Is there a lack of demand for oil or just over-supply?

[Wombat + 1,028]

https://oilprice.com/Energy/Crude-Oil/The-Unintended-Consequences-Of-Fossil-Fuel-Divestment.html

https://oilprice.com/Energy/Crude-Oil/Oversupply-Adds-To-Grim-Oil-Demand-Outlook.html

We all know that covid has destroyed 8-9mb/d of demand this year, but who would have guessed that supply is projected to reach a new record at the end of next year? Something similar occurred during the last oil crash in 2014. Big offshore projects that take years to construct kept coming online in 2015-2016, adding to the glut. That problem no longer exists, but excessive enthusiasm amongst most oil producers suggests the lessons have not been learned. Will restraint by BP and Shell be enough to offset the coming excess production by Exxon, Chevron, and particularly OPEC+?

[Eric Gagen + 713]

On 9/28/2020 at 5:40 AM, Wombat said:

https://oilprice.com/Energy/Crude-Oil/The-Unintended-Consequences-Of-Fossil-Fuel-Divestment.html

https://oilprice.com/Energy/Crude-Oil/Oversupply-Adds-To-Grim-Oil-Demand-Outlook.html

We all know that covid has destroyed 8-9mb/d of demand this year, but who would have guessed that supply is projected to reach a new record at the end of next year? Something similar occurred during the last oil crash in 2014. Big offshore projects that take years to construct kept coming online in 2015-2016, adding to the glut. That problem no longer exists, but excessive enthusiasm amongst most oil producers suggests the lessons have not been learned. Will restraint by BP and Shell be enough to offset the coming excess production by Exxon, Chevron, and particularly OPEC+?

I am not aware of any major oil producing company which has any interest in restraining oil production - BP and Shell among them.  OPEC does to the degree that OPEC as an organization has any singular goals or objectives, but none of the IOC's do (International Oil Companies).  However your analysis leaves out the sector which has created the oversupply problem even before the coronavirus came up, which is the US shale oil sector led by smaller scale upstream only oil companies.  As a general rule, these companies are heavily indebted, and they need cashflow NOW to make payments.  They won't let up on the gas pedal to keep their production as high as possible unless it produces a reduction in current cashflow.  The moment that oil prices rise, or even show any signs of not falling very much, they increase production as much as they can afford to do so.  This process won't end until they are bankrupt, or until some outside factor causes oil prices to rise so much that they are no longer heavily indebted.  This process will probably take several years to play out with our without a demand recovery, and only then will other factors influence the price of oil.  

[BenFranklin'sSpectacles + 762]

@Wombat

This seems like a distinction without a difference. What am I missing?

[Wombat + 1,028]

11 minutes ago, BenFranklin'sSpectacles said:

@Wombat

This seems like a distinction without a difference. What am I missing?

I suppose it is similar to asking whether a government deficit is just cyclical or whether it is structural and requires a fundamental shift in policy settings to return to balance. What I am really asking is "do you believe the optimists that predict we are just going through another oil CYCLE, or do you believe that BP is correct and that there is a STRUCTURAL imbalance between demand and supply that can only be fixed if the likes of USA, Canada and Brazil actually join OPEC+ and everyone agrees to share in the pain of a shrinking pie? 

[Wombat + 1,028]

On 10/1/2020 at 10:39 PM, Eric Gagen said:

I am not aware of any major oil producing company which has any interest in restraining oil production - BP and Shell among them.  OPEC does to the degree that OPEC as an organization has any singular goals or objectives, but none of the IOC's do (International Oil Companies).  However your analysis leaves out the sector which has created the oversupply problem even before the coronavirus came up, which is the US shale oil sector led by smaller scale upstream only oil companies.  As a general rule, these companies are heavily indebted, and they need cashflow NOW to make payments.  They won't let up on the gas pedal to keep their production as high as possible unless it produces a reduction in current cashflow.  The moment that oil prices rise, or even show any signs of not falling very much, they increase production as much as they can afford to do so.  This process won't end until they are bankrupt, or until some outside factor causes oil prices to rise so much that they are no longer heavily indebted.  This process will probably take several years to play out with our without a demand recovery, and only then will other factors influence the price of oil.  

