back to article What will happen to the oil price? Look to the PC for clues

Economics, of course, is simply a bunch of mumbo-jumbo – as evidenced by its failure to answer the Queen's question regarding the crash: "Why did nobody see it coming?" Theory of Finance scribe and Nobel laureate Eugene Fama's answer – that economic theory insists it is impossible to predict such things – tends not to convince …

  1. Anonymous Coward
    Anonymous Coward

    PC hardware wasn't controlled by a massive cartel that manipulated supply to control prices.

    1. Charles 9

      Sure it was. IBM served the PC industry around 1980 what OPEC does now...or the DeBeers diamond cartel. Thing is, all three faced or are facing disruption from suppliers they can't control.

      1. TheOtherHobbes

        No one who actually knows anything about the economics of fracking can claim that it's not capital intensive. In fact it's the opposite - it requires huge and constant injections of capital, because it's very tough on machinery.

        The current crash in oil prices - and I know people who were predicting the crash from at least a year back, and being laughed at by self-styled 'experts' like Worstall - is killing the fracking industry because it's flipped the switch on the profitability of so many projects.

        (Also, earthquakes and poisoned ground water. But only comical hairy hippies worry about silly things like that, so we shall move on...)

        So I have no idea what this piece is supposed to about. Fracking is like PCs over mainframes? Because the PC industry never needed as much capital as mainframes? (Intel and Microsoft will be surprised to learn that.)

        It's just one giant hot mess of flabby counterfactual WTF.

        1. Tim Worstal

          "No one who actually knows anything about the economics of fracking can claim that it's not capital intensive. In fact it's the opposite - it requires huge and constant injections of capital, because it's very tough on machinery."

          You can drill a fracking well for $5-$10 million. You can't even survey a traditional reserve for that sum.

          1. Vladimir Plouzhnikov

            Drilling *any* well onshore usually costs USD 5-10 million.

            But shale fields also require prospecting and proving of the reserves and a test well can just as easily happen to be dry. Yes, the shale prospectors in the US are using relaxed rules and a sleight of hand, reporting different numbers to the SEC and to the investors, to embiggen their reserves but at some point the chicken will come home to roost.

            On the production side, while there may be a lower risk of a dud well in a shale field where someone else has already started demonstrable production, the cost of extraction will still be very high. It is called "tough oil" for a reason...

            I think I get the idea of what Tim is saying - that the need for massive upfront investment for centralised conventional oil extraction is being replaced by decentralised operations individually requiring lesser capital outlays to start-up.

            That may to a certain extent be the case but a) these decentralised operations are coming with much higher life-time extraction costs, so they need higher market price to be sustainable and b) the initial capital requirements are really not that much lower per barrel of reserves than for other conventional operations, especially if you consider the need for additional hydrofracturing-related and transport infrastructure.

            P.S. One more thing where I disagree with Tim - unlike with mainframes v PC manufacturing, where the latter benefited from economies of scale and mass-manufacturing efficiencies, the fracking technology is not going to be affected by those. No matter if you have 10 fracking wells or 1,000 - you will not reduce your per unit extraction costs. It will always have high production costs (some wells higher than the others - just like conventional) and so the use of fracking will not lead to price deflation. On the opposite, fracking will continue to act as the incremental barrel, flushing supply when the market price rises, getting bankrupt when the price falls back again.

            1. Tim Worstal

              Umm, but

              "No matter if you have 10 fracking wells or 1,000 - you will not reduce your per unit extraction costs."

              The last 20 years of fracking is the very issue of having reduced unit extraction costs. That's rather what we mean by having moved to a "manufacturing model".

              1. Vladimir Plouzhnikov

                Re: Umm, but

                Do you mean that the cost of hydrofracking has fallen so much that it became economic for shale oil extraction and that it will fall further with incremental technology improvements?

                I am skeptical. I think that the main reason why the use of fracking has exploded so much recently is due to the meteoric oil price rise over the past 10 years or so. If the prices remain at the levels they are now (below $50/bbl) for a few months I expect to see fracking-dependent companies getting out of business in large numbers.

                Let's wait and see. I hope I will be proven wrong.

                1. Anonymous Coward
                  Anonymous Coward

                  @Vladimir

                  Do you mean that the cost of hydrofracking has fallen so much that it became economic for shale oil extraction and that it will fall further with incremental technology improvements?

                  It will fall further if technology improves so that a larger percentage of the oil/gas can be extracted. Given that we're only able to extract 5-10% currently, there's a lot of room to improve that. Since the cost of drilling is relatively fixed, if you were able to double the percentage extracted, you nearly halve the cost per barrel and per Mcf.

                  Technology will probably improve for conventional fields too, but doubling their efficiency won't happen and the initial outlay is several orders of magnitude higher so there are far fewer potential players.

            2. Alan Brown Silver badge

              "Yes, the shale prospectors in the US are using relaxed rules and a sleight of hand"

              In particular the USA's virtual total exemption on environmental regulations is something which makes gas fracking economic there (even so a lot of drillers were going out of business well before the oil price dropped)

              It's highly likely that EU requirements coupled with higher population densities and an unwillingness to allow the countryside to be turned into a pincushion will make the economics here a different proposition.

              Bear in mind that a large part of the reason for the US gas and oil gluts existing is a direct result of laws which prohibit capping wells until "the price is right". Once you have a well running, you are legally obliged to sell what comes out of it at the prevailing market price. This means that drillers have ended up selling the product below cost for some time.

              Oil Barons (such as the Kochs) who go in and hoover up production for resale (and are the main drivers of the above-mentioned laws) are the ones making big money, because they don't have to shoulder the risk/expense of the actual exploration/drilling. As with gold rushes the people who become millionaires aren't the prospectors, but the ones selling them shovels and buying their gold.

              Low oil/gas prices are damaging on several fronts. Countries which depend on oil revenue have to pump more in order to stay put, which ends up driving the price further down. That means more CO2 and as more explorers go out of business an increased risk that those remaining can corner the market.

              China is taking advantage of the low prices to stockpile as much oil as it can. I am surprised the US is still running its strategic reserve down instead of building it up.

              The real killer of oil prices won't be exploration technologies in any case. The PC (and microcomputers in general) was disruptive because it was a completely different paradigm from mainframes.

              Taking the point of view that the oil industry is an energy industry(*) (non-energy uses are a fraction of output) then the paradigm shift will be alternative (and much cheaper) energy sources. As with the proliferation of home pcs in the early 1980s, we see solar, wind and others all vying to be "it", but the most likely long-term answer is better nuclear power plants.

              (*) The oil industry was a predominantly lighting industry right up until the end of the 19th century and into early 20th century years. In the 21st century it's likely to move to be predominantly a source of raw materials for industry and agriculture, but demand will likely be less than half of what it currently is even with a wealthier global population wanting more "stuff"

          2. Gordon 10
            Boffin

            Capital Intensity

            Some interesting propositions. I presume the move from a Resource Extraction to a Manufacturing paradigm for Computing is still valid even taking into account the spiralling cost of FAB's?

            Im basing that presumption on the fact that Tim wouldn't have made such a schoolboy error ;).

            If take moore's law as a model for the computing industry as a whole, we would have Resource Extraction down near the base of the curve and then Manufacturing at the point where it starts to go exponential.

            Where this becomes most interesting is that if we posit that Moores law is actually a Sigmoid (S shaped) curve then what model does the top part of the this curve correspond to? A return to the Resource extraction model, or some other model takes effect?

            http://radar.oreilly.com/2007/11/its-not-exponential-its-sigmoi.html

            (wishing for chin scratching icon) Jimmy Hill?

            1. sniperpaddy
              Facepalm

              Re: Capital Intensity

              LOL

              Extrapolation from a regression curve is suicidal and mathematically naiive.

