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End Game For Oil? OPEC Prepares For An Age Of Dwindling Demand

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Much like the carriage salesman of the Horse & Buggy days; today's major players in Oil probably don't see or don't Want too see the light at the end of the tunnel. Because it's not a tanker comin into port to fill up for distant lands. Rather it's the beacon of a new wave of transportation technology comin down the proverbial road too displace Oil; much as the steam train an early autos 'displaced' the Horse & Buggy...  

My only concern with any 'change' is Let the Market determine the 'winner'...  Not some ecofreak or politico who 'decides' for us.

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I have been told no less than 6 distinct times over my 40 year career th

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This

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Oil will be here for the next 20+ years 

you dreamers keep dreaming 

I am going to buy production at the bottom and watch the price rise!!!

you guys keep dreaming of a green source that actually is cheaper!

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On 7/29/2020 at 8:07 AM, Adam Varga said:


OPEC is analyzing how to manage oil supplies with producers seeking to keep their weels running and protect their market share, amid a fall in daily crude consumption. 

https://www.reuters.com/article/us-global-oil-demand-insight/end-game-for-oil-opec-prepares-for-an-age-of-dwindling-demand-idUSKCN24T0KT

 

This is a very common but flawed idea. OPEC (and anyone else sitting on proven reserves) is not trying to "protect market share". They are trying to maximize absolute profit. You "maximize market share" by reducing your price, but that does not necessarily maximize your profit.

At some point (in the future?) the total proven reserves will exceed the estimated total remaining demand for crude oil, and a race to the bottom will ensue. Sources with higher marginal cost of production will be written off and P&A'ed. We have seen a small taste of this this year, with Oil Majors writing down the book value of their reserves.

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42 minutes ago, Dan Clemmensen said:

At some point (in the future?) the total proven reserves will exceed the estimated total remaining demand for crude oil, and a race to the bottom will ensue.

Dan - this same idea has been repeated ever since they started recovering oil in quantities. However, although there must be an  end point it is possible that it is so far away as to be meaningless in human terms. When oil prices spiked back in 07-08 I think it was, forecasters tried claiming that oil production was at a peak. Then the fracking revolution happened and they discovered deep oil deposits off Brazil and in the Gulf. There are also huge deposits of shale oil which would, admittedly, be very expensive to access. If producers are really desperate it's also possible to convert coal to oil (Germany did this in WWII). A couple of academics have tried claiming that there will be a hydrocarbon peak (coal plus oil), but the reality is that there's so much coal no-one's bothered to count it properly.   

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(edited)

1 hour ago, Dan Clemmensen said:

This is a very common but flawed idea. OPEC (and anyone else sitting on proven reserves) is not trying to "protect market share". They are trying to maximize absolute profit. You "maximize market share" by reducing your price, but that does not necessarily maximize your profit.

At some point (in the future?) the total proven reserves will exceed the estimated total remaining demand for crude oil, and a race to the bottom will ensue. Sources with higher marginal cost of production will be written off and P&A'ed. We have seen a small taste of this this year, with Oil Majors writing down the book value of their reserves.

Respectfully we have been and are still a race to the bottom. Todate there has been little published analysis on the depth of demand destruction. Frankly why would one want to, is it going to bounce?  The better question is how long will it take to rebuild societies back to precovid levels. And that will be a very long time. Until then it will be who servers that diminished pool and the Saudis are doing the best to clean the swamp so to speak.

Edited by Eyes Wide Open

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12 minutes ago, markslawson said:

Dan - this same idea has been repeated ever since they started recovering oil in quantities. However, although there must be an  end point it is possible that it is so far away as to be meaningless in human terms. When oil prices spiked back in 07-08 I think it was, forecasters tried claiming that oil production was at a peak. Then the fracking revolution happened and they discovered deep oil deposits off Brazil and in the Gulf. There are also huge deposits of shale oil which would, admittedly, be very expensive to access. If producers are really desperate it's also possible to convert coal to oil (Germany did this in WWII). A couple of academics have tried claiming that there will be a hydrocarbon peak (coal plus oil), but the reality is that there's so much coal no-one's bothered to count it properly.   

Sorry, no. Your examples were for supply-limited "peak oil", and you correctly point out that new cost-effective supplies were developed. I'm discussing demand-limited "peak oil", which is a completely different phenomenon. For the former, oil price goes up to infinity as the last drop of oil is produced, while the world desperately tried to shift to alternatives. For the latter, producers are stuck with the mother of all stranded assets and the price goes to zero, as the world moves to cheaper alternatives.

