Sunday, March 10, 2013

Oil's average price posts new records and they’re telling us it’s abundant!

It is a slick piece of public relations to convince people to disregard what is right in front of them and believe the opposite. And yet, that is what the oil industry has achieved with an oh-so obviously coordinated campaign to tell the public and policymakers that there is no need to be concerned about future oil supplies.

Many people remember the price spike of 2008 which shot prices to an all-time high of $147 a barrel. Oil subsequently crashed all the way down to about $35 at the end of that year as a brutal contraction gripped the global economy. But, oil has subsequently been making new all-time highs when you consider the yearly averages.

U.S. drivers should not be that surprised by this for they paid average daily gasoline prices that were higher in 2011 and 2012—$3.53 and $3.64 per gallon respectively—than they did in the previous record year of 2008 when they paid an average of $3.26, according to the U.S. Energy Information Administration (EIA).

Brent Crude, which has become the de facto world benchmark price for crude oil, has also just posted back-to-back years of record prices, higher than even the average daily price in the fateful year of 2008. In that year Brent achieved an average daily price of only $96.94 according to the EIA. But, in 2011 the average daily price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 has so far averaged about $114.

It is true that the American benchmark crude—Cushing, Oklahoma West Texas Intermediate—has been trading at a discount to Brent Crude. This is because Cushing, one of the country’s largest oil depots, is being flooded with supplies from North Dakota and the Canadian tar sands, supplies currently unable to find their way to a seaport that would connect them with world markets and thus world prices. An operator I know in Houston said that rather than send his production to Cushing where the discount is between $20 and $25, he is happy to put his oil on a barge and send it to Louisiana where he has consistently been getting prices over $100.

As it turns out, most inhabitants of the globe pay prices reflective of the Brent Crude price, and that’s why it is frequently quoted as the world price.

So, how is it that the public and many policymakers have swallowed the abundance argument even though the evidence of prices suggests the opposite? The industry has made its case by saying that newly accessible tight oil deposits in North Dakota and elsewhere are going to vastly expand oil production. It has coaxed Wall Street firms with whom the industry does business to put out rosy forecasts; it has made an army of paid think-tank propagandists available to the media; it has convinced government agencies that the future is bright; and, in one case, it sent one of its own to Harvard to write an industry-funded report that says everything will be fine—in the future!

You will notice one theme here. The industry’s case for abundance rests not on a current glut or a downward sloping oil price chart, but rather on the promise of abundance at some indeterminate time in the future, that is to say, on magical forecasts. But colorful charts and cheery prognostications are not facts. And, as always, it is important to consider the source.

Keep in mind that what a good magician does is not really magic. Rather, a good magic show is based primarily on misdirection. Get the audience to look in the wrong place while you do your handiwork unobserved.

And, so it is with the oil industry. It has been able to get the public and policymakers to focus on marginal gains in U.S. oil production while ignoring declines in the rest of the world. Mathematically speaking, that is how it must be since the rate of worldwide oil production has been essentially on a bumpy plateau since 2005. As U.S. production has grown, production in the rest of the world as a whole has declined by about the same amount.

Now, that wouldn’t matter quite so much if oil were not traded in a world market dominated by large countries that are still huge importers of crude oil. But, the other fact that the industry PR magicians don’t want you to focus on is that global net exports of oil—that is, the oil available on the world market to importers such as the United States, China, Japan, India and much of Europe—have been shrinking since 2006. The global competition among importers for those shrinking exports has been a major factor in sustaining record prices for the past two years.

It is worth keeping in mind that all of this is happening as the so-called fracking “revolution” is proceeding, as record investment in oil exploration and development continues, and as consistently high prices drive the necessary profits for all this effort. And yet, the impact on supplies worldwide has been almost imperceptible.

In fact, as John Westwood, chairman of the energy consulting firm Douglas-Westwood, explained in a slide presentation, it is becoming exceedingly difficult to add new oil production capacity. Some $2.4 trillion in oil industry capital expenditures from 1994 to 2004 increased the worldwide rate of oil production by 12 million barrels per day. However, $2.4 trillion in capital expenditures spent from 2005 to 2010 resulted in a decrease in the rate of oil production of 200,000 barrels per day. (See slide 8 of Westwood’s presentation.)

I am reminded of the late comedian Richard Pryor who, when caught by his wife in bed with another woman, explained that things weren’t what they seemed. When she resisted his explanation, he asked her, “Who you gonna believe? Me or your lyin’ eyes?”

Once you’ve seen the troubling facts about flat global oil production, shrinking global oil exports, and record high prices, about all the industry can do is insult your intelligence by asking the same question.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Anonymous said...

As an oil and natural gas producer myself I am forever defending my industry in the face of an angry public. Angry over offshore accidents that lead to horrific oil spills, angry over enormous quarterly profits that acutally represent less than 8% annual rates of return on capital investments, angry over the rediculous idea that tax incentives to drill wells are actually tax subsidies. Most of all people are always angry, darn right pissed, over the absurd notion that the oil and gas industry manipulates world crude oil prices to artificially prop up gasoline prices. The oil industry, I am often told, is in kahoots with Detroit to keep vehicle mileage low.