Thankyou for kick-starting the discussion. I know that it is illegal for the IOC's and the independent shale drillers to form cartels, but if BP is right and oil demand is in structural decline, then USA could be left with a trillion dollars of stranded O&G assets. Somebody will have to blink first, and I doubt it would be OPEC+ with their generally lower cost base? Under BP's "rapid climate action"scenario, where oil demand drops 60% over the next 30 years, do you envision the Texas Railway Commission putting limits on the number of wells that can be fracked each year (similar to OPEC), or do you see a series of wars with the intent of limiting the production of a competitor? Do you believe the USA will say "OK, we can't compete, don't worry about the trillion on oil and LNG and pipelines we spent, or the trillions in potential revenue lost, we will just shut them down because they will never make a profit", OR, do you believe an international ""understanding" will develop such that EVERY producer gradually cuts production at an equal rate in order to ensure they all make a profit as the industry dies, OR, do you think the process will occur in a disorderly manner which may involve a series of wars?

[Old-Ruffneck + 1,246]

49 minutes ago, Wombat said:

but if BP is right and oil demand is in structural decline

Somewhat an oxymoron there. BP trying to bolster prices in any which way they can to offset the Gulf disaster that cost 100 billion plus and in all their good name was thrashed and trashed and I would be have a careful listening ear to what they say.......

Edited October 3, 2020 by Old-Ruffneck
add

[Old-Ruffneck + 1,246]

"IF'' isn't a good word to put in-front of a Company like BP

[BenFranklin'sSpectacles + 762]

18 minutes ago, Wombat said:

I suppose it is similar to asking whether a government deficit is just cyclical or whether it is structural and requires a fundamental shift in policy settings to return to balance. What I am really asking is "do you believe the optimists that predict we are just going through another oil CYCLE, or do you believe that BP is correct and that there is a STRUCTURAL imbalance between demand and supply that can only be fixed if the likes of USA, Canada and Brazil actually join OPEC+ and everyone agrees to share in the pain of a shrinking pie? 

To answer that question, we need to know what affects oil demand. I don't think that's a question oil industry professionals are well-equipped to answer because it depends on non-oil businesses and technologies.

Here's my answer from an engineering and non-oil perspective:
1) Projections of increased oil demand depend on everything going perfectly. I.e. they ignore downside risks, like the coronavirus, recessions, wars, unpredicted technological innovation, changes in user preferences, government interference. Basically, they ignore all of reality. That's useless.

Even in the 1970's, the world displayed a remarkable ability to destroy oil demand. There was no significant innovation or ground-breaking technology; we succeeded by merely paying attention to the problem. Today, a host of technologies are being implemented to destroy oil demand despite low oil prices and wide-scale public apathy (Greenies talk about it, but take no substantial action). If we're transitioning when few people care, imagine the speed of transition if prices were high - prices that have no where to go but up. The potential for oil demand destruction has been badly understated.

When presented individually, a given change looks insignificant.  E.g. who cares if every scooter on the planet will be electric in 10 years, resulting in a 0.5MMbpd reduction in oil demand? I see oil professionals looking at individual changes and dismissing those changes on this basis. They're not seeing the whole picture. Together, hundreds of individual changes could destroy a majority of oil demand. I.e. the question is not, "What happens to oil demand when this one thing happens?" The question is, "What happens when many dozens of technologies enter the market simultaneously, entire continents throw their political weight behind ending oil dependence for geopolitical reasons, and industry collectively directs its attention to using off-the-shelf alternatives because their fuel supply is no longer secured and subsidized by the US Military?" That's our current reality, yet I haven't seen anyone analyze it. My back-of-envelope estimation suggests the scenario we're currently experiencing will destroy vast swathes of oil demand - and quickly. As with every other historical change, people will stand around dumbfounded, wondering who could have predicted such a thing - all while ignoring the decades-long, glacial creep of small changes leading to this pivotal moment.

Technological change always happens faster than mainstream forecasters predict. The overly-optimistic academics and denizens of Silicon Valley may be an exception to this, but I think we can ignore them based on their perverse incentives (academia makes bold statements to gain research funding) and general ignorance (Silicon Valley is full of the young, the naive, the overly optimistic, and the incompletely educated. They're hired for irrational devotion to the cause - not for foresight.). These overly-optimistic forecasters are an irrelevant minority.

