Oil Production: An Indicator Of Future Economic Growth Prospects

Summary
    Low global economic expansion since 2008 can be linked to liquid fuel production growth. Trend will most likely continue.
    Global production of liquid fuels would have declined in 2013 without the US' increase of 1.2 mb/d, mainly on the back of shale oil, the effects of which will diminish.
    Healthier growth rates may only return when current relationship between global liquid fuels growth and economic growth is broken, and growth becomes less reliant on it.


The negative surprise that the US first-quarter GDP handed us was quickly rationalized as a mainly weather related event. One thing that we can be sure of regardless of the reason why it happened is that previous 2014 forecasts for US growth have to now be revised downward somewhat. There is little hope now after a stagnant first quarter of reaching the 3% growth range forecast by various institutions for the year.

Looking at the bigger picture in order to get a better understanding of the overall context, the fact that 2014 growth will have to be revised down should not come as a great surprise. The US and global growth have constantly been revised downwards since 2007. 2013 was seen by many as the year when the economic crisis was finally put behind us and we are now looking at a few years of decent, if not outstanding growth. The IMF forecasts global growth to reach 3.7% this year, and 3.9% in 2015. That is a significant increase from 2013, when the world economy grew about 3% as well as a break with the 2008-13 period, which saw global average yearly growth under 3%.

Reasoning behind expectation of further downward revisions

According to EIA data 2013, global liquid fuels production growth was 0.6%, or just under 0.6 mb/d. If we are to exclude US liquid fuels production growth of 1.2 mb/d, the world would have been in a production decline. For 2014, it expects a global production increase of 1.4 mb/d and 1.3 mb/d in 2014 and 2015, respectively. US production is once more expected to contribute to most of the increase with year-on-year gains for this year of 1 mb/d and 0.7 mb/d next year.

Aside from the two very prominent shale oil fields, there are very few bright spots to report in America's oil production regions. Alaska is in decline, the Gulf of Mexico is stagnated, while the onshore Permian in Texas is only inching up very slowly. There is some limited increase in liquids production coming from predominantly shale gas plays such as the Marcellus, but at the moment there is no field ready to take the place of Bakken and Eagle Ford as the main engines of production growth.

Aside from potential for increase coming from resolution of conflicts in places such as Libya or improving relations with Iran, I see very little potential for global growth in production.
In fact, countries such as Saudi Arabia are likely to favor lower production, not so much because they want to keep prices high or that they are evil as many would believe, but because they want to manage their fields with care and are aware that many of their aging giant fields can potentially be damaged through overproduction for prolonged periods of time. There are also many places in decline such as Mexico, the North Sea, Azerbaijan and others.
I think a very good gauge of where global production is headed is the performance of oil and gas giant multinationals that operate all over the world where there is oil and they are allowed to participate by governments. As I pointed out in my last article, companies such as Exxon Mobil (XOM), Chevron (CVX), Shell (RDS.A) (RDS.B) and BP (BP) are all experiencing production decline.

Effect on the economy
It is very unfortunate that over the past half decade or so, the media as well as economists preferred to focus mainly on public policy as the main factor affecting economic growth instead of analyzing the underlying fundamentals. Thus, the question of why we are not witnessing a return to growth rates in the 5% range as we have seen in previous post-recession recoveries was always answered through the lens of political and ideological partisanship. These explanations have no value in terms of providing useful insight, but are extremely popular with audiences given the increased ideological polarization of our society.



http://seekingalpha.com/article/2221763-oil-production-an-indicator-of-future-ec...
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perceptions_now wrote on Oct 10^th, 2014 at 11:29am:

Is there any information on how accessible these proved reserves are? 

With Wti Oil futures now sitting at $78.84 -
http://quotes.post1.org/historical-crude-oil-price-chart/

There is a considerable question mark over the future of much of the "new oil" market, with much of that section of the market quickly becoming unprofitable!

http://www.marketwatch.com/investing/future/crude%20oil%20-%20electronic

WTi currently trading at US$77.19, which means large slices of Fracked US Oil & other "New Oil" is pretty much unprofitable & therefore a drop off in Supply can be expected from those New Supply sources!

perceptions_now wrote on Nov 13^th, 2014 at 10:00pm:


A substantial Decline overnight, WTi Oil now trading at $74.21!

Besides bringing down "somewhat" the price of Petrol, do you understand why Oil Prices are in Decline & the Global Economic/Security ramifications?

MumboJumbo wrote on Nov 19^th, 2014 at 6:45pm:


Will Oil Pricing increase Global Security?
No!

Will Oil Pricing decrease Global Security?
Yes!

A Few Quick Observations On Crude

Summary
There are other broad implications, both for high yield and for stocks.
I believe this crude crash, along with other commodities crashing, will lead to a negative impact on stock markets in general.

The defaults are coming
At the present levels, it doesn't matter if shale is profitable or not (as many are commenting on, lately). The fact is that every lending committee on every bank exposed to these things is going to turn the taps shut. No more credit, mostly new renewals, etc. Companies in this sector, which face the need to refinance large slugs of debt are going to be taken to the cleaners.

