World oil supply type, New Policies scenario, 2000-2035. Graphic: IEA / Kjell Aleklett

By Kjell Aleklett
15 February 2015

(Aleklett's Energy Mix) – On Tuesday 10 February at 13:00 GMT the IEA released its “Oil Medium-Term Market Report 2015”. The day before the release I was contacted by Jens Ergon at Sveriges Television (“Sweden’s Television, SVT) who wanted to get my opinion on the report. I had a number of hours to read through the 140 pages of the version provided to media prior to the report’s official release. This meant that I could comment on the report immediately it was released. SVT has now reported some of those comments in an article that Jens Ergon has written, “The Price Crash Will Reshape The Oil Market”. The subtitle is, “American oil boom behind the falling price. But opinions vary widely on the future of oil.”

Let’s now go through the article together and I will make a few comments as we do so.

“The comprehensive fall in the price of oil has taken the world’s experts by surprise. Since the summer of 2014 the price of oil has more than halved from over $100 per barrel to a price today of around $50. Last Tuesday the International Energy Agency, IEA, made its first report since the price fall. In the report, the development is described as the beginning of a new era. The IEA’s press release that accompanied the release of the report stated, “The recent crash in oil prices will cause the oil market to rebalance in ways that challenge traditional thinking about the responsiveness of supply and demand.

“What is surprising is not that the oil price has fallen but the severity of the drop and that it has continued during half a year until up to a few weeks ago”, commented Daniel Spiro, economist with focus on price developments for oil and natural resources at Oslo University.”

Aleklett: If we look back in time there were similar price falls at the beginning of the 1980s and in 2008. For economists the price fall were as surprising then as it is now. The interesting thing is that there has always been a good explanation for their occurrence but economists are very poor at predicting when a fall will occur. I have chosen never to predict the price of oil but to say always and only that, “the price will be what the market is prepared to pay”.

From end of cheap oil to price crash

The price crash comes after a number of years of historically high prices. With the exception of the temporary fall that occurred with the financial crisis of 2008-9 the oil price rose steeply during the entire first decade of this century and stayed at around $100 until the summer of 2014. This contrasts with the price of around $20 per barrel during the 1990s. Some researchers have regarded the high oil prices as a sign of Peak Oil, i.e., that the rate of global oil production is near the maximum that is geologically possible. Others have doubted the concept of Peak Oil and asserted that the higher prices will only encourage new, if more expensive, oil production. Data such as that published by the IEA clearly show that the easily produced, so-called “conventional oil” reached maximum production several years ago – at around 70 million barrels per day. But during recent years the introduction of more expensive, so-called “unconventional oil” – such as from the Canadian oil sands and, foremost, US shale oil – has compensated for the fall in conventional oil and has allowed total world oil production to increase somewhat, to just over 74 million barrels per day.”

Aleklett: During the 1990s the oil price even fell below $10 per barrel. It was in 1998 that Colin J. Campbell and Jean H. Laherrère published their famous article, “The End of Cheap Oil” in the journal Scientific American at the same time as The Economist wrote that the world was “Drowning in oil”. See my blog post, “How cheap is oil today?”. Colin and Jean wrote that cheap oil would reach a production maximum in around 2004 and today we know that the conventional oil, that was cheap in 1998, peaked in 2005. From 1998 until 2008 the price of oil rose from $10 per barrel to $147 per barrel. The era of cheap oil was over. Normally economists interpret such a price rise as a sign of scarcity and in this case we can call this shortage “Peak Oil”. Despite that, there are many who use any argument, no matter how contrived, to assert that Peak Oil lies far in the future.

Today, many people regard $50 per barrel oil as cheap and as a sign that we are, once again, “drowning in oil”. According to BP, production of crude oil and natural gas liquids totalled 82.6 Mb/d in 2006. If that production had continued at the same rate during the following ten years then the additional of oil would have raised total production to 92.3 Mb/d in 2013. Instead, 2013 saw total production at 86.8 Mb/d. The increase of 4.2 Mb/d we saw from 2008 to 2013 was not cheap oil. It came from deepwater, from Canada’s oilsands and as NGL and shale oil from fracking in the USA. We can see now that Colin and Jean’s 1998 predictions have proven completely correct.

As you can see in the figure [above], conventional crude oil reached maximum production in 2005-6 at 70 Mb/d and today is down at 67-8 Mb/d if one includes deepwater oil production as conventional. But deepwater production is expensive. If one also includes oil from oilsands and shale oil then the total production rate reaches 74 Mb/d. Note that NGL are not included in these numbers. [more]

The crash in the price of oil may change the oil market – a look at the IEA’s “Oil Medium-Term Market Report 2015”


  1. Steve From Virginia said...

    I predicted the price fall over two years ago and even had the time frame. I also worked out the process behind it:

    Then again, I'm not an economist.

    Right now oil markets are pricing organic return on the use of fuel not the availability of credit. Only liberal access to credit can support a very high price, at some point the cost of credit-plus- the cost of fuel become breaking.

    The credit system is indeed broken, only the smallest amount of our petroleum burning offers a direct return, the majority is simply waste for its own sake. What this means is the price will continue to fall even in the face of shortages as the shortages limit the amounts that customers can borrow. Prices decline => ability to meet the declining prices falls faster.  


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