed 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 isnt. 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 broker and pointy-headed economists are.

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.
Robert Rapier | Jan. 16, 2009
This mirrors my thinking almost exactly. People ask me about oil prices all the time, and I point out that while I wouldnt try to predict them in the short term, I always see them much higher in the longer (5-10 year) term. I think there is a high probability that in 10 years we are on the down side of the production curve, and at that point I think the oil industry ceases to be cyclical (at least for the reasons it was historically cyclical - producers overbuilding capacity). Robert Rapier R-Squared Energy Blog

Robert, Seems logical to me.
DH | Jan. 16, 2009
People were pinning their hopes on a robust economy continuing forward, at least robust enough to sustain the lifestyles they had a couple of years ago before the housing bubble burst just as the birth of a new and more damaging bubble in energy commodities began. The oil bubble burst the world economic balloon and I dont think the world is going to forget it this time even with the recent downturn in oil and gasoline prices. Lower oil and gasoline prices need to remain low for several years for memories to fade into the ones of cheap oil lasting forever, which ran through our heads just a few years ago. Anything less and we will not forget the lost opportunities caused by out of control oil prices and continue to look for ways to lessen oil consumption and demand. So get real. High oil prices and a damaged economy wont be forgotten and preventing it from ever happening again is the new goal.

Paul Matthews | Jan. 16, 2009
You are spot on. Best regards, Paul

Thanks Paul.
Richard Rieman | Jan. 16, 2009
We used wind, solar, and muscle power for over 8,000 years. Steam was more reliable, then internal combustion engines. The only reliable alternative that I see is nuclear, but it wont work with ground transportation. The politically correct alternatives may supply 10% of our needs, but hydrocarbons will dominate ground transportation until something that isnt even in a laboratory becomes common in cars. Meanwhile, when prices change it takes years for the market to correct itself. The best sign I have seen of sanity last year was several companies told their engineers to base their economics for new wells on $60 per barrel. $200 is likely at some point unless the price stabilizes in the $60 to $80 range soon. At that price, I think some new rigs would be built as old rigs wore out. When I was in the industry, I spent half of my time looking for work, and the other half looking for hands. I would like to see some stability in the market.

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.
Robert Paglee | Jan. 16, 2009
It is interesting to see the Feb futures price of natural gas falling below $5 at a time when the US is suffering a bone-chilling winter. However, there seems to be a possible glut of natural gas availability building up in North America, and this likely affects the price of oil indirectly because many utilities can switch quickly between piped-in fuels (this excludes coal) being used for electric power generation to get the most BTUs for the BUCKs. Last week, the Henry Hub gas spot price decreased 7% to $5.47 per MMBTU. Also last week, with WTI crude oil dropping to $37.43 per bbl, this corresponded to $6.45 per MMBTU, according to the EIA. If so, the oil/gas price ratio for equivalent BTUs was only 1.18, a small premium for the benefit of transport mobility. How can this be?

Interesting insight Robert. I take it you are not a casual observer. Maybe one of our readers can shed light on this question.
Rick Gronvall | Jan. 16, 2009
yes, we may see 300.00 $ oil or 5.00$ oil this is really not a proper thought the real thought would be what brought this issue that we are expiencing today so sudden. This world is huge and I would have to slightly remind one that we are approaching or border line an uncontrolled high speed waubble. We will have to worry about a whole lot more than the Yo Yo effect of the price of oil. Thank you for your time have a good day.

Rick, As Mr. Greenspan might say, "Welcome to the Age of Turbulence."
Ray Gilbert | Jan. 16, 2009
Ive worked in the oil & gas fields of Kansas for 30 years. When things went bad in the mid 80s drillers were still taxed on their equipment at standard rates. Unable to pay these taxes, they cut up most of the rigs and sold them for scrap. When the price started back up in the early 2000s, you couldt steal a rig to drill with. So companies bought new and then couldnt find people to run them. Now were back to the lows again! As much as I hate government intervention, oil and gas need a floor price of $60 per bbl, and rise 3% per year. This might stop the huge roller coaster and make it less horrifying to ride.

Ed Rodriguez | Jan. 16, 2009
There is no question that the era of cheap light oil has ended, the current Saudi projects and others worldwide are a proxy for the upstream cost structures moving forward.

However, even when US$200bbl might not be justified, it is clear that commodity price floors should start around the US$80-90 bbl.

