On the Peak Oil (Demand) Front...

Peak Oil demand is spreading more pain and gloom throughout the Oil Patch of the global economy.

The following two articles were posted by Raúl Ilargi Meijer on The Automatic Earth yesterday and today.

The first one:  More Pain Seen For US Crude As Product Glut Adds To Gloom (Reuters)

A glut of refined products has worsened the already-grim outlook for U.S. crude oil for the rest of the year and the first half of 2017, traders warned this week, as the spread between near-term and future delivery prices reached its widest in five months. A stubborn, massive supply overhang punished crude over the winter as U.S. oil futures hit 12-year lows in February. As supply outages and production cuts increased, crude rallied and spreads tightened significantly in May. But the unusually large amount of gasoline and oil in storage, combined with expectations of a ramp-up in crude production, has made traders more bearish on the price outlook for late 2016 and early 2017.

The second one: Fracklog in Biggest US Oil Field May All But Disappear (Bloomberg)

The number of dormant crude and natural gas wells in the U.S. stopped growing in the first quarter – and may all but disappear in the nation’s biggest oil field should prices hold steady. As of April 1, there were 4,230 wells left idle after being drilled, a figure little changed from January, according to an analysis by Bloomberg Intelligence. While some explorers have continued to grow their fracklog of drilled but not yet hydraulically fractured wells, others began tapping them in February as oil prices rose, the report showed.

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70% of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year. “We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

"Higher oil prices," that is, in the $40 to $50 range, can entice the extractors to return to pump out or frack out the wells that are dormant, or just drilled and capped. Unfortunately, according to the above Reuters article, and oil price developments today, those higher prices cannot be guaranteed. As Raúl Meijer says, What’s going to happen to the lenders who made it all possible?

Now the latest from The Wall Street Journal:

Oil prices fell Friday as a glut in oil products stoked market concerns that the global crude market will remain oversupplied longer than expected. 

U.S. crude oil for September delivery recently fell 54 cents, or 1.2%, to $44.21 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 58 cents, or 1.3%, to $45.62 a barrel on ICE Futures Europe.

This simple chart explains why oil prices are so low compared to those in 2014.
Source: vox.com.

Demand is not keeping up with supply, despite an amount lower than the peak extracted in July of 2015. A NEW oil production peak, projected for the end of 2016, is not expected to outstrip demand. Which means there will be an even BIGGER glut and a backup in oil supplies being delivered because consumption by the end user is not fast enough. And storing all that oil has got to cost a lot of money.

Now what's the cause of this new oil peak? It is certainly not demand. But the lenders have to be paid, the social welfare systems of the producer countries have to be supported, companies' employee payrolls have to be met (otherwise employees get laid off), and some amount has to be set aside or spent for maintenance, exploration, drilling of new wells, and overhead, especially if lenders become loath to lend any more money to the fossil fuels industry.

Eventually the oil producers and oil producing companies will have to wise up, and reduce the supply to clear out the glut and backup of oil, in order to get the prices to go back up to a level where they can make a profit, "hopefully" at a price the end consumer can afford*.

* "Hopefully" at a price the consumer can afford: this would be good for the economy, which always has to grow to keep people employed and governments to meet its obligations and lenders to be repaid, but it would be TERRIBLE for the biosphere, us and our civilization, all of which depend on a salubrious climate that doesn't change more rapidly than species and ecosystems can adapt. Burning of more fossil fuels means more Carbon Dioxide in the air which means more and faster Global Weirding... with the coming superstorms the size of continents and the strength of hurricanes coming sooner and more frequently. One already happened last winter.

Oil at $30 Dollars a Barrel Bodes Ill for Fossil Fuel Interests as Renewables Ramp up

First, there's no sign the present oil glut is going to go away. The inventories in the USA are bigger than ever since the Great Depression and the prices both on the spot market and at the pump just keep dropping -- with a few jumps to keep experts guessing.

