They’d push markets and policy debates in unexpected directions.
By Kurt Cobb, oilprice.com
Many energy analysts like to make predictions at the end of the year for the coming year. Instead, I’ll point to five possible surprises in energy–surprises because few people expect them to happen. I am not predicting that any of the following will happen, only that there is an outside chance that one or more will occur. Naturally, these surprises would move markets and policy debates in unexpected directions.
1. Crude oil ends 2016 below $30 per barrel.
With oil hovering in the mid-$30 range it doesn’t seem implausible that at some point in the not-to-distant future, crude oil will dip below $30 per barrel, if only briefly. What would surprise most people is if the crude oil price finished next year below $30 per barrel. The conventional wisdom is that cheap oil is giving a boost to the economy that will lift worldwide economic growth and thus demand for oil. There is also a belief that high-cost producers will simply have to stop drilling new money-losing wells after more than a year of financial Armageddon in the oil markets. This will bring down supply just as economic growth is rising, sending prices much higher as the year progresses.
The alternate view is that oil in the mid-$30 range is a reflection of an economy that has been weakening since the middle of 2014 and foreshadows a worldwide recession which should hit in full force by the end of 2016. In addition, with Iran almost certain to add to the current oversupply as sanctions are lifted and with the continued determination of OPEC to destroy the viability of tight oil deposits in the United States, the oil price could surprise on the downside, even testing $20 per barrel.
2. U.S. natural gas production declines.
Despite persistent low U.S. natural gas prices, U.S. production has continued to grow. Most of the growth has been coming from two places: the Marcellus Shale where ample deposits continued to be economical in the range of $3 to $4 per thousand cubic feet (mcf) and Texas where furious fracking for oil locked in deep shale deposits also produced associated natural gas without concern for the price of that gas.
With oil drilling across the United States in precipitous decline because of low oil prices, we won’t see nearly as much new natural gas associated with oil drilling as we saw in 2014 and 2015. With natural gas now hovering around $2, even the very sweetest of the sweet spots in the Marcellus are unlikely to be profitable to exploit.
Having said all this, U.S. natural gas production growth has continually defied predictions that it would dip in the face of low prices. Part of this had to do with desperate drillers carrying heavy debt loads who had to produce gas at any price in order to pay interest on that debt.
3. Several approved U.S. liquefied natural gas (LNG) export projects are postponed or abandoned.
One of the memes of the so-called shale gas revolution was that the United States would produce far more natural gas than it consumes and that would open the way for liquefied natural gas exports to other energy-hungry countries. Two things went wrong. First, U.S. production, while growing, has not exceeded U.S. consumption. Despite the highest natural gas production in history, the United States had net imports of natural gas of about 3 percent of its consumption so far this year.
Second, with the price of landed LNG around the world between $6 and $7, LNG exports from the United States are currently uncompetitive. Even with U.S. natural gas at $2, when the cost of liquefying and transporting gas–about $6 per mcf–is added to the American price, landed LNG prices would have to rise to about $8 just for American suppliers to break even. And, of course, just breaking even is not a proposition investors are very much interested in.
Now, some of the export projects have already undoubtedly received commitments from buyers to take U.S. LNG under long-term contracts, usually priced at Henry Hub plus a certain amount for liquefying and transporting the gas (plus something to reward investors, of course). If those contracts are in place, then the builders of the LNG export projects don’t care what U.S. prices are. They make money no matter what. And, it doesn’t matter whether they export so much LNG that the United States is forced to IMPORT more from Canada via pipelines or possibly in the form on LNG itself.
Whether buyers make out under such an arrangement will all depend on how world spot LNG prices unfold over the next couple of decades. Undoubtedly, many of those with long-term contracts today would be better off buying in the spot market. But, of course, when prices are high, they have no protection.
What we’ll find out this year is which projects have contracts from buyers and which do not. The ones that do not yet have such contracts will almost certainly be postponed or abandoned. For those that proceed, investors who are not careful to understand how much of the capacity of the project has been taken up by long-term contracts and how much will be sold on the spot market may be in for rude surprises if they are too exposed to the spot market and that market remains soft.
