Archive for the ‘Oil’ Category

Shale oil resists as Saudi attack fails and oil glut may last till 2017

May 29, 2015

Shale oil production in the US seems to have resisted the Saudi attack. While some of the smaller wells have decreased and even stopped production, they can restart very quickly if and when the price is right. US inventories are extremely high, but perhaps of more significance in the long run is that with the pressure of low oil price, shale oil production costs have come down drastically. The Saudi attack on shale has only forced cost cutting measures which the shale industry had not bothered with when prices were high.

Wells which were thought to have a break-even oil price of $60/brl have come down to $40 and those thought to have been at $40 are now closer to $20. Of course they are a long way from Saudi production levels of about $3/brl, but it is the Saudi attack which has now improved their competitive position. Europe – when it eventually gets past its debilitating green lobbies – will be able to take advantage of the much improved and streamlined shale oil production process. Shale oil with a production cost around half of that from the North Sea could provide a bigger boost for the England economy than North Sea gas provided for Scotland.

Saudi shale war

Saudi shale war

It is still a bit of a mystery as to why oil price has stabilised above $50 when inventories are so high. It is probably because OPEC was expecting to take greater market share – which they haven’t – in a recovering Chinese economy – which has not yet happened. The pressure on price is downwards and the current stability is probably temporary. It is likely that oil price is in for almost 2 years at a price averaging around $45/barrel or less.

US oil inventories may 2015 (EIA)

US oil inventories may 2015 (EIA)

ReutersThe North American oil boom is proving resilient despite low oil prices, producer group OPEC said in its biggest and most detailed report this year, suggesting the global oil glut could persist for another two years. A draft report of OPEC’s long-term strategy, seen by Reuters ahead of the cartel’s policy meeting in Vienna next week, forecast crude supply from rival non-OPEC producers would grow at least until 2017.

Sluggish global demand for oil means the call on OPEC’s crude will fall from 30 million barrels per day (bpd) in 2014 to 28.2 million in 2017, effectively leaving the group with two options – cut output from current levels of 31 million bpd or be prepared to tolerate depressed oil prices for much longer.

….. Brent crude has collapsed from $115 a barrel in June 2014 due to ample supplies amid a U.S. shale oil boom and a decision by OPEC last November not to cut output. Instead the group chose to increase supply in a bid to win back market share and slow higher-cost competing producers.

But shale oil production has proved to be more resilient than many had originally thought. “Generally speaking, for non-OPEC fields already in production, even a severe low price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs,” the OPEC report said.

…… since 1990, most of the forecasts concerning future non-OPEC oil supply have been pessimistic and often erroneous: “For example, non-OPEC production was once projected to peak in the early 1990s and decline thereafter.”

 

Time to invest in fossil fuels as China discovers vast new reserves

April 21, 2015

There is a campaign in the western “do-gooding” and deluded “green” community (exemplified by The Guardian) to pressurise investors to disinvest from fossil fuels. Fortunately there is no shortage of investors in Asia who would be only too happy to see the European financial institutions and pension funds selling off their shares in oil, shale and coal producing and using companies. There are few better investments than snapping up artificially depressed energy shares. I am watching closely to pick up any bargains that might appear if this campaign has any impact. So far it has had little effect.

In the 1970s and 1980s the alarmist view was that coal, oil and gas would run out catastrophically. Now that peak-oil and peak-gas have been pushed out into the indeterminate future and further new shale reserves are found, the alarmism has shifted to the use of these resources being catastrophic! The campaign itself is rather idiotic (“leave it in the ground”) and counter-productive, since any success can only shift ownership of energy companies eastwards. Supposedly – but misguidedly – it is about climate but the campaign has no measurable or relevant objectives. (Note that no “climate policy”  ever has a climate parameter as an objective and which can be measured.) It will certainly not reduce the consumption of fossil fuels at all – which will instead continue to grow as developing countries develop. In fact the competitiveness of the fossil fuel using countries will be further emphasised as the “do-gooding” countries entrap themselves into a very high-cost electricity production regime based on intermittent solar and wind energy. (It is worth noting that Germany which has installed more renewable energy than any other European country now has an electricity cost which is the highest in Europe and more than twice that of the US. And yet Germany burned more coal last year than they have ever done! The German Energiwende has been a fiasco for all other than those who have milked the subsidies available)

There is – again fortunately – no prospect of India, China and other developing countries in Asia and Africa reducing their use of all the fossil fuels they have available. If I could I would be investing directly in coal and oil and natural gas and shale gas in India and China and Indonesia. At present I must satisfy myself with some indirect investment.