          3. Anonymous Coward
            Anonymous Coward

            > You can drill a fracking well for $5-$10 million. You can't even survey a traditional reserve for that sum.

            Both interesting observations, having nothing to do with the current price of oil, the current collapse thereof, and the PC Industry.

            Why the current collapse in the price of oil: Shale Oil Economics:

            http://en.wikipedia.org/wiki/Oil_shale_economics

            Shale Oil is economic at >= USD $95/barrel. In situ (non-shale) Oil is economic at anywhere between USD $30 and USD $35/barrel. Both extraction methods assume a 15% profit.

            Shale Oil extraction in the US has proven to be much more expensive than originally anticipated:

            http://www.bloomberg.com/news/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs.html

            <QUOTE>

            Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.

            </QUOTE>

            A much simpler explanation is that Shale Oil extraction is simply not economic, not only because of the cost of extraction, but also because the scarcity in output.

            Once the Shale Oil industry is wiped out, oil prices will revert to their mean. Meaning, they will go up again. By then, many who invested in Shale Oil - namely oil producers and their banks - would have been badly burned, and there will not be a second wave of investments in Shale Oil.

            The PC did not kill the Mainframe Industry. Several other major transformations in Computing occured at just about the same time when the PC was first introduced to the market. I am referring to UNIX, the UNIX Workstation, the Distributed or Client-Server Model and Standardized API's and Programming Languages. None of these models were supported by IBM's Mainframes at the time. IBM's Mainframe Monopoly collapsed because it could not keep up with a large group of competitors who were also competing amongst themselves, and were offering a better, cheaper product and Standardized - more or less - product.

            Correlating the PC to the Mainframe Industry's collapse in the late '80's - early '90's is a bit too simplistic.

            1. Tel

              To the question regarding the relative economics of fracking versus traditional oil wells, it can at least be said that fracking does introduce a ceiling to the oil price, all other things being equal, since when the oil price goes high enough for it to be a viable business proposition, the increased supply will choke off a price rise simply due to supply and demand economics.

              1. Anonymous Coward
                Anonymous Coward

                > the increased supply will choke off a price rise simply due to supply and demand economics.

                In this particular case it's exactly the other way around: Shale Oil can be economically viable only in an environment with monotonically increasing oil prices, and at above USD $95/barrel. If the price of oil drops below USD $95/barrel, Shale Oil is a guaranteed loss maker.

                At the same time OPEC can afford to drop the price of oil to USD $45/barrel, because at USD $35/barrel they are - more or less - guaranteed a 15% profit.

                Which is exaclty what OPEC and Russia are doing right now.

                1. Anonymous Coward
                  Anonymous Coward

                  You quote that $95/bbl figure as though it is gospel. It is not. The NYT ran a story today that pegged the profitability figure (with 10% ROI) at $40/bbl for some fields, and I've seen other estimates that almost all shale oil is profitable down to $70.

                  The nice thing about shale oil is that it is short lived. You drill and most of your oil comes in the first 6-12 months. You drill, get your money, and go on to the next. It is relatively easy to deal with low prices - only drill the wells that will make money, and wait on the ones you know won't return well enough until the price goes back up again.

                  With conventional wells you have to keep pumping even if you lose money with every barrel, because if you stop pumping you can't restart that well again. Between that and the startup costs three orders of magnitude larger (no one starts a conventional project for less than a half billion now, it isn't worth the hassle) the risk is far larger for conventional.

                  The Saudis are thinking in terms of conventional wells, because that's all they know. If they drive the price down low enough to stop enough shale wells to bring supply/demand back into balance (requires sustained prices under $40/bbl) the minute the price goes back up, the shale guys will start drilling again and drive the price right back down. They might drive a few of the weaker companies that were overleveraged bankrupt, but the stronger players will buy their leases for pennies on the dollar and further lower their cost of production. The Saudis can't win this game, they're screwed.

            2. Tim Worstal

              "Shale Oil is economic at >= USD $95/barrel."

              The article you link to actually says $60-$80. And it's old numbers too. There's at least one company in the Bakken saying they're fine at $42.

              This is rather the point that is being made. Shale is like manufacturing in the sense that we're getting the usual sort of productivity increases that we do get in manufacturing.

              1. Anonymous Coward
                Anonymous Coward

                > Shale is like manufacturing in the sense that we're getting the usual sort of productivity increases that we do get in manufacturing.

                I don't see where you get these productivity increases, given that the Bloomberg article confirms that shale oil extraction is short-term with less output than conventional oil extraction:

                <QUOTE>

                Shale Oil output drops faster than oil production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.

                </QUOTE>

                So, if it costs USD $1.50 to extract USD $1.00 worth of Shale Oil, and the source will be economically depleted in a shorter time span than a conventional Oil source, and the total output of a Shale Oil source is less than the the output of an equivalent conventional Oil source, I don't see much room for productivity gains in Shale Oil extraction.

                Perhaps an overview given by Mr. Timothy Lane, Deputy Governor of the Bank of Canada, would provide a clearer picture about the economic viability of shale oil extraction:

                https://www.bis.org/review/r150114a.htm?ql=1

                Shale Oil extraction has had no noticeable impact on Oil prices in the US. There is a federal statutory ban on Oil exports from the US, including Canada, dating back to 1973:

                http://www.law.cornell.edu/cfr/text/15/754.2

                And while domestic US tight oil production has increased since 2009, so have US imports of Oil (see document below).

                The US Senate estimates (2014) that domestic tight oil production will decline starting in 2019:

                http://www.energy.senate.gov/public/index.cfm/files/serve?File_id=dfe108c9-cef6-43d0-9f01-dc16e6ded6b4

                Generally, and historically, decreases in domestic oil production combined with increases in oil imports have been positively correlated to increases in oil prices in the US. So I'm having trouble seeing this Shale Oil Miracle.

                1. Vladimir Plouzhnikov

                  Let's imagine - where would the productivity gains come from for fracking?

                  One can slightly improve the drilling techniques but not by much and any such improvements are as equally applicable to conventional wells as to the shale.

                  Perhaps the fracking fluid manufacturing can benefit from some economies of scale - but in reality it won't. At least not in the US, where every company seems to like to keep the composition of the fluid a patented commercial secret.

                  One can aggregate small independents on a large field and save something on improved efficiency of the gathering pipeline network and, maybe, on admin.

                  There are alternative methods of fracturing being developed - like plasma acoustic resonance but they can also offer only marginal economic improvements.

                  That's about it, right?

                  In each well you have to start from scratch - you have to drill down and sideways, then you have to pump the liquid to crack the shale, then you recover the well fluid and separate the oil out of it. If you make 10 wells you multiply the cost x10, if you make 100 wells you multiply the cost x100 - there are no savings with increasing the number of wells.

                  Also, the nature of fracking is such that its costs per barrel will always be on par with or higher than EOR conventional, which will always be higher than simple conventional. So, if conventional oil were to disappear, the market price can only go up, above the next cheapest alternative.

                  I think if you want to find a manufacturing analogy in hydrocarbon production, you need to look at synthetic oil. It can be scaled up indefinitely or it can be perfected for an efficient decentralised production. But it depends on the cost of energy - give it a fusion power plant and you can have oil as cheap as water...

        2. Ken 16 Silver badge

          OPEC are subsidising the current crash in oil prices in order to kill the fracking industry and retain their dominant market position.

        3. sniperpaddy

          OIL Tipping Point

          Fracking is a self-limiting resource and is just a temporary disruption to the current model of speculation and supply/demand economics.

          REASONING: The world passed the reserve/demand tipping point in 2005.

          Production at oil fields around the world is declining between 4.5 percent and 6.7 percent per year.

          Production at shale gas wells can drop 60 to 90 percent in the first year of operation.

