Earlier this year, within an "Unpopular Opinion" thread, there were questions about current oil markets and what was happening. I read a reprint of this article in our local paper this morning and thought it was worth sharing if you are interested. This is a major shift in the way the world oil market will operate going forward.
HOUSTON — For the better part of the last century, crude oil prices have
swung like a pendulum, pushing and pulling the fortunes of nations. More
often than not, global supplies of the volatile commodity were controlled by
the rulers of desert domains who would otherwise have been powerless had it
not been for the oil that bubbled beneath their thrones.
That pendulum is on the move again, sending the price of oil cascading to
less than $45 this winter from more than $100 a barrel last June, and it may
fall further in the months ahead. On the surface, this latest oil boom gone bust
may feel like history repeating itself, but there is a vital difference this time:
The center of the oil world has spun from the sands of Saudi Arabia to the
shale oil fields of Texas and North Dakota, a giant new oil patch some
wildcatters have begun to call “Cowboyistan.”
Put another way, the United States is overtaking the Organization of the
Petroleum Exporting Countries as the vital global swing producer that
determines prices. That remarkable change has been building since 2008, as
American shale fields accounted for roughly half of the world’s oil production
growth while American petroleum output nearly doubled. And shale
production methods have proven highly adaptable to market conditions.
Not coincidentally, nearly all the advantages of the price swing are moving
in Washington’s direction. Most American consumers and industries have
benefited from a sharp drop in gasoline prices and other energy costs. And abroad, the economies of oilproducing adversaries like Russia and Venezuela
are reeling.
Rene G. Ortiz, a former Ecuadorean oil minister who also once served as
OPEC’s secretary general, noted that as recently as late 2008 and 2009, the
last time oil prices slumped, OPEC cut oil production by four million barrels a
day to support prices, and the move stabilized the market in a relatively short
time.
“Why doesn’t Saudi Arabia think that couldn’t work again today?” Mr.
Ortiz asked. “Because of the soaring U.S. production. Today’s OPEC is
thinking about market fundamentals rather than manipulating the market
because it doesn’t have the same power it once had.”
Last Nov. 27 was a turning point for OPEC at its meeting in Vienna. It was
a turbulent session, though behind closed doors, where the firebrand oil
ministers of Venezuela and Iran faced off with the dour Saudis and their
Persian Gulf allies. The Venezuelans and Iranians, backed by Algeria, Nigeria
and a few other countries that need every cent they can get from their oil
exports, argued that OPEC should slash production to strengthen prices
exactly as the cartel did when the crude price tumbled during the Asian
financial crisis in the late 1990s, and again after the tech bubble popped in the
early 2000s, and finally as it did again just six years ago.
But the Saudis and their Gulf allies said no. They argued that if they cut
production, they would merely lose market share to the surging American
producers who were increasing daily production by a million barrels year in
and year out with no end in sight. The decision effectively forfeited the cartel’s
traditional role as the global oil swing producer — the one and only supplier
with the volume of production to raise and lower prices by managing the
cartel’s output.
The decision came as a shock to the oil market. From the moment OPEC
decided to keep its production constant at 30 million barrels a day, a fairly
gradual price retreat that began in July morphed into a nose dive as
commodity traders dumped their oil positions. Many independent American
producers saw the move as a direct attack on them, but it was really a throwing in the towel to the new reality of growing American oil output.
The demise of OPEC as the price manipulator is what virtually every
American president since Richard Nixon had in mind when they promised to
find a way to make the United States energy independent, not chained to
Middle East or OPEC oil, after the oil embargoes of the 1960s and 1970s.
Hydraulic fracturing, the blasting of oil and gas out of shale rock with
water and chemicals, is the single most important factor of change in global
markets in more than a decade, with an environmental outcry commensurate
to its magnitude.
As soon as railroads connected North Dakota’s Bakken shale field to East
Coast refineries the last couple of years, imports from the Middle East and
Africa dried up, forcing various OPEC producers to redirect their product to
China and other Asian markets. There, they battled it out for market share by
slashing prices. That is just one example of how shale drilling not only
transformed the United States from dependent consumer to a robust
producer, but is also transforming the price dynamics of the global market.
Shale fields differ in several ways from conventional fields. Shale is not
hard to find, but drilling is expensive because wells decline precipitously — by
60 to 70 percent in their first year. That means companies are obliged to drill
well after well to keep production and revenue up.
