Oil Prices Never Again Above $100 Per Barrel?

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As of this morning the price of West Texas Intermediate (WTI) crude oil has fallen below $47 per barrel - down more than 50 percent since this summer. In an interview with Fox Business anchor Maria Bartiromo Saudi billionaire businessman Prince Alwaleed bin Talal said:

Q: Can you explain Saudi Arabia's strategy in terms of not cutting oil production?

A: Saudi Arabia and all of the countries were caught off guard. No one anticipated it was going to happen. Anyone who says they anticipated this 50% drop (in price) is not saying the truth.

Because the minister of oil in Saudi Arabia just in July publicly said $100 is a good price for consumers and producers. And less than six months later, the price of oil collapses 50%.

Having said that, the decision to not reduce production was prudent, smart and shrewd. Because had Saudi Arabia cut its production by 1 or 2 million barrels, that 1 or 2 million would have been produced by others. Which means Saudi Arabia would have had two negatives, less oil produced, and lower prices. So, at least you got slammed and slapped on the face from one angle, which is the reduction of the price of oil, but not the reduction of production.

Q: Will prices continue to fall?

A: If supply stays where it is, and demand remains weak, you better believe it is gonna go down more. But if some supply is taken off the market, and there's some growth in demand, prices may go up. But I'm sure we're never going to see $100 anymore. I said a year ago, the price of oil above $100 is artificial. It's not correct.

NYMEX

The analysts at the investment bank Goldman Sachs now predict:

West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.

Recall that Goldman Sachs warned back in 2008 of the possibility of a "super-spike" in the price of of oil that would exceed $200 per barrel. That did not happen.

As I have noted before: When contemplating the future of oil prices, one should always keep in mind U.S. foreign service officer James Akins' observation, "Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah." Akins wrote that in 1973.

For more background, see my recent article, "How Low Can Oil Prices Go?"

Comments

[Counterfly]

If oil is that cheap, we can't afford NOT to tax the hell out of it.

[brokencycle]

My liberal friends have been getting a lot of mileage out of Krauthammer and some other conservatives who are now endorsing an increase to the gas tax.

[freeforall232]

One step ahead of you:

http://www.tennessean.com/stor...../20663975/

[JEP]

That's what Europe does! USA is soooo behind the rest of the world.

If we start taxing gas like Europe does, then our healthcare and education problems will all be solved. We'll start speaking in accents that make people assume that we're intelligent, our companies will design better cars, and all our cities will all of a sudden feel like they're steeped in history and had smart people living in them hundreds of years ago.

[UnCivilServant]

Our cities did have smart people living in them hundreds of years ago. They've since been restocked with dipshits.

[JEP]

Oh I know, I think it's just a combination of "the grass is always greener" and romanticizing European culture that makes people overlook the the positives that American culture does have.

[LynchPin1477]

For some reason, many Americans seem insecure about our culture, despite it being more dominant than any other culture throughout history. I admit that I fall victim to this. I guess I'm a sucker for fancy buildings and long traditions, but it really is silly of me.

[JEP]

Yep, I'm prone to it as well. There was a thread last week about how modern architecture is basically shite.

With the proliferation and availability of information, I think something was lost in that it's difficult for culture to develop in pockets any more. Instead of emulating the people around you, you can choose to emulate people half way around the world.

I grew up in Alabama for 18 years, and escaped without any kind of an accent. I think because I watched TV and decided to imitate those accents instead. When I was in Amsterdam, most of the waitresses I talked to had perfect American or British accents because they get American and BBC television there.

This is purely my opinion, but it makes sense that if the internet(and technology in general) allows groups like libertarians to find people who think similarly (allowing a minority to group together) then it's just as easy for conformity to spread as well.

[LynchPin1477]

The Fountainhead really changed the way I look at architecture, but it still requires effort on my part. I think the newest architectural styles are good, but the brutalism and concrete box style of the 60s and 70s is just awful. And even in modern architecture, there is a certain craftsmanship that is missing. That is what I miss the most.

Your point about conformity is a good one. Style aside, it would be nice if you could look at the skylines of American cities and readily distinguish between different regional styles. I certainly can't.