By comparison, mainstream forecasters tend not to understand the technologies they're forecasting and have displayed an astounding ignorance of their own, consistent failure. They're also exceedingly lazy. Most projections I've read have answered the question, "What will be the result if everything continues exactly as it's happening today. No new technologies. No improved products. No geopolitics. No disasters. No intelligent response to unfolding events. Nothing." /s Thanks, forecasters. I could have hired a six-year-old to extend graphs and gotten an equally valid result. /s

Somewhere between Silicon Valley's Magic Pixie Dust and mainstream forecasting's consummate laziness is the Real World(TM). The real world does not care about our emotions, our preferences, or our ignorance. It will beat us to death in a heartbeat if we fail to respect its complexity, uncertainty, and brutal adherence to fact. Its surface can be probed with heroic attention to detail and careful risk analysis, but it defies accurate, long-term prediction. Faced with that, I use Elon Musk's approach: go back to first principles - the things we know we know - be heroically attentive to detail (Musk knows almost every technical detail of every product his companies produce), and be brutally honest with ourselves. That is how you model things - not whatever forecasters are doing, which I assume involves crayons.

What's actually happening to oil is the triple-threat I mentioned in (2). I gave an extremely broad outline lacking any detail, but I have probed that threat to some extent. The more detail I discover and the more assumptions I scrutinize, the worse the picture looks for oil. I suspect BP is correct that oil has peaked already, but that's irrelevant. Their long-term projections of oil demand look optimistic.  Oil demand will fall rapidly.

But of course, plentiful oil is cheap oil, and cheap oil finds demand. I don't think this will matter, for two reasons:
1) Cheap oil is not profitable. The oil industry's days of easy money are over.
2) Most oil-consuming nations do not produce oil. If affordable alternatives exist - and they now do - these nations won't lash their economies to oil at any price.

In summary, the oil industry's power is broken. Even if they somehow manage to avoid catastrophic demand decline, there's no long-term scenario in which oil is anything more than a cheap, replaceable commodity. To me - and anyone else consuming oil - that's the real story. Everything about the exact nature of the decline is a side note.

But then, I'm not an oil industry professional.  What details are of interest within the industry, and why?

[BenFranklin'sSpectacles + 762]

1 hour ago, Wombat said:

Thankyou for kick-starting the discussion. I know that it is illegal for the IOC's and the independent shale drillers to form cartels, but if BP is right and oil demand is in structural decline, then USA could be left with a trillion dollars of stranded O&G assets. Somebody will have to blink first, and I doubt it would be OPEC+ with their generally lower cost base? Under BP's "rapid climate action"scenario, where oil demand drops 60% over the next 30 years, do you envision the Texas Railway Commission putting limits on the number of wells that can be fracked each year (similar to OPEC), or do you see a series of wars with the intent of limiting the production of a competitor? Do you believe the USA will say "OK, we can't compete, don't worry about the trillion on oil and LNG and pipelines we spent, or the trillions in potential revenue lost, we will just shut them down because they will never make a profit", OR, do you believe an international ""understanding" will develop such that EVERY producer gradually cuts production at an equal rate in order to ensure they all make a profit as the industry dies, OR, do you think the process will occur in a disorderly manner which may involve a series of wars?

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply. We no longer need their oil. In fact, eliminating their competition in oil markets would be a major boon for us, both economically and geopolitically. Even more interestingly, the US need not do anything to destroy the Middle East's oil production. If we simply walked away (saving $90bn/year in the process), they'd tear themselves apart. If region-wide warfare didn't break out, inability to fund their welfare states at low oil prices would collapse them one-by-one. Keep in mind that their price to lift oil may be $12/bbl, but their price to sustain their nations is $60-$80/bbl - a price they can't command.

Given all that, are you still worried about Middle Eastern competition? 

[KeyboardWarrior + 527]

2 hours ago, BenFranklin'sSpectacles said:

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply. We no longer need their oil. In fact, eliminating their competition in oil markets would be a major boon for us, both economically and geopolitically. Even more interestingly, the US need not do anything to destroy the Middle East's oil production. If we simply walked away (saving $90bn/year in the process), they'd tear themselves apart. If region-wide warfare didn't break out, inability to fund their welfare states at low oil prices would collapse them one-by-one. Keep in mind that their price to lift oil may be $12/bbl, but their price to sustain their nations is $60-$80/bbl - a price they can't command.

