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Global oil demand disappearing

Oilfield Technology,

Oil prices have hit US$ 80/bbl and prices at the pump have fallen, and analysts are surprised. But evidence of shifting demand and energy production has been around for some time, the Brookings Institution suggests.

Over the past three years, high oil prices have generated increased interest in oil and gas in remote locations such as the Arctic and East Africa. In addition, breakthroughs in oil and gas technology have also driven the development of unconventional oil and gas resources in regions of the world that were previously considered too high cost, too high risk or too far away from established markets for profitable energy production.

Furthermore, Charles K. Ebinger of Brookings highlights that as a result of climate change melting Arctic ice, new oilfields and delivery routes are opening vast new regions for resource exploration in countries like Tanzania and Mozambique, which lack even the most basic infrastructure and need high energy prices to justify their development.

Despite possible environmental and infrastructure challenges, a number of countries and regions are motivated to pursue increased resource development and extraction for a variety of non-energy related reasons.

Oil prices in free fall

Unfortunately, while these emerging energy producers are coming online, the market for energy has been shrinking, at least for the near term. Ebinger explains that since June 2014 (when oil was US$ 115/bbl), oil prices have been in free fall, with demand dropping across Europe, Japan, India, China, Brazil and much of the emerging world market. The drop in demand is the result of a number of factors, including:

  • Slowing economic growth.
  • Rising global oil production (especially in North America).
  • Unexpected resumption of oil production in Libya, Nigeria, South Sudan and Iraq.
  • Increasing energy efficiency, a response to three years of oil prices in excess of US$ 110/bbl, which, in turn has an impact and continues to impact long term global demand.
  • A decision by Saudi Arabia in August 2014 to cut oil production by 400 000 bpd, an attempt to defend its market share in the face of falling global oil prices.
  • Record oil output from Russia.
  • Surging natural gas liquids and hydrocarbon gas liquids production outside the OPEC quota system.
  • Natural gas easting away oil’s market share as a refining fuel and as a feedstock in petrochemicals.
  • The decision by Japan to restart some of its nuclear reactors, reducing forward demand for fuel oil in the power sector.
  • Dumping of oil onto the marketplace by hedge fund managers who had gone long on oil prices (by some estimates as much as 2 million bpd) in anticipation of further price rises, the hedge funds had no alternative but to liquidate their positions when the market turned against them.

According to Brookings, Saudi Arabia tried and failed to stop the slide in oil price this August. Supported by the UAE and Kuwait, the Saudis have decided to send a message to the world market that it will do whatever it takes to retain its market share, even accepting a near term loss in revenue over the next two years. The Saudi goal is to slow or halt unconventional oil production, which is undermining their market share. The short term decline in oil prices also serves Saudi Arabia’s agenda by hurting their adversaries (Iran and Iraq) and squeezing Russia’s ability to find the Assad regime in Syria.

However, Ebinger suggests that Saudi Arabia and its allies may be overlooking the complex economics of unconventional oil production in North America. For example, while drilling new wells in some unconventional basins may not be profitable at US$ 80/bbl, many existing wells have been largely amortized by current tax policies making them economic at prices in some basins such as the Permian at prices as low as US$ 40 –US$ 50/bbl.

The truth is that no analyst really knows the full range of production costs across the unconventional crude production continuum since this information is highly proprietary. Nonetheless, Ebinger holds that with oil prices for West Texas Intermediate (WTI) at US$ 81/bbl and Brent at US$ 83/bbl and with Europe poised on the brink of another recession, a major price decline similar to that in 2008 cannot be ruled out. Ebinger predicts that prices will fall to US$ 60 – US$ 70/bbl, before stabilising at a level still far above the US$ 38/bbl of 2008.

Adapted from a report by Emma McAleavey.

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