As we get ready to say goodbye and good riddance to 2012, we are also saying goodbye to oil’s historic run. Unless oil make a last minute run it appear that West Texas Intermediate oil could have its first losing year since the meltdown in 2008 and only its fourth losing year since the historic low that I called way back in 1999.
In the past every down year in oil was met with an up year the next year and usually dramatically so. Yet while oil looks strong as we get ready to start the year the prospects of another strong price rebound is less certain. I am not talking about the fiscal cliff but talking about the historic jump in US oil production. The shale gas revolution may write the final chapter in oil’s historic bull-run and it is not the first time in history that innovation in the oil industry inspired by high prices has done the impossible and crated supply when the naysayers said there were none. I mean come on, Remember what they (this author included) said! We have hit peak oil! What do you expect? Take a scepter and tap on a rock and you expect oil to come out! Well yes. Or I guess you can say through the use of horizontal drilling combined with hydraulic fracturing.
Instead of running out of oil it is now apparent that we are on target to become the world’s largest oil producer. As it stands right now data from the Energy Information administration shows that U.S. oil production hit the highest level in 15 years producing around 6.5 million barrels per day. Since September of last year U.S. production increased by more than 900,000 barrels per day. This surge in production has many predicting that the United States will soon be the world’s largest oil producer.
You see when the markets are allowed to work, the impossible becomes possible. Shortly after oil bottomed in 1999 and I spoke of the coming historic bull -run in oil many scoffed. The thought that oil could double or triple in price was heresy at that time. They said oil was old schools and computers made us much more efficient that if oil ever went above $30 a barrel it would drive us into a recession and prices would soon fall. Of course that proved to be wrong.
Then later on the other end of the spectrum when I said that the spike of oil being above $100 in 2007-2008 was unsustainable because it was not being driven by peak oil gears or demand but buy the greatest economic crisis of modern times. It was being driven by money flowing out of the United States and into Europe as U.S. rates were going lower and EU rates were going higher! I was told that not to worry because it was just a little sub-prime crisis and would not impact oil because China and Europe would continue to consume oil and the world was running out anyway.
I remember calling Peak Oil Enthusiasts ‘Peak Freaks” as their peak oil theory became more like a religion than anything that was based in historical fact. Of course I took a lot of heat especially when things did not happen in 24 hours. Of course in a world of economic lemmings it is not polite to think outside of the box.
And talking outside the box again I am predicting the era of high gas prices are coming to an end. Another benefit of the fracking revolution of course is that fact that we are like the Saudi Arabia of natural gas. Already Natural Gas vehicles are taking a chunk out of U.S. gasoline demand that hit the lowest level in 17 years. According to the American Petroleum Institute, gasoline demand, averaged 8.5 million barrels per day and fell 0.3% year-to-year. Distillate fuel oil demand dropped by a bigger percentage — 6.3%— to 3.8 million barrels per day.
What we are seeing is a shift away from petroleum and into natural gas vehicles. Some of course blame the economy or our aging population all of which is true but what is more true is that many businesses are realizing that they don’t have to pay high gas and diesel prices when they have a viable alternative. Many companies are shifting their fleets to natural gas. We are seeing natural gas cabs and busses. It will only be a matter of time before we see more individual cars on the road. We are in the early stages of a historic shift away from oil into natural gas!