The Weekend Wonk: With Coal on the Ropes, is This the Beginning of the End of Oil?

November 29, 2014


This is a sampler of the increasingly confused and borderline panicky reactions around the world to the plunging price of oil.   Intensely interesting puzzle emerging, as temporary price drops tease consumers, but more thoughtful observers see grave danger for producers, and the economies that are too reliant on them.

Setup: OPEC (the Organization of Petroleum Exporting Countries) had a meeting this week to consider the consequences of rapidly dropping oil prices.  The conventional wisdom was that Saudi Arabia, in concert with others, would cut production, thereby constricting supply, and pushing price back up.
In a twist, OPEC decided to do nothing, and prices responded by plunging even further – see graph above. Savvy observers take that as a sign that OPEC wants to wait it out, and strangle the production of exotic oil in the US and Canada – “exotic” because they require advanced and very expensive techniques to frack, cook, and process the flood of new oil coming on to the market.  Without the high prices we’ve gotten used to, that production begins to collapse.  The stage is set for classic boom and bust.


Dallas Morning News:

In Vienna Thursday, the Organization of Petroleum Exporting Countries voted to maintain production of 30 million barrels a day, about four times that of the United States. The news came as a shock to markets following predictions that governments in Saudi Arabia and Iran, which are heavily dependent on oil for public spending, would maneuver to try to raise the price of oil.

“We will produce 30 million barrels a day for the next six months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting, according to Bloomberg News. “We are not sending any signals to anybody. We just try to have a fair price.”

The fallout from OPEC’s decision is likely to mean more bad news for oil companies operating in the United States. Shale plays like the Eagle Ford in Texas and Bakken in North Dakota, which have boomed in recent years, are dependent on cost-intensive drilling techniques that analysts say are already uneconomic for some companies at current prices.

A report by Moody’s Investors Service earlier this week projected that capital spending by oil producers will decline 20 percent next year with “room for deeper cuts if weak oil prices persist.”

The financial press is reacting. Barrons, below, not known as a starry eyed promoter of sustainable futures, asks if oil may be accelerating its own decline.
Key phrase: “Volatility sells Teslas“.


The price of oil is plunging–and the shares of producers with it–after Opec decided not to cut production yesterday. Wolfe Research’s Paul Sankey and team think this is the beginning of the end for oil:

This is going to be volatile, and we can’t understand how that helps the Saudis. Volatility sells Teslas (TSLA). There seemed to be a clear degree of irritation in Saudi oil minister Al-Naimi’s comments to the crush of journalists; as ever, he had front run his position: no real cut because as he said, he expects the market “to stabilise itself eventually“. He is wrong…

We don’t think that global oil demand will significantly react to lower oil prices, and thus we think the market will clear at the point of US supply growth destruction. That will take six months to work through, at which point we will likely hit a significant slowdown in US oil production growth, falling Russian production, deteriorating OPEC member stability – notably in Venezuela, Nigeria, and of course Libya – and rising global demand. So we go low, to storage economics (likely $50/bbl WTI) in Q1 2015 and then squeeze supply. And then we squeeze radically higher. As a result, the world accelerates its move away from oil. The conclusion will be, OPEC, like Rockefeller, ultimately damned itself.

The New York Times mentions “winners” and “losers” in this development. Losers include oil  state economies, Vladimer Putin, and – with a big questionmark – the climate.


Winner: Global consumers. Anybody who drives a car or flies on airplanes is a winner, as lower oil prices are already translating into lower prices for gasoline and jet fuel. Lower transportation costs will also give manufacturers and retailers less urgency to raise prices, as their costs fall.

This is, in effect, a global supply shock, the reverse of what happened with energy in the 1970s (or, to a smaller degree, the mid-2000s) when petroleum shortages and embargoes led to a sharp rise in prices. It may not last forever, but for now consumers in the United States and beyond will be winners.

Loser: American oil producers. One of the big open questions is just how many of the small, independent producers in the American heartland have cost structures that make them viable with oil prices in the $60s rather than the $100s. Many have relied on borrowed money, and bankruptcies are possible. But because the companies tend to be privately held (their financial details not publicly released), analysts are doing guesswork in projecting how severe the pain will be.

