How low can oil go?

How far will oil prices drop, and what effect would that have on our local real estate market? There is a theory that part of what has driven our market is wealthy Albertans profiting from high oil prices buying up BC real estate.

Oil is now down to around $55 per barrel from a peak of $77 in late august. In the last week alone prices have dropped $5.

There’s an article on MSNBC today about the lower oil prices, some of the factors behind them and predictions for the future.

There a few oil analysts who believe oil prices could be headed for a much bigger fall —especially as heavy investment in new production during the recent price run-up begins to bring a big increase in supplies to market. Even at $55 a barrel, that investment in new production will remain strong, according to Peter Beutel, who follows the oil market as president of Cameron Hanover.

“We will find a lot more at these prices,” he said. “A proven barrel of oil is how much you can get at today’s price. I believe we have that a lot more oil on this planet than people believe. And we are going to find it over the next few years.”

Beutel thinks oil prices could fall as low as $20 a barrel in the next 4 to 8 years before beginning to rise again.

So anyone think there’s a chance in hell of seeing oil at $20 a barrel in the next 4 to 8 years? And what sort of effect would that have on our real estate market? I could see lower gas prices (along with improved roads) possibly driving demand in the suburbs, but I wonder what sort of effect lower gas prices would have on the income side of the equation, particularly if there’s anything to the ‘rich Albertan’ theory.

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loki
loki
13 years ago

Wow. Pretty close to $50 now. Will it keep dropping? Will we see sub $50 barrels soon?I'm on pins & needles!

Warren
Warren
13 years ago

Don't forget the peak capacity argument I made earlier. The draw at night is much lower. That is when most charging would take place.Yes peak capacity is a big issue, but mainly for Nuke and Coal. Hydro is easy to turn on and off. I'm not sure on other green generation methods. Don't get me wrong I'm all for pure EVs… fuel cells are frankly a load of BS when we have functional EVs staring us right in the face.

Freako
Freako
13 years ago

" Right now we can't generate our electric load cleanly, resulting in coal plants polluting, etc. Imagine if we were to add only a fraction of our current combustible engine demand to the grid? No deal.."Don't forget the peak capacity argument I made earlier. The draw at night is much lower. That is when most charging would take place.I do think the coal burning should go. Unsequestering all that carbon is criminal.

Warren
Warren
13 years ago

Freako, bc_cele,I think we are all talking around different viewpoints. However I'm sure we can all agree on these:1. Electricity is the energy form of choice. It can do basically anything except make things fly. It can be generated in massive amounts (Nuke) or small, for local needs (Solar).2. I believe for that we will always need some combustible fuel for certain applications like flight. In the far reaching future that may be Hydrogen.3. Oil (via money) is probably the most corrupting substance in the world today. Getting off of it would do wonders for world stability, not to mention pollution.4. Challenges that remain are generating enough clean power to keep us going. Right now we can't generate our electric load cleanly, resulting in coal plants polluting, etc. Imagine if we were to add only a fraction of our current… Read more »

bc_cele
bc_cele
13 years ago

Freako,EROIE, is actually a very fuzzy concept and there isn't a lot of agreement on what should be measured, except that it only includes the energy inputted into obtaining the the finished resource. By most estimates oil is actually poor compared to alternative sources. Today the estimate is around 3 barrels of oil for each barrel of input in the US (10:1 in some places) and the oil sands is less than 2:1. Compare this to an alternative such as wind which is 20:1, or hydro, which is pegged at 45:1. The reason I was using densities was to show that the output of oil's most energetic product is still rather low in comparison to nuclear power. In other words, for it to be a better return on investment the inputs much be far lower. This simply isn't the case.… Read more »

bc_cele
bc_cele
13 years ago

Damir said… Nuclear power has a rather poor EROEI once "minor" issues like reasonable safety measures and treatment of waste are considered. China has the ability to mandate-away those issues, but thankfully that is not the case (or at least much less the case) in our neck of the woods. Unless you are using an EROEI index that I'm unfamilar with, those concerns are not factored in. If those are factored in for nuclear then you would have to factor in the cost of polution, global warming, and cleaning up the mess made by the exploitation of fossil fuels as well. In this case I would still wager that nuclear comes out on top.

Damir
Damir
13 years ago

Nuclear power has a rather poor EROEI once "minor" issues like reasonable safety measures and treatment of waste are considered. China has the ability to mandate-away those issues, but thankfully that is not the case (or at least much less the case) in our neck of the woods.

