Crude oil prices will keep falling!

..and falling. What does this mean for the oil industry and consumers? Automologist, MAC, ventures to explain.

“Global oil prices take a tumble and are set to fall further.” If I had written that headline six months ago, you would have thought that I had shuffled off my sanity-trolley and was certifiable, but that was what happened this week.

Over the years, we have been continuously told that oil prices would continue to climb as demand for hydrocarbons outstripped the world’s ability to get the stuff out of the ground and reserves are depleting faster than we can find new sources. Certainly, throughout the 1990’s and 2000’s, this was the case as demand, particularly from China, led to a sharp spike in 2008 followed by the global recession. Since that time, oil has maintained a price around the US$115 per barrel mark in June of this year; that was until this week, when prices started to plummet, hitting US$91 by this week and some analysts think that the downward trend will carry on for some while.

The sustained high prices of the past few years led to a new market dynamic as a lot of small oil companies, particularly in the USA, suddenly found it to be profitable to extract oil from otherwise unconventional reserves. Terms like ‘fracking’ and ‘deviated drilling’ entered the public lexicon when oil companies started to drill from oil in rocks called shale, a fine grained rock with low porosity and negligible permeability. It was profitable to go after this type of oil as the high cost of exploitation is offset against the high price you can get for the product, and it is expensive. Due to the low permeability of the rock, you have to drill more holes to extract the oil; in fact, a lot more holes. In an average reservoir in the Bakken of North Dakota, you will need about 2300 wells per year (See: Watch out, OPEC, here comes Saudi America) 

This type of drilling alone added more than 2.4 million barrels to the total USA output since 2008, a figure which is thought will see a total growth in USA domestic production rise from about 5 million to potentially 11.6 million barrels, according to figures released by the US government. But the boom in oil production over the years has had little to no effect on the price of oil as the gains in the US production were offset by losses in production elsewhere.

Regional conflicts have been responsible for a reduction of about 3 million barrels per day from the OPEC production targets and when you consider that the global total is 75 million barrels per day, this is a significant figure. 

This fall in oil prices is going to cause a mini recession, but this time in the oil-producing countries such as Russia and Iran who both need oil prices to be above US$100 if they are going to hit their budget requirements. Of course, OPEC who still control over 40% of the world’s oil production could call for a cutback in production to try and create a scarcity.

There could be problems in the oil importing countries as well. Demand has been falling in these countries as high prices and government-mandated fuel economy drives have changed the public driving habits and fuel economy figures have risen steadily since 2007. Lower prices at the pump may make us all believe that big-government has been crying wolf all this time and indeed there is plenty of oil left for us to burn and pollute as we like. 

Demand in the most developed countries has probably peaked already and consumption will fall as more energy-efficient technologies are developed, and also as the population ages. In the less or non-developed world, demand will continue to grow as gradually improving wealth will allow for purchasing of personal cars, more for aspirational purposes than anything else. So, an equilibrium will be reached in terms of demand for oil.

So, have our beloved leaders been lying to us all of this time when they have been saying that oil is running out, an idea first mooted by the ‘Club of Rome ‘ in the 1970’s? No, not really. The truth is, we don’t really know how much oil is out there except that, in theory, there is a finite amount. As new technology comes along, it will enable us to exploit ever more difficult reserves. In the past few years, there have been significant deep water finds off the coast of Brazil and the British Falkland Islands; the same conditions exist off the East Coast of the USA where drilling is not yet allowed. Just this week, Shell Petroleum started oil production at its Gumusut-Kakap deep water well in Malaysian waters, a first for the region, and expects to be able to produce 135,000 barrels a day, or about 25% of Malaysian output; and there is a lot more deep waters out there.

Thus, you could be lulled into a false sense of security and ignore the impending oil drought that is sure to happen, or you could recognise that the reason we need to rethink personal transportation is more about the pollution and the lack of space to put your personal car, than it is about the amount of oil there is left.

(Read also: Crude Oil Prices Plummet As Supply Outstrips Demand)

image: cooper.edu