Oil Price Collapse –> Next Peak Oil Frenzy?

By David Middleton – Re-Blogged From WUWT

The ChiCom-19 hostage crisis certainly makes strange bedfellows. Over the past few weeks I have been agreeing with Dallas County Commissioner John Wiley Price on the need to end the hostage crisis now. In the 35 years, Mr. Price has served as a county commissioner, I don’t think I’ve ever agreed with him before. Matt Egan, lead writer for CNN Business, actually wrote an article about the oil industry that made sense. His work is usually so awful, that it doesn’t even have ridicule value… But, like a “blind squirrel occasionally getting the nut”…

How negative oil prices could set the stage for the next price boom

By Matt Egan, CNN Business

New York (CNN Business)The boom-to-bust oil market is experiencing one of its darkest moments in history.Oil demand is collapsing because of the coronavirus crisis. Supply is shrinking — but not nearly fast enough.

The world is literally running out of room to store unneeded barrels of oil piling up during the coronavirus pandemic.

That storage problem is so dire that it caused oil prices to turn negative this week for the first time ever.

The crash is forcing a reckoning in the oil industry — a painful one. Many shale oil producers have canceled drilling plans. Others have been forced to shut down active wells. Some frackers won’t survive at all.

But the violent rebalancing in the oil market might be so overdone that it will set the stage for a spike in prices. When and if demand recovers, there might not be enough supply to meet it.


“We are in an epic bust. As hard as it may be to believe, the next step is a boom,” said Pavel Molchanov, energy analyst at Raymond James.


“When demand returns to something close to normal levels, it’s quite possible there will be a shortage situation in 2021,” Molchanov said.


“With ultimately a finite amount of storage left to fill, production will soon need to fall sizably to bring the market into balance,” Goldman’s Courvalin wrote, “finally setting the stage for higher prices once demand gradually recovers.”


“This inflection will play out in a matter of weeks, not months, with the market likely forced into balance before June,” Courvalin wrote.

Companies are cutting production in two ways. First, they are slashing their spending plans for drilling new and uncompleted wells. For instance, ExxonMobil (XOM) cut its 2020 spending by 30%, including a large focus on the Permian Basin shale oilfield in West Texas.

Secondly, and most importantly, oil companies are turning the taps off on active wells through a painful process known as “shut-ins.” And there is no guarantee those taps can or will get turned back on at full capacity.

“It will take time and money to turn it back on. It’s not like a light switch,” David Trainer, CEO of New Constructs, an investment research firm based in Nashville.


“When demand comes back online, there won’t be as many people there to make the oil,” said Trainer.


CNN Business

While we don’t technically “make the oil,” if and when demand recovers, the longer the downturn, the longer it will take to bring production back up. When supply growth lags behind demand growth, prices quickly rise.

Unless the Fire Marshal Gumps of the world intend on perpetuating the ChiCom-19 forever, oil demand will recover and the supply might not be readily available. The Peak Oilers, who haven’t read Hubbert and don’t even know what “peak oil” is, will likely start babbling about falling off a Seneca Cliff into Olduvai Gorge. They’ll be just as wrong as they were the last time demand exceeded supply and prices skyorocketed. So, the world faces two possible paths

And… there’s another silver lining to this very dark cloud:

The possibility that this may lead to increased emissions

Historically, low oil prices have created headaches for climate advocates. Cheap oil means cheaper gas at the pump, leading people to drive more and spend more on emissions-intensive consumer goods.

Today, with much of the world locked down, consumers aren’t consuming all that much or making big choices that drive up emissions, but businesses are still making those decisions, and low oil prices reduce the incentive to change. A delivery company purchasing a new van fleet would be less inclined to go electric, for example. A consumer food company considering switching its packaging away from oil-based plastic product may wait it out a few more years. “Oil is cheap. It’s very hard to transition away from oil when it’s very cheap,” says Lorne Stockman, senior research analyst at Oil Change International, which advocates for a transition away from fossil fuels. “And it’s particularly difficult when we don’t have a coherent policy on climate change.”

A key concern for many climate advocates is the possibility that natural gas—which in the U.S. is often produced alongside oil and remains cheap for many of the same reasons that oil does—will further solidify its position in the mix of electricity sources. Low natural gas prices may entice utilities and policymakers to continue to rely on the fossil fuel rather than looking to renewable alternatives, and, because of the long lifespan of natural gas infrastructure, that would lock in decades of emissions.

Time Magazine

So it basically boils down to: The Fire Marshal Gumps of the world need a permanent ChiCom-19 hostage crisis in order to prevent the weather from changing… Sort of like if Stanley Kubrick directed a movie based on a George Orwell novel.


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