Freako
Freako
13 years ago

actually, I'm quite familiar with the EROEI and oil isn't anywhere the most powerful source of energy we have, nor is it the most efficient.This is not my field, and it seems to be yours, but I think Warren wasn't thinking about energy density, but rather energy per dollar. I have no idea what the formal application of EROE is. Nuclear power is levels of magnitude larger.Nuclear power seems to be the best thing going. I have followed EV developments closely, and I think electric vehicles will be in the majority sooner than we think (fuel cells are a no go). There are new developments with regards to more efficient use of electric power, such as peak time metering, and the incremental burden of charging electrics is less than we think (nightime). Still, nukes could reduce the need for coal… Read more »

bc_cele
bc_cele
13 years ago

Warren,actually, I'm quite familiar with the EROEI and oil isn't anywhere the most powerful source of energy we have, nor is it the most efficient. Nuclear power is levels of magnitude larger. Consider that octane has the highest enthalpy density of any hydrocarbon. One liter weighs in at around 6.33 kg and produces 3.8 x 10-4 kJ of energy when it is burned. Just one gm of U-235 produces 7.4 x 10-6 kJ! Heck even hydrogen and ethanol have much higher specific enthalpies, but are less dense.Moreover, energy in the form of the sun, wind, water and geothermal heat is also far more abundant than any oil reserves. The problem with alternative energies are harder to extract because we need to develop technologies to harvest the energy. However, the expense and return did not stop the oil sands, did it?… Read more »

Freako
Freako
13 years ago

"Oh, its an incredibly cheap, incredibly powerful source of energy."I don't think there is any dispute about that. BUT: It has back end cots, namely negative externalities, the full extent of which are not known at present, but probably very very expensive. Look at the dollar damage a single hurricane or one drought can do.In that sense, oil may not be cheap at all. The purpose of gas taxes are obviously to capture some of these costs. I don't think they go far enough. Why? Because IMHO we use it decadently. A guy whining because the cost of filling his SUV went up by a ten spot is not hardship. The best thing that could happen to world right now would be if the U.S. cranked up gas taxes significantly. It could be revenue neutral for all I care. Good… Read more »

Warren
Warren
13 years ago

Goldman Sachs has a pretty big name on Wall Street, but they were predicting $100 oil recently. Forgive me if I overload on salt whenever they talk about energy.bc_cele said:Oil isn't special, I wish people stopped thinking that it was some magical substance. It is simply a cheap abundant energy source.Oh, its an incredibly cheap, incredibly powerful source of energy. Nothing comes close to the power we get out of it, and how easy it is to extract. Don't kid yourself, nothing else comes close. But there are some alternatives that will help us junkies kick the oil habit. It won't be easy though. There's something called EROEI = Energy Returned on Energy Invested. Its a ratio, and oil as a power source blows away anything else we've discovered so far.

bc_cele
bc_cele
13 years ago

ReductiMat said… I hate to interrupt the gloating, but why has no one yet mentioned the Goldman Sachs Commodity Index? I think that I mentioned that idjit traders were the ones pumping the prices to new heights. So now they're applying pressure the other way. To me it's a little like being shot while falling 50 stories. You were dead anyways, but it just makes things more intersting.

ReductiMat
ReductiMat
13 years ago

I hate to interrupt the gloating, but why has no one yet mentioned the Goldman Sachs Commodity Index?

wannaget2calgary
wannaget2calgary
13 years ago

mohican said, "I'll keep that dance private out of respect for others!"No, no, no, pleez let us see it. RE is a bit slow these days and we all need some excitement. Post it on your blog, or maybe YouTube. ;-]

patriotz
patriotz
13 years ago

I agree with a previous poster that Alberta buyers are a factor for recreational property in the Kootenays, the Okanagan and the Island, but not Vancouver. I mean, why would a rich Albertan want to buy a 500K crapbox in Whalley? Or for that matter, a 300K shoebox in Yaletown. Most Albertans hate Vancouver you know. What kind of status symbol is that, and what kind of return could you get in rent?The price of oil is not a direct factor in Vancouver RE, but an indirect one – as an indicator of US and global economic demand. Fallings oil prices indicate that the US consumer (and by extension, US suppliers – China, etc) are in trouble. And that's trouble for BC too.