          The current spate of supply from fracking will quickly hit diminishing returns as the shallower reserves are depleted and extraction from deeper strata becomes more capital intensive.

          In a nutshell it's like a fire sale of the family crockery when the family silver is already sold.

      2. Charles Manning

        The analogy is entirely broken

        The oil price has not plummeted because fracking oil has come online. It has fallen because OPEC has fallen down. The fracking is just coincidental.

        OPEC colluded to keep oil prices up and supply down, but these cartels rely on full cooperation between the players. This means they all have quotas to keep to. Then somewhere along the path someone wants to sell more than their quota so steps outside the lines. They sell more, then the agreement is off and the cartel breaks down.

        If anything, this threatens fracking.If there's plentiful main well oil on the market there is no point bringing relatively expensive fracked oil to market.

        To bend that back into the original analogy.... We're still all using mainframes, but mainframe prices were held high by IBM, ICL, CDC and others colluding to keep supply down and prices up. Then one day IBM decided to sell more computers at hallf the price... The fledgeling PC market gets wiped out because it is cheaper to use mainframes.

    2. mi1400

      Article might be good for "What will happen.." but for "What has happened..." read...

      http://www.oilgasdaily.com/reports/Did_The_Saudis_And_The_US_Collude_In_Dropping_Oil_Prices_999.html

  2. codejunky Silver badge

    Fracking

    I think a lot of the complaining about fracking is due to the peak oil dream suddenly moving much further away thanks to this new tech. Of course people argue based on the wobbly co2 theory but since the argument has almost totally focused on fossil fuels instead of solutions and truth it is easy to dismiss the convenient argument.

    I for one am happy about the reducing costs of energy. Not only does it reduce the burden on peoples wallets but also provides heat, light and transport for people. Important survival criteria which seems to be forgotten when arguing about economics.

    1. daemonoid

      Re: Fracking

      I'm not sure light and transport count as 'survival' criteria for people. They are, admittedly, rather nice to have.

      1. P. Lee

        Re: Fracking

        >I'm not sure light and transport count as 'survival' criteria for people.

        We have much larger cities than in the past. If you can't get massive amounts of food in, people will starve.

        We've made our infrastructure extremely fragile in the pursuit of profit.

        1. Chris Miller

          Re: Fracking

          Extremely fragile? That must be why we're continually seeing cities in meltdown as their infrastructure fails. Except we don't, do we.

          And for 'pursuit of profit' read 'improving the lives of billions' - this is, after all, the reason that vast numbers of people are migrating to cities.

          1. Dan Paul

            Re: Fracking @Chris Miller

            You haven't seen much of what's happened to Detroit then have you? Migrating to cities? Maybe over there, but it's only the poor here and probably there as well.

            All the major cities are decaying rapidly, their infrastructure needs have been neglected for MANY years. This negligence is CRIMINAL as it now will take MORE money to fix or replace infrastructure that has been ignored, than it would have had it been done when noticed.

            Roads and Bridges are literally rotting away while we put tax money into social entitlements that only benefit the non-productive. Sewers and Telecommunication infrastructures are woefully under funded and overtaxed. The more that occupy the cities, the less can be fixed as there is no respite for any shutdowns.

            All the while, the "middle class" is paying for both the rich and the poor. The only thing "middle" about the middle class is that we are in the middle of a rock and a hard place.

            It's long past time that we rose up and took back government from the brain dead fools that run it now!

            1. Anonymous Coward
              Meh

              Re: Fracking @Chris Miller

              Nah; its because the weathy elite (the less than 20% who own 80%+ of the wealth) don't want to pay anything in taxes that doesn't benefit only them and NOW - so they screw the real idiots the middle class and claim its the poor that dun it all and the middle class believe them (as they all want to be wealthy too) oh the American Dream hijacked by the vested interests yet again

        2. adam 40 Silver badge

          Get hungry, not starve...

          I can walk out of the centre of London to the nearest farm in well under a day. If I follow one of the many rivers then I won't even get thirsty.

          There can't be any cities big enough yet, where I would actually starve to death before reaching food on foot?

          It would probably do most city-dwellers some good to get a bit of exercise!

          1. AndrueC Silver badge

            Re: Get hungry, not starve...

            If I follow one of the many rivers then I won't even get thirsty.

            You might get very sick though, unless you boil or filter it. How good are you at fire lighting?

            :D

          2. Peter Gathercole Silver badge

            Re: Get hungry, not starve... @adam

            You and tens or hundreds of thousands of other people.

            In the event of a breakdown in cities, you need to get out fast, and with as many guns as possible to deprive the people already in the country, and to stop others following and taking what you took first!

            There is a semi-rational a reason why US isolationists build defendable enclosures.

            1. Anonymous Coward
              Anonymous Coward

              Re: Get hungry, not starve... @adam

              obligatory XKCD

              https://what-if.xkcd.com/8/

            2. Alan Brown Silver badge

              Re: Get hungry, not starve... @adam

              "In the event of a breakdown in cities, you need to get out fast, "

              Analysis of such an event has described what would happen next as "the greatest environmental disaster of all time".

              Cities supplied with electricity and good transportation systems are what has made our large populations viable. There's an enormous amount of farmland required to support a city and having people living on it drastically reduces crop yields.

          3. LucreLout

            Re: Get hungry, not starve...

            I can walk out of the centre of London to the nearest farm in well under a day

            Me too. The problem comes from those further out from the centre than you are.

            I could set off from marble arch and walk for 25 miles - lets call that 4 hours. The people that set off from where I reached won't have left behind food for those of us starting further back, they'll have taken it with them. So now you get to keep walking.

            Lets walk another 25 miles. By the time I get to the farms nearest where I live, the people that live closer will have taken/eaten most or all of that food. So now I've walked 50 miles and I'm getting hungry.

            I'm not saying you'd starve, but it's not going to be nearly as easy as you're thinking it is just now.

          4. Anonymous Coward
            Anonymous Coward

            Re: Get hungry, not starve...

            >I can walk out of the centre of London to the nearest farm in well under a day.

            TOO LATE! A few million people will be there before you and even these will have to fight every inch of the way, both with each other and because any one living outside a city in these circumstances will do their utmost to prevent those millions of people getting out of the city.

      2. Flocke Kroes Silver badge

        Re: Transport counting as survival

        Last time I looked, the total human food supply was more than enough to feed everyone but there are still people starving, and poor people with crops they cannot sell locally because of over supply. Take away our advanced transport infrastructure, and we too can enjoy years of plenty and years of famine.

        1. AndrueC Silver badge
          Stop

          Re: Transport counting as survival

          Last time I looked, the total human food supply was more than enough to feed everyone but there are still people starving

          That's true but there's also a lot of wastage in the system. And I define 'wastage' as being food thrown away and also food being eaten by people that don't need it.

      3. codejunky Silver badge

        Re: Fracking

        @ daemonoid

        "I'm not sure light and transport count as 'survival' criteria for people"

        Various nomad tribes world wide can only take with them what they can carry (or if they have the facility, mount on livestock) in the search for food and water. The alternative and much more successful method is to bring the resources to population centres for distribution. To survive as we are now we rely on a global food chain to provide enough resources and that weighs even further onto transport. But to get the resources requires work which often requires tools which have to be made and so on. If you are restricted by daylight then there is a huge restriction on your time which at one point made fire, oil lamps and candles attractive alternatives.

        With a breakdown of artificial light and/or transport we would see major problems very quickly. This is without accounting for light reducing accidents at night and emergency services requiring both fast transport and uninterrupted light.

      4. John Sanders
        Holmes

        Re: Fracking

        My friend, I wish you never find yourself without electricity for a long period of time.

    2. LucreLout

      Re: Fracking

      I think a lot of the complaining about fracking is due to the peak oil dream suddenly moving much further away thanks to this new tech.

