US 2015 Oil Production and Future Oil Prices

Oil production can be confusing because there are various “pieces” that may or may not be included. In this analysis, I look at oil production of the United States broadly (including crude oil, natural gas plant liquids, and biofuels), because this is the way oil consumption is defined. I also provide some thoughts regarding the direction of future world oil prices.

Figure 1. US Liquid Fuels production by month based on EIA March 2016 Monthly Energy Review Reports.

Figure 1. US Liquid Fuels production by month based on EIA March 2016 Monthly Energy Review Reports.

US oil production clearly flattened out in 2015. If we look at changes relative to the same month, one-year prior, we see that as of December 2014, growth was very high, increasing by 18.0% relative to the prior year.

Figure 2. US Liquids Growth Over 12 Months Prior based on EIA's March 2016 Monthly Energy Review.

Figure 2. US Liquids Growth Over 12 Months Prior based on EIA’s March 2016 Monthly Energy Review.

By December 2015, growth over the prior year finally turned slightly negative, with production for the month down 0.2% relative to one year prior. It should be noted that in the above charts, amounts are on an “energy produced” or “British Thermal Units” (Btu) basis. Using this approach, ethanol and natural gas liquids get less credit than they would using a barrels-per-day approach. This reflects the fact that these products are less energy-dense.

Figure 3 shows the trend in month-by-month production.

Figure 3. US total liquids production since January 2013, based on EIA's March 2016 Monthly Energy Review.

Figure 3. US total liquids production since January 2013, based on EIA’s March 2016 Monthly Energy Review.

The high month for production was April 2015, and production has been down since then. The production of natural gas liquids and biofuels has tended to continue to rise, partially offsetting the fall in crude oil production. Production amounts for recent months include estimates, and actual amounts may differ from these estimates. As a result, updated EIA data may eventually show a somewhat different pattern.

Taking a longer view of US liquids production, this is what we see for the three categories separately:

Figure 4. US Liquid Fuel Production since 1949, based on EIA's March 2016 Monthly Energy Review.

Figure 4. US Liquid Fuel Production since 1949, based on EIA’s March 2016 Monthly Energy Review.

Growth in US liquid fuel production slowed in 2015. The increase in liquid fuels production in 2015 amounted to 1.96 quadrillion Btus (“quads”), or about 59% as much as the increase in production in 2014 of 3.34 quads. On a barrels-per-day (bpd) basis, this would equate to roughly a 1.0 million bpd increase in 2015, compared to a 1.68 million bpd increase in 2014.

The data in Figure 4 indicates that with all categories included, 2015 liquids exceeded the 1970 peak by 16%. Considering crude oil alone, 2015 production amounted to 98% of the 1970 peak.

Figure 5 shows an approximate breakdown of crude oil production since 1945 on a bpd basis. The big spike in production is from tight oil, which is another name for oil from shale.

Figure 5. Oil crude oil production separated into tight oil (from shale), oil from Alaska, and all other, based on EIA oil production data by state.

Figure 5. Oil crude oil production separated into tight oil (from shale), oil from Alaska, and all other, based on EIA oil production data by state.

Here again, US crude oil production in 2015 appears to amount to 98% of the 1970 crude oil peak. Thus, on a crude oil basis alone, we have not yet hit the 1970 peak.

Prospects for an Oil Price Rise

Most recent analyses of oil prices have focused on the amount of mismatch between supply and demand, and the need to craft a temporary agreement to reduce oil production. The thing that is missing in this discussion is an analysis of buying power of consumers. Is the problem a temporary problem, or a permanent one?

In order for oil product demand to keep rising, the buying power of consumers needs to keep rising. In other words, some combination of consumer wages and debt levels of consumers needs to keep rising. (Rising debt is helpful because, with more debt, it is often possible to buy goods that would not otherwise be affordable.)

We know that in many countries, wages for lower-level workers have stagnated for a number of reasons, including competition with wages in lower-wage countries, computerization, and the use of automation (Figure 6). Thus, we know that low wages for a large share of consumers may be a problem.

