For the second time in 7 months, OPEC and its non-member collaborators agreed last month, to continue to “do everything necessary” to drive an increase in global oil prices. As with their agreement late last year, members are expected to maintain a 1.8 million barrels a day reduction in output levels up to March next year.
As an oil producing economy who’s near-total dependence on earnings from the stuff meant that we went through the last crisis in the market on life-support, this is great news. It helps too that OPEC’s decision to exclude both Libya and Nigeria from the production-cutting arrangements conflates with our pacification of militancy in the oil-rich Niger Delta region to hold out the prospects of improved oil production and ancillary increase in foreign earnings.
Still, despite its best efforts, the new oil producers’ arrangement has not moved the price of oil pass the US$50 per barrel (pb) mark. In part, this was because the cutbacks in production which was agreed were not enough to dent the pre-existing glut in the oil market that had helped push prices down in the first place. Now, giving that most OPEC members need for oil to sell at about US$100pb if their respective budgets are to break-even, US$50pb oil simply won’t do. On the other hand, further production cuts will hurt most members, especially Saudi Arabia, and so are unlikely.
Nonetheless, by far the biggest source of downward pressure on global oil prices over the last 3 years, is the result of oil exploration and production in the US. In turn, much of this owes to hydraulic fracking of shale oil deposits. Not too long ago, this new technology was considered too expensive to be anything but a sideline to the global oil market. Yet, supply of U.S. shale oil ultimately played a crucial part in ending the global commodity super-cycle. Today, shale oil production in the US is nothing of the marginal play that it was supposed to be, and the U.S. has ridden on the back of exploration activities to become one of the world’s leading producers of the stuff.
Only last week, drillers in the U.S. were reported to have added 11 new rigs to their operations. According to data from Baker Hughes, an energy services company, this then makes last week’s addition the 20th week in which U.S. drillers have added additional capacity back-to-back. With production in the U.S. adding another 500,000 barrels per day (bpd) last week, the U.S. Energy Information Administration now expects output in the country to reach 10 million bpd in 2018.
If OPEC underestimated the production threat from shale the first time, it has done so consistently thereafter. First, the sense was that below US$70pb, the shale industry will go bust. And go bust a lot of them did. But the market then adjusted, and producers have continued to leverage financial engineering opportunities to continue financing their operations, while deploying an assortment of hedging instruments, to help manage price fluctuations.
If shale is the oil industry’s worst near-term bugbear, sundry other gremlins loom over the longer-term. Demand for instance for fossil fuels will be undermined by the increasing roles played by renewables (wind, solar, waves, etc.) in the global energy mix. Considerable efficiencies in these technologies have seen them account for a larger share of generation in both the OECD countries and China. True, intermittency is still a worry — electricity generated by renewables, is by definition unpredictable (solar, for instance tapers off at night), even as most grids were originally structured to deliver steady output to their consumers. But then bigger and more efficient batteries and snazzy engineering fixes mean that even this might not remain a problem for long.
Bigger and more efficient batteries also support the threat to big oil from another new sector. Electric vehicles (Tesla’s market capitalisation only recently overtook Ford’s, despite the former producing far fewer cars than the latter) would eat out of this pie too. As would expectations of improvements in the energy efficiency of the Chinese and Indian economies. It would seem on current trends, that these biggish rapidly- developing economies would start using up far less energy in producing more goods at an earlier stage in their development than most industrialised economies did.
Big oil, therefore might be witnessing its last hurrah. Oil-dependent economies like ours should worry. For while oil may have warped our internal workings, its abundance has helped hold together social organisations devoted solely to rent-seeking. Without a pivot towards saner husbandry of the economy, and away from oil, the demise of big oil might presage the unravelling of this space.