There are very few advantages to growing old. Except experience, only accumulated with practice and time. After writing about the ups and downs of the oilpatch for 35 years, two repeatable trends emerge. Following are the only common characteristics of numerous booms and busts, and what they mean for Albertans in 2015 and beyond.
First, there are very few accurate forecasters prognosticating about the future price of oil. Most are simply extrapolators. The default behaviour is to take whatever happened yesterday and extend it out forever. If prices are high, they’ll stay high. If they are low, they’ll never rise.
When somebody predicts an abnormal change in oil prices in either direction, they are generally ignored. The handful of really smart market analysts aren’t recognized as such until after the fact.
The only other consistent trend after studying this subject since 1979 is that the consensus view is invariably wrong. It never works out the way most believe it will or should. Direction doesn’t matter. After agonizing over forecasts and budgets for publicly traded oilfield service companies for 25 years, I finally realized the only sure thing is they were never right. The unknown was how much and which way. It’s a volatile business, Alberta’s oilpatch.
Commodity reports say world oil markets are oversupplied to the tune of two million barrels per day. All the alleged geopolitical subplots involving Iran, Russia, Saudi Arabia and the United States are interesting, but don’t mean much. The low-cost Middle East producers aren’t supporting the price at or near $100 because they are losing market share to new supplies from North America like oilsands and shale oil. They’ll never get it back if prices stay high, so they will remain abnormally low until global markets change.
Reversing the direction of oil prices from down to up will require a verifiable swing in the supply/demand equation of at least one million barrels per day. Half from demand and half from supply. This will occur this summer, perhaps sooner.
Currently, the world burns over 90 million barrels of crude daily. The price is down by $50 a barrel. If current prices hold (which they won’t) this would save the world’s oil consumers $4.5 billion per day, or $1.6 trillion per year. Big money. For the world to consume an extra 500,000 barrels per day, demand must only rise by 6/10 of one per cent.
While I’m not a classically trained or officially pedigreed practitioner of the “dismal science” of economics, I’m confident oil markets are sufficiently elastic that a 50 per cent reduction in price will lead to a 0.6 per cent increase in demand by mid-2015.
The other 500,000 barrels will come from high cost/high decline oil production. No matter how the North American shale oil boom came to be, production is unsustainable without continued intensive drilling. This won’t happen because of deep spending cuts. Production decline rates are huge. In south Texas, for example, an average well’s production falls over 60 per cent in the first year. Shale oil output will drop significantly as 2015 progresses. This is physics, not economics.
The two foregoing events will be measurable in about six months, or the summer of 2015. Barring a major geopolitical supply disruption, oil won’t increase to $100 anytime soon. But it will certainly rise much closer to the global replacement cost of about $80. Although this price isn’t high enough to resume all the massive spending on drilling and new oilsands plants we’ve enjoyed for years, it will stabilize house prices and job markets. Both are very positive developments.
Canada is the fifth largest oil and gas producer in the world. Big business. We’ll be at this for a long time. While the future will undoubtedly be different, be assured Alberta’s oilpatch will survive and prosper.
David Yager is national leader, oilfield services, with MNP. He is also vice-president of the Wildrose Party.
For Real Estate questions call Ivan @ 780-953-5251 or email Ivan@RealEstateEdmonton.net