[Swiss Servator, Winter...jetzt]

"The taller buildings, nearly all of them abandoned, were built in that ever-present Third World wog moderne style, cement puns on Le Corbusier."

[Jerryskids]

I remember reading an expert opinion about 18 months ago, in a column urging higher fuel taxes, that gas prices were headed for $5 per gallon and we would never again see $3 per gallon gas. I'm guessing that since higher prices are a good time to raise fuel taxes, lower prices will be seen as a good time to raise fuel taxes. If prices stabilize and remain steady, that will be a good time to raise fuel taxes as well.

[John]

We must raise fuel taxes. I mean my God, average people are seeing things get a little better thanks to this. And we can't have that. They will just take that money and do vulgar and uncontrollable things with it. Only the rich and connected in Washington and Wall Street are fit to have disposable income. We need to get out there and confiscate this windfall from people for their own good.

[robc]

Im no expert, but when oil was at $150, I predicted it would see $50 again.

I might have even said $30, I dont remember.

[Zeb]

Will we see $500 gold again?

[Swiss Servator, Winter...jetzt]

Shriek insisted it would be $300-600 an oz., some months ago. I am quite sure he has reaped a huge windfall with this accurate prediction!

[Francisco d'Anconia]

I'll go out on a limb and guess it'll stabilize around $70 in the next year and a half, provided no external interference.

[John]

If I knew how to predict such things, I would be very wealthy, which I am not. So, I can't say you are wrong. I do think that it will fall even further. The demand for oil is very inelastic. It takes a while for people to adjust to a new price. So that means that when the price falls, demand doesn't go up very much and it keeps falling just like it keeps rising when it starts to rise.

[Bobarian (Mr. Xtreme)]

One of the things that drove the fall in prices is the surge in supply vis-a-vis fracking and shale oil.

The cost of extracting by those methods means a floor of somewhere around $60 to remain profitable (last figure I saw). Improvements in the process may have driven this number down, but whatever that figure is, I think that will be the stabilizing point.

[Bobarian (Mr. Xtreme)]

This also brings up the question of NG.

The abundance of NG is a side effect of these other methods. I expect NG prices to start rising now, in order to find an equilibrium with oil prices.

Any petro engineers who could comment?

[Overt]

Interestingly, in many wells, they burn off the Nat Gas because it is just so uneconomical to capture and transport it. There is just so much natural gas, that I don't see any reason for it to measurably increase in price. There are so many wells out there burning it off that each time there is an incremental increase in price, dozens of wells will start capturing (because it is now economical) and supply will go up higher.

Some states are passing laws to prohibit burning off natural gas. So now they are just pumping it back into the well, which should help keep the oil yield higher.

[Francisco d'Anconia]

No expert, by any means, but I think if NG catches on and starts replacing oil it will have the effect of keeping energy prices low in general. As it is, the Saudis can control the price of oil at the spigot. If there is an alternative to oil, there are now multiple spigots. They turn theirs off, someone else opens theirs up.

Competition brings prices down.

[LynchPin1477]

But it would take a long time to replace all the infrastructure that supports oil, or even to build up a NG infrastructure along side it. 10-20 years seems like a minimum. Are any producers, of oil or NG, confident enough in future trends to actually make that long switch?

[Overt]

Are any producers, of oil or NG, confident enough in future trends to actually make that long switch?

It isn't just about confidence, it is also about interests. We get NG from our oil wells. So the guys you would expect to put a bunch of money into the NG Infrastructure are the same guys who would lose money on oil sales as natural gas displaced it. There isn't a lot of incentive for them to replace Oil- which has challenging margins right now- with NG which has even worse margins.

This isn't a conspiracy or anything, it is just a fact of the economics of this business. And I'm not saying NG is going to remain low demand forever. Where it doesn't really compete with oil, it is going to continue to grow. That includes power generation (where Coal is the competition) and agriculture as well as some residential growth.

[Overt]

NG is used in most homes west of the mississippi and a huge amount east. It is also used in a lot of peak power generation. Natural Gas is also the major ingredient (via the Kreb cycle?) for commercial fertilizer. There is already a pretty nice sized demand for it.

