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Negative price for a barrel of oil

by wchurchill Thu Apr 23rd, 2020 at 06:20:39 PM EST

A basic tenet of eurotrib in its early days was that oil was running out and the world was heading for high energy prices and hard economic times.  The $40 negative price for a barrel of oil recently brought that to mind.  
Oil is so plentiful compared to demand that the price was close to 0, but holders of oil were paying storage costs.  So if you wanted to get rid of your oil, you had to pay someone to take it, because they would incur the cost of storage.  Thus the negative price.
One reason for this is that there was plenty of oil left to be drilled.  Those that postulated we were running out were just wrong.
And the higher prices also brought out new technologies to retrieve that oil at the higher price levels, such as fracking..
And another reason is that higher prices are attractive to entrepreneurs who find new technologies to address a potential energy shortage, Elon Musk and many others.
Free markets and capitalism at work.
I hope you all are well.

Welcome back!

If I recall the hypothesis was that we were about to hit peak oil production, not that oil was in imminent danger of running out.

Obviously when prices rose more marginal fields and technologies became economic and thus we had the growth of fracking in North America.

So the peak has been postponed, but it doesn't mean the environmental damage is any less. In fact it gets greater the more extreme the extraction method.

We have also had massive growth in sustainable technologies which has helped to ameliorate the demand curve. Jerome has been a leader in this field.

With the cost of sustainable wind and solar energy continuing to decline it has rapidly become competitive against oil prices. Now if only we could reduce the subsidies to big oil and coal production there really would decline...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Apr 23rd, 2020 at 07:22:43 PM EST

"Free markets and capitalism at work" ...by ignoring externalities and being propped up by state subsidies.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Apr 23rd, 2020 at 07:41:40 PM EST
[ Parent ]
The biggest subsidy via 'externality' right now is that the drillers don't have to post a bond or even put money into a reserve to close in depleted wells. The states will likely get to pick up that cost. One quite reasonable way to reduce subsidies for oil & gas would be to start making such requirements law.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 24th, 2020 at 04:57:09 AM EST
[ Parent ]
Thanks for the welcome.  
Rather than dig back through the subsidy issue, I'll just accept that we're both happy with the boom in alternative fuels and all of the many benefits that come with that.  I'm glad to hear that Jerome is successful in supporting those industries.
My recollection was that Jerome was arguing that $100 oil was going to be the new normal.  But those discussions were more than ten years ago, so I could be wrong.
by wchurchill on Thu Apr 23rd, 2020 at 11:12:28 PM EST
[ Parent ]
Much of what changed was the fracking boom in the USA, which has become the world's leading oil producer. Ironically, fracked fields don't even pay for themselves. That linked article is from Sep. 2019 when oil was over $60/bbl. Futures for June are under $20/bbl now, banks have noticed and 'consolidation' appears immanent. A lot of oil/gas wells look to be sold at fire sale prices, accompanied with a lot of capital destruction. Sorry about those pension funds.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 24th, 2020 at 04:46:08 AM EST
[ Parent ]
I don't want to take the time to dig into the details of the cost structure in fracking.  But the cost structure is very different than those of massive oil fields.  Fracking is low fixed cost/ high variable costs; oil fields are high fixed costs/low variable.  Fracking can start up quickly and cheaply.  So that really means that high oil prices, let's postulate $80/barrel just for discussion purposes, a number of entrepreneurs and some small established businesses will start up.  and they'll make money while those prices stay high.  They will shut down when prices drop off.  It's the nature of their business model.

Very high oil prices brought in fracking.  But they also brought in investments in new forms of energy.  Billions++ of investments have been pumped into Tesla, solar power, wind power, etc. etc.  The economic and political implications of that over the years has been big--disaster for some, great opportunity for others.  And we're only at the very beginning of this transformation.

by wchurchill on Sat Apr 25th, 2020 at 07:39:51 PM EST
[ Parent ]
The negative oil price, is if I understand things correctly a local result of a glut from both lack of demand, lack of transportation to other markets, future markets and an unwillingness to cut production due to the nature of fracking. It is interesting, but I doubt it will last.

I don't remember much discussion about the price after the peak, more of how the price would rise as we approach the peak. And I think it is fair to claim that the peak was indeed passed in conventional oil. All areas in Frank' picture except North America are stable or declining.