Jens | Jan. 16, 2009
Holy ****. From the documents Ive seen, which and they all agree, the current price of oil is producing a loss for many drilling operations. New investment in many places has essentially stopped. Drilling depths everywhere have increased significantly, new finds are dropping off to almost nothing, meaning that this is NOT the time to continue to increase oil use. The fact that OPEC is cutting production means that they dont want to sell oil at the price it is now. See Fatih Birols of the IEA presentations on oil production. The IEA has rapidly changed its position on liquid fuel use as its now obvious (as it was already 10 years ago) that liquid fuel use is now into decline because production cannot be maintained.

Jens | Jan. 16, 2009
Holy ****. From the documents Ive seen, which and they all agree, the current price of oil is producing a loss for many drilling operations. New investment in many places has essentially stopped. Drilling depths everywhere have increased significantly, new finds are dropping off to almost nothing, meaning that this is NOT the time to continue to increase oil use. The fact that OPEC is cutting production means that they dont want to sell oil at the price it is now. See Fatih Birols of the IEA presentations on oil production. The IEA has rapidly changed its position on liquid fuel use as its now obvious (as it was already 10 years ago) that liquid fuel use is now into decline because production cannot be maintained.

Hacker | Jan. 16, 2009
When it comes to increased consumption, one must pay particular attention to the oil exporters themselves. Their consumption is growing the fastest reducing the oil available for export. See the Export Land Model work done by the folks at theoildrum.com.

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.

Thanks Hacker.
Bruce | Jan. 16, 2009
John B. says that one of the reasons that oil went to $147.00 is because of speculators. Why would you think that the speculators wont be back for the ride during the next run up in price? That is what speculators do.

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.
Paul Saks | Jan. 16, 2009
sometime, in near term, evidence of the large declines in existing oil production;as a result of much reduced global Capex Spending will emerge...I think IEA estimates in single digits will be low...so, better own good companies with long life, quality reserves, as better times loom in a global sense, and the "shorts" will be jerked back into reality

Thanks Paul.
DMS | Jan. 16, 2009
Mr. Kent,
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?

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.
K. Kelley | Jan. 16, 2009
This article is excellent, however it fails to include the fact that 2 billion people on this planet use wood, animal dung or charcoal as a primary source of fuel foe cooking and heating. Can you imagine what would happen to the price of oil & gas if just 40% of these people switched to hydrocarbon based fuels for their personal needs. Oil at $200.00 a barrel would be a bargin.

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.
Jack Mott | Jan. 16, 2009
Its also possible the the economies of india, china, and others could come crashing down, keeping oil prices low. Predicting the future is tricky =)

Thanks Jack. Tricky indeed.
Gary Cooper | Jan. 16, 2009
I too work in the Oil and Gas Industry. I see the biggest problem is too much population for this world.

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.!!

Gary Cooper
Perth, Western Australia

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.
Edgy | Jan. 16, 2009
Finally someone who understands the root cause - population growth, unfettered. Nate Hagens over at TheOilDrum.com wrote a letter to Obama and this was not addressed. It is the denominator. I believe there is a more than good chance the world is in overshoot and nothing will help unless the denominator is addressed... Scream and shout all you want; quote till blue in the face; offer up any number of sacrificial lambs... in the end, the earth constantly changes and is always in balance. And, as the past, present and future events make their way through earths systems, a new balance WILL be achieved - with or without our consent, with or without our beliefs.

Fasten your seat belts, were in for a bumpy ride.

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.
Bill | Jan. 16, 2009
In my previous post, I inadvertently left out hurricane season as part of the US production decline in August and September 2008. That being said, it only further illustrates the importaince of offshore production to the US energy equation.

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.
John Toplis | Jan. 16, 2009
I think that because of the 147 dollar price of oil recently,this would have sparked a lot of oil exploration companies to seek out further oil and gas deposits globally for the future. They wont start production just now due to the low prices, but they will be ready to go when the prices increase to around 70 to 80 dollars.

On this basis, I dont expect the price to exceed 100 dollars for the next 2 years as the new discoveries come on stream.

Thanks John. We will keep our eye out for discoveries in 2009.
Ramadan | Jan. 16, 2009
We tend to have blinders in our industry and dont think much past the last barrel we produced. This is about the long term future of our nation and our way of life. We need to consider a $2.00+ per gallon tax on gasoline to fund the massive construction required of nuclear power plants using the Manhatton Project as a model to set priorities and the Interstate Highway model for the Right of Iminent Domain. We should not burn ANY fossil fuel to generate electricity, that is a total waste of a most precious commodity. By the way, you are simultaneously building the electric car infrastructure we need. Too simplistic, I think not.

