starting with the basics…
A barrel of crude oil is a container filled with flammable liquid that weighs about 300 lb and occupies a volume of about 5.6 cubic feet. A cube measuring a yard on each side would hold about 7 barrels and weigh a ton. In other words, storing and transporting oil is a major issue.
According to OPEC, world oil demand is now about 91 million barrels daily. That figure is likely to grow by about a million barrels daily during 2015.
World supply is just under 93 million barrels daily. The difference between supply and demand, 2 million barrels daily, is enough each week to fill three of the largest oil tankers around.
Oil producers prefer to keep output steady, because that optimizes the amount of oil that can be recovered through a given well. Oil usage, on the other hand, is seasonal, with peaks in the US–the world’s largest consumer of petroleum products–during the summer driving season and the winter heating oil season. Temporary storage, either in tanks or on the seas in oil tankers, holds the “extra” oil in the slack seasons.
…and on from there
What happens to the 2 million barrels of daily output that consumers more or less don’t want?
The standard answer is that speculators with access to storage bid a price on the spot market that they figure will allow them to cover their costs and make a profit when they eventually sell.
There have also been press reports that China has been buying large amounts of oil recently to build its strategic oil reserve.
The issue of imbalance between supply and demand has been developing for several years. High prices prompt conservation, for one thing. They also make high-cost shale and tar sands extraction economically feasible. And until relatively recently continuing instability in the Middle East has kept output from this important producing region below normal–offsetting the growth of shale oil from the US.
In a few weeks, we’ll be entering the lowest-demand time of the year for oil. It will be too late to manufacture and deliver heating oil to customers for winter use; driving doesn’t pick up until April-May.
Paradoxically, lower prices can trigger a spate of new output entering the market. This could come from oil-producing countries trying to offset the price-related shortfall in their inflows of hard currency, or from financially leveraged private companies needing cash to service bank loans, or from companies whose oil inventories now look much too big.
7 years of $4 gas has changed behavior.
That said, I did several drives this holiday (Basically DC to Chicago). I didn’t notice the highways being full — but the rest stops were. Haven’t seen that since 2001 or so.
I’m sort of confused. How does low prices cause new production? I didn’t really follow the last sentence. I’ve read elsewhere that oil prices are so low that a lot of producers cannot profitably drill.
Thanks for your question. I did try to pack a lot into that one sentence.
Suppose that you’re a country that’s almost completely dependent on selling oil to get money to run the government–pay government employees, keep social services running…
Let’s say that when you drew the budget up, you were planning on selling a million barrels of oil a day at $100 each. That would be $36.5 billion.for 2015. Now if oil prices stay at $50, you’ll take in only half of that. You can try to cut back, but you’ll never stay in power if you cut everyone’s salary by 50%. Weird as it sounds, your only choice may be to try to get more revenue by upping oil production.
Same sort of thing for a small oil exploration company that has a large loan repayment coming due. If cash flow from current production won’t be enough, the company can either sell assets or up production.
The tactic may not work, but the government/explorer may feel there’s no other hope.
As to companies, when the price of a raw material is rising, they tend to buy much farther in advance than they really need, figuring they’ll make gains by holding the extra stuff. Supervisors tend to turn a blind eye to such speculation while it’s profitable. But if prices begin to fall, companies swing to holding as little as possible. They either stop buying for a while or dump the now-excess amount on the open market.
You’re right about a drilling slowdown. Lower prices mean fewer drilling projects make economic sense. Lower cash flow means companies have less capital available to fund new drilling.