Looks like we are in the midst of radical change in regional and world politics caused by the technological revolution in oil and gas production. I keep trying to wrap my little brain around what is going on. Here are a few articles that may stretch your brain too.
- Brain stretcher on the shift in geopolitics due to increased US oil production
- Speculation why the Saudi government’s plan to re-engineer their country’s economy isn’t going to work
- Three articles on the rapidly increased US shale production undercutting the OPEC production cut
3/12/17 – PJ Media – The Problem of Success – Article raises the unsettling idea that nobody has figured out the impact of dramatically increased production in the US.
Neither the previous US administration, the current US administration, leadership in Saudi Arabia, leadership elsewhere in the Middle East, nor even pundits for that matter, have figured out how geopolitics will change as Saudi Arabia loses its role as dominant oil producer and the decentralized American drillers gain the swing producer role.
It stretches my brain even to understand there is an issue.
American frackers used the dramatic run up in oil prices to $100 as an opportunity to figure out how to frack oil where it could never have been touched before. They then used the collapse in prices as an opportunity to figure out how to frack far more efficiently, far more effectively, with far higher production output from every well. As a result, the break-even price for U.S. shale has shrunk.
The vast network of independent producers are responding to price changes far faster than OPEC could handle or the majors could ever dream of. Prices go up somewhat and in about three months US production is surging.
Article points out that Saudi Arabia is living off their savings, meaning they are drawing down their foreign reserves to plug the budget gap, which was $79B last year alone. Article says they have postponed payments to vendors in the amount of $28B, making the actual deficit $107B. Stretching payables is always a sign of distress. Stretching payables in an amount equal to something around 5% of foreign reserves is a really bad sign.
The Saudi plan to transform their economy, discussed in the following article, is too little and too late according to this article.
With my limited field of vision, I can realize that the Saudi plan requires transforming the outlook of most people in their country from what-do-I-absolutely-have-to-do-today government employees to self driven entrepreneurs is going to take a really, really long time. I don’t know how long that sort of massive transition in mind-set would take, but I know it is many years beyond what it will take to deplete their foreign reserves.
The kind of transition that has already taken place in geopolitics caused by what we are seeing in the oil market will take a long time to understand, according to the article.
In a sentence, the goal is to shift away from the government employing most people with most income coming from oil towards a vibrant private sector with diversified industry employing most people.
Most sobering comment in the linked article is an explanation that previous seven 5-year plans have emphasized building infrastructure, build human capital, and use the private sector to drive growth. If it hasn’t happened in the last 35 years, what would make it happen now?
The MDW article cites four reasons the plan won’t work:
it is an overblown mega-project scheme
it focuses on economics and discards political development
it superficially approaches the challenge of instilling virtues of achievement
it takes the generation of non-oil revenues as it ultimate goal
One of the most severe challenges, it seems to me, will be the need for massive change at the cultural level away from easy or no-show government jobs to a widespread entrepreneurial attitude.
Other massive changes in cultural will be required. Adopting the needed political changes will be painful.
3/13/17 – Reuters at Rigzone – Russian Oil Major Says US Shale Growth Imperials OPEC Deal – Rosneft, a major oil player in Russia, thinks that the increase in production from the US could lead to a renewed price war when the six-month production cut from OPEC comes to an end. Article quotes the company has estimated that there has been 90% compliance with the OPEC production cut.
3/14/17 – Ship and Bunker – Russia Warns of New Price War Due to US Shale Gains as Kuwait Calls for Extension of OPEC Production Cuts – Same coverage as previous article just mentioned. Speculation is Russia will increase production when the OPEC production cut expires in the middle of this year. Increasing production from the US means that agreement will likely not be extended.
3/19/17 – Bloomberg – Oil Drops as US Drilling Growth Threatens to Counter OPEC Cuts – Output of oil from American shale increased for the 10th month running. This is either offsetting or beginning to offset the production cuts from OPEC, depending on which article you read. As an expected result oil prices are dropping.
1/23/17 – Wall Street Journal – Halliburton Standing Firm on Price Increases – Interesting tidbit that is a commentary on state of fracking – Halliburton is working to pull back their heavy discounts of the last two years. If you don’t like their upwardly revised prices, find another vendor.
Even back in January there were signs that drilling activity was stepping up.