Drowning in oil again

For 4 years now the oil price (Brent) has been range bound between $90 and $130 per barrel (Figure 2). This is where it settled after the convulsions of the $148 per barrel peak in 2008 followed by the financial crash. Recently it has dipped below the $90 mark and looks set to break even lower.

With the world in turmoil, including OPEC producers Iraq and Libya ± Iran, and Russia cast out by the West, one might expect the oil price to be quite perky. But the opposite is true. This post takes a look at some of the key production indicators from OPEC, Europe, N America and Russia. But I believe one needs to look no further than Figure 1 to understand the weakness in the oil price. Rampant production in the USA, the world’s largest oil producer and importer, means that competition for supplies on the international markets is weakening. The world is once again drowning in oil.

Figure 1 USA oil production has grown an astonishing 4 million barrels per day in 4 years thanks largely to shale oil development supported by high oil price. 

So does that mean the real energy crisis is over? Well not quite. One needs to understand that shale oil, the US miracle, is expensive to produce. Over production of an expensive resource that dumps the price below the profit level is one of the effects of broken capitalism on the back side of Hubbert’s peak.


All data reported here are taken from the monthly International Energy Agency (IEA) oil market reports. OPEC data are for crude oil only and specifically exclude condensate and natural gas liquids (NGL). Production figures for other countries are for crude oil, condensate, NGL and non-conventional sources. The IEA data are used in preference to other sources because they are now the only source to report on OPEC spare capacity which is on occasions a key indicator. All data are to August 2014, the July and August figures subject to minor future revisions.

The latest chapter of the oil story begins with the plunging oil price (Figure 2). Range bound for 4 years, it is now threatening to break out to the low side. What fundamental aspect of supply and demand has changed to cause this chronic weakness in price?

Figure 2 Brent oil price from The Financial Times 13 October 2014.

Oil production and consumption are always roughly in balance since global oil storage is small in relation to the massive daily flows. Global production is rising steadily, and has been doing so since the illusory 2008 peak caused by the financial crash (Figure 3). There is absolutely nothing in the global total supply figures to warn of impending weakness in price.

Figure 3 Global oil production continues to grow reaching a recent peak of 93.4 million barrels per day in June 2014 confounding any notion of a pending peak in global production.


For a number of decades, OPEC and in particular Saudi Arabia, have been astute at matching global supply to demand in order to deliver the price that OPEC (i.e. Saudi Arabia) wants. Figure 4 shows the stack of OPEC production + spare production capacity. Total OPEC capacity has been on a plateau of 35 million barrels per day since 2009 and if anything is now drifting slowly down.  The only remarkable thing about OPEC production has been its stability in recent years when confronted with chaos in major producers Iraq and Libya. Notably, there has been no move to reduce production to support price in the face of an additional 4 million barrels per day production in the USA.

Figure 4 The black band of Ecuador marks the top of actual OPEC production, the grey band at top denotes spare production capacity (see Figure 5)

Figure 5 The oil price spike of 2008 was marked by OPEC spare capacity being squeezed close to zero, i.e. everyone was pumping flat out to meet rampant demand. The financial crash put an end to that party and saw OPEC rein in production by about 5 million bpd to compensate for the temporary destruction of demand. While most OPEC countries book some spare capacity in most cases this is small and it is widely held that the only country with meaningful capacity to spare is Saudi Arabia.

Figure 6 There is no sign of Saudi Arabia cutting production to make way for new US production in the global market. Saudi production has been stable at about 10 million barrels per day for about 4 years with spare capacity running at around 2. 5 million barrels per day. NZ = neutral zone between Saudi Arabia and Kuwait where the two countries share production equally from the Wafra oil field.

Figure 7 Iraqi production remains on a growth trend with no real sign of recent turmoil having any significant impact. Most of Iraq’s production comes from the south of the country, a long way away from the IS incursions to the north. But there are large fields in the centre and north of the country such as Kirkuk and East Baghdad.

Figure 8 According to the IEA data, Libyan production remains largely off line although this chart over on PeakOilBarrel which is OPEC data up to September 2014 suggests Libyan production may be recovering. This might add further weakness to the oil price.

Figure 9 I’m not sure what is going on with Iranian production. Iran has been subject to western sanctions and this initially impacted their exports. Sanctions may also impact Iran’s ability to maintain production equipment etc.

