We’re at the Dawn of a “New Energy Age”
Recently I received a very thoughtful comment from a subscriber.
In response to “The Truth About Iran’s Impact on Oil Prices,” Ramon had this to say about playing “the Iran card:”
I find your updates very helpful in cutting through the chatter. After spending a large amount of time and resources trying to understand petroleum related energy, I developed this question.
If the budgets of OPEC and Non-OPEC oil dependent governments need in excess of $100bbl pricing to sustain their budgets, doesn’t this also signal that increases in the longer term will exceed that pricing?
I understand capital resets, restructures and bad bond debts will be had. However, since gold is “off the balance” sheets for fiscal responsibility, I surmise that black gold is not and therefore due to its world wide availability, this consumable will act as an asset class to sustain dependent governments in the long run.
While 2015 and 2016 will likely see WTI prices range from $55-$75 a barrel, I am developing an idea that 2017 and beyond will be significant or at least until other larger sources such as Nat Gas or Nuclear energy can ramp up.
Sorry for the long comment but what’s the longer play here? Is it oil, nat gas, or nuclear?
Now, I admit that I don’t respond to reader queries as often as I should, but Ramon’s comments deserve their due.
How OPEC’s “Non-Move” Changed Everything
Thanks for such an astute set of observations Ramon, and no, your note isn’t too long.
Your insightful comments correctly point to three considerations all energy investors need to heed moving forward.
Each of them are issues I have addressed in previous articles, but it’s nice to take this opportunity to bring them together all in one place.
First, there is a growing disconnect between what some major international oil producers need in the way of prices to balance their budgets and what the market can actually justify.
Traditionally, this tenuous balance has been maintained by cutting supply. However, OPEC’s “non-move” on Thanksgiving last year changed this trajectory, at least in the near term.
Today it’s all about defending market share and quite a bit less about balancing budgets.
That means the pivotal issue of the cost per barrel has taken a back seat to cutting export volumes. As a result, we are certain to witness more protracted fiscal crises in the future, since the overall pricing picture is no longer based on what the producer needs in the way of revenue.
And yes, Ramon, you are correct: under the “old rules” prices could move up to meet budgetary needs. The main international producers were called the “price makers” for a reason.
But not anymore.
The game changer here is the unconventional shale and tight oil that has once again transformed the U.S. into the global production leader. That not only has taken a major consumer off the table, but has also introduced a completely new dynamic to the pricing calculation.
Today, the battle for market share pits OPEC against the U.S. shale patch, with a secondary battle being waged against Russian exports.
But, as I’ve noted in the past, over 80% of the available shale oil worldwide is located outside North America. That means OPEC is attempting to work out a strategy through its competition with American producers that can be used in other parts of the world.
Remember, the bulk of U.S. crude is not being exported yet. Once that happens, OPEC will have an even bigger problem on their hands. OPEC may still control 40% of the world’s oil production, but that doesn’t buy what it used to.
Today, the “call on OPEC” has become the “call on shale.”
Oil Prices are Headed Higher, But Not Enough to Save the Day
So what does all of this mean for oil prices down the road?
A number of factors are emerging that indicate oil prices will be going up, but hardly to the levels needed by the countries most dependent on oil revenues. In short, we’re not headed back to triple-digit oil prices any time soon.
The biggest obstacle to triple-digit oil prices in 2017 and beyond will be the leveling effect of the international availability of shale and tight oil. As it stands, the essential level of profitability without hedging for U.S. shale producers is still about $75-$80 a barrel.
As the market approaches this price range, additional unconventional production will kick in, keeping a lid on additional advances absent a major geopolitical crisis.
The single most important change is this: Virtually no amount of increased demand can spike oil prices in the face of a readily available supply.
Second, you are right Ramon. Oil is becoming an “on book” fiscal tool.
In fact, I have discussed how oil was becoming the new “gold standard” on several occasions here in OEI. Another chapter in this story has unfolded over the last six months.
The connections between oil prices on the one hand and currency forex values, gross domestic product, and employment on the other have become more marked and direct.
Oil is already a “store of value” and will continue to be so moving forward… even as other sources of energy make greater contributions to a new energy balance.
And that leads me to the final observation occasioned by your comments.
The longer-term play involves a wide range of energy sources. The new energy balance I often refer to is developing with remarkable speed. While oil will be the central piece for some time to come, it will no longer maintain the dominance it enjoyed in the past.
As a result, there will be major profit moves to be made across the spectrum, featuring investments in oil, natural gas, renewables, and nuclear, along with advances in energy technology, efficiency, and smart grids.
For those still searching for a magical silver bullet – a single energy solution to replace oil – they are simply looking in the wrong place.
The future of the energy world will undoubtedly be multi-dimensional. We’re at the dawn of a “new energy age” and it’s going to be a remarkable ride.