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U.S. Domestic Oil Prices

The Oil Bubble Myth

Written by Keith Kohl
Posted November 5, 2013

The "bubble bursting" crowd appears around the same time every year...

You know the ones I'm talking about. They say oil prices are heading off a cliff, and their rumblings grow louder as prices head lower.

(We'll forget for the moment that this is the time of year when oil prices should be weak.)

Before I go any further, it's important to understand why these oil bears are popping up and calling for oil to crumble. After all, we've seen it happen before...

Back in 2008, the price of Western Texas Intermediate (WTI) increased more than 60% in a matter of five months. The cost of one barrel of light, sweet crude from West Texas sold for as much as $147 at one point.

oil price run 11-5

Of course, what followed that run-up was an absolute nightmare for investors with skin in the game:

oil price crash 11-5

So it's understandable that a cursory glance at an oil price chart would have some people worried that a collapse is imminent. In fact, I saw one prediction just a few minutes ago that called for crude prices to fall below $60 a barrel.

Now, WTI prices did jump nearly 30% between April and September of this year.

And as of yesterday morning, WTI was trading under $95 — its lowest point in more than four months.

oil chart 11-5

To the bubble prognosticators, it's a sign we're heading for a crude awakening.

But I'm not buying it — and neither should you.

You see, there is a huge flaw with the “it happened before, it'll happen again” school of thought. Simply put, we are in a very different situation today than we were back in 2008.

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Reality of the “Oil Bubble” Today

Where do we even start?

Anyone who believes that a massive decline in U.S. demand was responsible for the price crash may want to rethink that position right away.

Despite being the world's undisputed leader in global oil consumption (Americans consumed more than 19 million barrels per day last August), U.S. demand for petroleum products has been relatively flat for decades.

oil demand flat

And don't expect our consumption to take off in the future. Demand in OECD countries (think countries like Canada and Germany) is expected to stay more or less flat for the next thirty or more years.

Some groups have even speculated that overall demand in these countries will decrease during the next three decades.

So, if the problem isn't on the demand side of the equation, then perhaps it's with supply?

Remember, we were importing practically 14 million barrels per day in June of 2008, before everything hit the fan.

Since 2008, however, the U.S. has been flush with supply, and oil imports are now at a 15-year low (a statistic that will continue to fall as more domestic crude production comes online, mind you).

That alone should directly translate to lower crude prices, right?

Well, don't be so quick to jump to that conclusion, because the oil we're producing today is far from the crude we've enjoyed in the past...

The low-hanging fruit of the U.S. oil fields has long been picked already, and we're spending more and drilling deeper than ever before to get lesser-quality crude.

The exorbitant price tag attached to these new wells ensures us that oil prices won't ever drop below $70 a barrel. If it does, we can immediately cut out millions of barrels of oil from our daily production.

Let's be clear about how important this surge of tight oil has become to U.S. supply: Not only is it responsible for every drop of oil that has been added to domestic output, but this resource has also had to account for the decline in conventional production.

Take away the barrels of oil produced through unconventional means (including the barrels from every shale play currently being developed), and not only are we right back where we started at the 2008 crash — but we're actually much worse off.

My friends, the game has changed.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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