Global Oil Production Booming; Demand is Softening

Oil prices have remained remarkably stable over the past few years, considering the impressive price boom and bust of 2007 - 2008 - 2009. Peak oil doomers have been particularly disappointed at the failure of their predictions of near-term global collapse -- made so gleefully in the heady days when it was still possible for a halfway intelligent person to believe that oil production had permanently peaked in 2005. But the real world still holds a lot of surprises for people who believe they understand its energy complement -- or even its climate, for that matter.

The reason for the oil price softness is slowly but surely being revealed. Oil and gas production is booming globally but particularly in the US to the point where just last month, the International Energy Agency projected that “extraordinary growth in oil and natural gas output in the United States will mean that … the United States becomes a net exporter of natural gas by 2020 and is almost self-sufficient in energy, in net terms, by 2035.”

According to the EIA, the average cost of production is lowest in the Middle East at around $US17 a barrel, with a global average around $US25 a barrel. This suggests the low will be a little above that, barring a demand free-fall. In the US, the cost of production is in the mid $US30 range, all of which suggests a level as low as $US40 is possible.

Add to that the tepid growth phase of the global economy and price trends should be down. _BusinessSpectator

There is a lot more oil to be discovered, particularly around the great underexplored areas of the planet. Even the Persian Gulf is underexplored compared to North America, by a factor of roughly 1,000.

“We see an easing of oil prices [in 2013] as demand remains weak,” explained Peter Kiernan, lead energy analyst for the Economist Intelligence Unit, adding that even fast-growing emerging markets and non-OECD nations will experience a poor economic performance next year.

...A “shale revolution” in the U.S. promises to change the market landscape. “U.S. production of shale gas has exploded with a nearly 50% annual increase between 2007 and 2011,” a report by the National Intelligence Council noted, while shale oil production, still in its infancy, could bring anywhere from 5 to 15 million barrels per day by 2020 at a break-even price as low as $44 to $68 per barrel. “By 2020, the U.S. could emerge as a major energy exporter,” the report added. _Oil 2013

This is bad news all around for aging peak oil doomers, who sit wanking in their circular echo chambers.

It is also bad news for many supporters of US President Obama. Obama has backed dozens of failed or failing big green energy startups at taxpayer expense, to please green political backers and to enrich the bank accounts of campaign bundlers and other crony supporters.

Obama favours intermittent unreliables, but it is the hydrocarbons and nuclear power -- both of which Obama dislikes -- that deliver reliable energy, power, and fuels. Obama was the accidental beneficiary of an unplanned US shale boom. But he is happy to take the credit for an economic boom that only happened because his EPA was too slow to kill it before it bloomed.

And now that the US oil & gas boom is proceeding ahead, despite Obama, the UK and the EU may be next. And don't forget China. If Australia can dump its foolish green "energy suicides", it might wish to join the global party.

If Oil Prices Drop Below $80 a Barrel . . . .

According to the consensus, only a collapse in demand for oil is capable of driving oil prices below critical levels. At that point, the expectation is that marginal producers would quite production, resulting in a drop in supplies, and a rapid rise in oil prices above the critical cutoff.

The European recession, the slowing growth in China, and the Fiscal Cliff in the United States could drive oil prices much lower.

Recent economic figures from China were mixed. Its Service PMI was above 50, but still dropped quite significantly over the last two months. Europe’s unemployment is rising as the economy slows again, and in the U.S., talk of the Fiscal Cliff is raising the level of uncertainty for markets. One might extrapolate from all of this to mean lower economic activity ahead. This would mean lower demand for energy.

What if Brent Crude Oil prices were to drop below $80? WTI Crude oil was $88.50. Brent Crude Oil was around $110 on December 4 2012. A drop in Brent prices would hurt profits for oil companies. _The Street

The short article above focuses on the effect of a price drop on small to medium-sized oil companies, and marginal producers. Certainly a number of them would be forced to halt production and new drilling if prices dropped below $80.

