The simple fact is that the arrival of US shale production means OPEC are no longer the swing producer, able to control the world market. The quotas will have little effect in themselves, as most of the participants will cheat. Instead, they will simply help to boost US oil and gas production, whilst turbo-charging the use of smart meters.
OPEC’s core problem was also highlighted by the recent announcement by the US Geological Survey of:
“The largest estimate of continuous oil (shale) that USGS has ever assessed in the United States.The Wolfcamp shale in the Midland Basin portion of Texas’ Permian Basin province contains an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids
“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more.”
The US is already well on the way towards energy independence within the next 5 years, as BP have reported. OPEC’s move will therefore prove totally counter-productive, as it will simply support the growth of natural gas, renewables, and energy efficiency. (This inter-active map from the University of Texas shows the dramatic growth in the role of gas and renewables for US electricity production).
Saudi Arabia had therefore adopted the right policy in the summer of 2014, in recognising that market share was the key to success. Anyone who cuts back on oil sales today in the hope of higher prices, risks being unable to sell in the future. But, of course, Saudi has now had to change course for geopolitical reasons, as I discussed last week. With President-elect Trump about to take office, it can no longer rely on its Oil-for-Defence deal with the USA.
Trump’s arrival will add to OPEC’s problems, as his 100-day Action Plan aims to:
“Lift the restrictions on the production of $50tn worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.”
Fracking technology is now well understood in the US, and becoming very efficient due to the introduction of horizontal drilling techniques. It is therefore unlikely that OPEC’s new quotas will have much impact on the global oil market. Most OPEC and non-OPEC producers will cheat, as usual. And today’s temporarily higher prices are simply going to further increase the overall supply glut by incentivising higher US oil and gas output:
The recent price rises have already enabled US producers to lock in very attractive margins into 2019
They will also support US oil exports into Asia, one of OPEC’s key markets. BP is currently sending the first shipment, of 3 million barrels, and others such as Sinopec and Trafigura are following
They will also support US natural gas production, where the US became a net exporter last month. US gas exports have already risen 50% since 2010, and the US Energy Department expects it to become the world’s 3rd largest exporter after Australia and Qatar by 2020. This is very bad news for oil demand, as it means gas will be even more competitive in world energy markets.
Equally important is the rise of energy efficiency as a topic for action. This was first flagged by ExxonMobil in 2009, when they argued:
“The most important ‘fuel’ of all, will be energy saved through fuel efficiency“.
Now, thanks to climate change, efficiency has reached the top of the political agenda. Smart meters will soon provide more than a billion consumers with the ability to avoid wasting energy, as the World Energy Council report this month:
“China is the leader of the smart metering market with 250 million units, in Asia plans are underway to reach 70% coverage, and 40% of American households have a smart meter. At European level, Italy and Sweden are the leading examples (close to 90% of consumers have smart meters). Furthermore, the Energy Efficiency Directive requires EU member states to deploy smart meters by 2020.”
The arrival of smart meters means that consumers now have an alternative to paying higher prices, as they can more easily identify where they are wasting energy, and cut back.
Developments such as the growth of US oil and gas production, plus the growth of smart meters, means that the energy world is going through major change. In this New Normal world, OPEC risks becoming irrelevant if it continues to try and turn back the clock to the 1970s with its pricing policies.