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2 minutes ago, Dan Clemmensen said:

Sorry, no. Your examples were for supply-limited "peak oil", and you correctly point out that new cost-effective supplies were developed. I'm discussing demand-limited "peak oil", which is a completely different phenomenon.

Oh I see, I did misread you - my apologies - but the peak demand is just as wrong as the peak supply stuff, as has been pointed out often enough. While there certainly is a lull in demand at the moment, there is no indication of the peak you are hoping for. 
Cheaper alternatives? What cheaper alternatives? If you mean electric vehicles you are in for a grave disappointment. Among other problems, about half oil demand (in the US at least) is from prime movers (large trucks and the like), and batteries can't be used there at all. They take up too much of the load. 

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2 minutes ago, Eyes Wide Open said:

Respectfully we have been and are still a race to the bottom. Todate there has been little published analysis on the depth of demand destruction. Frankly why would one want to, is it going to bounce?  The better question is how long will it take to rebuild societies back to precovid levels. And that will be a very long time. Until it will be who servers that diminished pool and the Saudis are doing the best to clean the swamp so to speak.

I agree completely that Covid-19 has shown us the dramatic race to the bottom by causing its dramatic demand destruction. But this sits on top of the more gradual demand destruction caused by the shift to cheaper alternative energy sources. We do not yet know if the recovery from the pandemic will be fast enough to cause oil demand to reach per-pandemic levels before the more gradual energy shift continues the downward trajectory.  My wild guess is that oil will remain at $40/bbl before finally going away.

It's not clear that the Saudis will be the last ones to quit pumping oil. From a purely economic perspective, they should be, since they have the lowest marginal costs. But they used the OPEC cartel to artificially force the price up to insane levels, and then built a society based on the revenue, and now they are running a deficit. What happens when the money runs out?

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5 minutes ago, markslawson said:

Oh I see, I did misread you - my apologies - but the peak demand is just as wrong as the peak supply stuff, as has been pointed out often enough. While there certainly is a lull in demand at the moment, there is no indication of the peak you are hoping for. 
Cheaper alternatives? What cheaper alternatives? If you mean electric vehicles you are in for a grave disappointment. Among other problems, about half oil demand (in the US at least) is from prime movers (large trucks and the like), and batteries can't be used there at all. They take up too much of the load. 

Elon Musk disagrees with you. I don't know if he is correct, by every time I've been skeptical of his wild-ass ideas I have been proven wrong. He is playing with his prototype and he is installing ridiculously high-power (one megawatt??!) chargers for them.

I think marine bunker fuel uses even more oil than trucks. It is beginning to be replaced by LNG, but that's not a long-term solution since the current super-cheap LNG is a result of the downward price pressure of associated gas from oil wells.

I'm not exactly "hoping" for peak oil demand. Instead, I'm predicting it.

If the US ever goes back to using rail, it's easy to use electricity. Use electric trucks to move the containers to the rail yards. Much of this infrastructure is already in place but would require massive expansion.

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3 hours ago, Eyes Wide Open said:

Respectfully we have been and are still a race to the bottom. Todate there has been little published analysis on the depth of demand destruction. Frankly why would one want to, is it going to bounce?  The better question is how long will it take to rebuild societies back to precovid levels. And that will be a very long time. Until then it will be who servers that diminished pool and the Saudis are doing the best to clean the swamp so to speak.

The abandonment of the city office tower has a big impact on reducing oil consumption short term as commuting is reduced forever, but it has a positive long term effect as the energy efficiency of the city is lost and large scale construction must ensue as this movement of exurbanization proceeds.

We are accelerating the trend that has already gotten us to 55% sub/exurban in the US since it took hold in the 1950s, and accelerated in the1960s.

It will demand more oil than the world we are in now till EVs can be produced at high power and long range at a more reasonable cost so that you are not trying to make a Tesla look like more of a value by comparing it to an entry level BMW. At this point, the plug in hybrid is the ultimate choice, till EVs get there.

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3 hours ago, markslawson said:

Oh I see, I did misread you - my apologies - but the peak demand is just as wrong as the peak supply stuff, as has been pointed out often enough. While there certainly is a lull in demand at the moment, there is no indication of the peak you are hoping for. 
Cheaper alternatives? What cheaper alternatives? If you mean electric vehicles you are in for a grave disappointment. Among other problems, about half oil demand (in the US at least) is from prime movers (large trucks and the like), and batteries can't be used there at all. They take up too much of the load. 

