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We’re at the Dawn of a “New Energy Age”

by | published March 24th, 2015

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:”

Dr. Moors,

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.

Here’s my response…

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.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Doris
    March 24th, 2015 at 20:43 | #1

    I disagree about nuclear having a future. When the cesium 137 from Chernobyl changes to barium 137 crystals in our atmosphere next year, we will see crop failures. People will, slowly, realize that nuclear will kill us all. It will take several decades for the barium to ‘wash’ out of the atmosphere, just in time for the cesium 137 from Fukushima to repeat the process. However the barium from Fukushima will be MUCH worse as there is a lot more of it. Those of us who can find food will be using oil, gas and wood to stay warm thru out the year.

  2. Robert in Vancouver
    March 24th, 2015 at 20:47 | #2

    Over the past few years I’ve made out OK by trading nat gas based on seasonal price swings – buy in the summer when the price is low and sell in the winter when the price peaks.

    But it didn’t work this year bacause of the huge supply glut in North America.

    So I’m wondering if this glut will shrink and nat gas trading get back to ‘normal’ sometime after North America starts exporting LNG?

    Or will supply ramp up and keep nat gas prices at current levels no matter how much LNG is exported?

  3. Al
    March 24th, 2015 at 22:55 | #3

    General prices will always go up and this includes oil. So you will be right one day, maybe in a few years or a hundred years. So that’s no prediction. Right now I think oil price is being kept in check with the increase use of electric cars. Thanks Nissan and others. Wait until Tesla knock the socks off oil prices in a few years.

  4. Martin
    March 25th, 2015 at 08:56 | #4

    I am not sure I agree that Saudi is keeping oil low to maintain market share.
    I do believe they are keeping oil low to directly impact Iran should they get the go ahead to sell their oil.
    Iran is a bigger threat to Saudi than US shale.

  5. mariana
    March 29th, 2015 at 01:16 | #5

    good one by kent sir

  6. JR
    March 31st, 2015 at 22:15 | #6

    @Doris
    Nuclear will continue to have a future because the environmentalists will forever continue to push against hydrocarbon fuel with its associated CO2 emissions. However, there will be a transition to thorium reactor technology which provides massive mitigation against the risk of “old” uranium technology. It will take time for the commercialized thorium technology development to play out, but I believe it will.

  7. boule theou
    April 3rd, 2015 at 18:19 | #7

    @Robert in Vancouver
    The natural market for LNG is Japan and Europe.

    To transport LNG, you end up burning your boiloff to power the ship, because you’ve got to do something with it. So you consume part of your cargo while transporting it.

    There are lots of gas fields in the South Pacific that are closer to Japan (with floating liquifaction facilities not subject to the hysteria and environuttiness you see over here) Plus Japan is restarting their nuke program, cutting their demand for gas.

    Europe is a good second possibility, and it does make some sense to help isolate the Russians, but sooner or later Israel and its neighbors will end up tapping the new finds in the Med. Much easier and cheaper to liquify the gas in the Med and transport it to Europe.

    I don’t think LNG export is going to get that much traction for US and Canadian producers. Factor in also that wherever there’s shale oil, there’s also generally lots of shale gas. And as Moors points out, there is a whole lot of untapped shale out there.

  8. boule theou
    April 3rd, 2015 at 18:28 | #8

    @Martin
    Martin,

    I agree. Their motives seem to me to be multifaceted. Keeping prices low seems to accomplish many things.

    1. It keeps the US from walking away from the Middle East if they can crash our shale production because it’s no longer viable. Saudi needs the US to defend them and their interests.

    2. It keeps Iran from profiting too much on what oil it can sell in the near term, reducing their ability to cause trouble.

    3. It keeps ISIS from profiting too much from the oil they sell from seized fields.

    4. It punishes Russia for supporting the Syrian regime.

    Given that, I don’t think there’s any way the Saudis are going to cut production and allow the price of oil to rise too much until they are flat broke and have no choice.

  9. Chris
    April 5th, 2015 at 14:40 | #9

    I agree. Except for Russia. The cold war was a farce. Wall street bankers have always controlled Russia as they financed the Russian Revolution. Russia is cozy with Nato Turkey doing oil deals and Turkey is funnelling terrorists into Syria to topple Syria. Read the globalresearch.ca website. PS. The Saudi royal family are secret Jews and Israel protects them, not the US. Israel is brissling with US sponsored weapons inclyding the nuclear variety.

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