Sunday, December 30, 2007

The Coming Oil Glut and $30 Oil, $1.50 Gas?

The tripling of oil prices since the summer of 2003 has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower.

With prices close to the inflation-adjusted record, energy companies and governments are investing heavily in facilities that generate crude and crude substitutes. Consumers of fuel oil and gasoline are starting to economize, and over time, these changes in behavior will shift the balance of power in their favor. When that happens, an oil glut will emerge, and the price will plummet. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.

Read more here.

(HT: Newmark's Door)

15 Comments:

At 12/31/2007 12:45 AM, Anonymous Fred said...

Not gonna happen.

 
At 12/31/2007 10:30 AM, Anonymous Anonymous said...

Fred is right, it ain't gonna happen but if you could return the value of the dollar to it's 2000 level and get rid of the speculative factor we would currently be paying $35 to $40 for oil.

 
At 12/31/2007 11:41 AM, Blogger Brian Dunbar said...

Not gonna happen.

I find the reasons in the article more compelling than a flat 'not gonna happen'.

What makes you think so, Fred?

 
At 12/31/2007 3:51 PM, Anonymous Anonymous said...

I also doubt that we are going to be seeing cheap gas in another few years for the following reasons:

1. increased demand from China, India & SE Asia; the number of cars & motorcycles in this part of the world is increasing; China has been one of the best performing car markets for Ford for example.

2. lack of an economically viable alternative to gas (bio-diesel in Europe has had the same problems as ethanol in N.America with rising costs of raw materials, lack of customer acceptance, and dwindling political support for subsidies)

3. shortage of refinery capacity in the US creates a bottleneck in the supply chain; the last new refinery was built in the 1970s, thanks to the Nimby factor, it is doubtful that this picture will change any time soon

4. the majority of the world's oil resources are now controlled by government oil companies and some of these resources are being very poorly managed (ie. very little capital investment/exploration and proceeds used to fund political projects) Brasil's oil co. is one of the few that is well managed.

5. While the world is not yet running out of oil, it is running out of "easy oil". Most of the easily accessible oil and oil in politically stable countries has been tapped.

6. Gas prices are not sufficiently high to change consumer behavior. When one looks at vehicular sales, cross-over vehicles are outselling economy cars (as well as larger SUVs and vans). While this is an improvement, the consumer has not abandoned the desire to drive a large and powerful car.

7. Fuel efficient technology will have to be passed on to the consumer in increased vehicle costs. Consumers will consider whether fuel savings are sufficient to justify increased capital costs.

For the above reasons, I very much doubt that new sources of supply and conservation will deliver $35 to $40 per barrel oil. A more modest $70 per barrel might be achievable.

 
At 1/01/2008 10:24 AM, Blogger Rick Ballard said...

"3. shortage of refinery capacity in the US creates a bottleneck in the supply chain; the last new refinery was built in the 1970s, thanks to the Nimby factor, it is doubtful that this picture will change any time soon"

Foreign oil companies building Texas-size refinery in Port Arthur

I suppose you meant "aside from "the largest oil refinery in the U.S.".

 
At 1/01/2008 10:44 AM, Anonymous Anonymous said...

He could be right over the long term but in the short term 125-150 is most likely in the cards this year. Oil like Gold is increasingly being seen as an inflation hedge against a country that is devaluing the worlds reserve currency. OPEC for one simply has no reason to do make the mistake they made in the late 70's. China is allowing the RMB to appreciate in an attempt to lower the dollar induced inflation before the Olympics this year and the Japanese will be repatriating yen in march driving the dollar lower.

 
At 1/01/2008 1:36 PM, Anonymous Anonymous said...

Thanks, Rick for the link to the article on the Texas refinery. It is nice to see that refinery capacity is expanding.

http://www.eia.doe.gov/emeu/finance/usi&to/downstream/update/#tab3

As you will note from the above link, total number of refineries in the U.S. was 149 in 2004 down from 219 in 1987.

http://news.bbc.co.uk/2/hi/business/4296812.stm

The above article from BBC Oct. 2005 states: "During the last 29 years, US gasoline consumption has risen 45%, yet not a single new refinery has been built." (ie. 1976). The article also mentions the shortage of refinery capacity and the shortages after Hurricane Katrina when several refineries went offline.