From Zero Hedge via The Automatic Earth (hat tip to Raul Ilargi Meijer)


US Crude Inventories Are The Highest Since the 1930s
by Tyler Durden, Zero Hedge, 27 January 2016

In case you were under the impression that oil was stabilizing, we thought this chart might help clarify just how “different” it is this time in the energy complex… U.S. crude inventories are at levels last seen when President Herbert Hoover was battling the Great Depression.

US Crude Inventories are the greatest since the Great Depression!
Source: Zero Hedge via The Automatic Earth 

After this week’s build – Crude stockpiles climbed 8.38 million barrels to 494.9 million in the week ended Jan. 22, the highest since November 1930, according to weekly and monthly data from the Energy Information Administration. It did not end well last time…

http://www.zerohedge.com/news/2016-01-27/us-crude-inventories-are-highest-great-depression

But prices will probably continue to go down. After all, according to historic data going back to 1861, today's prices, while relatively inexpensive, are no bargain.

From Market Watch via The Automatic Earth (again, hat tip to Raul Ilargi Meijer)


Chart going back to 1861 shows oil isn’t insanely cheap right now
By William Watts, Market Watch, 27 January 2016

Not insanely cheap by historic price
Source: Market Watch via The Automatic Earth.

Oil futures are hovering around $30 a barrel—not far off 12-year lows—and bears are penciling in a test of $20 or lower. It is a pretty downbeat picture, but is black gold really that cheap on a historical basis? Not really, according to the chart from Deutsche Bank, which tracks inflation-adjusted oil prices—and the average price—all the way back to 1861, just two years after Edwin Drake drilled the first productive U.S. oil well near Titusville, Pa. Over the last 150-plus years, the average oil price is $47 a barrel, according to the data. West Texas Intermediate oil futures for March delivery were down 22 cents, or 0.7%, at $31.23 a barrel in late morning trade. “So current levels are low but not exceptionally low relative to long-term history,” said Jim Reid, macro strategist at Deutsche Bank, in a Wednesday note.

The charts were published as part of an annual study by the investment bank. Interestingly, Reid did note that this was the first year that the firm’s long-term mean reversion exercise shows positive return expectations for oil since the study began more than a decade ago. But don’t get too excited over prospects for an immediate mean-reversion rally. Reid puts the findings in the context of the commodity cycle, which is on the downswing after a sharp run-up that began in the mid-1990s. He notes the “long-held belief” that commodities, such as oil, that are a factor of production can’t outstrip inflation over the long term because “if they do there will be alternatives found.”

That helps to explain oil’s pullback. This process, however, “can take years to resolve, so even if we’re correct, commodity cycles can still last a long time before they eventually mean revert,” he wrote. Meanwhile, the graph “doesn’t suggest that current levels are as extreme as many would suggest even if long term value has returned,” Reid said. “The $140 prices a few years back look especially bubble-like” from a long-term perspective.

Of course, if oil stays at a low price for *too* long, when demand comes back up, the fossil fuel companies may not be in a position to furnish the demanded supply. Prices will shoot up and demand will be destroyed again.

From Our Finite World (hat tip to Gail Tverberg)


Why oil under $30 per barrel is a major problem

by Gail Tverberg, Our Finite World, 19 January 2016  

A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

1. Oil producers can’t really produce oil for $30 per barrel.

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.



Source: Alliance Bernstein via Our Finite World.

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well. 

http://ourfiniteworld.com/2016/01/19/why-oil-under-30-per-barrel-is-a-major-problem/

In the above article, Gail Tverberg notes that renewables are still at a vary small fraction of total energy supply, but the graph she posts indicates that they are increasing in proportion. Enough to cause some traditional fossil fuel energy companies to try to head off the ramp-up of renewables off at the pass. Like in Nevada recently. (hat tip to Robertscribbler.)

Welcome to the Renewable Energy Renaissance — Fight to End Fossil Fuel Burning is Now On
by Robertscribbler, 27 January 2016

Beneath the dark and growing cloud of human fossil fuel emissions there are a few carbon-free lights being kindled among all the black, coal-ash soot.