Figure 6. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis IRS data, published in Forbes.

Figure 6. Chart comparing US income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis IRS data, published in Forbes.

Figure 7 shows that world debt has been falling since June 30, 2014. This is precisely the time when world oil prices started falling.

Figure 6. Total non-financial world debt based on Bank for International Settlements data and average Brent oil price for the quarter, based on EIA data.

Figure 7. Total non-financial world debt based on Bank for International Settlements data and average Brent oil price for the quarter, based on EIA data.

One reason for the fall in world debt, measured in US dollars, is the fact that the US dollar started rising relative to other currencies about this time. Oil is priced in dollars; if the US dollar rises relative to other currencies, it makes oil less affordable to those whose currencies have lower values. The big rise in the level of the dollar came when the US discontinued quantitative easing in 2014. World debt, as measured in US dollars, began to fall as the US dollar rose.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Figure 8. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

As long as the US dollar is high relative to other currencies, oil products remain less affordable, and demand tends to stay low.

Dollar Indix vs Crude Oil Price Logan Mohtashami

Figure 9. Index of US dollar, relative to other currencies, compared to crude oil price.

Another issue that struck me in looking at world debt data is the way the growth in debt is distributed (Figure 10). Debt growth for households has been much lower than for businesses and governments.

Figure 8. World non-financial debt divided among debt of households, businesses, and governments, based on Bank for International Settlements data.

Figure 10. World non-financial debt divided among debt of households, businesses, and governments, based on Bank for International Settlements data.

Since March 31, 2008, non-financial debt of households has been close to flat. In fact, between June 30, 2014 and September 30, 2015,  it shrank by 6.3%. In contrast, non-financial debt of both businesses and governments has risen since March 31, 2008. Government debt has shrunk by 5.6% since June 30, 2014–almost as large a percentage drop as for household debt.

The issue that we need to be aware of is that consumers are the foundation of the economy. If their wages are not rising rapidly, and if their buying power (considering both debt and wages) is not rising by very much, they are not going to be buying very many new houses and cars–the big products that require oil consumption. Businesses may think that they can continue to grow without taking the consumer along, but very soon this growth proves to be a myth. Governments cannot grow without rising wages either, because the majority of their tax revenue comes from individuals, rather than corporations.

Today, there is a great deal of faith that oil prices will rise, if someone, somewhere, will reduce oil production. In fact, in order to bring oil demand back up to a level that commands a price over $100 per barrel, we need consumers who can afford to buy a growing quantity of goods made with oil products. To do this, we need to fix three related problems:

  • Low wages of many consumers
  • World debt that is no longer rising (especially for consumers)
  • A high dollar relative to other currencies

These problems are likely to be difficult to fix, so we should expect low oil prices, more or less indefinitely. Lack of oil supply may bring a temporary spike in oil prices, but it cannot fix a permanent problem with consumer spending around the world.

 

 

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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1,015 Responses to US 2015 Oil Production and Future Oil Prices

  1. Don Stewart says:

    Dear Finite Worlders
    I want to offer a thought. Take a look at the comment I posted on Ugo Bardi’s site (and copied here) about the ‘waste heat’ phenomenon which drove BW Hill’s model to predict declining oil prices and, essentially, the bankruptcy of the oil companies. I speculated that there is an awful lot of something like ‘waste heat’ coming out of the economy of the United States…I cited evidence of gross inefficiency or mal-investment.

    Then take a look at BW Hill’s comment today at:
    http://peakoil.com/consumption/iea-chief-says-oil-price-bottoming-depends-on-global-growth/comment-page-1#comment-263088

    He explains why the low efficiency the economy exhibits in converting the energy in oil to actual valuable products operates as a leverage which leads to continued deterioration in both the economy and the oil industry.