Figure 10 Angola is an OPEC country facing natural production declines. With all production off shore is deep water, Angolan production may go the same way as the North Sea.

North America

Figure 11 Canada and Mexico are not changing much in recent years, a small rise in Canada cancelling slow decline in Mexico. The North American story is dominated by production growth in the USA (Figure 1).


Figure 12 After a decade of decline and recent records in investment, North Sea production appears to have stabilised at above 3 million barrels per day. This stabilisation will also have a negative impact upon the oil price since North Sea decline was, in part, absorbed by the growth in North American production.

Russia and FSU

Figure 13 No grand tour of global production would be complete without a look at the Former Soviet Union where production is little changed over the last 4 years. The other FSU production is dominated by Azerbaijan and Kazakhstan.


The explanation of weakening oil price appears quite straightforward. Production of expensive shale oil in the USA has boosted production by 4 million barrels per day in 4 years. Natural declines in other areas like the North Sea have been arrested and will be reversed in the years ahead as a number of large new projects come on stream. OPEC has made no move to reduce production to make way for additional US oil and the price has given way to the economic reality of supply exceeding demand driving prices down.

Other factors to consider are the on-going economic concerns in the OECD, parts of which are set to slide back into recession as the debt burden continues to weigh and slowing growth in East Asia. Lower oil prices will of course help on those fronts.

Political and social turmoil stretching from Ukraine through Iraq and N Africa to northern Nigeria is having remarkably small impact upon oil supplies, apart from Libya. But Libya too is perhaps emerging from the abyss and new oil from Iraqi Kurdistan that is likely by-passing the international metering system, will be adding to the over-supply woes.

Why has OPEC not cut production? This would certainly boost oil prices and countries like Saudi Arabia reportedly require an oil price over $100 / barrel to remain solvent. It is also reported that US shale oil requires a price over $90 / barrel to turn a profit. And so, if Saudi were to close some valves this would help sustain the US shale boom and result in expanding the current over supply situation.

The oil markets are in for a period of instability while Saudi Aramco tries to stare down the US shale operators. Who will blink first?

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43 Responses to Drowning in oil again

  1. A couple of articles hot off the press on this subject:


    Most U.S. shale production would remain profitable even if oil prices fall to $80 a barrel, energy watchdog the International Energy Agency said Tuesday. Its estimate, which is shared by some OPEC officials, suggests crude prices could fall further before supply starts to come out of the market. In its monthly report for September the IEA said “further oil price drops would likely be needed for supply to take a hit” because most of shale oil “remains profitable at $80 a barrel.”


    The kingdom is sometimes likened to a central bank managing the global oil market, adding or withdrawing supplies to control prices. But that vastly overstates the degree of influence, let alone control, which the kingdom can really exercise over the market. In the short term, the Saudis, acting in concert with close allies Kuwait and the United Arab Emirates or OPEC as a whole, may exercise a mild restraining influence on price movements. But there is no evidence that Saudi Arabia, or OPEC, has had a decisive impact on medium and long-term price trends. The big price movements of the last 30 years have all originated outside the cartel.

  2. Phil Chapman says:

    Interesting graphs, Euan.
    While the Saudis may need .>$100/bbl to run their economy, I believe their actual marginal production cost is very low, perhaps 50% of his budget on the military. Then the price of oil collapsed, eliminating his only major source of foreign exchange. His attempts to reorganize the USSR to deal with all this were the principal reason for the collapse of the USSR.

    I was disappointed that the oil price collapse killed the SPS, but of course the end of the Cold War was much more significant. My role in Star Wars was very small, as I was just one of the astronautics types in the CACNSP. I certainly did not know it at the time, but in retrospect the meetings of the Council were probably the most important I ever attended — but the Star Wars project would probably not have ended the USSR without the fall in oil prices.

  3. Phil Chapman says:

    The above doesn’t make sense because WordPress seems to have screwed up my comment. Please ignore it.

  4. Sam Taylor says:


    The majority of the focus at the moment appears to be on the shale drillers vs the Saudis, with a sprinkling of OPEC backbiting thrown in. This seems to ignore the fact that most of the majors have been cashflow negative at $100+, and presumably if things hover around $85 for long they’ll be feeling the pinch in relatively short order. In any war between the Saudis and the shale drillers there’s a big chunk of expensive conventional production which could become collateral damage. The exploration industry is already suffering, and this will presumably translate into a fall in production in the coming years.