The only two areas we could see significant growth for Nat Gas is in energy production (NG constitutes about 30% of energy today) and Auto transportation. Energy usage could maybe increase by 50% to 45% of US consumption, but Autos is really a hard one just given how much infrastructure has to change.

The short story is unless we see people dropping big dollars on new NG power generators or massive NG gas station distribution networks, I don't see any major switchover to NG that will cause it to grow in massive amounts that drive up the cost of NG. As I said before we are burning it or putting it back in the ground because it is so cheap. Most likely, demand will continue to move incrementally, and pricing will stay relatively low. But, I'm probably wrong so, yeah.

[Scruffy Nerfherder]

I thought about half of natural gas went into plastics.

[Overt]

I'm not sure about that. I'm pretty sure plastics- if they use NG falls- under industrial uses, which would be shared with fertilizer creation. And that, in total represents around 27% of total demand.

[Zeb]

Seems like it would be fairly easy to make more NG filling stations for cars, at least in places where there are already gas lines. Though I suppose you still have to compress it for the car tanks.

[Francisco d'Anconia]

I read $50-55, recently and an "oil guy" told a friend of mine it was more like $45.

Regardless, it will dip below that and drive some of the frackers out of business, decreasing supply and bringing the price back up to somewhere in the middle.

However, the current drop will also spur efficiencies in the process which drives prices lower.

In the end, competition is a good thing. We'll end up somewhere in the middle of $40 and $100, which will be a welcome relief from $100-$110.

[John]

The long term question is how cheap can technology make fracking. Whatever the cost of fracking, is probably going to be the long term floor of oil prices.

[Overt]

The good news is that fracking depends on SOOOO many technologies, that improvements can be made anywhere.

I've been watching fracking over the past 5 years here in Colorado, and you've seen so many changes in what they are doing. Wells just 5 years old look totally different than ones being put in today. Previously, the drilling operations looked like a couple pickups pulled up around an old flatbed with a drill on it. Now, there are dozens of trailers pre-sited, dropped in place, and baricades are built, around the clock lighting in place. Additionally, they are moving from trucking oil from wells to slowly building pipe-based distribution to collection centers.

The $60/barrel floor that you see discussed with fracking includes everything from drilling to maintenance to distribution and refinement. Everything from materials technology to logistics management to human resources impacts that pipeline. It has a ways to go before it hits a floor.

[Warren's Strapon]

The $60/barrel floor that you see discussed with fracking includes everything from drilling to maintenance to distribution and refinement.

This. Drilling is really the technology that is improving like gangbusters.

People talk about fracing, but that isn't the main technology that changed extraction*. Fracing is old technology. It's the horizontal drilling capabilities that really changed things. What once would have taken a dozen wells to extract can now be done with one.

*Yes, fracing tech is improving, too. More a follower than a driver, though.

[R C Dean]

Bobarian, you are on target.

Costing and pricing wells is a tricky biz. Generally, if you drill a well that you think is going to need $80/bbl to break even, you keep producing no matter what the price is, because when you are producing the marginal cost of each bbl is quite low.

That said, the "cost" per bbl of a new well is a pretty good indication of the cap price, roughly and given time lags in the markets.

The current low priced oil is probably below the cost of bringing a new bbl to market, so I expect the price to rise. When and how fast depends, mostly, on the global economic demand for oil.

[Malkavian]

"But I'm sure we're never going to see $100 anymore."

So... This means it will go to $100 very soon? Usually, you take expert predictions, and invert them to get reality.

[HeteroPatriarch]

Never is a big word.

[UnCivilServant]

Especially since at some point $100 will be worth the $40 of today.

[Sevo]

UnCivilServant|1.12.15 @ 12:19PM|#
"Especially since at some point $100 will be worth the $40 of today."

Pre '70s gas was $0.30/gal. According to this site, ( http://inflationdata.com/Infla.....ulator.asp ) that means $1.60 in 2014.
If we subtract the taxes added since then, I'm saying we have the cheapest gas I've ever seen.

