A historic change of roles is
at the heart of the clamor and turmoil over the collapse of oil prices, which have
plummeted by 50 percent since September. For decades, Saudi Arabia, backed by
the Persian Gulf emirates, was described as the “swing producer.” With its
immense production capacity, it could raise or lower its output to help the
global market adjust to shortages or surpluses.
But on Nov. 27, at the OPEC meeting in Vienna, Saudi
Arabia effectively resigned from that role and OPEC handed over all
responsibility for oil prices to the market, which the Saudi oil minister, Ali
Al-Naimi, predicted would “stabilize itself eventually.” OPEC’s decision was
hardly unanimous. Venezuela and Iran, their economies in deep trouble, lobbied
hard for production cutbacks, to no avail. Afterward, Iran accused Saudi Arabia
of waging an “oil war” and being part of a “plot” against it.
By leaving oil prices to the
market, Saudi Arabia and the emirates also passed the responsibility as de
facto swing producer to a country that hardly expected it — the United States.
This approach is expected to continue with the accession of the new Saudi king,
Salman, following the death on Friday of King Abdullah. And it means that
changes in American production will now, along with that of Persian Gulf
producers, also have a major influence on global oil prices.
America was once, by far, the
world’s largest oil producer and exporter, and its swing producer. The Texas
Railroad Commission determined “allowable” levels of production for Texas, the
Saudi Arabia of the day. But by 1970, United States oil production had reached
its high point of 9.6 million barrels per day and began to decline.
The United States began to
import more and more oil. By 2008, its own oil production was down almost 50
percent from the high point. Oil prices reached $147 a barrel, and fears that
the world’s oil production had peaked and that we were beginning to run out of
oil had become pervasive.
Quietly, though, an
unconventional oil and gas revolution was beginning to pick up speed in the
United States. It yoked together two technologies: hydraulic fracturing and
horizontal drilling. The impact was measured first in the rapidly growing production
of shale gas, which now makes up about half of total American gas. This “shale
gale” catapulted the United States ahead of Russia to become the world’s No. 1
gas producer.
Then around 2010, the same
technologies started to be seriously applied to the search for oil. The results
were phenomenal. By the end of 2014, oil production in the United States was 80
percent higher than it had been in 2008. The increase of 4.1 million barrels
per day was greater than the output of every single OPEC country but Saudi
Arabia.
Today, American output is
almost back to where it was in 1970. On top of that was a million-barrel-a-day
gain since 2008 from the Canadian oil sands. The chimera of “energy
independence” began to look more tangible, at least for North America.
This revolution also turned
out to be a big boost for the American economy, creating jobs, improving the
country’s competitive position and drawing in over a $100 billion of new
investment. Only rarely has the global oil market seen production increases on
this scale this fast. The last time was in the early 1980s, when new supplies
from Mexico, the North Sea and Alaska created an oil surplus that led to a
price crash.
This time, several things
postponed a price collapse. One was the growing consumption in the developing
world, led by China. Another was turmoil in Libya, South Sudan and other
countries that reduced supply. Over a million barrels per day were also taken
off the market by sanctions imposed on Iran. Without that big surge of shale
oil from the United States, it is highly likely that those sanctions would have
failed. Prices would have spiked, countries seeking cheaper oil would have broken
ranks — and Iran might not be at the nuclear negotiating table today.
By the middle of last summer,
however, circumstances changed. World economic growth was slowing. Europe was
on its back. Since 2004, China’s rapidly rising demand for oil had been the defining
factor for the global oil market. But China’s economy was slowing, too, and
that meant slowing growth in oil demand. At the same time, Libya managed to
quadruple its oil output, at least for a time. That was the trigger for the
beginning of the price decline.
It was assumed that OPEC would
step in and cut production to boost the price. Trillions of dollars of
investment have been made over the last several years on that premise.
But Saudi Arabia and the other
gulf countries declined to do so. If they reduced production, they reasoned,
they would lose market share permanently. As they saw it, they would be cutting
back on their “low cost oil” to make room for “high cost oil,” and then would
have to make more cuts to accommodate more high cost oil.
They were looking at
competition not only from American shale oil but also from Canadian oil sands
and new supplies from Russia, the Arctic, Brazil, Central Asia, Africa and
growing volumes of offshore oil around the world.
But, most immediately, they
were looking at two neighbors. They did not want to give up markets to Iraq, a
country they see as an Iranian satellite, and whose output is increasing. And
they certainly did not want to make way for Iran, which they thought might come
to a nuclear deal with the United States and its allies, bringing that missing
Iranian oil back into the market.
The depth of the price fall
may be much more than even some of the gulf producers anticipated. Around the
world, oil companies are cutting budgets, paring costs, slowing down projects
and postponing new ones. Some may end up being canceled.
Saudi Arabia is hoping that
lower oil prices will stimulate economic growth and demand for oil. In the
meantime, with their large holdings of foreign reserves, Saudi Arabia and the
Persian Gulf emirates can afford to wait.
That is not true for many of
the other oil exporters. Venezuela is highly vulnerable to turmoil and even
financial collapse. Russia is coping not only with lower prices for oil, which
provides over 40 percent of government revenues, but with Ukraine-related
sanctions, and seems headed into a deep recession.
Nigeria, the largest economy
in Africa and the continent’s most populous nation, is also at risk. The oil
sector represents 95 percent of export earnings and 75 percent of government
revenues. And its revenues are falling as it needs more money to fight the Boko
Haram Islamist insurgency.
Over all, the fall in oil
prices could mean a $1.5 to $2 trillion transfer from oil-exporting countries
to oil-importing countries. Japan will be a big beneficiary. So will China.
American consumers will benefit, too, though it will also mean that fewer oil
wells will be drilled here, more rigs will be laid up and increasing numbers of
workers will be let go.
American shale oil has become
the decisive new factor in the world oil market in a way that could not have
been imagined five years ago. It has proved to be a truly disruptive
technology. But will that impact continue in a world of low prices?
Oil is now below $50 a barrel,
a price too low for a good deal of the new shale oil development to make
economic sense. Yet output is likely to continue to rise by another 500,000
barrels per day in the first half of 2015 because of sheer momentum and
commitments already made.
Come the middle of the year,
however, growth will flatten out. Producers will work hard to improve
efficiency and lower costs, but in 2016, at these prices, American output could
decline. Production elsewhere in the world will also be flattening.
But by then, the world economy
might be doing better, stimulating oil demand. Prices could start rising again.
If the gulf producers have their way, prices will not go back to $100 a barrel.
Even at prices well below $100, American shale oil producers will find ways to
drive down costs and output will start rising again. And the world’s new swing
producer will find itself back in the swing of things.
Daniel Yergin.
TNYT