By Jeff Sanford
Toronto, Ontario -- September 7, 2015 -- The low price of oil has fallen this summer to a multi-year low of just $40 a barrel. The low price of crude has taken the price of gasoline to the lowest price its been in many years. No wonder the auto industry as a whole is booming this summer.
The U.S. Department of Transportation found the 12-month moving average for miles driven through May 2015 reached its highest level since 1990. The demand for gasoline is the highest in eight years. US auto sales were at record levels this past August. All the extra driving seems to have led to more accidents. Can the price of oil be expected to stay low? It’s a trillion dollar question.
The oil price volatility of the last decade and a half has been intense. The recession of 2008 saw a record price of almost $150 a barrel for crude flare out the modern global oil-fired industrial economy. With gasoline prices at record levels consumers stopped spending. Malls emptied at that time. So the recent low prices have been a welcome break from generally high and damaging prices.
But this past week the price of crude spiked almost 30 percent over just a couple days. Could the price of gasoline be ready to rise again? Is this summer’s driving boom a short-term event? Or is the spike in the price of oil short-lived, a matter of financial speculation among traders?
This is hard to say. There are, of course, a seemingly infinite number of variables that act on the price of crude oil. How the various pieces of the oil puzzle play out is anyone’s guess. But there are some general trends that can be discussed.
For the past several years North America has enjoyed the benefits of a boom in so-called “fracked shale oil.” This is crude that is trapped tightly in rocks and requires expensive, energy intensive processes to extract.
For the past several years this so-called “unconventional oil” has been produced in ever greater amounts. Advanced hydro-fracking technologies have been applied to rock formations like the Barnett Shale and the Eagle Ford play. The effect has been a flood of oil from reservoirs many thought would be unproductive. The frenzy of drilling in these plays has flooded the market with new crude. American production of crude, which had fallen to just six million barrels a day in the mid-2000s, has put downward pressure on the price of crude. The price of gasoline has been low as the refinery system has been flooded with crude.
But as geologists monitoring the shale boom point out, the recent increases in American production may already be at an end. One geologists warning about just such an eventuality is former Ministry of Natural Resources geologist, David Hughes. He is a well-known commentator on energy trends here in Canada. He has released a couple of reports through the Post-Carbon Institute predicting an imminent peak and decline in America shale production.
Hughes spent last summer surveying the one publicly-available data base on well-by-well completions in shale plays in the United States. His conclusions are sobering. The shale wells are depleting far more quickly than traditional conventional oil wells do. The "sweet spots" of the shale plays have now been tapped and drained. As drillers move into less abundant areas of these shale plays the amount of wells drilled will have to increase mightily to maintain production. At the same time these wells are expensive to drill. The companies doing this drilling need a price of at least $60 a barrel to break even. With prices below this, the production will fall off, as drilling shale becomes unprofitable.
This now seems to be happening. Here at the end of the summer of 2015 the American Energy Information Administration is reporting that American domestic production has actually fallen in the most recent reporting period. After several years of increasing production this is a worrying sign, and likely has something to do with the recent upticks in the price of crude. At least some speculators seem to be betting the shale boom is coming to an end.
Last week a Credit Suisse energy economist Jan Stuart, speeking on Bloomberg TV, suggested something similar. He predicts the price of oil was going to rise in the year to come. “I admit, my target looks very ambitious. [But] we think United States crude oil production ends the year below 9 million barrels a day from the 9.6 high.” He went on to mention that declining rates in many of the world’s biggest oil fields found back in the golden age of conventional oil discovery (the mid-1960s) are advancing. Every oil field begins to deplete with the first barrel taken out. Now, after forty years of production many of the massive conventional oil fields found in the golden age of discovery are beginning to deplete at higher rates. At the same time fewer big conventional oil fields are being found. The growth in the industry now is in the unconventional (and expensive) sources like tarsands and fracked shale. Arguably, the price of oil will have to rise to a level that makes it profitable to drill in shale, as some claim, $60 a barrel.
Stuart did claim that one factor that would work to keep the price of oil as low as it is now would be an extended downturn in the Chinese economy. One of the reasons for the unexpected bull market in oil was the sharp increase in consumption of crude in China. In that country vast numbers of new drivers took to the road through the 2000s. The Chinese government built a massive highway system linking every area of the country. just as America built its interstate system in the 1950s. China began to import more oil than it produced. The country emerged as one of the world’s largest oil consumers. The new consumption in the world’s most populous country helped drive the price to that record of almost $150 a share in 2008. But as the rapid growth in China cools, the easing of pressure on the global oil system to provide ever more amounts may be just the thing North America needs to keep motoring this fall of 2015. If the China suffers a sharp downtown the demand for oil there will be tempered, the price of oil can be expected to stay low.