Given all that, are you still worried about Middle Eastern competition? 

Yes that would seem like a large net positive for the U.S. 

[Dan Clemmensen + 1,011]

3 hours ago, BenFranklin'sSpectacles said:

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply. We no longer need their oil. In fact, eliminating their competition in oil markets would be a major boon for us, both economically and geopolitically. Even more interestingly, the US need not do anything to destroy the Middle East's oil production. If we simply walked away (saving $90bn/year in the process), they'd tear themselves apart. If region-wide warfare didn't break out, inability to fund their welfare states at low oil prices would collapse them one-by-one. Keep in mind that their price to lift oil may be $12/bbl, but their price to sustain their nations is $60-$80/bbl - a price they can't command.

Given all that, are you still worried about Middle Eastern competition? 

Crude oil is not fungible. You cannot arbitrarily replace heavy crude with light crude. Each refinery is optimized for a different mix of inputs.  As I understand it (after about six months of casual participation on these forums) The huge refineries on the US gulf coast use heavy crude and cannot easily be modified to use the light WTI crude. The US exports light crude and imports heavy crude (and refined products). It is nearly impossible to build a new refinery in the US, formerly mostly because of regulatory roadblocks and now because the "end of oil" makes it financially unattractive. Given all of that, we still "need" Middle east oil. More accurately, The global oil industry is very highly interconnected and you cannot instantly cut off a piece of it.

[Eric Gagen + 713]

5 hours ago, Wombat said:

Thankyou for kick-starting the discussion. I know that it is illegal for the IOC's and the independent shale drillers to form cartels, but if BP is right and oil demand is in structural decline, then USA could be left with a trillion dollars of stranded O&G assets. Somebody will have to blink first, and I doubt it would be OPEC+ with their generally lower cost base? Under BP's "rapid climate action"scenario, where oil demand drops 60% over the next 30 years, do you envision the Texas Railway Commission putting limits on the number of wells that can be fracked each year (similar to OPEC), or do you see a series of wars with the intent of limiting the production of a competitor? Do you believe the USA will say "OK, we can't compete, don't worry about the trillion on oil and LNG and pipelines we spent, or the trillions in potential revenue lost, we will just shut them down because they will never make a profit", OR, do you believe an international ""understanding" will develop such that EVERY producer gradually cuts production at an equal rate in order to ensure they all make a profit as the industry dies, OR, do you think the process will occur in a disorderly manner which may involve a series of wars?

None of the above.  What might prevent the limiting of production hast nothing to do with forming a cartel or not forming a cartel.  You are mixing up countries with companies.  The USA doesn't have ANY oil and gas assets stranded or otherwise.  Companies based in the USA have a whole lot of them.  The USA has $0 invested in oil and gas pipelines or LNG.  The companies do.  The USA only looses revenue if the companies were making a profit and stopped making a profit,  but the USA based oil and gas companies haven't collectively made profits to be taxed in any consistent way since around 2014.  The TRRC (Texas RailRoad Comission) could limit production on it's own,  but even in the extreme of negative oil prices declined to do so,  on the basis that it is too small of an organization to have an impact.  If people don't want to buy a product, you can force it to be sold,  but you can't force it to be sold at a taxable profit.  Nobody will gradually cut production in an equitable manner because that makes absolutely no financial sense.  The only realistic way to sort it out is through the financial processes of bad companies (not countries) going out of business, and good ones surviving.  

The exception IMHO is in the middle east, where @BenFranklin'sSpectacles has clearly noted the 'companies' producing the oil are actually an arm of the state, and the entire process of oil and gas production is essentially a method of providing welfare for the citizens.  In a world of declining demand for oil and gas,  these places will go down in flames - probably literally with Venezuala, Libya and Syria as different examples of how it will play out.  

