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Page added on March 23, 2014
Is Fracking The Market’s Revenge On OPEC?
Market interference by petro states spurred the energy revolution led by fracking, according to the head of commodities research for Citigroup—and that revolution is bound to spread around the world.
As it spreads, governments will find it more difficult to interfere in energy markets, said Edward L. Morse, the managing director and global head of commodities for Citi.
“The irony is that what we see unfolding is a return to market forces,” Morse said during a recent panel discussion in Chicago, “an erosion of the ability of countries to use oil or natural gas as an instrument of foreign policy.”
The OPEC nations still have the lowest production costs in the world, Morse said, but because of “the calamity in petro states” they have the highest revenue requirements. For example, the price of oil is often elevated to pay for populist measures, such as high salaries and allowances, to appease populations that could be swayed by extremists.
“For example, there is no doubt that at least some of the rapid increase in world energy prices between 2005 and 2008 was the result of insufficient investment in oil and gas production in the Middle East, Russia, and, to some extent, in China,” Morse has written in Foreign Affairs. “In most cases, underinvestment was intentional, to slow production growth in order to influence global energy prices.”
Over time, that kind of price manipulation fosters innovation elsewhere, Morse said, such as the combination of hydraulic fracturing and lateral drilling that has caused a gas and oil boom in the United States.
“Revolutions are brought about by high prices, and they are making conventional what used to be unconventional: shale and tight oil in the U.S., deep-water (drilling), which is very important to this scenario, and then oil sands in places like Canada,” Morse said. “Because of the requirement of high prices by OPEC countries, this unconventional stuff is probably going to be in the market for a long time.”
Morse appeared on a panel sponsored by the Chicago Council on Global Affairs with two other energy economists who supported his view, though in more restrained terms.
“We’ve started to see a response in production that takes the edge off of” high prices, said Michael Levi, a senior fellow for energy and environment at the Council on Foreign Relations. “It’s primarily a technological response that allows increased production in places like the United States but also elsewhere to start to moderate prices. What that does going forward is allows us to rely a little less on expanded production from countries that are making political decisions about how much to produce.”
Energy Scholar Jan H. Kalicki spoke of the leverage that policy has in shaping the energy market, but Morse emphasized the power of the market and the interference of policy.
“I think it’s the market that’s the lever and not policy, and policy ought to be supportive of the market,” Morse said.
Asian and European countries are “lining up” to buy U.S. liquified natural gas exports, Morse said, because they are free of policy constraints on exports from other nations.
“Why are Japanese and Korean customers lining up to buy U.S. LNG? It’s because it’s an alternative to oil-linked LNG, it’s because its on the other side of the strait of Hormuz, and it’s because they can resell it not the spot market.”
“I think it will have this fundamental structural change on the gas market which will deprive companies like Petrobras and countries like Qatar from maximizing their revenue through the mechanisms that we’ve seen.”
Though fracking has been slow to catch on overseas, Morse predicted it will:
“What’s unfolding in the U.S. is bound to not only continue to unfold in the U.S., but it’s not going to remain confined to the U.S. It will expand. It may not expand very rapidly, or it may expand very rapidly—that’s an important policy issue—but it will expand to the rest of the world, so this is kind of permanent.”
17 Comments on "Is Fracking The Market’s Revenge On OPEC?"
Davy, Hermann, MO on Sun, 23rd Mar 2014 2:17 pm
Article said – “The irony is that what we see unfolding is a return to market forces,” Morse said during a recent panel discussion in Chicago, “an erosion of the ability of countries to use oil or natural gas as an instrument of foreign policy.”
Wow, folks at “Forbes” be patient not only is energy going to be an instrument of foreign policy again in a few years so will food, finance, water, critical natural resources and all the other critical elements of globalism. This will end when your (Forbes) belief in human “exceptionalsim” of technology, knowledge, and economics of substitution are shown as victim of limits of growth and population in overshoot to its carrying capacity. When your (Forbes) “cornucopian” idea of the economy and finance is a victim of a deflating debt bubbly, financial panic, and evaporation of value in paper assets. Then, if we still have a MSM, please tell me how you are going to explain the lies you formulated and delusions created claiming a bright future of plenty. Explain this to the hungry and cold masses. I suspect you will be in hiding because there may be a lynch mob looking for people driving in Porsches and living in McMansions.
