Tuesday, November 4, 2014

The Oil Crash: it is happening now!

James Schlesinger said once that humans have only two modes of operation: complacency and panic. This bimodal kind of functioning seems to be applied also to the oil market, where everything is judged on the base of a simple binary rule: high prices: bad; low prices: good. So, with oil prices falling rapidly during the past few days, the general attitude seems to be mostly of rejoicing. All worries about peak oil are being swept under the carpet and SUV owners seem to be happily expecting the fall of gas prices that will allow them to fill up their tanks on the cheap.

Unfortunately, the bimodal perception of the world makes people blind to the fact that nothing happens in isolation in the world. It is the basic law of complex systems: you can't do just one thing. If something changes in a complex system, it is because something else has made it change. And if something changes, then something else will have to change. Complex systems work in this way. And changes are unavoidable and not always for the good of those experiencing them.

That's true also for the crude oil producing system, which is not an isolated system. Changing some of its features reverberates all over the world. So, bringing down oil prices has an effect on other parameters. Look at this figure (from an article by Hall and Murphy on The Oil Drum)

Of course, these data are to be taken with some caution - they are only estimates. But there are other, similar, estimates, including a 2012 report by Goldman and Sachs where you can read that most recent developments need at least 120 $/barrel to be profitable. So, you see what is the problem? Prices under 80 $/barrel destroy the profitability of about 10% of the oil presently produced. If prices were to go back to values considered "normal" just 10 years ago, around 40 $/barrels, then we would lose around half of the world's production. Anyone saying "peak oil"? Well, yes, this is the mechanism that generates peak oil: an irreversible decline of the world's oil production. But it is not just a question of reduced oil production: if oil demand collapses, then the whole world plunges into deep recession, as it happened already in 2009, when prices briefly collapsed down to about 40 $/barrel.

Maybe this is just a temporary fluctuation; maybe things will go back to "normal" in a few months. After all, the market worked some magic during the past 4-5 years that kept oil prices high enough to generate profits high enough to make the industry able to keep producing at the usual levels (and even increase them a little). And these prices seemed to be not so high to destroy demand (not too much, anyway). But, in the long run, it is a no-win game. Depletion makes extraction progressively more expensive and not even the mighty market can work the magic needed to keep selling something that customers can't afford to buy. The oil crash takes time to unfold, but it is happening, and it is happening now.

Ugo Bardi teaches at the University of Florence, Italy. He is a member of the Club of Rome and the author of "Extracted, how the quest for mineral wealth is plundering the planet" (Chelsea Green 2014)


  1. Price may be the least of our concerns. The cheap oil (reading the figure from left to right) isn't in what one would call the most politically stable areas.

    Sam Carmalt

  2. To the point summary Ugo ! Thanks for that.
    About shale/tight oil and tar sands, I understand the dynamic of "up start investment"/production cost is very different : much more up start investment required for tar sands vs more pure operational costs for "shale oil" (as what used to be counted as investment, drilling, more or less becomes operational cost)
    And this also translates in more small/medium companies in shale oil, more majors in tar sands.
    Do you know if shale oil is the highest column in your diagram ? Or is it not there ?
    How about the GS doc (couldn't access it somehow).

  3. deep denial here in austria :-) got very casandra-like reaktions of posting a link to this post. so register and make also a unlike :-) https://derstandard.at/plink/2000007780113/40644944

    1. Well, also here I had several reactions - not really negative, but simply of total disbelief. If oil prices go down, it seems, it MUST be a good thing. No way.....



Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)