      Agreed. That, and widespread misinformation to stoke up peoples fears of ground water pollution etc.

      Peak oil, as a theory, never held any water for those with a rational mind. I first heard the theory when I was 10 years old. We had about 50 years worth of economically viable oil left at the time, so the theory went. Despite significant increases in both global population, and oil used per person, we still have about 50 years worth of economically recoverable oil at the rate we're using it.

      It must be infuriating for those pushing the mantra of less to have wasted their lives shouting about something that now seems to have retreated into the longest of grass. Peak oil, given frackings likely path, might one day be a concern for our childrens childrens children, but we're not going to run out for a very long time to come.

      Technology IS the answer.

      1. itzman

        Re: Fracking

        Technology cannot manufacture oil from nothing: the oil has to be there. Or the energy to synthesise it.

        Technology can and has delayed peak oil, but it won't prevent it,

        And all the information I have read is that fracking/tight oil is unprofitable at much less than $120/barrel oil price...remind me what we are now at?

        And why?

        Saudi pumps oil to crash the market to drive fracking out of existence.

        Then the oil price will go up again?

        1. codejunky Silver badge

          Re: Fracking

          @ itzman

          "And all the information I have read is that fracking/tight oil is unprofitable at much less than $120/barrel oil price...remind me what we are now at?"

          I might be wrong but I am sure I was reading recent articles about fracking being profitable to about $50/barrel. Will have to see if I can find those articles again.

          1. Tim Worstal

            Re: Fracking

            Piece in the WSJ today saying some producers profitable (10% return on capital) at $40. And going lower.

            1. codejunky Silver badge

              Re: Fracking

              @ Tim Worstal

              I have been watching the news for this and dont see how the Saudi's think they will win. Apart from making a few financial people jittery about economic deflation by crashing the price of oil they dont seem to be making much sense. Maybe they think they can remove some of the shale producers but since it started I wonder if it is some favour to the US to keep Russia in line without military action.

              For the world of cheap and plentiful energy, fracking is definitely a good thing

              1. LucreLout

                Re: Fracking

                Apart from making a few financial people jittery about economic deflation by crashing the price of oil they dont seem to be making much sense.

                In a FIAT system, you usually only get the delfation you want. Lets say we did get a bit of deflation - the government could just cut taxes and print money to offset the cost to them. Instant inflation.

                All OPEC is achieving is giving away their only asset for peanuts rather than starting the process of urgent and much needed societal reform within their countries. They've had 60 years to diversify their economies and have wasted it on palaces, religion, and porsches for the elite. Only Dubai seems to have made significant effort to bring forth alternative revenue streams, and for that I wish them well.

        2. Anonymous Coward
          Anonymous Coward

          Re: Fracking

          "Saudi pumps oil to crash the market to drive fracking out of existence."

          Not for that reason. Most of the costs in resource extraction are in the capital and setup. So once you're in the game, you keep pumping all the while each barrel makes a marginal profit, even if you're losing money overall - this applies to fracking as much to conventional oil exporters. Eventually, if you keep losing money you go bust, but until that time it makes financial sense to keep pumping. There's also the fact that the Saudis and all other oil exporters have huge public spending budgets based typically on a minimum oil price of $80. As a result, these countries are running huge budge deficits at the moment, because they can't reign in the bread and circus spending that keeps the hoi polloi anaesthatised (and avoids them toppling undemocratic governments).

          The other thing is that the oil price collapse needs to be seen in the context of collapsing iron ore, copper and other commodity prices. Fundamentally the world has geared up over the past two decades for a "one time" Chinese infrastructure build that has inflated world demand and inflated prices. As China both runs out of money and out of opportunities to productively invest, the demand for concrete, energy, steel, copper falls dramatically. This has knock on effect in consumer demand. The West (and Japan) are debt-addled and can't take over the economic baton, so you have the mother of all slow downs taking place.

          Even if OPEC could force the price up, they'd reduce demand further (and further again by multiplier effects), so that the reality is that they'd not get much more money.

        3. Anonymous Coward
          Anonymous Coward

          Re: Fracking

          I've got to agree with Itzman, the current reduction in oil price is being driven by Opec, presumably with the aim of driving competitors out of the market. There are analogies within the IT industry to this (Windows / OS2, browser wars, Uber etc.), so it seems to be a proven approach.

          The key to it all will probably depend on how deep the war chest of Opec really is.

          I also think this reduction serves the additional political purpose of Saudi giving both Russia and Iran a good financial kicking.

          My concern is that the reduced oil price causes serious destabilisation is parts of the world that really don't need any further destabilisation.

        4. LucreLout

          Re: Fracking

          Technology can and has delayed peak oil, but it won't prevent it

          It only needs to delay it for long enough for us to invent a better fuel. Given that this was likely within a 50 year timeframe, and fracking will provide a peak oil distance measured in 100s of years, time is on our side.

          And all the information I have read is that fracking/tight oil is unprofitable at much less than $120/barrel oil price

          You need to read some more up to date sources. The point of the article was that the unit cost of fracking has fallen far enough and fast enough that we're at the beginning of a road which leads to its commoditisation.

          And why?

          Partly naked self interest on behalf of OPEC trying to bust the Fracking flush before it can beplayed. Partly politics - the oil price being this low really magnifies the effect of the sanctions on Russia over Ukraine.

          Saudi pumps oil to crash the market to drive fracking out of existence. Then the oil price will go up again?

          Sure, but it won't go back where it was or fracking would restart. Fracking sets a ceiling price for OPEC of somewhere around 80 USD per barrel, which should fuel economic growth rather well.

          Fracking can't be uninvented, but you can bet OPEC are now infiltrating the green groups just as the communists did before them. Banning fracking is their only hope at a lucrative future. Lets not let them rob our children and grandchildren of their future so prince al-avannothafezza of some tin pot backwater can preserve the status quo.

    3. Mage Silver badge
      Pirate

      Re: Fracking

      Politics:

      What Western Country wants to be dependent on Russia or Middle East?

      It's not just about the Money.

      I feel a little sorry for Venezuela. Scotland/UK can cope better.

  3. David Roberts

    PERSONAL computer!

    The big feature about the personal computer is that it is personal. That is, you have your own device in your home.

    Unless everyone can have at least one fracking rig on their property then I don't think the analogy works.

    At most you have a switch from a few large global production sites to a local production industry with small plant and low start up costs. A bit like coal where there are small deposits all over the UK. Oh, hang on.....

    ...perhaps like dairy farming where you have a local dairy farm so you small production unit is close to the consumer. Oh, hang on....

    So the model is that lots of small production units can change the way that oil is produced? Of course, it has to be refined so you either need lots of small local refineries or you need to transport your local small scale output to a big central refinery.

    No, still not working for me as a conceptual model of a radical change in the production dynamics.

    It may bring a few more large players in, though, and put pressure on OPEC.

    1. BoldMan

      Re: PERSONAL computer!

      Whoosh... that was the sound of the point missing you by a significant distance...

      1. David Roberts

        Re: PERSONAL computer!

        O.K. Elucidate.

        1. David Roberts
          IT Angle

          Re: PERSONAL computer!

          O.K. - perhaps I should have another go.

          The oil industry started out small and distributed with a low entry cost.

          Much like the PC industry alluded to in the article.

          All you needed was a wildcat rig and a "nodding donkey" and (with luck) you were an oil man.

          All Texans were millionaires and fuel costs were so cheap that cars were made with huge engines and bodies because why not?

          Since then the industry has followed the model of most major industries.

          Over time the big players have swallowed up the small players maximising efficiency and productivity with ever larger plant and distribution networks.

          Over time the "low hanging fruit" has been picked and each new major oil field required more complex and expensive equipment to begin extraction, and more complex and vulnerable distribution networks. Increasing the efficiency of recovery from older fields has also required more expensive technology.

