Canada’s oilpatch is basking in an extended sweet spot of sorts. Commodity prices aren’t spiking in a way that’s sure to sink the global economy, nor are they plumbing depths that would force small producers out of business and big players to start tightening their belts and cutting jobs. The global oil market, however, is changing and nowhere are the signs more evident than the reaction to what’s happening in the Middle East.

In the past, military conflicts in the Middle East and the attendant threat of supply disruptions would send oil prices soaring. Today, oil prices are falling even as the region is seemingly unraveling. Civil wars are unfolding in Iraq, Syria, and Libya, atrocities by ISIS have the western world mounting military action, and Hamas and Israel are coming off arguably the most intense period of conflict in years. The region feels like a tinderbox. Oil supply has already suffered in Libya and Iraq and the threat of production losses is looming over other countries in the region.

Historically, such widespread unrest would have caused global oil prices to march higher, but instead of rising against the backdrop of heightened geopolitical risks, Brent, the global price benchmark, has recently sunk below $100 a barrel. Despite the unrest in the world’s most important oil producing region, the price of Brent is now actually 16 percent lower than it was in June.

On one hand, the world’s major oil consuming economies can let out a big sigh of relief. In the past, oil shocks emanating from the Middle East have led to devastating recessions. For investors in oil companies, though, the recent retreat in global crude prices raises a different question. If crude can’t rally on what’s happening in the Middle East, then what will it take to move prices higher? Does today’s disconnect between global oil markets and the chaos that’s gripping the region signal an end to the era of triple digit oil prices? If so, what are the consequences for North America’s oil industry?

According to U.S. shale producers, it’s the prolific production from the Bakken and the Eagle Ford that’s taken the edge away from OPEC’s market clout. Thanks to the contribution from unconventional plays, U.S. oil production is threatening to surpass the output from Russia and even Saudi Arabia. Although current U.S. law prohibits raw crude from being sold abroad, the sale of 3.5 million barrels a day of refined products such as gasoline and diesel is, ostensibly, helping to keep a cap on the price of oil elsewhere in the world.

It’s a cute theory, but the real reason global oil prices are falling doesn’t have much to do with a bump in the amount of refined products that are being exported from the U.S. In actuality, it’s the same reason that coal prices have been cut in half over the last two years — demand is no longer increasing at the rate it once was.

U.S. oil consumption, by far the largest in the world, has recently fallen to 18.6 million barrels a day, down from nearly 21 million prior to the last recession. European oil demand peaked more than 20 years ago and has fallen in each of the last five years. Even China’s thirst for oil is diminishing as economic growth there shifts into a lower gear. The country’s latest industrial production numbers were the weakest since 2008. Indeed, global oil demand forecasts are being cut by nearly everyone in the business, whether it’s the International Energy Agency, the U.S. Energy Information Agency, or even OPEC.

If the trend towards weakening demand growth continues, there’s only one direction for oil prices to go. It’s the same direction that coal prices have already went. Newcastle spot prices, essentially the global benchmark price for coal, have fallen from a peak of more than $140 a ton in early 2011 to less than $70 a ton.

Tumbling prices have wreaked havoc in the industry. Coal companies have gone bankrupt, mines have closed and investors have seen their portfolios decimated. Since early 2011, coal giants such as Peabody Energy and Arch Coal have shed more than 80 percent of their market value. If crude prices end up mimicking, their fossil fuel cousin, prices could be heading as low as $40 to $60 a barrel in the not-too-distant future.

For the moment, it might seem like North America’s unconventional production has relegated OPEC to the sidelines. That can easily happen in a world of $100 oil, because such high prices offer enough incentive for producers to bring on new supplies from expensive sources such as the Bakken or Alberta’s oil sands. In a world of falling prices, however, it will be high cost production from shale formations and the oil sands, not the low cost conventional crude from places such as Saudi Arabia and Iran that will be hit the hardest. Investors in North America’s oil sector need to ask themselves what happens when lower prices make those plays uneconomic.

