Friday, August 5, 2016

Oil: Welcome To The New World Of Energy

(Drivebycuriosity) - It looks like that year`s fierce rally, that catapulted the price of oil (Brent Crude) from $27 to $52, is history. Oil prices are hovering about 20% below this year´s peak. This reminds of last year´s oil price hikes which all turned out as flashes in the pan.

I believe that oil will stay cheap for many years. The reason: Technological progress. Machines are getting more & more energy efficient thanks to the technological advances. Cars, trucks, airplanes & ships burn on average less fuel per mile. Refrigerators, washing machines and other devices need less electricity. As a result the demand for energy - and therefore for oil - is growing slower than some years ago. And electric cars are getting more & more popular, even that these vehicles are still expensive.  The pioneer Tesla is not alone, traditional automakers, including Volkswagen, Honda, Toyota, Renault, Chevrolet, Mercedes and more, are already offering electric cars as well. And Apple plans to produce electric cars beginning in 2019. These vehicles will get cheaper in the coming years thanks to technological progress, competition and mass production - and they will become common in the 2020s. Then the new car revolution will curb the demand for gasoline, the main use for oil, considerably.

On the opposite side the technological progress is making the oil reserves in the ground more accessible. The rise of US fracking from around 2006 through 2015 is just the begin. Today the costs to extract an extra barrel of oil (break even point) in the US vary around $60 - with a range of range from around $40 to more than $70 a barrel (marketwatch).  At current oil prices - in the moment of writing the US Type of oil WTI costs about $41 - many wells may be unprofitable and are getting shut off. This explains the slight drop of US oil production since last summer. But, the productivity of fracking is rising swiftly which leads to shrinking costs (economics21  oilprice  econbrowser). A study by BP explains that fracking is "a standardized, repeated, manufacturing process" and "manufacturing productivity has led to a trend decline in the prices of goods relative to services" (forbes).

So the break even point for producing oil has been moving lower and will continue to fall in the coming years. Falling costs of fracking also raise the chance that in the coming years the US oil producers will  be accompanied by oil producers from China and other countries. In June 2013, the United States Energy Information Administration (EIA) released a world shale oil and gas reserve assessment that showed 32 countries outside the United States have substantial reserves locked up in 137 different formations - units that can be exploited using Bakken-like technology....The EIA placed China third behind Russia and the U.S. in tight shale (tribune ).

Cheaper supply and a curbed demand will keep oil cheap for years.

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