Sunday, December 14, 2014

The high cost of low-priced oil

As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But...

If you work in the oil industry, you will not.

If you work in the renewable energy industry, you will not.

If you work in the energy efficiency business, you will not.

If you work to address climate change, you will not.

If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not.

If you live in a country that exports a lot of oil (not just Saudi Arabia, but Mexico, Canada and Norway, too), you will not.

The declining price of oil is supposed to have a balanced ledger of winners and losers. But we may be on our way to finding out that in the long run we will have a much larger list of losers than winners.

And, the list will lengthen if the price continues to fall, and especially if it stays down for a long time. (Low prices are not necessarily an indication of future abundance. Remember that oil reached $35 a barrel at the end of 2008 before returning to record average daily prices in 2011, 2012 and 2013.)

Now here is something to contemplate. Is the price of oil falling because we can no longer afford it? This is not an idle question. Record high average daily prices for oil in the last three years have been an unrecognized cause of sluggish overall worldwide economic growth. That subpar growth appears to be exhausting itself now, particularly in Asia and Europe. In dampening growth, high oil prices sewed the seeds of their own demise by ultimately dampening demand.

But, low oil prices will make it even harder to secure future oil supplies. The oil industry was already cutting back its exploration budgets before the price plunge. The industry said that there were not enough profitable prospects available even at $100 per barrel. What happens to industry exploration and development budgets with oil prices now around $60? Without exploration there can be no new production; and without new production, oil supply falls automatically.

Now, exploration and development are not being cut to zero. But they are being cut substantially. And, as with any mineral exploration, there is no guarantee of success--even less so with cutbacks. With existing oil production worldwide declining around 4 to 5 percent per year, the industry already had a huge task keeping production growth just barely positive. Now, that will be almost impossible if oil prices remain low.

What that means is supply will likely stagnate or even shrink. Barring a deep and prolonged economic slump now (which would send oil prices even lower and keep them there for some time), as demand for oil reignites, we're setting up for another big price spike later that might then send the economy off a cliff into a serious slide.

For now, those in the renewable energy business are finding it more difficult to be competitive with lower-cost oil. Energy efficiency business owners must tell their clients that many efficiency measures will have a longer payback period while oil prices stay low. Both these outcomes send us in the wrong direction.

And, there is climate change. When petroleum products are cheap, there is less incentive to use them parsimoniously. All things being equal, that means more oil products are burned which produces additional greenhouse gas emissions.

Now, regarding the financial consequences of low oil prices, one could say, "Well, if you've chosen to work in the oil industry or if you've staked your whole country's future on the price of oil, then that's just your tough luck. Some of the wealth that flowed to you is now going to start to flow back to me."

And therein lies a problem. If that money flows too quickly away from the oil industry and the major oil exporters, it could create a financial cascade in the debt markets, in the world's stock markets, in the currency markets--oh wait, it already has. The question is how far will these disruptions carry, and will they cascade in a way that leads to a recession or depression.

One can be passive in the face of such events. But, a smarter plan would be to implement something along the lines I proposed last week--an oil tariff that keeps prices high and so keeps renewables and energy efficiency attractive. In fact, a system that keeps all carbon-based fuels high-priced would do more to move the world toward a sustainable energy system than all the current renewable energy subsidies combined. And, it would prevent the kind of price manipulation now engaged in by OPEC from wrecking havoc on any plan to move toward a renewable energy society.

It is just such disruptions in the fossil fuel markets that make us believe things that aren't good for us--that we can somehow burn cheap oil and forget about climate change. That cheap oil will go on forever. That cheap oil is a sign that the marketplace solves all problems (rather than creating new problems that it can't solve by itself).

We can celebrate lower gasoline, diesel and heating oil prices now. But like any overindulgence, we will pay for it later. When a pusher offers a junkie a discount on his drugs, we shouldn't take it as an act of kindness.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Unknown said...

Wouldn't it be truly ironic if low oil prices crashed the economy even further and due to this the end of the oil age goes out with even lower oil prices....that only the very few could afford. I think though that the scenario that you put forth is the most likely. I hope Santa brings you a lump of coal or two.....or better yet a solar panel

The North Coast said...

