OIL WARS: A FIGHT TO THE END

In the race for the top oil producer, the US is on the verge of dethroning Saudi Arabia and challenging Russia as the largest producer. This as Shale oil continues to revolutionise global energy markets. The principal agency of the US Federal Statistical System responsible for collecting, analysing and disseminating energy information, Energy Information Administration (EIA), had increased its estimates of US crude oil production in 2018 by 250,000 barrels per day to attain the figure of 10.3 million barrels per day (mbpd). This very estimate is forecasted to grow to a mammoth 10.9 mbpd in 2019 thereby having the maximum production level surpassing Saudi Arabia. When the US does achieve the status, it would be a remarkable accomplishment given that only in the last decade most oil industry observers believed that the US oil production was on perpetual decline. However, since the observation, new technology created a production surge from Shale activities in the Bakken, Eagle Ford and Permian regions of the US. Likewise, the revoking of US crude oil export restrictions in December 2015 opened up new opportunities for the markets especially in the Asian region. The combination of above factors has driven a virtuous cycle. US crude oil production is advancing at record levels but this is not swamping the domestic refining market and dragging down prices because the additional production is finding an outlet in export markets. In hindsight, exports have surged to a record 1.8 mbpd in October 2017. With all the positive story, the Shale production method is controversial since in order to extract oil and gas, a high-pressure mixture of water, sand and chemicals are blasted deep underground to release hydrocarbons trapped between layers of rock. The process known as fracking or hydraulic fracturing has alarmed environmentalists as the components could contaminate groundwater and even result in small earthquakes.

DILEMMA OF OPEC

In order to restrain their own production, the OPEC oil producers in partnership with Russia agreed to support the global price of crude oil in 2017. OPEC and non-OPEC members were thrilled to watch prices steadily rise from mid $40s to exceed $60 early this year. However, the downside of the OPEC policy was that it provided renewed impetus to US Shale producers, some of whom had been struggling to generate profits with the impending lower prices. The current spot price levels are comfortably above almost every Shale producer’s breakeven points. Low price levels have encouraged new drilling throughout the US influencing the boom as identified by EIA. OPEC has successfully managed price levels but at the cost of helping the US to become a giant new competitor. The OPEC nations and their allies are in a dilemma: if they unleash their full production capacity, they could pump more supply into the global oil market with the prospect of dragging down prices. Also, they could threaten Shale oil’s profitability and reverse the EIA bullish estimate of the US oil production. But humbling the US by lowering global oil price could come at a major cost to producer nations’ national budgets. This is an especially challenging for Saudi Arabia who is planning to IPO its national oil company, Saudi Aramco.

PROSPECT OF FALLING OIL DEMAND

The prospect for US production is not looking bright even without a reversal of the OPEC policy. Analysts opine that boosting production by such high levels could have an impact on prices if the global demand fails to keep up with the surging US output. With the US growing dependence on exports, US producers are increasingly exposed to performance of the economies in Asia. Although the market currently favours suppliers, the rapid and dramatic change in US production in recent times has proved the impossible pedigree of predicting how global energy markets will evolve with time. The only reliable constant is the price volatility.

CONCLUSION

In its January 2018 monthly report, the International Energy Agency (IEA) had hinted that the USA are set to overtake Saudi Arabia with a promise that the year could be a record-setting one for the US. With the USA not part of any deal or association, the Shale productions have continued uninhibited. The growth in the US Shale production has beaten all expectations as the industry has bounced back profiting from cost cuts and enhanced drilling activities. As the IEA observed “The big 2018 supply story is unfolding fast in the Americas,” the oil wars have reached a peak with all competing nations fighting to the end.

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Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]