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.
John G. Davies | Jan. 16, 2009
I am in total agreement. The current oil price will be short lived. The economic history and world growth will dictate that price will, inevitably, go up. The one sad factor I see in the industry at the moment is the laying off of experienced personnel. In the past personnel have been laid off in the lows and they have decided, after tasting some home life, not to return to the industry. The industry currently is tremendously short of experienced personnel with the result that, due to head hunting, salaries are rising. This is good for those in demand but ultimately it is bad news for companies who cannot afford inflated salaries. Companies should grin and bear what, in my opinion, will be a short term slump and retain their expeienced personnel so that when the upturn comes they will have the skilled people available to mkove forward quickly. However, this is unlikely as at the end of the day it is dividends for the shareholders which come first. The fact that in the longer term they can more than make up for the short term losses is something that, in their greed for the the quick buck, they do not seem to appreicate. This is a time for consolidation and preparation for the upturn. Review company policies and streamline their methods of doing business. The oil industry, particularly in the good times is a very wasteful industry. Take the lull as a time to overhaul their methods of doing business. You can bet your bottom dollar that the financial institutions will be taking a long hard look at eliminating the massively wasteful methods that they have been using during what they, falsely, perceived as a time of plenty.

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...
Rob Watson | Jan. 16, 2009
As long as oil is top of the pecking order for global energy Im going with the subject that deep water exploration is going to be a key factor for relatively short term demand.

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

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.
Bert | Jan. 16, 2009
The difference this time around is the entire US economy, and even perhaps most of the worlds economies, are spiralling downward, with some, such as ours, being in a true recession. Because of this, I dont foresee the patch bouncing back as soon as this article predicts, altho, as a recently unemployed patch hand, i hope i am wrong.

Bert, Sorry to here you were recently unemployed. Your business will recover. Hang in there.
MD | Jan. 16, 2009
I tend to agree although I dont see oil going to $200 that soon, eventually yes but shorter term I see stabliizing in $80-120 range. Regarding Mr. Himels comments his economics dont work. His last sentence is nonsense, we wont shut down. Let me give an example: 100 barrels priced at $100 = $10,000. The 2008 demand reduction was 6% (see Oil & Gas Journal 1-5-09). Reduce total value by 6% and 94 bbls @ $100 = $9400. Take same 100 bbls without demand reduction priced at $40 = $4,000. Oil companies do not "lose out". Also, we still consume more gasoline than we refine. Production "shut downs" are not the result of demand destruction but maintenance and turn-aound activity.

MD, Thanks for your insight. It will be interesting to see how demand moves in the first quarter of 2009.
Diogo Lutterbach | Jan. 16, 2009
As mentioned above, this is a cycling market. It is notorious that as the demand increases with prices decreasing, at some point in the future (and I think in a near future) the thing will collapse to the other side again. At determined point, if the price is too low, the operators will have to put most of their resourses on that to continue exploring. If at some point this situation gets critical, and they decide to push the break or even stop this effort, production will decrease, and so demand, that is already high, will increase dramatically, and then the prices will jump substantially again.

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.

Thanks Diogo.
MJK | Jan. 16, 2009
Oil will remain in the $30 to $50 range for the next year. Long term, three to five years, $100 to $150 per barrel. Much depends on access to big reserves in Russia, Venezuela, and the middle east, politically speaking. Hell, we cannot even get access to much of our domestic oil and gas because of ignorance in government along with our mostly brain dead general population!

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.
Bill Sparks | Jan. 16, 2009
1. When the price started down in August of 2008, it was US producers that started shutting wells in. As a matter of fact, including the Independence Hub shut down for maintenance, US production fell about 23% or about 1.1 million barrels per day from the yearly average by September 2008. What is going to be done to protect the all important US stripper well from extinction? After all, US stripper wells contribute 1.2 million barrels of American crude (or did) every day. Regardless of demand, if US producers shut-in to preserve profitable operations for a later date, the countries we import from are only getting more of this nations hard earned income. (Please see the table on page 6 of JPT, Jan 2008.)

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.

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.
Lucas Brendler | Jan. 16, 2009
That's the point. Imagine that nowadays the emerging markets demand is just starting to increase. In 2007, China's per capita demand was just 2.2 barrels/person. USA had a 25.0 barrels/person. If China alone increases its demand, say, to 3.0 barrels/person (besides the natural increase in population), it will represent about 30 million barrels/day of more production necessary to maintain the equilibrium. And what about the rest of the world?

Damir Schmidt | Jan. 16, 2009

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.

Geoff Thompson | Jan. 16, 2009

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.

Brendan Lally | Jan. 16, 2009
The shift from the 7 sisters to National Oil Companies has added a bizarre twist to the old formula.

