A comprehensive interview with T. Boone Pickens, arguably the nation’s leading expert on energy and fossil-fuel markets in general, designated America as the world’s new “swing oil producer.”
This means the U.S. has replaced the disparate number of OPEC constituents, whose majority, led by Saudi Arabia, has been the arbitrator of industry pricing since its coming into existence almost 50 years ago.
Although reviled by many critics of this primarily “Mideast-controlled” bloc for politicizing industry pricing by cutting production or expanding shipments, OPEC has been the global oil industry’s balancing instrument for price-change expectations on an ongoing basis.
But with Saudi Arabia supplying one-third of OPEC’s 30 million barrels per day utilized by the current 90 million-plus bpd worldwide, the whims of Riyadh have been the key as to whether prices rise, fall or stay the same in a given time period.
This decades-long set of circumstances has now been dramatically distorted by the advent of the United States’ unprecedented hydraulic fracking success. This tripling of production to near 10 million bpd (equal to world leaders Russia and Saudi Arabia) also has the reserve potential to double this amount in the next decade.
This turn of events has prompted an increasing “glut” of supply over demand, which has all but eliminated OPEC’s price-setting power, especially the “swing production” leverage of Saudi Arabia.
While 140 U.S. refineries (whose combined capacity exceeds the rest of the world added together) have achieved record export shipments of such finished products as gasoline, diesel, jet fuel, heating oil, etc., these refineries are stymied from receiving heavy Brent crude from Canada through the Keystone XL oil pipeline.
Also, shipment of light West Texas Intermediate is prevented from exporting its growing surplus glut due to the administration’s refusal to cancel the 1974 embargo on crude oil overseas shipments, except for “light condensates,” which is a small proportion of the total. However, since Canada was not on the original embargo list, it has been reported that a growing volume of WTI crude oil production produced through fracking is being exported through Canada.
In the meantime, such oil giants as Exxon-Mobil, Conoco Phillips, Chevron and Shell are in major employee layoff mode and cutting back thousands of drilling rigs. Offshore drilling is being cancelled, as is the production of technical services equipment from the likes of Schlumberger, Baker-Hughes and Halliburton.
While America’s domestic stability eventually assures its dominant oil and natural gas reliability for the indefinite future, the increasingly complex Mideast, European and African geo-political situation puts the U.S. in the driver’s seat as far as overall oil prices are concerned.
The growing oil supply
With periodic OPEC meetings increasingly becoming nonevents due to the waning influence of the once mighty price-setter controlling one-third of the world’s oil supply, market-share protection by dominant Saudi Arabia has become the weakened monopoly’s guiding principle.
What had driven the post Great Financial Recession (2008-10) world prices above the $100 mark before a 50%mid-year crash in 2014 was the Saudis’ fear of U.S. fracking. This had brought America’s fading conventional production of 3.4 million bpd to near 10 million and upward in a short four years. This turn of events panicked the Saudis into pumping their daily volume to a full-blown effort, currently reaching their highest level ever at 10.5 million bpd.
Despite the desperate protests of the likes of Iran and Venezuela, whose annual budgets have barely balanced at the $100 bpd mark, Riyadh’s fear of the U.S. becoming totally energy independent and, worse, a potential global exporter, overrode these plaintive protests of most OPEC members now facing huge budget deficits going forward.
Even with the disintegrating geopolitical facade involving the traditional Shia/Sunni confrontation complicated by the ISIS threat, the Saudis continue to “stick to their guns” despite the probability their huge and dominant five oilfields may be tapped out in the next decade. Their trillion-dollar financial capital reserve provides a safe cushion against the improbability of oil prices declining to even lower levels.
While peak oil demand is dependent on the growth of both global population (expected to reach 9.5 billion by mid-century) and the accelerated needs of increasing commercial and industrial development, these should be met with supply from U.S. fracking and the recently discovered oil sand reserves in Canada and Venezuela, which carry huge amounts of oil. These are superseded only by the U.S. and Russia as independently verified.
While Saudi Arabia’s claimed 266 billion barrels has been suspect for years, its breakeven production price of $7 per barrel gains them significant leeway. Iraq’s $13 and Iran’s low-$20s also provides comfortable profit margins at present global price levels.
Conversely, Russia at $46, Canada in the mid-$50s average, and the U.S. close to the high $50s when averaging new fracking and conventional excavation, gives the Saudis a massive price advantage.
At this stage of the global “oil wars,” Saudi Arabia seems to be the solitary oil price dictator with protection of global market share its primary objective.
The big question mark to be answered in the months and years ahead will assuredly be determined by the intensifying military antagonisms now brewing.
Trade deficit expansion
The U.S. trade deficit, which had shrunk significantly in the post-Great Financial Recession aftermath, reversed sharply in the first quarter of 2015 causing negative gross domestic product where a slight positive increment had been expected.
Already beset by a drop in business and industry stock building early in the year together with export-restricting West Coast port strikes and inclement weather in the East and Midwest plus a strong export-reducing dollar, the first-quarter trade deficit posted the greatest downward widening since the pre-recession (2008-10) years.
With U.S. exports more expensive due to an increasingly stronger dollar vs. all major world currencies combined with cheaper imports, such a reversal was anticipated but registered worse than expected.
Other economic disappointments in the first quarter included the drop in business spending and reticence by the consumer sector to open its pocketbooks, even less than expected.
With the second quarter just getting underway and the continued shrinking of drilling rigs and other technical services equipment for expanded shale fracking proceeding, it is expected the oil production boom of the last five years will continue its downward slide. Even a moderate increase in the rebound of oil prices in the second half of 2015 will not reverse the employment reductions or further cost saving by the energy sector as a whole.
Of increasingly greater concern by domestic manufacturers and American-based suppliers is the discounted pricing by foreign imports of ostensibly comparable products, due to the currency differences benefitting overseas producers.
While the overall energy panorama is clouded by geopolitical strife in the Middle East and North Africa, there is little hope by domestic energy producers that the current situation will significantly improve during the second half of 2015.
With U.S. policymakers showing no eagerness for all types of infrastructural expansion (pipelines, dams, bridge rebuilding, highway upgrading, etc.) the general overall business and industrial economic climate appears to have stabilized at a level unexpected to markedly increase the near $18 trillion U.S. gross domestic product or major employment growth. Hundreds of billions of dollars of additional revenues, generated by unexpected domestic manufacturing increases, plus an upward blip in employment increase or consumer spending does not seem in the cards for the rest of the year.
Marked unanticipated economic changes in the geopolitical arena, primarily in the Mideast, Europe, or Southeast Asia, could make a difference up or down if they were to occur during the second half of 2015.
