A lot of people have been experiencing this “deja-vu” condition, particularly specialists reading the news that on November 5 the price of Texas light oil (WTI) started to approach the 75 dollar mark. In one day alone the price of light oil fell by 3 dollars, in percentage terms losing as much as 3.7%, according to Bloomberg.
The reason for such a sharp drop in oil prices is the company Saudi Arabian Oil which has lowered the price of its exports to the United States. “This action by Saudi Arabia shows that it is trying to keep its share of the market in the USA, which has recently started to decline,” John Kilduff of Again Capital LLC hedge fund points out, adding that this oil price will have no effect on Saudi Arabia, as this country can allow itself to lower the price of oil artificially and still feel comfortable. The effect of this was immediately to produce feelings of “deja-vu” of the events that took place in the 1980s, when Saudi Arabia and the UAE started increasing the production of “black gold”. It was precisely this action that led to the sharp fall in world prices and proved to be extremely detrimental for the Soviet Union. However, there is now a completely different alignment of powers, and if anyone is being threatened by the sharp fall of Saudi oil exported abroad it is mainly the USA and its “shale oil revolution”. The fall in oil prices has struck a blow at American production companies which had put their plans for the processing of new deposits in 2015 on hold. In any case, the economy of the USA is in an advantageous position – the fuel prices as well as oil prices have fallen, and American – unlike Russian – consumers have saved $70 billion which may become a reserve for the growth of internal demand.
However, the situation is not so evident for the USA and is rather so complicated that it cannot be estimated by analysts. Washington’s readiness to play “the oil card” is related to its belief that shale energy resources extraction will allow America to become “the world’s biggest oil producer”.
But the sharp fall in oil prices makes the processing of a number of shale oil deposits unprofitable. Smaller American companies which have recently been the most successful at processing shale oil, surpassing such giants as Royal Dutch Shell and Exxon Mobil, have started to slip. For example, Sanchez Energy from Houston intends to spend $600 million this year to support the production of the Eagle Ford deposits owned by them – one of the largest shale oil deposits in the USA, situated in the south of Texas (along with the Bakken deposit in the north of Dakota). But this is twice as high as the profits the company expects to receive by the end of the year. In the 4th quarter of 2014 Chesapeake Energy confirmed a net loss of $116 million, worse than the market expectation. Fort Worth announced a 47% fall in profits during the same period. QEP Resources Inc. reported that its production fell by 10.5% as compared with the figures for the corresponding period in 2012.
Shale oil deposits are marked by higher depletion rates than traditional deposits. Companies are forced to increase the number of wells in order to keep production at previous levels. The International Energy Agency (IEA) estimates that workers at the Bakken oil and gas deposits have to drill around 2,500 new wells to keep production at the level of 1 million barrels a day. For comparison, companies processing usual deposits in Iraq will only need to drill 60 wells this year to maintain the same level of production.
According to the estimations of the SunTrust Robinson Humphrey agency, in order to keep the prices at the level of $100 per barrel, independent companies in the USA will spent an average of $1.50 for each dollar made from the production and sale of oil and gas, and in the case of the giant company ExxonMobil – 68 cents for each dollar.
The “shale oil revolution” might have prospered at the previous high prices and continued to gain pace. But at today’s prices which have fallen by 25% only in the last few months, all this threatens to have a catastrophic effect not only on the oil industry but also on the present American establishment, just as in the USSR at the time. The Americans are hardly likely to agree to an increase in prices in the oil industry, which in turn poses a threat to other sectors of the economy (transport, electricity, heating, etc.)
Furthermore, the Saudis have no intention of leaving the American market and have made it clear that they will fight to the end. “We’re very interested in the American market,” the Saudi newspaper Al Jazirah candidly writes, “and in the current conditions we will lower the price of our own oil in the USA until we can reinstate our previous quota, which will of course lead to the collapse of the shale oil revolution.”
However, Saudi Arabia is not a country that can tolerate cheap oil for several years. “On the contrary, it is keen to see oil prices rise,” remarks the German Tagesspiegel. “Statements are being issued one after the other, when all you got before was silence, which points to some media campaign in the industry and the Saudis’ attempts to reinstate the previous prices on the markets.”
The majority of the players on the world oil market are not content with the current pricing situation. In the USA the shale oil projects have come under threat, Venezuela is talking of a threat to the entire economy, and the fall in prices is even having a negative impact on Russia.
But there’s one player who should be happy. That is China, which has not lost its head and has seized the moment. The number of supertankers heading for China’s ports is the highest it has been for nine months. The world press notes that the number of the largest vessels in the industry transporting crude oil is as high as 80. On average, each of these tankers transports 2 million barrels, which means that China will receive 160 million barrels in the near future, and this is likely to continue. China is obviously trying to fill as many depositories as possible while the prices are low.
The average daily consumption in China has now risen to 10.3 million barrels. The IEA predicts that the growth in 2014 will be 2.3% in 2014, and 3.2% in 2015. China increased its import of oil to 13.1% in September, compared to 6.7% million barrels a day in August, while over the nine months of 2014 imports have grown by 8.3% – to 6.11 million barrels a day. The demand for “black gold” in China continues to grow, forcing it to spend $500 billion a year on imports by 2020, according to the data of Wood Mackenzie.
Current consumption requirements are generally met by imports of oil from Angola, Venezuela and – increasingly – from Russia. Saudi Arabia seems to be totally excluded from China’s plans. At the present time, Saudi Arabia accounts for 19% of China’s total import of oil, but this level has remained unchanged for two years already. Saudi Arabia’s contribution is likely to be reduced in the future.
China may become an important factor for stabilising oil prices in the near future. If the number of supertankers heading for China does not fall, experts note, then this should shore up the world market in the short-term.
“It’s perfectly obvious that the decrease in the growth rate of the global economy, the record increase in global supplies of oil, as well as the manipulation of oil prices for the benefit of some people’s interests have all had an impact on the oil market,” announced President Vladimir Putin in an interview with the Chinese media the day before his visit to China. “In addition, there’s always a political element to oil prices. Moreover, at certain times of crisis, you get the feeling that politics is the deciding factor in setting the prices of energy resources.”
Everything will clearly fall into place in the near future, and we’ll see new victories or the general defeat of the “shale oil revolution” in the USA, Riyadh’s ability to lower its oil prices further or price politics being re-directed towards increases. We should not forget that when the Arab Revolution engulfed Saudi Arabia some years ago, King Abdullah ibn Abdel Aziz Al Saud was able to buy the subordination of his subjects for 170 billion dollars. Can he now, when the internal situation of his kingdom is continually heating up, find that amount, and more importantly, is Washington, the main custodian of Saudi wealth, willing and able to give away such an immense sum of dollars without harming its own economy?
And one more thing: amid the euphoria of the “shale oil revolution”, will Washington want to save the Saudi regime, knowing that Riyadh is trying to inflict harm on the USA willingly or unwillingly by its actions in the oil industry?
Victor Mikhin, corresponding member Russian Academy of Natural Sciences, exclusively for the online magazine “New Eastern Outlook”.
