Dec

23

More discussion of falling oil prices…

Statements of OPEC oil ministers are regularly reported as if they were true, or even plausible. Consider today's implausible Financial Times headline: "Opec leader vows not to cut oil output even if price hits $20." Reporters seem to think OPEC is somehow like Apple or Microsoft that authentically care about market share and brand recognition.

The Financial Times article claims: "In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec's traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel's market share at all costs." But actually, OPEC's traditional policy was to keep oil prices reasonable (below $25 a barrel) in order to reduce incentives for investment in non-OPEC oil production and alternative energy. That policy fell by the wayside as the Iraq war and later Libyan revolution destabilized oil production, and prices jumped to $100 a barrel and stayed there. Not surprisingly, vast capital was deployed to discover and develop many of the world's $40, $60, and $80 a barrel oil sources. Near zero interest rates further fueled the development boom for $100 a barrel oil.

On the demand side, $100 a barrel oil/$4 a gallon gas energized transportation entrepreneurs. Billions of dollars were invested designing more energy-efficient engines. Hybrid and electric cars were entering the mainstream. Tesla easily found billions of dollars from outside investors (and state governments) for their Tesla Battery Gigafactory. Toyota is planning to pour billions more into its new hydrogen car. Most future Teslas and Toyota hybrids and hydrogen cars will run on electricity from coal and natural gas (plus pacific northwest hydropower), not from OPEC or anyone else's oil.

So high-price oil not only sucks millions of new barrels of oil out of New World shale and tar sands, but also begins to push millions of cars off gasoline altogether. Wind and solar power have been small subsidized sideshows so far, but high oil prices attract billions of dollars and millions of engineer hours to searching for cost-cutting wind and solar inventions and innovations.

Now OPEC is apparently coming to its senses as oil sand and shale oil production continues to climb as production costs fall. Also, billion-dollar deep sea projects are coming on-stream as newly developed deep-sea technologies bring deeper reservoirs into reach. Again, though, only at $80 to $100 a barrel. At $40-$60 a barrel many of these sources go back off-stream, and new Arctic and deep sea projects will be cancelled or postponed.

The FT article quotes Saudi oil minister Ali al-Naimi: "It is not in the interest of Opec producers to cut their production, whatever the price is… Whether it goes down to $20, $40, $50, $60, it is irrelevant." Well, this is nonsense and an exaggeration. The goal is obviously to signal oil majors and investors to pull the plug on oil investments vulnerable at, say, $40 a barrel. (At $20 a barrel, most oil projects outside Saudi Arabia are vulnerable, but also the Saudi's themselves. Even if the Saudis "make money" at prices over $5 a barrel, they obviously won't make enough to cover bloated government expenses, plus the costs of thousands of Saudi princes and their wives.)

Why would Saudi Arabia care about market share? Isn't it more reasonable to care about total revenue from oil sales? What benefit is market share for the Saudis, apart from revenue from sales? The reality is the Saudis care about revenue, oil sales times the price of oil.

At $100 a barrel, shale oil from Texas and North Dakota went from zero to 2 million barrels a day over the last seven years, and production is on its way to 3 million by 2017 (according to IEA). Who knows how much oil can be produced from Canada's oil sands and U.S. shale deposits at $100 a barrel? The Saudi's didn't want to find out.

Current shale production is just from regions of the U.S. in private ownership. Additional shale oil reserves are locked in state and federal government lands, waiting to be opened by the next Republican administration. In China and the UK still more shale oil and gas deposits to ready to be brought into production. At $80 ro $100 a barrel, these reserves could break through government regulatory barriers at any time. At $40 to $60 a barrel, not so much.


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