OPEC, Caught in Pincers of Price and Technology, Tries to Control the Oil Market

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From short-term issues like increased oil production by the United States to longer trends like the rise of renewable energy, OPEC’s efforts to manipulate oil prices could be in vain.

The Shale Boom

In many ways, oil prices that topped $100 a barrel as recently as 2014 may have produced the seeds that are weakening OPEC.

In particular, companies in the United States took advantage of the high prices, learning to produce huge quantities of oil from shale rock in a process called hydraulic fracturing, or fracking. The technique, which involves extracting energy by drilling long horizontal wells and then loosening oil from the rock, has transformed the United States into a so-called swing producer that is able to adjust production rapidly to match changes in the market.

But fracking has required substantial investment, and when oil prices plummeted in 2015 and 2016, output from shale in the United States fell by around 900,000 barrels a day, equivalent to almost 1 percent of the global supply.

In recent months, that has changed. The American shale industry is now an efficient machine that finances the drilling of thousands of new wells with varied sources of capital, including the advance sales of oil, bank and private loans and high-yield bonds.

When prices are down, that money dries up, but when prices tick up around $52 a barrel, activity turns on a dime, according to Roger Diwan, a vice president at IHS Financial Services, which advises investors.

Now, with oil prices near $50 a barrel, OPEC’s biggest worry is a revival of American shale production, presenting the bloc with a thorny problem as it considers its own market moves.

“The higher the price goes, the more shale operators accelerate production, and the more OPEC has to cut,” said Mr. Diwan, who forecast that United States shale operators would increase their output by about 900,000 barrels a day this year, soaking up much of OPEC’s production cuts.

The Electric Engine

A few years ago, high energy prices were sustained by a belief that the supply of oil was reaching a peak, but demand — driven by fast-growing economies like China and India — would keep rising.

Oil Prices: What to Make of the Volatility

Over the last two and a half years, the oil industry experienced its deepest downturn since at least the 1990s.

That is changing, and fast. Not only does there seem to be a virtually unlimited supply of oil from shale, as well as other sources like the ocean drilling, but demand appears to be peaking.

The most obvious threat to oil demand? The growing number of electric vehicles, a trend that may accelerate with the development of cars run by computers.

“Everything is gradually going digital and everything digital is effectively electric,” Dieter Helm, a professor of energy policy at Oxford, wrote in a recent commentary. “Transport will not escape this trend.”

Mr. Helm, the author of new book on the decline of fossil fuels titled “Burn Out,” argues that given oil’s uncertain future, a price of $50 a barrel could actually prove to be “very high.”

Even some big oil companies are coming around to the view that a future with declining demand for oil is in sight.

BP, the big oil company, in its Energy Outlook 2017, said that if the spread of alternative fuel vehicles, fuel efficiency and other trends accelerated more than expected, demand for oil might peak as early as 2035.

An Erosion of Credibility

In decades past, an OPEC decision to curb or increase production could have sent entire economies into a tailspin.

That no longer seems possible: Markets are prepared for it.

“OPEC has used Band-Aids to get through crises of the moment,” said Bhushan Bahree, an OPEC analyst at research firm IHS Energy. “Its not clear they are willing or able to address the larger issues of the global market.”

With that in mind, Saudi Arabia, OPEC’s de facto leader, brought in Russia and other producers outside the cartel to add clout to the recent production cuts. But adding those players has increased the complexity of presenting a united front.

And there is disunity within the 13-nation bloc. Member countries like Iraq and Iran believe they are entitled to higher production because of years of revenue lost to conflict and sanctions, and will probably press for increases to their output allocations.

Added to that has been a disconnect between the announced level of the cuts, and the actual reductions.

That is because of a multitude of factors: knowing that cuts were on the horizon, OPEC members increased production in the run-up to the implementation of cuts, which meant starting from an artificially high base; and several members have been selling from their stockpiles of crude, blunting the impact of the reductions.

IHS Markit, for instance, estimates that OPEC countries trimmed output by 1.1 million barrels a day in the first quarter of 2017, but exports fell by only 900,000 barrels a day.

There are signs that the oil glut is easing, but its persistence has undermined OPEC’s credibility with the markets.

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