I can think of only one industry more mistrusted, more loathed than oil and those folks have to take bar exams.

But as to this tight oil abundance propaganda, the hype about energy independence and the end of peak oil worries, it is the biggest scam on the American public I have witnessed in my 60 years and I agree with you 110%, Mr. Cobb. The scam is about raising money, about selling stock in public companies, about financing the tight oil drilling treadmill and people wanting to believe we don't need to worry about our energy future have bought it, hook, line and sinker.

The same industry who nobody trusts now says we are good to go for future oil supplies, Saudi Arabia move over, and everybody believes them. Bank on it. Lets go buy a bigger SUV, honey.

Denial does seem to have its privileges.


yvesT said...

Thanks for this, and indded current propaganda is truly amazing.

Maybe another piece of information that could wake people up a bit is that the western "big oil" production is decreasing since 2004 :

GT Johne said...

There has been a recent (last 10 yrs)invention in Canada that has enabled the retrieval of vast reserves into 'tight' formations. Multi-stage Frac'ing. This is done in horizontal wells drilled up to 2 km long and frac'ing numerous stages within the formation. Hence the development of the Bakken in SE Saskatchewan and North Dakota and numerous other tight formations throughout various basins in North America. What was impossible to recover previously with former technology has now brought about a renaissance of the oil industry. Recoveries of reserves have escalated significantly and the risk of drilling has been diminished. What you are seeing is a glut of landlocked oil reserves within North America. We who are actively pursuing these reserves are dishing out inflated prices to develop the reserves (that is why consumers are still paying significantly at the gas pump). Comments made casually and are generalizations to the 'abundance' of oil in the future are only predicting what will happen when the technology is utilized in other basins across the world. Russia alone can add another 3 trillion barrels to the world markets just by applying this new frac'ing technology, let alone some of the other significant producing basins such as the middle East. Yes, there is copious amounts of oil, so we aren't running out, far from it. You will see Brent nose dive in price once the new frac'ing technology is applied to their basins.

Kurt Cobb said...

GT Johne claims that fracking is a recent invention. In this he is only partially correct for fracking originated in the 1940s and has been used on wells around the world since then. The most recent development in fracking is high volume slickwater hydraulic fracturing and that is a new phenomenon though it is being oversold by its proponents.

GT claims that Russia will add 3 trillion barrels to world supply using this technique. But he does not give us a price. Oil in the ground only becomes usable at a certain price and that price is, as he admits, quite high. This begs the question of how much oil people will be able to afford in the long run at escalating prices.

Nor does GT give us a source for his claim. If he is talking about total resources, then he should know--he claims to be geological consultant--that only a small fraction of that resource is ever likely to turn into reserves, that is stuff we can get out of the ground at current prices, using known technology from identified fields.

He again launches the canard that we are not running out. But I have never claimed that we are running out,only that we may be nearing the highest attainable RATE of production. And, rate is the key metric for the world economy requires continuous infusions of high-quality energy to function. Even the current plateau in oil production has been in part responsible for sluggish economic activity in the past few years as prices have remained high.

But GT makes my point. For he does not give me any facts available TODAY to refute my contention that oil supplies are constrained. Instead, he tells me the IN THE FUTURE all will be well because he says it will.

Tight oil is exceedingly difficult and expensive to extract. The drillers go after the easy stuff first which is logical. Soon, they will go after the marginal stuff and costs will rise and volumes decline.

GT does not mention the decline rate for tight oil wells, about a 40 percent decline in the rate of production EACH YEAR. That is setting up a treadmill that will be hard to overcome as drillers must double their drilling every two and half years or so just to keep production flat. That geometric progression is hardly a recipe for a glut and suggests future constraints on the number of available oil rigs, trained personnel, pipeline infrastructure, and just about everything else one needs to find, extract and deliver oil.

Yes, I know IN THE FUTURE we will all see that it works. But we've been hearing that since the early part of the last decade when the new miracle technology was deepwater drilling. This is just the latest round in pronouncements about "miracle" technologies.

There is no miracle here, just physics. And physics is going to be a formidable foe for drillers as they move to more and more difficult deposits.

yvesT said...

Just a quote from Hubbert :

"'I was in New York in the 30s. I had a box seat at the depression,' Hubbert says. 'I can assure you it was a very educational experience. We shut the country down because of monetary reasons. We had manpower and abundant raw materials. Yet we shut the country down. We're doing the same kind of thing now but with a different material outlook. We are not in the position we were in 1929-30 with regard to the future. Then the physical system was ready to roll. This time it's not. We are in a crisis in the evolution of human socienty. It's unique to both human and geologic history. It has never happened before and it can't possibly happen again. You can only use oil once. You can only use metals once. Soon all the oil is going to be burned and all the metals mined and scattered.'

Anonymous said...

I don't think the general public really has any idea about oil. GP probably has more exposure to global warming news. Most people just go about their lives doing the things they can.

I'm sure almost nobody knows about M. King Hubbert and his prediction.