Potential Loser: The environment. As a general rule, the cheaper fossil fuels become, the more challenging it will be for cleaner forms of energy like solar and wind power to be competitive on price. That said, the picture is a bit more complicated with this particular sell-off. Solar and wind power are sources for electricity, whereas fluctuations in oil prices most directly affect the price of transportation fuels like gasoline and jet fuel.

Unless or until more Americans use electric cars, they are largely separate markets, so there’s no reason that cheaper oil should cause a major reduction in investment in renewables. But to the degree cheaper oil means people drive more miles and take more airplane flights, the falling prices will mean more carbon emissions.

But not so fast. While there are stories of increased sales for SUVs and trucks,  oil prices on a roller coaster are not long term good news for the fossil fuel industry.

Fox News cheers for good ol’ American drill baby drilling, then worries about the frackers – who need relatively high oil prices to support their production of exotic oils.

Fox News:

But the next question could be whether the fracking industry can survive the low prices it brought.

“The shale boom is on a par with the dot-com boom,” Russian oil baron Leonid Fedun of OAO Lukoil told Bloomberg. “The strong players will remain, the weak ones will vanish.”

OPEC, the cartel of oil-producing nations that has historically been able to calibrate the price of oil – and ultimately gasoline – by increasing or decreasing supply, announced Thursday that it won’t fight the price skid by cutting production this time. That likely means prices will continue to fall, and the more costly production technique of fracking could become cost-prohibitive, say experts.


OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.

The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields.

American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil (LKOD), said in an interview in London.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,”

Al Jazeera asks how OPEC fares in the age of climate change:

On the face of it, shutting down some of the extreme oil, which adds to the world’s excess of reserves, could be seen as good news for the climate. Venezuela’s Minister Ramirez told Al Jazeera that expanded US production was “a disaster for climate change”. (However, he did not comment on how OPEC’s reserves square with climate limits.)

The trouble is that any such reprieve from a fracking cutback will be temporary, as those reserves will not disappear. Whenever the oil price increases again, companies will come back to extract them.

A reduction in US production could only become more permanent if there were active government regulation to restrict demand for fossil fuels. Ironically then, OPEC and Saudi Arabia – generally seen as obstructive in international climate negotiations – might best be able to protect their market share with a meaningful global deal on climate.

Inside Climate News:

As oil prices sagged again on Monday to a four-year low, the Carbon Tracker Initiative said the recent downward spiral “changes the whole dynamic” for Canada’s tar sands production.

The “vast majority” of potential capital expenditures on tar sands projects that are still in the earliest phases of development would require such high oil prices that they are “particularly risky,” the group said.

Hundreds of billions of dollars could be spent on projects that are underway or in development, Carbon Tracker said. At least two-thirds of the tar sands enterprise is at risk if current prices persist, or if they drop even lower.

“We believe shareholders should be concerned at this potential level of expenditure and should consider whether it is prudent to risk such large amounts of capital on high cost projects that need high oil prices to be commercial,” the report said.

Some 92 percent of this prospective tar sands production would need a price of at least $95 per barrel to make sense, given the risks. And “virtually all” of it needs at least $75 per barrel. These calculations include a $15 margin of safety above the estimated break-even cost of production, since it would not be prudent to invest in a project that would only break even.

The Toronto Star underlines the point that continued investment in Alberta Tar Sands presumes a continued, and predictable, high price for oil:

Oops. There go the tarsands.

The dramatic slide in oil prices has underscored the fragility of Stephen Harper’s entire resource-based approach to the economy.

For this government, Alberta’s oilsands were the key to Canada’s economic future.

Alberta heavy oil would be sold to the world at premium prices. Spin-offs would provide jobs for Canadians across the country.

It was a coherent vision. But it rested on one thin reed: an oil price high enough to cover the cost of extracting bitumen from the tarsands.

Now, with oil prices expected to remain low for the indefinite future, the entire project looks increasingly iffy.

That became glaringly obvious in the stock markets late this week as investors bailed out of energy companies.

