Time For Some Crude Talk.

“Fight Against Stupidity And Bureaucracy”

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$200 per barrel oil

It’s not so long ago that I was getting bombarded with emails about how great an investment oil would be.

At that time the predictions by those in the ‘know’, who really know nothing, was that oil would hit $200 per barrel – maybe much, much more!

Well, they almost got the number correct, except that oil actually hit $20 per barrel, not $200. As these things go it was a pretty good guess!!!

declining oil price

So why has the oil price declined and, although it has recovered a bit, why are the predictions for today’s low prices to hold long term?

The simple layman’s answer of course is that the oil price has declined because supply is greater than demand. When there is a surplus of a commodity the price falls and when it is scarce the price rises.

The supply of oil has increased relative to demand for a number of reasons.

The most obvious one is the vast reserves of oil found and now being recovered in the massive shale-oil fields in the United States of America and the tar-sands in Canada that have added more than 5 million barrels per day to domestic oil production since 2008. Able to produce more at home, North America has been able to reduce its demand for imported oil.

OPEC

The effect of this, of course, is that the OPEC countries have seen their annual revenues fall sharply during the same period. To try to rectify this fall in income, which they need to provide for their own citizens, they have been trying to replace lost revenue from North America by increasing production of their own oil supplies.

In other words, they have created even more over supply in the market, which helps to keep the oil price down.

Then there was the ISIS or ISIL terrorists in Iraq who had taken control of most of the oil fields and were dumping oil on the black market as fast as they could to help finance their war. Recently they’ve lost control of a lot of those oil fields so that part of the equation may no longer be in play to the same extent.

However, if there is a deal ever done with the Iranians and they are able to trade without restriction again, no doubt they will be adding their oil to the market glut which will also help to keep the market over-supplied and the price suppressed.

burning off gas at oil well

Then there is the increasing use of compressed natural gas or CNG. This is the natural gas that used to be burned off at the oil wells, but that is now collected, compressed into tanks and used to power vehicles and in drilling equipment, meaning less diesel is purchased.

Despite all these over-supply pressures, the thing that is keeping the oil price from collapsing completely is the continued demand from China. This is a good thing because a long-term collapse in the oil price, whilst it may make life a bit easier financially for many with decreased heating and fuel bills, also has detrimental secondary effects on some parts of the country where the oil industry provides a living for a great many people.

I haven’t had an email about investing in oil for a long time and I don’t expect them to start again soon. Now you know why.

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