[0R0 + 6,251]

4 hours ago, Wombat said:

Thankyou for kick-starting the discussion. I know that it is illegal for the IOC's and the independent shale drillers to form cartels, but if BP is right and oil demand is in structural decline, then USA could be left with a trillion dollars of stranded O&G assets. Somebody will have to blink first, and I doubt it would be OPEC+ with their generally lower cost base? Under BP's "rapid climate action"scenario, where oil demand drops 60% over the next 30 years, do you envision the Texas Railway Commission putting limits on the number of wells that can be fracked each year (similar to OPEC), or do you see a series of wars with the intent of limiting the production of a competitor? Do you believe the USA will say "OK, we can't compete, don't worry about the trillion on oil and LNG and pipelines we spent, or the trillions in potential revenue lost, we will just shut them down because they will never make a profit", OR, do you believe an international ""understanding" will develop such that EVERY producer gradually cuts production at an equal rate in order to ensure they all make a profit as the industry dies, OR, do you think the process will occur in a disorderly manner which may involve a series of wars?

The key is that the decline is gradual, however real it is, and is slower than the rate of decline of conventional wells, not to speak of that of shale. The rapid response and volume producer is the US shale patch. Thus it is the swing producer and price taker/maker at the margin. OPEC+ is cheaper production in general, but net of NG credits, Shale can come close. Of course, the planned Saudi gas production will put a dent in that LNG price.

We can see that $40 price is already enough for some incremental increase in the shale patch

And more substantial in Canada

Nothing much on the international rig counts - they only just stopped falling.

 

The most rapid push is from NG/LNG displacement of bunker fuel and heavy trucks. Remote mining also benefits from EV + solar + battery conversion more than LNG conversion because of the enormous cost of theft of diesel truck supplies, which would also be a danger for LNG.

3 hours ago, BenFranklin'sSpectacles said:

The US spends around $90bn/year defending the Middle East, almost exclusively to protect the oil supply. We no longer need their oil. In fact, eliminating their competition in oil markets would be a major boon for us, both economically and geopolitically. Even more interestingly, the US need not do anything to destroy the Middle East's oil production. If we simply walked away (saving $90bn/year in the process), they'd tear themselves apart. If region-wide warfare didn't break out, inability to fund their welfare states at low oil prices would collapse them one-by-one. Keep in mind that their price to lift oil may be $12/bbl, but their price to sustain their nations is $60-$80/bbl - a price they can't command.

Given all that, are you still worried about Middle Eastern competition? 

. The gulf is contracting with Israel for military training and missile and air cover. The big difference is that they are paying for it, rather than the US footing the bill. But that is no guarantee of international supply. As the Israeli support may target Iranian production to remove it from China's supply chain and cut off its funding again.

The actually big question is what happens with China as it has stopped loading oil and has been hit with an enormous food import bill as CV19 containment measures restrict migrant farm labor mobility and thus leave crops in the ground around the world, most notably Australia. China has run out of Corn already

 

https://www.washingtonpost.com/world/asia_pacific/china-food-shortage-clean-plate/2020/10/02/578daa0e-0223-11eb-b92e-029676f9ebec_story.html

The no food waste campaign to counter the biggest crop season loss in a long while. 

Meats bought at the spot market rather than futures

Milk also bought on the spot market at a big premium to futures, which are in backwardation.

Hopefully the flooding subsides for planting season. Or the problem gets much much worse.

The world has been absorbing significantly bigger Chinese manufacture exports, particularly PPE which may defray some of the food import bill.

But Caixin continues reporting a continuous erosion of manufacturing and service margins as increased costs can not be passed on to customers, and inventories are accumulating. That has been a persistent element of China PMI reports since March. That means that their incremental increases in volume are being done at the cost of declining margins and many reported losses, and thus a drive to maintain low head count, as Aug was the only month to show. increased hiring in China.

This continues the  decade long crunch in labor and a very weak recovery in labor markets. Meaning that most of May's 200 mil unemployed are still not working full time.

So the big worry is China's ability to retain its position as the largest oil market by far. Their farm and demand structure problems and possible food inflation led economic and social collapse is a worrisome outcome.

 

[Gerry Maddoux + 3,627]

Per the title of this thought stream: Covid 19 reduced demand by 10M bo/d. Folks everywhere are trying to make a living so there's also too much oil in storage tanks. But this virus will finally leave, one way or another. 