    Now I want to speculate a little about poor people and rich people. The conventional view here has been that we rich people in rich countries should use all the oil we can, because it is a one way trip down. However, there is another way to look at things. Suppose that the ‘waste heat’ that I referenced is 90 percent of what the average rich American emits, while an Amish farmer emits only 10 percent ‘waste heat’. Does that mean that the Amish farmer will outcompete the rich American, post-crash, for whatever resources are still available? For example, to take a much cited possibility, will armed men go to defend, and share the food of, the Amish farmer rather than their erstwhile overlords in Washington and Wall Street? The Amish know how to do something which will be useful after the crash. What will Obama and Jaime know that is useful?

    Don Stewart

    • Ed says:

      Importing poor people to fill section 8 housing so they owners of section 8 housing can continue to collect government money is a very inefficient way to run America. But it is the way it works so I will not waste my energy fighting “city hall”.

    • I guess it’s still to early to correctly evaluate the oil price drop and current renewal, we don’t know as to whether it will last, relapse etc. Some argue, it’s basic inverse USD vs. Oil relationship, some say the reversal is insider’s new position as now betting on commodity upswing cycle within stagflation, because shale is dead and depletion starts (Mexico, Norway, Venezuela,..)

      Obama is just hired media actor for the PR branch of the project “lets postpone collapse of the US few more years”, while Jaime is likely way closer to the real source of power, ..

      • Vince the Prince says:

        The latest shortonoil post…thanks Don…..I went back and read every comment “he” made at that site…with what I have read from Gail….a complete picture….something from the old TVee show Nightmare Gallery
        http://www.thehillsgroup.org/depletion2_022.htm
        The industry was able to keep production growing by 5.46% per year because in years prior it had many yet to be discovered huge rich fields to tap into. Those fields are gone, and the average field to come on online today is less than a 10th of the size of those discovered a few decades ago. The Red Queen is rapidly losing her lead, and the industry can no longer make enough money to replace the reserve that it is extracting.
        A couple of years ago oil was selling for almost $100/ barrel, it is now down to $43. We know that they are not making money because if production costs are only $43/ barrel producers would have to have been making a 57% profit margin on their gross sales when prices were $100. They didn’t! The best that the industry can now do is pump what remains in their existing fields, not reinvest in production that can not make money, and shut their doors when their wells run dry!
        Economists will continue to fantasize over increasing capital expenditures which the industry can no longer afford; they will continue to dream of increasing price that the economy can longer bare. They will avoid the subject of leverage; its what they don’t want to hear!
        http://peakoil.com/consumption/iea-chief-says-oil-price-bottoming-depends-on-global-growth/comment-page-1#comment-263088

        The oil industry is liquidating itself as we breath!

        • Fast Eddy says:

          I’ve long wondered if the central bankers’ playbook looked like this:

          – push the price of oil up over $100 to ensure that oil companies would sink cash into every possible remaining oil left in the ground — from shale to deep sea to tar sands — once the investment is sunk into these then even if prices were allowed to drop they’d still produce

          – of course $100 oil kills growth so that could not be allowed to go on for too long

          – and now we see gimmicks that allow expensive oil to still come out of the ground — we also see the central banks edging the price up in Goldilocks fashion so as to try to keep producers from completely collapsing…. but not too high so as to collapse the global economy

          At the end of the day the bankers are manipulating EVERY asset price — so of course they would be directly controlling the price of oil as a policy measure to ensure collapse is delayed for as long as possible

        • wereallmikeyd says:

          The only real question is when production drops low enough to trigger a “change” in all that we think is granite but is really hot air.

        • greg machala says:

          Just hope the shale depletion rates are not very high and the wells flow for decades like conventional oil fields. But, I think the new well depletion rates are higher than 30% year over year. I hope not.

