Tuesday, November 25, 2014

Cheap oil and gas will stop many developments

The price of oil and natural gas has dropped over the last years because supply has outstripped demand and this means the price has fallen.   For years people have predicted peak oil and the world coming to an end with the price constantly rising.  That has never seemed realistic to me because as the price rose cheaper alternatives would gain market share and technology would drive the amount of energy needed and the cost to produce it down.

Natural gas has benefited more from fracking than oil because there seem to be more opportunities to unconventional gas that has been opened up by the new technology.  Another change is the emerging global gas market.   Oil has always been a global commodity but natural gas has not been because it is not easy to transport without a pipeline.   Now with the massive global rise in LNG there is a global price emerging and the price is weak everywhere.   Natural gas is the best of the fossil fuels and has a near term future as there is a shift to electricity produced by natural gas, but in the long term it will be replaced by other sources of electrical power,

Oil has seen the addition of a lot of new supply from the tar sands in Canada but also because of fracking, which has lead to a huge increase in US oil production.   As I write this the price of oil is $76 to $80 a barrel, prices not seen since the depth of the global economic crisis in 2009, which was a temporary drop at that time.   From July 2010 to July 2014 the price of Brent oil was about $110 a barrel.   The WTI and Brent prices are not the Canadian prices,the Western Canadian Select price for oil is at $66.03 a barrel today.  

For years now the price of tar sands oil has been significantly lower than the WTI or Brent crude oil prices.   There is two reasons for this, tar sands oil is not as a nice a product as WTI and there is a constraint problem when it comes to delivery, Alberta produces more oil than the pipelines can move.

This lower price for oil makes building more pipeline capacity uneconomic at this time.  There are at least eight tar sands projects that require a much higher price of oil than the current market prices.   These projects represent about $40 billion of capital investment over the next ten years.   That is $4 billion less investment per year in Alberta for the next ten years..

Even the shale oil of North Dakota becomes financially questionable when the price is below $80, the cost to produce a barrel from North Dakota runs from $50 to $90.   The margins will be low, but not too low to stop an expansion of drilling.  

With an ongoing high price of oil for the last decade the public and businesses have found ways to use less oil.  Global demand for oil has been growing slower than rising supply, it has not even been growing as fast the global economy.

Supply is not likely to fall much soon.   As the boom fades the costs to drill for new oil will fall.   This is for two reasons, first the crazy prices that have to be paid for anything to do with drilling will fall and second the drop in price will push more technological advances.   At the same time the oil being produced in the tar sands will not go down because tar sands projects require large up front capital investments to start.  Once the projects have been built the operational costs per barrel is low enough to allow them to continue even with a significant fall in the price of oil.

At the same the cost to produce green electricity has been falling dramatically.   The price for wind, solar and geothermal is dropping quickly and is now rivaling the cost to produce to electricity from fossil fuels.   It seems probable that in the next five to ten years renewables will be cheaper than all the fossil fuels for producing electricity.   Electrical production is a major use of natural gas and coal, without this demand the price will drop.   The still cheaper natural gas and coal will displace some oil and help to keep the price of oil low.

The fossil fuel era will come to an end not through protests or government intervention, but through simple economics.