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How Low Oil Prices Are Erasing The Glut

Pipeline Alaska

Here I review key trends in the oil market over the last decade.

(Click to enlarge)

World field production of crude oil, in thousands of barrels per day, monthly Jan 1973 to Nov 2015. Excludes natural gas liquids, biofuels, and refinery processing gain. Blue line segment connects June 2005 and June 2013. Data source: EIA Monthly Energy Review, Table 11.1b.

World oil production barely increased between 2005 and 2013. Yet this was a period when oil consumption from the emerging economies was growing rapidly. For example, Chinese imports of crude oil grew by a million barrels a day between 2005 and 2008 and increased by another two million barrels a day between 2008 and 2013.

Chinese oil imports in millions of barrels a day, average over the previous 12 months, Jan 2003 to March 2016. Data source: JODI.

How could China realize such a big increase in consumption when very little additional oil was being produced worldwide? The answer is that consumption in places like the United States, Europe, and Japan had to fall. The primary factor that persuaded people in those countries to use less was the high average price of oil over 2007-2013.

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U.S. product supplied of petroleum products in millions of barrels per day, average over the previous 52 weeks, Jan 3, 1992 to May 20, 2016. Data source: EIA. Related: Trump's Energy Policy: Less Regulations And Approval For Keystone XL

But in the last few years global oil production broke away dramatically from that decade-long plateau. In 2013-2014 the key factor was surging production from U.S. shale formations. That peaked and began to decline in 2015. But world production continued to grow during 2015 thanks to tremendous increases from Iraq. And increases in 2016 may come from new Iranian production now that sanctions have been lifted.

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Iraqi field production of crude oil, in thousands of barrels per day, monthly Jan 1973 to Nov 2015. Data source: EIA Monthly Energy Review, Table 11.1a.

The new supplies from the U.S., Iraq, and Iran brought prices down dramatically. And in response, demand has been climbing back up. U.S. consumption over the last 12 months was 800,000 b/d higher than in 2013, a 4% percent increase. Vehicle miles traveled in the U.S. are up 6% percent over the last two years.

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Average monthly U.S. vehicle distance traveled over the 12 months ended at each indicated date, in billions of miles, Jan 1992 to March 2016. Source: Federal Highway Administration.

Average fuel economy of new vehicles sold in the United States is no longer improving.

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Average miles per gallon of new U.S. vehicles sold. Source: University of Michigan Transportation Research Institute. Related: The End Of The Petro-State Era

Low prices are increasing demand and will also dramatically reduce supply. The EIA is estimating that U.S. production from shale formations is down almost a million barrels a day from last year.

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Actual or expected average daily production (in million barrels per day) from counties associated with the Permian, Eagle Ford, Bakken, and Niobrara plays, monthly Jan 2007 to June 2016. Data source: EIA Drilling Productivity Report.

These factors all contributed to a rebound in the price of oil, which traded below $30/barrel at the start of this year but is now back close to $50.

(Click to enlarge)

Nevertheless, I doubt that $50 is high enough to reverse the decline in U.S. shale production. Nor is the slashing that we’ve seen in longer-term oil-producing projects about to be undone. And while there is enough geopolitical stability at the moment in places like Iraq and Iran to sustain significantly higher levels of production than we saw in 2013, there is no shortage of news elsewhere in the world that could develop into important new disruptions. For example, conflict in Nigeria may cut that country’s oil production by a million barrels a day.

Adding a million barrels/day to U.S. oil demand and subtracting 2 million b/d from U.S. and Nigerian supply would seem to go a long way toward erasing that glut in oil supply that we’ve been hearing about.

By James Hamilton via Econbrowser.com

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  • JHM on May 31 2016 said:
    I'm not convinced that I see any increase in US demand here. Sure consumption has increased as the price of oil falls below $60/b, but how do we know that consumption will not decline again as oil rises above $50/b? Moreover, can non-OECD countries really grow their economies with oil above $60/b? I just don't see much demand anywhere for oil above $60/b. And yet this is a level required to expand supplies.

    Fuel efficiency, alternative fuels, renewable energy and EVs all move to make oil consumption more optional going forward. So demand elasticity for crude is likely increasing and reaching a point where marginal supply cannot be maintained. We are fooling ourselves if we think that "demand" will grow by 1.2 mb/d annually over the next few years, as the IEA believes. Consumption may grow this much if the price of oil remains below $50/b, but with oil above $60/b we may well see global consumption decline.

    So we really need to stop confusing consumption with demand. And the author knows better.
  • Malcolm Rawlingson on May 31 2016 said:
    I am inclined to agree with that JHM. Forecasts are always based on today's technology which is one of the reasons they are often wrong. One needs to study the trends in the largest end users of oil products which is motor vehicles. There are two that I see will have major impacts on consumption. The first is driverless vehicles. Not only do these vehicles dispense with the need for a driver...it is the driver that has the greatest effect on the operating efficiency of a motor vehicle. Computers will always operate the vehicle within the posted speed limits and the result will be a 20 to 30% improvement in gasoline consumption. Of even greater importance, driver-less vehicles dispense with the need to actually be a car owner. UBER already has this in its business model. In the future you will simply call up a ride on your cell phone and a car will be there in 5 minutes to take you to wherever you want to go. Driverless cars will drive down consumption by operating vehicles at maximum fuel efficiency all the time, avoiding wasteful traffic jam idling and simply having less cars with tanks full of gasoline.My estimate is the combined impact will be a consumption reduction of the order of 30% - worldwide.
    The second technological game changer is the long awaited electric vehicle which consumes no gasoline at all. Tesla has changed the game. It currently has over 300,000 pre orders for its new low cost vehicle. That means there are at least 300,000 customers willing to spend 30,000 dollars on a vehicle that uses no gasoline at all. Once the numbers of these vehicles on the roads hist critical mass the numbers of gasoline stations will fall and the number of electric recharge stations will increase. There will be no demand for lubricating oils for engines since electric motor drives do not need the 4 or 5 litres that goes into every car and is required to be replaced every 10,000km. Of even greater importance is the fact that Tesla has given away all of its patent rights to its competitors (because the money is to be made in the batteries not the cars) which means just about every car maker in the world is going to have an electric vehicle option within three years.
    The resulting increase in electricity consumption will have no effect on gasoline consumption since power plants do not use gasoline or oil. In a world where even only 20% of vehicles are electric demand for gasoline and therefore oil will decrease and continue to decrease as market share of EV's increases. This is going to happen faster than most people think.
    The impact of these technological changes on gasoline consumption is going to be dramatic. Within 10 years US consumption will be half what it is now and the days of the petro-state will be numbered. The IEA will once again be proven wrong because it once again fails to take into account future technology.
    As an illustration, I read recently that the use of graphene in the electrodes of lithium ion batteries instead of regular carbon will increase the range of electric vehicles by at least 30% and reduce battery weight and size by 10 to 15%.
    While I did not expect to see it in my lifetime I am now convinced that the days of oil are over and its use will be in structural decline for the next 20 years.Tesla has let the genie out of the bottle and it is not going back in. I drove a Tesla Model S a few weeks ago. It is a great vehicle. Quiet and very fast with near instant acceleration. This is the future.
  • Bill Simpson on June 08 2016 said:
    Notice how US oil demand is roughly flat. That is because everyone who wants a car in the United States already has one. Ditto Japan, most of Europe, and some of developed South America. The rest of the people on the planet would like to have a car too. There are billions of them. So the demand for oil will continue to go up, unless we have another Great Depression.

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