Crude Oil Today Is Cheaper Than In 1970
Crude Oil Today Is Cheaper Than In 1970
$OIL, $USO, $XOM
In Y 1970 a barrel of Crude Oil averaged about 13.00. Adjusted for inflation, that barrel should cost about 78.00 today. Instead, WTI Crude Oil for Apr delivery is trading in Asia at 49.36 as I write this articel.
With crude prices at about45 yr lows, Saudi Arabia pushed its OPEC partners into adopting a policy of no production cuts and letting the market decide who rules the world of Crude Oil.
What Saudi Oil minister Ali al-Naimi understands, and other oil industry experts do non, is summed up in a Question he asked at an OPEC conference in December 2014.
In a paper by energy economist Philip Verleger, Naimi is quoted: Is there a Black Swan the we do not know about which will come by Y 2050 and we will have no demand for Crude Oil?
To guard against that remote possibility, the Saudis did not cut production to force prices up for every producer, but they took the more sensible step of calling into question the feasibility of all the hugely expensive hydrocarbon projects that were started in the middle of the past decade.
Mr. Naimi said that he gets a “sense that people want to get rid of Coal Crude Oil, and Nat Gas.”
The recent agreement between China and the United States on further steps to slow global warming is just the latest indication of that desire to rid the world of hydrocarbons.
Virtually all those projects were begun before horizontal drilling and fracking became common in North America, and all require a Crude Oil price closer to 100 bbl than to 50 bbl in order to make a profit. Even horizontal drilling and fracking cannot compete with conventional production in Saudi Arabia, and Kuwait.
Exxon Mobil Corp. (NYSE: XOM) said last week that it would reduce capital spending by about 12% Y-Y in Y 2015 to approximately $34-B, and that capital spending over the following 2 yrs would be below $34-B. Still, production is expected to rise by 300,000 BPD, in Y 2015 and by another 400,000 BPD by the end of Y 2017.
The Question becomes whether Exxon, or any of the Supermajors, is likely to begin a new, expensive project in the next few years if Crude Oil prices remain in a range of 50 to 75 bbl.
As US the economy recovers and interest rates rise, the Big Q is: where will the billions of dollars needed to fund those projects come from if Crude Oil price projections remain close to the cost of production?
Low prices will push up demand.
We only need look at the boost in US sales of full-size pickups and sport utility vehicles to see the impact of low gasoline prices on demand for less fuel-efficient vehicles.
As long as Saudi Arabia does not blink, there is no reason to expect it to, the country can keep the pressure on prices and ultimately force high-cost producers to decide how long they can continue to produce Crude Oil and lose money.
It may take several years with ups and downs, but over the long haul, I expect the last Oilman standing to be a Saudi selling Crude Oil for the Y 2050 equivalent of 13 bbl.
The outlook is overall Bearish to Very Bearish
CRUDE OIL & NATURAL GAS
|Crude Oil (WTI)||USD/bbl.||49.36||-0.25||-0.50%||Apr 15||00:44:03|
|Crude Oil (Brent)||USD/bbl.||59.29||-0.44||-0.74%||Apr 15||00:45:26|
|TOCOM Crude Oil||JPY/kl||46,120.00||-700.00||-1.50%||Aug 15||00:44:36|
|NYMEX Natural Gas||USD/MMBtu||2.75||-0.09||-3.28%||Apr 15||00:42:24|
Have a terrific week.
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