The recent plunge in oil prices, roughly from $100 a barrel to current prices hovering in the $60.00 per barrel range deserves some analysis and reflection concerning the underlying causes for the downturn. Senior partner of Silver Tusk Oil Co, Shawn Bartholomae has made the following observations:
“A major factor in the recent decline in oil prices is due to the global economic slowdown. Two major Asian players, China and Japan are both experiencing lesser economic growth than what was earlier anticipated.”
It had been the expansion of these economic systems and their need for a growing volume of energy imports that had provided much of the momentum for the preceding surge in oil prices. This surge in demand had prompted the resultant growth in world production for the past five years.”
The slow down in that part of the world is being felt in international markets.
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| Changing Oil Picture |
It had been the expansion of these economic systems and their need for a growing volume of energy imports that had provided much of the momentum for the preceding surge in oil prices. This surge in demand had prompted the resultant growth in world production for the past five years.”
The slow down in that part of the world is being felt in international markets.
The EIA (Energy Information Administration) made the following note:
“Since August, both crude oil and currency markets have been influenced by lower economic growth expectations in countries outside the United States. Prices in both markets recently have broken out of established trading ranges, driven by concerns about weaker future global demand. The current situation, with the dollar index and oil prices moving in opposite directions, presents a sharp contrast to one in which crude oil supply disruptions or geopolitical risks would cause both the dollar index and crude prices to rise”
Shawn Bartholomae also has stated “The booming production levels from the shale formations across the country are having an effect. This revolution is changing the petroleum outlook of the world. It is not the production of oil alone that is changing. With this surging production comes a new wave of technology.”
The technology of finding and producing oil is not only making oil and gas wells more productive, the technology is opening up new territories for exploration. It is making exploration possible in formations that were once considered out of reach or technically non feasible.
Another large factor in what has been falling oil markets is the apparent determination of Saudi Arabia to hold steady to current production levels. The world had grown accustomed to giving Saudi Arabia the center stage and letting this nation call the shots.
As the OPEC world’s leading producer, the Saudis would usually coordinate the agreements among its members and assign quotas that were usually agreed upon among these twelve OPEC members. The kingdom traditionally reserved for himself or herself the role of “swing producer”. This function necessitated the need for staying flexible. They would operate in a range wide enough to allow them to either raise or lower their own production enough to adjust, and thus control the market and make the price conform to their satisfaction.
The concept of OPEC, market price control based upon Saudi leadership and cooperation among the members had worked smoothly since its inception. It is this cooperation and adherence to the agreements among all of the members that has become suspect, acknowledged by Shawn Bartholomae. Lately the Saudis appear to disfavor that role and they seem more inclined to act unilaterally. If no one of the member states complies with their assigned quota, there is no controlling aspect attributed to the cartel. Basically, if these conditions exist, there is no OPEC.
Even before the summit, Iran has let it be known that they favor a higher price. They suggest that the way to affect the higher price is for Saudi Arabia to cut her own production. Everyone seems happy to tell Saudi Arabia to cut production, except the kingdom. They do not appear to be too enthused about being asked to carry the burden virtually alone. Even if the agreement were reached that each nation would share fortunately, Saudi Arabia would still carry the lion’s share of the cuts as they dwarf the other nation’s outputs.
The cartel has an agreed upon quota now (before the November meeting in Vienna) of 30 million bopd. The cartel total production though is at 200,000 bopd above this quota. Analysts agree that 1,000,000 bopd is the amount that needs to be cut to have the desired effect on the world market. Both Baghdad (Iraq) and Iran have ambitions and capacity to produce even more. With America’s basic military exit from Iraq, this nation has leaned closer to Iran politically.
Shawn Bartholomae, speaking as senior partner of Silver Tusk Oil Co. Goes on to explain “ It is the interaction of many factors that makes the world oil situation like one large chess game, or even a three dimensional chess game.”