That is not always good for individual producers, especially small ones,
when prices fall. But those characteristics give shale producers collectively
more power to influence the market because it condenses the amount of time
companies have to respond to the inevitable cycles of boom and bust. Oil
producers operating in the United States have the ability to rapidly accelerate
or tap the brakes — much as Saudi Arabia and its OPEC partners have turned
on and off their spare capacity in the past — depending on market conditions.
Jack Gerard, chief executive of the American Petroleum Institute, noted
that the United States, which produces roughly the same amount of oil as
Saudi Arabia and is poised to surpass the kingdom, is positioned to become
the new OPEC but without the overt manipulation.
“The only difference is our position as swing producer will be managed by the free market,” he said, noting that a few all powerful sheikhs are being
replaced by hundreds of executives serving competing companies deciding
when, where and how to drill in the new shale fields.
“With the technological advantages we have, we have the ability to adjust
to the market,” Mr. Gerard added.
The Saudis, in comparison, are in an increasingly weaker position. Last
year, their exports declined not only to the United States, but to Asia as well.
Still, as one of the lowestprice producers with an expanding refinery capacity,
it remains an important player on the world stage.
With Saudi Arabia leading, OPEC still controls roughly 30 percent of
world oil production, but that is down from more than 40 percent in the 1970s.
A reversal of that trend is not likely. (United States production now represents
roughly 10 percent of global production.)
Jason Bordoff, a former energy adviser to President Obama and now the
director of Columbia University’s Center on Global Energy Policy, noted that
Saudi Arabia’s 2.5 million barrels of spare production capacity (over and above
its roughly 10 million barrels a day of production) would continue to give it
major influence on world markets, especially when prices are rocketing up as
demand outstrips supply. It can still pump more to ease prices when it wants.
But now with a global glut and prices cratering, he said, the United States was
in the driver’s seat.
“The nature of U.S. shale production, which turns on and off so quickly
and has the potential to provide a floor for the world oil price, can have pretty
fundamental historic implications for how we think of the role of OPEC and
Saudi Arabia versus the role of the U.S.,” Mr. Bordoff said.
Since the drop in crude prices began last year, the American oil industry
has responded with remarkable speed, dropping more than half its oil rigs,
from just over 1,600 late last year to fewer than 800 by April.
The transformation has not been without its share of pain. Oil companies
have announced layoffs of more than 100,000 workers since November. But as
large companies take advantage of bargain basement prices to gobble up the
assets of weaker companies, the industry is likely to be better capitalized to expand production in the future.
The oil price has edged up in April but a full rebound could take years. In
the short term, the West Texas Intermediate oil price benchmark may fall
again as American storage facilities reach their space limit this spring. But the
decelerating rate of American production growth is bolstering the hopes of
commodity traders that the glut will dissipate faster than some extended price
collapses of the past.
“The shale industry is now revealing itself as a nimble and priceresponsive
producer at a time when OPEC memberstates have refused to
squelch their own production, thereby rejecting their customary marketbalancing
role,” according to a recent study by Rice University’s Baker
Institute for Public Policy.
The Energy Department has predicted that current United States oil
production of 9.4 million barrels a day will decline by 210,000 barrels a day in
the third quarter. Energy experts expect further declines into 2016
(accompanied by reduced production in some conventional foreign oil fields),
and many executives are predicting that prices will stabilize at $70 to $80 a
barrel over the next few years, a sweet spot where consumers get a break but
companies can still profit because technology is making drilling cheaper.
The nation’s new ability to influence supplies and prices could only have
been a dream in the Nixon and Carter days. Ample United States supplies in
recent years protected the American economy while the Middle East and
North Africa have been in turmoil, and it enabled Washington to spearhead
sanctions on Iran without causing a price increase.
But just as the end of the collapse of the Soviet Union and the end of the
Cold War did not usher in an era of peace and harmony, the new American
energy security has not brought with it perfect stability. Analysts who
suggested that energy independence would end the need for United States
intervention in the Middle East did not see the coming of Islamist terrorism
nor the spreading turmoil that has moved from Syria to Iraq and potentially
beyond.
Foreign foes like Venezuela and Russia have been weakened by the falling price of oil, which dominate their economies. Iran may be willing to negotiate
a deal to curtail its nuclear program to escape sanctions. But there is no sign
that the Kremlin is less aggressive or dangerous. Falling oil prices should help
the global economy, but deflation could be a risk in some nations.
Environmentalists argue that the worst thing about low prices for oil and
other hydrocarbons is that they encourage more consumption. Lower gasoline
prices have pushed up sales of sport utility vehicles and other large cars. Lower
oil and natural gas prices are directly tied to the expanded production made
possible by hydraulic fracturing, which is still considered risky by many
environmentalists because of the escape of greenhouse gases into the
atmosphere during exploration, production and transport, along with
potential seepage of toxic fluids into water supplies.
