For the first time since 2008, the US Energy Information Administration (EIA) revealed in early June that total stockpiles of crude oil and gasoline in the United States have reached their highest levels. Additional stress was placed on oil markets when Opec said production rose through revived output in Libya, Nigeria, and Iraq.
The political climate in the three countries has improved, helping to increase production. And they are also exempt from the extended Opec production cuts that began last November intended to boost market prices for oil. An International Energy Agency report stated: “If … (Libya and Nigeria) continue to increase output, those extra barrels will delay Opec’s goal to re-balance the market.” Iraq is the wildcard because Baghdad isn’t going along with Opec production limits and that signals continued downward pressure on the price of oil.
Despite Opec’s extension of production cuts, the worldwide glut of oil, “the world is awash in oil” is keeping the price from rising. But other issues are contributing to the descent into what some are predicting will be a $20-a-barrel range. The unconstrained pro-fossil fuel policies of President Donald Trump’s administration are fueling this decline, unlike his predecessor — Barack Obama — who advocated for clean energy and no exploration and production on federal lands.
US boosts fossil-fuel output, confounds Opec
The US is setting the market for world oil prices led by shale plays involving hydraulic fracturing (fracking) in Texas, North Dakota, Oklahoma and Pennsylvania. Whatever price hikes Opec believed could be achieved through lower production quotas have been displaced by record-breaking US shale output and higher weekly rig counts. Even floating tanker storage of crude is on the uptick in Southeast Asia, furthering the glut.
Moreover, according to the Wall Street Journal, market volatility has diminished and global economies have recovered from the 2008 recession. Wall Street’s “fear gauge,” is historically low, and global dynamics that fostered negative reaction in Europe have largely subsided with the election of French President Emmanuel Macron and continued German leadership under Angela Merkel.
Events such as Chinese currency devaluation or Brexit instability are no longer hampering markets. Hedge funds and private-equity investors have pumped over $19 billion into US shale exploration for the near future. Oil markets, like all financial markets, seek stability and this is exactly what is being cited for increased oil and gas production, particularly in the US.
Renewables have a clear future, just not now
Renewables are the future, but they won’t replace fossil fuels anytime soon. The unanswered questions regarding large-scale renewable viability are numerous, along with how to achieve scalability, storage, and smart-grid diversification. Without those factors in place, renewables will stay a niche energy source — not unlike electric vehicles (EVs) — which need tax incentives, government marketing, and affluent populations to achieve higher sales over the combustion engine.
Intermittent renewables are still a problem overtaking fossil fuels because they need those very fuels (natural gas and coal) as a backup when wind and solar fail. It’s difficult to envision renewables overtaking fossil fuels and the 6,000 petroleum products that are supported by increased production outputs. The future is bright for renewables, but the remainder of this decade points to oil as the choice for global energy growth and consumption.
But the biggest influences leading oil into the 2020s will come from three factors: “Smarter management of complex exploration and production systems, data analytics, and automation.” These will allow oil and natural gas companies to deliver even more product to an oversaturated world market while lowering costs as never before.
Smarter management of complex systems allows exploration and production firms — no matter the size — greater efficiency drilling for oil and gas. As an example, deepwater breakeven costs have gone from US$100 a barrel in 2014 to $40 to $50 in the Gulf of Mexico. Projects once stalled are now producing oil and providing high-paying jobs through standardized drilling platforms that are easy to duplicate. Shell Oil is now applying lessons learned in their fracking operations to their mature deep-water operations.
Lower costs and fewer equipment failures
Better analytics allow oil companies to use complex algorithms and seismological testing to scour large amounts of data germane to finding oil and gas that was once undiscoverable. Also, “predictive maintenance” is now used through enhanced data analytics and historical records to predict equipment failures during the entire E&P process. This practice, which was first put in place by aircraft engine companies, has now been adopted by oil companies to cut costs and chronic equipment failures.
Dangerous jobs such as fitting pipes during the drilling process and exploring for hydrocarbons in hostile environments once performed by oil-field roughnecks will now be carried out by automated systems and robots. This new era of automation greatly enhances the chances of bringing more product to market than was previously thought possible. Robots are being developed by companies to inspect offshore pipelines and underwater equipment. But where automation is seeing its greatest transformative effect will be in the industry’s workforce. According to a McKinsey & Co. study, “within 10 years, oil and gas companies could employ more data scientists with Ph.D.’s than geologists.”
Geopolitical turbulence, however, could stop the oil price decline in the 2020s. War-like posturing in Syria between the US, Russia, and Iran, China militarizing the South China Sea, and Venezuela moving towards failed-state status are geopolitical pressure points that could cause oil prices to skyrocket quickly.
Increased oil production and supply have made the US a paradoxical nemesis for Opec — in the words of Roman general Lucius Cornelius during the wars of the Republic: “No better friend and no worse enemy.”
Low oil prices are good for consumers and domestic consumption but will transform the energy industry in unforeseen ways, not unlike the unpredictability of wars and international relations. But one thing is clear: The world is awash in oil with insufficient demand to soak up the excess. This will cause oil prices to continue their downward trend unless a dynamic event occurs on the world stage.