History will be contemptuous of the irrational demonisation of fossil fuels by the alarmists and the “do-gooders” during the late 20th and early 21st century.

Xinhua reports:

China continued to be increasingly successful at discovering crude oil and natural gas reserves last year, new data from the Ministry of Land and Resources indicated on Thursday.

The country discovered nearly 1.06 billion tonnes of new crude oil deposits in 2014, up from 1.1 billion tonnes the previous year, marking a stable increase and the eighth consecutive year in which the amount discovered surpassed 1 billion tonnes. More than 1.1 trillion cubic meters of new natural gas reserves were also discovered in 2014, a record high.

Of the new discoveries, 187 million tonnes of oil and 474.9 billion cubic meters of natural gas can be exploited with current technology, according to the ministry.

New shale gas reserves discovered amount to 106.75 billion cubic meters, with 26.69 billion exploitable.

This is the first time that proven reserves of shale gas have been publicized since the Chinese government approved the listing of shale gas as an independent mineral resource in 2011.

Discoveries of coal-bed methane, an unconventional gas, amounted to 60.2 billion cubic meters, up 155.3 percent year on year.

shale basins China (The Diplomat)

shale basins China (The Diplomat)

The Indian sub-continent too has large shale reserves waiting to be exploited. The shale basins extend into Pakistan and Bangladesh and offers Pakistan the possibility of actually becoming self-sufficient for energy.

shale gas basins India

shale gas basins India

Fossil Fuels Will Save the World (Really)

March 17, 2015

Matt Ridley has an opinion piece in the WSJ which says many things far better than I can.

The environmental movement has advanced three arguments in recent years for giving up fossil fuels: (1) that we will soon run out of them anyway; (2) that alternative sources of energy will price them out of the marketplace; and (3) that we cannot afford the climate consequences of burning them.

These days, not one of the three arguments is looking very healthy. In fact, a more realistic assessment of our energy and environmental situation suggests that, for decades to come, we will continue to rely overwhelmingly on the fossil fuels that have contributed so dramatically to the world’s prosperity and progress. …….

The article is well worth reading. Fossil Fuels Will Save the World Ridley WSJ

Ground zero is that fossil fuels will eventually be replaced only when a cheaper, more reliable source of energy (electricity production) is found. There is no foreseeable “peak” for fossil fuels and availability is not a constraint. Solar and wind technologies have small, clear niches which they can well fill but practical and affordable energy storage is needed before they can be any significant source of our energy consumption. And Li-ion batteries will not cut it. As Ridley points out they provide about 1% of our energy consumption today while fossil fuels still reign supreme at about 87%. Nuclear power could make a severe dent in fossil fuel consumption, but only if the costs and the construction time due to the regulatory process can be drastically reduced – and that does not seem likely as long as alarmists and doom-sayers hold sway. (I estimate that around 30% of the capital cost of nuclear plants is unnecessary and due to CYA regulations which are driven by fear). Small, safe, pre-approved, modular, fifth-generation nuclear power plants could take-off but that requires many alarmists to give up their faith.

(As an aside, I observe that climate and energy politics have become the politics of fear, but I am an optimist and I expect the pendulum will swing to return to energy politics based on courage. It is a form of cowardice which drives energy politics today where I take cowardice to be actions subordinated to fear and courage to be fears subordinated to purposeful actions).

Perhaps fusion (probably hot rather than cold) will come – but a breakthrough is not in sight (though by definition breakthroughs are never generally in sight). We can fantasise that we will someday be able to tap into the gravitational energy of the solar system (which would be solar energy in another form). I don’t doubt that some new, cheap, energy source or energy conversion technique will appear – but until then fossil fuels will provide the basis for human development. And if we are on our way into a new ice age it is fossil fuel which will ensure our survival.

