By John Richardson
THERE are few other genuine long-term bright spots in the US economy other than shale oil and shale gas unless you are at the very top of the economic pile and so view cloud computing, social media and internet search engines as equivalent to “Morning in America” again.
Cloud computing, social media and internet search engines don’t create enough middle class average-income jobs, and it is more of these jobs that the US is going to desperately need as it struggles to deal with a new global recession/depression.
US oil industry executives are thus making a good case when they say that lifting the US oil export ban will create 630,000 jobs within five years.
Stacked up against this claim are refinery workers who worry about their jobs because the domestic glut in oil guarantees lots of very cheap oil to make gasoline and diesel etc. Environmental groups are also against lifting the ban.
Money obviously talks, though, and so another statistic might determine the outcome of this debate: US oil revenues will rise by no less than $25 billion by 2025 if the ban is lifted, according to an Energy Information Administration estimate.
But regardless of the outcome of this latest attempt to lift the export ban, I believe that politicians on both the left and right will become more and more conscious of the need to something, anything, about the “squeezed middle classes”.
Popular resentment can only rise as it becomes clear that the monetary policies of the Federal Reserve have not only failed America, but have also failed the world. So if it isn’t a lifting of the crude-oil export ban, why not trade protectionism? The pressure to do something about “cheap Chinese imports” can only build as a result of the global deflationary cycle.
What does this latest attempt to lift the export ban also tell us about oil markets?
It is that US producers recognise that we are in a long-enduring era of abundant supply. Saudi Arabia will resolutely stick to its “market share” strategy as it has no other choice. Meanwhile, Iran will soon re-enter the global market and initially at least, it, too, will want to regain market share rather than push for higher prices.
Crucially, also, the demand side of the story tells us that there will be a lot of further downward pressure on oil prices. Not since 1989 has the global economy undergone such a major shift.
So from a US oil industry perspective it surely has to be a case of “if you cannot beat them, why not join them?” – i.e. “let’s get this ban lifted so we can also chase global market share as if we do the alternative of cutting production, prices are still likely to remain depressed”.
A vital part of this thinking is US shale oil’s ability to constantly innovate in order to further lower production costs.
This has confounded analysts who thought that the absolute minimum price that oil had to be to produce shale oil economically would always stay at $60 a barrel. Then they thought it was $45 a barrel, but it is now in the low $40s a barrel range for the most efficient producers.
Why on earth shouldn’t this process continue, especially given again politics? As the shale oil industry is such a vital and rare creator of decent middle class jobs, I wouldn’t be surprised at all if we see more tax breaks and other investment incentives that encourage further research and development.
And finally, what does this tell us about the oil price? Sadly, we can only be certain of one thing and that is extreme and unprecedented volatility over the next few years.
Prices could easily go back to $100 a barrel, but only on geopolitics and/or more misguided central bank stimulus. I think there is also a very good chance that prices could fall to as low as $25 a barrel, or remain close to today’s $50 a barrel.
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