Guest Yogi Berra impression by David Middleton

Last month, Dr. Phillip Verlenger, a professional prediction maker, predicted a crash in U.S. crude oil production in 2020. My response was:

Certainly if prices drop below $50/bbl for a prolonged period of time, Dr. Verlenger’s prediction of a decline in US crude oil production will very likely be correct. If prices rise into the $60-80/bbl range, his prediction will very likely be wrong. It all boils down to predicting oil prices and most oil price predictions are wrong the moment they’re made.

Economist Foresees “Quick Decline” in US Oil Production, David Middleton / March 15, 2019

Now Dr. Verlenger is predicting that sanctions levied against Iran and Venezuela by the U.S. will lead to a 66% increase in oil prices, taking Brent crude to about $120/bbl…

The findings from the model indicate that the current disruption will likely cause prices to increase sixty-six percent at their peak. Roughly speaking, Brent will rise to between $114 and $126 per barrel.
This conclusion results from my calculation that the present episode will take roughly two percent of supply from the market.

The reduction will come from falling Venezuelan production, which is also subject to US sanctions, the declining Iranian exports, and a modest cut in Libyan exports.

Oil Price Dot Com

Brent trades at a roughly $10/bbl premium to West Texas Intermediate (WTI), the base price for most U.S. shale producers. A 66% increase would take WTI to $106/bbl. With all of the cost-cutting over the past four years, their break-even prices have fallen to $30-40/bbl…

Dr. Verlenger’s forecast for a crash in U.S. oil production was based on a decline in hedging activity, under the misapprehension that hedging was a leading indicator for production. A spike in WTI above $100/bbl would lead to a surge in drilling and the shale players, along with the rest of the industry, would be hedging like crazy.

If it comes to pass, Dr. Verlenger’s April 29th prediction would invalidate his March 11th prediction. It just goes to show that…

Or, as Jude Clemente very eloquently put it…

I have learned a very simple truth during my 15-year career in the energy business: one of two things usually happens when you make seriously bold predictions, especially for the longer term.

When the time comes to answer for being wrong, either you are not around to have to respond, or the critics will have forgotten that you ever made the prediction in the first place.

Real Clear Energy

Will the sanctions imposed on Iran push oil over $100/bbl? I have no idea.

As someone who finds oil & gas for a living, $100/bbl oil is great for a few months. Then the cost of doing business skyrockets, rigs are harder to find and it actually becomes more difficult for “Little Oil” to make a profit. This is always followed by a sharp drop in oil prices… which restarts the cycle. As someone who drives vehicles with internal combustion engines (no electric Jeeps for me!), I get p!$$ed off when I have to pay more than $3/gal for gas… FRACKING OIL COMPANIES! (/Sarc… Big time).

Readers of my posts may have noticed that they often revolve around petroleum geology and/or the oil & gas industry… Occasionally one or more of the commentators asks questions like this: “I thought this blog was about climate change… How is the oil & gas industry relevant?” The most obvious answer is the alleged scientific consensus is that climate change is almost entirely caused by greenhouse gas emissions from fossil fuel (oil, natural gas & coal) combustion. RealClearEnergy usually features more articles about climate change than about energy. Justified or not, energy and climate change are “linked at the hip.” But there is a more fundamental relationship between fossil fuels and climate change. Without the rather extreme climate changes that occurred throughout Earth’s geologic history, there would be no coal, no oil and no usable natural gas. There wouldn’t even be much in the way of sedimentary geology.