I dismiss the hypothesis – and it is still only a hypothesis – that man-made emissions of carbon dioxide are of any significance for “global temperature”. In fact the carbon dioxide concentration in the atmosphere (and man-made emissions are a tiny contributor to that) has a very small effect on “global temperature”. Instead it is “global temperature” which has a very large effect on carbon dioxide concentration through the balance of absorption and emission from the oceans and from the biosphere. Carbon dioxide concentration lags rather than leads “global temperature”. The sun and clouds and ocean currents and winds (also driven by the sun) dwarf any effects of carbon dioxide. The hypothesis looks broken considering that over the last 18 years man-made carbon dioxide emissions have increased sharply but “global temperature” has been static. Even the assumed “global warming” that is supposed to have taken place over the last 100 years are to a significant extent “manufactured” by “adjusting” temperature data and choosing weighting and averaging algorithms which are biased to show a pre-determined result. There is a shortage of “science” and far too much confirmation bias in what passes for “climate science” these days.

High stocks and continued oversupply mean oil price has further to drop

March 9, 2015

The underlying and driving fundamental remains that there is an oversupply and oil stockpiles are still increasing. Certainly oil exploration has taken a hit with the drop in oil prices and will – eventually – lead to lower production. Certainly the growth of shale oil production in the US has slowed. But the decline in some of this production has only been to turn off the most expensive production rigs. The oversupply has hardly been affected. Industrial growth has not yet picked up enough to balance this oversupply.

Oil price has been relatively stable for over a month at around $60 per barrel and all the talk from Saudi Arabia and the Gulf is about a stabilisation at this level and a recovery of oil price in the second half of 2015.

MarketPulse:

Saudi Arabia’s oil minister said on Wednesday he expected oil prices, which hit a near six-year low in January, to stabilize, signalling cautious optimism about the market outlook. Giving a speech in the German capital, Ali al-Naimi also urged non-OPEC producers to help balance the oil market, saying it was not up to Saudi Arabia to subsidize higher-cost producers and that circumstances required non-OPEC to cooperate.

“Going forward, I hope and expect supply and demand to balance and for prices to stabilise,” Naimi said. “Global economic growth seems more robust.” The comments are a further sign OPEC’s top producer is sticking to its policy to defend market share. Last month, Naimi signalled satisfaction with developments, saying he saw oil demand growing and that markets were “calm”. Oil was trading just above $60 a barrel on Wednesday, up more than 30 percent from a near six-year low close to $45 on Jan. 13.

ABS CBN:

World crude prices are expected to gain this year or at least stabilise at between $50 and $60 a barrel, Kuwaiti Oil Minister Ali al-Omair was quoted as saying.

“Forecasts for the oil price this year indicate that it will gain or at least stabilise between $50 and $60 a barrel,” the official KUNA news agency quoted Omair as saying late on Saturday in Bahrain. The minister said prices are currently supported by conflict in Iraq and Libya and by a drop in sand oil and shale oil output. But that is counterbalanced by slow global economic growth, which is dampening demand, Omair said.

World prices dropped at close on Friday as the dollar rose sharply, making dollar-priced crude more expensive for buyers using weaker foreign currencies. West Texas Intermediate for delivery in April slid $1.15 to $49.61 on the New York Mercantile Exchange, ending near its week-ago level. Brent North Sea crude for April, the international benchmark, dropped 75 cents to $59.73 a barrel in London.

But there is a large element of wishful thinking here. The January price of around $45 per barrel was just testing the waters that we will probably see again later this year. According to “data released by the Energy Information Administration (EIA) shows that crude inventory is sitting at an 80-year high with the United States recently recording its biggest weekly inventory rise in 14 years. Crude inventories are now sitting at 444.4 million barrels, which is more than a year’s worth of production”. Storage capacity in the US is now utilised to 60% compared to 48% at this time last year.

Global economic growth may provide some demand growth in the second half of 2015 and it is possible that oil price will remain at between $50 and 60 for most of the year. But I think it is more likely that we will see another dip to around $40.

US crude oil stocks March 2015 source EIA

US crude oil stocks March 2015 source EIA

 

 

Swedish motorists among least benefited by oil price drop

February 26, 2015

Price is whatever value people are prepared to pay. There is no morality or ethics involved except if there is a monopoly of supply or the collusion of a cartel. (And Saudi Arabia and OPEC and the oil majors are no strangers to cartels). There is no inherent reason – other than competition – for price to the consumer to follow the cost to the producer.

