“The price of oil will hit its floor and it will rise again,” President Nicolas Maduro assured Venezuelans, whose shaky economy depends critically on a high oil price. “Venezuela will continue with its social plans. Venezuela will move forward.”
No it won’t, and neither will Russia, Iran, or Nigeria. The only major oil exporters that are not in deep trouble are the Arab countries, whose governments have some room for manoeuvre because of low production costs, relatively small populations, and big foreign currency reserves.
Since June the cost of a barrel of Brent crude, the benchmark for world oil prices, has fallen by almost a quarter, from around $110 a barrel (where it was stuck for the past four years) to just above $80 a barrel. Last month, for the first time in decades, Nigeria exported no oil at all to the United States. Even at a big discount, Americans just don’t need it. And the main reason for all that is fracking.
American production has almost doubled in the past five years thanks to the new drilling technologies, and the United States overtook Russia last year to become the world’s largest producer of oil and gas combined. (Saudi Arabia comes a distant third.) With production soaring and world demand for oil stalling due to slow economic growth, a collapse in prices was inevitable. The question is how far they will collapse, and for how long.
The answer is probably not much further, for the moment – but they could easily stay down in the $75-$85 range for a couple of years. The reason for that is that the “swing” producers (mostly Arab), who could theoretically push prices back up by cutting their own production, have clearly decided not to do so.
Their concern is for the long-term power of the OPEC cartel, which used to be strong enough to set the price of oil. That never will be true again unless they can drive the (mainly American) frackers who are causing the over-supply of oil out of business.
Saudi Arabia and its allies are hoping that a prolonged period when the price of a barrel of oil is lower than the cost of getting that barrel out of the ground by fracking will ruin this new industry and bring back the Good Old Days. Dream on.
For the rest of this column, click here: http://gwynnedyer.com/2014/oil-blind-sided-by-technology/