World Energy Blog

Is Saudi Arabia winning the price war...not without help.

7/1/2015 10:14:15 AM

Over the last year we have watched the price of oil drop from a high of $107 to lows in the $30 dollar mark and a recovery to $60 dollars. Today we have some saying that the price war against swing producers (US unconventionals) is over and the price has stabilized.  

If the goal was to derail the shale revolution in North America the effect has certainly been visible.  The US onshore rig count is down by over 50% and production levels are dropping accordingly.  But US small producers are not the only ones being hurt by these lower prices. Long term Canadian projects and expensive Alaskan developments are being put on hold rapidly.  

These projects are facing more than just lower prices, they are facing a political atmosphere that makes moving forward difficult.  In Canada we are seeing increasing taxes and royalty payments being installed by the government.  A carbon tax increase is just one of the ways that Canada is making the oil industry uncomfortable. Additionally, the Canadian market is being affected by...the United States.  Our inability to approve the XL pipeline means that those projects if developed could be left stranded.  Not a good business model when added to the low priced environment.

In Alaska, a new Governor has taken over, but it appears that it will business as usual...or will it.  Recently announced changes in the rebate program mean that marginal projects at are not going to get done.  Even the majors are still on hold when it comes to Alaskan development.

Not to be undone, but another level of uncertainty was introduced when the Pope came out and said that we must do something about Climate Change and it must be done now.  Those in the oil patch know what that could mean and we are already seeing some strange reactions to the Pope's stance.

So, as they say "are we there yet?" Has OPEC accomplished their goal of reducing long term supply so as to gain market share?  This is a hard one to predict and it assumes that was the goal in the first place.  In another recent post we looked at the relationship between Russia and Saudi and what relevance that might have.  Looking at the 50,000 foot level this could be part of the end game for Saudi.

Recently the US has been trying without much success to work a deal with Iran.  One of the theories about OPEC's lack of response was that it was to add some pain to the Iranian regime and slow their nuclear ambitions.  However, as they say if you can't beat them join them.  Russia all ready has close ties with the Iranians and are well versed in using energy as a passive weapon to achieve policy objectives with it's neighbors.  Recently Russia has been having meetings with Kingdom to establish energy projects together.

Could this all be part of a greater strategy to take advantage of waning US influence in the region?  In the early 70s we negotiated an agreement with Saudi where we guaranteed their safety and sovereignty and they guaranteed us oil.  Recently the US has been pulling back from its support of countries in the region, allowing bad actors like ICIS to gain strategic footholds and countries like Libya to fall into chaos.

Together, Saudi and Russia control close to 1/4 of the worlds oil supply.  An Iran freed from sanctions and working with Russia and Saudi would be a force to reckoned with.  Other news showed that Russia was now the top supplier of oil to China, exceeding the levels achieved by Saudi Arabia over the years.  What was not widely reported was that this increase did not come at the expense of the Saudi's whose exports to China have remained consistent.

So while the US begins talking about exporting oil, we could be looking at a "Super OPEC" coming together to keep prices low and keep North American crude in the ground.  Couple that with governments in the US and Canada that have no great love for hydrocarbons and we could be looking at very low production levels in North America for the foreseeable future.

Unless we get our act together in North America and begin to realize that the way to lead on the planet requires a viable energy infrastructure and an ability to move that energy internationally we will continue to be at the mercy of others, even though we have the resources and the technology to change that.  If only we had the political will.