Where is the future of crude oil?

August 10, 2016

Oil prices will not approach $100 for the foreseeable future, and this will bring significant challenges to the state-owned giants

     ”When will the world run out of oil?” It’s hard to believe that was once a common question, but analysts of past decades forgot to factor game-changing new technologies into their forecasts. In recent years, the world has discovered much more oil than it has consumed, as hydraulic fracturing, new horizontal drilling techniques, and other factors brought previously inaccessible reserves out of the ground and into the market at the same time that a growth in the demand of oil has declined. China’s slowdown has hit commodity exporters in Latin America, the Middle East, sub-Saharan Africa, and East and Southeast Asia especially hard. Add uncertainty over Europe’s future with the beginning of negotiations over Brexit, the risk of a return of the migrant crisis as the EU’s deal with Turkey begins to unravel, plus the continued uneven recovery in the United States, and it’s difficult to see where a future surge of oil demand might originate.
The resilience of smaller US companies at the forefront of the fracking revolution and the relative speed at which they can ramp up production in response to higher prices ensure that the Saudis can’t make a lasting difference in oil prices. If the Saudis cut, the price drifts higher, more U.S. fracking comes back on line, and the added supply brings the price back down. The net effect is a Saudi loss of market share and the realization that, after peaks at $147 per barrel in 2008 and $115 in 2014, oil prices will not again approach $100 for the foreseeable future.
This has implications among state owned oil giants: producers like Venezuela and Saudi Arabia will now need to rethink traditional production cutting strategies in order to generate revenue. Saudi Arabia will become even more anxious in coming years because they can’t cut production to reach the oil price needed to provide crucial government revenue. Bitter rival Iran, now free of sanctions, is rapidly increasing production and growing market-share at Saudi expense. Venezuela is already on the brink of disaster: they import virtually everything except crude oil, and shortages of electricity, water, staple foods, and other necessities have the country on the edge of open conflict. Those within the Chavista movement may soon sacrifice President Nicolas Maduro to preserve their own grip on power. But only a much higher oil price can buy the regime a lot more time, and that’s not on the horizon.

We live in a moment of seemingly constant change. Yet, all of us, oil producers and consumers, must prepare for a world in which crude oil trades at a lower price, the implications of which will only become more important.

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