Low oil price is the one financial headline that doesn’t go away. Some weeks the news focus on Greece, or China, or the U.S. budget but oil is always there. Other days we hear about the Federal Reserve and interest rates but oil is also right there. You can’t go a do without hearing about oil.
Below is an interesting graph provided by the International Energy Agency. It breaks down the average cost of production for the different oil producing countries. Saudi Arabia has the lowest cost per barrel at around ~$20 and the Canadian oil sands is the most expensive to extract at over $70 a barrel. None of this is breaking news. I just like to see in way where it’s comparable among regions.
Below are two tables. One on of the rising demand for oil displayed quarterly and the second one is world supply. You can see that the demand for oil has increased significantly with the drop in oil prices. Demand is also expected to hit 96.8m/bpd by Q4-2016. Now supply has to keep up. Because of low oil prices capital expenditure has been slashed the most in twenty years and is still expected to drop in 2016. That could cause an eventual supply shortage or a “rebalance” from excess oil to not enough oil to meet demand in the future. Oil is a depleting resource so if we don’t actively drill for new sources supplies will decrease. And the current production from oil wells is always declining due to natural depletion. That means a well produce less oil year after year and you need to keep spending money to find oil. So there’s a lot of production/supply constrain. First you need a lot of money, then you need to find oil, then you need to drill, maybe you find some, maybe you won’t, if you need do you need to extract it and find a way to ship it out and refine it. There are other intermediaries between the well and your gas tank. Plus you need to navigate the fragile regulatory and political environment that can change at any time. It seems that the cure for low oil prices is low prices. According to the IEA, demand is expected to exceed supply in Q3-2016. If the market is under supplied and demand is increasing, well we have a situation where oil prices have one way to go.
My point is you can’t get too comfortable with low oil prices. We hear so much about low oil prices that we feel like it’s the “new normal”, that its there to stay forever. Remember that not too long ago the consensus was the high oil prices weren’t high enough. Oil prices can turn around and shoot up like a rocket just like it came crashing down like a house of card.
For more info on oil you can read the IEA Oil Market Report. It’s a great resource on a resource.