Oil: blind-sided by technology

2014-10-24 00:00

“THE price of oil will hit its floor and it will rise again,” President Nicolas Maduro assured Venezuelans whose shaky economy depends critically on a high oil price.

“Venezuela will continue with its social plans. Venezuela will move forward.”

No it will not, and neither will Russia, Iran or Nigeria.

The only major oil exporters not in deep trouble are the Arab countries whose governments have some room for manoeuvre because of low production costs, relatively small populations and big foreign-currency reserves.

Since June, the cost of a barrel of Brent crude, the benchmark for world oil prices, has fallen almost a quarter, from around $110 (R1 229,80) a barrel (where it was stuck for the past four years) to just above $80 (R8 94,4) a barrel.

Last month, for the first time in decades, Nigeria exported no oil at all to America. Even at a big discount, Americans just do not need it.

And the main reason for all that is fracking.

American production has almost doubled in the past five years, thanks to the new drilling technologies, and the U.S. overtook Russia last year to become the world’s largest producer of oil and gas combined. (Saudi Arabia comes a distant third.) With production soaring and world demand for oil stalling due to slow economic growth, a collapse in prices was inevitable. The question is how far they will collapse and for how long.

The answer is probably not much further, for the moment — but they could easily stay in the $75 to $85 (R838 to R950) range for a couple of years. The reason is that the “swing” producers (mostly Arab), who could theoretically push up prices by cutting their own production, have clearly decided not to do so.

Their concern is for the long-term power of the Organisation of Petroleum Exporting countries (Opec) cartel which used to be strong enough to set the oil price.

That will never be true again unless they can drive the (mainly American) frackers, who are causing the over-supply of oil, out of business.

Saudi Arabia and its allies are hoping that a prolonged period when the price of a barrel of oil is lower than the cost of getting that barrel out of the ground by fracking will ruin this new industry and bring back the good old days. Dream on.

The Saudi strategy will not work because some 98% of U.S. crude oil and condensates has a break-even price of below $80 (R894) per barrel. Indeed, 82% of American production would still turn a profit at $60 (R670) per barrel.

Even with its massive foreign-currency reserves, Saudi Arabia cannot afford to keep the oil price low enough for long enough to break the American frackers. Its own break-even price for conventional oil is $93 (R1 039) per barrel.

And the Iranians, Nigerians, Venezuelans and Russians, who depend on oil revenues for at least half their national budgets, will be screaming for higher prices before they face riots in the streets. So this is not a transient event; it is a revolution.

Opec came into its own when the U.S. ceased being the dominant global producer in the early seventies.

With the re-emergence of the U.S. as the biggest producer, Opec’s clout is bound to shrink — so oil prices will probably stay well below $100 (R1 118) a barrel for the foreseeable future.

Of course, a broader view of our situation would find little reason for rejoicing in all this.

Our global civilisation depends on fossil fuels for 85% of its energy and our global annual emissions of carbon dioxide and other greenhouse gases are still rising.

Just another 25 years of that will deliver us to the “point of no return”: 450 parts per million of CO2 equivalent in the atmosphere.

That would raise the average global temperature by two degrees Celsius and trigger natural sources of warming that it will be impossible for us to turn off again.

Runaway warming is not a happy prospect, so it is unseemly to celebrate the news that we have even more oil to burn — and cheaper oil, at that.

• Gwynne Dyer is an independent journalist whose articles are published in 45 countries.

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