When it does, demand for oil will come back, not 10M bo/d but about 15--a # I pulled from the air. 

Why so robust a guess?

B/C people have been pent up. They'll be ready to travel. People are socially deprived. They're going to want to make up for lost time, so factories and commerce will go full out--especially building the bodies and battery casings for 'lectric cars, solar panels, windmill props. 

During this idiotic lockdown, green energy has flown, because the left has been able to conflate this virus with "damage to Mother Earth." 

This is not the end of oil, or the end of much anything else. For a novel coronavirus, our toll--tragic though it may be--is shockingly small. 

This is a political zoo, visitors. Please don't pet the animals. They sometimes bite. Wear a mask at all times; it confuses the animals. 

I think it is the perfect time to buy the oil majors paying 8% and the MLP's paying 10%. Both have lost 50% this year--"The Year We Lost Our Mojo." I have recently visited both oceans--neither is rising. In addition to me, I have had about a dozen friends contract Covid--only one died, and she had Alzheimer's. Our president is ailing because he refused to give in to the virus and continued to do his job--he will likely do just fine. California is burning up but they will all drive electric cars by 2035 so that clearly fixes their problem. As an aside, however, it does seem that the more particulate carbonaceous matter California pumps into the troposphere (150M tons this year alone), the more they want to lecture the rest of us on global climate change and that's beginning to cramp my ass. State carbon tax, anyone? 

I'm so damn tired of reading about green energy that requires petroleum products so the "green-piece" of junk machinery can even exist. Give me a break! I love energy in any shape or form so I'm investing as fast as I can in TAN, FAN, SMOG, LIT, QCLN TSLA, NIO too, but I don't come on here and harrumph about how it's the "end of oil," for Pete's sake. Where do you people even come up with that crap?

I would even invest in the ITER if it were on the New York Stock Exchange--I have been interested in Tokamaks since the first one (I'm that old) and I would dearly love to see the big one in Provence--but I don't see how I can make it until 2026--oh, nix that, I'll be there, hell or high water. Lithium? Love the concept of retrieving it from the well-bore of old worn out oil wells that are suddenly yielding more water than oil because they've pulled in salt carbonates. This is America, for God's sake. We do anything for progress, the love of humanity, and energy. Don't tread on me just because I'm old and love oil and gas more than a Shankar skyrmion (ball lightning to those of you who live in the science lab of West Texas; plasma eruptions or corona storms to just about anyone else). 

And to folks in the OPEC nations? Well, brothers and sisters, I'm struggling to put this in a gentle way but you're toast. No longer can KSA suck the Mother's milk from the good ole US of A. Pump until your sulfur tanks run over and smear the sand black, I don't care. Pump until you flood the market and drive the Russian oligarchs out of their dachas and into their vodka bottles. At the end, the bitter end, the shale oil basins will still come back to life and we'll eek out a little more oil, enough to put the Saudis back into the desert so far they can't even spell Hashemites, much less see any. OPEC, flyspeck, you were nothing to begin with and you'll soon be nothing again.

Have I missed anyone? No? I didn't think so. A tip to the kids (never drink wine at lunch during a drawn-out pandemic).

Let's see, the title was, "Is there a lack of demand for oil or just over-supply?" Well, son, there's quite a bit of both, right now. But try to keep your knickers dry, because it'll soon be just fine.

[Jan van Eck + 7,558]

On 9/28/2020 at 6:40 AM, Wombat said:

We all know that covid has destroyed 8-9mb/d of demand this year, but who would have guessed that supply is projected to reach a new record at the end of next year?

I caution readers not to use the term "demand" when referring to oil usages.  What you are terming "demand" is actually "consumption,"  which is not the same thing. 

The question then arises: is there sufficient supply to meet consumption?  And the answer is: but of course.  There is always liquid fuels, and feedstocks, available to meet consumption requirements.  When was the last time a plastics factory, or a plant that makes greases, was unable to operate due to a lack of supply of the feedstock?  When was the last time yhou pulled into a filling station and told, "Sorry, no gas this week"?   Never?

the point is that there is always supply, and excess supply, to meet consumption.  The next point is that consumption is a function of the price of the fuel, not the supply of the fuel.  For some users, such as motorists, the price is said by economists to be "inelastic."  For other users, such as big industrial boilers for industrial space heating, the price is elastic: when the price of liquid fuel rises, and a competing fuel such as gas drops or rises less, the boiler is switched over to the cheaper natural gas.  These are "dual-fuel" boilers designed to take advantage of price elasticity. 