          • Vince the Prince says:

            Shortonoil wrote
            The shale industry has now issued more that $300 billion in high yield junk bonds; some of which are paying almost 15%.
            What could possibly go wrong?
            http://peakoil.com/production/what-happens-to-us-shale-when-the-easy-money-runs-out
            When the petroleum industry can no longer make money producing oil it will stop. At $56/barrel most of the industry is no longer making money. The average producer has a production cost that is far higher than $56, and prices are not likely to improve in the foreseeable future. In this low price enviroment every producer in the world is producing flat out just to stay alive. Cash flow has become the new King; profit an after thought.
            Petroleum has reached its maximum value to the world’s economy, and that value is declining as every new barrel is added to the world’s accumulation of total oil produced:

            Since Drake sunk his well in 1859 the world has pumped about 1,440 Gb out of the crust of the earth. Oil has certainly been popular, and it is not likely to go out of style. At $56/barrel it is, however,very likely that it will simply go out of business

  2. Yoshua says:

    Anti-immigrant AfD says Muslims not welcome in Germany

    http://www.reuters.com/article/us-germany-afd-islam-idUSKCN0XS16P

    Germany is not a fringe nation in Europe and AfD is no longer a fringe party… and they just declared war on Islam. Front National in France has declared war on Islam and so has the Freedom Party in Holland.

    I’m afraid that things will soon get very ugly in Europe. Europe is an old continent with old values, rituals, culture and traditions (we are not all that modern as we pretend to be) and we have a very long memory for injustices brought upon us (by us selves… that we blame on others… of course).

    I’m not a fan of Islam (which is another medieval politico economic religious fascist system) so it was predictable that this would lead to a conflict. But… well… I don’t know…

    • That described undercurrent is evident all over Europe, that’s true.

      However, now we have to ask the question how strong is the side of status quo, by which here I mean the unholy alliance of globalists, bureaucratic paper pushers, fraudulent money changers – in fact it’s a quite wide coalition nurtured for decades, it’s the so-called center-left and center-right. The most disgusting personalities being Merkel, Hollande, Juncker, Verhofstaadt, Schultz, Draghi and many others. This bunch effectively sits in at least ~90% of all higher level bureaucracies already. They are largely immune to voting them out strategies long term, as they always show propensity to return as the “undead” Dracula no matter what.

      In a way the situation of AfD is still something like 10-20yrs ago in Austria, where similar parties are by now able to at least chip away old entrenched powers both in communal, regional and capital city politics, but it took years. Obviously, the mood in Germany might change more rapidly with recession-depression and/or deep fin market shakeout.

  3. Stefeun says:

    Don’t remember if this chart was displayed here.

    “Debt Is Growing Faster Than Cash Flow By The Most On Record
    Submitted by Tyler Durden on 04/27/2016”

    “By now it is a well-known fact that corporations have no real way of generating organic growth in this economy, so they are relying on two things to boost share prices: multiple expansion (courtesy of central banks) and debt-funded buybacks (courtesy of central banks), the latter of which requires the firm to generate excess incremental cash. Incidentally, as SocGen showed last year, all the newly created debt in the 20th century has gone for just one thing: to fund stock buybacks.

    Of course, every finance 101 student knows that a firm which has to borrow more cash than it is able to produce from its core operations is not a sustainable business model, and yet today’s CFOs, pundits and central bankers do not.

    And the next question is: what happens if the Fed does raise rates, what happens to the feasibility of these companies servicing the debt while also spending on R&D and CapEx (assuming there is any), and who can only afford the rising interest expense as a result of ever smaller interest rates? The answer is, first, massive cost cutting, i.e. layoffs, which would be a poetic way for the Fed’s disastrous policies to be reintroduced to the real economy… and then, more to the point, mass defaults.”

    http://www.zerohedge.com/news/2016-04-27/debt-growing-faster-cash-flow-most-record

    • Stefeun says:

      One missing:

      • richard says:

        These type of economic events fall under “perverse incentives”.
        There are legitimate reasons for management to buy company shares if a) the shares are undervalued; b) the company cannot find better uses for the cash internally; and c) there is a change to the structure of the company such as going private.
        If the shareholders were rational, they would sack the management, or cut their compensation.

  4. Fast Eddy says:

    “So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression?”

    http://davidstockmanscontracorner.com/the-cult-of-central-banking-is-dead-in-the-water/

    David – you are tantalizingly close! You are at least asking the question now.

