Why an Oil Glut May Lead to a New World of Energy

[GliderGuider]

More evidence that Peak Oil ain't here yet...

Why an Oil Glut May Lead to a New World of Energy

Recently, as if to underscore the magnitude of the current rout, ExxonMobil and Chevron, the top two U.S. oil producers, announced their worst quarterly returns in many years. Exxon, America’s largest oil company and normally one of its most profitable, reported a 52% drop in earnings for the second quarter of 2015. Chevron suffered an even deeper plunge, with net income falling 90% from the second quarter of 2014. In response, both companies have cut spending on exploration and production (“upstream” operations, in oil industry lingo). Chevron also announced plans to eliminate 1,500 jobs.

According to Wood Mackenzie, an oil-industry consultancy, the top firms have already shelved $200 billion worth of spending on new projects, including 46 major oil and natural gas ventures containing an estimated 20 billion barrels of oil or its equivalent. Most of these are in Canada’s Athabasca tar sands (also called oil sands) or in deep waters off the west coast of Africa. Royal Dutch Shell has postponed its Bonga South West project, a proposed $12 billion development in the Atlantic Ocean off the coast of Nigeria, while the French company Total has delayed a final investment decision on Zinia 2, a field it had planned to exploit off the coast of Angola. “The upstream industry is winding back its investment in big pre-final investment decision developments as fast as it can,” Wood Mackenzie reported in July.

Historically, OPEC has responded to such declines by scaling back production by its member states, and so effectively shoring up prices. This time, however, the organization, which met in Vienna last November, elected to maintain production at current levels, ensuring a global oil glut. Not surprisingly, in the weeks after the meeting, Brent prices went into free fall, ending up at $55 per barrel on the last day of 2014.

Responding to the challenge (GG: of increasing output from shale and other sources despite falling prices), the Saudis ramped up production, achieving a record 10.3 million barrels per day in May 2014. Other OPEC members similarly increased their output and, to the surprise of many, the Iraqi oil industry achieved unexpected production highs, despite the country’s growing internal disorder. Meanwhile, with economic sanctions on Iran expected to ease in the wake of its nuclear deal with the U.S., China, France, Russia, England, and Germany, that country’s energy industry is soon likely to begin gearing up to add to global supply in a significant way.

With ever more oil entering the market and a future seeded with yet more of the same, only an unlikely major boost in demand could halt a further price drop. Although American consumers are driving more and buying bigger vehicles in response to lower gas prices, Europe shows few signs of recovery from its present austerity moment, and China, following a catastrophic stock market contraction in June, is in no position to take up the slack. Put it all together and the prognosis seems inescapable: low oil prices for the foreseeable future.

[arcane1]

1. "Most of these are in Canada’s Athabasca tar sands"

Therein lies part of the problem. We're scraping resin out of the crack pipe at this point.

[GliderGuider]

2. Yeah, but there is a whole shitload of resin to be scraped out burned. nt

[arcane1]

3. Exactly. More pollution, of the dirtiest kind :(