    Given the fact that places like China seem to be trying to run up their own version of the 2009 debt bubble it’s hard to see how this ends well.

  5. Glen Mcmillian says:

    I can’t keep up with all the acronyms these days. What is meant by ”Plus one half NZ?”

  6. Ralph W says:

    Half of NZ – Oil produced in the neutral zone between Saudi Arabia and ? UAE ? is revenue shared between the nations and each claims half for their own national production.

    I ignore spare capacity numbers. They are as meaningless as OPEC official oil reserves.

    I remember writing 10 years ago that peak oil would be an economic event – the peak of production would come when the world could no longer afford the cost of the marginal barrel. I called that incorrectly in 2008, but with US shale oil being so expensive to drill and with such a high production decline rate, I am much more confident calling it today. We are at peak oil because the global economy can no longer sustain $100 oil.

    We are seeing converging crises. Clearly Saudi Arabia has decided not to reign in production to keep the price of oil high, and this will put severe pressure on overstretched shale drillers, and Russian general economy. EUrope (and UK) is still drowning in debt and drifting back into recession. Paying back debt was only possible if GDP returned to healthy growth and $100 oil prevented that. China is also looking very wobbly economically, although with such an opaque state the real situation is hard to read. A lot of the drop in oil prices is due to a rising dollar against these key other currencies. Demand in the short term is also going to crater as Ebola begins to spread, it will kill aviation stone dead from panic.

    Ebola triggered panic is going to do what $147 oil did last time. Tip the global economy over the edge and burst the financial system bubble. This time the debt is even greater, and will the fallout. The bankers will be bailed out again, a few more marginal economies will be sacrificed, but this time I don’t think it will be enough.

    Ebola is not going away. A million dead in a matter of months in Africa. It is completely out of control. There is no way it is staying put. Western nations are making a real botch of the first few high profile cases, but the real breakout will be a migrant worker returning home to an Asian or far eastern country, where it will not be recognised until it is out and in the wild in the unwashed of Mumbai or another big city. Then it will go global. AS global health budgets are slashed in the deep recession, it will be all over.

    This is a black swan as big as medieval plague.

  7. Euan has asked me to post this graphic:

  8. Countries that are dependent on oil as their main source of revenue may not react to lower prices by reducing production. Here in Mexico PEMEX has historically run at a loss, but the oil had to be kept flowing because oil exports financed about half of the government’s budget. Other countries are probably in a similar position. And two billion barrels at $50/bbl is still worth $50 billion more than a billion barrels at $50/bbl.

    • A C Osborn says:

      Not if you are losing $5/bbl.

      • Euan’s Figures 6 and 7 show Iraq and Iran producing close to capacity. I don’t have any data for Nigeria and Venezuela but I’m sure they are too. And according to the Figure I posted a few comments upthread they’re all losing at least $25/bbl doing it. Iran is losing $45/bbl.

  9. First time poster here, hi…

    I think, this price slump is a deliberate effort to repeat the 1980ies to a.) revive world economy and b.) to bankrupt Russia. I agree with Euan, that us shale is key and that without enough international supply this whole thing would not have gotten going.

    But today is NOT1985.The only way to be successful would be, that the shale revolution turns out to be the real thing and not a “bubble”. And that shale production is fit to work outside the USA as well. But my guess is that the outcome will be different – some sort of shortages and the re-regionalization of oil supply.

    For german language readers:

    Andreas, Vienna

    • Syndroma says:

      Could anyone show me some data supporting the claim that the world oil production was increased in 80’s to lower the price? From what I can see there was a decade-long depression in oil production:

      And Saudi Arabia was especially hurt:

    • A short english summary of the post can be found here: http://staatsstreich.at/oil-prices-a-repeat-of-1985-will-trigger-a-supply-crisis.html
      I am no professional oilman (nor am I a native english speaker). Criticism and comments very welcome. Cheers

      • Syndroma says:

        Your article contains the following:

        the flooding of the oil markets by the Saudis

        It’d be nice to provide some backing to this statement. The chart I linked in the previous post contains no trace of such an event. Actually, it indicates that the opposite was happening.

