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http://www.forbes.com/sites/markpmi...pitulates-on-price-and-opec-blinks/?ss=energy
12/21/2015 @ 6:30AM 21,584 views
Shale Wars Round Two: Congress Acts On Exports. Russia Capitulates On Price. And OPEC Blinks.
The year 2015 marks the end of the old oil era.
Last week the U.S. Congress finally repealed the four-decade-old legislation that, until now, prohibited American firms from selling their product, crude oil, to willing buyers overseas. No other oil-producing nation had such a self-inflicted ban.
It was finally rescinded in the face of overwhelming evidence that America’s situation is precisely the inverse of that which inspired the misguided legislation back in 1975: America was gripped with the fear of limited oil supplies, shortages and ever-escalating prices. The new era is defined by oil gluts, price collapses and a limit on how fast and high prices can increase.
Just one week before the Congressional vote, Russia’s deputy finance minister said that his nation foresees oil staying cheap for at least the forthcoming decade. He went on to say that while Russia could weather this “different reality,” other oil producers would have a tougher time.
Although OPEC is far from dead, the cartel did blink at its most recent meeting this past December 4th. This “blink” was evident in its failure to try and raise prices, despite the fact that OPEC members are hemorrhaging hundreds of billions of dollars.
OPEC used to have the power to control prices by either cutting back or increasing production because the marginal supply of a commodity like oil determines the overall price. It only takes one or two million barrels per day of over- or under-supply to swing prices wildly.
In that context, consider recent history. By last summer the boom in American shale led to a several million barrel per day world over-supply sending prices down 35% by the time OPEC met in November 2014. Instead of cutting production to try and boost prices, Saudi Arabia actually increased output. Adding yet more oil to glutted markets ensured a longer and deeper period of over-supply, driving prices even lower. Prices dropped another 35% by the time OPEC met this past December 5th, 2015, when they again declined to cut production to try and raise prices.
What is Saudi Arabia doing? After all, oil exports are the primary source of revenues for OPEC economies – all of them need prices over $80 to meet domestic budgets. (Saudi Arabia, for its part has $700 billion of cash reserves to fund budget shortfalls.) One explanation on offer is that Saudi Arabia wants prices low enough to destroy as many producers as possible, and thus ensure future market share for OPEC. That theory is certainly plausible.
But there is another possibility. Saudi Arabia is likely afraid to find out how quickly U.S. shale output will rise when oil prices creep up. And now that U.S. exports are in play, everyone wonders how quickly American entrepreneurs will capture markets that, until now, have seen little competition. For OPEC, it’s better to put the day of reckoning off as long as possible.
But the radically different characteristic of the new oil era is not so much that America has emerged as a big source of swing supply. That of course was a surprise to many, and the central fact animating Congressional action. The single difference that really frightens OPEC and Russia the most can be captured in a single word: velocity.
Shale technology allows astonishingly fast increases in production and at volumes that can move global markets; furthermore, U.S. capital markets are inherently flexible, fast and have plenty of capacity to fuel shale expansion almost overnight if prices, and profits, creep back up.
In addition, in the shale fields of America, drillers can get permits in weeks on private and state lands, as opposed to years for both U.S. federal lands and those of other nations. Then, shale wells can be drilled and completed in weeks not years.
Every single metric associated with shale drilling and production has not only improved radically in the past half-dozen years, but continues to do so at stunning speeds. The combination of experience (it is, after all, a very new industry) and technology progress (which is propelled by pressures on profit margins) is yielding ever more efficiency gains.
The Energy Information Administration tracks some of this in its relatively new shale productivity report. Overall efficiency—oil produced per rig—has improved some 400% in the past half-decade, and improved about 40% in the last year alone. And the rigs are getting cheaper not more expensive.
And the story is far from over. Shale entrepreneurs will now benefit from the rapid maturation of new techniques and tools infusing the entire industrial sector, from big data analytics, to automation, robotics and advanced materials. (For a more on the next shale tech boom, see my earlier Shale 2.0 paper.)
Then there is the velocity of decision-making associated with shale. The old oil era was characterized by long-cycle mega-projects and utterly dominated by political considerations made by nation-state monopolists or oil oligarchs. In the shale era, each well is a micro-economic decision. There are a myriad of profit-seeking decision-makers in the shale ecosystem. We already know what happens when thousands of companies make hundreds of thousands of “micro decisions” to drill in shale.