But quite a few producers of shale oil and oil sands would be able to ride out oil prices below $80 -- as long as prices dropped no lower than $60. A drop in prices would force even more of them to innovate more economical production methods.

But what about the effect of a serious oil price drop on Russia and a number of OPEC countries?

Many of these countries -- including Iran, Russia, and Venezuela -- have ambitious plans for regional domination through military power. To achieve these goals they will require high global oil prices. Other countries such as Saudi Arabia, Iraq, and other Gulf states, need high prices to pacify their restless populations -- and to fund global Islamic fundamentalist movements.

It is in these parts of the world -- where governments are dictatorships and free markets are not allowed to function -- where a sustained drop in oil prices would lead to serious unrest.

As mentioned above, the consensus hovers around the idea that only a drop in demand could possibly lead to a serious drop in oil prices. But if free market forces were unleashed across more of the world -- including the US, Europe, South America, MENA, Africa, and Australia -- significant new supplies would complicate the picture as well. It is only by bottling and confining markets and innovation that political entities artificially contain latent supplies. Thus the term, "political peak oil."

Russian Economy At Risk if Oil Prices Decline

The US shale boom has already hit Russia's Gazprom hard. Now, the rising boom in US oil production, along with other sources of new global crude production, are casting a shadow across Russia's grand plans for the future.

The Russian government requires an oil price of above $125 in order to achieve fiscal breakeven. That means that the Russian government is being forced to either postpone spending, or dip into cash reserves, as long as oil prices stay well below that level.

But now there is a very real risk that oil prices will dip from around $110 a barrel to below $90 a barrel. That would present a serious challenge -- perhaps a catastrophe -- to Putin's ambitious and free-spending government.

“If the [oil] price is $80 per barrel, the budget deficit will widen to 3 percent of GDP," Kudrin said.

"The figure of 3 percent is a critical boundary, beyond which we are likely to lose our country’s investment-grade rating,” he said.

Russia’s budget for 2013-2015 will run a deficit even with oil priced at $100 per barrel, he said. _Russia's Oil Risk

Another startling bit of news out of Russia, is the big push to shale oil & gas production in Siberia. After all the rude talk from Putin, Gazprom, and other Russian authorities -- telling the world how bad shale drilling and fracking is, and how pathetically irrelevant US shale production was -- now Russia's state oil company is taking the plunge into shale big-time:

ExxonMobil agreed to spend $300 million on advanced horizontal drilling and fracking at Russian state oil company Rosneft's Siberian fields in a project designed to help Russia realise its vast tight oil potential.

The two companies will form a joint venture, split 51-49 between Rosneft and Exxon, to carry out the pilot programme and launch commercial production if they find sufficient oil in the Bazhenov shale and the nearby Achimov formations of Western Siberia.

The Bazhenov is the world's largest source rock. However, Russia, still rich in conventional reserves, has yet to follow in the footsteps of the United States in deploying advanced horizontal drilling and hydraulic fracturing technologies, which is known as fracking, on a commercial scale.

With the core fields of Western Siberia in decline, however, the government of Russia, the world's largest crude producer, has offered tax breaks for companies who drill into "tight" formations where hydrocarbons are trapped in non-porous rock. _Siberian Shale

There is always the chance that US President Obama will let his buddy Putin off the hook, of course. Obama's EPA is chomping at the bit to shut down the US shale boom. Obama would make a lot of friends within the global faux environmental complex if he were to shut down the nascent US energy and economic boom. And such a move would make Putin a very happy man.

But Putin cannot count on that -- given Obama's ambivalent stance toward his own presidential legacy.

And so Russia sits in a type of limbo, trying to maintain world-class oil production utilising Soviet-era infrastructure -- in the face of a demographic collapse of ethnic Russians, a continuing capital flight overseas, and an enervating brain drain and "womb drain" to freer lands abroad.

The Oil Curse: Over-dependence On Petroleum Revenues In a Volatile Age

In one sense, the price of oil has been very volatile -- boom & bust -- ever since the beginning of the oil age in the late 1800s. The price of oil in US dollars has been particularly volatile. But even when measured against the price of gold, the price of oil has seen some significant peaks and troughs over the years.

