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Page added on May 15, 2016
Yergin: Where Oil Prices Go From Here
Leaders of major oil-exporting countries used to talk about “saving the oil” for their grandchildren. But now the grandchildren are in charge, and they want to monetize the oil. That is certainly so in Saudi Arabia, where Deputy Crown Prince Mohammed bin Salman—a grandson of the country’s founder, Abdul Aziz ibn Saud—has launched an ambitious plan to reduce the country’s dependence on oil. Decrees issued this month announced far-reaching changes in Saudi ministers and government organization.
Yet the result could end up making Saudi Arabia, which now produces one out of eight barrels of the world’s crude, an even bigger player in the global oil market. Prince Mohammed’s Vision 2030 plan comes as the oil market is working back toward balance, having crashed to a low of $26 a barrel in February from $100 in 2014. Current prices in the mid-to-high $40s are signaling a turn in the market.
And a turn is due. It has been 18 months since the November 2014 meeting when OPEC members made the historic decision to let market forces manage the market—in what became known as a “battle for market share.” World production still exceeds consumption. Yet by autumn declining production and rising demand should put the market roughly in balance, with prices around $50 a barrel, although still with a big overhang in oil inventories.
The effect of the oil-price collapse over the past two years can be seen in the postponement, delay or cancellation of multibillion-dollar exploration and production projects around the world. The latest report from my company, IHS, notes that 2015 marked the lowest level of new conventional oil discoveries since 1952.
Even as prices fell during 2015, resilient and ingenious U.S. shale producers dramatically reduced costs and kept increasing output. But now even they have run out of running room. Some have gone bankrupt. For most, survival and protecting their balance sheets has become priority No. 1, and they have slashed investment. So U.S. total production is now falling—by later this year probably by more than a million barrels a day from the 9.7 million peak month of April 2015.
Yet by 2020 world oil consumption could be 5.7 million barrels a day higher than this year’s 95.6 million. So prices will have to rebound to provide the signal for new investment. U.S. shale will play an important role because it is “short cycle”: New shale production can be brought on much more quickly than multibillion-dollar megaprojects that can require a decade or more.
But a big part of the new demand is likely to be met by Saudi Arabia and other Gulf countries. And here is where the changing stance in Saudi Arabia—the “new new factor” in the oil market—will have a big impact.
Among the decrees this month, Saudi Arabia announced the retirement of petroleum minister Ali al-Naimi, a commanding figure for two decades, and his replacement by the experienced CEO of Saudi Aramco, Khalid al-Falih. In his new job Mr. Falih will be in charge of petroleum and an expanded Ministry of Energy, Industry and Mineral Wealth, as it is thought that the country has significant, largely untapped reserves of minerals ranging from phosphates and uranium to gold.
Continuity is clear in Saudi Arabia’s deployment of this new market-forces policy that first emerged at the 2014 OPEC meeting. Prince Mohammed reaffirmed it in April. The oil business, he said, “is a free market that is governed by supply and demand and this is how we deal with the market.” The day after his appointment, Mr. Falih stated that Saudi Arabia could well expand output “to its maximum sustainable capacity,” from the current 10.2 million barrels a day to more than 12 million, a number that could go higher with new investment.
Moreover, Saudi Arabia doesn’t intend to give up one barrel of market share to an Iran that is ramping up its own exports now that economic sanctions have been lifted after the nuclear deal. The heightened tension between the two countries is a central factor in today’s oil market.
Yet change is clear in the Saudis’ new orientation toward oil. After consolidating most of the Arabian Peninsula in the 1920s into the kingdom of Saudi Arabia, Ibn Saud depended overwhelmingly on rising receipts from the Haj, the annual pilgrimage to Mecca. When the flow of pilgrims collapsed with the Great Depression, so did the country’s finances.
The signing of an oil concession in 1933 with Standard Oil of California rescued the kingdom with upfront payments, and it has continued to live off the revenues from oil exports. But that strategy no longer works when 70% of the population is age 30 or younger and unemployment is officially 11.6%, and about 30% among young people.
The new Saudi strategy is to use oil revenues to diversify the economy and build the world’s largest sovereign-wealth fund as the investment engine for development. Ninety percent of the government’s revenues came from oil between 2010 and 2014; with the fall in oil prices, it is temporarily down to about 80%. The new target is to increase non-oil government revenues at least sixfold by 2030. A key step is the proposed IPO of up to 5% of Saudi Aramco, by far the world’s largest oil company.
