Introduction
Last week’s column drew attention to the fact that the United States remains comfortably the world’s pre-eminent economic powerhouse. This pre-eminence is reflected over wide swathes of social life; ranging from entertainment and sport to military and cyber capability. Of specific note, the US is also the pre-eminent global energy hub. Its oil and gas sector has undergone, over recent decades, a profound re-configuration of its energy mix, both in production and utilization. Last week, I had also indicated that the leading edge of its energy re-configuration has been the explosive expansion of shale oil production and use. The US is, today, the world’s lead producer and consumer of crude oil as well as one of the world’s leading crude oil exporters and importers!
Based on the above circumstances, I had urged last week that international focus on the ill-advised oil war between Saudi Arabia and Russia, which President Trump had dubbed “crazy,” runs the risk of diverting attention from the deadlier war over crude oil market share between the United States and OPEC. I believe this war is existential, in that its outcome will surely determine whether the US shale oil industry and/or OPEC will survive as they now stand. Contrarily though, I expect the Saudi Arabia vs Russia conflict over crude oil market shares to be handled within the context of OPEC+
This week’s column sets the stage for next week’s controversial conclusion on the US vs Saudi Arabia struggle for the global crude oil market share. I argue the outcome of this struggle will shape Guyana’s and the world’s crude oil and gas market.
OPEC
To recall, since its formation way back in 1960, OPEC’s five permanent Founding members (Iran, Iraq, Kuwait, Saudi Arabia and Venezuela) have seen new members join, leave, and even re-join the organization! Thirteen members are now current. Requirements for membership include being a substantial net exporter of crude oil; and, sharing OPEC’s fundamental interests. To secure membership, an applicant must obtain a majority of three-quarters of the members’ votes. Associate members are permitted. And, as revealed last week, OPEC’s operational paradigm has been re-configured from what it was in the earlier period of the 1960s and 1970s.
Shale oil
At this juncture, I advise those readers who have asked me to clarify the notion of US shale oil that I recommend they undertake a Google search. Space in these columns does not permit more than a couple observations. One of these is that the descriptors, which I have used, US shale oil, and at times US tight oil, have been used interchangeably. The other observation is that when used thus far I have been referring to hydrocarbons trapped in shale rock formations, which have been extracted by a process known as hydraulic fracking. The main US shale deposits are situated in the Permian, Eagle Ford, Bakken and Anadarko areas. US shale oil production started in 1944 under a synthetic oil initiative termed The Synthetic Liquid Fuels Program. The US holds about 80% of known economic reserves. A few more comments are offered below on the economic features of US shale but I address the crude oil market collapse first, to give context.
The crude oil market collapse
Despite signs that 1) the negative crude oil price reached last month may have been a “once in a lifetime event” and 2) a slow and fragile rally in crude oil prices since May 1, when the OPEC+ Agreement on production cuts came into force, the dramatic collapse in crude oil demand remains fundamentally un-relieved, in the early days of May 2020. This is largely because the Covid-19 pandemic continues its global sweep alongside an unfolding global recession and a 2020 global crisis, as I have already indicated. I should add that crude oil storage capacity has improved recently thereby facilitating growing inventories.
The present circumstances mark an inflection point. The key features of this inflection for present purposes are: 1) it is driven by both the COVID-19 pandemic and the April 2020 negative price arrived at when global demand for crude had fallen by about 30 million barrels per day (mbpd); 2) In 2019, before the crude oil market collapse, US shale output had accounted for about 63% of the country’s crude output and this was projected to yield an output of around 9.08 mbpd in 2020 (Presently that forecast has been severely reduced to 7 mbpd); 3) crude oil prices in the region of US$30 are also being forecasted to lead to bankruptcy for around 40% of US shale production; 4) on-going research on the economic features of the US shale industry is revealing several intrinsic vulnerabilities, some of which are referenced briefly below; and 5) the turnaround of this downward trajectory depends on both a public health outcome and the speed of economic recovery. That is, whether the recovery is V, W, U, or L- shaped.
As of now the odds favour a slow recovery, basically because of two key considerations. One of these is the legacy effect of the public health crisis and its consequent collapse in demand for the output of significant employment generating sectors, such as travel, transport, tourism, entertainment, restaurants, sports, retail and selected personal services. The other consideration is that governments across the world have created huge stabilization funds relative to their GDP in order to provide economic relief. This increase in their indebtedness puts anti- inflationary pressures that will inhibit the economic flexibility of near-term public spending.
US shale features
US shale is produced both by the oil majors and a number of independent producers. It is a notoriously high cost operation to retrieve oil by hydraulic fracking. Rystad Energy has calculated that only five shale producers would earn a profit at US$31 per barrel of crude! Further, only 16 companies enjoy costs at or below US$35 per barrel Cost reducing technology has been introduced over the years and the newer producers are believed to have lower costs. Presently reported cost per barrel ranges between US25 and US95. This is a wide spread. The independent producers are reportedly highly leveraged, risk takers, and respond to prices swiftly, adding to and cutting output.
Conclusion
Next week I wrap up this analysis.