DMyers on Sun, 23rd Mar 2014 2:19 pm
This piece qualifies as Sunday’s “cartoon of the day” on PO.com.
ghung on Sun, 23rd Mar 2014 3:27 pm
““Why are Japanese and Korean customers lining up to buy U.S. LNG?”
Reminds me of when I arrived in Moscow in 1974; watched folks lining up to wait for a chance to buy some chicken at a market. Not enough chickens to go around; most went home disappointed.
Davey on Sun, 23rd Mar 2014 3:34 pm
G, Czechoslovakia is 83, was similar. Dad and I were researching family tree. They had people shadowing us. They must of thought these Americans are weird hanging out in cemetery’s.
rockman on Sun, 23rd Mar 2014 3:53 pm
This truly does rate as the joke of the day especially with the “revenge” angle. LOL. We’ve really screwed OPEC now: we’ve “forced” them in the last 10 years to increase their oil sales revenue from around $390 billion/year to a bit over $1 TRILLION. Take that you bitches. Since the boom in oil prices began which led to the economical development of the shales (known about for decades and had the tech to develop for almost 20 years) OPEC has pulled in about an ADDITIONAL $5 trillion away for the oil consuming economies. And Forbes, who likes to act as if business is its child that it watches over, sees the oil consumers now getting the upper hand on the oil exporters. Sounds more like they’ve become the PR machine for OPEC.
shortonoil on Sun, 23rd Mar 2014 4:16 pm
It is quite amazing how many totally erroneous assumptions can be pawned off on a totally ignorant readership. For starters, it is not an “energy revolution”. More than 50% of the US shale production is field condensate, which doesn’t supply any energy to the general economy. Except for the methane produced, which is better than 90% of total production in most fields, the majority of the LTO production range from ethane to pentane. Otherwise know as feedstock; stuff to make plastic bottles, use as a diluent for tar sands, and some fuel additives. The large majority of it never participates in the energy production process, called combustion. Thus, it has nothing to do with energy, to say even less of a “revolution”.
Now to all this NG that everyone, and their uncle is lining up to buy. Now exactly just where is all this going to come from? Conventional gas production is declining by 24% per year, and shale gas has an annual first year decline rate of 65%. It would take a miracle for the US to maintain its present production for more than a year or two. That may have something to do with why the last three LNG projects got scrubbed before they got off the drawing boards. Not many investors seem anxious to invest $20 billion in a liquifying natural gas plant that is most likely soon not going to have anything to liquify. Maybe the South Koreans will take delivery in paper bags!
So, we have mythical NG, mythical energy, mythical revolutions, and mythical LNG plants! Not a bad story for Peter Pan; a little out of character for the distinguished Forbes!
http://www.thehillsgroup.org
Nony on Sun, 23rd Mar 2014 4:17 pm
Rock:
Would have been even higher oil price without shale (perhaps 20$, based on calculations of volume and demand elasticity).
Keith on Sun, 23rd Mar 2014 4:40 pm
Nony people wouldn’t pay 20$, their behaviours would change over night. And our children’s future would be better for it (climate change). Of course, if your a climate change denier as well…
Davey on Sun, 23rd Mar 2014 4:48 pm
Nony $20 will get you a collapse. In fact our economy probably can’t afford $10
Nony on Sun, 23rd Mar 2014 4:58 pm
I mean shale oil has made world price $20 lower than it would have been. (I have said this before.) IOW, I basically agree with Rock. $100 oil sucks unless you’re Saudi Arabia or North Dakota. But for the mass of the economy/nation, it is a huge drain and wealth transfer. Just we would be 120, without the Mark Papa and Harold Hamm.
J-Gav on Sun, 23rd Mar 2014 5:19 pm
Answer: No, it’s the market’s revenge on the environment, which big industry has never really much cared for, or about …
rockman on Sun, 23rd Mar 2014 8:34 pm
Nony – “Would have been even higher oil price without shale”. Sorry…you can’t have it both ways: if oil prices had not boomed we wouldn’t have the shale production we have today. IOW if we could have drilled up the shales when oil was $35/bbl then you argument could be valid. The only reason we have all the oil being produces from the shales today is because of high prices…not in spite of them. But let’s do the mental exercise: what if the shale reservoirs didn’t exist at all. So when oil prices reached $100/bbl or so no new oil would have been brought on from the shales. So what would oil be selling for today? Just a hypothetical that I can’t prove but I would say the same. Those buyers that can’t afford oil above $100/bbl wouldn’t still be buying. Those that could would. The US was paying 1/3 less for oil when we were importing more oil. Thu we chase our tails in the supply/demand/price dynamic. But there would be less oil in the US market place so we would have to import more. So we would put price pressure on the international market. So you’re correct that this might induce higher prices.
