This piece originally appeared on TomDispatch.
As
2015 drew to a close, many in the global energy industry were praying
that the price of oil would bounce back from the abyss, restoring the
petroleum-centric world of the past half-century. All evidence,
however, points to a continuing depression in oil prices in 2016 — one
that may, in fact, stretch into the 2020s and beyond. Given the
centrality of oil (and oil revenues) in the global power equation, this
is bound to translate into a profound shakeup in the political order,
with petroleum-producing states from Saudi Arabia to Russia losing both
prominence and geopolitical clout.
To
put things in perspective, it was not so long ago — in June 2014, to be
exact — that Brent crude, the global benchmark for oil, was selling at $115 per barrel. Energy analysts then generally assumed that
the price of oil would remain well over $100 deep into the future, and
might gradually rise to even more stratospheric levels. Such
predictions inspired the giant energy companies to invest hundreds of
billions of dollars in what were then termed “unconventional” reserves:
Arctic oil, Canadian tar sands, deep offshore reserves, and dense shale
formations. It seemed obvious then that whatever the problems with, and
the cost of extracting, such energy reserves, sooner or later handsome
profits would be made. It mattered little that the cost of exploiting
such reserves might reach $50 or more a barrel.
As
of this moment, however, Brent crude is selling at $33 per barrel,
one-third of its price 18 months ago and way below the break-even price
for most unconventional “tough oil” endeavors. Worse yet, in one scenario recently offered by the International Energy Agency (IEA), prices might not again reachthe
$50 to $60 range until the 2020s, or make it back to $85 until 2040.
Think of this as the energy equivalent of a monster earthquake — a
pricequake — that will doom not just many “tough oil” projects now underway but some of the over-extended companies (and governments) that own them.
The
current rout in oil prices has obvious implications for the giant oil
firms and all the ancillary businesses — equipment suppliers, drill-rig
operators, shipping companies, caterers, and so on — that depend on them
for their existence. It also threatens a profound shift in the
geopolitical fortunes of the major energy-producing countries. Many of
them, including Nigeria, Saudi Arabia, Russia, and Venezuela, are
already experiencing economic and political turmoil as a result. (Think
of this, for instance, as a boon for the terrorist group Boko Haram as
Nigeria shudders under the weight of those falling prices.) The longer
such price levels persist, the more devastating the consequences are
likely to be.
A Perfect Storm
Generally
speaking, oil prices go up when the global economy is robust, world
demand is rising, suppliers are pumping at maximum levels, and little
stored or surplus capacity is on hand. They tend to fall when, as now,
the global economy is stagnant or slipping, energy demand is tepid, key
suppliers fail to rein in production in consonance with falling demand,
surplus oil builds up, and future supplies appear assured.
During
the go-go years of the housing boom, in the early part of this century,
the world economy was thriving, demand was indeed soaring, and many
analysts were predicting an imminent “peak”
in world production followed by significant scarcities. Not
surprisingly, Brent prices rose to stratospheric levels, reaching a
record $143 per barrel in
July 2008. With the failure of Lehman Brothers on September 15th of
that year and the ensuing global economic meltdown, demand for oil
evaporated, driving prices down to $34 that December.
With
factories idle and millions unemployed, most analysts assumed that
prices would remain low for some time to come. So imagine the surprise
in the oil business when, in October 2009, Brent crude rose to $77 per
barrel. Barely more than two years later, in February 2011, it again crossed the $100 threshold, where it generally remained until June 2014.
Several
factors account for this price recovery, none more important than what
was happening in China, where the authorities decided to stimulate the
economy by investing heavily in infrastructure, especially roads,
bridges, and highways. Add in soaring automobile ownership among that
country’s urban middle class and the result was a sharp increase in
energy demand. According to oil giant BP, between 2008 and 2013,
petroleum consumption in Chinaleaped 35%,
from 8.0 million to 10.8 million barrels per day. And China was just
leading the way. Rapidly developing countries like Brazil and India
followed suit in a period when output at many existing, conventional oil
fields had begun to decline; hence, that rush into those
“unconventional” reserves.
