A Bearish Oil Market Leaves OPEC at Uncertain Crossroads
Crude
oil prices are currently hovering on $ 42 per barrel, on track for their worst
first-half show since 1997. TechSci explores one of the major reasons for this
decline: the burgeoning shale oil industry
The oil market
has slowly but decidedly been turning bearish for quite some time now. Since
the steady highs of $105 per barrel (bbl) not 3 years back, and not to mention
oil almost touching $145 bbl in July 2008, oil is trading currently at the $42
bbl level, sending OPEC into panic mode. Experts at TechSci weigh in on the
argument and offer their insights:
Shale oil is
perhaps the biggest reason being cited, in the race to the bottom for oil
prices. Shale technology has been nothing new, and in fact, shale oil
production peaked in the 1980’s, when around 45 million tonnes of shale was
produced (to put this in perspective, current production is about 30 million
tonnes); after the 1973 oil crisis when OPEC ‘embargoed’ several Western
countries, said countries found it incumbent to develop some modicum of energy
independence, given the growing political and economic clout of OPEC.
A recent
estimate pegged the total global reserves of shale oil at 6.05 trillion barrels,
with around 80% of it in the US. TechSci Research report “Middle
East & Africa Oil & gas Pipeline Market By Application, By Type,
Competition Forecast & Opportunities, 2012–2022” goes into a little
more depth about the impact of shale in the MEA region. Technological
innovation in shale and steeply declining capital costs have led the
shale-boom, with some estimates suggesting that there has been a fall of
35%-40% in cost of drilling and completion of shale wells in FY16. Companies
have become smart, achieving extraordinary gains in productivity by optimising
production techniques and drilling only in ‘sweet spots’ that generate the most
oil. Shale wells need not work continuously. Operations can shut down and
restart without much pain, unlike oilfields which simply are not that easy to operate.
OPEC tried to squeeze shale oil by boosting oil production; the bottom dropped
out of the oil market but shale producers simply sat back and bided their time.
Once the unreasonable production ceased and oil prices rebounded, shale production
started once again.
What makes matters more interesting is that
OPEC itself has internal and external factors to deal with. Several countries
such as Iran, which is just coming out of a US led sanction, wants to retain
its current production level, as do Iraq, Libya and Nigeria. Then there is
Russia, with its vast natural resources, where energy sanctions are being
recommended by the US but virulently opposed by energy-hungry European
countries, making for some very confusing geopolitics. The key problem,
however, for OPEC and other producers is that oil has become zero-sum game; if
production is hiked, shale leaves the market but conventional oil suffers
higher market share at the cost of low oil prices and if production is cut,
then prices will rise but this will further entice more shale producers,
diluting OPEC and conventional oil’s market share.
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