Ron | Jan. 16, 2009
Don't look for oil prices to stay low for very long. If Obama and the other "environmentalist" have there way, they will do everything they can to increase the price and difficulty of exploiting oil reserves, wreck the coal industry and promote "green" power that is much more expensive. Look for evidence of the "green" jobs in the "stimulus" legislation. There is a popular notion that a tax should be levied to keep the price at the pump high enough to compete with the increased cost of green power. That may be too transparent, so they will just make it impossible for the oil companies to produce efficiently in the US.

Claudio | Jan. 16, 2009

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.

Jimmy | Jan. 16, 2009
You need to write an article titled, "Oil Will Keep Going Up Until It Doesn't."

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.

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.
Brian | Jan. 16, 2009
I couldn't agree more.

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.

Thanks Brian. $90 is not far from where we are... all things considered.
BP | Jan. 16, 2009
Yes, as population increases, energy demand increases. This downturn in the economy is short-term, and consumer demand will increase. On the supply side, all it takes is for the Middle East to blow up again.

The chance of sustainable peace in that part of the world is zero while the chance of conflict is 100%.

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.
Sachin Mitake | Jan. 16, 2009
As in India, population holds the key. The rate of increase in population also unchanged. India has sufficient natural resources for oil & gas. All other countries should have invested in the India market. Both China and India are the key for rescue from the recession.

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.
Rajan | Jan. 16, 2009
As the oil production is being cut and regulated and the people's spending power has been reduced all over world, my opinion is that oil price will not go up more than $100 in a year or so.

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.

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.
David Wylie | Jan. 15, 2009
As the new administration coming in, they are promising great things, so did FDR, only he had the charasima to pull it off, even after the first 2 years were a complete failure. For Washington to be able to pay for the new stimulus package, I feel there will be much higher priced oil and gas to keep the Independents going and wanting to seek out the domestic supplies.

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."
Donaho | Jan. 15, 2009
The current consumption rate is rising like helium with prices low. The SUVs are back in the swing of the car buying market. Bitter cold in the Northeast and Midwest using up plenty natural gas and heating oil. Diesel prices are down where they once were and lower. It won't be past 4th quarter 2009 before the oil hogs are burning both ends of the candle and it catches back up with production and turns the prices around again for the good of us drillers. Some simple facts that can't be ignored.

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.
Kim Himel | Jan. 15, 2009
Oil will possibly go to $80-$100 barrel next year for a short time then go down and stay around $40 to $50 range. The reason for this is the oil companies lose out on oil sold at $100 because consumers stop buying supplies, but if they keep it around $40 to $50 barrel they will keep a steady buying of supplies by the consumer. People keep forgetting that this past year, when the oil went up to $150 barrel, the consumers stopped buying supplies to the point that the refineries had to shut down production(some areas 50% to 25%)because they didn't have anywhere to put their refined product. Also the country was not structured for the high price of oil.If the price of oil stays above $100 barrel over 3 months then this country will shut down to where no products will ever sell, no matter what price they were priced. Mr. Kim Himel

Mr. Himel, Valid point. High oil prices definitely put a damper on consumption.
| Jan. 15, 2009
I feel we need to do something about this going up and down so much. So many people are losing their jobs on the drilling rig because of this. It hurts many families -- well, the whole economy. One day you have a job and the next day you don't just because it is allowed to go up and down so quick for many selfish reasons.

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.
Jack Lott | Jan. 15, 2009
The rig count in 1999 in the USA was below 500, just ten years ago. How low will it go? If it goes below 800, severe cuts will hurt the oil field for a long time.

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.
G R | Jan. 15, 2009
Dont fool yourself.....Oil is supply and demand, dollar fluctuations had very little if any impact on the cost per barrel of oil....go back over the last 30 years and youll see no correlation between oil rising or falling with the dollar. This little more than a myth of the left to keep domestic energy development in decline. There is but one way to keep oil from hitting $200.00 pb and consequently our economy from collapsing further..shale..domestic oil...ANWR...coal to liq.. nuclear....

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.
CC Tam (Mr) | Jan. 15, 2009

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

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.
Tom Mostello | Jan. 15, 2009
Oil will hit the $200 mark in the next year or so.

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.
D Williamson | Jan. 15, 2009
Another point to make. The reason speculators fell in love with oil was due to the fact that the US dollar was depreciating against virtually every world currency. The US dollar goes down, oil goes up. It could be argued that the peak price of oil was 30-40% than it would have been if the US dollar had maintained its global buying power seen just 8 years ago. The US government can not control the price of oil, but it can surely cause the currency to move up and down which can make oil cheaper or more expensive in dollar terms.

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.


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