Tag Archives: OPEC

U.S. Now Top Oil Producer

The United States has officially surpassed both Saudi Arabia in terms of crude oil production. In 2014, the U.S. had already exceeded both Russia and Saudi Arabia in hydrocarbon, oil and natural gas, production. The U.S. Energy Information Administration (EIA) recently predicted that such high production is likely to continue into the future, with an expected 9.4 million barrels a day this year and 9.3 million barrels a day for 2016.

Adam Sieminski, U.S. EIA administrator, said:

Despite the large decline in crude oil prices since June 2004, this May’s estimated oil output in the United States is the highest for any month since 1972.

U.S. producers have managed to maintain production levels by becoming more efficient and generating new cost savings. Lower prices have led to many labor cuts, with a loss of nearly 100,000 energy-related jobs. Some companies have cut up to 40 percent of their service and supply crews. By April 2015, only 750 rigs were still in operation compared to 1,596 in October 2014.

Industry insiders were not surprised by the EIA report and had previously expected production to keep steady while the growth rate slowed. With prices hovering around $60 a barrel, shale oil exploration is still profitable and will continue be an important source of production.

The Organization of Petroleum Exporting Countries’ (OPEC) plan to cut prices and hurt high-cost U.S. shale producers, however, remains unchanged. On June 7, OPEC announced it would keep production levels unchanged despite pressure from countries within the organization to lower production and increase price.

Fawad Razaqzada, a technical analyst at the trading website FOREX.com, commented on OPEC’s influence saying:

The cartel is losing some influence to the U.S. shale oil market and to a lesser degree Russia, but it still remains a dominant force ― just not as powerful as before.

 

Feeling the Heat — Oil Export Stalemate in Venezuela

Typically when a currency falls in value, investors flock to purchase that country’s assets and exports under the new exchange rate. The Venezuelan government however, is stuck producing nearly the same output. Why? Simply put, because of the South American country’s involvement in the Organization of the Petroleum Exporting Countries (OPEC) and its incredible reliance on oil, which is estimated by Reuters to be responsible for 96 percent of government revenue. Venezuela is in a position where it cannot produce more oil — to take advantage of break-even costs as low as $40 per barrel — or less, due to burgeoning global supply’s effect on prices.

Venezuelan oil production has not risen substantially in almost two decades:

Venezuelan Oil Production

This is not the byproduct of a lack of private interest in the country: exploration and extraction companies such as Chevron already operate within Venezuela and the Bolivarian government even claims grievances against ExxonMobil for resource theft by its international waters with Guyana. This is not because the country is attempting to use its reserves more sustainably — Venezuela has the largest deposit of proven oil reserves, and owns over 17 percent of the world’s oil, compared to the rest of Latin America, which collectively owns less than 5 percent. The combined lack of productivity and revenue is due to OPEC quotas, which have become a thorn in President Maduro’s side. This has effectively stunted Venezuela’s production capacity compared to its neighbors:

Proven Oil Reserves

Oil Production

Venezuela’s recent attempts to counter economic collapse and civil unrest have come in the form of two new deals:

  • Much like Nicaragua and Venezuela’s accord to trade coffee beans for crude oil, and Cuba and Venezuela’s deal to trade oil for teachers and doctors, Uruguay has now agreed to begin trading food for oil
  • India has joined China in becoming a key consumer of Venezuelan oil, with a long-term investment plan of $143.7 billion being put in place to develop infrastructure for oil production in Venezuela

Even if OPEC were to scale back production tomorrow, all of these attempts to harness and expand on the country’s competitive advantage are likely futile for Venezuela itself, as it has a fixed supply quota it cannot surpass. Additionally, because of that quota, strengthening oil trade with Asian countries has meant neglecting and making cutbacks with the rest of Central and South America. Supply shocks are already being felt in Petrocaribe, a trade bloc of Caribbean nations which rely heavily on Venezuelan crude.

Apart from simply diversifying their economy and liberalizing the market, it is becoming increasingly urgent that Venezuela corresponds with the needs of its people rather than the whims of OPEC. The ailing nation should reduce these regulatory barriers such that its production more accurately reflects growth in global oil demand, it is after all one of the few oil-rich nations that has yet to do so.

 

The Next Saudi Arabia? Lessons from Coober Pedy

In 1977, near the end of a decade of energy headaches, President Jimmy Carter addressed the nation in a speech that would bring the Department of Energy into fruition, give national attention to the need for the development of renewable resources, draw widespread criticism not only from OPEC-supporters but from scorned Americans and perhaps most importantly, state something we now know could be untrue.

World oil production can probably keep going up for another six or eight years. But sometime in the 1980s it can’t go up much more. Demand will overtake production. We have no choice about that.

― President Jimmy Carter

Fast-forward to June 2012. Leonardo Maugeri, a Senior Associate at Harvard’s Belfer School for Science and International Affairs, the Chairman for Ironbark Investments and a world-renowned oil expert published “Oil: The Next Revolution,” a major study that was funded by British Petroleum and utilized datasets and observations gathered by multitudes of oil exploration and extraction companies. Maugeri unflinchingly shattered through public belief regarding impending declining oil production, claiming “oil capacity is growing worldwide at such an unprecedented level that it might outpace consumption.”

