One of my favorite charts of late comes from a JP Morgan Presentation on Markets. This document contains an overwhelming number of charts and indicators – but this one stood out to me:
Looking for a quick way to explain the dramatic drop in oil prices? This chart shows the dramatic increase in US production due to fracking, as well as dropping demand from Japan. Japan had been burning more oil for electricity after the Fukushima earthquake caused nuclear to shut down, but now they are starting to bring more nuclear back online. And with all eyes on China slowing down, its no wonder there is an anticipated drop in future demand.
As always, I also like to point to the rapid drop of solar power crowding out demand for oil. Check out this article which shows that the cost of utility scale solar installations have been cut in half since 2009:
In the 2007-2009 period, the typical cost was about $6.3 per Watt of AC power; in 2014, that had dropped to $3.1/WAC. The lowest-priced projects (bottom fifth) are now coming in at $2.3/WAC. This price includes a 30 percent investment tax credit, which is due to drop to 10 percent in 2017.
Note that with the reduction in tax credit in 2017, there is a big push to bring a bunch more solar installations on in 2016 – so one would assume we would see a slight spike lower in oil demand in 2016.
Another semi-related tidbit I found fascinating was this story about electricity prices temporarily going negative in Texas. A windy night and low energy demand provided a surplus of power.
So whats more likely by the end of 2016 – $20 a barrel oil or $100 a barrel oil? I would have to put my money on the lower of the two.