Demand thus remains a function of price levels.  Consumption remains a function of both need and price levels, but is mostly factored by need. There is, historically, outside of artificial embargos such as 1973, always sufficient supply for all consumption requirements. 

[BenFranklin'sSpectacles + 762]

7 hours ago, Dan Clemmensen said:

Crude oil is not fungible. You cannot arbitrarily replace heavy crude with light crude. Each refinery is optimized for a different mix of inputs.  As I understand it (after about six months of casual participation on these forums) The huge refineries on the US gulf coast use heavy crude and cannot easily be modified to use the light WTI crude. The US exports light crude and imports heavy crude (and refined products). It is nearly impossible to build a new refinery in the US, formerly mostly because of regulatory roadblocks and now because the "end of oil" makes it financially unattractive. Given all of that, we still "need" Middle east oil. More accurately, The global oil industry is very highly interconnected and you cannot instantly cut off a piece of it.

US refineries are optimized for heavy crude, but my understanding is that they can still process large quantities of light crude. Portions of the refinery would go unused, they would lose some capacity, and it might require some upgrades - but it could be done. That's not a deal-breaker for the US economy. 

IIRC, they've already begun some of those upgrades to process the excess of shale oil now available.

[BenFranklin'sSpectacles + 762]

7 hours ago, 0R0 said:

The gulf is contracting with Israel for military training and missile and air cover. The big difference is that they are paying for it, rather than the US footing the bill. But that is no guarantee of international supply. As the Israeli support may target Iranian production to remove it from China's supply chain and cut off its funding again.

Many OPEC nations need $60-$80/bbl to support their welfare programs - a price they won't get. How will they pay for protection once they run out of money?

[BenFranklin'sSpectacles + 762]

3 hours ago, Jan van Eck said:

I caution readers not to use the term "demand" when referring to oil usages.  What you are terming "demand" is actually "consumption,"  which is not the same thing. 

 I did not know that; thank you.

[BenFranklin'sSpectacles + 762]

10 minutes ago, BenFranklin'sSpectacles said:

Many OPEC nations need $60-$80/bbl to support their welfare programs - a price they won't get. How will they pay for protection once they run out of money?

@Old-Ruffneck, you disagree?

[Old-Ruffneck + 1,246]

22 minutes ago, BenFranklin'sSpectacles said:

@Old-Ruffneck, you disagree?

Agree wholeheartedly, I don't see oil in the next 12 months making it to 50 per bbl. Too many new finds and demand isn't "there".

[0R0 + 6,251]

4 hours ago, BenFranklin'sSpectacles said:

Many OPEC nations need $60-$80/bbl to support their welfare programs - a price they won't get. How will they pay for protection once they run out of money?

Their people won't be starving, and their workers may actually need to produce something, but they are not in dire straights at $40 oil.

[BenFranklin'sSpectacles + 762]

7 hours ago, Old-Ruffneck said:

Agree wholeheartedly, I don't see oil in the next 12 months making it to 50 per bbl. Too many new finds and demand isn't "there".

Ah. I'm a bit confused because you rolled your eyes at me. Was that intentional?

[BenFranklin'sSpectacles + 762]

3 hours ago, 0R0 said:

their workers may actually need to produce something

I suspect the Arab countries will find this part difficult. Citizens are not naturally productive; they must be raised, trained, and encouraged to be so. The Arab world is starting with populations that have never worked and cultures with no work ethic. I would be surprised if their economic transitions make the least progress. The more likely outcome is that they'll return to what they were before oil: irrelevant 3rd world countries.

Is it possible they'll pull it off? Yes. I just don't see any evidence in their favor. It would require a dramatic cultural shift of people who, quite frankly, haven't accomplished anything in centuries  and whose previous accomplishments mostly involved wanton violence. Trillions in windfall oil revenues; zero accomplishments. How, exactly, is that supposed to succeed in the modern world?