Severe oil price swings make it very difficult for countries that are overly dependent upon oil & gas revenues to balance their budgets. Countries such as the MENA oil states, Venezuela, Russia, etc. are finding themselves in a difficult pickle with regard to mounting obligations toward the future.

A new report suggests that Saudi Arabia will need an oil price of $320 a barrel by 2030 in order to balance its swelling government budget.

Russia's fiscal breakeven number varies between about $130 a barrel and $150 a barrel, depending upon who you are asking. Regardless of the exact figure, the number is likely to skyrocket in the future, and Russia is already having trouble making ends meet. What of the future?

Gustafson said that many in Russia's government realize that trouble lies ahead but that consensus is lacking on how to move forward. A reduction in oil revenues could devolve into a power struggle between interest groups over shrinking oil rents... A decline in oil revenues could usher in a major crisis, forcing cutbacks to major spending programs such as pensions and subsidies that underpin the stability of the Putin regime. In such a crisis the state would be forced to confront the difficult choice it has avoided for so long--whether or not to lessen the tax burden on the oil industry and enable it to invest in the next generation of fields and technology. _If Oil Declines, Russia Declines

Putin's agenda of bread and circuses will only suffice to cover up Russia's ruinous corruption and cronyocracy for so long, in the face of stable or falling oil prices.

The chart above reveals that the actual cost of production of oil for these countries is quite low -- in comparison with their fiscal breakeven oil price. The difficulty balancing their budgets in the light of their already huge production profits, points out the depth of oil dependency and corruption so prevalent in these countries.

In the meantime, US oil production continues to grow -- despite the Obama / Salazar agenda of energy over-regulation. The vast deposits of Canadian oil sands are also waiting to be developed, and shipped to market. A rapidly accelerating oil production from the huge Iraqi deposits of oil await a suitable environment of stability. And large oil & gas deposits in Iran, Africa, Central Asia, the Arctic, and offshore deposits around the world, await the proper geopolitical and global economic milieu for development.

Vast amounts of global energy await the proper conditions for development and distribution. Advanced nuclear energy from unranium and thorium, clean coal technologies of IGCC and liquefaction, efficient and scalable GTL technologies, development of vast deposits of bitumens in Canada, Venezuela, and elsewhere, huge deposits of kerogens, and huge quantities of gas hydrates.

Advanced nuclear energy could supply abundant energy for tens of thousands of years. But until such technologies are developed, fossil fuels can bridge the gap in time.

As for carbon hysteria and climate change? Only a clear and dispassionate knowledge of the global carbon cycle of the land and sea can eradicate those phantom fears. For humans to acquire clear knowledge and wisdom on that and many other crucial issues -- a better leadership and a more honest information media will be needed.

Fiscal Breakeven: Why War Is Inevitable

Many people are confused between the concept of oil production costs and the concept of fiscal breakeven, for countries that rely on oil production to finance their government budgets. The graphic below looks at fiscal breakeven for a number of oil states belonging to OPEC.

Real Clear Energy

This is how much each nation must charge for a barrel of oil to support its government budget. For Russia -- not a member of OPEC -- estimates for fiscal breakeven vary between $125 and $150 per barrel.

The price of oil is currently around $85 per barrel, which means that all the countries to the right of Saudi Arabia are losing ground. This is where Hulbert sees the a pending instability. He writes:

"A key outcome of the Arab uprisings has been a significant increase in the prices needed by the producers to manage their fiscal position. This is a serious indictment of the producers' failure to diversify their economies away from a dependence on oil revenues over the past 20 years.

