Drop in Oil

[dougstove]

Following earlier threads here, I am wondering if we are watching a battle to determine who gets to supply the twilight of the oil age.
If prices stay low, long enough, will the high extraction cost reserves be left stranded, as we replace oil with other sources?
There is a good article in the Economist on related topics.
This could be the breathing space we need to solve alot of problems.
Indonesia just used the drop in oil price to eliminate fuel subsidies, freeing money for better uses.
India could follow.

I would be very happy to stop sending money to benighted cultures that hate us.

 

[valuman]

There are a lot of possible ramifications from the reduced price of oil we're currently seeing. Unfortunately, one of those is sure to be increased consumption at a time when we should be focused on continuing the reduction of our consumption. As much as I'm enjoying the money that stays in my pocket, I wonder how this might impact the continued development of EVs and more efficient combustion engines. Personally, I'd love to be able to stop using any oil at all in my personal heating/cooling/transportation modes and hope that possibility will exist in my lifetime.

 

[woodgeek]

Bottom line: the only struggling oil producers will be frackers in the US and oil-sands guys Canada. Those that go bankrupt will default on their debts to their counterparties, who are the TBTF US banks. The assets of bankrupt frackers (shut off wells) will prob be sold to the US majors for pennies on the dollar, who will revive the fields as soon as the price bounces back up (as it will, global conventional production is inadequate). If the TBTF banks lose too much money (i.e. the price undershoots too far for too long) then they will be bailed out by you and me.

Net effect: Fracked assets developed using money that comes from the US govt bailout or Fed gets given to the oil majors for pennies on the dollar. Everyone wins!

 

[valuman]

Yes, there's a pretty serious financial consideration to this as well. Everybody wins? I'm supposing that's a facetious statement. Right?

 

[woodgeek]

Indeed. Or if the frackers are 'well managed' they can just hunker down until prices recover, and then resume operations with minimal financial drama. And prob at a price point significantly below $100/bbl.

The 'not well managed' frackers should be bankrupted and their assets auctioned off. And if the the TBTF banks are 'well managed' they can eat the loss.

Etc.

 

[woodgeek]

There are a lot of possible ramifications from the reduced price of oil we're currently seeing. Unfortunately, one of those is sure to be increased consumption at a time when we should be focused on continuing the reduction of our consumption. As much as I'm enjoying the money that stays in my pocket, I wonder how this might impact the continued development of EVs and more efficient combustion engines. Personally, I'd love to be able to stop using any oil at all in my personal heating/cooling/transportation modes and hope that possibility will exist in my lifetime.

EVs are continuing strong sales. Gas-burning hybrid car sales are flat to down, being hurt by gas prices on the financial end, and EVs on the green end.

I got my EV mostly for carbon reasons, and because it was a nice and fun car that was cheap after rebates. With the drop in gas prices, I am saving $70/mo instead of $120/mo. Whatevs, no regrets.

Stated another way, all your cheap gasoline is my fault. You're welcome.

 

[valuman]

Indeed. Or if the frackers are 'well managed' they can just hunker down until prices recover, and then resume operations with minimal financial drama. And prob at a price point significantly below $100/bbl.

The 'not well managed' frackers should be bankrupted and their assets auctioned off. And if the the TBTF banks are 'well managed' they can eat the loss.

Etc.

If they're really well managed they might figure out how to spend their profits and get a bailout too as per your first post on the topic.

 

[valuman]

EVs are continuing strong sales. Gas-burning hybrid car sales are flat to down, being hurt by gas prices on the financial end, and EVs on the green end.

I got my EV mostly for carbon reasons, and because it was a nice and fun car that was cheap after rebates. With the drop in gas prices, I am saving $70/mo instead of $120/mo. Whatevs, no regrets.

Stated another way, all your cheap gasoline is my fault. You're welcome.

Currently, my work car is a 2014 Prius and my personal car is a 2010 Jetta TDi that has been a fantastic vehicle that I've put 140k on since buying it new. My dream work car is a Model S and I'm holding off on buying a Tacoma pickup to replace the Jetta in hopes that the Chevy Colorado diesel model will be available soon. I hope I'm contributing to the reduced fuel consumption trend too!

