Zaphod
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Euan or others,
Society struggles to account for externalities except through heavy-handed legislation, so it is always apples-and-oranges when comparing various energy sources and their taxes or supports. Still, the obvious points, as they have been since 2005/6 when I self-educated via The Oil Drum, remain:
1) When talking about any peak or production level of oil the discussion must include “at what price” else it is meaningless. It is not yet clear to me, even after 5 years of apparent success, that the world really affords $100 oil.
2) There is no fundamental issue with backstopping intermittent renewables with fossil fuels, other than cost penalties. Any use of renewables, or better still efficiency and conservation, will postpone fossil fuel peaks and delay climate or ecological impacts….but it comes at a cost.High oil prices enabled technology development for shale that will persist through a fairly significant downturn, as marginal cost of production on the downturn will be much less than on the upswing. The US, if it manages to gain an energy policy, could elect to protect its own industry, and complicate the world economy more with trade wars. If we are indeed at the cusp of the next step down, that would be a natural progression of post-globalism.
Still, I don’t get as doomerish as in 2006-8 as we watched the trainwreck unfold, as the gov’ts have proven to be really good at spinning the plates. The difference between envisioned collapse scenarios (the slow ones, anyway) and what we have now is that the little guys are feeling the pressures as envisioned yet the main indicators look rosy, so there is global cognitive dissonance. I’d bet higher fractions of GDP go to energy over time, and lifestyles ratchet down, but I still struggle to see a fast-crash collapse.
The oil industry may be subsidized, but it is far better to spend oil money in the US than sending it to the Mideast. You can argue the same thing about cars and computers (the “buy American” angle for jobs and manufacturing), and that’s the crux of post-globalism and a perpetual current accounts deficity.
A lot of good points here.
– Drilling cost: as the industry slows, service costs are going to plummet. They were already down from the highs, and they’re going to be dropping again. Every service company is getting hit up to cut prices now, and every equipment vendor is, too. The days of “cost is no object – get that well done!” may give way to more considered spending. When COP says they’re cutting investment by 20%, that’ll probably drill as many well in 2015 as they did in 2014. But they’ll probably cut more if prices stay down.
– Well costs don’t all cost $10M. I’d say the range is $6M to $11M, drilling on pads reduces per-well cost. Plus, producers will cherry-pick as they cut back, going for lower cost play.
– As weaker companies go under, debt will wash out. This will be excruciating for their financiers, but whoever picks up the relics can milk it for a good while. This will reduce the average cost basis and keep the game going longer, and prices low for longer as a consequence.
– The North Sea has at least as high a cost basis for new projects, and probably at least as high ongoing production costs, as shale. If the North Sea drops first, this will pull oil of the market (up to 2Mbpd if it all goes away), but that’ll take a while.
– The 130% cash ratio isn’t the same as a ponzi scheme for any company that is still increasing production, as pretty much no areas had yet peaked at the 2000 rigs level. Efficiencies had been going up, so 1900 rigs could drill next year what 2000 did this year, but it’ll drop beyond that in a few months as contracts complete and rigs lie down.
– Natural gas is trending down, as the NAM winter has been fairly mild so far, but gas is not as fungible as oil and the prices have held up better. As production of oil draws down, gas production will slide as well, and gas may recover more quickly than oil. There aren’t many rigs drilling dry gas anymore, but they could, if there was money in it. Chenier LNG is still the first export terminal planned to come on-line, and the US industry desperately needs every penny it can get. I think that’s still a year away, though.I keep seeing “2Mbpd excess production”, but I struggle to see back up for this. Some excess is obviously headed to China, but overall storage is not yet in full glut. In 2004, we saw many millions of barrels parked at see (investors buying to sell higher later), and shipping rates for VLCCs were way down. VLCC rates have been low for a long time now, given newly built ships are plentiful, but they are above even the 2014 lows.
I think we’re seeing some negative market momentum seeing a bleaker future than the current reality, though that may be well where we’re heading. It will be interesting to see what happens in China’s economy with lower energy costs, whether Baltic Dry and other commerce indicators pick up, and how storage numbers evolve at Cushing, in floating storage (say, off Malta), and elsewhere.
I mostly agree on Ilargi’s OPEC angle, but once rigs lay down OPEC could elect to slow production to drain the glut once they see production dropping, else we’ll overshoot on the far side. I’m still not convinced the world can eat $100 oil continually (the US may do better with local $100 oil than imported $60 oil, though!), but OPEC doesn’t want to see a repeat of 2008 either.