“If the oil price goes much lower, three scenarios could ensue sequentially: a price war forcing prices even lower, a period of internal repression as revenues fail to buy compliance among populations, and internal unrest among producers, which could lead to supply disruptions followed by prices bouncing back." _RCE

Contrast fiscal breakeven levels as pictured above, with upstream production costs for various regions: Costs for Producing Crude Oil and Natural Gas, 2007–2009
2009 Dollars per Barrel of Oil Equivalent¹

	Lifting Costs	Finding Costs	Total Upstream Costs
United States – Average	$12.18	$21.58	$33.76
On-shore	$12.73	$18.65	$31.38
Off-shore	$10.09	$41.51	$51.60
All Other Countries – Average	$9.95	$15.13	$25.08
Canada	$12.69	$12.07	$24.76
Africa	$10.31	$35.01	$45.32
Middle East	$9.89	$6.99	$16.88
Central & South America	$6.21	$20.43	$26.64

_USEIA
Keep in mind that for the US, Canada, most of Europe, etc. the concept of fiscal breakeven does not apply, since these nations do not depend upon oil sales to finance their governments. The concept of upstream production costs, of course, still applies.

The reason that war is inevitable, is that nations such as Iran, Venezuela, and perhaps Russia, are losing money at current oil prices. And yet, oil production is set to increase from North America to Iraq to Brazil to the far East.

Russia is struggling to produce as much oil as it can, using an infrastructure that should have been replaced over 20 years ago. Red Queen Russia is faced with the need to lure more competent international oil companies into the country to upgrade badly deteriorated oil & gas infrastructure. But Russia has a bad reputation of stealing foreign investment outright -- without apology. Getting insurance to do business in Russia can be difficult, for that reason, and due to rampant organised crime, violence, and extortion.

Is there any wonder why Russia is egging on Iran to build nuclear weapons, or supporting Syria's bloody suppression of a popular uprising? Russia thrives on the geopolitical risk premium built into the price of oil -- between $15 and $30 per barrel in some markets. Russia seeks to push that risk premium even higher, to avoid being forced to curtail its ambitious military and nuclear upgrades.

The same dynamic is at work in the thinking of the dictatorships of Iran, Venezuela, and other oil tyrannies. These despots may understand that wars often grow out of control and consume those who sought to gain from them. But some of them may see no other way out of their fiscal trap.

For Europe, North America, Oceania, and East Asia, the lesson is clear: Develop your own energy resources. Conventional and unconventional oil & gas, coal, nuclear, bitumens, kerogens, gas hydrates, biomass, geothermal . . . . Everything must be on the table -- except for the intermittent unreliables which are more destructive than constructive.

It is time for the more advanced nations to decouple themselves from the incredibly unstable OPEC / Russian oil & gas producers -- as much as possible. That is the only way to prevent the inevitable war from spreading out of control.

Oil Prices Fall Well Below Breakeven for Russia, Iraq, Bahrain . . .

Despite a fall of oil prices below break-even levels for several nations, Saudi Arabia shows no inclination of reducing its high rate of oil production.

 Following is a table of some OPEC producers' fiscal

breakeven oil prices: 
                $/bbl
 Algeria        105
 Iran           117
 Iraq           112
 Kuwait         44
 Libya          117
 Qatar          42
 Saudi Arabia   71
 UAE            84
 Sources: National authorities and International Monetary Fund

_Reuters

Above table as of 1 June 2012. Scan the graphs below for snapshots of break-even levels from May 2012 and December 2011. Notice that the estimated break-even levels tend to fluctuate. It is likely that most of those published levels are underestimates.

In Russia, for example, the most recent estimate for break-even price level is $117 per barrel. But Russian insiders estimate the true break-even level is closer to $150 a barrel -- particularly with Putin's ambitious new re-building schemes. May 21st 2012
1 December 2011

Citibank expects that Russia will have a very turbulent next five years, given their estimate that Brent crude prices will likely settle close to $85 over that time period.

Oil producers are beginning to feel the future threat of peak demand for oil caused by multiple factors -- including unconventional liquid fuels -- breathing down their necks. For oil to sell in the coming markets, producers will have to price their product to be competitive.

For some quasi oil dictatorships such as Iran, Venezuela, and Russia, the economic pressure on government spending could lead to intemperate, perhaps violent, actions, geared to force oil prices much higher. They will require a close watching.