          Oh, apart from the Saudis who did the wildcat and nodding donkey thing back in the day and now just sit on the oil fields turning the tap on and off, and the price up and down, to match the production costs of the non-Saudi producers. No major new investment required as far as I am aware.

          So as far as I can see all the investment in extraction technology required to recover more from old fields and remote recent fields has turned up a method of extracting crude using affordable plant from resources which are easily accessible - so much like the early days mentioned above.

          So the clock has been reset back a few decades and oil can once again be extracted without having to pay governments with potentially dodgy backgrounds (hang on..) and always having to consider being held to ransom over our energy needs. We now start climbing the same slippery slope as the easily frackable resources are exploited and the cost and sophistication of the technology starts climbing again - just like in the old oil days. A reprieve, nothing more. Once again "peak oil" is just a spike on a jagged but steadily climbing graph which has a big dip at the moment..

          Hopefully this will give us more time to develop alternative resources. More likely it will destroy all the current business cases for alternative energy such as wind and solar which seem to depend on an ever increasing oil price to justify the expenditure. The West will just coast along with a warm and toasty feeling that all is well again and all that green stuff can be safely ignored because we are more or less energy self sufficient. Watch out for changes in the requirements for new gas fired generation plant.

          So I don't see any parallel with the mainframe/PC industry which started out high technology and horrendously expensive per unit of computing and then gradually cost reduced and became ubiquitous.

          I see some parallel with the immense increase in the technology to produce computers coupled with the massive reduction in the location and number of producers. I wouldn't like to see fracking following this model because if a flood in Thailand crippled the global industry we would all be very unhappy.

          Equally I don't see any major change in the technology basis of crude oil extraction - just a re-emergence of small distributed extraction plant where small onshore distributed resources in temperate first world locations are once more available and economically viable.

          So the overwhelming impression is that this article has no real relevance to IT but has mainframe/PC shoved into it to shoehorn it into an IT rag - which I think is probably the aim of the original report the article is based on

          Fracking is always interesting but ------->

          1. LucreLout

            Re: PERSONAL computer!

            More likely it will destroy all the current business cases for alternative energy such as wind and solar which seem to depend on an ever increasing oil price to justify the expenditure.

            There is no business case for alternative energy. There never was. The whole industry exists to fulfil the available government subsidy and grants, nothing more. Its just pork barrel politics.

            Personally, I think the more available energy sources the world has the better the future will be, so don't mind some subsidy going into R&D for alternative energy, but that won't be harmed by falling oil prices as it was always an ideological persuit as opposed to an economic endeavour.

            1. sniperpaddy

              Re: PERSONAL computer!

              That is an INCORRECT statement based on false assumptions.

              Global oil reserve/demand reached tipping point in 2005.In the long t erm oil prices WILL go up.

              Yes we should have diversity in other energy sources including nuclear but barring a disruptive technology breakthrough in fusion, the financial models of solar/wind/wave are going to get ever stronger.

              NOTE: the travesty of subsidy -driven corn alcohol production should not overshadow alternative energy technologies.

              1. LucreLout

                Re: PERSONAL computer!

                That is an INCORRECT statement based on false assumptions.

                No, it isn't. It's based upon reality rather than wishful thinking and greenwash.

                Global oil reserve/demand reached tipping point in 2005.

                Citation please. From an actual peer reviewed source, so not the guardian, and not some environmental lobby group.

  4. Zog_but_not_the_first

    Price of oil

    I've always been led to believe that the price of oil is very largely set by political factors.

    1. Charles 9

      Re: Price of oil

      They are to an extent, but if more players enter the game, it becomes harder for politics to game the price.

      1. Zog_but_not_the_first

        Re: Price of oil

        I wasn't referring to gaming as such, tlthough this may happen. Rather, when events occur that threaten to disrupt the political landscape (Norks posturing, Russian adventures etc.)

        1. Charles 9

          Re: Price of oil

          It still applies in broad. If you can get oil from an assortment of disparate locations, then what happens in one part of the world isn't likely to affect things in the other locations. A geographical version of diversification, if you will.

        2. I ain't Spartacus Gold badge

          Re: Price of oil

          It's complicated. Politics is certainly involved, as prices tend to rise with Middle East instability. And I suspect that's partly because so many people hedge their oil price risk. For example if you're an airline, big fluctuations in oil price are a right bugger for forecasting your profits. Especially if you sell seats on the flight many months in advance. People get most pissed off with sudden fuel surcharges.

          However you can buy a futures contract for your oil and feel a lot safer. It probably won't be as cheap as if you'd bought it on the spot market at the time, but on the other hand there's no risk of suddenly losing all your profits, or making your customers hate you. Obviously if political tension goes up, those futures contracts will go up - even if no event ever occurs that actualy restricts oil output - at which point whoever took the other side of that futures contract makes a profit. On the other hand, if prices soar, those counterparties take a bath.

          Apparently a lot of the frackers in the US have hedged their positions too, so they won't be making the huge losses that perhaps OPEC are hoping for.

          OPEC aren't the power that they once were anyway, since so much oil is coming from non-OPEC countries. And they're a lot less politically unified, given that almost no-one gets on with Iran. The Saudis still have the whip hand in OPEC, given they apparently have the cheapest production.

          The final bit that everyone always seems to ignore in this equation is demand. I guess because it's so much more natural to talk about someone's cunning plan affecting the price. China's industry is getting more efficient - so using less oil, and everyone's industry isn't growing as fast as it was in the boom times last decade. There's also more alternative energy around (even if still a small amount) - and this year has been warmer than historically too, so less oil has been burned for heating and electricity.

          So we've had a drop in demand combined with an increase in supply. Surprisingly enough the oil price has plummeted.

          1. Anonymous Coward
            Anonymous Coward

            Re: Price of oil

            China may not be growing as fast but it's still at 7% and also from a larger base than it had 10 years ago, so it's still very substantial. Let's not forget that Saudi maintained production levels in the face of weakening demand knowing the effect it would have on price.

            1. Anonymous Coward
              Anonymous Coward

              Re: Price of oil

              The Saudis are loss-leading, accepting a temporary dunking to try to reduce or stop western production that's increasingly based on fracking. I believe they said it themselves. IOW, we're now in a price war, and the most immediate question is who will blink first: the frackers or the Saudis.

              1. I ain't Spartacus Gold badge

                Re: Price of oil

                The Saudis aren't loss-leading. They seem to have the cheapest oil in the world, and apparently can break even at $20 a barrel.

                They are accepting less money than they could otherwise get. But then so are others. After all, demand has dropped, but no-one else seems to want to cut their supply either.

                What the Saudis aren't breaking even on is their government spending. They have lots of programs based on a much higher oil price to keep the population happy, and not much taxation on anything else. So they'll have to run a government deficit. But then when the oil price was over $100 a barrel they were raking in the cash and saving it for a rainy day, so they can easily cover this. The Gulf states all put lots of Western assets by for this sort of thing, so they can sell a few of those to keep the wolf from the door. I presume the idea is to hit Venezuala, Iran and Russia - who don't have that to fall back on. Obviously Russia would be OK had it not also got itself into bother with Western sanctions, as they had nearly $600bn of reserves at the beginning of last year - but they've already blown $150 bn propping up the Rouble because of sanctions, and committed another $100-odd billion to protect government spending as no-one will lend to the Russian government, along with many more tens of billions to help the big state-backed companies cope with their debts.

