OPEC’s Secretary General Abdulla al-Badri made headlines when he announced that the oil price may have bottomed out—indeed, we had four straight days of increase—and predicted “you will see more than $200 when it comes to future oil prices.”
Al-Badri makes a strong argument. In the current reduced-oil-price environment, we see oil companies cut back on budgets, curtail exploration, and pull in rigs—as in many places it costs more to get the oil out of the ground than the present sales price. The Wall Street Journal (WSJ) reports: “The number of rigs drilling in the U.S. has sunk to a 3-year low.” Reuters states: “The rig count is down 29% from its October peak … a clear sign of the pressure that tumbling crude prices have put on oil producers.”
In today’s market for crude oil, a reduction in the number of drilling rigs in the U.S. does not mean overall production declines. It only means less future production. Tim Snyder, an energy economist with Lubbock, Texas, based Pro Petroleum Inc., who analyzes trends to help his company, and others, make educated decisions and manage risk, told me: “We anticipate a decrease in ‘new’ production in the U.S. as exploration and production companies reallocate capital expenditures and reduce drilling exposure.”
Economics 101 tells us that less supply results in higher prices. Addressing the recent up-tick in prices, Yahoo News says: “Investors bet supplies would tighten in the long term because major oil companies were scaling back investments and drilling to cope with falling prices.
Al-Badri extrapolates this scenario out to a future of $200 a-barrel oil.
What he apparently misses is that as soon as prices increase, activity in the oil industry will pick back up. Snyder says: “Once prices reach the $70 to $75 per barrel range, the more complex drilling solutions begin to become attractive and we will see new production increasing; putting downward pressure on prices all over again.
There are plenty of smaller companies that can be very nimble. The equipment they have pulled and the employees whose jobs they cut can get back in the field quickly—in fact, they must. Every day that equipment sits on a lot, they are losing money. The trained talent wants to be working.
Yes, it will take some time to get the bigger projects up and running again and to build the needed infrastructure, but as prices climb, more and more production will come back online—bringing balance to the markets.
When prices are high, human ingenuity comes in and finds a solution—which is how the technologies of horizontal drilling and hydraulic fracturing combined to unleash America’s new era of energy abundance and helped lower prices worldwide.
Maybe al-Badri’s comments were designed to talk the markets up—after all, several OPEC countries’ economies are grim due to the drop in oil prices. For example, oil-rich Venezuela is facing default and is rationing food. Business Insider reports: “The country is broke … in large part because oil prices are so low. And now … its economic crisis is leading to a health crisis”—a pack of 36 condoms costs about $750. Both Venezuela and Iran have called “for OPEC’s cooperation in stabilizing oil prices,” but Saudi Arabia—OPECs biggest producing member—is maintaining its current output.
Al-Badri is not stupid. He has held several high-ranking positions in his native Libya, starting in 1990 as Minister for Oil. He was appointed Secretary General for OPEC in 2007. His January 26 $200-a-barrel prediction focuses on the future production losses that will result from the industry pulling back—which, as outlined above, are not likely to result in $200 oil.
Snyder believes al-Badri may be signaling something bigger: “The only way for prices to reach the level mentioned is for there to be a decline in available supply through a disruption in production or a break in the supply chain.”
Libya, al-Bardi’s homeland, has the largest oil reserves in Africa. It, according to the WSJ, “helped trigger the world-wide rout in oil prices” when it “surprised the world with a sudden burst of new oil” last summer. However, as Reuters points out: “Libya is in the middle of a struggle between two governments and parliaments allied to armed factions fighting for legitimacy and territory.” In the WSJ, Richard Mallinson, an analyst at London-based consultancy Energy Aspects, explains: “There was an implicit agreement between the different factions to avoid disrupting oil production. Now the parties have realized that controlling oil means power.” As a result of the fighting, “Libyan oil output has fallen to about 325,000 barrels a day in January from nearly 900,000 barrels a day in October.”
The situation in Libya is deteriorating and Western oil companies are pulling out. Then, on Sunday, security guards at the last functioning export port, that used to export 120,000 barrels a day, went on strike because their salaries were not being paid—which closed the port and lowers Libya’s oil output to less than 300,000 barrels a day.
Libya does have one remaining port open, but it is used to supply the Zawiya refinery with crude rather than for export. Reuters states: “All other ports and most oilfields have shut down due to fighting nearby or pipeline blockages by rival factions.”
Snyder posits: “Maybe al-Badri is telling the world that, left unattended, the rapid increase in terrorist activity seen lately could be the only thing to lead to the $200 level in crude oil—which will have catastrophic results.”
With Jordan’s accelerated air strikes, and the United Arab Emirates rejoining the fight against ISIS, added to the already troubled situation in Libya, a major supply disruption becomes extremely plausible.
Maybe al-Badri is right—though not for the reasons he outlined. Maybe he knows more than his simplistic explanation revealed. If he is, if he does, the U.S. is going to need every drop of oil found within our borders, including the Arctic resources that President Obama just proposed be permanently put off limits.
With the current low oil prices, we can easily think that we have too much oil already—after all, last week’s sudden price drop came after the release of official data remain a factor and, if al-Badri is correct, America’s energy abundance can provide us with energy security and global stability—not to mention the economic benefit of supplying our allies with oil and refined-petroleum products. Suddenly, the Keystone pipeline’s critical role becomes perfectly clear.