They’re the lights of a new renaissance. An unprecedented period of change for governments, the energy markets, and for individuals themselves. For we are all, whether we realize it or not, now embroiled in a struggle that will determine our own fates as well as that of our children and of all the generations to follow. For this renaissance is as much about liberation — the provision of clean energy choice as means to free ourselves from a wretched captivity to fossil fuel consumption — as it is about fighting to leave those very hothouse mass extinction fuels in the ground.

It’s a new kind of vital social unrest. A global struggle for justice on a scale not seen since at least the downfall of the slave trade. The battle lines have been drawn — in courtrooms, at ports, along pipelines, and on the train tracks, in the legislative offices of cities, states and in the halls of the federal government itself. We, as a civilization, are being divided into pro-renewable energy, pro-response to climate change, pro saving life on this Earth, and anti-renewable energy, anti-response, climate change denial factions. It is a disruptive, highly dangerous period of history. One we must successfully navigate if we are to survive as a modern civilization and, perhaps, as a species living on this Earth....

An example of this struggle in microcosm took place during December through January of 2015 in Nevada. Emboldened by similar decisions in Arizona, monopoly utilities moved to protect their carbon-polluting infrastructures by pushing the state government (made up of a majority of republicans to include the governor — Sandoval) to impose restrictive fees on solar energy use throughout the state. Targeting rooftop solar energy systems, the Nevada Public Utilities Commission (PUCN — also made up entirely of republicans) voted to, across the board, increase costs for rooftop solar users by both slashing incentives and imposing draconian fees. The decision negatively impacted 12,000 current solar customers using rooftop power to include families, schools and even public libraries....

Nevada’s PUC decision smacks of a monopoly power generation protection scheme. One that has made it impossible for solar installers to operate in the state. As result, Nevada’s two other top solar installers (Vivint and Sunrun) have now followed Solar City’s example [of stop doing business in Nevada] and decided to halt operations in Nevada. The jobs impact from just these three solar providers closing shop is a net loss of 6,000. But with hundreds of small solar installers active in Nevada before the ruling, the economic and environmental damage is likely to be ongoing and long-term....

As if Nevada’s war against rooftop solar industry within its own state wasn’t bad enough, a group of 26 states currently governed by fossil fuel industry funded republicans are now submitting a Supreme Court challenge to Obama’s Clean Power Plan. The group has re-stated the now typical and jaded republican claim that the EPA doesn’t retain the legal authority to regulate carbon emissions. The new claim is predicated on the statement that EPA will force fossil fuels out of business, stating that the federal government does not retain the authority to effectively ban the use of a particular set of fuels.

It’s a convoluted appeal that smacks of past states rights arguments regarding every kind of dangerous, toxic or nefarious trade from slavery, to firearms, to tobacco. The appeal letter demands an ‘immediate stay’ on the Clean Power Plan (a cessation of implementation). It seeks to sanctify as ‘legal right’ the ability of coal plants to remain open and to continue pollution. It attacks federal government decisions that would support renewable energy as a solution to climate change (without using the words climate change once in the document, which itself required a supreme manipulation of legalese to achieve). And it uses language that implies state policy directives and goals supersede those of the federal government. 

http://robertscribbler.com/2016/01/27/welcome-to-the-renewable-energy-renaissance-fight-to-end-fossil-fuel-burning-is-now-on/

It is folly to oppose the growth of Renewables and further increasing it. Because we don't have an infinite amount of fossil fuels within the Earth's crust and eventually, sooner rather than later due to the insanely low prices compared to the costs of extraction, there will be no more fossil fuels that will be brought to market, and an ever-increasing reduction in supply prior to that. Better to build out renewables as much as we can, and perhaps build ourselves a bridge to a better future, even with a lower standard of living, than to collapse, bit by bit, headlong into a new Dark Age and all the misfortunes and unpleasantlesses that would accompany it.