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Big Oil’s Nightmare Is Coming True

Big Oil’s Nightmare Is Coming True

Royal Dutch Shell has followed…

James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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The Changing Face of World Oil Markets

Here’s the introduction to a new paper I just finished:

This year the oil industry celebrated its 155th birthday, continuing a rich history of booms, busts and dramatic technological changes. Many old hands in the oil patch may view recent developments as a continuation of the same old story, wondering if the high prices of the last decade will prove to be another transient cycle with which technological advances will again eventually catch up. But there have been some dramatic changes over the last decade that could mark a major turning point in the history of the world’s use of this key energy source. In this article I review five of the ways in which the world of energy may have changed forever.

Below I provide a summary of the paper’s five main conclusions along with a few of the figures from the paper.

1. World oil demand is now driven by the emerging economies.

 Petroleum consumption in the U.S., Canada, Europe and Japan, 1984-2012,
Petroleum consumption in the U.S., Canada, Europe and Japan, 1984-2012, in millions of barrels per day. Black: linear trend estimated 1984-2005. Data source: EIA. Figure taken from Hamilton (2014).

2. Growth in production since 2005 has come from lower-quality hydrocarbons.

 Change in world liquids production 2005 - 2013
Amount of increase total liquids production between 2005 and 2013 that is accounted for by various components. Data source: EIA. Figure taken from Hamilton (2014).

3. Stagnating world production of crude oil meant significantly higher prices.

Fuel Prices.
 Prices of different fuels on a barrel-of-oil-BTU equivalent basis (end of week values, Jan 10, 1997 to Jul 3, 2014). Oil: dollars per barrel of West Texas Intermediate, from EIA. Propane: FOB spot price in Mont Belvieu, TX [(dollars per gallon) x (1 gallon/42 barrels) x (1 barrel/3.836 mBTU) x 5.8], from EIA. Ethane: FOB spot price in Mont Belvieu, TX [(dollars per gallon) x (1 gallon/42 barrels) x (1 barrel/3.082 mBTU) x 5.8], from DataStream. Natural gas: Henry Hub spot price [(dollars per mBTU) x 5.8], from EIA. Figure taken from Hamilton (2014).

Related Article: Why Canada Would Rather Export Oil Than Refine It

4. Geopolitical disturbances held back growth in oil production.

Global oil supply disruptions, Jan 2011 to June 2014. 
Global oil supply disruptions, Jan 2011 to June 2014. Source: constructed by the author from data provided in EIA, Short-Term Energy Outlook. Figure taken from Hamilton (2014).

5. Geological limitations are another reason that world oil production stagnated.

 Total oil production and capital
Total oil production and capital expenditures for the major international oil companies, 2004-2013. Includes XOM, RDS, BP, CVX, STO, TOT, PBR, PTR, ENI, REP, and BG. Source: updated from Kopits (2014). Figure taken from Hamilton (2014).

And here is the paper’s conclusion:

Although the oil industry has a long history of temporary booms followed by busts, I do not expect the current episode to end as one more chapter in that familiar story. The run-up of oil prices over the last decade resulted from strong growth of demand from emerging economies confronting limited physical potential to increase production from conventional sources. Certainly a change in those fundamentals could shift the equation dramatically. If China were to face a financial crisis, or if peace and stability were suddenly to break out in the Middle East and North Africa, a sharp drop in oil prices would be expected. But even if such events were to occur, the emerging economies would surely subsequently resume their growth, in which case any gains in production from Libya or Iraq would only buy a few more years. If the oil industry does experience another price cycle arising from such developments, any collapse in oil prices would be short-lived.

My conclusion is that hundred-dollar oil is here to stay.

By James Hamilton of Econbrowser


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Leave a comment
  • Levis Kochin on July 29 2014 said:
    Doesn't bitumen which has a flat supply curve make the demand for crude much more elastic in the medium and long run. This high elasticity of bitumen supply raise the elasticity of the demand for crude oil facing Saudi Arabia. This higher elasticity of demand raises the marginal revenue that Saudi Arabia obtains from each barrel of oil exported. This rise in marginal revenue raises the marginal cost to Saudi Arabia of oil. One effect would be for Saudi Arabia to stop generating the bulk of its electricity by burning oil.
  • Nony on April 04 2016 said:
    Hilarious how this guy predicted hundred here to stay almost at the exact month the price crash started. Hamilton bought into the peak oil stuff too much.

    Good points Levis. But Hamilton really isn't strong on supply curves. He is much more drawn to time series analysis than fundamentals. The only sort of supply analysis that interests him is depletion. And here he takes a lot of pretty lightweight peak oil Internet stuff and treats it with too much respect. But really breaking down the overall industry into supply segments, he seems weak at. When he does cite something it is just snippets of papers or popular articles. But he doesn't really seem to think about the structure much himself.

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