  • Doug Stewart

    In the summer of 2008, when west Texas intermediate was $140, crusty old oil man said to me, “the oil price could go to $80. I’m not predicting it, but it could happen. 2 months later, it was $40.
    Predicting commodity prices is tough.

  • petr aardvark

    predictions are hard, especially about the future.

    who would have predicted that a couple of months later the most conservative administration (GWBush) in the most conservative nation would turn communist by buying AIG among others.

  • Mary Jenkins

    The analogy to coal isn’t black and white. In the US, the EPA has upped emissions standards requirements, bringing the cost burden of coal usage higher independent of the price of coal itself, while at the same time the fracking natural gas boom has made natural gas fired plants more attractive. I haven’t run numbers, but an interesting theory to investigate (feel free, Jeff!) would be to check on the degree to which these dynamics are behind the dive in coal prices far more so than market-driven forces.

  • Doug the guest

    Jeff, this post is quite a departure from what you predicted 4 years ago about how demand would outstrip supply and put the price of oil up. Most likely this drop is temporary, due to the reasons you mentioned and a recent increase in supply. It’s probably a good time now or in the near future to buy energy stocks or funds that invest in them.

  • mushalik

    US crude oil imports decreased from 14.2 mb/d in May 2007 to 8.8 mb/d in June 2014

    That is 5.4 mb/d or around 30% of what passes through the Straits of Hormuz.

    Low oil prices will also be a problem for Middle East oil producers as most, especially Iran, need a fiscal neutral oil price above $100

    From my website:

    OPEC’s average fiscal break-even oil price increases by 7% in 2013

  • O’Chamberlain LordO’PinkLines

    I think Gail Tverberg hits the nail on the head and has consistently done so since 2008.

    In her latest piece “Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?” she argues that the debt bubble holding up the global economy post WW2 is failing to expand enough. If the debt bubble collapses then it’s game over.

    “The problem we are encountering now is that once resource costs get too high, the debt-based system no longer works. A new debt-based financial system likely won’t work any better than the old one.”

  • Steve

    I believe this drop in prices is temporary. Tight oil appears to be in a bubble that has about 4-6 years left before it collapses (see these articles:;;
    When this happens, things will get really interesting…

  • O’Chamberlain LordO’PinkLines

    EXACTLY what I think Steve, somewhere between 2015-2020, the mother of supply side energy crisis strikes when unconventional falls off a cliff then the fun and games really starts.

    No one yet has twigged the reason we’re seeing deflation/deleveraging/credit contraction is because of the Fed’s tapering program. Any idiot can work out the economy we have is debt based and the master controller is the Fed. Turn the taps of heroin off even for a second and all goes “kaput”. Well surprise suprise it’s going kaput, but as they did in 2008, they’ll fire up the presses and whip the banks into shape behind closed doors. I think the EU already has negative rates.

    Yellen will not allow deflation on her watch, remember she’s a Greenspan, Bernanke disciple. She’ll simply fire up the printing presses and hold a gun to the banks again to get lending.

    The real elephant in the room is “Peak Cheap Oil” and the fact that unconventional’s about to fall off a cliff. We’ve already seen the world fracturing and deglobalizing as a result of the energy crisis.

  • Jon Doe

    Contrary to this article Oil consumption is 92 million bbls/d and rising granted not as fast as previously.

  • Larry

    Its hard to believe shale oil or oil sands
    producers will sell oil at any price below $70 because each barrel would be sold at a cash loss

  • petr aardvark

    what credit contraction? interest rates are rock bottom.

  • Reda

    I hope this this drop continues at least until depletion is more evident

    shale oil may be a bubble but countries like Libya Iraq Iran produce
    nothing compared to their potential/production capacity + there is
    always offshore exploration recently Morocco seems to be in the spot
    light not to mention the arctic sea / north pole especially Russia where
    a new Koweit is to be found and also south China sea Venezuela’s tight oil if
    all the types of oil are included venezuela must be a heaven with a
    quarter of global oil reserves with +300 billion barrels more than 260
    bbls of Saudi Arabia that can still produce more than 10/11 million
    barrel/day that it’s procucing today.