 

[begreen]

A couple other countries have already used the drop in oil prices as timing to cut oil co. subsidies. Not a bad idea.

 

[vinny11950]

A couple other countries have already used the drop in oil prices as timing to cut oil co. subsidies. Not a bad idea.

Never gonna happen here as our political system is owned by big money. The industry will go away before those subsidies are cut.

 

[Ashful]

Following earlier threads here, I am wondering if we are watching a battle to determine who gets to supply the twilight of the oil age.
If prices stay low, long enough, will the high extraction cost reserves be left stranded, as we replace oil with other sources?

A little early to be calling the curtain, no? My eye still sees an upward trend.

 

[woodgeek]

The majors have little exposure to the fracking business, but are drooling at the prospect of buying already drilled holes for cheap.

 

[BrotherBart]

Exxon got up to their butts in fracking when they paid $41 billion for XTO in 2009.

 

[woodgeek]

I wonder if XOM considers that a significant exposure....

 

[Jerry_NJ]

Has the price for heating oil dropped anywhere near what we've see for gasoline? I'm still working on paying off my geothermal heat pump investments....working now on my Waterfurance replacement - I think the first one paid off during its21 year life. Heating oil at$3 a gallon was easy to beat with the geo heat pump. Heating oil at $175 may be hard to beat on cost per BTU

 

[begreen]

I wonder if XOM considers that a significant exposure....

http://www.nytimes.com/2015/02/03/b...ent/exxon-mobil-q4-earnings-decline.html?_r=0

 

[iamlucky13]

If prices stay low, long enough, will the high extraction cost reserves be left stranded, as we replace oil with other sources?

Definitely not. The low prices will last six months to a year. If I'm badly wrong, it could be as much as two years before we're back in the $80-120 per barrel range where oil shale and tar sands make healthy profits. That's still nowhere near enough time to displace them.

2014 EV sales were about 120,000 cars in the us (source). Total US car sales were about 16.5 million (source). That puts EV sales at less than 1% of the current market, and in the ballpark of 0.1% of the current fleet.

The growth is very rapid so far, but even if the trend stays in the high double-digit range (more likely it will taper off to low double-digit as the market matures), we're still talking at least a decade before half the cars being sold are electric, and the overwhelming majority in service will still be internal combustion at that point. Besides, the electric grid can't absorb that much growth that fast.

Biofuel growth, meanwhile, has slowed significantly, and is not going anywhere until oil prices go back up.

Meanwhile, the low oil prices remove the biggest incentive for users to switch to other sources.

 

[woodgeek]

2014 EV sales were about 120,000 cars in the us (source). Total US car sales were about 16.5 million (source). That puts EV sales at less than 1% of the current market, and in the ballpark of 0.1% of the current fleet.

The growth is very rapid so far, but even if the trend stays in the high double-digit range (more likely it will taper off to low double-digit as the market matures), we're still talking at least a decade before half the cars being sold are electric, and the overwhelming majority in service will still be internal combustion at that point. Besides, the electric grid can't absorb that much growth that fast.

Agree with the EV growth curve projection, but not with the grid limitation. When people get a 'charge cheaper at night' option then a significant portion of EV owners do just that (built in charge timers are already common), so peak load on the grid is not higher. Of course that energy production still needs fuel, like natgas at the utility....but gasoline production already consumes a LOT of energy: natural gas and other light components (like ethane, propane, etc) at the refineries are used for process heat and to generate elec on site to run pumps, etc. If the light compounds currently used to produce gasoline were switched to making electricity off peak for EVs, it would offset more than 50% of the required energy mile for mile replacing an ICE vehicle.

The amount of energy used for light vehicle transportation looks like a significant fraction of the total energy used by the economy, but drop the required energy used per mile by 75% as in an EV, and it isn't really that much. Running my EV 10,000 miles/yr is increasing my home elec bill by ~20%.

 

[jebatty]

Seems to me that the drop in oil prices will have little effect on the growth of PV and that cafe standards for cars and trucks will push the market for EV regardless of the drop in oil prices.

