Cheap oil will last a while longer, as Saudi Arabia makes clear it’s not going to take it on the chin to save beleaguered U.S. producers.
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
Low oil prices will be a fixture of the world economy for at least the next year, as the big oil producers inside OPEC show zero appetite to rethink their 2014 decision to pump with abandon and let the market sort winners from losers.
Saudi Arabian Oil Minister Ali al-Naimi told an industry conference in Houston Tuesday that a cut in production “is not going to happen.” Instead, he said, low prices will themselves drive out “inefficient and uneconomic” producers from the market, slowly bringing some balance to an oil market that remains badly out of whack.
Crude oil prices had rallied on Monday, but gave all those gains back after Naimi dashed any lingering hope that Riyadh might ride to the rescue. Prices dropped about 5 percent in New York and London, putting oil back under $32 a barrel.
Another year or more of low oil prices will be bad news not just for Saudi Arabia, which is running budget deficits and scrambling to diversify its economy. Other big producers, like Iraq, are literally running out of money to meet other pressing challenges, such as the eruption of the Islamic State.
Venezuela, another country heavily reliant on oil exports, is slowly imploding, and more time with cheap oil simply compounds the pain from sky-high inflation, worthless currency, and a dysfunctional political system.
OPEC oil export revenues have plunged from a combined $1.2 trillion in 2012 to an expected $320 billion this year if prices stay near current levels.
Expectations for a sustained period of cheap oil don’t just come from the top dogs at OPEC. The International Energy Agency, in its medium-term oil report released Monday, also said that oversupply in the oil market will continue into 2017. The IEA noted that low prices are indeed poleaxing U.S. shale producers, who need higher prices than their Mideast rivals; the IEA projected U.S. shale oil production will fall this year by about 600,000 barrels a day, the first such contraction since the American energy boom began in 2008. Bankruptcies have already littered the oil industry, and big banks are increasingly setting aside money to cover bad loans to the U.S. oil and gas patch, too.
But even a modest growth in demand, primarily from developing economies, won’t be enough to erase the huge supply overhang that exists today. Analysts figure the world pumps between 2 million and 3 million barrels per day more than it consumes.
Naimi, making his first visit since 2009 to the oil industry’s most important conference, appeared to tender an olive branch to beleaguered U.S. producers, who have suffered the most from OPEC’s risky gamble.
“I welcome additional sources of supply, including shale oil,” he said, adding that “nimble” U.S. oil companies will be needed again once demand catches up with global supplies of crude.
Yet behind the conciliatory words, Naimi brought a tough message for U.S. producers, many of whom are struggling to stay in the black. Much of the world’s current oversupply, he said, is because oil prices stayed around $100 a barrel for years. Those high prices made pretty much any oil field economically viable, no matter how complicated or exotic, from Canada’s tar sands to Brazil’s ultra-deepwater discoveries to America’s frack-happy boom of the last eight years.
The remedy for what ails the oil market today, Naimi said, is to embrace the market itself and let prevailing prices determine who should be pumping and who should be idling drilling rigs. Saudi Arabia, which can pump oil cheaper than just about any country on Earth, can still make money even if oil prices keep going south. Others, like many in the U.S. shale patch, cannot.
“Cutting low-cost production to subsidize higher cost suppliers only delays an inevitable reckoning,” Naimi said. “Inefficient, uneconomic producers will have to make way.”
Just don’t expect Saudi Arabia and other OPEC members to do the heavy lifting. Naimi said that Saudi Arabia’s experience in the 1980s — when it alone shouldered the lion’s share of production cuts to help balance a glutted market — taught Riyadh a lesson. That’s why, Naimi said, OPEC decided to keep pumping oil flat out in late 2014, even after it was apparent that crude prices were falling off a cliff.
That doesn’t mean there’s nothing Saudi Arabia or other big producers can do to stabilize the market. Riyadh and Moscow, two of the world’s biggest producers, have discussed a production “freeze” at current levels.
“It’s the beginning of a process. If we can get all the major producers not to add additional barrels, then these high inventories (of crude oil) will probably decline in due time,” Naimi said. But he added, “it’s not like cutting production, that’s not going to happen.”
The trouble is, both Saudi Arabia and Russia are pumping near-record amounts of crude every day; freezing production at sky-high levels will do little to alleviate the global glut. What’s more, other big oil producers, like Iran, which is desperate to boost oil production and exports to claw back market share after being sidelined by international sanctions for the last half decade, have made clear they have no plans to respect any informal “freeze.”
On Tuesday, Iran’s oil minister called the proposed freeze “ridiculous.”
None of which is to say that low prices will be here forever, or even through the end of the decade. Every year, said IEA chief Fatih Birol on Monday, the world needs 4 million new barrels per day of oil production: 1 million barrels to meet growing demand, and 3 million barrels simply to replace production declines at old, tired oil fields.
That’s why IEA warned that back-to-back years of investment cuts in the industry could well set the stage for a price spike in a few years’ time, as much-needed projects get delayed or axed altogether.
“The risk of a sharp oil price rise” by the end of the decade, the IEA report warned, “is as potentially destabilizing as the sharp oil price fall has proved to be.”
Photo credit: FAYEZ NURELDINE/AFP/Getty