That's in addition to the entire world rooting for their failure after centuries of said wanton violence. Once their oil is unneeded, who exactly will reach out to help them?  No one. They have no friends; only enemies and dwindling resources. To put this in perspective, Arabs have so repulsed the world that the US ran roughshod over them for nearly two decades, causing untold suffering, and the world's only concern - even the bleeding heart liberals - was whether the oil would flow.

The Arab world will end in flames or poverty, and no one will care.

[0R0 + 6,251]

3 hours ago, BenFranklin'sSpectacles said:

I suspect the Arab countries will find this part difficult. Citizens are not naturally productive; they must be raised, trained, and encouraged to be so. The Arab world is starting with populations that have never worked and cultures with no work ethic. I would be surprised if their economic transitions make the least progress. The more likely outcome is that they'll return to what they were before oil: irrelevant 3rd world countries.

Is it possible they'll pull it off? Yes. I just don't see any evidence in their favor. It would require a dramatic cultural shift of people who, quite frankly, haven't accomplished anything in centuries  and whose previous accomplishments mostly involved wanton violence. Trillions in windfall oil revenues; zero accomplishments. How, exactly, is that supposed to succeed in the modern world?

That's in addition to the entire world rooting for their failure after centuries of said wanton violence. Once their oil is unneeded, who exactly will reach out to help them?  No one. They have no friends; only enemies and dwindling resources. To put this in perspective, Arabs have so repulsed the world that the US ran roughshod over them for nearly two decades, causing untold suffering, and the world's only concern - even the bleeding heart liberals - was whether the oil would flow.

The Arab world will end in flames or poverty, and no one will care.

The decline in oil money was a known and expected outcome as an eventuality since the oil can't last forever. But the royal families of the Gulf have extensive investments accumulated over 50 years. Saudi is estimated at $2.5 T alone, The rest of the Gulf at something close to that. Their production structures are not staffed by locals but imported labor from Philippines Indonesia Pakistan and India. They are at least in Saudi's case, fairly integrated in the oil value chain into petrochemicals.

So your issues are valid but the timeline for their eventual demise is not within a decade. The bite of reduced state subsidies and the social response are not as bad as expected so far. The people are aware of their livelihood depending on the oil price. It would take time for them to blame someone, and the current generation is not going to face starvation any time soon, nor even life without air conditioning. . 

[BenFranklin'sSpectacles + 762]

39 minutes ago, 0R0 said:

The decline in oil money was a known and expected outcome as an eventuality since the oil can't last forever. But the royal families of the Gulf have extensive investments accumulated over 50 years. Saudi is estimated at $2.5 T alone, The rest of the Gulf at something close to that. Their production structures are not staffed by locals but imported labor from Philippines Indonesia Pakistan and India. They are at least in Saudi's case, fairly integrated in the oil value chain into petrochemicals.

So your issues are valid but the timeline for their eventual demise is not within a decade. The bite of reduced state subsidies and the social response are not as bad as expected so far. The people are aware of their livelihood depending on the oil price. It would take time for them to blame someone, and the current generation is not going to face starvation any time soon, nor even life without air conditioning. . 

Perhaps.  However, that's the best possible outcome and wholly dependent on several dubious conditions:
1) No war. Unlikely given that the US is no longer forcing them to behave.
2) Their investments maintaining current value. Unlikely given impending challenges to their industries. Also unlikely given that there's now too much money chasing too few investments. I.e. there's no where left to go for a good rate of return; you must have an idea and competence to make money.
3) Their cash reserves maintaining value. Unlikely given how quickly the world is printing money.
4) The royal families willingly surrendering their wealth to save a failing nation in lieu of absconding with it. Unlikely given... all of history.
5) Welfare demands remaining constant. Impossible given religious and cultural norms driving population growth.

I could probably think up more conditions, but those will suffice. I wouldn't underestimate the Arab world's ability to burn through $5T in short order. They've certainly demonstrated a talent for waste.

You do make a valid point though: it won't happen immediately. Maybe it takes 5 years. Maybe 10.  Maybe longer. It will happen though. When it does happen, I would bet the entire region comes unglued, eliminating the last of their income. Then they will be lucky to have food, much less air conditioning.