Introduction
This column appears at the start of only the fifth month of the infant life of Guyana’s petroleum sector. My presentation hasn’t reached a point where the full impacts on the sector, generated by the “2020 General Crisis” can be sensibly appraised. As already identified, there are six features of this crisis that I expect to frame outcomes that, overall, will produce a baptism of fire and brimstone for Guyana’s infant petroleum sector.
Regular readers are aware that three of these features have been addressed to date, namely: 1) the early (2019) forecasts showing economic recession and collapsing crude oil demand during 2020, 2) the dramatic emergence of the COVID-19 pandemic, and 3) the” crazy” oil price war. These three features by themselves foretell an impending global economic depression of catastrophic proportions. Today’s column and next week’s address the fourth feature, which I attribute to the impact on crude oil prices from the on-going structural re-configuration of the US petroleum sector. Readers are advised that my columns do not pretend to offer a comprehensive appraisal of US petroleum. Instead they briefly reference aspects of the US petroleum sector that are pertinent to my discussion of their consequences for the global crude oil market.
US petroleum perspective
Two observations are warranted at the outset. First, last week’s discussion of the oil price war suggests that although the OPEC+ meeting on April 12 had successfully ended the crazy oil price war, nonetheless real risks remained that the Agreement achieved “too little too late”. That is, the agreed production cuts (roughly 10 million barrels per day) may turn out to be too limited and the three week long interval between reaching the Agreement and its coming into force, May 1 provided opportunities for destabilizing global speculation, as indeed occurred.
Second, several analysts have observed that, although the dominant narrative centering on the oil price war continues to focus on the two publicly identified lead protagonists—Russia and Saudi Arabia—in truth, the United States is in fact as much an originator of the oil price war as these two protagonists! Based on such analyses, the conditions for continued oil price wars remain favourable. Such perspectives are anchored in a geo-strategic view of the oil price war as manifesting an on-going struggle over crude oil global market shares. This struggle occurs through both commercial competitive channels and state- guided non-commercial ones.
To evaluate this contention, I start with the basic observation that the United States is comfortably the world’s leading economic power. Thus overall, its research and development capacity, market size, capital stock, human capital, and entrepreneurial capability are un-matched. Further, its currency is the most widely accepted nationally denominated store of value and medium of exchange. Indeed, crude oil prices are denominated in US dollars, making its influence in global energy policy un-matched, as oil is the highest value globally traded commodity. The point I stress from the above is that the US’ global economic leadership is strongly reflected in its energy sector broadly, and its petroleum sector specifically. Recent changes in the sector have been spectacular, with the US moving from a net importer of energy to a net exporter in 2019!
The pertinent United States details are as follows. First, US Energy Information Administration (EIA) data reveal that net import of petroleum relative to consumption, has, on the whole, increased every year between 1950 and 2005. But over the last decade and a half this reversed, domestic output has grown every year and in so doing reduced net imports every year. In the second half of the recent decade, US output has varied between 8.8 million barrels per day (mpbd) in 2016 and 12.2 mbpd in 2019 for an average of 10.2 mbpd. In the 2000s, output never reached 6 mbpd.
Remarkably, the United States overtook both Saudi Arabia and Russia to become the world’s largest oil producer in 2019, followed by Saudi Arabia and Russia. World output in 2019 totaled 80.6 mbpd. It also exported 3.8 mpbd, which ranked it at fourth after Saudi Arabia, Russia and Iraq in that order.
Second, these achievements have been mainly due to the explosive growth of US shale oil fracking, spurred by fierce private competition. Fracking shale oil has transformed the US energy sector. And because of this the US Authorities’ geopolitical stance on crude oil has changed today. One sign of this change is the authorities shift from a laisse faire approach to strong support for private shale oil output in the form of tax cuts, deregulation, and other measures such as public purchase of crude oil for the national strategic stockpile.
This shift signals that the rapidly rising private shale oil industry is a leading edge in the reconfiguration of US energy, including its crude oil production and trade. Here OPEC and its allies (OPEC+) are the prime threat.
OPEC perspective
OPEC’s formation six decades ago as an inter-governmental body has had as its pre-eminent goal the coordination and unification of its members petroleum policies. Over this period its mandate has witnessed several twists and turns. However, OPEC has steadfastly maintained that its core aims are: 1) to secure fair and stable prices for crude oil, 2) to be an economically efficient and regular supplier delivering crude to global consumers, and 3) providing a fair return to the capital invested by its members. There is no denying that, at its inception, OPEC was seen by many as an anti-colonial and anti-imperialist body, championing the cause of poor exploited underdeveloped countries. Its operating enterprises are state-owned and/or controlled
This initial narrative placed primary emphasis on OPEC members’ national ownership and/or control of their petroleum resources in order to pursue the structural transformative use of their petroleum revenues and re-balancing the global distribution of income and wealth. Since the Great Recession (2007/08), OPEC has been pre-occupied with negotiating global macroeconomic instabilities and uncertainties, financial/economic/political risks, and, their accompanying wider social unrest. Its core membership has remained constant, with others joining, leaving, and re-joining. It has welcomed associated allies as OPEC +
Conclusion
The US-OPEC struggle for global crude oil market shares is likely to be the most impactful on Guyana’s offshore sector. Next week I continue to pursue this.