“Having prices that reflect the environmental damage are better than low
prices that don’t reflect that damage,” said Sonia Aggarwal, director of strategy
at Energy Innovation, an environmental consulting firm in San Francisco. But,
she added, “the advancement of technologies and the efficiency standards that
the Obama administration has put in place for cars and trucks should make
the lower oil prices less damaging than they would have been 10 years ago.”
President Obama has applauded the drop in gasoline prices, but he still
straddles the interests of environmentalists with those of the oil companies
when it comes to hotbutton issues like offshore drilling and expanding
exports of United States oil and natural gas. Nevertheless, he can be expected
to use lower energy prices and the abundant domestic oil supplies as a reason
for finally rejecting the Keystone XL pipeline intended to bring Canadian oil
sands production to American refineries.
There is a strong chance, energy experts say, that this could be the
beginning of decades of United States dominance in the oil markets, and that
dominance will be accompanied by relatively inexpensive energy. The shale
fields around the country are plentiful, and there is much more to be drilled.
Lower prices have already driven down drilling and other service company
costs by more than 15 percent.
But more important, the drilling and fracking technology that has made the shale revolution possible is rapidly improving, bringing production costs
even lower and raising the yield of each well. For instance, more powerful
computers are improving multidimensional geological modeling for well
planning. And production output is improving through experimentation in the
mixing and use of proppants like sand and ceramics to keep fractures in shale
open to release more oil.
A recent Citi Research report noted that even when the rig count for
natural gas collapsed in 2008 and 2009, production increased anyway,
because companies cut costs while bolstering their yields.
Even if oil doesn’t exactly follow gas, United States oil production may
still increase in coming years even as prices stay well below the $100 a barrel
level of recent years. That could marginalize OPEC, and potentially make the
United States a major oil exporter for the first time in more than half a century
if Washington finally overturns some decadesold regulatory hurdles. Those
memories of long car lines at the pump in the 1970s are becoming fainter.
They may soon be forgotten.
“The Saudis are facing very challenging conditions as they face the future
of the global oil market in part because shale does work at far lower prices
than many people thought,” Mr. Bordoff said, “and U.S. shale production is
going to keep growing as prices rebound.”
A version of this article appears in print on April 23, 2015, on page F1 of the New York edition with
And do read the comments within the article link. Everyone's perspective is welcome. My intention is not to change anyone's mind about O&G, only to further discuss what is happening in the global market. IMO, we need to keep working towards using ever cleaner and all renewable resources. I also think water reclamation will be crucial to the industry going forward and hope that diminished prices will not totally hinder investments in better conservation worldwide.
I'm going to sit down and reply more when I'm at my computer, but this was interesting. Thanks for sharing, Pom.
Montana's experience is interesting. Eastern MT is on the bubble of the Bakken oil field. Places like Sidney, Glendive, Ekalaka and Plentywood have experienced wild cultural changes. But, fracking is only economically viable in this area if crude is +$100/barrel. So where MT had 50 fracking rigs in 2012, today there is 1 in operation in MT. The cost of transporting the crude via rail lines is prohibitive. It also competes with miles-long trains of coal bound for China because it's too dirty to burn in the US.
I agree that weakening OPEC's stranglehold on oil/ the economy is a good thing. But doing so at the cost of clean water is worrisome to me. I think water is the next oil, in terms of political and economic power.
And do read the comments within the article link. Everyone's perspective is welcome. My intention is not to change anyone's mind about O&G, only to further discuss what is happening in the global market. IMO, we need to keep working towards using ever cleaner and all renewable resources. I also think water reclamation will be crucial to the industry going forward and hope that diminished prices will not totally hinder investments in better conservation worldwide.
I agree and would like to see less dependency on oil and gas (and coal) from the entire world. If we continue to rely on non-renewable resources, we will only do more damage to the fragile environments and inch closer to a third world war over resources. Given all we can accomplish as humans, I get sad when I think about how we still have so much conflict. Or put another way, I'm disappointed in the human race.
Being so close to Oklahoma, I also worry about the unknown side effects of fracking. I worry we jumped on a new technology without fully understanding the impact. I really hope the smart people are making sure we don't go too far with something that can't be reversed.
Sorry to be a Debbie Downer, but on the up side, at least we're becoming less dependent on resources from unstable nations.