The crash in the price of oil may change the oil market – a look at the IEA’s “Oil Medium-Term Market Report 2015”

On Tuesday 10 February at 13:00 GMT the IEA released its “Oil Medium-Term Market Report 2015”. The day before the release I was contacted by Jens Ergon at Sveriges Television (“Sweden’s Television, SVT) who wanted to get my opinion on the report. I had a number of hours to read through the 140 pages of the version provided to media prior to the report’s official release. This meant that I could comment on the report immediately it was released. SVT has now reported some of those comments in an article that Jens Ergon has written, “The Price Crash Will Reshape The Oil Market”. The subtitle is, “American oil boom behind the falling price. But opinions vary widely on the future of oil.”

Let’s now go through the article together and I will make a few comments as we do so.

“The comprehensive fall in the price of oil has taken the world’s experts by surprise. Since the summer of 2014 the price of oil has more than halved from over $100 per barrel to a price today of around $50. Last Tuesday the International Energy Agency, IEA, made its first report since the price fall.

Oil majors fail to find reserves to counter falling output

Big oil companies had a poor record of finding and producing oil and gas last year, according to figures out in the past week - and big cuts in spending in response to falling crude prices could undermine their plans to turn that around. Four of the world's six biggest oil firms by market value - Royal Dutch Shell, Chevron, BP and ConocoPhillips - released provisional figures showing together they replaced only two-thirds of the hydrocarbons they extracted in 2014 with new reserves. Combined, those four and industry leader Exxon Mobil posted an average drop in oil and gas production of 3.25 percent last year.

All predict their output will increase and new reserves will be added in coming years. But the 2014 results echo longer-term trends. Over the past decade, the biggest Western oil companies have seen reserves growth stall, production drop 15 percent and profits fall by almost a fifth - even as oil prices almost doubled, a Reuters analysis of corporate filings shows.

Read the full article here:

How cheap is oil today?

If one studies the price of oil between 1980 and the present day one can see that the price was lowest on 10 December 1998 at $9.10 per barrel. During the period 1990 to 2014 the average rate of inflation in the USA has been 2.59%. At that rate of inflation a price of $9.10 equates to $13.70 per barrel today. It was in 1998 that Colin Campbell and Jean H. Laherrère published their famous article, “THE END OF CHEAP OIL” in Scientific American. Today’s “low” crude oil price of around $50 per barrel is more than 250% higher than the equivalent price in 1998. The price of half a year ago of $100 per barrel would be over 600% higher than the 1998 price. Is there any better evidence that the cheap oil is gone and we will never see such cheap oil again?

Those who follow the oil story know that in 1956 M. King Hubbert said that the USA’s conventional oil production would reach a maximum between 1965 and 1970. Hubbert was ridiculed for his estimate and in 1970 his opponents happily declared that “we have never produced more oil than we are doing today”. The fact is that, at the peak, more oil is produced than ever previously.

200 billion barrels of new oil production is needed by 2030

This 21 November the world’s oil analysts are attempting to guess what OPEC will decide at its meeting in Vienna on 27 November. Before each OPEC meeting Bloomberg News asks a number of analysts their opinions on OPEC’s future oil production. Yesterday Bloomberg News published what 20 analysts think regarding the 27 November meeting. Half of them believe that OPEC will reduce its production while the other half believe it will not change. The possibility of impending reductions in oil production affected the oil price such that, in London, the price of Brent crude for delivery in January rose by 67 cents to $80 per barrel while in New York the equivalent price to the WTI rose by 95 cents to $76.80 per barrel.

The fall in the price of oil by 30% since June has raised the issue of the profitability of oil production or what is called the “breakeven point”.

"Russian primary industry cannot withstand this roller coaster."

Katarina Lagervall DN called me last Friday and we had a long and interesting conversation about oil and the global economy. A summary of our conversation is now available at [in Swedish] under "Russian primary industry cannot withstand this roller coaster." (I have added some clarifications with parentheses)

(Published 2014-11-07 13:17)

Falling oil prices on the world market are hard on the Russian economy. But those who should be most worried about these developments are the oil-dependent nations of the EU. So says oil analyst Kjell Aleklett.

- Our energy costs will be expensive in the long run because we do not have any of our own fossil natural resources. Russia has oil in the ground and if they do not produce it now, they can do so later, he said.
Since June, the price of Brent crude oil has dropped from $ 113 per barrel down to today's price of around $80 a barrel.

Is the Johan Sverdrup oil field in Norway a new Norwegian Bonanza?

Johan Sverdrup

Last Monday, Statoil made a statement to the press about the oil field Johan Sverdrup. The fact that The Wall Street Journal highlighted this news meant that it was spread around the world. The title of their article was "Statoil Forecasts New North Sea Oil Bonanza". From the WSJ article itself we learn that the expected production profits from the field are about $200 billion over the next 50 years (1.350 billion NOK, NKR). The fact that the state is expected to seize 670 billion NKR of this means they will be taking 50% of the production value. One could easily get the impression that the rest of the income would accrue to Statoil, but the fact is that the producer only owns a part of the production rights.

Later in the article the WSJ discusses Norway's oil production, noting that it was 1.46 million barrels a day in 2013 and that this is less than half of Norway’s maximal production that occurred in 2001.

The Baltic Sea is of increasing importance for Russia

My article on the strategically important of the Baltic Sea for the Russian oil exports, is now published in Aftonbladet, a Swedish tabloid and one of the larger daily newspapers in the Nordic countries. Read the article in Swedish on, ”Östersjön får allt större betydelse för Ryssland”.

The Baltic Sea is of increasing importance for Russia

The submarine hunt in Stockholm's archipelago is over and yet again we can state that there were only indications of underwater activity. At the same time we have heard from, among others, Finland that Russia has recently increased its military activities. Analysts tell us that the Cold War has returned and comparisons are made with the Soviet era. Many people in various branches of the media will now analyze the increasing tensions between Sweden and Russia.

Peak Oil is still our future’s reality

(This is the final replay in the discussion on "The falling oil price may presage a future recession.")

In a reply to my previous contribution, “The falling oil price may presage a future recession”, Civil Economist Magnus Grill (19 October in Swedish) says that I assert, “that Peak Oil does not mean that oil will run out rather than that demand for oil will disappear. Thus it is no longer a question of Peak Oil from a production standpoint rather than now it is from a demand standpoint. This means that Aleklett has completely altered his early reasoning.” I must disappoint Magnus Grill. Peak Oil is still related to production of oil from oilfields.

When we discuss Peak Oil we do this based on the fact that oil production in an area or group of areas reaches a maximum and then declines.

The falling oil price may presage a future recession

This is the English translation of my article in the Swedish newspaper Svenska Dagbladet, Fallande oljepris ett tecken på recession)
Kjell Aleklett

brent oil 141015

Since July the price of Brent crude oil has fallen from $113 per barrel to $85.62 (on October 14). Historically we saw a similarly rapid fall in the in the oil price in late 2008 followed by the start of the global recession the year after. In 2008 the fall from July to December was from $140 down to $40 per barrel. At the moment we see no slowing of the price decline and we do not know how low the price will fall.

The fact that increased global energy consumption is a measure of economic growth means that these recent trends are pointing to an economic contraction.

Russia (Rosneft) and the USA (ExxonMobil) strike oil in Arctic well


News is spreading around the world that Rosneft and ExxonMobil have been successful in their joint effort to find oil in the Kara Sea up in the Arctic. Personally, I am doubtful that we should produce this oil but now that the oil appears to exist there we must place it in our global energy system. From the headlines spreading around the world one can get the impression that the discovery will change the future of oil production.

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