Here I would argue for @Dan Clemmensen's point, as there is a demographic cliff overhanging oil demand, and both EVs for consumers, and LNG/CNG for commercial transport are set to displace a large chunk of the current demand and all of forward incremental oil demand. The CV19 crisis is preventing it from happening earlier as it notched the better part of a year from the conversion, the US may remain neutral, but China is joining Japan and Europe in steadily declining demand as its demographic slide accelerates in 2025 and goes down rapidly from there.

The final frontiers for Emerging Market development are India and Sub Saharan Africa, Indonesia and Philippines. I don't expect any of these to see the scale of foreign investment seen by the former EMs we know. First because their geo-economic position is still of low return and low productivity economies and they do not seem to be on the way to overcoming it with loss making investments from abroad, only China can conduct these in scale, and not for much longer.

Give me either or the 3 remaining regions and we may extend oil consumption at a level rate, give me any 2 and I would concede some demand growth. Give me all 3 and I will laugh my bum off, as I am obviously facing a great comic talent.

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We are looking at decreasing demand because of the pandemic and increasing debt. That's why back in 2005, it was believed that oil demand would rise to 115 Mbd by 2015, and that producers could easily meet that. Instead, the global economy crashed in 2008, leading to poor economic growth and demand that has barely risen to 100 Mbd. At the same time, producers used more expensive unconventional production to meet even that demand and have been burning through cash flows to cover that due to lower prices. They went through with such investments because they thought oil prices would remain high, even though it was the same high oil prices that led to weak economic growth.

In short, the world avoided an economic crash that would have been caused by peak oil by having an economic crash (and now a pandemic included) leading to peak demand.

Finally, EVs and similar products (which have low energy returns) not only require oil because fossil fuels are used extensively in mining, manufacturing, and even shipping, it will even need more oil if one expects EVs to replace ICEVs and maintain not only global industrialization but even economic growth. Even EVs producers are counting on that as they will invest in such technologies only if there are growing consumer markets for them.

One more point: as explained in another thread, a peak in world population which is claimed by social scientists can only take place if "rapid industrialization" on a global scale take place (according to the same scientists). For that to happen, oil consumption (among others) has to increase significantly, and with it production.

Thus, we are looking at an interplay of forces that most do not understand: basic needs for a growing population where 71 pct earn less than $10 a day can only be assured if there is enough oil to produce them, but if oil prices remain low due to lower demand brought about by decreasing wants for middle class conveniences (around 60 pct of personal consumption worldwide comes from only around 20 pct of the world population), then that oil production cannot be sustained. With too much unpaid debt, some oil producers might even declare bankruptcy. When that happens, even EVs won't be available because they also require oil for manufacturing and even the infrastructure that they need.

Meanwhile, investors put more money in EVs expecting higher demand for that. But higher demand means meeting not just basic needs of the same global population, among others. If more people worldwide don't buy these products, then there's no point in investing in such technology, as there won't be enough sales (and thus profits) to meet growing demand for returns on investment.

I'll let forum members figure out the rest, but I think many will now understand what's taking place.

 

 

 

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9 hours ago, ralfy said:

We are looking at decreasing demand because of the pandemic and increasing debt. That's why back in 2005, it was believed that oil demand would rise to 115 Mbd by 2015, and that producers could easily meet that. Instead, the global economy crashed in 2008, leading to poor economic growth and demand that has barely risen to 100 Mbd. At the same time, producers used more expensive unconventional production to meet even that demand and have been burning through cash flows to cover that due to lower prices. They went through with such investments because they thought oil prices would remain high, even though it was the same high oil prices that led to weak economic growth.

In short, the world avoided an economic crash that would have been caused by peak oil by having an economic crash (and now a pandemic included) leading to peak demand.

Production shifted to unconventional sources because OPEC was a cartel. If oil had been a free market, those unconventional sources would never have been developed. The marginal cost of production of the highest-cost source needed to meet 100 Mbd was never as high as $40/bbl and was probably closer to $35/bbl. Add in a 10% profit and you are still below $40/bbl. But the artificially high price of oil forced the quest for alternatives, first unconventional oil and now renewables. In my opinion this will prevent prices from ever rising above $60/bbl.

The shift from coal to wind, solar, and batteries is only loosely related to the cost of oil. It was initially driven by the Greenies because coal is "Bad", but is now driven by cost per MWh. The costs continue to decrease. This means that the developing world is likely to skip the ICE and go directly to EV, just as they skipped the telephone land line and went directly to cell phones, because build-out of the dedicated gasoline infrastructure needed for ICEs is more expensive than build-out of the shared electrical infrastructure needed for EVs. A super-cheapo third-world EV is cheaper than a super-cheapo ICE and is easier to build and maintain.

