Evolution and revolution influencing oil market

You likely have noticed an evolution in the oil market over the past five years.

We’ve seen dramatic swings in price, inventories, and demand.

Domestic production is up; oil imports into the U.S. are down.

In 2011, the U.S. became an exporter of petroleum products for the first time since 1949!

Remember the peak oil theory -- that point in time when maximum petroleum extraction is reached, and then production enters a terminal decline? In 2007, pessimists said that most global oilfields already had passed their prime production rate, and we were fast running out of oil.

Well, the peak theorists were partially correct. We ran out of cheap oil.

By 2008, prices started rising dramatically, China’s oil use was escalating along with that of other emerging countries, and the world was requiring a lot more oil.

Along with the rise in oil prices came the ability to utilize expensive technology. Hydraulic fracturing (fracking) in conjunction with horizontal drilling made a huge difference in our ability to recover oil that had once been unrecoverable.

Suddenly, new vistas opened up to the world: heavy oil in Venezuela, oil sands in Canada, oil shale in North Dakota and elsewhere. Reaching oil deposits in deep water also became a reality.

High oil prices made a lot of things possible which had previously been economically infeasible.

Then the recession hit. Prices fell dramatically, oil inventories grew, and demand tanked. Massive global debt was revealed, and developed countries still are experiencing no demand or negative oil demand.

Meanwhile, in what we traditionally think of as the oil-producing area of the world, uprisings and revolutions are spreading. It has been a year since the “Arab Spring” began with protests in North Africa and the Middle East.

Leaders were toppled, a civil war ensued in Libya, oil infrastructure was destroyed, and many protestors lost their lives.

At the core of the protests are high prices for food and fuel, coupled with high unemployment in countries that depend upon the oil industry for huge portions of their GDP.

The oil market is lately captive to two opposing forces: fear of supply disruption (largely stoked by Iran) and economic weakness/lack of oil demand from developed nations.

But we know it won’t sit range-bound for too long -- that is just not the nature of the oil market!
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Jackie McKinnis is a GROWMARK energy analyst. Her e-mail address is jmckinnis@growmark.com.