How the Oil Market Dies | Markets Are Dumb 8

I often talk about the oil price on this channel. That’s what I do with today’s video. But I don’t think I talk about what incredibly good news the death of the oil market is. For the environmentalists this is a bit of a mixed bag, but I think on balance very good. The whole “peak oil” thing has turned out to not be a problem. 30 years ago it was mostly the US, Japan and Europe that were intensively using other people’s petroleum resources. We’ve more than tripled the number of people, and probably more than tripled the amount of consumption. And we’ve all survived. That’s pretty damn cool. The downside of course is that we’re producing more and more carbon. Cheaper oil prices are not a good thing for those worried about global warming in the short term. Oil is cheaper, more of it gets consumed, and more carbon gets dumped into the atmosphere. But it can actually be a good thing in the long term.

Lower oil prices provide the same sort of good news to environmentalists that it does to geopolitics nerds. Bad people have less power. If oil is permanently cheaper, that provides less money to all the people who used to use oil wealth to steer the world. As I keep pointing out, lower oil prices are leading to a collapse in terrorism. It will also lead to a collapse in oil industry influence in the United States and other countries across the world. We can already see it happening. The fact that electric cars have been allowed to go this far is an indicator of how much power the oil industry has already lost. The days when oil execs could confidently march into the government’s most powerful positions almost certainly ended with Rex Tillerson. The Oil industry’s global warming skeptics are still churning out their reports, but they look laughable to everybody now, including the oil executives who pay for them. The oil industry’s decline in prestige will cede the climate change conversation to the scientists and their friends in the environmental lobby almost entirely. Good news all around!

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Video Transcript after the jump…

Hey there. So over the past couple weeks my predictions on oil prices have been vindicated. The Iran sanctions have been exactly the bust I always predicted and the price of a barrel of oil has gone careening back down into the 60s. Getting this right has made me super arrogant and cocky so I am going to shoot myself in the foot with today’s video and try to look into the future to predict how the oil market ends. This is almost 100% guaranteed to be wrong and could be disproved by the time I upload it, but this is what I think is going to happen.

We are going to hang out here in the 60s for a bit. Indian demand + Saudi and Russian efforts constrain supply should bring some stability to the price. But China’s economic issues, plus worldwide regulations steadily chipping away at demand are eventually going to get us back down into the 40s. One of the crazy things about the shale revolution in Texas is how slowly the oil is coming to the market, leading to a gap between the two main prices for oil. By the time the new Texas pipelines come on stream next year Brent should be under 50.

And this will kill the US shale patch. Not all of it. The technology won’t go away. There will be companies that survive. US production won’t be going back to 5 million barrels of oil a day, but I highly doubt it will stay over 10 or even 8. This is due to a dirty secret that the New York Times highlighted a couple months back… nobody’s actually making any money with this new oil technology. All the businesses are surviving on loans. Wall Street has been relying on the same bullshit assumption that keeps people lending money to Saudi Arabia… The oil market had to come back eventually!

Actually it doesn’t. We have been playing this game since 2014 when world oil prices crashed for the first time. Oil traders and business news types have been telling us that prices are sure to rise next month for over four years now. Over the past year or so It finally looked like they were right. But it took a perfect storm of factors to get the price limping up again. Russia and Saudi Arabia, the second and third biggest producers entered an unprecedented deal to cut supply. Venezuela destroyed its own industry. And Donald Trump told everybody he was going to drive Iran’s oil exports to zero.

We now know that’s just not happening, and oil prices are down almost 25% since early October wiping away almost the entire years gains. If something can’t go on forever, it won’t. After finding themselves back in 40 dollars a barrel territory, four years later, I think Wall Street will pull the plug. Oil companies are actually going to be expected to show returns, and US production will plummet. Which will lead to… wait for it… a spike in oil prices….

For the past four years the usual exploration and development just hasn’t been happening. All sorts of exciting new oil locations have been found, but understandably, folks haven’t wanted to build out projects that need oil to cost 70 to 80 dollars a barrel to be viable. The world really has come to rely on that extra production from the United States. When wall street decides to end the party, I think a short term supply shortage is very possible.

I am talking about oil costing more than 100 dollars a barrel again. But only for a brief period of time. It’s not going to be shale that kills the rally the next time around. It’s something entirely different. Electric cars. After decades of being a bad joke, electric cars really are finally poised to take over.

Every large car maker seems to be coming out with new models next year. There is one massive problem though.. price. At current oil prices you don’t actually save any money by buying an electric vehicle. The other problems are technical ones like range and charging stations that will quickly be fixed by a mass market. But we won’t get a mass market if it’s cheaper to buy a gas guzzler. Electric cars are waiting on a big bang.

The post shale surge in oil prices will be the electric car big bang we have been waiting for. Once the mass electric car market starts, a fall in oil prices won’t actually matter. The volume of cars sold will drive innovation, and oil won’t be able to keep up. By the 2030s oil should cost around 20 dollars a barrel. And that is how the oil market dies. Or maybe not.

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