4. Bipartisan support for climate change measures emerges in the U.S. Congress.
You will certainly think I’m reaching here, and it would be a surprise if this does happen. But expectations for the recent climate conference in Paris were extremely low. And yet, world leaders hammered out an agreement that committed the parties to emissions limits with regular reviews. True, there is no enforcement mechanism. But even so, this result was better than most anticipated.
The same could go for a U.S. Congress stalemated on the climate issue. Even though the Republican majority has taken the view that regardless of the science, Republicans are better off opposing any measure to address climate change, not all Republicans have taken this extreme position. If enough of them peel off and join Democrats on even a small measure, it will mark progress–though it will certainly be a surprise coming in an election year.
5. World oil production declines.
In the past world oil production has declined only during recessions or once in the early 1980s following a long period of rising prices and the most severe recession since World War II (that is, until 2008). We’ve had a long period of price rises from 2000 onward, followed by a severe recession. But production continues to eke out some growth.
According to figures from the U.S Energy Information Administration, worldwide production of crude oil including lease condensate (which is the definition of oil) grew by 15.7 percent in the nine-year period leading up to 2005. In the nine-year period from 2005 to 2014, production grew only 5.3 percent despite record prices and investment.
If worldwide production declines, it will almost surely be because drillers simply lay down even more rigs and companies delay development of tar sands mining projects in Canada to wait for higher prices. This restraint would have to counterbalance additions to world production expected from Iran which will have sanctions lifted in 2016 allowing it to increase its oil production and exports substantially. If peace breaks out in Libya, then the rise in Libyan oil production will probably prevent an overall decline in world production. By Kurt Cobb, oilprice.com
Low oil prices aren’t just a short-term phenomenon: their long-term effects will echo for a decade or more. Read… Lower Oil Prices Are Shaking the World
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Corporate insiders dump stocks in cautionary sign for markets
None of the 5 items would be a surprise.
What remains to be seen is just how far energy demand will fall.
More oil demand analysis please. No more supply side narratives/analysis/etc.
If folks have links, please share.
Or Andrea Rossi, or one of the other handful of researchers will break through with the news that “cold fusion” works, and is commercially viable. See: e-catworld.com (which I am not associated with.)
Fusion power has been “the energy of the future” for over sixty years. And it always will be.
If solar technologies were subsidized like fossil fuels have been subsidized, fossil fuels would be dismissed as a curiosity.
I try to be polite, but your post is such a deception I restrain myself from a long chain of Southern colloquialisms which express my opinion about both your intellect and your intent.
From all my reading, there is ONE solution I have run across across which both SCALES and is PROVEN. No dreams required. And has enough zeros to really matter given our current global population and energy demand. It isn’t ideal, given it produces electricity, and oil as a liquid fuel is unmatched, but it can work.
That is a Liquid Fluoride Thorium Reactor (LFTR). You are welcome to go read on your own, since you are here to learn of course, rather than promote deceit. Karl Denniger has a recent COMMERCIAL development bit in this space posted recently:
Thorium was not pursued by the US because it can’t be weaponized and thus did not underpin the costs of bombs for the military. Pretty much that simple. In terms of energy production, it is superior in many ways, which I also wont get into, because readers should learn to research, read, think critically, and come to their own conclusions. Lots of good stuff out there if you go google-fu and rub some brain cells together.
Today, the established nuclear industry is allowed to exist through REGULATORY CAPTURE. LFTR would obsolete their assets, which they are now in the process of milking well past their design lives. Not much more complicated than that.
But the rest of the world may very well press on and perhaps eventually the “West” may be disadvantaged due to their refusal to modernize while protecting the moneyed interests of the nuclear industry.
If Indonesia plays through, this is a game changer as they are tackling the problem in very unique and scalable ways.
Cooter, You are welcome to go read on your own, since you are here to learn of course. I have provided the link. In any case, remember that you heard it from me when the time comes.
Um, don’t read this: http://www.forbes.com/sites/jeffmcmahon/2013/02/22/nasa-a-nuclear-reactor-to-replace-your-water-heater/
Apparently Joseph Zawodny is a crank — and NASA has its share of them – it happens — a big bureaucracy has a hard time getting rid of them – and generally just tries to move them to locations where they are harmless – peter principle at work. It also appears that NASA is so concerned about budgets that it has adopted Oscar Wilde’s position, “The only thing worse than being talked about is not being talked about”, and allowed its good name to be abused. I’ve come across several of these crank videos with NASA’s name attached. A bit sad. But I guess this is no worse then seeing our universities prostitute their formerly good names for monetary gain – like USC did when it put out a bogus study on the Monterey Shale. Money is corrupting science – which allows the shills and con men to exploit public opinion. Very sad.