                It's an interesting question as to whether this is to kill the US fracking industry and Canadian tar sands, or punishing Russia and Iran for propping up Syria (when the Gulf states have been supporting the opposition). Although I guess both could be the reason. And the drop in demand gave the opportunity. Or maybe none of that is true. Maybe it's just that demand has dropped and no-one has the self-discipline to drop output. Or at least they don't trust each other to do it, and the first one to drop production loses most. After all it was people cheating on their OPEC production promises that broke the cartel down in the 80s in the first place, and I'm not sure they've ever really recovered. Now they control even less of supply than they did then. Maybe there really is no conspiracy?

        3. Anonymous Coward
          Anonymous Coward

          Re: Price of oil

          > (Norks posturing, Russian adventures etc.)

          It ever occurred to you that maybe, just maybe, it's not the others who are always in the wrong after all?

          Unless I missed the news about the North Koreans invading and occupying miscellaneous countries in the last few decades, or deposing democratically elected leaders when the "wrong" ones have been chosen or when they don't quite bend to their wishes.

  5. Anonymous Coward
    Anonymous Coward

    I'm more interested in the geopolitics of it

    An energy independent US - particularly an energy independent US which is aware of it's impeding energy independence - will be an interesting beast.

    The moment the US doesn't need Saudi oil (and has carefully de-invested enough to not care) then all of a sudden, the need to be nice to the Saudis goes away. So to does the need for the Saudis to appear remotely civilised. Because believe it or not, despite all the (legal) floggings, beheadings, and hangings, the Saudis really are on their best behaviour.

    On a tangent, has the UK every been energy independent ?

    1. dogged

      Re: I'm more interested in the geopolitics of it

      Not since the days of steam.

      Water and coal, we have. In abundance.

      1. Androgynous Cupboard Silver badge

        Re: I'm more interested in the geopolitics of it

        Water, we have - last I looked we were storing most of it on the surface of Somerset :-) But we now import 80% of our coal, not ideal as it's still the largest single component of our electricity generation.

        1. dogged

          Re: I'm more interested in the geopolitics of it

          > But we now import 80% of our coal

          While this is true, we still HAVE a fuckload of coal. What we don't have are any miners or working mines, as a result of deliberate Government policy in the 80s.

          1. Charles 9

            Re: I'm more interested in the geopolitics of it

            That's probably because coal mines aren't exactly the cleanest or most neighborly of industries. Just ask Buffalo Creek, West Virginia.

          2. LucreLout

            Re: I'm more interested in the geopolitics of it

            What we don't have are any miners or working mines, as a result of deliberate Government policy in the 80s.

            Unfortunately, you can only blame Scargill for that, not the government. He was determined to control the government for the benefit of his union members at the expense of the rest of us. Thankfully, the last PM we had with any balls was a woman. Scargill destoryed his inudstry because he was too much of a mysoginist to be governed by a woman.

            Costs needed to fall in mining, but couldn't, because the union were insisting on what amounted to double pay, plus final salary pensions. They paid themselves out of the game. No miner was worth what they were paid - they always had a lot more money than everyone else in town (Yes, I'm from a coal mining town), and epitomied the "Greed is good" mantra before ever Gordon Gecko uttered his immortal catchphrase.

            Were Britain ever to need energy independence, it could be achieved, but would have to be organised in such a way that trumped up little union leaders don't get ideas above their station, and once again try to hold the country to ransom.

    2. Anonymous Coward
      Anonymous Coward

      Re: I'm more interested in the geopolitics of it

      "An energy independent US - particularly an energy independent US which is aware of it's impeding energy independence - will be an interesting beast."

      It will be a game changer, and not good for people like the Sauds.

    3. I ain't Spartacus Gold badge

      Re: I'm more interested in the geopolitics of it

      Even if the US is energy independent, it still has to worry about global oil supplies a bit. Because Europe, China and Japan definitely aren't energy independent. And they are the USA's main trading partners. If your main trading partners' economies go titsup - then so does yours.

      In the end the US is the world's policeman* because no-one else wants the job. Only the US, UK and France have shown much willingness to carry out this role since WWII, to varying degrees at different times. It's probably no coincidence that all 3 are major international trading economies. No-one else looks particularly interested to take over in future either.

      *Seeing as there's no functioning international system of justice, or broad agreement on what this should be, perhaps I should have typed: world's policemen / lynch-mob / vigilantes / posse. [delete as appropriate]

  6. hfhghg6767

    Let's hope you are right. If so, then the arabic influence on world politics is over, and they can go back to herding camels, while new countries get the chance to produce oil.

    Without oil, arabia would not have much to say in the world.

    1. Peb

      re Without oil, arabia would not have much to say in the world.

      or perhaps not, as things stand they have lots of money, and so lots of planes, bombs etc. But according to Wikipedia "Saudi Arabia is said to be the world's largest source of funds for Salafi jihadist terrorist militant groups" so without any need to 'play nice' what will they do with both of those things?

      1. Omgwtfbbqtime
        Flame

        so without any need to 'play nice' what will they do with both of those things?

        Not a lot, as the money tree will no longer be bearing fruit.

        1. John Brown (no body) Silver badge

          Re: so without any need to 'play nice' what will they do with both of those things?

          "Not a lot, as the money tree will no longer be bearing fruit."

          I suspect they are well aware that the oil wells will not last forever and have already diversified their holdings all over the world in various industries and financial markets.

          1. Peb

            Re: so without any need to 'play nice' what will they do with both of those things?

            Re have already diversified their holdings all over the world

            So till recently America has needed Saudi (for their oil) more than Saudi needed America

            But now it seems we are entering a period where Saudi needs America (because they have investments there that they need to preserve) whereas America’s interest in Saudi is minimal

            Which is not only an interesting reversal of fortunes, but also has interesting implications for global stability

          2. LucreLout

            Re: so without any need to 'play nice' what will they do with both of those things?

            I suspect they are well aware that the oil wells will not last forever and have already diversified their holdings all over the world in various industries and financial markets.

            Sure they have - which is why we'll begin to see the ruling families upping sticks to enjoy their wealth abroad, leaving their countries behind to implode.

            Arab dynasties don't view their countries wealth as belonging to the people, they view the people and the wealth as belonging to them personally. They'll care not if they don't rule a scrap of desert - money talks, and on a familial basis, they'll continue to be rich for 100 generations.

          3. Alan Brown Silver badge

            Re: so without any need to 'play nice' what will they do with both of those things?

            "I suspect they are well aware that the oil wells will not last forever "

            The saudi quote which sticks in mind from my youth is this:

            "My grandfather drove camels. My father drove a truck. I drive a sports car. My sons and grandsons will drive airplanes. My great-grandsons will drive camels."

  7. roger stillick
    Go

    Missed GTL Conversions and Dewatered Alge oil...

    GE and Royal Dutch Shell are quietly getting rich selling pollution free bus diesel made from natural gas at a cost off less than USD $40.00 per barrel crude oil equivalent... Saudi Arabia and Housten has plants running for the last few years wide open making clean synthetic diesel diesel... South Africa has been doing this since WW2.

    The US Navy and the USAF has verified F-15 engines run ok on Synthetic Jet-A made from Dewatered Alge oil... US Commercial airlines are starting tests this year... excess heat from power plants is used to dry the Alge oil and then it is proessed into Jet-a by conventional methods, also a USD $40.00 per barrel crude oil equivalent.

    Modular plant equipment results in 200K barrels / day capacity units that can be placed anywhere, land or sea... excess heat from our USN Nuclear Fleet can make "free" Jet-A, likewise excess heat from our US Military bases powered by fuel cells (most now are for money reasons)...

    IMHO= decent laptops are going for USD $300.00, tablets for USD $100.00, 16 GB usb chips for USD $10.00... we all win in 2015...YUM...RS.

    1. dogged

      Re: Missed GTL Conversions and Dewatered Alge oil...

      could you throw some citations in there?

