U.S. shale is a disruptor, but how much hurt can it take?

Published on

March 12, 2020


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Petroanalysis Team

We at PETROANALYSIS had to call for an extraordinary working session in order to provide some reflections on the oil market as ever declining figures for prices appear on the screens .

Everyone was enthusiastic less our storyteller as he argued that “the crisis has always been with us and sooner or later it had to happen ” ! Here goes the argument..

A birthday anniversary is being prepared for OPEC to celebrate its 60 years .The motto then was to reach and maintain a ” Fair Price” ; Mideast crudes were selling in 1959 at around $ 1,80 /b and all but one of the Majors was happy with that price . BP found it necessary to reduce its price by 10 US cents and that was interpreted by the influential TIPRO (Texas Independent Producers & Royalty Owners Association) as a Price War.

That was amidst the Restrictions imposed by the Eisenhower administration precisely in order to protect high cost domestic production from low cost Mideast crudes imported into the US market by Big Oi .

Discussion broke out and further clarification was required…
“It doesn’t help to understand the complexity of interests within the Oil Industry in the US if by oversimplifying you throw everything in a basket and call it: the EMPIRE “.

This is why Fair Price is a cultural issue, because it is in the eye of the beholder .

Another difference arose when a nostalgic staff member who had been an enthusiastic militant of the “$100/b Party “saw his dreams evaporate with today’s realities.

“In 1982 prices slipped down and somebody took the responsibility by saying we engineered the oil glut.. OPEC came to the rescue and the TIPRO like Prorrationing System was first applied but cheating was frequent and in 1986 the same remedy had to be implemented. This time under the figure of Net Back… George Bush , under Ronald Reagan , had to visit Arab Gulf capitals to ask for the no application of free market mechanism because US domestic producers were unable to compete.

The problem is that there is plenty of oil and exploiting it provides wealth.. but that needs higher costs…investments and consumers have to pay higher prices and that is not popular . Neither oil companies nor governments wish to be seen as the tax collector. Thus they will only accept to do so, pay higher prices if they are convinced that cheap oil comes from unstable and unreliable regions and people .. This is how No – OPEC oil entered the market in the late seventies of the past century.

“And why on earth did the price decline again in 1998 to around $ 10/b .. who was in control at that time ?

Nobody within OPEC could establish discipline and Domestic Oil in the USA faced massive bankruptcy. Thus it was a Texan’ the then Secretary of Energy Bill Richardson who mediated through Mexico, Norway and Saudi Arabia to bring peace into the ranks of OPEC and there was so much comfort that the Second Summit took place in the year 2000.. Few people knew that the stage was being set for the twenty first’s century Shale Revolution.

Shale has upset not just the market but also various power balances

In fact very considerable volumes of hydrocarbons that had so far not been included as part of world’s proven oil reserves moved smoothly to double previous
figures, but not all non conventional oil and gas, that is to say the shale areas in the U.S. and the tar sands in Canada, has been exploited with such successful results as in those two countries. These, remember, paved the way for the “shale revolution” with its subsequent economic and geopolitical implications. This means that our storyteller’s version should be clearly examined by our readers.

From 2005, the shale oil and gas industry experienced an impressive rate of expansion, which has significant implications for the world’s supply-demand balance. Shale’s production costs were very high, and it was OPEC’s main producers that had to reduce their production in order to avoid a collapse in prices – where the primary victim would have been the shale producers and the corresponding banking system.

But perhaps more important than the industry as such it would have inflicted a serious blow to the very sensitive U.S. strategic balance of power with regard to Russia, China, and Europe.

Less dependence on imported oil had always been viewed by Washington as the cornerstone of its national security. And thanks to the shale revolution the Pentagon policy-makers in the Establishment gave oil and LPG exports a degree of importance that can be only compared to the most modern weapons of war.

Under these circumstances, OPEC was not in a position to provoke Washington’s anger by trying to defend its share in the oil market. It was at that point, on the 29th December 2016, that Russia and others decided to join OPEC, although the burden of production cuts was never made proportional. In other words, it was the Saudis, Kuwait, and the Emirates that carried the burden, with Russia just carrying a small amount.

Nevertheless, a new reality was emerging – that of a strategic trade war with implications for U.S. National Security Doctrine.

None of the members of OPEC can ever imagine, or could ever have imagined, confronting the U.S. But when Russian oil was losing part of its market in the ever-growing Chinese market because of growing U.S. oil and gas exports, and as President Trump imposed a harder stand against Russia’s Nord Stream through sanctions thus endangering the very important European market from Russia’s point of view, the Kremlin seems to have signaled to its oil oligarchs to take part of the steam out of its cooperation with OPEC. Thus, the last OPEC+ meeting failed to sign an agreement on a further and significant cut.

As a reaction to this lack of agreement Saudi Arabia, being the OPEC member country that holds almost 3 million barrels of spare capacity, because of its responsible attitude to price defense, decided to offer significant discounts in its traditional markets of Asia and Europe.

This, of course, mainly hits oil companies’ share prices in the Stock Exchange – including Saudi Aramco, but it also hurts the banking system as a whole. Moreover, within the oil industry the most severely hit are those with the highest production costs, including the DUCs.

So President Trump is right when he says that gasoline prices are down, but perhaps oil producers in the U.S. are now taking measures to adapt to the new price-cost equation reality, and are less optimistic with regard to their exports expectations which might hurt the strategic vision of national security.

National Security is King, and the U.S. oil King is in danger.

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