 
At 1/01/2008 4:59 PM, Blogger Rick Ballard said...

What does the number of "new" plants have to do with refinery capacity?

Refining capacity has increased 11% since 1985 and the Port Arthur expansion by itself will not exceed the capacity added in '98-'99.

I find it intriguing that ARAMCO is adding at least 2.8 mbd in refinery capacity over the next five years while world production is scheduled to increase by some 6.4 mbd. Pretty agressive.

 
At 1/02/2008 11:51 AM, Anonymous Anonymous said...

Rick,

I agree with you that the present refineries have increased production over the last 30 years. I have read articles by industry analysts who assert that the present refineries are running at full tilt with very little capacity to expand further. It would appear that you do not share this view so let's move on.

I must assume that you disagree with my conclusion that cheap gas is unlikely to return as well as the information presented to support that assertion. I do not anticipate a significant decline in demand (a Pigovian tax ie. gas tax would create an incentive for conservation however, it appears that there is no political will to support this policy) and I believe there are significant impediments to expand supply.

Perhaps, you could tell me why my other assertions and conclusion do not hold or present counterarguments and evidence to support the view that cheap gas is only a few years away. I would like to know why you support this view.

 
At 1/02/2008 8:20 PM, Blogger Rick Ballard said...

Anon,

I would not place a wager on $1.50 gas, period. Not because of the factors that you mention but because the governments involved on the production side have become very good at managing the illusions concerning reserves that underly the speculative play that is currently propping the price. Brazil isn't playing along and if Sugar Loaf comes on at the optimistic projection levels we should see a drop.

The other scenario that could cause a drop to $1.50 is 7% unemployment. I'd rather pay $3 than see that.

I did not disagre with your other provisos but the refinery capacity problem does not require a greenfield plant solution. I expect to see additional expansions such as these continue to come on line.

 
At 1/03/2008 1:05 PM, Anonymous Anonymous said...

Rick,

On considering the degree to which political instability in places like Liberia, Iraq, Iran, Congo, etc. is driving recent price volatility, one cannot ignore the degree to which oil prices reflect bearishness rather than sound fundamentals.

Oil prices like gold prices tends to reflect retrenchment and anxiety. It will be interesting to see what actually emerges when the hype starts to abate.

Strictly from the standpoint of supply and demand, one would expect the world price of oil to create a substantial incentive to increase supply by developing new sources as well as bringing higher cost sources such as the oil sands of Alberta and heavy crude online.

Today's WSJ reported that the U.S. has approved drilling for oil & natural gas off the coast of Alaska much to the chagrin of environmentalists. As you have indicated, refinery capacity is also expanding.

As Peter Drucker used to say when you have a problem and none of the conventional solutions will work, the answer is to innovate. Technological innovations can completely change the conditions on the ground. Altanino has developed a battery which can store over 2 Megawatts of power and has just set a new land speed record with an electric car.

Who knows perhaps $1.50 gas is possible.

Thanks for a very enjoyable thread.

 
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At 5/26/2008 11:26 AM, Anonymous Anonymous said...

OIl at thirty dollars a barrel, a buck fifty for a gallon of gas? NOT HAPPENING!! Even if by some miracle oil drops to thirty buck a barrel, which it wont, gasoline will NEVER be cheaper than three dollars a gallon again. I predict gasoline will never be cheaper than four dollars a gallon again. Why may you ask? because the American consumer is willing to pay the piper and there is no reason why oil companies should charge less than what the market will bear for it. Considering oil is a finite resource that has peaked and is on the decline, I predict oil will never be cheaper than sixty dollars a barrel again even when the speculative bubble bursts and the price will streadily increase as time passes. Oil will one day run out and heaven help us if we do not have a viable alternative when that happens.

 
At 12/04/2008 1:50 PM, Anonymous Anonymous said...

Its happening. Maybe even below 1.50!!!

 
At 1/13/2009 4:49 AM, Anonymous Anonymous said...

Whoever wrote this is a genius

 

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