The speed with which a four million barrels per day rise in U.S. production happened—about a half-dozen years—is unprecedented in the history of the oil industry. And there are no technical, capital or resource constraints that prohibit the same from happening again, as long as there are profits to be made.
And oil prices will rise because petroleum is a cyclical commodity. There is no evidence that cycles are over. With every cycle, the only question is how long it lasts and how high, or low, each peak or bottom.
In the global petroleum price wars now underway, OPEC is hoping to extend the cycle to ensure a big swath of the U.S. shale industry doesn’t survive before prices rise and spark a second American shale boom.
We have some idea as to the price needed to cause another shale land rush. While year-end 2015 data won’t be available until the first quarter of 2016, industry experts at RBN Energy estimate that many shale fields are still (marginally) profitable at $40 per barrel assuming that drilling costs have dropped 25% since 2014. Data already show that costs have dropped from 20% to 30%, and more efficiencies are still coming. Thus the magic number that could spark a new boom is something not too far north of $45.
The Russians think that $40 to $60 per barrel is the new normal for the next decade for a good reason.
The global oil market is undergoing a once-in-a-generation transformation. The future is now destined to be one of serial gluts with prices capped by the rapid addition of thousands of shale wells that can over-supply markets every time prices rise a little bit (by historic standards) for only a short time.
There is no doubt that the world will use more oil; it is vital for modern societies and for all practical purposes nearly irreplaceable. And there is no longer any impediment to America competing in world oil markets.
What is in dispute now is who determines the maximum price. OPEC’s ministers may have the appetite and capacity to drive prices down. But America’s multitude of shale entrepreneurs now control how high and how long prices can rise.
In military parlance, this is a form of asymmetric warfare. A handful of big nation-owned oil companies versus a multitude of private American businesses. Monopolies vs. markets. And technology progress vs. old-school price-fixing.
We are entering uncharted territory. It is one in which two questions now need to be asked. So far neither appears part of any serious policy discussion:
Have strategists in the State Department, CIA and the Department of Defense considered how all this reshapes the geopolitical landscape? And, what can the United States do now in order to take advantage of this new-found power? <>
Posted for fair use.....
http://www.forbes.com/sites/markpmi...pitulates-on-price-and-opec-blinks/?ss=energy
12/21/2015 @ 6:30AM 21,584 views
Shale Wars Round Two: Congress Acts On Exports. Russia Capitulates On Price. And OPEC Blinks.
The year 2015 marks the end of the old oil era.
Last week the U.S. Congress finally repealed the four-decade-old legislation that, until now, prohibited American firms from selling their product, crude oil, to willing buyers overseas. No other oil-producing nation had such a self-inflicted ban.
It was finally rescinded in the face of overwhelming evidence that America’s situation is precisely the inverse of that which inspired the misguided legislation back in 1975: America was gripped with the fear of limited oil supplies, shortages and ever-escalating prices. The new era is defined by oil gluts, price collapses and a limit on how fast and high prices can increase.
Just one week before the Congressional vote, Russia’s deputy finance minister said that his nation foresees oil staying cheap for at least the forthcoming decade. He went on to say that while Russia could weather this “different reality,” other oil producers would have a tougher time.
Although OPEC is far from dead, the cartel did blink at its most recent meeting this past December 4th. This “blink” was evident in its failure to try and raise prices, despite the fact that OPEC members are hemorrhaging hundreds of billions of dollars.
OPEC used to have the power to control prices by either cutting back or increasing production because the marginal supply of a commodity like oil determines the overall price. It only takes one or two million barrels per day of over- or under-supply to swing prices wildly.
In that context, consider recent history. By last summer the boom in American shale led to a several million barrel per day world over-supply sending prices down 35% by the time OPEC met in November 2014. Instead of cutting production to try and boost prices, Saudi Arabia actually increased output. Adding yet more oil to glutted markets ensured a longer and deeper period of over-supply, driving prices even lower. Prices dropped another 35% by the time OPEC met this past December 5th, 2015, when they again declined to cut production to try and raise prices.
What is Saudi Arabia doing? After all, oil exports are the primary source of revenues for OPEC economies – all of them need prices over $80 to meet domestic budgets. (Saudi Arabia, for its part has $700 billion of cash reserves to fund budget shortfalls.) One explanation on offer is that Saudi Arabia wants prices low enough to destroy as many producers as possible, and thus ensure future market share for OPEC. That theory is certainly plausible.