      1. Flocke Kroes Silver badge

        @Dogged

        I was suspicious of similar claims about solar powered transport, until I did the maths myself. Half the area of my home in the south of the UK would be sufficient to charge an electric car for my rather modest personal transport needs (I would have to cover the whole house and garden to transport everyone living here). The cost of the panels and regular replacement costs of the batteries make fossil fuels cheaper, but solar panels and batteries are getting cheaper.

        Algae are much more efficient than land plants. I do not have all the numbers required to calculate the costs, but if I find them, it is worth doing the calculation. At a guess, it might work out in places with cheap land and plenty of sunshine, but I think the technology would have to mature before it could be cost effective where live.

        1. Charles 9

          Re: @Dogged

          I've looked into the algal oil experiments. According to estimates, the current limit of the technology is 1,000 gallons per acre per year. Your typical fighter jet, variables depending, can easily burn up over 2,000 gallons of jet fuel per sortie. Which leaves me concerned about the long-term viability of this technology given how active the USAF and USN are with their jets.

  8. Pete 2 Silver badge

    Consumption is not the same as production

    The basic fallacy behind comparing PC use to oil consumption is that the model IS fundamentally different; PCs were (are?) subject to the "law" of mass-production: the more things that are made, the cheaper they become. Whereas oil production - from whatever source - is subject to supply and demand: the more something is consumed, the higher it's price becomes.

    Now it might be convenient, as a prop for the "Rise of the ManufRacturers" to assume that:

    > There's simply no shortage at all of shales to exploit around the world

    However, that statement is clearly bollocks. Even if there was a (practically, if not physically) infinite supply of fossil fuel there is still geopolitical issues that limits its distribution: someone can turn off the tap - just ask Mr. Putin. There is also the factor of what to do with the emissions from burning this stuff: even if climate change is "questionable" now, once a proportion of this "no shortage" oil shale disappears into our air it will alter that questionability and/or lead to air pollution of unacceptable levels.

    We could also discuss the effect of transportation costs (oil, being sucked out of the ground is, essentially, free. But the cost of getting it to the end user is high. Whereas PCs have substantial production / software costs and transport adds little to that) on the different markets. Also that PCs are not in themselves a desirable "good" - they are merely a platform for the software we wish to run on them and unlike oil don't have any viable alternatives for their use.

    1. Charles 9

      Re: Consumption is not the same as production

      Mr. Putin cannot turn off a non-Russian tap. Plus if shale reserves are as diverse as hoped, that could reduce the transport issue as well.

      1. graeme leggett Silver badge

        Re: Consumption is not the same as production

        "Mr. Putin cannot turn off a non-Russian tap"

        Soviet fleet in Straits of Hormuz? Diplomatically 'awkward' but might have the effect of curtailing supply.

        1. Charles 9

          Re: Consumption is not the same as production

          "Soviet fleet in Straits of Hormuz?"

          OK, how would they explain a Russian fleet patrolling the Atlantic? Fracking exports from the Western Hemisphere would be tough for the Russians to block without looking even more awkward.

          That's the point. The more potential sources of oil there are, the less likely any one power can corner the market.

    2. Archaon
      Paris Hilton

      Re: Consumption is not the same as production

      "PCs were (are?) subject to the "law" of mass-production: the more things that are made, the cheaper they become. Whereas oil production - from whatever source - is subject to supply and demand: the more something is consumed, the higher it's price becomes."

      Both oil and PCs are subject to mass production and supply and demand. You seem to be under the impression that the two factors are not linked? Mass production increases supply* thereby having an impact on one side of the supply and demand curve and affecting pricing.

      "the more something is consumed, the higher it's price becomes."

      No. Pricing rises if consumption (demand) increases at a higher rate relative to increases in production (supply). With growing population worldwide it is natural that demand will increase. Fracking etc should - in theory - increase supply. If both increase at the same rate and nobody messes around then pricing should stay reasonably constant. If one increases faster than the other then the price will rise or fall accordingly.

      As alternatives to oil are developed supply will be at a high point due to all the demand. As that demand drops off the production capacity will remain constant or possibly even keep increasing (at least in the short term) leading to oversupply and a price crash. That is the short version of the peak oil theory. Of course it does assume that we develop and adopt alternatives long before oil becomes properly hard to source - but to get to that point it would probably be when we're near enough done with fracking and have to move on to whatever the next technology is.

      This is analogous to how PCs now cost £200+ rather than £10,000. And yes, there are alternatives to PCs (tablets for example). Before anyone starts with "Lolz alternative to PC my arse try doing XYZ on an iPad you muppet!" I KNOW the alternatives do not fit all use cases, but they fit some and as technology develops over time the alternatives become more capable and put more pressure on the original product.

      Same goes for alternatives to oil. They're not suitable for everyone and everything, but they're there, they're getting better and critically due to numerous factors such as new technology, economies of scale and increased supply they're getting cheaper.

      * Or at least the ability to supply. Whether supply is artificially restricted or not where other factors such as politics and greed come in.

  9. Anonymous Coward
    Anonymous Coward

    Well written and interesting article as ever, but I'm more impressed you sent a photographer all the way to Stevenage to get the photo of the garage.

  10. Anonymous Coward
    Anonymous Coward

    here's hoping it continues to fall. I'll be filling my heating oil tank in June/July I paid 53p/l last year hopefully this'll be down near 40p/l this year. Don't think it'll be the 18p/l I was paying 15 years ago!

  11. Haro

    US Fracking has a time limit

    They are injecting all the waste water deep under Oklahoma, and a large earthquake mechanism is building. I know such things, since it was my field. A big earthquake will cause a shock in supply, but new technology may sort that out eventually.

    1. Alan Brown Silver badge

      Re: US Fracking has a time limit

      " and a large earthquake mechanism is building"

      Perhaps we should be glad they're not doing it near New Madrid (a large earthquake is brewing there anyway as you should already know)

  12. tojb

    All computing is not yet small or cheap

    Ask someone who works at google or cern how great it is that they can do all the computing they need on their mobile. Haha.

    For some time there has been a steady flow of capability downwards in scale from the continent-class research facilities to the desktop to the portable, but I'm not sure that most of the worlds computing (if you measure it by watts or by the value of the results) isn't still on the mainframe, and perhaps will always be.

    1. Charles 9

      Re: All computing is not yet small or cheap

      Mainframe computing's mostly moved to cluster computing. Instead of a big, honking piece of customized hardware, you can throw a bunch of commodity or at least standardized units at a problem. Granted, sometimes even that doesn't give you the performance you need, but the solutions Google and such provide against the PC atmosphere are less revolutionary and more evolutionary.

  13. kmac499

    Wrong Model...Dumb Comparision

    This is a dumb comparision because:-

    The increase in recoverable supplies of oil close to the major national consumers and away from the historic producers with their relatively minor national consumptions, is not the same as the increase in CPU cycles and Gb of memory available per capita.

    Sure drilling holes and sucking oil out is cheaper now, but was there ever a technological block on fracking once we knew oil was underground ?

    Old mainframes were handmade, just google pictures of ferrite core memory being hand 'knitted'. or PCBs being hand soldered and computers being hand coded.

    The development of computers followed an evolutionary path. Each of the major component parts, processor, memory and storage changing from being an expensive limiting bottleneck, to being cheaper and more powerful via new manufacturing methods and automated assembly. This reduced costs, power consumption and increased portability. . This trend continues with the increasing bandwidth of internet connections enabling new services.

    Plus we have a huge cumulative investment in software to run on this mass produced hardware.

    A more realistic comparision would be computers and the reduction in oil consumption in vehicles and homes. But never let reality get in the way of an economist with a theory.

    1. Anonymous Coward
      Anonymous Coward

      Re: Wrong Model...Dumb Comparision

      Except for one key step: the development of the Compaq clone BIOS. That was a disruptor since it broke IBM's stranglehold on business computing and gave rise to the PC clone market which in turn evolved into the modern PC market.