      • Sam Taylor says:


        While I generally agree with your assessment of the situation in terms of what another price shock might entail, however I disagree that it’s a deliberate event or a conspiracy.

        A large portion of the slide in price at the moment is demand side related. Europe is slipping back into recession, and China appears to be approaching debt saturation, limiting it’s ability to afford expensive oil. Unless this has somehow been orchestrated as well, it seems like we might be losing our ability to keep things going with vast amounts of debt.

        • Sam, thx. for your answer. We can only rely on what media report and as a former journalist I know (and suspect), that much of the agenda and a considerable part of their information comes from government offices, including the likes of FT and WSJ. So: cloak and dagger conspiracy is a thing of the past, state controlled media is not. Not even in the west.

    • Euan Mearns says:

      Andreas, I flirted with the idea that the USA in collaboration with Saudi Arabia were planning an oil price route that would produce economic pain for many of the USA’s big enemies. This is a theory about what happened in the 1980s leading to the fall of the Soviet Union. The charts that Syndroma links to shows the huge drop in Saudi Production at this time that was in fact a vain attempt to support prices. The fall in Saudi / OPEC production is matched by the growth of N Sea and Alaska production. So I think it is more likely that Saudi Arabia does not want a re-rum of the 1980s loss of market share and they have a stronger hand this time. In the 1980s, Alaska and the North Sea were going to be developed no matter what. Today, the US shale industry is fragmented, many over-leveraged small operators that will go bust if confronted with a prolonged spell of low price. I’ll be watching the Baker Hughes rig count to see the story unfold. US energy independence based on expensive non-conventional oil and gas may evaporate. Aramco and Saudi Arabia are unlikely to go bust though the Saudi state does need to pay a high price for civil obedience. During the last big price crisis in 1998, the Saudis borrowed money from UAE – that was the signal that the oil price crisis was about to end.

  10. dennis coyne says:

    Hi Euan,

    A problem with IEA data is that it tends to not report crude separately. This tends to inflate world output since NGL and ethanol has less energy per barrel relative to crude. Using EIA data one can adjust to barrels of oil equivalent which is more relavant.

    Chart below uses BP Data to compare World liquids and C+C+NGL in boe with C+C output from the EIA. Note that in 2013 world liquids was only 84 million barrels of oil equivalent per day, rater than the 90 million barrels per day suggested by the IEA.


    • Euan Mearns says:

      Dennis, is it not the case that the EIA data are in arrears and recent months not very accurate?

      And despite what others say, I think the spare capacity signal is a useful one to watch. There is no recent rise in spare capacity and therefore no sign of OPEC production with held.

      • dennis coyne says:

        Hi Euan,

        It is true that it is not as timely as the IEA data, my assessment is that is just as accurate as the IEA data. The chart I presented is based on BP data. Does it make sense to count a barrel of NGL or ethanol with crude, the ethanol and NGL barrels contain about 70% of the energy of the average crude barrel. Just a suggestion, but if we are concerned with energy we should be using barrels of oil equivalent when presenting total liquids, the IEA does not do that (nor does the EIA). The EIA data can be broken down into NGL, C+C, other liquids, and refinery gain.

        • Hiruit Nguyse says:

          A long time ago, I concluded that we needed an energy system of measurataion based on Energy (calories, for example) rather than the cumbersome volumetric barrell for exactly that reason. Total Liquids bears no relationship to Crude + Condensate because you can’t drive your car on zip lok bags and Pepsi bottles (the products derived from NGL’s for example).

          It seems to me that all the refinery gains, ethanol, natrual gas condensates, and natrual gas plant liquids added to our C+C numbers obfuscate our real energy situation much in the manner than substitucion, hedonic regression, and geometric weighting serve to becloud our actual inflation rate….that was 7.5% in my kitchen last year BTW.

          Good point. I like to watch C+C numbers, and LTO like a hawk these days. I am always cognizant of the price difference between the extration of the different species as well. New york Times assured us that we were awash in oil again this week, but I am not seeing 97c / gallon at the pump near where I live.

          Good Pont.