Any proposed move has multi-dimensional aspects. The Saudis would undoubtedly like to see the momentum of the shale boom in the United States curtailed, they appear to be willing to take the plunge, and endure the lower prices of oil, even at the risk of undermining of the cooperation among fellow members of OPEC. “
Shale extraction has boosted the production in the U.S. to close to 9 million barrels per day. Most of the industry analysts say the continuing surge in United States production will put this nation on track to overtake the Saudis by 2016. The Saudis know that shale extraction is expensive. They are apparently hoping that a sustained period of prices in the $80 a barrel range will take some of the momentum away from shale investors.
The senior partner of Silver Tusk Oil Co., Shawn Bartholomae, says, “The long range direction and the implications of the future impacts of lower prices on oil is complicated. One has to consider the effects of lower prices elsewhere in the world.”
Things have changed dramatically since the crisis of the 1970’s. That situation had brought long lines at U.S. gas stations and high prices. Underlying the intense situation was deep seated fears of what the U.S. might be forced to do if the shortage became even more acute. It had already reached dangerous levels. The American economy was literally choking on the shortage of oil. There was high-level talk that referred to the actions as American economic strangulation. There were unmistakable military implications. It was clear to global analysts that the U.S. had lost control of a market that they had dominated for decades. They were now at the mercy of OPEC. That was at the height of the cold war. The United States was in the very uncomfortable situation of confronting unfriendly nations, and possibly even warring nations, while being crippled by the critical shortage of oil.
The current situation is one that is very much different. The outlook now favors American interest more. In this new global outlook, it is the United States that has the surplus of oil. The new market speaks of American production strength. Before we bargained from a critical shortage of oil. We can now approach the bargaining table with a show of strength. .
We have local production and a local market. The large appetite of the U.S. consumer was once considered a liability. That may no longer be the case. It is this local need for oil that can sustain the United States producers through a fair degree of market turbulence. It is this large hungry market that is capable of utilizing most of our own production. Although undoubtedly, the shale producers are feeling the budget pinch, generally, the analysts are calling the U.S. a winner in the ongoing struggle for the market.
The world news is beginning to suggest more and more that this new age is the decline or even the dissolution of OPEC.
Shawn Bartholomae states, “The market is complex and there are a lot of variables”
Lower prices are likely to spur both consumer spending and give a stimulus to the overall economic productivity. Shawn Bartholomae, senior partner of Silver tusk Oil Co. Has commented, “In tight market times, the cost of producing a well comes down as the drillers and field workers become more accessible. When the prices come back, these cost savings often translate into a higher profit level.”
The pressure of this current market condition appears to be focused squarely on the leaders of the Middle East. Mohammed Surer al-Sabban, top advisor to the kingdom, has described the upcoming talks scheduled for November 27th, as “the toughest ever” as some ministers have not anticipated prices to drop to this level.” This advisor knows the separate members of the cartel are restless. They will want a solid agreement on favorable prices and production quotas.
According to Jeff Colgan, assistant professor at the School of International Service, an American University, who has studied the price actions of the OPEC cartel all the way back to 1982, published his results in the “Washington Post”
“OPEC rarely, if ever, influences its members oil production rates. It has almost no impact on prices.”
“I find that its members cheat on their quotas a whopping 95% of the time. “
The meetings being held in Vienna this month (November 27th) are as much a test for the OPEC solidarity and ability to coordinate agreements as it is a challenge to the rest of the world’s producers.
Analysts the world over is beginning to call this era, the possible end of OPEC hegemony. While still producing roughly 30 million bopd, the same as they had produced in 1973, the world has changed. That was a bigger proportionate bite when the world consumed 50 million bopd. Today the world is consuming 90 million bopd. The output of OPEC has remained roughly the same. Their influence or share of the market has subsequently diminished.
Regardless of what OPEC says or what rulings they make in Vienna this November, if the market ignores them, or the members fail to comply with the agreements or the quotas, then the days of OPEC being recognized as a dominant force or even a significant authority in the world of oil are over.
The net effect is, if these events take place, there will no longer be an OPEC.
The senior partner of Silver Tusk Oil Co. Shawn Bartholomae states “We remain confident that the petroleum producers of the United States will withstand the market turbulence and remain strong. Silver Tusk Oil Co. is proud to be a member of this industry”.