But how true were these assertions, and what was his rationale?

Maugeri’s predictions came on the heels of breakthroughs in oil extraction technologies and methods such as fracking and horizontal drilling, but these innovations alone were not enough to explain the increase in supply.

In the analysis, Maugeri states that not only do these technologies allow us to further exploit existing reserves that were deemed inaccessible, but they will also be integral in extracting not millions or billions but potentially trillions of barrels of oil in undiscovered oil reserves “with no [supply] peak in sight.”

Fast-forward again to January 2013. A major oil discovery is found underneath Coober Pedy, Australia. How major? Brisbane Company Linc Energy estimated possible reserves to equal roughly 233 billion barrels of oil, roughly 30 billion barrels short of Saudi Arabia’s massive stock. For many reasons, however, we should be conservative in assessing the actual value of such a find. John Young who is a senior resources analyst at Wilson HTM, a prominent investment and wealth management company, asserts that we must gauge the actual quality of the oil find and determine what portion of the reserve is physically unrecoverable or economically unfeasible to attain as this may affect the yield and value of the find.

Coober Oil Reserves

 

Though gargantuan by itself, the value of such a find is not just economic, but also symbolic of the enormous potential for untapped resources that lie undiscovered across the world.

Eerily, Maugeri predicted the discovery of new and huge oil reserves across the world and the rise of American tight-oil which we know as shale oil. Maugeri rationalized that the Brazilian Santos Basin Lula and Campos Basin, which both show extreme promise, as well as the new feasibility of shale trapped in Canada and the U.S. will shift production power to the Western Hemisphere while matching or even outpacing growing demand from developing countries such as China. Additionally, such a find could bring about a stable and long-term decrease in the price of oil. Finds like this suggest we have more time on our clock to deal with the many economic repercussions of energy supply than we originally thought.

Santiago Bello is a research associate with the National Center for Policy Analysis

The Demise of King OPEC

The rise of U.S. shale oil has signaled the beginning of the end for almighty King OPEC. But it has been Saudi Arabia that has hammered the nail in the coffin for the King. OPEC effectively worked in the 1970s influencing world oil supply and price because all members acted as a cohesive unit. Because of the enormous clout of growing U.S. shale oil, the Saudis now realize they can act with OPEC or act in their own self-interest. They can help raise the price of oil or maintain their market share in the United States. The Saudis realized that U.S. shale oil production is not going to decrease but increase in the coming years. Raising prices is a short-term solution that provides no long-term help for when the U.S. replaces Saudi Arabia as the World’s largest oil producer. Thus, the Saudis decided to keep prices low and maintain market share in the United States. With the World’s largest oil producer effectively bailing on the organization, OPEC can be seen as the once great giant that ruled the world with a black fist of gold and has now tumbled from his previously untouchable throne.

-Reeves Favrot is a research associate at the National Center for Policy Analysis

 

The Oil Price War Could Be Bringing About Imminent Change

OPEC has declared open season on U.S. shale oil companies through its decision to leave oil production unrestricted. On separate accounts, Matt Phillips and Steve LeVine insist that “the fallout could create a crisis” in the American banking market as well as the energy industry, while Bloomberg notes how China has capitalized on this escalating feud.

American shale’s rise to power is largely credited to advancements in hydraulic fracturing, a method used by companies attempting to extract the resource from underground, as well as additional funding from junk bond investors who have been attracted by the high returns and low interest rates. Consequently, drilling companies both large and small have had an ample supply of credit and financing, such that 17 percent of the $1.3 trillion market is now financed exclusively by such contributions. With the abundance of equity, falling gas prices were to be expected as a simple byproduct of increased production.

In an unexpected response, OPEC signaled its unwillingness to reduce market share and kept production ― and hence future prices ― constant. Phillips and Levine warn that maintaining competitive prices has forced U.S. companies to dig into their profit margin. Normally this would not be a problem were it not for the prevalence of creditors and private owners bloating market value through their contributions. The desire to be on the energy-boom bandwagon has thus indirectly created a host of unfunded liabilities and nurtured an environment for assets such as receivables to fester and become toxic to the global banking system. Jan Stuart, the Director of Credit Suisse’s investment banking division issued a statement insisting “investors remain hungry for yield” and will remain so, deepening the divide between listed externally acquired funds and suffering shale oil companies’ ability to perform up to par.

While America stares down the looming double-threat, China has quietly begun increasing crude oil stockpiles by as much as seven-hundred thousand barrels per day amidst a fading “golden time window.” Bloomberg notes the steady progress taken by the creeping giant, even despite comparatively lackluster current and future growth of 7 percent as projected by fifty-six independent economists. At the current rate, the opportunist state hopes to stockpile 570 million barrels of crude by 2020, reserves equal to about 100 days of their domestic demand.

American lenders and shareholders must necessarily become more stringent with their credit and their capital when assessing companies. Phillips and Levine warn that there are negative “implications for everyone” from hydraulic fracking fields to Wall Street if financing dries up or if OPEC succeeds in destabilizing American shale, but in a time when the rising industry could be facing one of its greatest global triumphs or defeats, this is clearly an understatement.

Santiago Bello is a research associate at the National Center for Policy Analysis.