  11. Syndroma, it is correct, that the Saudis lost volume and market share in the first five years because they adhered to OPEC price goals (while other members seemingly cheated; also north sea came online). In 1985 SA began to make what Yergin calls “netback deals”, after which the bottom fell out of the market. Prices were cut in half and Saudi production went from 2 to 5 mn. barrels. It is mentioned here (don’t have more at hand at the moment)

    So if I had to tell the story from what I know now i would differentiate between the frist five years of declining prices (dampened demand, north sea, cheating OPECs) und the second half (Saudis).
    My main point is though, that today is a completely different situation. It is the difference between abundance and managed scarcity.

  12. Syndroma says:

    My main point is though, that today is a completely different situation.

    I can agree with that.
    I just object to the simplistic view that “the Saudis opened the spigots to flood the oil markets and bankrupt the USSR.” The reality was much more complex, and the motivations of the players were quite different. And now people are trying to apply that simplistic view to the current, completely different situation.

  13. Syndroma, as they say in journalism school: “Keep it short and simple(istic)” In earnest: Why would the Saudis be content with 80 dollars or less when they need 92 dollars, 2014 certainly more?

    Kuwait or Qatar I could understand, SA not.

    And wrt the 80ies: George Bush father, a Texas oilman with close links to the Saudi royals was vice president at the time. So maybe this was a factor as well. Didn’t Reagan or Bush himself even boast about hitting the Soviet Union with oil prices (from memory – I would have to look for this quote).

    • Syndroma says:

      Why would the Saudis be content with 80 dollars or less when they need 92 dollars, 2014 certainly more?

      Maybe because they see no way to squeeze 92 dollars out of the faltering global economy?

      Didn’t Reagan or Bush himself even boast about hitting the Soviet Union with oil prices

      There’s an endless line of people who want to take credit for the collapse of the Soviet Union. It almost reminds of the collapse of the Roman Empire:
      Of course low oil prices were a factor, and a big one. But I believe they were low not intentionally and nobody predicted the outcome.

  14. Ian Smith says:


    I think you know that that 4Mbpd figure isn’t real, and is mainly consisting of NGL which are great for a BBQ, but no use to put in a car. The 1-1.5Mbpd of real production is an expensive nice-to-have – provided you don’t look too carefully at the balance sheet.

    Rather I think the price fall is due to weakness in the demand side – if china isn’t buying, the price will fall away quite quickly.

    I expect KSA to take advantage of the situation and make some hard pressed US oil companies an offer they cannot refuse.

    Oh, and the North Sea doesn’t appear to have levelled off at all in my book.

    • Euan Mearns says:

      I’ve been in London for a couple of days and Saturday head off on holiday fro a week. When I get back I’ll take a closer look at the breakdown of liquids production. So many data sources and spread sheets if I run through them all I never gat around to writing a post.

      So what evidence do you have that N Sea has not levelled off. There’s a sufficient build up of new projects in UK and Norway that will see production rise between now and 2020, so long as $50 / bbl doesn’t derail the show completely.

      • dennis coyne says:

        Hi Euan,

        Based on your chart, it does look like the North sea has levelled, if we assume that prices will recover to above $100/b, output might even rise somewhat, but note that the decline rates in the newer fields are likely to be quite steep so there might be a “Red Queen” effect that keeps output relatively flat. What kinds of increases in North Sea output do you foresee if oil prices get back up to around $110 to $120 per barrel?

  15. There seems to be consensus in this forum, that the main factor for oil pricees is weak demand. But demand has been weak for three years now as GDP growth has been declining after the recovery of 2010. It’s all a matter of perception/anticipation of future demand.

    OK – but why would anticipation of future demand decline so abruptly, when growth expectations are revised downwards ? Elasticity for oil consumption is said to be low, when prices move higher. Then why does everyone expect imploding oil demand, when GDP growth is expected a tad lower? Do they expect, that people stop driving cars?

  16. Sam Carmalt says:

    Great post, Euan.

    The focus on oil doesn’t include the fact that natural gas, most notably in North America, has been making inroads into oil demand during the period of high oil prices. This will make Saudi management of the oil price more difficult going forward.

    Oil fundamentals, especially the amount of production that can be brought on at low cost compared to sales price, have changed since the 1980s. But much else hasn’t changed that much. Two similarities are the difference in the time scale between oil investments and resulting production when compared to most other factors, and the fact that geopolitics will somewhat bend (although it cannot change) the economics of oil.

    And, speaking of what may be limitations in Chinese demand over the immediately coming years, I’m reminded of the Chinese saying “may we live in interesting times”.

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