Thursday, October 24, 2013

Crude oil: another collapse ahead?

Oil prices have been showing a downward trend, recently. Is this the start of a new collapse of the oil market?
(image above from

In January 2008, I was writing on the blog of ASPO-Italy that, "...[oil] prices could very well increase over $100 per barrel and even much more, but will continue to be extremely volatile. A temporary collapse would be nothing to be surprised about, in which case everyone will say that the oil crisis was a hoax. For a while.(translated from Italian)

As you can see in the graph below (from Stuart Staniford's "Early Warning" blog), I was right: I had foreseen both the price spike and the subsequent collapse. I was right also in several other predictions about the oil market that I made in early 2008 (as reported here, in Italian). 

In making these predictions, I was not using a special crystal ball; just ordinary common sense. Oil prices and production, as in all markets, are determined by the interaction of offer and demand. In the case of non renewable resources, such as oil, offer is affected by depletion which makes the resource gradually more expensive as it is extracted. As a consequence, prices increase in order to maintain the profits of producers. But there is a limit to what customers can afford to pay. That was the cause of the 2008 spike: prices went above that level; demand collapsed and with it prices.

After the big spike, the oil market managed to rebound; prices returned to high levels and production reached new highs. During the past few years we saw the development a nearly static situation in which oil producers managed to obtain profits high enough to keep production increasing- but not at prices so high to bankrupt their customers (not right away, at least). But how long can this stasis last? Not forever, because resources are being gradually depleted and production costs can only keep increasing. 

That is true also for the "non conventional" fossil resources, which have been the main factor that has permitted to the industry to avoid a decline in production. These resources are expensive to produce and their booming phase may be already over. This is almost certainly the case for shale gas (see here, and here) and possibly also for shale oil (see here). With several of the world's economies in deep trouble, today we have the right conditions for a collapse of the demand that would lead to another collapse of oil prices. That, in turn, would lead to reduced investments in new resources and to a decline in production. It would be 2008 again and this time a rebound to high productive level would be much more difficult.

Is the recent decline in oil prices a symptom that this scenario is unfolding right now? It is still too early to be sure, but we can be 100% sure that if we see prices collapsing people will say - again - that the oil crisis was a hoax.

(note: Gail Tverberg develops similar considerations, although at a more general level, on her blog "Our Finite World")


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)