    I hope the world takes this chance to recove and invests in renewbale energies because after this drop
    the decline rate of existing fields will take oil prices back to +100 $/barrel
    after being conpensated by full production in the middle east and new
    offshore production combined with unconventionnal production.

  • jim patterson

    prices fall for one reason only. Supply exceeds demand whether it’s oil or widgets

  • rigpigpetey

    we have more oil and gas liquids in this part of the world than most “minds” will ever be able to grasp. I have indicated previously in past posts where oil prices will be “now” “today” as of posting two years ago or more, on the other hand, Jeff has changed his tune and re-invented himself.

    Considering world political events, economics and “growth yet to come”, the price of oil / liquids will flatline with a 2-5% price adjustment on the daily trading aspect on today’s current pricing schedule. Now, with our increase in todays production, some third world economies can afford to grab a toehold on the plateau we are on and be able to pull themselves into our comparisons. However, that will take “time”, and that is what we currently are experiancing on a day to day basis.

    The way i see it based on a lifetime in this industry, between all four western provinces and including our north, we have in excess of 3 trillion barrels in”ALL” reserves considering all potential production at todays ability to produce,…………and we are getting better at it.

    The world runs on oil,……………Jeff was right about that.

    Todays pricing may be the standard that is now potentially a constant.

  • Steve
  • rigpigpetey

    Geologists in California,………now there is a pretty good chuckle.

    i suggest paying attention to the “donate” tag in the right hand corner. The agenda can be surmised. A good read however,…….meanwhile, we will continue to drill, produce and keep you warm.

  • Alec Sevins

    Why don’t more people simply do the MATH of reserves vs. demand instead of treating oil supplies as mystical or unknowable? For example, North Dakota’s Bakken + Three Forks formations are estimated (as of 2013, USGS) to have a mean of 7.4 billion recoverable barrels, making total oil in those formations only about a year’s worth of U.S. dependence. Add shale formations like Eagle Ford in Texas and the full amount might be 2 or 3 years. This is hardly long-term, game-changing oil unless viewed only on a daily production basis with the ridiculous assumption that it will never peak.

    Yet, such assumptions are exactly how U.S. shale drilling is being talked about in the minds of non-geologists who want to hype stocks and use patriotic terms like “energy independence.” It must also be emphasized that kerogen (seen as America’s Saudi Arabia by non-geologists) may never break even, commercially. This recent global oil price drop is mostly due to slacking demand and the coincidence of U.S. shale output, not some infinite supply of tight oil that disproves the whole Peak Oil phenomenon.

  • Alec Sevins

    Sir, you’re using the diversion tactic of lumping “oil and gas liquids” into the presumed category of oil itself (the most versatile fossil fuel). The vague term “liquids” is a common fuzzy math deception. Sure, America has a good deal of natural gas, but it’s probably nothing close to the “100 years” hype that Obama unfortunately embedded in the public mind.

    Dry kerogen shale (unlike oil-bearing shale in Bakken, etc.) must be cooked and has terrible ERoEI, but it accounts for the bulk of “America’s Saudi Arabia” hype. Kerogen mining may never break even and would ravage landscapes and water supplies if attempted. But industry front groups like the Institute For Energy Research (IER; Koch Bros.) keep pushing kerogen as if it were frackable shale. They have to know they’re lying about real world prospects unless they have supernatural faith in technology. I suspect a bit of both.

    Your claim of “3 trillion barrels” is more fuzzy “liquids” math and defies honest calculations of recoverable reserves. True figures are more in the range of 130 billion barrels, stretched out over many years with relatively meager flow rates (aka demand-driven rising prices). You are citing hypothetical “oil in place” and pretending it’s the same as recoverable reserves. This confuses unscientific minds but not the rest of us.