Following the recent drop of oil prices, the benefits to the consumer (petrol price to motorist) varies greatly between countries. The US motorist has seen the greatest benefit. India is not far behind. But the Swedish motorist has seen relatively little of the benefit.

I take 95 octane petrol/gasoline and January 2014 as the reference point.

Crude oil price 2014

Crude oil price 2014

petrol prices at the pump

petrol prices at the pump

petrol price at the pump table

I wonder why?

Iran prepares to resist Saudi Arabia even with $25 oil price

January 19, 2015

Iran needs $72 per barrel for its budget. That Iran (along with oil shale production) is one of the targets of Saudi Arabia’s oil price strategy seems very clear. They have the lowest cost of extraction and with their accumulated reserves they could probably withstand 5 -8 years with a price lower than $50. However their strategy will be completely nullified if there is growth in demand (for example with an economic recovery in China) before they have brought the shale oil producers and Iran to their knees. The question now is how low the price can go?

Light crude price February 2015

Light crude price February 2015

The Iranians are girding their loins for a battle and are adjusting their budgets to be able to withstand a longer period with relatively low prices. Iran probably wants to avoid precipitating a further fall but I suspect that just mentioning their worst fears – in the present atmosphere – will only ensure that those fears come true. It would seem, from the almost belligerent Iranian stance, that prices will now almost certainly drop to around $25 per barrel within the next 6 -12 months.

Reuters:

Iran sees no sign of a shift within OPEC toward action to support oil prices, its oil minister said, adding its oil industry could ride out a further price slump to $25 a barrel.

The comments are a further sign that despite lobbying by Iranand Venezuela, there is little chance of collective action by the 12-member OPEC to prop up prices – entrenching the reluctance of individual members to curb their own supplies.

In remarks posted on the Iranian oil ministry’s website SHANA, Oil Minister Bijan Zanganeh called for increased cooperation between members of the Organization of the Petroleum Exporting Countries. ……. 

Oil has plunged by more than half since June 2014 to below $50 a barrel on Monday, pressured by a global glut and OPEC’s refusal at its last meeting in November to cut its output. ……. 

OPEC decided against a production cut despite misgivings from non-Gulf members such as Iran and Venezuela, after top producer Saudi Arabia argued the group needed to defend market share against U.S. shale oil and other competing sources. ……… 

Zanganeh said Iran had no plans to cut its own oil production and that it had no further meetings with Saudi Arabia – Iran’s main political rival in the Gulf – since the OPEC meeting.

Last week, Iranian President Hassan Rouhani said countries behind the price fall would regret their decision and warned that Saudi Arabia and Kuwait would suffer alongside Iran from the price drop.

Zanganeh said Iran’s budget should be based on oil at $72 per barrel, but Iran could withstand lower oil prices. “Even if the oil price goes down to $25 a barrel, the oil industry will not be threatened,” the Fars news agency quoted him as saying.

Oil wars: US crude drops below $50 as Saudi Arabia drops prices to protect market share

January 6, 2015

Some stock markets are spooked as oil prices continue to slide, but bringing oil price back to a cost-based price is a good thing in the long term. For too long – almost 45 years – oil producers and their governments have fleeced the consumer. Oil prices have had no relationship to cost of production but have been governed by artificially controlling its scarcity (by the OPEC cartel) and pricing it at the level of unacceptable pain for the consumer. Predatory governments have assisted by taxing oil products as far as they can even for the necessities of living (gasoline, diesel, LPG, fertilisers, pesticides…). If the present oil wars bring the price to the consumer in line with the cost of production – and there is no shortage of oil available to be produced – then it is a fundamentally sound, and long overdue, removal of one of the great, artificial distortions of the market place.

History will show the OPEC cartel to have held back development for 4 decades and to have been an evil thing.

Even if Saudi Arabia is engaged in a multi-pronged war – against shale oil, against Russia, against Iran – the root cause of the drop is that there is no longer a monopoly that the OPEC cartel enjoys. And the the way being shown by US shale oil is available to many more countries. In the short term it may well affect stock markets as these fetters are removed but in the long term this is an inexorable driver of growth – especially for the developing countries and their hard pressed consumers.

