Posted on 11/18/2014 8:56:11 AM PST by thackney
The market for crude oil is in veritable free fall. The price of a barrel has dropped 30 percent since June, and the ripples have only begun, with analysts warning of everything from bankruptcies of Texas oil fields to economic troubles in big oil-producing nations like Venezuela and Nigeria.
If oil prices stay low or keep falling, it will be one of the most important trends shaping the world economy in 2015, which raises the question: Why is this happening? To answer that, it is useful to look at the market for another fluid that is stored in barrels, one that is less economically consequential but quite a bit more tasty: bourbon.
As it turns out, oil producers from Dallas to Abu Dhabi could learn a few things from the Kentucky distilleries that turn out nectarlike whiskeys.
What oil and bourbon have in common are the long time lags between investment in a new supply and availability of the finished product. With bourbon, that’s because a distiller must keep the good stuff in barrels for seven, 10, or even 20 years before it’s ready to drink. With oil, it’s because investment in new drilling projects is a slow-moving affair, frequently involving years of complex engineering and construction before the crude starts to flow.
The result for both is that supply is basically fixed in the short run. The amount of oil available in the near future is determined by investment decisions that oil producers made years ago. This creates big swings in prices over long time horizons that have broad effects on everything from the cars we drive to the politicians who win office.
The current sell-off in oil, for example, has its roots in actions taken in the middle of the last decade....
(Excerpt) Read more at nytimes.com ...
...As someone who’s consumed a fair amount of both liquids, I was intrigued, but Irwin’s comparison falls flat.
Certainly, there would be benefits to taming the volatility that dominates the global oil market. Crude prices have tumbled 30 percent since the summer, companies are scaling back capital budgets and consolidation is underway, most notably with Halliburton’s $35 billion bid for rival Baker Hughes.
Irwin proposes that the bourbon industry could offer a lesson in how to ward against such volatility. Like oil, bourbon has a long lag between the initial investment in new supply and the finished product, he argues....
In the oil market, price is the regulating factor between supply and demand. It’s impossible predict the confluence of emerging economies, geopolitical upheaval and technological disruptions that contribute to the oil cycle. Irwin goes on to compare the current volatility in oil to the bourbon market, in which demand is rising dramatically. Distillers, though, are fighting the urge to increase supplies, recognizing that by the time the new bourbon reaches the market, the current craze may have waned, resulting in a glut. He notes that bourbon makers are allocating their product to distributors at just below the market-clearing price....
This is where the argue falls apart. Oil producers don’t need to cultivate a new generation of fossil fuel users. They already make the cheapest, most efficient form of energy we have. In fact, while prices are falling now, all indications are that demand for oil will continue to rise, driven by emerging economies in places like China and India. If anything, the next generation is over-cultivated.
The other key difference between the two markets, which Irwin fails to acknowledge: oil isn’t a free market. The price is controlled by an international cartel, OPEC, which in the past six months has allowed the price to fall. What happens to prices in the next few months largely will be determined by whether OPEC decides to cut output at its meeting next week....
Excerpted
I know NOTHING about the oil industry, but let me take a guess:
ALL of the oil industries problems are ALL POLITICALLY CREATED?
How’d I do?
Not all, but certainly too many.
I’ll drink to that.
If production in non-OPEC countries continues to rise, through newer technology now becoming widely available, that shall continue to make mincemeat of world oil prices.
Even old “depleted” oil wells, which have slowly replenished, could be accelerated to much higher production with the application of fracking and more efficient solvent extraction methods (including carbon dioxide injection). Add to that new discoveries of untapped petroleum reserves, and substitutes such as natural gas for oil, and the pressure will continue to be exerted on crude oil prices.
Unlike oil, there are few satisfactory substitutes for bourbon. 190 proof ethanol made from the natural gas fraction called ethylene, mixed with various fusel oil and other popskull ingredients, may look or even smell like blended bourbon, but nobody will be fooled for very long.
Old wells don’t replenish. But you can spend extra money for secondary and tertiary recovery methods to get more of the oil left in the ground, out the well.
Water Flood, CO2, even heat in a few locations are used to squeeze that underground “sponge” out a little more.
Most folks don’t realize how much oil is left in the ground once it runs “dry”. It is just a matter of economics, what will come out for how many extra dollars.
So folks will know, that is basically the US with a little bit of Canada.
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