 

[woodgeek]

Since the price of gas only really dropped dramatically in December (with associated media attention) it is still too early to say what will happen to EV sales (latest comprehensive figures are for November). Regular hybrids (i.e. Prius) sales have been flat lately, IMO because EVs are eating into their sales on the efficient end. Conventional wisdom (that I agree with) is that hybrids will sell weakly with cheap gas, but EV sales will just plow through. We shall see shortly.

 

[dougstove]

I am still thinking this could be a play by the Saudi's to retain a bigger fractional slice of a static or shrinking pie.
Afterall, oil is their only option to fund a transition to some other future.
Remember China is huge, and if they make a policy decision towards electric, they can turn on a dime.
Likewise India is an immense market that could leapfrog the ICE.
I suspect there is also a geopolitical dimension, in that the Saudi/USA co-dependency is critical to the Saudi regime, and to alot of rich (=lobbyist) people in the USA.
An oil-independent USA would disrupt alot of applecarts.

 

[woodgeek]

The last time the US of A was a global hegemon, it was still exporting oil.

 

[iamlucky13]

I am still thinking this could be a play by the Saudi's to retain a bigger fractional slice of a static or shrinking pie.
Afterall, oil is their only option to fund a transition to some other future.
Remember China is huge, and if they make a policy decision towards electric, they can turn on a dime.
Likewise India is an immense market that could leapfrog the ICE.
I suspect there is also a geopolitical dimension, in that the Saudi/USA co-dependency is critical to the Saudi regime, and to alot of rich (=lobbyist) people in the USA.
An oil-independent USA would disrupt alot of applecarts.

It does seem to be a Saudi-led dumping tactic. The current low prices are certainly not in their long term interest, since they depend on oil revenue to fund public works projects to placate their subjects. Monarchies can be expensive to prop up.

But they can presumably take a hit now, drive a number of the US and Canadian companies (and maybe some of the European and Australian producers, too) out of the business, and then return to "normal" for a few years while the newer sources regain the courage to risk their money in a volatile industry.

On the geopolitical angle, the US does not benefit from political instability in Saudi Arabia, which could result from low oil prices. Nor do many rich lobbyists in the US benefit from low oil prices - most of them are losing a lot of money right now. However, there has been suggestions, not given much discussion so far, that Saudi Arabia is also looking to hurt Russia, perhaps at the US and European behest, or perhaps just because Russia is their biggest non-OPEC competitor.

The US and Europe would arguably like to exert more pressure on Russia to stop meddling in the Ukraine, but oil sanctions are basically out of the question for Europe, which depends heavily on Russian oil and gas. But Europe's appetite for oil and Saudi Arabia's desire to limit competition might combine with political concerns about Russia to overcome any qualms in the middle east over OPEC's current policy.

 

[dougstove]

Currently, the only reason for the USA to pay attention to a regressive, oppressive monarchy in the middle east, is oil.
So the Saudis rely upon oil to maintain the protection by the USA.
An oil-independent USA could largely ignore Saudi.
But there are also significant economic actors in the USA profiting handsomely from the current Saudi/USA interaction, and they would be disrupted if/when the USA becomes energy independent again. To be cynical (remembering Eisenhower) the current arrangement supports alot of arms dealing as well.

The 'natural allies' of the west in the Middle East are Turkey and possibly Iran. Iran is currently something analogous to England in ~1600; an authoritarian church supported ruler, but at least the structure and some of the function of a nascent democracy. I can dream they could evolve back into a representative government system. Current mania aside, they also have some heritage of reasonable inter-religious relations.

Saudi has no natural cohesion, just a personal autocracy under a family that assembled territory through conquest and marriage, propped up by a sick deal with religious extremists. It is not a nice place.

On the bright side, think the USA is (once again) going to win the geography jackpot, because your deserts are a great opportunity for solar, with relatively low NIMBY resistance.
5 years ago, I was worried about desertification hitting your crops hard, but now solar farms might take over some of the drying areas.

Sorry to ramble, off work today.

 

[woodgeek]

I am no expert of middle east politics or cultures, but I know that if we wanted to get to oil independence via fracking, it would cost another ~$1-2T up front, and would last 5-10 years or so.

The only long-term solution to the oil problem is renewables. $1-2T would buy a lot of renewables and grid infrastructure and EV incentives.