Fine: World oil, producers, price and policy

Daniel Fine
Daily Times Energy Columnist
Energy policy expert Daniel Fine.


This writer, earlier on, regarded the OPEC-nonOPEC production cut as a must for Saudi Arabia. If the royal family – the Crown Prince — is unable to balance world oil supply and demand this year via OPEC quotas it would create instability in Saudi Arabia. Saudi Aramco (state owned oil) was in overcompliance with Its reduction until now, briefly lowering output from more than 10.4 million barrels per day to somewhat under 10 million barrels.

In Houston three weeks ago, the minister of oil and head of Saudi Aramco warned other OPEC members and Russia (non-OPEC) that there would be no “free Riders” or non-compliant OPEC members producing more oil that agreed upon. This, when coupled with a dinner at which the OPEC secretary general met a group of American shale producers to propose a joint cooperative approach to an American oil production cutback, clearly indicates that the “deal” of lower OPEC world oil production was in deep trouble.

The price of oil tumbled two weeks ago as traders exploited the apparent weakness of OPEC by selling and forcing the price down to the mid-$40 per barrel. Continental Resources led by Harold Hamm has suffered a one-third loss of its share price in less than four months.

It is widely understood that Southwest and Dakota shale producers are behind massive capital outlays and drawing rigs out in record numbers. Production In domestic oil has recovered to more than 9 million barrels per day and is approaching the 9.4-million-barrel record of two years ago before the downturn began.

OPEC internal tension is based on how far the “Americans” will go – how much OPEC oil reduction is being replaced by American production. The Houston dinner, no doubt illegal if it included discussions of price and production, failed. What next?

Next month OPEC will meet to decide whether to extend the production cutback deal of removing 1.8 million barrels per day from the world market. This will depend on the price per barrel. Should it fail to have reached more than $60 per barrel (for West Texas Intermediate), the “deal” would not be extended and a resumption of “production at will” will take place.

Consequently, the price per barrel will retrace the 2016 average of $43.44 per barrel and then test $35 per barrel. This will trim Permian producers who can turn to prolific wells that promise a 10 percent return on capital deployed. Those are few and mostly the very large producers without debt constraints.

This is the scenario of the “Second Downturn” sketched out earlier in a talk I delivered at the San Juan College School of Energy. It follows that the intense competition among the “Americans” prevented the adoption of OPEC deal cooperation.

It remains to be seen what Washington will do in an “America First” policy application to American oil communities and workforce in a Second Downturn.

President Donald Trump would exercise bilateral power in taking OPEC apart country by country. He has the authority under trade laws and the World Trade Council to invoke national security actions. He can reduced oil imports from OPEC nations and investigate foreign oil usage of American oil storage, which has in part parked oil in tanks at a current count of more than 500 million barrels. Finally, he can review and reduce the security cost of protecting the world flow (U.S. Navy) of oil on behalf of OPEC, which did not vanish with the end of the Cold War with the Soviet Union 25 years ago.

At least he would not rest easy with a Second Downturn in the oil industry as another in the White House did nearly three years ago.

There is a Navajo saying that when a horse dies, get off. This should apply to ex-secretaries of state George P. Shultz and James Baker who are organizing a new version of a carbon tax. It has been around since the 1970s as an economist favorite,  mostly in the Ivy League.

They have invented a new incentive, however. Pay a dividend to the American tax-paying family, or everybody, from the revenue stream of a carbon tax. Is this a new approach to the Trump Movement in 2020? What has it to do with lowering the carbon emissions, which are supposed to change climate? Is this similar to arguing that methane must be controlled because it is an economic waste – economism – as a way of selling it to the voters. Obama’s administration never embraced It.

Exxon has voted for natural gas. It has bought into a world gas play in off-shore Mozambique in the billions. This confidence in natural gas is good news for the San Juan Basin. After all, ExxonMobil recently purchased 3.6 billion barrels of oil reserves in the Permian/Delaware Basin.

At his New Mexico Senate confirmation hearing in Santa Fe last month, new Secretary of Energy Minerals and Natural Resources Ken McQueen established a geological foundation for coalbed natural gas and carbon emissions. Seeps and natural gas around coal seams were created with 10 million years of process. T. Greg Merrion of Merrion Oil and Gas joins McQueen and adds that it is the dewatering of shallow coal that releases carbon emissions in the recovery of natural gas.

A technical paper no doubt is forthcoming on how it got there that will cause debate with climate scientists on climate change. McQueen was confirmed in a sweeping bipartisan vote.

Daniel Fine is the associate director of New Mexico Tech’s Center for Energy Policy. The opinions expressed are his own.