This also has a possible impact on the high yield markets. There has been a tremendous explosion in investment in the crude sector in the U.S. and worldwide.

I'd expect the news of defaults to start hitting soon, as the main problem won't be a lack of profits (which should be gone, too) - the main problem will be the lack of refinancing as every finance institution will be seeking to reduce exposure at the same time.

Furthermore, since this might lead money to withdraw from the high yield sector - seeking to avoid these losses - the impact should then spread to high yield bonds outside the oil sector.

Economic and stock market implications?

It's not usual to see crude, iron ore, coal and other commodities break down so hard without there being some economic distress out there

. While the most affected industries (again, crude, iron ore, coal) each have industry-specific problems, namely excess supply problems,

the breakdown is still incredibly large indicating that demand must not be that healthy.

Furthermore, we should see a quick collapse in capex in the shale sector - as well as a wave of staff dismissals, etc, which will have a direct economic impact.

The breakdowns in several commodities are also surprising in that they could go to such lengths without demand kicking in and stabilizing prices. For me this has overall negative implications for the equity markets

Conclusion
At around $50, I'd actually turn a buyer even if fundamentals and speculative positioning remained unfavorable. At the present levels, however, I am just neutral with a positive long-term expectation that's not enough to commit to long positions.

I also expect a wave of defaults in the energy sector, mainly by shale drillers/explorers/producers,

leading to a significant negative impact on high yield bonds in general (though the defaults will obviously be concentrated in the oil sector, I believe this will lead to high yield seeing money fleeing, thus also affecting overall prices for other bonds).

Finally, I believe this might be the final straw that breaks the speculative stock market mania.

http://seekingalpha.com/article/2717015-a-few-quick-observations-on-crude?ifp=0
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Normally, the Oil Price would reach a bottom & then rebound to higher levels.

However, THIS TIME IS DIFFERENT and it is different because Global Demographics will ensure that Demand does not bounce back this time, as it usually has, over most of the last 200 years or so

!

Oil And The Global Slowdown

The world economy is slowing down and the authorities are fretting.

Japan, Italy, and Greece are all in recession. China is slowing down according to official statistics, and even more according to whispered accounts.

Germany, France and the Netherlands are all at stall speed.

According to the BLS, the United States is doing just great at nearly 4% growth for two straight quarters, but you wouldn't know that either from the quality of the few jobs being created (which is low) or from consumer spending (also low).

The worry, as always, has nothing to do with the central banks' concern for you, your job, your children, the actual prices you pay, wealth equality, or the future, and everything to do with the simple fact that the stability of the banking system absolutely depends on a steady stream of new loans.

I guess with the binary choices of growth or collapse before them it only makes sense for the current crop of central bankers to do whatever it takes to keep that system limping along, er growing, for as long as possible.

In 2008 and 2009, net credit creation was only slightly negative, but that was enough to very nearly cause the entire system of money and banking in the developed world to collapse.

Now after the most heroic period of interest rates forced to zero (ZIRP) and below (NIRP in Europe) and the grandest experiment with money printing in global history, credit growth is somewhat back on track but not enough to ease the banker worries or to justify their actions.

So the bankers continue to pump, jawbone, and panic at every slight downturn in financial market prices because that's all they have left in the world upon which they can hang their reputations.

The actual economy, the one that lives on Main Street, never really bounced back fully, at least not compared to past recoveries. Growth, jobs and incomes all were anemic compared to prior recoveries. Investment in new capital was and remains dead in the water.

Because oil is the main engine of growth, and we know that even with 2.5 trillion dollars of additional spending over the past 9 years the world is producing roughly the same amount of oil as ever. Why? Because depletion of existing reserves is being matched by new production.

Unless investment in oil production really accelerates from here, new production will be swamped by existing declines.

In the US we know that even under the best of circumstances shale oil, the one and only engine of increased oil production growth, will peak in 2020.

But these are no longer the best of circumstances and oil is now priced well below the actual cost to get most of the shale oil out of the ground:


As we can see in that chart, the only plays that are still viable at today's prices are the core areas of the Bakken and Eagleford plays, which should not surprise anybody. Those were the ones drilled first and hardest because they are the most economic.

The fun thing about the shale companies is that they are incredibly nimble and very sensitive to prices. They can stop drilling at any time. As soon as they do, the peak of shale production will be measured within a month.

While they have not stopped drilling, the speed of the pullback is incredible and drilling permits dropped by a whopping 40% in November alone as compared to October:

The bottom line, though, is that without growth in oil economic growth is hard to achieve. I'll go further and say it's impossible to achieve, at least under the old paradigm of consumption based growth.
If oil prices do not recover and quickly, the US shale miracle will rapidly turn into a shale bust. The decline rates on these wells are ferocious.
And with the loss of that fantasy will go the sky-high valuations we currently see for stocks and bonds. After all, the operative question always should be what is the value of these stocks and bonds in a world without growth?

To me the answer is simple; a lot less.

In short, we are now past the point where the next correction could be survived injury free. It's going to hurt.

http://www.peakprosperity.com/blog/89380/oil-and-global-slowdown
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Nuff said!