Remarkably many oil producers are now even increasing production in a time of a glut and cutting prices to win market share. They are being short-sighted. As the Opec cartel collapses, and it becomes a buyer’s market it will be oil price which governs and even then only for short term supply contracts. It will no longer be possible for the cartel oil producers to extort long-term contracts at high prices from developing countries who have no alternatives.

FP0106_Oil_C_JR

2015 not 2014 — via Financial Post

 Financial PostU.S crude crashed below US$50 a barrel while benchmark Brent crude tumbled under US$53 after data showed Russian oil output at post-Soviet era highs and Iraqi oil exports at near 35-year peaks.

Meanwhile, the outright price for Canadian heavy crude fell below US$35 a barrel. ……. The drop in WTI pushed the pushed the price of Canadian heavy crude to US$34.64 per barrel, a level that could make producing crude from the oilsands unprofitable for most operators in the world’s third-largest crude reserve.

Many of the region’s operators have already slashed capital spending and slowed work on new projects in order to cope with the price crash, though production from the region has not yet been affected.

…… Top crude exporter Saudi Arabia revealed it had made deep cuts to its monthly oil prices for European buyers , the sixth time in a row since June when it had slashed prices, corresponding with the rout in crude futures markets over the period. Analysts read the latest cut as reflecting Saudi Arabia’s deepening defence of its market share for crude. The OPEC kingpin also trimmed its prices for U.S. refiners for a sixth straight month, while raising rates for Asia.

…… Some traders seem certain that U.S. crude will be trading in the US$40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build. ……. 

Russia’s oil output hit a post-Soviet high last year, averaging 10.58 million barrels per day (bpd), up 0.7% thanks to small non-state producers, Energy Ministry data showed. Iraq’s oil exports were at their highest since 1980 in December, an oil ministry spokesman said, with record sales from the country’s southern terminals.

The Russian and Iraqi data overshadowed reports of drops in Libya’s oil output due to conflict. Libya’s oil output has fallen to around 380,000 bpd after the closure of the OPEC producer’s biggest oil port Es Sider, along with another oil port Ras Lanuf.

The sooner oil price drops to less than $40 per barrel, the sooner the oil price can stabilise for 12 – 18 months. Then, as the price works its way through the economies of the consumer countries, the markets could see a year or two of stable, sustainable growth.

Is Saudi Arabia prepared to let oil price drop to $20?

December 20, 2014

Saudi Arabia seems to fighting two battles; one against oil shale and one against the Iran-Russia combination. In the long term both are doomed to failure. At best all that Saudi Arabia can hope for is that

  1. the smaller shale oil producers find it uneconomic to continue production, and
  2. Iran and Russia’s oil production is severely curtailed.

But any such result is bound to be temporary. It may force the reduction of investment in shale oil but Russia and Iran will need to produce more to keep their revenues up. It is unlikely to lead to the permanent impairment of oil production from shale or in Iran and Russia. It may allow Saudi Arabia to take control of pricing for a while but the OPEC monopoly has already gone. And the limited monopoly they can win, can only continue as long as oil price stays too low to make it economic for the shale and tar sands alternatives. The reestablished monopoly will only apply as long as oil stays cheap.

It becomes intriguing now as to whether Saudi Arabia has the nerve to allow prices to drop to as low as $20 per barrel and for how long? The long term benefits to Saudi Arabia are not quite so clear for me. Having a monopoly which does not allow prices to rise seems somewhat useless. Certainly their cost of extraction is so low (less than $5 per barrel) that they could continue making profits, but they would need to keep the price low for many years to see off the competition – and the competition would come back if prices rose again.

Anatole Kaletsky considers this question at his Reuters blog:

…… Low oil prices will last long enough for one of two events to happen. The first possibility, the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump. The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004. ….

….. The key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range. The history of inflation-adjusted oil prices, deflated by the U.S. Consumer Price Index, offers some intriguing hints. The 40 years since OPEC first flexed its muscles in 1974 can be divided into three distinct periods. From 1974 to 1985, West Texas Intermediate, the U.S. benchmark, fluctuated between $48 and $120 in today’s money. From 1986 to 2004, the price ranged from $21 to $48 (apart from two brief aberrations during the 1998 Russian crisis and the 1991 war in Iraq). And from 2005 until this year, oil has again traded in its 1974 to 1985 range of roughly $50 to $120, apart from two very brief spikes in the 2008-09 financial crisis.

