A look at the past is very interesting.
In 1985, oil prices dropped.
Many expensives drillings became unprofitable and U.S. oil demand started to rise again.
Posted on 12/08/2014 7:58:38 AM PST by thackney
The Opec meeting of Nov. 27 brought new strategic thinking to Opec's deliberations and redirected its fixation away from short-term oil pricing toward greater commercial transparency and market-based commodity pricing. This was due in no small measure to Saudi Arabia's determination to eliminate ill-advised oil price manipulations and restore Opec's credibility as the price setting leader of international oil markets. This reality check became inevitable when Opec finally focused on the stark facts of a weak global economy and soft oil demand at a time of abundant oil supplies and inflated prices. The kingdom was forceful in advocating the reality that the only way to re-establish a balance in the oil markets was through transactions that were not encumbered by convoluted contracts or diverging producer alignments and interests.
In fact a comparison between the Nov. 27, 2014 Opec meeting and meetings dating back to the mid-80's sheds light on Saudi Arabia's logic. At that time Ali Naimi was the chief executive of the newly created Saudi Aramco and Opec was struggling to reactivate 15 million barrels per day of idled capacity. Half of that was in Saudi Arabia. In the course of several Opec crisis meetings, Saudi Arabia was landed with the dubious role of swing producer and ended up taking the bulk of the production cuts on behalf of all the other Opec producers.
This commitment did nothing for the kingdom other than dropping its production from 10.5 million b/d in 1981 to as low as 2.2 million b/d by year-end 1985. Meanwhile the high oil prices that the kingdom had been defending resulted in subsidizing competing production from costly new frontiers including the North Sea, Alaska, the Gulf of Mexico and West Siberia. Once these competing sources of capacity had established their infrastructure, it became virtually impossible for Opec to displace them for years thereafter.
There are of course many major differences between the circumstances of 1985 and the oil industry today. There are also however many fundamental similarities. As in the past, the kingdom has been investing heavily in its production capacity in order to buffer the global economy from profound oil supply disruptions and geopolitical volatility. At the November meeting it found itself, as it did in 1985, pressured to shut down efficient operating plants in order to accommodate costly competing suppliers from dispersed centers across the world.
It does not take much to visualize what might have occurred had the decision been made to reduce Opec's output by 1 million or 2 million b/d in November. A cut in quotas would have been dutifully negotiated and a large part would have been allocated to Saudi Arabia. Because of the commercial and logistic realities of the oil markets, it would have been impossible to implement the quotas for at least one or more operational months. Commitment by all the Opec members would then have wavered, execution would become uneven, adherence uncertain, and the revised quotas would become hypothetical guidelines with a transient impact on oil prices.
Meanwhile non-Opec production would have benefited from stabilized or re-inflated oil prices and would have continued to capture more Opec market share. The 3.5 million b/d of US shale oil and incremental 2.5 million b/d of US refined product exports that had materialized since 2011 would have been supplemented by further shale oil supplies, costly new Canadian bitumens and conventional production from Russia, Brazil, West Africa and the Gulf of Mexico. All of these incremental supplies would have been subsidized by Opec's declarations that it is shutting down capacity in order to defend oil prices!
Given the high development cost of much of the non-Opec oil reserves and the concentration of conventional oil within Opec, defending near-term oil prices is not in fact a necessary strategy for restoring oil prices. Shale oil technology has already been proven to be limited to a few regions within North America, deep offshore developments run at three times the capital cost of conventional projects and financing Arctic developments will not be not feasible for years to come.
At moderated oil prices, most non-Opec producers would have had to scale back their investments within the next year or two, the global economy would have had a further opportunity to recover, and a widely distributed call on Opec crude would become inevitable. Oil prices would recover to earlier levels simply by waiting out the recession rather than trying to artificially manipulate oil prices and supplies.
Given the disparity in production costs across the world, the option taken by Opec to let the physical markets reduce excess capacity is a simple process of eliminating the least competitive oil supplies. There are already good indications that the oil price corrections that followed the Opec meeting have set in motion an elimination process of high-cost developments. At continued low prices, costly oil developments will continue to be delayed pending a clear economic recovery and a reinvigorated oil market.
In regards to global megaprojects, oil pricing uncertainties will also drive these projects toward major deferrals. Barclay Capital had already confirmed in early 2014 that over $700 billion in financing had been committed in 2013 toward upstream oil and gas projects. Another $800 billion had been forecast as a requirement for 2015. In view of the current 30% drop in oil prices and the reality that price volatility will persist through 2015, it is highly unlikely that such levels of upstream expenditures can now go forward as previously anticipated.
Ironically, downstream oil and natural gas liquids projects may now benefit in a very significant way from Opec's reduction of energy prices across the world. Given this incentive, a sustained expansion in refining and petrochemical developments may now materialize driven by growing demand for transportation fuels and petrochemical feedstocks. That will be a comfort for Opec members holding major oil reserves and having a concern regarding the future demand for their natural resources. It will also be a comfort for the engineering, procurement and construction contractors and the oil and gas industry leaders, all of whom will be called upon to continue to supply energy to a global economy hungry for hydrocarbons.
Sadad al-Husseini is the former exploration and development chief at Saudi Aramco and founder of consultancy Husseini Energy.
I didn’t realize this at first, but it would have helped the North American market had OPEC cut their output until after 2016 elections (assuming a conservative is elected - Hopey Changy maybe).
Higher oil prices anong with an opening of exploration and production from more federal land would have bought North America a larger share of the market sooner. It would have driven more production infrastructure to cover the intitial capital investment for development of the fields.
Ultimately, however, supply and demand will win on commodities if enough players are competing. I suppose that is where we finally are. The monopoly is crumbling. That is good for the citizens.
I’ve read several posts on other threads that mistakenly believe OPEC and particularly the Saudis are flooding the market with oil.
Oil Production by OPEC and Saudi Arabia
Thousands of barrels per day
2013
Aug = 30,493 = 10,110
Sep = 29,891 = 10,049
Oct = 29,894 = 9,839
2014
Aug = 30,109 = 9,654
Sep = 30,479 = 9,673
Oct = 30,253 = 9,603
Increases from 2013 to 2014
Aug = -1.3% = -4.5%
Sep = 2.0% = -3.7%
Oct = 1.2% = -2.4%
I think that sums it up nicely.
Now if we can keeep competing players in action, we can also inflict economic deterioration on unfriendly countries like Saudi Arabia, Russia and Venezuela. -Tom
And many times in between now and then as well.
Thanks thackney.
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