NPR Living on Earth interviews energy investment strategist Joseph Stanislaw, who points out again that uncertainty will ultimately drive more users to curtail oil use or find alternatives :

CURWOOD: Considering the prospects for the price of oil, how crucial is Keystone to making it economically viable to use tar sands oil?

STANISLAW: Does it make a difference right now in the short-term? Probably not a whole lot at all. [LAUGHS] Let’s be realistic. So far, that oil has not been moving through those pipelines. It’s been going east and west through other already existing pipelines. Now, there are other pipelines being built in Canada, one going east, one going west, to the tune of about 2 million barrels a day of oil equivalent flow. So that oil is going to be produced, it’s going to be moved. That’s a fact. When it is actually produced and moved, there’s an issue of pricing and timing, but it’s going to happen over the next five or 10 years. If it is delayed 20 years, if there are enough objections to it on the environmental front, they may pull back on that. But with the current situation and potential alternative routes for exporting, in the next five or ten years, it’ll happen.

CURWOOD: Now, Joe, I know you’re familiar with the argument of this put forth by some that to protect the climate two-thirds at least of present oil and carbon-based fuel reserves need to stay in the ground. How do you reconcile additional infrastructure like Keystone against those kind of concerns?

STANISLAW: In the short-term, we’re not going to get off the stuff as they say, and oil will move. There will be that transition period taking place, and it’ll begin to slow everything in the mid-20s probably, but equally I think more and more people will recognize that it used to be the fear of peak oil supply. That’s now something that’s been discredited. The real issue is, people can find new ways not to use the stuff. People will be using it much more efficiently, alternative sources will be found. Peak oil demand is really…should be the factor people are looking at.

Fossil fools may temporarily celebrate lowered prices, but as the roller coaster bottoms out, and boom times in North Dakota face a shakeout, consumers who were hoping for continued cheap gas in that new SUV will be in for a shock.
Volatility is almost as deadly as continued high prices for the oil industry, and just continues to fuel the long term prospects for more efficiency, more electric cars, and more renewable sources, where the price is predictable, boring, and luxuriously flat, forever.


57 Responses to “The Weekend Wonk: With Coal on the Ropes, is This the Beginning of the End of Oil?”

  1. […] started a discussion over the weekend (below) on the effects of plunging oil prices. Here’s […]

  2. […] OO Oil’s Volatile Price Can Push Investment in Stable Renewable Energy and falling oil prices could help bust American fracking and Canadian tar sands, expensive ventures which need high oil prices to be profitable. […]

  3. […] OO Oil’s Volatile Price Can Push Investment in Stable Renewable Energy and falling oil prices could help bust American fracking and Canadian tar sands, expensive ventures which need high oil prices to be profitable. […]

  4. […] OO Oil’s Volatile Price Can Push Investment in Stable Renewable Energy and falling oil prices could help bust American fracking and Canadian tar sands, expensive ventures which need high oil prices to be profitable. […]

  5. […] OO Oil’s Volatile Price Can Push Investment in Stable Renewable Energy and falling oil prices could help bust American fracking and Canadian tar sands, expensive ventures which need high oil prices to be profitable. […]

  6. […] I’ve argued that the extreme volatility in oil prices is an achilles heel of the fossil fuel industry.  The uncertainty around fuel prices, in an era when alternatives are increasingly available, hastens the adoption of those renewable alternatives.  The hapless boobs who are running out to buy SUVs during this hiatus will make good cautionary examples when the whipsaw of prices catches up in 18 months or so. But for investors expected to pony up billions for this supposedly indispensable energy lifeline, uncertainty is poisonous. […]

  7. […] Josh Brent Expected To Play TonightElectronic Health Records (EHR) – Some ComparisonsThe Weekend Wonk: With Coal on the Ropes, is This the Beginning of the End of Oilbody { background: […]

  8. […] out that roller coaster energy prices do not make oil more attractive to investors, in fact, more knowledgeable observers than myself have pointed out oil “volatility sells Teslas”. Wait till all the suckers that ran out to buy SUVs during the recent price plunge see what happens […]

  9. […] very, very, expensive to do business here. With the global price of oil falling, and many observers predicting continued low prices, its not going to get any easier to attract investment in this area in the near, or medium […]

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