Shanghaithunder
Shanghaithunder
13 years ago

Personally, I would actually perfer that gas prices stay higher because eventually people will give up and switch to more fuel efficient cars, and there will be a real impetus to develop alternatives. Oil isn't special, I wish people stopped thinking that it was some magical substance. It is simply a cheap abundant energy source. It is, however, only one source. It's time we started putting in an ernest effort to develop those other sources. If oil prices plummet too much then those efforts will evapourate.Nicely put. I have a brother in Edmonton who is doing his part to save the planet.Cycling to work in -25 temps. I tell him that is all nice but what scares the hell out of me is the 3 billion people in Asia(India & China) that all want to ditch their bikes and using… Read more »

bc_cele
bc_cele
13 years ago

Warren said… Don't forget about OPEC. They certainly remember the mid 90s and I'm sure they'll do their best to keep oil up. Above average high temperatures across the US definitely play a role in prices. We'll see what happens in this upcoming cold snap.I hope you people complaining about "high gas taxes" are aware of the billions of dollars spent on new highways, bridges, and maintenance every year.As far as I'm concerned they should be taxed to the point people start thinking about it a little more seriously, like cigarettes. I know people who talk about buying pickup trucks with no intention of using them for hauling anything, but because they "look cool". Call it a stupid tax. OPEC hasn't had a handle on prices in so long that there are posters here that weren't born when they were… Read more »

Warren
Warren
13 years ago

Don't forget about OPEC. They certainly remember the mid 90s and I'm sure they'll do their best to keep oil up. Above average high temperatures across the US definitely play a role in prices. We'll see what happens in this upcoming cold snap.I hope you people complaining about "high gas taxes" are aware of the billions of dollars spent on new highways, bridges, and maintenance every year.As far as I'm concerned they should be taxed to the point people start thinking about it a little more seriously, like cigarettes. I know people who talk about buying pickup trucks with no intention of using them for hauling anything, but because they "look cool". Call it a stupid tax.

mohican
mohican
13 years ago

Freako said… "Where is Randallbard and deliver8or? I have a bet to collect on."I remember your bet and I think you are owed. PS – As a financial planner I have been telling my clients to not purchase Energy and Resources becasue they are overpriced and the risk of a correction is high. Looks like the correction has happened / is happening. Its time for the 'I told you so' dance. I'll keep that dance private out of respect for others!

digi
digi
13 years ago

A three zone transit pass is $9. Where are all those gas taxes going again? How can transit be so lousy in the lower mainland?

Snap Up Real Estate
Snap Up Real Estate
13 years ago

I read another article where Buetel states the opposite, "Oil prices have dropped 24% in the last three months and dipped below $60 a barrel for the first time in nearly eight months Tuesday. But although prices are expected to drop a bit further, the floor is likely not too far away, says Peter Beutel, president of Cameron Hanover, an energy consulting firm."Who is this fool?

bubble-hater
bubble-hater
13 years ago

just 6 months ago people scoffed at the thought that oil could ever go back to $50, and now they would still scoff if u said $30-$35. funny thing is the US isn't even in recession yet and oil cracked 30%, makes u wonder what might happen if the beloved GDP goes to zero or less at some point this year.

Freako
Freako
13 years ago

"How do people manage? Is public transport a viable option? "A three zone transit pass is $9. That means that if you already own a car, it is probably still cheaper to drive, even without car pooling. All ignoring wear and tear of course.If you factor in time and inconvenience, it gets much worse.

Shanghaithunder
Shanghaithunder
13 years ago

It has been said that the purchase of a home is probably the single largestexpenditure one makes in his life.Coming 2nd has got to be motor vehicles. They are an important part of our day to day life. With the likelihood of gas not dropping much, it has got to take a chunk out of the monthly income. Add in a hefty lease or loan payment. Along with the already +%50 afford ability ratio for housing, How do people manage? Is public transport a viable option? Although it is sure hard to haul all that stuff home from Costco on public transit. I feel it matters not what the price of oil is or is going to be. We sure are Dependant on automobiles.

Freako
Freako
13 years ago

Where is Randallbard and deliver8or? I have a bet to collect on."Technical trading always ignores the realities that underpin the movements and I have no doubt that you'll see this prediction fail as well. "Resistance is a reality among traders in a zero sum game, but is no match for real world supply and demand. While it may sound hard to swallow, $20 oil is entirely possible. As is $150 oil. I betcha $75 sounded undreachable only a few years ago.Even in real estate people cling to thoughts that prices cannot go below (or above) a given price. Or even percentage change. Many argue that a 30% drop is simply impossible for no other reason than it is a lot, but in reality that only gives back the last couple of years. Supply and demand takes prces where it wants… Read more »