[KDN]

Not quite. When I first started driving (2000), gas was between $1.00 and $1.10. $1.25 back then is the equivalent of $1.70 today, but gas is currently at $1.95 - $2.05 with equivalent taxes (NJ hasn't raised the gas tax in 25 years, and a potential increase is quite unpopular).

[Zeb]

Not too long before that it was often below a dollar.

[The Late P Brooks]

I think there is a noteworthy currency effect at work here, but increased supply and reduced demand cannot be ignored by the commodities markets forever.

[Spencer]

I'm sure it's because of cash for clunkers. We'll here that in the next cycle. Oh, and green energy and the Nissan leaf.

[The Late P Brooks]

PEAK OIL!

[Francisco d'Anconia]

Literally, loled.

What percentage of predictions about the future EVER become reality? Let's count.

Well, there was Peter Schiff. And Peter Schiff. And...hey...wait.

I think we need to throw trillions of dollars at Climate Change.

[Sevo]

Francisco d'Anconia|1.12.15 @ 12:28PM|#
"What percentage of predictions about the future EVER become reality?"

J. P. Morgan: "The market will fluctuate."

[Zeb]

Peak oil is an absurd concept because of supply and demand. Venezuela might encounter peak oil because they are idiot socialists, but the world will not see peak oil as a whole. If supplies do start to dry up, prices will rise and people will switch to other things.

[JW]

Curse your speedy and prompt fingers.

[LL85]

Relax. The peak oil people are wrong. Plenty of carbon down there. What's right is that the age of oil is coming to a close. The important number is Energy Rate of Return. That number just keeps falling. It will get to "checkmate" and so we better be researching alternate fuels.

http://8020vision.com/2011/10/.....roduction/

[sarcasmic]

I figure the price will keep bouncing around. When it gets low like this, then there is less of an incentive to extract the oil that is hard to get to. Deep water, shit like that. So will less exploration, supply will remain stagnant or drop. That will cause the price to go up, which will mean more exploration in places where it's expensive to extract. This will raise supply which will cause the price to come down....

[John]

The thing is that big projects like that are years in the making. So, they don't stop once started because of a drop in prices.

[sarcasmic]

How does that contradict what I said?

When the price comes down there isn't an incentive for new expensive projects. Eventually that will affect supply.

[John]

It doesn't. I was agreeing with you. Sorry I didn't make that clear.

[Malkavian]

What will be interesting to see, is when Saudi Arabia will net out. A couple of years back, they were consuming 25% of their production, and that number was climbing fast (both population growth and quality of life improvements). Wonder if they will stabilize, or keep consuming til 100%.

[OA-5599]

But, but, Peak Oil! I'm so emoootionally inveeested in my belief in imminent doomsday that my life has no meeeeaning anymore if oil prices don't keep going straight up and we don't all starve. Now what will I do?

[Francisco d'Anconia]

Get a job? 😉

[JEP]

To be fair, that isn't the easiest thing to do right now...

[Pro Libertate]

What? In this boom economy? The greatest in the history of this sector of the galaxy? You musty be kidding.

[Pro Libertate]

Er, mustily.

[Sevo]

Ixnay on the mustily

[LL85]

Peak oil is wrong. We will never run out of it. What we will run out of is economic oil. Fracking schmacking. The energy rate of return of each new thing has been consistently declining. Oil goes low when the economy goes down, then limits it's upside by going up too much. We are already deep into the end game.
See the energy rate of return:
http://8020vision.com/2011/10/.....roduction/

[Pro Libertate]

Never is a long time. This kind of statement reminds me that the Democrats were going to control the government forever. Or was that the Republicans? I can't really tell the difference without special glasses.

[$park?'s head exploded]

They make contacts now that don't cause headaches like the glasses did.

[Pro Libertate]

My problem is all of the spinning they do with the lenses. Makes me dizzy. I don't know how people wear them all of the time.

[bassjoe]

It's called the Permanent Duopoly Super-Super-Super Majority.

[bassjoe]

"Never" is a really long time.

We are in the midst of an oil glut (because of high OPEC and US production) as well as in the beginning/middle of a very strong bull market for the dollar. Those things are working together to keep the price of oil relatively low.

