Game Change: U.S. Oil Revolution Has Torn Up the Rule Book

BY KEITH JOHNSON

FEBRUARY 10, 2015

In a radically different oil market, says the International Energy Agency, the United States looks like the winner and Russia and other ailing petrostates the losers.

Game Change: U.S. Oil Revolution Has Torn Up the Rule Book

This, the International Energy Agency said Tuesday, is most definitely not your father’s oil market.

In its annual five-year oil market outlook, the IEA, which is the energy agency of the Organization for Economic Cooperation and Development (OECD), said that the rise of the United States as a heavyweight crude producer, OPEC’s abdication of its historical role as the arbiter of world oil supply, and sluggish oil demand growth worldwide will have big implications for oil producing and consuming countries alike.

The upshot: generally smooth sailing for the United States, a few years of discomfort for cash-rich oil giants in the Persian Gulf, and years of turmoil, crippled finances, and political instability in petrostates like Venezuela. Russia will be hit hardest, the IEA said.

In contrast to the continued increase in U.S. production over the next five years, the IEA expects Russian oil output to shrink by half a million barrels a day, thanks to lower crude prices, devastating Western sanctions, and a withering currency. All those factors make it hard for Russia to invest in capacity to maintain oil production at old fields, let alone tap exotic new projects in the Arctic or offshore.

“Russia, facing a perfect storm of collapsing prices, international sanctions, and currency depreciation, will likely emerge as the industry’s top loser,” the IEA said. Russia’s oil production could fall by 560,000 barrels a day by 2020, the agency said; today, Russia pumps about 10.5 million barrels a day. That, in turn, would likely cause a broader economic slowdown that could represent the most serious challenge to Russian President Vladimir Putin since the strongman began his reign more than a decade ago.

Beyond Russia, the oil market has one big, immediate question: Is the rout over? Prices fell more than 50 percent from summertime highs, which in turn scared the industry into slashing investment, which in turn has spooked oil traders and sent prices back up in recent days. With the price per barrel in the mid-$40s, American drivers got a jolt of nostalgia as gas prices plummeted at the pump to less than $2.50 per gallon in many parts of the country. That’s changed a bit in recent days, with U.S. oil prices rebounding to about $50 a barrel. (That also nudged prices at the pump back up.)

Oil analysts are divided about whether the whiplash-inducing price swings will come to an end anytime soon. Some, such as Citibank’s veteran Edward Morse, think oil could go as low as $20 a barrel. Optimists inside OPEC think it could soar again as high as $200 a barrel.

Figuring out who’s likelier to be right is tricky because of the double-barreled change in how oil markets work. U.S. oil output, largely dependent on fracking hundreds of individual wells, is a lot more responsive to price swings than huge, multibillion-dollar oil projects in other parts of the world. That means the supply side of the market is twitchier than it’s ever been.

But the old rules of oil consumption are also out the window, the IEA said. First and foremost, oil demand is no longer about the industrialized world: In 2014, for the first time, developing countries outside the OECD burned more oil than the rich countries inside it. In 2015, for the first time, Asia will consume more oil than the Americas.

“The center of gravity of oil demand continues to move east,” the IEA said.

What’s more, the whole nature of oil consumption is changing, too. In the past, there was a straight line between cheaper oil and increased demand. Not anymore: Thanks to a global hangover from the Great Recession, greater energy efficiency, and a conscious move to put energy-guzzling economies like China’s on a diet, cheaper oil no longer automatically finds buyers.

The IEA says that double whammy suggests that oil prices will pick themselves up off the floor, but won’t likely climb to dizzying heights, either. It assumes that prices will “stabilize at levels higher than recent lows, but substantially below the highs of the last three years.”

Underlying the whole convulsing market is the U.S. tight oil revolution. Last year, the United States far outpaced every other country in the world in boosting oil production. The IEA expects that to continue: The United States will pump two out of every five new barrels that come out of the ground in the next five years. Canada will also keep growing, adding an extra 800,000 barrels a day of production over the period, despite fears in the industry that lower oil prices will kneecap producers.

“The price correction will cause the North American supply ‘party’ to mark a pause; it will not bring it to an end,” the IEA said.

OPEC can’t say the same. The oil-producing cartel will increase production only about half as much as the United States, the IEA said, and Iraq accounts for nearly all of that projected growth. Given the threat Iraq faces from the Islamic State, combined with a shrinking budget and worries over how to keep juicing production at its big southern oil fields, that is one very wild wildcard.

Though for the IEA, Libya is OPEC’s real problem child. The country is torn by feuding governments and dueling militias, with Islamists fighting over control of oil fields. That has reduced Libyan oil production to a “trickle,” the agency says. Iran presents the opposite case: The prospect of a deal with Western countries over Iran’s nuclear program raises the possibility of an end to the sanctions that have hamstrung Iranian oil exports. If a deal is reached, the IEA warns, more than 1 million barrels a day of Iranian will flood the markets, upending trading patterns globally and sending prices lower.

With Russia tapped as the oil world’s biggest loser in the report, Russian oligarchs are looking outside their own borders for someone to blame for their troubles. Igor Sechin, the head of Russia’s big oil company Rosneft, blamed OPEC for the market turmoil at an industry event Tuesday in London: The cartel decided to keep pumping oil late last year even as prices were in free-fall, despite pleas from Moscow, Caracas, and Tehran to close the spigots.

But Sechin, battered by sanctions on himself and on Rosneft, also belittled the U.S. oil boom, saying that revolutions by their nature are short-lived. As a result, Sechin expects falling prices to squeeze producers so much that there will be a supply shortfall later this year.

For the IEA, that’s a little doubtful. Lower prices will lead to a tighter market later this year, but hardly a supply shortfall. More to the point, the global oil market revolution, especially in the United States, will not go gently into that good night.

“If anything,” the IEA concluded, North America and Iraq “loom even larger by the end of the decade than previously expected.”

If oil demands are moving East as this article says then Russia will have a massive ready made market on its doorstep, and don't forget Europe which gets half its oil and gas from Russia. This supply chain cannot be changed easily and its why Germany is now backing down in its ill-judged attacks on Putin. The oil price will soon move up as where it is now will stop shale oil production in its tracks.

There is new battery technology rapidly maturing that promises, within the next five years, the massive production and sale of inexpensive electric cars with a 200 mile range. If that is realized it will significantly temper the nation's thirst for oil.

If the Environmentalists who are pushing their AGW meme would actually think about being effective rather that trying to be intellectual elitists, they would take the argument that Renewables will free the countries that are net importers of energy (most Western countries and most Eastern Asian countries) from the generally bad actors who are net exporters (apologies to the few good actors like Norway).

With a technology product such as solar whose costs should continue to decline over time, we would not only produce cleaner energy, but we could defund the bad actors in the Muslim world along with others such as Russia and Venezuela. More people could buy into a very tangible vision of moving away from these troublemakers than they do based on an unresolved scientific debate about global temperatures.

Environmentalists (and pretty much everyone else concerned with maintaining US hegemony) have LONG espoused 'Increased Energy Independence' as one of the potential benefits of investing in renewables. As a bunch of intellectual elitists they realized that 'Not Accelerating the Pace of Global Warming' was not the only impact decreasing our dependence on fossil fuels would have.

Your shallow dig against elitist strawman environmentalism is pretty lame. Believe it or not smart liberals and conservatives concerned with protecting our planet aren't so blind in their tree hugging fervor that they cannot see the forest through the trees. I'm not saying you are wrong about there being all kinds of good reasons to invest in renewables - I'm saying you are right and welcome to the intelligent thoughts conversation!