This
is more or less where things stood in early 2014, when the price
pendulum suddenly began swinging in the other direction, as production
from unconventional fields in the U.S. and Canada began to make its
presence felt in a big way. Domestic U.S. crude production, which had
dropped from 7.5 million barrels per day in January 1990 to a mere 5.5
million barrels in January 2010, suddenly headed upwards, reaching a
stunning 9.6 million barrels in July 2015. Virtually all the added oil
came from newly exploited shale formations in North Dakota and Texas.
Canada experienced a similar sharp uptick in production, as heavy
investment in tar sands began to pay off. According to BP, Canadian
output jumped from
3.2 million barrels per day in 2008 to 4.3 million barrels in 2014.
And don’t forget that production was also ramping up in, among other
places, deep-offshore fields in the Atlantic Ocean off both Brazil and
West Africa, which were just then coming on line. At that very moment,
to the surprise of many, war-torn Iraq succeeded in lifting its output
by nearly one million barrels per day.
Add
it all up and the numbers were staggering, but demand was no longer
keeping pace. The Chinese stimulus package had largely petered out and
international demand for that country’s manufactured goods was slowing,
thanks to tepid or nonexistent economic growth in the U.S., Europe, and
Japan. From an eye-popping annual rate of 10% over the previous 30
years, China’s growth rate fell into the single digits. Though China’s
oil demand is expected to keep rising, it is not projected to grow at anything like the pace of recent years.
At
the same time, increased fuel efficiency in the United States, the
world’s leading oil consumer, began to have an effect on the global
energy picture. At the height of the country’s financial crisis, when
the Obama administration bailed out both
General Motors and Chrysler, the president forced the major car
manufacturers to agree to a tough set of fuel-efficiency standards now
noticeably reducing America’s demand for petroleum. Under a plan announced by
the White House in 2012, the average fuel efficiency of
U.S.-manufactured cars and light vehicles will rise to 54.5 miles per
gallon by 2025, reducing expected U.S. oil consumption by 12 billion
barrels between now and then.
In mid-2014, these and other factors came together to produce a perfect stormof
price suppression. At that time, many analysts believed that the
Saudis and their allies in the Organization of the Petroleum Exporting
Countries (OPEC) would, as in the past, respond by reining in production
to bolster prices. However, on November 27, 2014 — Thanksgiving Day —
OPEC confounded those expectations, voting to maintain the output quotas of its member states. The next day, the price of crude plunged by $4 and the rest is history.
A Dismal Prospect
In
early 2015, many oil company executives were expressing the hope that
these fundamentals would soon change, pushing prices back up again. But
recent developments have demolished such expectations.
Aside
from the continuing economic slowdown in China and the surge of output
in North America, the most significant factor in the unpromising oil
outlook, which now extends bleakly into
2016 and beyond, is the steadfast Saudi resistance to any proposals to
curtail their production or OPEC’s. On December 4th, for instance, OPEC
members voted yet
again to keep quotas at their current levels and, in the process, drove
prices down another 5%. If anything, the Saudis have actually increased their output.
Many reasons have been given for the Saudis’ resistance to production cutbacks, including a desire to punish Iran
and Russia for their support of the Assad regime in Syria. In the view
of many industry analysts, the Saudis see themselves as better
positioned than their rivals for weathering a long-term price decline
because of their lower costs of production and their large cushion of
foreign reserves. The most likely explanation, though, and the one
advanced by the Saudis themselves is that they are seeking to maintain a
price environment in which U.S. shale producers and other tough-oil
operators will be driven out of the market. “There is no doubt about
it, the price fall of the last several months has deterred investors
away from expensive oil including U.S. shale, deep offshore, and heavy
oils,” a top Saudi official told the Financial Times last spring.