Despite that, any number of things can easily double the price of oil in a relatively short period of time: poor earnings or sustained losses can force American shale producers out of business; a terrorist attack in against a major OPEC country's distribution system; the FED surprising us with another round of quantitative easing; etc.

[Suthenboy]

It is very difficult to make accurate predictions, especially about the future.

[Sevo]

Not in the USSR!
There, you couldn't change the future, but you could change the past!

[albo]

We are all interested in the future, for that is where you and I are going to spend the rest of our lives. And remember, my friend, future events such as these will affect you in the future

[robc]

Gold/Oil ratio: 24.5

That is above 20 so for its an opportunity to go long oil and short gold (dont choose just one).

Or, you know, explain why this time is different.

Or, dont bother, because this kind of investment isnt for you (my personal strategy).

When the ratio is below 5, you go the other way, long gold and short oil. Between 5 and 20 is normal.

[LL85]

Energy rate of return on oil has been falling. So, yes. Go long on oil and then pray we research our way to some other dense fuel source. Good old govenrment can save our butts by putting a boat load of money to get us out of this trap.

http://8020vision.com/2011/10/.....roduction/

[Bill Dalasio]

Count me in the "never is a long, long, time" camp.

The fact is that people are inclined to project current trends indefinitely. The world doesn't work like that. Oil prices will eventually break $100 on the upside. In our lifetime. All we need is a pick-up in demand.

This time is not different.

[Bobarian (Mr. Xtreme)]

$2.00 is all it takes for me to consider going back to the V8 as a daily driver.

Or for GM to start making Hummers, again, or civilian versions of MRAPs...

[Cytotoxic]

I am not convinced oil prices are coming back. Natural gas prices fell along with oil in around 2009 and they never came back. I think it's oil's turn.

[albo]

Recall that Goldman Sachs warned back in 2008 of the possibility of a "super-spike" in the price of of oil that would exceed $200 per barrel

Why is it that so many 'experts' who work in markets every day seem to know so very little about how markets react and work?

[JEP]

It's the equivalent of the "do something, anything" attitude that politicians have.

When people have a problem, they want to hear someone say "I completely understand your problem, and I have the perfect solution for you. See, it's all backed by these numbers, data, and equations that you don't understand."

It's the modern day equivalent of selling snake oil. Most people today are not confident in what they know and understand, so when someone comes along that has a bunch of letters after their name, they default to their opinion.

[Francisco d'Anconia]

When people have a problem, they want to hear someone say "I completely understand your problem, and I have the perfect solution for you.

But I really DO have a solution...

It's called the free market.

[MSimon]

Sometimes the people with a lot of letters after their name wind up with a lot of numbers after it.

[Lost_In_Translation]

Prices are a lagging indicator. Alot of what is coming on line now driving prices down was sanctioned atleast 2 years ago. We're in for a lag for the next year or so at the least before budget cuts turn into production decline forecasts and the market sees how drastically shale production declines compared with previous production wells. At that point I anticipate oil will bounce back. There is no fundemental change in the success of independents or NOC's to sustain a

[Lost_In_Translation]

So reason has a really low character count limit now. Blech.

Essentially I'm trying to say fracking is not magic and is expensive and no one can make money in the current environment at less than $60/bbl oil, $3/mmscf gas, so rebalances will come and force oil and gas back up above these values. And $100/bbl oil is not "never" coming back, its definitely coming back and sooner than the idiot talking heads are predicting this week (next week I'm sure they'll say it will be back by christmas, in order to be wrong on both ends of the time spectrum.

[juanitakwilliams]

my roomate's half-sister makes $69 hourly on the laptop . She has been without a job for 10 months but last month her check was $15722 just working on the laptop for a few hours. why not look here...........
????? http://www.netjob70.com

[Paul.]

Looks like the peanuts and oil bugs are gonna have some explaining to do!

[LL85]

Just the fact that he said it will never go back to $100 probably means that the smart money would be to take out call options on the current price. I'm guessing it will be back at $100 in several years. Good time to buy oil stocks probably.