But there is another possibility. Saudi Arabia is likely afraid to find out how quickly U.S. shale output will rise when oil prices creep up. And now that U.S. exports are in play, everyone wonders how quickly American entrepreneurs will capture markets that, until now, have seen little competition. For OPEC, it’s better to put the day of reckoning off as long as possible.
But the radically different characteristic of the new oil era is not so much that America has emerged as a big source of swing supply. That of course was a surprise to many, and the central fact animating Congressional action. The single difference that really frightens OPEC and Russia the most can be captured in a single word: velocity.
Shale technology allows astonishingly fast increases in production and at volumes that can move global markets; furthermore, U.S. capital markets are inherently flexible, fast and have plenty of capacity to fuel shale expansion almost overnight if prices, and profits, creep back up.
In addition, in the shale fields of America, drillers can get permits in weeks on private and state lands, as opposed to years for both U.S. federal lands and those of other nations. Then, shale wells can be drilled and completed in weeks not years.
Every single metric associated with shale drilling and production has not only improved radically in the past half-dozen years, but continues to do so at stunning speeds. The combination of experience (it is, after all, a very new industry) and technology progress (which is propelled by pressures on profit margins) is yielding ever more efficiency gains.
The Energy Information Administration tracks some of this in its relatively new shale productivity report. Overall efficiency—oil produced per rig—has improved some 400% in the past half-decade, and improved about 40% in the last year alone. And the rigs are getting cheaper not more expensive.
And the story is far from over. Shale entrepreneurs will now benefit from the rapid maturation of new techniques and tools infusing the entire industrial sector, from big data analytics, to automation, robotics and advanced materials. (For a more on the next shale tech boom, see my earlier Shale 2.0 paper.)
Then there is the velocity of decision-making associated with shale. The old oil era was characterized by long-cycle mega-projects and utterly dominated by political considerations made by nation-state monopolists or oil oligarchs. In the shale era, each well is a micro-economic decision. There are a myriad of profit-seeking decision-makers in the shale ecosystem. We already know what happens when thousands of companies make hundreds of thousands of “micro decisions” to drill in shale.
The speed with which a four million barrels per day rise in U.S. production happened—about a half-dozen years—is unprecedented in the history of the oil industry. And there are no technical, capital or resource constraints that prohibit the same from happening again, as long as there are profits to be made.
And oil prices will rise because petroleum is a cyclical commodity. There is no evidence that cycles are over. With every cycle, the only question is how long it lasts and how high, or low, each peak or bottom.
In the global petroleum price wars now underway, OPEC is hoping to extend the cycle to ensure a big swath of the U.S. shale industry doesn’t survive before prices rise and spark a second American shale boom.
We have some idea as to the price needed to cause another shale land rush. While year-end 2015 data won’t be available until the first quarter of 2016, industry experts at RBN Energy estimate that many shale fields are still (marginally) profitable at $40 per barrel assuming that drilling costs have dropped 25% since 2014. Data already show that costs have dropped from 20% to 30%, and more efficiencies are still coming. Thus the magic number that could spark a new boom is something not too far north of $45.
The Russians think that $40 to $60 per barrel is the new normal for the next decade for a good reason.
The global oil market is undergoing a once-in-a-generation transformation. The future is now destined to be one of serial gluts with prices capped by the rapid addition of thousands of shale wells that can over-supply markets every time prices rise a little bit (by historic standards) for only a short time.
There is no doubt that the world will use more oil; it is vital for modern societies and for all practical purposes nearly irreplaceable. And there is no longer any impediment to America competing in world oil markets.
What is in dispute now is who determines the maximum price. OPEC’s ministers may have the appetite and capacity to drive prices down. But America’s multitude of shale entrepreneurs now control how high and how long prices can rise.
In military parlance, this is a form of asymmetric warfare. A handful of big nation-owned oil companies versus a multitude of private American businesses. Monopolies vs. markets. And technology progress vs. old-school price-fixing.
We are entering uncharted territory. It is one in which two questions now need to be asked. So far neither appears part of any serious policy discussion:
Have strategists in the State Department, CIA and the Department of Defense considered how all this reshapes the geopolitical landscape? And, what can the United States do now in order to take advantage of this new-found power? <>