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It is amazing to see how self absorbed you are with your opinion so much so that you start making up quotes that you project as facts and 

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Are nothing but opinion 

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23 hours ago, Dan Clemmensen said:

Elon Musk disagrees with you. I don't know if he is correct, by every time I've been skeptical of his wild-ass ideas I have been proven wrong. He is playing with his prototype and he is installing ridiculously high-power (one megawatt??!) chargers for them.

I would agree with you on rail to the extent that its certainly less wasteful than trucks. As for Musk being right. He was an excellent high-tech entrepreneur and has pioneering work in space flight to his credit but the e-car stuff is still more personality than reality. Thanks to him there many more e-cars on the roads than there would otherwise have been but its still s drop in the bucket compared to conventional engines, or even hybrids.. anyway, time to move.. tnks for the discussion.

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19 hours ago, 0R0 said:

Here I would argue for @Dan Clemmensen's point, as there is a demographic cliff overhanging oil demand, and both EVs for consumers, and LNG/CNG for commercial transport are set to displace a large chunk of the current demand and all of forward incremental oil demand.

ORO - I can see where you're coming from but you're taking indications of changes in some markets and assuming a a broad movement. I would be happier about accept the idea if any of this could be seen in the figures for oil demand but it can't. see this graph from the IEA. Where is the decline? This point about trucks switching to LNG has happened before, but it has petered out. China is pushing for it because it has gas but no oil so some change will happen there, but the country's freight task is also increasing enormously, so it would be possible for a lot of trucks to convert there and fuel demand still increase sharply. As for the demographic change, it would most likely be swamped by GDP growth, once the virus crisis is passed of course..  

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There's two things that I've been wondering for a while.

Firstly the money printing by central banks will/should cause inflation so shouldn't that have an effect on the price of oil since the purchasing power of FIAT currencies will be less?

Secondly I think we're seeing a huge bubble in the markets (hardly a revelation at this point) if it pops then money could flood out of the markets and into commodities (we're already seeing investors buying gold and silver), in 2008 money poured out of the markets and into oil driving the price close to $150.

 

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15 hours ago, markslawson said:

ORO - I can see where you're coming from but you're taking indications of changes in some markets and assuming a a broad movement. I would be happier about accept the idea if any of this could be seen in the figures for oil demand but it can't. see this graph from the IEA. Where is the decline? This point about trucks switching to LNG has happened before, but it has petered out. China is pushing for it because it has gas but no oil so some change will happen there, but the country's freight task is also increasing enormously, so it would be possible for a lot of trucks to convert there and fuel demand still increase sharply. As for the demographic change, it would most likely be swamped by GDP growth, once the virus crisis is passed of course..  

The issue is that you don't have the GDP growth without the demographic driver. That is why you don't get the demand growth. Japan in the 90s and Germany and China in the 2000s relied on exports to produce growth as there was some demographically driven growth elsewhere - like the US. After which Chinese pushed consumption increases domestically, which required gigantic scale infrastructure projects to absorb retirement savings of their boomer demographic and convert them into demand generation. Once that ends, there is nowhere to get growth in existing industrialized countries, including traditional EMs. The remaining demographic growth sources are countries where high upfront infrastructure has to be put up in order to employ and industrialize those countries. They lack natural advantages and in the case of Africa, they are not even remotely close to feeding themselves. On the governance front, their broad corruption prevents investment from abroad from coming in in size.

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23 hours ago, Dan Clemmensen said:

Production shifted to unconventional sources because OPEC was a cartel. If oil had been a free market, those unconventional sources would never have been developed. The marginal cost of production of the highest-cost source needed to meet 100 Mbd was never as high as $40/bbl and was probably closer to $35/bbl. Add in a 10% profit and you are still below $40/bbl. But the artificially high price of oil forced the quest for alternatives, first unconventional oil and now renewables. In my opinion this will prevent prices from ever rising above $60/bbl.

The shift from coal to wind, solar, and batteries is only loosely related to the cost of oil. It was initially driven by the Greenies because coal is "Bad", but is now driven by cost per MWh. The costs continue to decrease. This means that the developing world is likely to skip the ICE and go directly to EV, just as they skipped the telephone land line and went directly to cell phones, because build-out of the dedicated gasoline infrastructure needed for ICEs is more expensive than build-out of the shared electrical infrastructure needed for EVs. A super-cheapo third-world EV is cheaper than a super-cheapo ICE and is easier to build and maintain.

