All posts by wluyties

The Great Oil Slump of the 2020s – Part 1, Supply

Guest blog by S. A. Shelley  Many readers are probably wondering what is happening with oil prices, especially with all the efforts by OPEC+ to curtail supply and all the efforts by various trade groups and governments (e.g., Denmark and China) to affect demand. Every year in January, big companies (BP, EXXON) and big organizations (OPEC, EIA, IEA, OECD) release their energy reports. I don’t have quite the scale or resources that they do, but I try my best. Back in 2016, when I wrote about oil demand peak, I included a chart of a possible oil price path for the next few years (Fig. 1). I was under on the demand and supply a bit, and relied upon the 2016 futures prices to guide my price thinking, but I was damn near bang on with the timing of the most recent collapse of oil prices, Q3 of 2018.

Fig 1 – SAS prediction of oil price collapse from 2015

In order to get a sense of the future direction of oil prices, and by extension which technologies to invest in or which companies will thrive or fold, we need to consider the current likely future states of oil supply and demand in order to make a self-educated forecast of where the equilibrium will be in the future (down). This blog, Part 1, will focus on oil supply and another blog, Part 2, to be posted later, will focus on oil demand. So, all other things being equal, as oil prices crashed (again) then that means that the world must be in an oversupply condition (again). Sit back, grab a beer and a smoke, or a Timmies and a donut, and hold on tight as I lead you through a wonderful collection of charts and divinations.

I. Increasing Oil Supply due to Increasing Tight Oil Production

A lot of global oversupply is the result of the amazing growth in shale oil production in the United States, primarily the prolific production coming out of the Permian Basin in West Texas (Fig. 2).


Fig. 2 – The Rise of Shale Oil

In terms of global oil supply, the United States has surpassed both Russia and Saudi Arabia to become the largest oil producer in the world (Fig. 3).

Fig. 3 – Monthly crude oil production

(Aside, this resurgence of United States oil production, along with the fracturing of OPEC, was forecast back in 2008 by Paul Michel Wihbey in his prescient book, “The Rise of the New World Oil Order”).

The United States is not done growing its supply. Once the pipeline constraints in West Texas are resolved, Permian basin production can increase by another few million barrels of oil per day. Furthermore, if Americans can replicate the success of the Permian basin with the Bakken, Marcellus, and eventually the Greater Green River Basin (with estimated reserves of over 4 trillion barrels of oil, yes trillion), the United States will become totally self-sufficient in oil, and oil from the Middle East could be stranded. One thing I never wager against is American ingenuity to figure things out, but hopefully without reverting to again using atomic bombs.

There are huge tight oil formations in other places too, including Argentina, Canada, Mexico, and Poland, and thus the potential for tight oil production from those places is also significant. Though maybe I should not include Canada as a potential tight oil supplier as Canada is suffering a politically self-inflicted mess that is making it difficult for Canada to maintain its current supply to global markets let alone expand it. The particular problems of Canada will be addressed in a separate blog.

II. Decreasing Oil Supply due to Mismanagement by Low Tech Legacy Suppliers

In addition to the growing shale oil production in the Unites States, there is the danger of Low Tech Legacy Suppliers (LTLS), also coming back on stream to quickly add to the global oil supply. My two favorite LTLS states are Mexico and Venezuela (Fig. 4). Looking at oil production in the last ten years together between Mexico and Venezuela, the loss of production is almost 1,400,000 bbls / day.

Fig. 4 – Crude oil production decline in Mexico and Venezuela

This loss of production is mainly due to mismanagement of fields and infrastructure and not so much because of depletion or loss of access to world markets. Thus, with a bit of investment in hardware and meritocratic operators, the production of these two states could quickly increase back to historical levels which would then add back those 1,400,000 bbls of oil / day to an already well supplied global market.

A similar review of production in states like Libya, Angola, etc., reveals that compared to historical averages, those states are under-producing by around 500,000 bbls / day, each, and those states could also, if the political will and competence is there, quickly rebuild production volumes.

Iraq, much affected by war, has started to rebuild its production and is already producing at around 3,200,000 bbls / day with plans to increase production by another 1,500,000 bbls / day. Iraq is another LTLS country which just needs to apply a bit more hardware and people to ramp up production quickly.

OPEC+ has for reasons of self-interest been ignoring the problems of Venezuela, and OPEC+ has probably been grateful that many other oil states have also been under producing.

III. Increasing Oil Supply due to the Application of “Big Data”

A new technology that is contributing to a boost of oil production and upward revisions of recoverable reserves is digital and data analytical technology. Though not yet widely applied in the industry, where it is applied, data analytics is already having a profound impact on production and costs. A good example is the announcement by BP that with better data analysis, BP was able to find additional, significant reserves in way of its Thunder Horse platform in the Gulf of Mexico. The result of this discovery at this one site is forecast to boost oil supply by about 100,000 bbls / day.

It is not just the success with reevaluating data about existing fields; data analytics is now being used to improve efficiencies and output across the whole spectrum of oil production activities, including drilling. Most applications of “big data” to oil are still somewhat hush-hush, but conversations with a few neighboring firms suggest that the impact is substantial.

IV – The World is Awash with Oil

The global oil market is already well supplied with oil and it won’t take much to flood the global markets. Adding even just a fraction of the technically available LTLS or tight oil to the global markets is very doable in the short term. Perhaps just an additional 100,000 bbls / day of new supply is enough to flood the market and keep oil prices low, even very low, because supply is plentiful but demand is weakening. Demand will be discussed more in Part 2.