Despite
the Saudis’ best efforts, the larger U.S. producers have, for the most
part, adjusted to the low-price environment, cutting costs and shedding
unprofitable operations, even as many smaller firms have filed for
bankruptcy. As a result, U.S. crude production, at about 9.2 million barrels per day, is actually slightly higher than it was a year ago.In
other words, even at $33 a barrel, production continues to outpace
global demand and there seems little likelihood of prices rising soon,
especially since, among other things, both Iraq and Iran continue to
increase their output. With the Islamic State slowly losing ground in
Iraq and most major oil fields still in government hands, that country’s
production is expected to continue its stellar growth. In fact, some
analysts project that
its output could triple during the coming decade from the present three
million barrels per day level to as much as nine million barrels.
For years, Iranian production has been hobbled by
sanctions imposed by Washington and the European Union (E.U.), impeding
both export transactions and the acquisition of advanced Western
drilling technology. Now, thanks to its nuclear deal with Washington,
those sanctions are being lifted, allowing it both to reenter the oil
market and import needed technology. According to the U.S. Energy
Information Administration, Iranian output could rise by as much as 600,000 barrels per day in 2016 and by more in the years to follow.
Only
three developments could conceivably alter the present low-price
environment for oil: a Middle Eastern war that took out one or more of
the major energy suppliers; a Saudi decision to constrain production in
order to boost prices; or an unexpected global surge in demand.
The
prospect of a new war between, say, Iran and Saudi Arabia — two powers
at each other’s throats at this very moment — can never be ruled out,
though neither side is believed to have the capacity or inclination to
undertake such a risky move. A Saudi decision to constrain production is
somewhat more likely sooner or later, given the precipitous decline in
government revenues. However, the Saudis have repeatedly affirmed their
determination to avoid such a move, as it would largely benefit the
very producers — namely shale operators in the U.S. — they seek to
eliminate.
The
likelihood of a sudden spike in demand appears unlikely indeed. Not
only is economic activity still slowing in China and many other parts of
the world, but there’s an extra wrinkle that should worry the Saudis at
least as much as all that shale oil coming out of North America: oil
itself is beginning to lose some of its appeal.
While
newly affluent consumers in China and India continue to buy oil-powered
automobiles — albeit not at the breakneck pace once predicted — a
growing number of consumers in the older industrial nations are
exhibiting a preference for hybrid and all-electric cars, or for
alternative means of transportation. Moreover, with concern over
climate change growing globally, increasing numbers of young urban
dwellers are choosing to subsist without cars altogether, relying
instead on bikes and public transit. In addition, the use of renewable
energy sources — sun, wind, and water power — is on the rise and will only grow more rapidly in this century.
These
trends have prompted some analysts to predict that global oil demand
will soon peak and then be followed by a period of declining
consumption. Amy Myers Jaffe, director of the energy and sustainability
program at the University of California, Davis, suggests that growing
urbanization combined with technological breakthroughs in renewables
will dramatically reduce future demand for oil. “Increasingly, cities
around the world are seeking smarter designs for transport systems as
well as penalties and restrictions on car ownership. Already in the
West, trendsetting millennials are urbanizing, eliminating the need for
commuting and interest in individual car ownership,” she wrote in the Wall Street Journal last year.
The Changing World Power Equation
Many
countries that get a significant share of their funds from oil and
natural gas exports and that gained enormous influence as petroleum
exporters are already experiencing a significant erosion in
prominence. Their leaders, once bolstered by high oil revenues, which
meant money to spread around and buy popularity domestically, are
falling into disfavor.
Nigeria’s government, for example, traditionally obtains 75% of its revenues from such sales; Russia’s, 50%; and Venezuela’s, 40%.
With oil now at a third of the price of 18 months ago, state revenues
in all three have plummeted, putting a crimp in their ability to
undertake ambitious domestic and foreign initiatives.
