Shale Oil and the 2014-15 Price Collapse

Art Berman is out with a new deck: "The North American Unconventional Revolution & The 2014-2015 Oil Price Collapse" (pdf) and it's a great review of US shale, Saudi/OPEC response, and the great price fall over the past year. 

As always, Art is out to tell you some facts you don't often see in the headlines: 

  • The story of the price collapse is pretty simple: It's Chinese demand fall + US oil production growth + response of Saudi oil production growth. That's pretty much it. Lower demand and production gains leading to surplus and lower prices.
  • The heroic tales of rig productivity and drilling efficiency gains are what oil companies have to tell investors to show a brave face. Dig a little deeper to realize - what should be obvious to everyone - that companies are getting killed at these low prices. 
  • But future higher oil prices are INEVITABLE, and this is important to understand because a lot of really smart people out there don't seem to get this. John Kemp has an article out today on how U.S. gasoline sales have surged at the fastest rate in a decade. That's just Econ 101, price is always the leveling mechanism that brings supply and demand back into balance. Colin Eaton has another article out today on how North American oil drillers are responding to the tough environment by slashing investments. In this environment, companies are thinking about staying afloat, not increasing production. In an article from a month ago, Robert Rapier pours cold water on the far too common predictions that oil is going to $20 and will stay there for an extended period of time. "I don’t believe the people predicting $20 oil are seeing the whole picture," Rapier writes, in what might be the understatement of the year. 
  • Finally, Art touches on Peak Oil and reminds everyone that things are preceding exactly how the Peak Oil story predicted. When you look at the numbers, it's easy to see that conventional oil production remains in decline and is increasingly being replaced by unconventional production. And that shift is important for people to grasp because what does the future look like if you're forced to increasingly rely on more expensive, lower quality sources of oil? As Art reminds us, remember that U.S. tight oil required almost 100 times more wells to produce the same volume of liquids as Saudi Arabia, with a cost 100 times as much.

That sentence might not give you cause for concern... but it should.