I live not far from the INEL where most of the research in civilian nuclear energy has been carried out over the past four decades. Met a nuclear engineer in his 60’s who has worked there for years. In the course of our conversation I asked him whether he saw a future for LFTR technology.
He didn’t even know what it was!
At least the Chinese have over 400 engineers working on commercializing the technology, using as a starting point the mimeograph records of the successful pilot project that Weinberg directed at Oak Ridge National Laboratory in the 1960’s.
Perfect example of the distorted priorities of American Exceptionalism, an Empire based upon military power that is entering senility.
Love the handle. May I call you Crazy?
If fusion power were viable it would be on the market, somehow, somewhere, even if were suppressed by fossil-fuel special interests.
But it’s not. Because it’s not viable. It never has been. Show otherwise. You can’t.
I try to be polite, but your post is such a deception I restrain myself from a long chain of British colloquialisms which express my opinion about both your intellect and your intent.
Um, LFTR which Crazy brought forth is a fission reaction. LENR appears to be a fusion reaction. So don’t call Crazy crazy, it is I who babbles aimlessly about fusion reactions.
Correct. India as well as China have made significant investments in thorium reactors. And don’t forget breeder reactors either.
The West would rather recarbonize their economies that develop various forms of nuclear energy. (eg Germany and now France and the US).
Don’t expect the rest of the world to stop the West if they are intent on economic suicide.
Nuclear shill alert.
An exercise in futility.
Attempting to formulate a prognostication of a future market direction, in an atmosphere of such wide spread and deep manipulation, fraud, malinvestment, interference and dislocation, is less than useless.
The supply/demand channels have been so corrupted along with the attendant price discovery mechanisms, on which valuations are gauged, that ANY prognostication based upon them is highly suspect.
Now, now, fossil fuel markets can’t be rigged. Why, that would be illegal.
Why are you using a NYMEX price to determine if production in the Marcellus makes sense? Prices in that part of the US have been well below 2 for years and even trade with a 0 handle in cash.
Agree with your question and your concern about the price differentials. The Marcellus has been an unmitigated disaster for drillers for years, given the prices at the local trading hubs where they have to sell their gas.
But I also understand the author. We do this all the time. In discussing US oil prices, we talk about WTI, but different US grades and regions have very different prices, from the Bakken crude oil grades to California’s Buena Vista Hills or Midway Sunset grades.
Interest rates were used in the past to price risk.
This risk pricing mechanism is broken and has been for some time.
Recent focus on junk bond rates spiking higher, portends a market moving to normalize high risk yields. The upshot will be bankruptcy for the smaller producers, while the bigger ones become even larger. With an inordinate amount of weight to price gouge.
“The same could go for a U.S. Congress stalemated on the climate issue. Even though the Republican majority has taken the view that regardless of the science…”
This is another pet peeve of mine.
Folks, go over to Wikipedia and read about Nucleosynthesis
The very short version is that in stars, where gravity is so crazy, little bits of matter bang together, fuse, AND release energy – all the way up to IRON. After that, little bits of matter bang together, fuse, AND absorb energy.
With this in mind, there is a distribution (log scale) of matter from the lightest elements (most common) to the heaviest elements (least common). This is because stars basically “freak out” once the energy production orgy is over (and sometimes blow up if they are fat enough).
This is know as the “thin mint” theory:
On our little mud ball in space, there is GALACTIC amounts of carbon. So shut the hell up. A few hundred million years ago, the Earth was so awash in carbon that oceans went anoxic (which is where oil comes from). Spend a bit of time with this documentary which gives a well done introduction into what I am attempting to explain:
If the Earth had an unusual volcanic event (geologic terms) it would likely surpass man made carbon emissions. Humans only taps the most economic of fossil fuel reserves. There are huge, HUGE reserves out there we can never recover because it just doesn’t make sense. These are gross orders of magnitude beyond anything humans have or will ever dig up/pump/extract and burn.
