Posted on 05/30/2013 5:26:05 AM PDT by thackney
OPEC meets in Vienna on Friday, a meeting that will, according to the Wall Street Journal, be a mite testy. The last few years have been flush for the cartel, with oil prices well above their historical average. Now fracking is changing all that--and hammering open fissures in the cartel that been temporarily plugged with huge wads of petrodollars.
On one side are members like Saudi Arabia, who you can think of as OPEC's central banker. Saudi Arabia sits on top of a vast reservoir of high quality oil that is cheap to pump and cheap to refine. It's not literally true that you can just stick a pipe down in the desert and have oil come-a-gushing, but it might as well be. Because they have such a huge quantity of cheap, good oil, Saudi Arabia is the low-cost producer. They also manage their production very intelligently--Aramco, the state-owned oil company, is very well run, and the Saudi government hasn't pumped every spare petrodollar into their economy. Which means that when the price falls, Saudi Arabia can afford to cut back production a bit.
Here's the thing about cartels: without legal enforcement, they pretty much never work. The incentive to cheat, and take extra profits by producing a little more than your quota, is too high . . . so pretty soon everyone is cheating, and your cartel doesn't really exist any more.
OPEC has managed to flagrantly violate this general economic truism for a few decades now. Saudi Arabia is one of the main reasons that it's been able to hold together for so long, even after the price crash of the mid 1980s. Until the Chinese economic boom drove global oil demand right up against the limits of the industry's pumping capacity, causing prices to spike, Saudi Arabia's excess capacity kept prices roughly stable, in the neighborhood of $25-$35 a barrel. Which, probably not coincidentally, is well under the break-even price for shale oil projects.
Saudi Arabia is one reason that the cartel has held together. The other is countries like Venezuela and Iran, which are pumping much less than they theoretically could. Thanks to Iranian sanctions, and Venezuela's terrible oil management policies, production in those countries is well under its theoretical maximum . . . which acts as a sort of implicit subsidy to the other members of OPEC.
As long as prices were high, all of this was fine; Saudi and everyone else were pumping a lot and taking in a lot of money. But fracking threatens to change that happy equilibrium. The supply of oil will once again start rising to meet demand. And that means that the price is likely to fall.
It probably isn't headed back to $20 a barrel any time soon; at that price, shale oil projects wouldn't be economic. But Venezuela and others cannot afford any sustained decrease in the price of oil. They have spent every petrodollar they got, neglecting investment in favor of other projects. With production declining they are absolutely dependent on the scarcity pricing that has prevailed over the last 5-8 years. They will be pressing for production cuts to maintain price.
But the Journal suggests that lower-cost producers with sounder finances, like Saudi Arabia, are unlikely to be accomodating. They face no threat from fracking--they will always have cheaper, more plentiful oil than North Dakota or Alberta. And from the perspective of the cartel as a whole, it is probably better if price comes down. The higher the price, the more investment there will be in fracking projects. And the more investment there is in a new technology, the greater the risk that some combination of practice and breakthroughs will bring down the production costs of fracked oil. Better for the cartel for prices to fall to the point where current fracking projects are just barely economic.
But this will not be better for Venezuela, et al. Venezuela is experiencing ongoing shortages of basic goods like toilet paper because of its economic mismanagement. Algeria reportedly needs an oil price of $121 a barrel to cover planned spending--and has already experienced riots over food and housing. Iran is experiencing runaway inflation thanks to sanctions; falling oil prices will only make this worse. That's why they so desperately want the cartel to keep prices over $100 a barrel.
For them, however, the strength of the cartel is also its weakness. In some sense Saudi Arabia is the cartel because they're the ones who can afford--and will stick to--production cuts. Venezuela can make all the demands they want. But unless they can afford to cut their production, they will ultimately have to accept whatever the gulf states decide.
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Megan McArdle is a special correspondent for Newsweek and The Daily Beast covering business, economics, and public policy. A former senior editor at The Atlantic and writer for The Economist, Megan has a diverse work history including three small startups and a disaster recovery firm at Ground Zero.
Fracking is Pitting OPEC Members Against Each Other. It Couldn't Happen to a Nicer Bunch of Cartel Members.
Venezuela, Iran, and others, desperately need high oil prices. But the more powerful members of OPEC don't seem willing to go along.
Iraq Minister: Shale to have Minimal Effect on Oil Demand
http://www.rigzone.com/news/oil_gas/a/126787/Iraq_Minister_Shale_to_have_Minimal_Effect_on_Oil_Demand
by Dow Jones Newswires|Hassan Hafidh|Thursday, May 30, 2013
Rising U.S. shale oil production will have only minimal effect on demand for crude oil from the Organization of the Petroleum Exporting Countries, meaning most members of the group want to leave their output ceiling unchanged at 30 million barrels a day, said Iraqi Oil Minister Abdul Kareem Luaiby Thursday.
OPEC members will discuss the selection criteria for choosing a new Secretary General at its meeting Friday and Iraq’s candidate for the job, Thamer Ghadban, is still standing, Mr. Luaiby told reporters at a briefing in Vienna.
Excerpted for Dow Jones content
What’s your opinion on this Thack?
The wild card is the possibility of a growing number of vehicles in this country running either on natural gas alone or on gasoline or natural gas. Natural gas filling stations are being installed in WV along the I-79 corridor. Given the extremely low price of natural gas and the high price of oil, some reduction in demand for gasoline and by extension oil is going to happen. If it significantly decreases the US demand for oil, currently about 25% of the worlds, production, the Middle East is going to be scrambling for petrodollars. The cartel is toast although the article’s author missed the most dangerous threat to OPEC.