    But you are coming up with the wrong answer….

  5. Stefeun says:

    Deindustrialization
    has started much earlier, and is more widespread, than I thought.

    http://rodrik.typepad.com/.a/6a00d8341c891753ef019affe1fb89970c-pi

    The chart is from this blog:
    http://rodrik.typepad.com/dani_rodriks_weblog/2013/10/on-premature-deindustrialization.html

    “The pattern is unmistakable. While early industrializers managed to place 30 percent or more of their workforce in manufacturing, latecomers have rarely managed that feat. Brazil’s manufacturing employment peaked at 16 percent and Mexico’s at 20 percent. In India, manufacturing employment began to lose ground (in relative terms) after it reached 13 percent.”

    It’s been happening all over the world, and was only marginally dampened by delocalizations, as reported in this congressional report:
    https://fas.org/sgp/crs/misc/R42135.pdf
    And this NYT article (already linked here):
    http://www.nytimes.com/2016/04/27/business/economy/the-mirage-of-a-return-to-manufacturing-greatness.html?_r=0

    So, we’ve been aware for ca 50 years that global industry was slowing down and would stabilize to a quite low level, despite so-called ‘development’ of the third world, but all we did is bet on a ‘service economy’ that -since- has never proved it would bring prosperity, nor even work by itself.
    Am I mistaken somewhere?

    • Stefeun says:

      Sorry the chart didn’t display.
      A pity because it shows peak happened in 1953 in the USA, 1970 in Germany, 1961 in UK, etc..

      Let’s try with this other one, that starts later:

    • xabier says:

      Stefeun

      Moreover, the viability of the general transition to service economies in the first industrialised regions had as its premise the growth of broad-based demand for such services in the late – Asian – industrialisers. That stage will most probably not be realised, one can only agree.

      • Stefeun says:

        Xabier,
        “Transition to service economy”, then what about products, food a.s.o.??
        Does a “service economy” ultimately aim to move vacuum around, but more efficiently?

        Had a quick look to check how much carictural this statement was.
        Well, not that far from truth!..
        Wish you a good laugh: https://en.m.wikipedia.org/wiki/Service_economy

  6. Fast Eddy says:

    And here we have proof positive that China is lying about its GDP numbers:

    http://peakoil.com/enviroment/is-coal-really-peaking-in-china

    • Stilgar Wilcox says:

      https://www.weforum.org/agenda/2015/10/what-is-driving-chinas-investment-in-renewables/

      “The narrative around renewable energy sources is typically framed almost entirely in terms of their contribution to reducing carbon emissions and thereby providing a means to tackle climate change.

      China is investing more in renewable energy production and manufacturing of renewable energy devices than any other country.

      Our view is that China is running into the limits of a predominantly fossil-fuelled expansion and now needs to find a new development pathway based on green growth and clean technology. This, we argue, is what lies behind its vast investments in renewables.”

  7. theedrich says:

    Let’s consider the reality:  the politically encouraged compulsion to show “charity” to every ThirdWorld invader merely in order to expiate Judeo-Christianity’s fabricated White Guilt (for having allegedly once eaten a forbidden apple in a mythical garden) will lead to the death of civilization on the planet.  This death, of course, is exactly what is desired by the “progressives.”  (See Stalin, Mao, Pol Pot, etc. on this.)  The only question left is, are Judeo-Christianity and the political establishment more powerful than the instinct to survive?

    • akrasia says:

      Agreed and well put.
      Are synthetic control mechanisms more powerful then dissipative structures as they play out? I’d say no. (Homo sapiens passim).

      • richard says:

        Hopefully, after the moneychangers are summarily dealt with (as per example), the rest of the problems can be, if not easily solved, at least resolved by negotiation.

    • richard says:

      A while back Pettis wrote that the only way forward for China was to sell off state industries to Chinse citizens.
      I tend to see a problem with that: overcapacity, corruption, false accounting …
      You get the picture. But if China can get through these hurdles, they will be just like the rest of us – at a “permanently high plateau”.

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