But go back to the original premise: we only have the shale production because higher oil prices justified shale development. And I agree this is where my logic gets tricky/questionable: if we didn’t have the shale production would we be paying $20/bbl more? If you answer yea than why aren’t the producers making us pay $20/bbl more now? The world is producing more oil today then ever before and oil is averaging a higher yearly price then ever before.
Nony on Sun, 23rd Mar 2014 8:54 pm
Rock:
Take that 3 million barrels off the market today and watch the price spike. You didn’t think the world could handle $100 oil, what makes you think that attitude guides you well in decrying $120?
Supply and demand, Rock. Supply and demand. Draw the cost curve and draw the supply curve. Really, this stuff is not that hard and to see people twist themselves up in knots, just amazes me. The textbook answer is the simplest one.
Of COURSE the shale oil does not come on stream until the price is high enough to make a profit getting it out. And OF COURSE, it retards prices from going even higher.
This really is econ 101. Even someone like James Hamilton (a peaker) will back me up. There’s a cost curve. There’s a supply curve.
shortonoil on Sun, 23rd Mar 2014 11:11 pm
“Take that 3 million barrels off the market today and watch the price spike.”
Depletion of conventional crude is taking a lot more than 3 mb off the market every year. LTO is actually having very little effect on the market. It doesn’t supply enough energy to drive its own demand. The price of oil is not that low, about $14/barrel. Look at what happened after the 1998 Dotcom bust, and the World Trade Center disaster. Prices stayed below the curve for 7 years. What is producing low prices is a tapped out middle class, 20 year olds that can’t find a decent job, and are living in their mothers basement, bankruptcies in China, and a European economy that is worse than the Great Depression.
Your faith in LTO is misplaced; it is just another unintended consequence of the FED’s poker game with the economy. A game that nobody but the 1% can win!
http://www.thehillsgroup.org
Davy, Hermann, MO on Mon, 24th Mar 2014 1:07 pm
WELL PUT SHORT! – What is producing low prices is a tapped out middle class, 20 year olds that can’t find a decent job, and are living in their mothers basement, bankruptcies in China, and a European economy that is worse than the Great Depression.
Your faith in LTO is misplaced; it is just another unintended consequence of the FED’s poker game with the economy. A game that nobody but the 1% can win!
Basically with financial repression in play with excessive debt levels with low rates commodities will remain strong of course relative to the financial manipulation. Have you noticed how the gold and oil price does not drop below the cost of production? Both markets are heavily manipulated one by the central banks (gold) the other by market makers globally (oil). Gold cannot rise too high or it affects the ability of central banks to keep interest rates low. Oil must stay in a goldilocks range or the delicate price position swings with nasty consequences. Oil will remain stable in this range until a contraction begins and or an above or below ground supply disruption. Oil currently is supported by stagnating demand and just enough production to keep it on the undulating plateau within the goldilocks range. This will only last as long as the debt and stock bubbles persist and or oil production can be minimally maintained. The stock and debt bubble will persist as long as financial repression can continue with central bank intervention. Oil production has been maintained by high prices. All this relies on confidence. The stories out of MSM worldwide are dominated by exuberance, exceptionalism, and plenty. This is being challenged by undeniable evidence to the contrary but since the news sources reaching the majority are manipulated, corrupted, and distorted this message is drown out by the MS meme. Expect a violent correction when this story breaks down as it will.
Boat on Mon, 24th Mar 2014 5:07 pm
Davy you said…Oil currently is supported by stagnating demand and just enough production to keep it on the undulating plateau within the goldilocks range.
Yes, since the beginning of the oil market. Prices always come back to the plateau. Supply and demand rule. Confidence, exuberance, plenty or gloom and doom, scarcity and fear all affect the market in the short term but not the long term.
Davey on Mon, 24th Mar 2014 5:40 pm
Boat we are now in a new normal were old fundamentals are no longer behaving as before