In
Nigeria, diminished government spending combined with rampant
corruption discredited the government of President Goodluck Jonathan and
helped fuel a vicious insurgency by Boko Haram, prompting Nigerian
voters to abandon him in the most recent election and install a
former military ruler, Muhammadu Buhari, in his place. Since taking
office, Buhari has pledged to crack down on corruption, crush Boko
Haram, and — in a telling sign of the times — diversify the economy, lessening its reliance on oil.
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Venezuela
has experienced a similar political shock thanks to depressed oil
prices. When prices were high, President Hugo Chávez took revenues from
the state-owned oil company, Petróleos de Venezuela S.A.,
and used them to build housing and provide other benefits for the
country’s poor and working classes, winning vast popular support for his
United Socialist Party. He also sought regional support by offering oil subsidies to
friendly countries like Cuba, Nicaragua, and Bolivia. After he died in
March 2013, his chosen successor, Nicolas Maduro, sought to perpetuate
this strategy, but oil didn’t cooperate and,
not surprisingly, public support for him and for Chávez’s party began
to collapse. On December 6th, the center-right opposition swept to
electoral victory, taking a majority of
the seats in the National Assembly. It now seeks to dismantle Chávez’s
“Bolivarian Revolution,” though Maduro’s supporters havepledged firm resistance to any such moves.
The
situation in Russia remains somewhat more fluid. President Vladimir
Putin continues to enjoy widespread popular support and, from Ukraine to
Syria, he has indeed been moving ambitiously on the international
front. Still, falling oil prices combined with economic sanctions
imposed by the E.U. and the U.S. have begun to cause some expressions of
dissatisfaction, including a recent protest by long-distance truckers over increased highway tolls. Russia’s economy is expected to contract in
a significant way in 2016, undermining the living standards of ordinary
Russians and possibly sparking further anti-government protests. In
fact, some analysts believe that Putin took the risky step of
intervening in the Syrian conflict partly to deflect public attention
from deteriorating economic conditions at home. He may also have done
so to create a situation in which Russian help in achieving a negotiated
resolution to the bitter, increasingly internationalized Syrian civil
war could be traded for the lifting of sanctions over Ukraine. If so, this is a very dangerous game, and no one — least of all Putin — can be certain of the outcome.
Saudi
Arabia, the world’s leading oil exporter, has been similarly buffeted,
but appears — for the time being, anyway — to be in a somewhat better position to
weather the shock. When oil prices were high, the Saudis socked away a
massive trove of foreign reserves, estimated at three-quarters of a
trillion dollars. Now that prices have fallen, they are drawing on
those reserves to sustain generous social spending meant to stave off
unrest in the kingdom and to finance their ambitious intervention in
Yemen’s civil war, which is already beginning to look like a Saudi
Vietnam. Still, those reserves have fallen by some $90 billion since
last year and the government is already announcing cutbacks in public
spending, leading some observers to question how
long the royal family can continue to buy off the discontent of the
country’s growing populace. Even if the Saudis were to reverse course
and limit the kingdom’s oil production to drive the price of oil back
up, it’s unlikely that their oil income would rise high enough to
sustain all of their present lavish spending priorities.
Other major oil-producing countries also face the prospect of political turmoil, including Algeria and Angola.
The leaders of both countries had achieved the usual deceptive degree
of stability in energy producing countries through the usual
oil-financed government largesse. That is now coming to an end, which
means that both countries could face internal challenges.
And
keep in mind that the tremors from the oil pricequake have undoubtedly
yet to reach their full magnitude. Prices will, of course, rise
someday. That’s inevitable, given the way investors are pulling the
plug on energy projects globally. Still, on a planet heading for a
green energy revolution, there’s no assurance that they will ever reach
the $100-plus levels that were once taken for granted. Whatever happens
to oil and the countries that produce it, the global political order
that once rested on oil’s soaring price is doomed. While this may mean
hardship for some, especially the citizens of export-dependent states
like Russia and Venezuela, it could help smooth the transition to a
world powered by renewable forms of energy.
http://www.salon.com/2016/01/14/there_will_be_blood_big_oils_collapse_and_the_birth_of_a_new_world_order_partner/?source=newsletter
