Low Prices Batter Oil Industry (And Later The Rest Of Us)

For the rest of us who are consumers rather than producers, low prices which seem felicitous now could foreshadow instability and trouble ahead. The world still depends on oil for about one-third of its energy needs. Oil production (defined as crude oil including lease condensate) has been in decline since well before the pandemic, namely, since November 2018. With the onset of the pandemic, production plunged as demand careened downward in response to the shuttering of vast parts of the world economy to fight the pandemic. Production has recovered as demand rebounded, but it remains significantly below the peak of late 2018.

It turns out that oil prices this low cannot make enough of the oil left to drill in the world profitable. Much of what's left comes in the form of offshore fields, arctic deposits, and shale deposits, all of which have high costs of development. Companies are not going to make significant new investments in raising production until they can see sustained prices that are much higher. In the meantime, production will tick down as depletion continues to overcome new well production.

Where will it end? Petroleum geologist and consultant Art Berman believes that U.S. oil production will be 5 million barrels below government estimates by July 2021 as U.S. shale production declines rapidly without renewed investment. He has logic on his side. Right now less than a third of the rigs needed to maintain U.S. production are deployed. Even if that number climbs from here, it is already baked in the cake that U.S. production will fall precipitously in the coming year.

This matters because the United States has contributed to 73 percent of all global growth in oil supplies since 2008. In 2018 it contributed 98 percent. Production declines in the United States matter as the rest of oil-producing world in aggregate is just treading water.

If production ticks down and the economy continues to sputter, oil prices may remain low. But at some point production levels will dip below demand and oil prices will likely spike. If the economy recovers gradually and continuously, that could support higher prices for a while. But the main problem is that oil prices high enough to support sustained development of new high-cost resources may not be affordable for consumers. Prices above $80 per barrel could be a significant drag, and prices needed for deepwater development (water more than 600 feet deep) where much of the large resources remain may need to be well above $100 per barrel on a sustained basis.

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Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular ...

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