September 28, 2016 | Were you bullish on oil a year ago–and are now shocked that oil is barely $50/barrel? You aren’t the only one. This wasn’t supposed to have been possible. An oil price crash…ok. To crash and stay this low for two years….no way. … Read MoreGet Oil and Gas Stock Investor Kits
Since the turn of the 20th century, oil has become one of, if not the most, important energy sources in the world. It has caused wars, propped up economies and ensured that every new car is able to work. Yet all that may be coming to a worryingly swift end.
The concept of “peak oil” was derived from the Hubbert curve, named after M. King Hubbert, who in 1956 successfully created and used mathematical models to accurately predict that US oil production would peak between 1965 and 1970. At its most basic: oil demand outpaces oil production, causing a rise in prices and scarcity of usable oil.
The traditional system of accessing oil is well and truly over. For instance, the US Energy Information Administration (EIA) released a report in May 2014, highlighting that tight oil production will slow in 2021, with a total US decline in oil production around 2040. Visual Capitalist put together an infographic that sees oil running out by 2050.
Production vs consumption of oil
China and the US are the largest consumers of oil in the world and both are ranked among the top oil-producers in the world. The US also took the lead as top oil-producing country in 2014, at an average of 13.9 million barrels per day, while China produced about 4.5 million barrels per day. According to the EIA, China is the world’s second-largest consumer of oil and is projected to become the largest net importer this year. Looking at the companies who produce the most oil, Visual Capitalist put together an infographic to outline those numbers and it was a Saudi Arabian company that took the lead.
The US has started shifting its focus to hydraulic fracking and offshore oil drilling as it seeks to compensate for increased oil demand. But environmentalists remain outspoken about the potential for environmental disasters caused by techniques used in both. That isn’t helped by prices for the technology remaining high, meaning more refined development is needed.
The cost for extracting oil has risen higher than revenues, causing a crunch for companies. According to a presentation by Douglas-Westwood, oil production costs are outpacing revenues by 2 to 3 percent per year, while profitability for companies is down 10 to 20 percent. For companies, that means it’s harder to turn a profit as all their work is consistently being outpaced by production costs. Expensive production costs aren’t being helped by consistently high extraction costs. Reuters reports that about 65 percent of crude oil is left in wells because draining the extra barrels is either too difficult or expensive for companies.
Supply and demand
Anyone who has been watching the oil space knows that the commodity’s price environment has been volatile since it reached up past $140 per barrel in 2008. Since then it has crashed all the way down to $40 and then began to recover in 2015, when it started to hover in the $50 to $60 per barrel range. The reason behind the drop have been put down to a few main factors. According to Fundamental Research analyst Sid Rajeev, the main factors include the production exceeding consumption in 2014, which continued into 2105, the appreciation of the US dollar and last but definitely not least, was the Organization of the Petroleum Exporting Countries’ (OPEC) decision not to cut back on production.
All of these factors have affected the price in a negative way, but what goes up, must come down and Rajeev believes all these negative factors will eventually result in the price going back up. For example, the US shale oil boom is already beginning to digress and the consumption of oil will also likely increase considering the low prices. Then there are the OPEC countries who heavily rely on oil to support their GDP.
Conversely, the demand for oil may decrease in coming years as the world looks to lessen its carbon footprint and switch over to cleaner and renewable forms of energy. For example, China has been making a major push to grow its stake in the uranium market and has 26 reactors being built, with more planned. That said, the demand for oil isn’t likely to disappear overnight and while it remains to be seen where the price will go in the future, many analysts remain positive on its future.