Fracking did change the picture, but as far as I understand it, it is a poor source of energy with low EROI, even ignoring the damage it causes. I suspect it will be up there with Soviet ideas about turning around rivers among examples of late imperial hubris.

I have some vague recollection of whale oil (or was it whale bone?) having wild swings in price after the peak. So that would fit, if I remember it correctly.

by fjallstrom on Fri Apr 24th, 2020 at 12:03:26 PM EST
I'm not sure whale oil fits since, if my memory serves, that was mostly driven by investment cost compared to price. Here we have a clear demand collapse, coupled with the fact that the vast majority of oil traders can't actually physically receive it. The weirdness of fracking on the other hand is that the whole industry was never profitable, their investment horizon is something like three years and heavily frontloaded, yet they just keep pumping.
by generic on Fri Apr 24th, 2020 at 12:45:45 PM EST
[ Parent ]
Whaling, I am thinking more that after the peak you still have whalers but they are catching less. So parts of the market needs to move to other resources, and also whalers needs to move if they can't sell and catch. That might give wilder swings of the price as you move between high price, then some industries change because they can't get whale products, price falls and some whalers leave, price gets high and some industries change etc. Don't think I remember any negative prices, but then again they probably didn't have as advanced financial tools.

Fracking reminds me a bit of some silver mines in northermost Sweden in Sweden's Great power era. They never ran a profit, but in accordnace with the economic theories of the time they didn't really have to. Even though the state paid out more silver in coins then the silver the state earned it was in the mercantilistic model considered a success because they were digging up silver, and accumulation of nobel metals is the way to get rich. As the Great power era ran out, so did the support for unprofitable silver mines.

by fjallstrom on Fri Apr 24th, 2020 at 01:52:54 PM EST
[ Parent ]
I have a 10 gallon gasoline container built into my car, and I will fill it up as soon as the gas station offers to pay me to do so. Honestly, though, I don't think the meters on their pumps can calculate negative prices.

Also it will be interesting to see how those small, flexible fracking companies recover from bankruptcy. One expects the US government to bail them out as usual...

by asdf on Sun Apr 26th, 2020 at 12:53:19 AM EST
That would be outrageous if they bailed out fracking companies.  I don't see any justification for it.
by wchurchill on Sun Apr 26th, 2020 at 08:23:38 PM EST
[ Parent ]

Of course it may not happen. Which would be good.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Apr 28th, 2020 at 05:03:40 PM EST
[ Parent ]
I expect the bulk of the fracking and shale players will be swallowed by the big boys, except for those already closely associated with the bigs such as Halliburton.  I expect the standard procedure will be the fracking/shale company filing a Chapter 11 bankruptcy with a prepackaged liquidation plan in which one of the big oil companies buys the assets and the creditors are left to carve up the funds from that sale.  Once the bigs have soaked up all these assets, they'll run to Congress for a bailout to "save the US oil and gas industry" because they have the political clout to do so.
by rifek on Sat May 9th, 2020 at 02:58:34 PM EST
[ Parent ]
Very interesting thoughts.  We'll see,,,,
by wchurchill on Sat May 9th, 2020 at 05:24:29 PM EST
[ Parent ]
by Oui on Mon May 11th, 2020 at 09:57:04 PM EST
[ Parent ]
Indeed, I was a peak-oiler, in fact I followed Jérôme from the Oil Drum to Eurotrib.
I have never been afraid to be wrong, nor embarassed about changing my opinion when better information emerges. Like many, I indulged in wishful thinking : already very conscious of global warming, an early physical peak of oïl extraction was an appealing element of a "solution".

However, resource exhaustion is - traditionally, historically - a driver of societal and civilizational collapse. What we need is something new : a renouncement, a voluntary choice of harder options, a rapid transition to a sustainable future. That would be a sign of maturity... I keep hoping.

The stone age didn't end for lack of stones.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Apr 28th, 2020 at 07:51:40 AM EST
"The stone age didn't end for lack of stones."  It seems to have ended with better tools, use of a variety of materials, innovation and human ingenuity,,,amongst other things I'm sure.

Oil will likely suffer the same fate.  The cost of drilling, storing and transporting will likely make oil the high cost option.  Other technologies will win out due to lower costs, cleaner use, etc.

by wchurchill on Fri May 1st, 2020 at 05:54:18 AM EST
[ Parent ]

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