Further, the reserves that ARE economic are only partially produced, usually well under 50%, 30%, and even 20% and lower.
It. Is. A. Joke.
Most of our species is just block head stupid. A few of our species is really good at manipulating the rest of the block heads for their own gain. Please don’t help them.
4. Bipartisan support for climate change measures emerges in the U.S. Congress.
Carbon dioxide (CO2) is an important trace gas in Earth’s atmosphere currently constituting about 0.04% (400 parts per million) of the atmosphere. (Wikipedia)
Correct Yoshua. There is no evidence nor scientific consensus that small increases in CO2 measured in a few hundred parts per million will cause climate catastrophe a century from now. The Earth itself started warming 20K years ago as it emerged from the last ice age when most of North America was buried under miles of ice.
The warming plateaued 8,000 years ago and temperatures oscillate +/- 1.5 degree C around a mean. Even in recorded history the Earth was as warm as it is today (or warmer); as well as having been plunged into a mini-Ice Age.
There is plenty of evidence and consensus that climate chaos is happening. The AGU meeting was packed with talks and posters on how to deal with it and the cost analysis and trades. Only a handful of cranks and paid oil shills claim no evidence. The cost in infrastructure of converting to solar/wind is about the same as it was for indoor plumbing as a percentage of GDP – which cranks said we couldn’t afford. Frankly I’m glad they did it anyway.
The oil industry is so used to profiting immensely from the inelasticity of oil demand that they forgot the curve works just as well when the price slides, or how previous highs has incentivized oil thrift consumer behaviour which is much much more resilient than fluctuating oil prices.
If we talk about fundamentals, the annual natural decline rate is 4-5%, that makes about 4 mbd of lost production a year. I appreciate that there are still some new completed projects coming on-line, but over two-year period of low prices about 8 mbd needed to be replaced. OK, I guess 2 mbd were added by SA and Iraq, some added by Russia and also some aditions in the Gulf of Mexico (I doubt that as Pemex production dropped sharply to offset any increases in US production), but some experts say that about 3 mbd of high-cost oil production have already been lost. Add 1.5 mbd in new demand and you get quite a hefty difference. So we may be in 1997-98 scenario, when prices, after double-dip, rebounded strongly and then skyrocketed. The only viable scenario for a fall to $25 is if global recession reduces demand sharply, while oil producers will keep pumping.
4. Bipartisan support for climate change measures emerges in the U.S. Congress.
Humanity is fully destined to roast in a hell of its own making. What’s left of it after any of a number of other avarice-driven catastrophes.
“We’re not going to make it, are we?” John Connor asked. “People, I mean.”
“It is in your nature to destroy yourselves,” said The Machine.
It is only a matter of time.
#4. No. Cutting the use of hydrocarbons will sabotage the economy.
Without constant growth, the capitalist economy dies, credit freezes up and supply lines stop.
Uh oh…instant chaos.
New fusion reactor designs are achieving good results. These designs are not based on tokomak configurations.
Here’s a sample design called Dense Plasma Focus that has achieved two the the three criteria for aneutronic fusion, with reactions measured in billions of degrees. The results have been published in mainstream science journals.
This particular company– LPPFusion– has operated on a shoe-string budget and moving towards achieving sustained fusion reactions on a very short time-scale. It’s not about physics at the moment, more about mundane plumbing to ensure a tight vacuum chamber.
Nothing is guaranteed, but this is quite promising– much more promising than gargantuan white elephants such as the ITER tokomak.
The only practical fusion reactor is 93 million miles away – very clean, no waste, will last billions of years, easy to capture the energy. Fusion proponents, like the fission proponents before them, are trying to maintain the model of centralized control of energy production for rent extraction. Claims about unlimited clean energy from these technologies have been floating around since the 1950s – its bunk. Those that promote this stuff on various web comment pages are either paid shills or ignorant chumps. Not sure which Sarastro is – but since he/she/it is a climate denier, probably a oil-nuclear shill.
Everyone understands that extremely cheap, non-polluting, unlimited energy pose a nightmare scenario to Green Malthusians, who most desire to see global populations (of “other” people) reduced by six billions.
That’s what generates such hysterical hyperbole.