I think that Saudi Arabia will still remain strong as they are investing heavily in refineries and chemical plants. They see that the future of only selling crude oil will have limited value and return on dollars.
I think we will see enough growth in non-OCED countries to keep oil demand high enough to keep prices up even with the increased supply. I think the high prices will help drive the US to use more Natural Gas for transportation fuel, utilizing CNG, LNG and GTL for different markets.
I just hope the SOB’s have to feel the pain we Americans have felt due to their extortionist priceing schemes.
Let the OPEC members eat their oil.
Thanks.
Most of OPEC provides fuel subsidies to keep their domestic fuel prices quite low.
...delegates have already hinted that the asymmetric impact of the shale revolution on OPEC’s member countries has weakened the bloc’s resolve and will mean no agreement on curbing supply.
That’s because US shale oil is pitting African members against Arab members. The new American oil bounty is of the light, sweet crude variety. It’s higher quality than the heavy crude produced by Gulf OPEC members. But countries like Nigeria, Algeria, and Angola have typically exported sweet crude to the US, and the shale boom is hitting them hardest. Exports from those African members dropped 41 percent from 2011 to 2012.
OPEC Is Cracking…
http://blogs.the-american-interest.com/wrm/2013/05/29/opec-is-cracking/
Thack,
I am assuming that the fracking/horizontal drilling technology that has been perfected here in the US is being exported to other locals around the world. Will this not bring down the cost of this technology just like all other tech advancements over time.
Also, the way it has revised once dead production areas in the US, will it not do the same thing in foreign countries?
I am assuming that there are shale locations outside of ND, MT, TX, CA, PA, OH, NY & WV. Are there other large shale plays in other countries similar to the Balkan and Eagle Shale and Marcellus where the new technology could be used to extract oil and NG?
Also, in these foreign countries they probably do not have Democratic State governments and Matt Daman running around worrying about frackings affect on local drinking water.
This would not even be a concern in countries like China, Venezuala, Nigeria and Angola among others.
I know re-opening old fields is being considered here in Kansas....my company is opening a new office in the vicinity of where we predict this oil play to happen.
But, there’s one problem - fracking uses alot of water. Water rights are pretty much spoken for in most of Kansas (and we had drought last summer). So we could never reach the scale of ND in production. I think this is true for lots of places around the world.
ND just happens to have an abundance of water (in certain areas around the river). Our company also has offices in ND, and we a building a raw water line...all it will do is bring water from the river, untreated, to the oil fields...and we’ll charge by the gallon.
Why are they holding their meeting in Vienna?
Oh, that’s right, they have liquor there. Nevermind.
Put ‘em in a room with a bunch of “display” knives and swords on racks on the wall.
So it may not work in the deserts around the world. However, this should not be a problem in many places in Asia, Equatorial Africa, South and Central America.
Can you use Salt water or does it need to be fresh water?
Hydraulic Fracturing is over 6 decades old. It isn't new and recently developed. We already went through that curve a long time ago.
Horizontal steerable drilling isn't new either. It has gone through quite a bit of development and has become more common because it already went through that initial price drop.
Other technologies like the walking rig that allows a new hole drilled without tearing down and setting up the rig again are making more changes.
Also, the way it has revised once dead production areas in the US, will it not do the same thing in foreign countries?
The increases in production we are seeing areas like the Permian Basin are due to new fields coming into play, mostly shale or other tight formations. We have already been doing Enhanced Production techniques from old fields for decades.
Not all shales are equally rich in oil/gas. The green river is huge with lots of hydrocarbons but not producible with just hydrofrac and horz drilling. Some like the Monterey have the petroleum but other technical problems making it hard to produce (in addition to the political problems)
Many companies are already exploring shales and the like in other countries. There will be some successes but has been limited so far. Expecting shale to be massive in oil production around the world is no different that expecting the massive traditional fields of Saudi Arabia to be around the world. They may exist, but no real reason to expect them everywhere.
That is often overstated. South Texas is a very dry location and the Eagle Ford tends to require several times as much water to hydro frac as formations like the Bakken. Studies show the massive amount of drilling in that area are using about 1% of the total water use in the area.
Aramco is not very well run because of the Saudis. It is very well run because of the American engineers and financial people they hire to run it for them.
FWIW, Aramco is an anacronym for Arab-American Oil Company. They actually have their own city in the Eastern Province where women are allowed to drive and American and other foreign employees are free to live their own lives with minimal Saudi interference.
Your typical mid-sized and larger company in Saudi Arabia actually has very few Saudi employees. Almost all of them fall into one of two categories: (a)a government minder who is there to collect a paycheck due to some connection or (b)a rare bird who got their education in the west and has real ability to perform the job. Those in category (b) tend to be far less rigid idealogically and less trusted by the Saudi establishment. They are also the reason why the Saudi establishment floods certain western universities with their own idealogues, a task which is often fruitless because those with real ability tend to "go western" on them whereas those without tend to "go terrorist."
“That is often overstated”
Not really.
We are negotiating with small towns across Kansas to purchase their treated sewer water, for fracking. Kansas is in drought, and the backlog to even apply for a water right is 9 months...not that they would actually issue any new permits in the central and west zones of our Division of Water Resources.
Trust me - water is a huge issue in Kansas, and the premium put on it will prevent us from exploiting all our oil and gas nearly as rapidly as they have in ND.
“Can you use Salt water or does it need to be fresh water?”
That is a very good question, which I don’t know the answer to.
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