Has the oil price and market share war ended with a Saudi Arabian win? Or, as some fund managers and speculators argue, has Midland won? We are now in a trading range high of $50 per barrel for West Texas Intermediate.
Looking back two years, Wall Street, the oil and gas industry and its trade associations got it all wrong. I was a minority of one in New Mexico with my OPEC analysis of a low of $23 to $28 per barrel which was realized earlier this year. Once again there is triumphalism and hubris about winning the war against OPEC.
What is it all about? If OPEC agrees to freeze production at August output that would put OPEC between 32.5 and 33 million barrels per day. In 2013, OPEC was below 30 million. If they “freeze” it will be at 2.5 million more than early 2014 while our production had dropped almost 1.5 million.
In other words, OPEC oil expanded its market share and more significantly has displaced our oil here at home in the American market by nearly one million barrels per barrel. This is a double win for OPEC and Saudi Arabia: more of their oil imported into our market and fewer barrels of our oil produced, which is the loss of rigs and jobs and a painful downturn.
The Permian Basin and its Delaware Basin extension into New Mexico has become the new North Slope Alaska of the 1970s. It is there that drilling rigs and well completions will be re-activated next year. The "breakeven” price is lower because of geology and cost-cutting service contracts. The downturn contracts, however, will expire and non-Haliburton contractors will ask for more. Margins will tighten as costs increase. But North Dakota has leveled off and Eagle Ford is not the Permian.
As said before in this column, a warning to Carlsbad: should the Permian/Delaware production ramp up, the market would be oversupplied as in 2013-14 and the oil price will collapse once again. I see this as the Second Downturn in early 2018.
OPEC and Saudi Arabia forecast about a 1-percent increase in annual world demand for oil and they have prepared to preempt our oil from filling it. In short, demand for oil, while an oversupply exists, is not expected to match or exceed supply. The balance between supply and demand is what moves OPEC and Saudi Arabia.
It is important to recognize that the price of oil is set by perceptions of future supply which are based on geopolitics, asset bubbles, interest rates, and speculation. Producers and consumers no longer follow posted prices — algorithms have taken over as substitutes for buyer-seller negotiation.
With the Saudi Arabian and OPEC historic interest in avoiding high prices for oil consumers who will resist, and their recent market share strategic interest, any production cut next month will vanish in favor of flat-out production, continuing the bankruptcies and the loss of jobs and economic growth we have lived through here. Will this happen if the price runs up over $65 per barrel? Yes, without a doubt.
The engineering innovation of our companies is now the basis of the OPEC defeat and the future of higher prices. This is the horizontal effect of economist forecasting. With the exception of BP’s spider horizontal well model, not much more is expected. Saudi and Kuwait lifting costs remain lower.
What is likely after the election next month?
Regulatory cost and obstruction is expected from a Clinton administration. The objective of climate change energy policy is indirectly at work in the regulation of fossil fuel energy. Combined with a Second Downturn, imported oil from overseas should slowly return to early 1990 levels. With banks adverse to risk in both LNG/natural gas as well as oil, operators should not look for relief from Washington, D.C.
With a Trump Administration an attempt to offset climate change with national economic security considerations to sustain a domestic oil and gas industry is expected. The EPA would operate more like a Post Office or without visionaries in charge.
The question of who lost India and its oil market should be the next lecture in the Four Corners. Last week, Russian oil was transported through a Russian port in India alongside a Russian aircraft built in India. Hardly noticed, the Russian supply of oil protects India from Middle East oil and OPEC pricing and offers security in regional politics. Recall, the benefit of selling oil and gas to emerging markets and our new legal right to export our oil to “friends and allies.”
Dr. Fine is the associate director of the New Mexico Center for Energy Policy and the New Mexico Energy Policy Project leader. The views he expresses here are independent of his institutional affiliations.