What makes these three periods significant is that the trading range of the past 10 years was very similar to the 1974-85 first decade of OPEC domination, but the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985 and the shift from monopolistic to competitive pricing for the next 20 years, followed by the restoration of monopoly pricing in 2005 as OPEC took advantage of surging Chinese demand. ….

……. There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis. In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor. …

…… So which of these arguments will prove right: The bearish case for a $20 to $50 trading-range based on competitive market pricing? Or the bullish one for $50 to $120 based on resumed OPEC dominance?

Whether market pressures dominate or whether the cartel reestablishes control, we seem to be in for a long period of prices around $40 – 50 per barrel. At this price bio-diesel would need hefty subsidies to survive. Assuming that gas prices continue their link to oil prices, gas becomes the dominating choice as fuel for power generation. Renewable energy will need even greater subsidies which are already being cut back. Not all of this price reduction will be passed on to the transport industry. The pass through of the price cut will be greater in the US than in Europe or Asia. But any pass through is itself a stimulus for consumer spending.

For the stagnating world economy low oil prices can only be a good thing.

Less than $60 – but where’s the bottom for oil price

December 12, 2014

I reckon the bottom is about 6 months away and probably less than $40 per barrel before there is some recovery. If the price does not fall that much, or if it recovers faster, then Saudi Arabia will have lost its battle against shale oil. In any event, shale oil is here to stay and all Saudi Arabia can hope for is to restrict new and small oil shale wells. Even a steep fall to around $40, held for a period of only 6 – 12 months, will not be enough to put all shale oil producers out of business and win the battle against shale oil.

oil price bottom

Break-even price for shale oil could be as low as $40 per barrel

November 28, 2014

UPDATE: Reuters – Saudi Arabia’s oil Minister Ali al-Naimi declares war on US Shale OIL


 

Yesterday Saudi Arabia got its way at the OPEC meeting and successfully resisted all calls for a cut in production to try and stop the decline of world oil prices.  It seems Saudi Arabia (which has the lowest oil production cost in the world) has chosen the strategy of maintaining an oil price low enough to put a cap on US shale oil production and provide a disincentive for new shale oil wells.

This strategy is premised on the break-even price for shale oil being at or above $80 per barrel for small production sites down to about $30 per barrel for large production sites. For example Credit Suisse estimated these levels as varying between $24 and $85 earlier this year.

shale oil break even estimates credit suisse

shale oil break even estimates credit suisse sep 2014

 

The US department of Energy puts sustainable break even values between $35 and $54. The Saudi calculations seem to be based on similar estimates. They appear to believe that with current oil prices moving down to about $70 per barrel, some of the smaller US oil shale wells are already uneconomic and that at this price new investment for further production sites will dry up.

But shale oil production costs are declining – fast. Costs are coming down following the learning curve for both capital costs and running costs. The analyst estimates are already out of date. My estimate is that actual break-even points are already down about 20% from those in the Credit Suisse estimate.

So I believe the Saudis have miscalculated. The average break-even world price for shale oil is probably – already – closer to $40 per barrel rather than $60-70 per barrel being assumed. While new investment in shale oil wells may well be toned down by world oil consumption, it will probably not be because world oil price is below some critical threshold. If the Saudis believe that any uptick in consumption will bring the oil price back up to over $80 per barrel, they are following a flawed strategy. We could be in for a decade of relatively low oil prices perhaps with a floor at around $40 per barrel and set by the average break-even for shale oil.

Consumers are still very wary. They are not sure that the reduction in oil price will be sustained and is not just a temporary dip which might lure them into a higher and more vulnerable consumption level. It will take a few months for them to see that OPEC has actually lost control over the world oil price but is still in denial about that. A sustained low oil price is what will trigger a new – and sustained – wave of global growth that is now so badly needed. The cartel is shrinking. New shale oil producers will all be outside the cartel – and the sooner Europe, China and India start production the better. But it is the beginning of the end of the OPEC cartel power.

History will – I think – show that the OPEC cartel lasted for 50 years. It will show that the cartel started in 1973 and that market forces of supply and demand were re-established around 2020.


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