This shift is also driven by geopolitical forces—the rivalry with Iran, the need to blunt the appeal of jihadists, and the fraying of the Saudi-U.S. alliance. Saudi Arabia intends to bolster its role in the world and make itself a major force in global financial markets. The nation also wants to raise its status as a geopolitical player: As of 2015, Saudi Arabia had the world’s third-largest military budget, trailing only the U.S. and China, and ahead of Russia.
Achieving these goals in a traditional society in the designated time frame is challenging. Yet ironically, reducing dependence on oil cannot be achieved without reliable petroleum revenues. This means Saudi Arabia will seek to capitalize on its position as the world’s lowest-cost producer to expand output and enhance the competitive position of its oil in what is destined to become an ever-more-competitive global energy market.
12 Comments on "Yergin: Where Oil Prices Go From Here"
makati1 on Sun, 15th May 2016 10:29 pm
Jerki’ Yergin and the Wall Street Casino pimp rag. Both trash.
dave thompson on Sun, 15th May 2016 10:35 pm
“Yet by 2020 world oil consumption could be 5.7 million barrels a day higher than this year’s 95.6 million.” Seems a bit of a stretch to think that the world will some how manage to pump 0ver 101 million bbls per day in 2020.
Truth Has A Liberal Bias on Sun, 15th May 2016 10:49 pm
Click bait for retard comments. Mission accomplished eh Mak? Is that what you consider one of your intelligent comments, a sign of your open mindedness and intelligence. Are you in grade 8 or something?
makati1 on Sun, 15th May 2016 11:22 pm
Truth, my intelligence is so far above yours that there is no measurement possible as can be noted from your comment. kindergarten dropout? I enjoy dropping down to the retarded level sometimes to put them in their place. Think, if you can. Then come back with something adult and insightful*.
*Simple Definition of insightful: having or showing a very clear understanding of something : having or showing insight
Chandra Deven on Mon, 16th May 2016 1:37 am
Clear moments are so short. There is much more darkness. More ocean than terra firma. More shadow than form. More trade to carry on the Aid within the soceity
Anonymous on Mon, 16th May 2016 6:41 am
If we could only attach a pipeline to Daniel Jerkins ass. We could pipe all his bullshit to giant bullshit refineries located in the american fartland. These refineries would guarantee amerikas energy independence by converting Daniels copious bullshit into pure, clean(ok not really), merikan fart-gas energy. Which, could in turn, be given to the uS military to put in its tanks and planes to make sure no one in the world ever gets to see a stable supply of energy from the middle-east, ever.
Between the bullshit produced by the Wall St Urinal, and Danny, amerika could achieve energy independence in no time. But, no one seems in a hurry to tap this potential source of virtually unlimited form of fossil-fool energy.
Davy on Mon, 16th May 2016 7:07 am
Sounds great as usual when someone talks of light at the end of the tunnel. Looking out far into the future to calm our fears and assure us life will be normal and as it is now. The facts are not so clear. We have the whole issues of multiple other forces at play that make any prediction beyond a year hazy at best.
Short term and within the confines of economics and free markets these greater forces of change are not considered because of the narrative of innovation, efficiency, and substitution. These folks believe ultimately in progress through markets with price from supply and demand relationships efficiently allocating resources. This has worked for so many years that people now put their full faith and belief in it.
Modern human civilization has worked so long because we had the resources for it. We had a relatively intact environment, climate, and our economy was in the growth stage. Our population was positioned well with lower levels than today. Population was growing and could grow to ensure growth forces were firmly in motion. This basis of our civilization has had momentum to push us through any and all obstacles in the past even destructive wars and economic difficulties.
The problem is we are no longer at a healthy basis. We have multiple limits to growth. We have diminishing return to growth itself. Growth is now many times destructive in the aggregate. Years ago growth was still destructive but the waste stream or resulting ecosystem damage was absorbed by the system. This is no longer the case. Even within our human ecosystem growth of consumption and population is an accumulating negative in most cases today.
We are in a trap because we need to slow down growth but we must grow to supply the economic forces to slow down growth. This is an incongruous juxtaposition. You can’t grow to lower growth. The catch 22 don’t stop there we have to stop growing to prevent a runaway climate event. To do this we must stop carbon emission by leaving fossil fuels. It is apparent if we leave fossil fuel we have a mass die off. Just tinkering with the edges of the fossil fuel economy with efficiency and alternatives are little more than Band-Aids on a gaping wound. We have to lower emissions so far we are beyond a fix through anything man can do. Population is snowballing out of control just by natural forces of human reproduction. These forces are beyond our management efforts even if we had the force of will to manage an effort.
