Lightstream Resources Ltd. LSTMF

Oil Economics

[tcelling]

Reading the doomsday oil price news daily I have come across a number of articles pointing out cash break even prices, such as this one from today:
https://www.theaustralian.com.au/business/wall-street-journal/saudis-drill-up-shock-therapy-in-shale-war/story-fnay3ubk-1227181436518

This article admits that while very few projects are all-in profitable at today's prices only 0.2% of worldwide production is cash flow negative at $50 oil. They summize that this means oil will cotinue to be in surplus for some time. 

What seems to be forgotten entirely at this point in time is that worldwide decline rates average around 7% (6.7% in 2007 which has likely increased since then, especially with high decline tight oil production) https://grandemotte.wordpress.com/oil-and-gas-5-production-decline-rates/. 

This means we will see oil production DECLINE by around 6.4 million boe/d over the next year if new production is not brought online. What this means is that supply isn't dependent on cash costs, it is dependent on the cost of producing NEW wells. The current estimated oversupply sits at around 2M boe/d (with OPEC pumping around 900K boe/d of that above their quota - accident, right?). This means that if even 1/3 of the expected decline is not replaced by new investment, the market will shift to undersupplied in one year. But wait, it gets better. Demand is still INCREASING by about 2.7%/annum. This means oil demand will INCREASE by about 2.4 million boe/d over the next 12 months. This means the world needs to produce an EXTRA almost 9 million boe/d over the next year from new wells to keep the current supply/demand situation at status quo. This is simply not possible at $50 oil. 

You will also read about the Saudi's ability to draw on extra capacity. Sure, they can, and likely will/are. But, this is estimated to be around 2.8M boe/d. We will still see a net deficit by year's end even with the Saudi's pumping everything they possibly can. 

In summary, if prices stay where they are, there will be a net undersupply of oil in the global economy by the end of 2015 or before and there is nothing the Saudis or anybody else will be able to do about it. The only way to prevent this is for prices to rise, and quickly. Furthermore, a full year of $50 or less oil will have lasting consequences beyond the single year. In essence, we will see a rebound of oil prices well beyond $100 in that scenario.