Make use of the temporary glut and low prices to prep for much tighter oil supplies in the future, and unaffordable prices.

Now is the time to arrange your life for much lower energy consumption. That means weatherize your dwelling, or sell your place in your car-dependent town or suburb, and move somewhere where you could imagine doing without not only a car, but with half as much energy available to do absolutely everything.

This would be a good time to invest in what truly viable renewables exist, and in learning skills that will help you live with much less, and do more with what you have. It would also be a good time for our authorities to stop allocating money to energy-hog infrastructure that will be rendered obsolete by steeply reduced fossil fuel supplies in the future, such as highways and airports, and invest in rail (NOT "high speed" either), and water transportation. But I doubt they will do this. Instead, they'll double down on "investment' in systems dependent on cheap fuel.

Oh, well.

Steve Bean said...

The unknown seems to be whether the price will stay that low and for how long. Your conclusions about whether this is a "blessing" seem a bit premature in light of that uncertainty, Kurt, at least for those on the 'good' side.

The Elliott wave principle suggests that they won't stay low, though. The most likely scenario is a bounce briefly and then drop to a new low over the next several months to a year (but probably not that long), followed by the spike you (wisely) anticipate.

I think you're seeing the picture in reverse with regards to the economy. Existing low demand contributed to the drop in price, so I see little concern about those same drivers (primarily) upping their use because it's now much cheaper. They still can't afford it. They'll just go into debt that much less.

If this crash is long enough to mostly shut down (i.e., bankrupt) the shale players, that'll be a good thing for climate change. Even with a subsequent price spike, the true costs of the current bubble will have been exposed and prevent another round of extensive speculation. The majors that remain will have a tough call to stay with oil at that point. If social mood is negative enough it could mean oil wars in the next decade, but it might not come to that, depending on other changes, and there will be other changes.

Energy efficiency is mostly about electricity, so I don't see that affected much, especially since most related businesses won't close shop that quickly while this plays out, at least not relative to the broader economy. Some will stay in business, and the conversion LED lighting and more-efficient appliances will continue. Conservation will regain attention as well.

Likewise for renewables. EVs might not drop in price fast enough, but people can get by with their current vehicles and reduce miles driven even further. PV, on the other hand, has reached an affordable installed price and will likely drop further with widespread deflation (labor costs in particular). The wealthy (if they don't lose everything in the stock/bond markets) will buy them.

I'm not particularly optimistic about all that, but that's my current assessment as things stand and the wave patterns for the various markets look.

Kurt Cobb said...

Thanks for the thoughtful comments. It would indeed be a supreme irony if the way peak oil announces its commencement would be low prices rather than high. The North Coast has it exactly right, not only when it comes to personal, but also societal preparations. The remaining bounty of fossil fuels ought to be used to create a society that does not require them.

And, thanks to Steve Bean for his long-form response with many telling points. I'll only comment on a few. His reference to Elliott wave theory reminds me of the story of the Swiss army unit doing weekend maneuvers in the Alps that gets lost and only finds its way back to base three days later. When asked how they found their way back, the soldiers respond that they had a map. Surprised, the base commander asks to see the map. "But this is a map of the Pyrenees." To which the soldiers respond: "Yes, but we had a map."

I'm skeptical of technical analyses of lines on a chart and regard them as mere artifacts of a time series of prices or other numbers. But, I have to admit like the lost Swiss soldiers, sometimes technical analysis of such lines appears useful. We'll see.

Bean is right about most energy efficiency relating to electricity. This will probably not be hampered. But, where heating oil, diesel, gasoline, propane and LPG are used, efficiency measures will appear less cost-effective. And, when it comes to high gas mileage, consumers may choose to emphasize this aspect of their purchase less.

Converting transportation to electricity could be a bright spot if renewable energy costs continue to decline. And in any case PV has the ability to provide a lot more electricity at progressively lower cost.

Anonymous said...

A look at the past is very interesting.

In 1985, oil prices dropped.

Then, oil demand started to rise again and, outside the Middle East, many expensive drillings became unprofitable.

So, U.S. production of crude oil dropped from 9 million barrels per day in 1985 to 5 million barrels in 2008.

U.S. net imports of crude oil rose from 3.2 million barrels per day in 1985 to 9.8 million barrels in 2008.