Add these factors up and we conclude there is no visible price limit on oil after supply falters.
I've been discussing the concept of an Oil Head-Fake since 2008, most recently in The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive (September 29, 2014)
Oil: One Last Head-Fake? (May 9, 2008)
The basic idea is straightforward: as global demand slackens, oil producers are incapable of reducing supply due to their dependence on oil revenues. This leads to oversupply which further depresses prices, to the point that marginal wells are shut off and costly exploration-development projects are shelved.
This process is far from orderly, as the low prices destabilize oil-dependent governments and regions. Geopolitical turmoil is only half the story; the immense mountain of debt that's been built on the collateral of oil collapses as cash-starved borrowers default on bonds and loans. This meltdown of oil-based debt then destabilizes an increasingly fragile global financial system.
Supply can be turned off easily enough, but it can't be expanded as easily. Costly deepwater wells that were shelved in the price bust can be restarted, but it takes many years to bring these hyper-expensive projects online.
Meanwhile, existing production declines without constant injections of capital and expertise. Contrary to popular conception that oil flows for decades without having to do anything other than poke a hole in the ground, oil fields need huge investments of capital to maintain high production: carbon dioxide or water must be injected into the wells, and so on.
So even if fields are kept online through the price bust, their production will decline as capital spending dries up.
The end result of the price bust is impaired supply: impaired by depletion, impaired by reduced investment, impaired by the collapse of oil-based debt.
Even if demand only remains constant, the price of oil will rise as supply falls. And with several billion people aspiring to the energy-intensive middle-class lifestyle of the developed world, we can anticipate global demand rising even if it stagnates in the developed world.
