Monday, January 5, 2015

The crude reality of declining crude oil prices

The crashing price of oil, which dominated the world of energy in the last six months, and promises to stay with us for much of 2015, has brought cheers to American consumers and tears to the oil tsars of Russia, Iran and Venezuela in particular. If the price of oil remains in the neighborhood of $60 per barrel (bbl) for much of this year, the economic impact on Russia, Iran, Venezuela and maybe Iraq, Algeria, Nigeria and Libya could be ruinous. The sharp decline in oil revenues could force both Russia and Iran to review and maybe reduce their financial and material support for the Assad regime in Syria. Some optimists speculated that the crude reality brought about by the changing energy landscape may force Iran to show more flexibility in its nuclear negotiations with the P 5 + 1 in return for a quicker process of sanction relief. The precipitous fall in the price of oil has forced governments all over the world as well as the international financial institutions to review their investments and risk assessments for 2015 and beyond.

The foreign currency reserves that Saudi Arabia, the United Arab Emirates and Kuwait have accumulated will help them navigate the turbulent markets in the immediate future, but even these economies will be forced to adjust their balance payments and maybe cut back on subsidies and social programs, in the absence of a market “correction” that would restore the price range that prevailed in the last 5 years. A sustained low price of oil could lead a country like Venezuela to default on its debts, a severe contraction in the Russian economy, and dramatic and unprecedented consequences on the Iranian economy, which is – like Russia’s economy- already teetering because of painful international sanctions. In Iraq, Libya and Yemen, very low oil prices could plunge these countries deeper into violence. So far, the three largest economies in the world; the United States, China and Japan (two major importers of oil) have benefitted from the decline of oil prices. However, if the current low price prevails for some time, this could impact those American companies that have invested large resources in the production of shale oil in States like Texas and North Dakota, who incur higher production costs.

Wild fluctuations

The story of energy, specifically the production of oil and gas in the last 20 years has been one of wild transient fluctuations in global oil prices. Prices swung from a record high of $145 bbl in July 2008 to a precipitous low of $30 bbl in December of the same year in the wake of the financial crisis. The price of oil completely collapsed in 1998 to an incredible low of $10 in the middle of the Asian economic crisis. Last June, the price of Brent crude hovered around $115, by January 2, benchmark Brent has plummeted to $57.11 bbl. But for all the turmoil in the energy markets in the last few decades, most analysts kept saying that the “fundamentals” of the market i.e. energy prices will continue to rise, that the market will remain susceptible to the production levels of the Organization of the Petroleum Exporting Countries (OPEC) and other major producers notably Russia, and that we are not likely to see a radical change in this supply model any time soon. But a “made in America” revolution may be changing some of the old energy assumptions.

The Shale revolution

In recent years the traditional energy landscape based on the production of fossil fuel, has seen radical changes particularly the increased use of wind and solar power, the production of electric vehicles and the notable advances in battery technologies which are reducing the consumption of fossil fuel, something that environmentalists and others who are concerned about climate change have been calling for. But, parallel with this alternative technological revolution, the United States initiated another energy revolution of unprecedented nature; fracking shale oil. American technical ingenuity and the fact that the U.S. has the largest deposits of shale oil in the world led American oil companies during the years of high oil prices to invest in the production of shale oil to limit imports of conventional oil.

The result has been truly historic and put the U.S. (and Canada) at an energy inflection point. The rapid increase in shale oil production in the last few years brought America’s oil output from five million barrels per day in 2008 to an astonishing average of 9 million (bpd) in 2014. This four million bpd is more than what Iraq produces (3 million bpd). And this huge production was achieved in only six years. Even with declining oil prices, it is still expected that overall U.S. oil production will increase another 700,000 bpd this year.

Full article: http://english.alara … ude-oil-prices-.html

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