  14. Bunbury

    Why compare to the price of PCs?

    Apart from to attract interest to the piece I suppose. Why not cars, or washing machines? They are all manufactured products after all. The demand for oil based products does change but not by the logarithmic scale that the PC market did.

    Surely the drop in price of PCs was less to do with the cost of extracting the raw material that goes into them and more about the benefits of snowballing demand leading to mass production? So a better oil industry comparator might be any change in the cost of refining petroleum from crude oil and delivering it to the customer?

    The comparison between oil and PC industries seems claptrap to me.

  15. Anonymous Coward
    Anonymous Coward

    Bah, take one model that has nothing to do with your subject, beat with large hammer until it fits, write article, ..., profit.

    Fracking is certainly an interesting new way to get our oil fix but I think it's a still a long way from being mature enough for us to be able to say it is the future of oil production. I suspect the proliferation of small producers is simply down to the large producers being slow off the mark and that will change over time I'm sure.

    What we really need to be looking at it energy return on energy invested (EROEI) as (I believe) fracking is poor when compared to conventional extraction techniques. If you are getting a low EROEI then other power sources such as PV / wind start to look a lot more attractive long term.

    1. Charles 9

      Unless those alternatives are ALSO poor in EROEI since with EROEI you have to look at the ENTIRE production chain, including mining, extracting, manufacturing, maintenance, and any regulatory cleanups inherent with the associated processes.

  16. conel
    FAIL

    Utter BS

    This is just plain silly and is a good example of the hubris of economists. Their models are incapable of acurately respresenting the economic world they're supposed to be made for yet economists are happy to apply their nonsense to other disciplines. Mainstream economists not only didn't predict the economic crash but many had convinced themselves that a crash was impossilbe because of how brilliantly they were managing the economy.

    This report - which is the type of fluff the Reg usually derides - seems to have been inspired by the increasing use of the term "factory drilling". Factory drilling is used to describe the massive productivity improvements that drilling has achieved through automation and repition. These improvements have been immense but it still doesn't justify the nonsense idea that oil production is no longer an extractive industry and is better described as a manufacturing sector.

    http://www.drillingcontractor.org/%E2%80%98factory-drilling%E2%80%99-boosts-rop-with-automation-11614

    This report is coming from someone who knows nought about the the oil industry, there are some simple clues like referring to Tengiz, an old field, when he clearly meant Kashagan and using the term "fracking rig" which belongs in a Guardian article.

  17. Anonymous Coward
    Anonymous Coward

    Gratitude.

    "One obvious answer is that the limitation is the ability of the atmosphere to absorb the CO2 emissions but that's a different question."

    Build trees. They like CO2. And they express their gratitude by emitting oxygen.

  18. Turtle

    How?

    "Theory of Finance scribe and Nobel laureate Eugene Fama's answer – that economic theory insists it is impossible to predict such things – tends not to convince all that many."

    Makes you wonder how he got that Nobel. Kinda like Obama got it, I guess...

  19. thames

    What a load of bollocks

    The story is rubbish. The oil industry goes through repeated boom and bust cycles, as does mining, as do many agricultural sectors (outside of the subsidized and coddled EU market). There's nothing new or unusual about what's happening now. Anyone who has been in the industry for a while has been through several of these cycles. The last time this happened was 2008, when oil went from $140 a barrel to $40 a barrel.

    The cycles are driven by the fragmented market and the long lead time between investment and production, and compounded by economic cycles. There are many competing producers, who use the cash flow from rising prices to invest in new production capacity. The new production capacity provides yet more cash flow which, like compound interest, increase the rate of new investment.

    Eventually, capacity exceeds demand, or an economic downturn depresses demand, and a surplus of product is on the market. Unlike manufacturing, the costs are largely fixed, since not much labour is required once a well is in production. This means that producers have little incentive to cut back production when prices fall. However, falling prices crimp cash flow, which means new investment gets cancelled. Eventually, the market bottoms out, often because falling oil prices boost economic growth in the world in general. Prices start rising again, and the cycle repeats.

    The modern oil industry started more than a century and a half ago in southwestern Ontario, Canada, which is where the Americans from Pennsylvania went to learn how to do it. The oil industry has gone through many of these investment/boom/crash cycles since then. There have been many, many new technological developments in oil exploration and production during that time. Fracking as a technique is something relatively new (it's actually a combination of different techniques developed over decades), but new drilling and production methods are certainly far from unprecedented.

    The classic economic model for this sort of thing is pig farming and it's taught in a lot of introductory economics classes. The price of pork goes up, pig farmers raise more pigs, the market gets saturated, the price of pork goes down, farmers stop raising pigs, the price of pork goes up, repeat ad infinitum. The instability in the market is driven by the lag between inputs and outputs, as the pigs can only reproduce so fast while peoples' food buying habits can react instantly.

    As for what fracking means to the overall oil market, it should be pointed out that the US is not self sufficient in oil. They are a huge oil importer, being one of the biggest, if not the biggest importer of oil in the world (I don't have up to the date figures for China to see if they have passed the US in oil imports yet). The fracking industry has become a political football in the US, which means the publicity given to it is out of proportion to its actual significance in the oil market. If they were located anywhere else in the world, I doubt that most people would have heard of it. They hare however the high cost marginal producers, which means they get squeezed out of the market first.

    Actual costs vary from well to well, so any numbers along the lines of "as low as" are snake oil. The fields currently producing in the US (and Canada) have been known about for a long time. The production rates however were too low to pay back the investment costs without stimulation by fracking. The recent high prices of course played a big part in that as well. The big problem with fracking is that the wells run dry very quickly, so your investment payback has to be very quick in order to make money at it. The industry is also heavily indebted due to being funded by the basically free money from low interest rates. The higher interest rates which are expected when the US economy recovers more will probably result in widespread bankruptcies in the fracking industry, and the tastier assets being snapped up by the oil majors (funded by traditional wells) at fire sale prices. A number of US banks who have been funding fracking are expected to go tits up as part of this, so we may see "banking crisis 2.0" before too long.

  20. Anonymous Coward
    Anonymous Coward

    Economics - the dismal science ?

    it might be dismal and not even a science but it still gets more comments than most articles (Government stupidity usually generates more).

    Well done Tim.

  21. HOW many?

    The Queen asked the WRONG question

    The RIGHT question was 'Its well evidenced quite a number of Economists DID leap around and scream about in increasingly worried tones about the imminent excrement / air conditioning interface in the wunnerful world of finance .... SO WHY WERE THOSE GUYS IGNORED'?

    (Worryingly, some are doing the leaping about shroud waiving bit again now too).

    Still, despite starting from a shaky premise, there's actually quite a lot of convergence in the main (if implied) message of the article - A lot of folk had too much invested to dare try and get off the Tiger's back of their investments, they had to (have to)? try and keep the plates up on the sticks.

  22. DLKirkwood

    Allow me to further this analogy.

    Yes, PC’s brought prices down so that most households could afford them. They, at one point, be bought for as low as $200.00 laptop, to $450.00 desktop, however today the prices have once again increased drastically and PC’s have brought with it illegal activities, such as, hacking, theft, and damaging viruses.

    No worries, along came the MAC which - although a bit more expensive in the beginning - has proven to be a far more reliable and sustainable form of cruising the web. So the moral of this exhaustive, not partial look, into the industry teaches us one thing.

    Put a bit more money into it and avoid the problems altogether. Forget fracking (which threatens ones environment and is also limited) and develop alternative systems to begin with.

    1. Charles 9

      Re: Allow me to further this analogy.

      In case you haven't noticed, all those alternatives have strings attached: they're costly, don't scale well, AND involve lots of toxics themselves. AFAIK, there's no free lunch unless you can point us somewhere we haven't looked.

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