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Global Oil Prices to be kept in check by US shale oil?

Author: Kingshuk Nag/Friday, November 17, 2017/Categories: Oil & Gas, Expert View

Global Oil Prices to be kept in check by US shale oil?

Ashok Das is a public sector manager based out of Kolkata, Amit Khanna works for a multinational in Gurgaon, Srinivasa Prasad is an IT professional in a company operating from Hyderabad while Giridhar Apte is a production supervisor at a factory in Mumbai. All four of them are not known to each other. Yet the fates of all four are tied up indirectly. Sounds surprising? Read on. Even more startling is the fact that their fortune depends on how the crown prince of Saudi Arabia, 32 year old Mohammed-bin- Salman ( referred to as MBS)  is able to consolidate his power in the Kingdom or not. In a move that is seen as being impulsive, the prince recently had 11 other princes and 200 members of the Saudi business elite arrested on charges of graft, corruption and malfeasance. Analysts are not sure how the whole matter will play out but conjecture that the global prices of oil will partly depend on the outcome of this power struggle.

With 80% of India’s oil requirements being imported, the Indian economy’s well- being and the state of finances of the Government of India will depend on the global oil prices. Inflation and the current account deficit of the budget- all depends on international oil prices. On November 16, US West Texas Intermediate (WTI) crude declined 19 cents from $55.33 to $55.14 a barrel, while Brent crude fell 51 cents from $61.87 to $61.36 a barrel.

Globally crude prices are on the decline and for Saudi Arabia which accounts for around one third of the crude production of the Organization of Oil Exporting Countries (OPEC) this has meant a significant decline in its dollar reserves. From a peak of US $ 737 billion, Saudi Arabian reserves have now fallen to US $ 475 billion. Analysts say that the anger of the Saudi crown prince is partly due to this and he holds the corruption of those arrested partly responsible for the mess up. But for the time being, the massive clamp down has however led to investors scurrying to take their money out of the Kingdom and spooked the planned IPO of Aramco. Owned fully by the government, Aramco is the largest oil producer in the world and has a market valuation of a stupendous US $ 711 billion. A company of 1933 vintage, it was totally nationalised in the early 1980s. It‘s annual revenues are of US $ 311 billion and the company sits on reserves of 260 billion barrels. In January 2016, the Saudi crown prince had announced the IPO to build a sovereign fund. However the timing had not been announced and neither the exchanges where the shares would be listed had been unveiled. But markets expected a 10% divestment with listing of the New York and London Stock Exchanges in 2018 or even in 2019.

The crown prince wants the Saudi Arabian economy to be diversified and reduction on dependence on oil revenues. He also espouses the policy of ‘lower for longer.’ This means cut back in oil production, so that higher prices can be commanded in the world market. Although Saudi Arabia has huge oil and dollar reserves it requires higher oil prices to balance its current revenues with current spending. According to an IMF report, Saudi Arabia will require oil prices at US $ 70 a barrel for fiscal break even in 2018.

OPEC members are expected to meet at the end of this month in Vienna to discuss limit oil production and thus effectively fixing global oil prices. An earlier arrangement between OPEC countries to limit crude output will expire in March 2018. The interest of big producers like Saudi Arabia will be to keep the controls intact. In fact Saudi Arabia is giving out statistics to show that its inventory of oil has declined by 70 million barrels. This is to influence international prices by projecting a shortage. But some satellite data seems to indicate that this is an overestimate.

A new factor, however, threatens to break the OPEC game plan. This is the increasing production of shale oil in the US. Oil shale extracted from a special type of sedimentary rock containing kerogen, is now being produced in a big way in the US. Although oil shale has been known for at least a century and a half, it was not exploited because the costs of extraction are high. Thus, it does not make economic sense to produce oil shale if the cost of crude is low. Presently, the US is producing 4.25 million barrels per day of shale oil.

In fact, the emergence of US as an energy producer (via oil shale) has reversed the position of the country which was a net importer for well above half a century since 1948. The US is now poised to be a net exporter of oil in the coming years. The International Energy Agency (IEA)- based out of Paris- predicts that US will become the dominant player in the fossil fuel business as early as 2025. It has estimated that US recoverable shale resources are of the order of 105 billion barrels. This development portends positively for countries like India which are net importers of crude. But negatively for OPEC cartel who have utilised the control of oil production to squeeze countries like India. US shale production thus acts as a check on OPEC which seems to be the first time a little out of depth. Analysts perceive that OPEC will have no other option but to cut oil prices. Otherwise this will lead to a build- up in inventories- and the smaller members will be inclined to break the agreements. But for the largest producer – Saudi Arabia which has spent a lot of money in its war with Yemen– it is imperative that the prices are kept high.

Though OPEC’s estimates must be different, leading consultants like J P Morgan predict that crude prices could crash by US $11 by 2018. This may be an overestimate but surely it is clear that crude prices will be in check for the next few years. Our protagonists, mentioned in the beginning of this column would certainly feel elated on hearing this! 

(Kingshuk Nag is the author of several best-selling non-fiction books and former Resident Editor of Times of India)

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