Talking about oil and the future without factoring in all these other dynamic variables is nothing more than narrow short term marketing. Marketing will work very short term while the system is holding but there is no way we can predict oil and the economy with all these unresolved issues longer term. These forces are predicaments without solutions making long term prediction null and void without their inclusion. These forces cannot be included in future predictions because they themselves are beyond manageable understanding themselves. Fuzzy understanding yields fuzzy results.
One of the biggest issues for oil is the economy. Oil is useless without an economic relationship with the rest of the global economy. If we are in a deflationary cycle of supply and demand destruction we are not going to see a healthy oil sector. In this type of cycle predicting supply, demand, and price is not possible with normal metrics.
We are likely going to have a dysfunctional market leading to irrational price movements. We are likely going to see economic abandonment across a broad cross section of the global economy. This will lead to random and destructive change like failing states. Eventually if this process continues it will lead to a global economic crisis. An economic crisis in today’s world means the end of the status quo.
The global economy is a creature of dispersed global production and distribution with an underlying just in time status of resource supply operating with a financial system that must have economies of scale. Confidence and cooperation in trade is paramount for economic activity. Everyone is dependent on everyone else within the confines of a global economy. Tell me how that will work in a crisis? Now tell me how you can predict oil prices with oil supply and demand with these uncertainties. You can’t and that is why Yergin is a farce. This is why most academic predictions and analysis of the future beyond a short term envelope are set to fail. We are approaching a threshold of profound change leaving any future predictions useless if they are based on past experiences.
shortonoil on Mon, 16th May 2016 7:16 am
“In yet another paradoxical move that will leave many scratching their heads, just days after throwing in the towel on its bullish dollar call (now that it expects far less rate hikes over the next year), Goldman moments ago announced that it is also cutting back on its longer-term oil price forecasts (which paradoxically are linked to a stronger dollar) for the coming year, as a result of a rebalancing that is taking far longer to take place than previously anticipated.”
http://www.zerohedge.com/news/2016-05-15/goldman-cuts-2017-oil-price-forecast-due-slower-market-rebalancing
Either Yergin is just another blind bat, flying into walls, or if he does know something he does not intend to tell anyone about it. As we have continuously repeated the market is not going to rebalance like everyone seems to believe that it will. When a barrel of oil goes out of production the demand that was created by producing that barrel goes with it. It is not a one on one relationship with supply rebalancing. A 2 mb/d over supply takes more than a 2 mb/d cut in production to bring the market back into balance. The demand lost from reducing production varies according to the oil; it varies from 1/2 a barrel/ barrel for higher grade crudes to almost 1 barrel/ barrel for oils like Shale.
Since we projected the price decline almost a year before it happened one would think that Yergin, and people like him might come to the conclusion that they don’t quit have it all figured out yet:
http://www.thehillsgroup.org/depletion2_022.htm
Of course its easier to “scratch their heads” than it is to use their brains. You will soon be able to spot the lazy ones from the bald spot in the middle of their pate!
http://www.thehillsgroup.org/
onlooker on Mon, 16th May 2016 7:18 am
Very good analysis Davy. Basically, it it boils down to those who believe that somehow “human innovation and ingenuity” can trump physics and actual physical and biological limits to growth. If one immerses oneself enough in the hard sciences one realizes that the Earth is a closed system at least in terms of the time/space relevant to humans. One also realizes that certain fundamental physical and biological processes allow for life on Earth to exist. Well we are undermining these processes and the very fabric and relationships that make these processes possible. In short, we are killing the potential of Earth both as a purveyor of resources and as a womb to life. No amount of human or other agency can circumvent or cancel out these circumstances and laws of nature.
penury on Mon, 16th May 2016 10:25 am
Dear old Daniel, wrote one book, and has been consistently wrong on every call since then. I use Dan as a contra indicator.
Sissyfuss on Mon, 16th May 2016 4:14 pm
Thank you, Mr Murdoch. May we have another?
denial on Tue, 17th May 2016 4:19 pm
You got to hand it to the guy….he has made a lot of money on telling the media what they want to hear…it had to be someone…