Right now suffice it to say that oil supply and oil oversupply is here to stay for a while.

Published by Our World of Energy

California Does Not Need Big, Very Expensive Floating Offshore Wind Farms

Guest blog by S. A. Shelley

Californians do not need big and very expensive offshore floating wind farms. In fact, nobody needs big and very expensive offshore floating wind farms. Fixed offshore wind farms started out very expensive, requiring significant government subsidies, but small. They have since matured to allow for big inexpensive offshore wind farms with no government subsidies of any kind. The latest fixed offshore wind farms are producing and supplying electricity to their grids at a cost competitive rate compared to the current supply, and this is a result of technological evolution, improved execution strategies and increasing turbine size (power output). However, floating offshore wind technology is still in the nascent, small and heavily subsidized phase of the technology lifecycle. Yet, for some reason, various consortia are pitching huge floating wind farms right off the bat to California. That’s a big problem and folks in California need to watch that they do not get forced to subsidize those projects.

Continue reading California Does Not Need Big, Very Expensive Floating Offshore Wind Farms Published by Our World of Energy

Still a Tesla basher? – It’s time to drive a Model 3

It seems that bashing Tesla is the favorite topic for the financial news media. Whether it’s a story about Tesla’s profitability, production woes, product quality, lack of a real market, impending competition from “real” automakers like Volkswagen, or the behavior of Elon Musk, the message is clear – Tesla is all hype with no substance and destined to fail. Apparently, the only question is when. In the present world of “fake news”, social media “bots”, and a news climate that only values the bad, how does a normal person wade through all the BS and make a good decision on what car to buy? Well, I have the answer…just go drive a Tesla Model 3. Until you have the experience of driving a Tesla, you won’t truly understand how it has changed the concept of an automobile. Continue reading Still a Tesla basher? – It’s time to drive a Model 3 Published by Our World of Energy

The human side of the oil market crash

Note from your editor – over two years ago OWOE printed a similarly titled blog The Human Side of the Oil Price Collapse, and shared a story from an expatriate couple living in Angola about the impact on the people of a country where everything is directly or indirectly dependent on oil. This blog by an engineer in Houston brings the situation closer to home and shares how she and her family have coped and even prospered.

Guest blog by Ms. Kelley Ellis

My husband and I are native Houstonians.  We were kids in the 80’s when the oil market crashed, and although neither one of us had parents in the oil business to be impacted directly, like all families in Houston, the economic downturn trickled into our families’ realities.  So when we got married soon after I graduated from Texas A&M at Galveston in 2000 with a degree in Maritime Systems Engineering as oil prices climbed back up from a 1998 low, we knew that my job would never offer the stability that his job as a firefighter offered. Continue reading The human side of the oil market crash Published by Our World of Energy

The latest push for fossil fuels – rhetoric or reality? Part 2 – oil

By W. H. Luyties, editor OWOE. Recently, OWOE initiated a series of blogs to take a closer look into the key US government actions to promote fossil fuels. Since the 2016 election, one lightening rod topic has been the push to increase coal and oil production in the US. This has energized both proponents of fossil fuels, who see an opportunity to possibly save their industries (coal) or increase production (petroleum), and opponents, who fear the environmental consequences of such a change. But is this a real threat to the global move away from fossil fuels, or is it simply rhetoric to energize a political base? Continue reading The latest push for fossil fuels – rhetoric or reality? Part 2 – oil Published by Our World of Energy

Carbon Taxation – A Policy for Combating Global Warning That Has Been Poorly Planned, Implemented, and Marketed

A carbon tax and a carbon cap-and-trade program are fiscal policy tools that a government can implement to reduce carbon dioxide (CO2) emissions to the atmosphere (see figure) and help in the fight against climate change. Continue reading Carbon Taxation – A Policy for Combating Global Warning That Has Been Poorly Planned, Implemented, and Marketed Published by Our World of Energy

Throwing Away 3 of every 4 Gallons of Gasoline Bought

Guest blog by S. A. Shelley

I love the guys and gals over at Lawrence Livermore National Laboratory (LLNL). They tend to produce some of the coolest energy studies with nifty graphics (all the while hiding the space aliens from us). Earlier this year, as it does every year, LLNL published the U.S. energy flow chart which illustrates total US energy production by source and how it is consumed. Continue reading Throwing Away 3 of every 4 Gallons of Gasoline Bought Published by Our World of Energy

The latest push for fossil fuels – rhetoric or reality? Part 1 – Coal

By W. H. Luyties, editor OWOE. With the election of Donald Trump as president of the US and control of all 3 branches of the government in the hands of Republicans, who have historically been strong supporters of fossil fuel interests, one lightning rod topic has been the push to increase coal and oil production in the US. This has energized both proponents of fossil fuels, who see an opportunity to possibly save their industries (coal) or increase production (petroleum), and opponents, who fear the environmental consequences of such a change. But is this a real threat to the global move away from fossil fuels, or is it simply rhetoric to energize a political base? Continue reading The latest push for fossil fuels – rhetoric or reality? Part 1 – Coal Published by Our World of Energy

Net Metering: A brilliant concept whose time has passed?

There is no doubt that the practice of net metering for residential solar photovoltaic systems has been a key enabler of the rapid growth of rooftop solar generation in the United States (see OWOE: How does net metering encourage private investment in home solar systems?). But has it outlived it usefulness? Or, has it even become a barrier to greater renewable penetration into the marketplace?

Net Metering (Illustration by Andy Warner)

Continue reading Net Metering: A brilliant concept whose time has passed? Published by Our World of Energy