It's the other way round: production shifted because of a free market.

The marginal cost isn't $35 to $40 but $50 to $90. That's why the oil industry took on around $2 trillion in debt (according to the BIS) to increase production and burned through its cash flows (plus sell assets and lay off people) when oil went down. And the fact that production shifted to unconventional production shows that.

The claim that the price of oil is "artificially high" is nonsense. The price of oil is pegged by the market and not by producers. You're mistaking price with cost.

The fact that there are shifts to alternatives is proof that cost is rising. Otherwise, there would be no need to shift at all.

The cost in dollars for renewable energy is going down but energy returns are low. For example, for solar, in lab conditions the return is 30. For nameplate power, it's 6-7. In actual conditions, it goes down to 2-4. Similar problems are seen for wind, etc.

The developing world will not skip ICEs because it has a lot to develop to industrialize, especially infrastructure, just to use ICEs, let alone EVs. The amount of oil it will need for that development plus to mine components, manufacture, and ship EVs will be much more than what is available.

Put simply, the current population uses 20 TW of energy, and that's for a population where 71 pct earn less than $10 daily and where 20 pct are responsible for over 60 pct of personal consumption. To arrive at a "super-cheapo" world where no one is poor, we will need 50 TW, but that's for the current population. To meet the needs of almost 10 billion (which is a bit higher than the predicted peak of 9.74 billion) we will need at least 75 TW. And to achieve that plus minimize environmental damage plus meet middle class conveniences (e.g., not just "super-cheapo" EVs but the nice gadgets and other amenities that are part of a lifestyle dependent on such) around 120 TW.

At best, one report states that we can manage up to 50 TW with all energy sources online. And that's assuming that some one-world government coordinates the global population and ensures that nothing is wasted.

Good luck with that fantasy.

 

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8 minutes ago, 0R0 said:

The issue is that you don't have the GDP growth without the demographic driver. That is why you don't get the demand growth. Japan in the 90s and Germany and China in the 2000s relied on exports to produce growth as there was some demographically driven growth elsewhere - like the US. After which Chinese pushed consumption increases domestically, which required gigantic scale infrastructure projects to absorb retirement savings of their boomer demographic and convert them into demand generation. Once that ends, there is nowhere to get growth in existing industrialized countries, including traditional EMs. The remaining demographic growth sources are countries where high upfront infrastructure has to be put up in order to employ and industrialize those countries. They lack natural advantages and in the case of Africa, they are not even remotely close to feeding themselves. On the governance front, their broad corruption prevents investment from abroad from coming in in size.

This is almost correct. There is a projected net population decrease of 50%  in all "advanced" economies by the year 2100, except one. That is a profound demographic change and will have enormous and unpredictable economic impact.

The exception is the US. The US population is projected to remain roughly the same in 2100 as it is now. The difference: immigration. The US will have the population it needs to maintain its economy and economic growth. If we can assimilate the immigrants, we can also maintain our cultural values, I hope.

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6 minutes ago, 0R0 said:

The issue is that you don't have the GDP growth without the demographic driver. That is why you don't get the demand growth. Japan in the 90s and Germany and China in the 2000s relied on exports to produce growth as there was some demographically driven growth elsewhere - like the US. After which Chinese pushed consumption increases domestically, which required gigantic scale infrastructure projects to absorb retirement savings of their boomer demographic and convert them into demand generation. Once that ends, there is nowhere to get growth in existing industrialized countries, including traditional EMs. The remaining demographic growth sources are countries where high upfront infrastructure has to be put up in order to employ and industrialize those countries. They lack natural advantages and in the case of Africa, they are not even remotely close to feeding themselves. On the governance front, their broad corruption prevents investment from abroad from coming in in size.

@0R0our comments are circling around the same drain. We both are looking at the same writing on the same walls. The very design of the central banking system requires growth to sustain the debt payments. Take away that growth and there's nowhere for the "money" to come from. Governments left to their own devices would follow the Zimbabwe model. Central Banks at least pretend to follow the precepts (such as they are) of economics. But either train can't get off the track we're on heading full speed towards that bridge that isn't there. 

In the old days they could distract the plebes with a nice bloody war, sop up all that excess currency with war production and damage a lot of goods that would need replacement by new industry paying new interest. Unfortunately for that model, war is getting too efficient and asymmetric warfare doesn't match the mayhem of standing armies duking it out toe to toe. Not to mention nukes instead of dukes leading to abysmal losses and no rebuilding. 

We live in interesting times indeed. 

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