Revealing developments going on at the moment on the world
energy market. Coal has seen its price halved in the past year. The price of
oil has fallen. The oil price has fallen by more than 40% since June, when it
was $115 a barrel. It is now below $70. This comes after nearly five years of
stability. and some oil-producing countries want the OPEC cartel to restrict
production so as to put up prices. The question being asked is why the Saudis
haven't themselves cut back production as they have done in the past. There
are, of course, a number of conspiracy theories.
According to the Economist
curbing their output to once again raise its price would benefit Iran and
Russia. More likely but not necessarily solely the reason this is being opposed
by Saudi Arabia which wants to keep the price low so as to discourage fracking.
Saudi Arabia can tolerate lower oil prices quite easily for quite a while. It
has $900 billion in reserves. Its own oil costs very little (around $5-6 per
barrel) to get out of the ground. Low prices stem investment in other sources
of oil, such as Canada’s tar sands or America’s shale, that means more demand
for low-cost ‘dirtier’ coal in future.
The U.S. is producing more than 3 million barrels a day than
it did several years ago. As Robert Bryce of the Manhattan Institute points
out, this is like adding another Kuwait to world oil production. The Marcellus
shale in Pennsylvania alone, he writes, has added another Iran to world
natural-gas production. And it is fracking that is doing it.
According to the Institute for Energy Research, "Nearly
every barrel of new U.S. oil production can be attributed to the use of
horizontal drilling and hydraulic fracturing technologies."...
In fact, the International Energy Agency has predicted that
the United States will produce more oil next year than Saudi Arabia; the US might even pass Russia, which, at ten million
barrels a day, is the world’s biggest producer. (it already produces more
natural gas than Russia.)
Over the past four years, as the price hovered around $110 a
barrel, they have set about extracting oil from shale formations previously
considered unviable. Their manic drilling—they have completed perhaps 20,000
new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted
America’s oil production by a third, to nearly 9m barrels a day, just a 1m b/d short of Saudi Arabia’s output. US
domestic demand has apparently plateaued so this extra production is going on
to the world market. The boss of Continental Resources, Harold Hamm (whose
fortune has dropped by $11 billion since July), has said he can cope as long as
the oil price is above $50. Stephen Chazen, who runs Occidental Petroleum, has
said the industry is “not healthy” below $70. The uncertainty reflects the
diversity of activity. Wells produce different mixes of oil and gas (which
sells for less). Transport costs vary: it is cheap to pipe oil from the Eagle
Ford play, in Texas, but expensive to shift it by train out of the Bakken
formation, in North Dakota. Firms use different engineering techniques to pare
costs.
The pain of this competition will be borne more by those new
players who wish to enter the industry as many companies in the UK seek to do. Wells
that are producing oil or gas are extraordinarily profitable, because most of
the costs are sunk. Taking a sample of eight big independent firms, average operating costs in 2013 were $10-20 per barrel of oil (or equivalent unit of
gas) produced—so no shale firm will curtail current production. But the output
of shale wells declines rapidly, by 60-70% in their first year, so within a
couple of years this oil will stop flowing. It is far less clear if the
industry can profitably invest in new wells to maintain or boost production. With their revenues now dropping fast, they will find themselves overstretched.
A rash of bankruptcies is likely.
Neverthelesss, the global oil economy, despite the ‘green’
goals, will be around for several decades.
"The largest companies in the energy industry have
concluded that policymakers are unlikely to act quickly enough to strand their
current fossil fuel assets or make it unprofitable for them to continue
exploring for new reserves. The oil and gas sector, in particular, is gambling
on a business-as-usual model that projects out to a roughly $14 trillion
investment in new reserves by 2035. This investment would correspond to a
staggering amount of wasted capital should policymakers decide that these
reserves cannot be burned."
What this shows is the impossibility of a rational energy
policy under capitalism as energy use under it reflects the relative prices of
the various sources (coal, oil, gas, shale oil, etc) and changes as they vary. There's
also a lesson for those who want to campaign against the use of fracking under
capitalism. They should be careful what they wish for. They may get fracking
slowed but not replaced by renewable sources as these are too costly at the
moment but by ... oil and coal. Another reason the environmentalist shouldn't
like it is that a fall in oil price is a boost for general economic growth. Cheaper
oil should act like a shot of adrenalin to global growth. A $40 price cut
shifts some $1.3 trillion from producers to consumers.
It highlight the utopianism of environmentalists who think
shaping the market is a solution. Just too many variables. Price collapses,
need for alternative sources such as renewables collapses , price rises, need
for alternative sources becomes a profitable proposition. Environmentalists are
generally not happy because lower gas prices lead to more use. And more use puts
more pollutants in the air. But every cloud has a silver lining since it means
that critics of the Keystone XL pipeline project will be happy because lower
oil profits may very well kill the project. The market price drops enough to
make tar sands oil barely profitable, adding the cost of an expensive pipeline
may be foolish from a business perspective. Activists may squabble pro or con
about the pipeline’s impact on job growth and the environment, but if producers
decide it won’t be profitable, it won’t be built.
The environmentalists used to say oil is a finite resource
and, as supplies dwindle, the costs will have to rise. That will make
alternatives like wind power much more attractive. That sounded sensible, and,
for the many people who have long argued that our addiction to oil and gas is
destroying the planet, so did the much discussed concept of “peak oil’’—the
theoretical moment when half the world’s oil reserves had been consumed and
fossil fuels began to become scarce. The date of peak oil is hard to pin down,
but most suggest we passed that point a decade ago. New York Times columnist Paul
Krugman said that the magic moment had arrived in 2010. High oil prices would
force governments, corporations, and consumers to find another way to power the
world. It was a nice dream, but it’s over now. We are awash in cheap oil. The
cheaper fossil fuels become, the more challenging it will be for cleaner forms
of energy—like solar and wind power—to become competitive. The drop in oil
prices comes at a terrible moment. Last month the Intergovernmental Panel on
Climate Change reported that our only chance to halt the rising temperature of
the Earth, and to prevent the calamity that rise will cause, would be to
eliminate fossil-fuel emissions by the end of the century. A plan to end U.S.
fossil-fuel dependence would be an unlikely goal in any case, but, if oil
remains easily accessible, it becomes politically and economically impossible.
As oil-addicts, it doesn’t really matter to capitalism how much damage it
causes, because we simply don’t have the power to walk away.
Nor should it be only the environmentalists panicking. The so-called
"petro-socialists" of Venezuela and some African nations such as
Angola who may have to devalue currency or sell off assets according to some
commentators. And the deep-water wells off-shore the UK become less profitable
which would have been a blow to a newly independent Scotland’s revenues.
The SOYMB blog concedes that the present oil price war there
are more questions than answers as the game is played. In the end, we ain’t got
a clue. But on the other hand, unlike those green economists, we never ever
claimed that capitalism can be predictable and offer the solutions to climate change.
We were never ever delusional enough to believe capitalism had the answers.
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