Index
Overview
Fracking
Why the prices
diminished?
What situations would force an increase in prices?
Market power
The medium-term outlook
The short-term outlook
Historical
experience
Conclusion
1. Overview
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No one can
know exactly what will happen tomorrow. Prospective studies are based only on
one thing: the historical experience. Analyzing the past is the only way to
make a prediction for the future. In the case of oil, prices are essentially
determined by two realities: a) the situation of the reserves and immediate
availability of oil and b) decisions on prices adopted by who dominate the
market. So far, reserves and availability of oil have been abundant. This has
allowed to the market decide prices. However, since the early years of
this century began to appear in the oil world horizon signs of stagnation or
weak growth of global reserves. The book Running
Out: How Shortages Global Economic Change the Paradigm (1) in 2005 and then
in 2008 introduced the mathematical support, statistics, which proved that
trend in different countries. Based on these figures, the author considered
that the North Sea soon significantly reduce its oil reserves. That forecast
made in that book and in other essays published by the author was confirmed
afterwards, on June 3, 2014, by the Energy Information Administration, EIA, the
US government agency. (2)
2. Fracking
To address the
true fact of the reduction and / or stagnation of world reserves and the
availability of oil, from the 2005 United States resorted to fracking, a
technology known since the 40s, but which had not been used because of two
facts: a) the high cost of production b) its negative impact on the
environment. Rising oil prices made profitable the new technology and from the
year 2010 United States increased its production by about 40%. The situation
changed from 2015 when prices began to drop below $ 80, a figure that experts
say is the minimum price needed to sustain fracking.
OPEC
Reference Basket (ORB) and corresponding components spot prices ($/b)
Years 2011 2012 2013 2014 2015
OPEC
ORB 107.46 109.45 105.87
96.29 49.49
Source: OPEC Annual Statistical Bulletin 2016
Table
7.1, page 86
3.
Why the prices
diminished?
By 11 July
2008, after months of continuous increases, oil reached its highest price level
in history: $ 147. From that moment began a profound change in the global
economy: a) the financial crisis with the collapse of major banks in the US and
Europe and b) the price of oil and other commodities began to decline ensued.
As metaphor we could say that oil is the lifeblood of the world economy that
could not maintain that price over time. The other determinant aspect of prices
is the threat of overproduction that represents fracking, because with prices
above $ 80 this process is possible. This has determined that the large
producers and OPEC countries have not reduced their production to boost prices.
4. What situations would force an increase in price?
The independent variable which any market player can control is the reality of nature: the behavior of
oil reserves. If reserves and the availability of oil diminish or grow at a slower pace than production
and consumption inevitabily it will have an effect of upward price at medium and long term. In the
opposite direction, the other factor that could affect prices is the development and increased use of
technologies to reduce oil use. The automotive industry is key in that sense. If this industry manages
to amass green vehicles oil consumption would drop significantly.
5. Market power
Large market
buyers have obviously a great influence to dictate prices. A similar power have
large producers, which now has joined the United States with the use of new
technology.
6. The medium-term outlook
Fracking, since 2015, it has been the factor that has slowed the upward trend in prices.
As predicted in 1999 Sheikh Ahmed Yamani, former minister of oil of Saudi Arabia, following the
increase in oil prices that year, “technology is the great enemy of OPEC.” Yamani then said the price
rise would help the development of new technologies that allow increased production in countries
whose oil supply was limited. The idea of Yamani was correct and production of fracking in America
is proof of that. Now, it is very important to see the behavior of world reserves of conventional oil and
the tendency to stagnation and / or decline.
World proven
crude oil reserves (m b)
Total world
2010 2011 2012 2013 2014 2015
1,459,765 1,467,811 1,480,251
1,490,134 1,492,880 1,492,677
Source: OPEC Annual Statistical
Bulletin 2016
Table 3.1 page 21
The above figures show the sluggish growth of the world's proven oil reserves between 2010 and 2015.
How will this fact affects to the market? Is unconventional oil, as having Venezuela, enough to meet
the requirements of the global economy? Those are the big questions whose answers are not easy, since
due to its status as an essential raw material for the global economy there is no absolute transparency
on key issues such as the true figures of production and reserves. Great actors of world trade in oil,
such as Shell, for example, recognized in the past have overestimated its reserves, because of the
strategic importance of the matter. Every so often the media spread news about the discovery of new
oil reserves, but when the information is checked often proves to be inaccurate. A case was the Caspian
Sea.
7. The short-term outlook
Oil Minister of Saudi Arabia, in March 2016 said that the market tends to stabilize and recover.
http://lta.reuters.com/article/businessNews/idLTAKCN0ZJ10T
Saudi Arabia is the world's largest producer and its position is very important in determining prices.
United States, as a producer of fracking, is now the first interested in the price increase while OPEC is
now the first interested in stability below $ 80 to hinder the fracking.
A price above $ 80 would allow the United States to resume its production of fracking and reduce
imports but it would be an inflationary factor for the US and for the world economy. For the United
States this is a matter of prime importance because is at stake its oil independence, due with low prices
continue to depend on imports; on the contrary, if prices rise above $ 80 could resume its production
of fracking, now decreased due to lower prices.
Large producers not members of OPEC as Russia are also affected by the low prices but they prefer
those low prices rather than face the competition of fracking. We could say that OPEC and non-OPEC
producers work all united against fracking. This leads us to think that if it does not occur in the short
term a sufficiently shocking fact in the market, as a sharp decline in reserves and physical availability
of oil, one might expect that the price will be temporarily below $ 80.
8. Historical experience
In 1970 the
price of oil was $ 1.25, ten years later, in 1980, he reached $ 40; this
represented an increase of 3,200 percent roughly between the two years. If a similar
phenomenon had occurred in recent years, oil prices had surpassed $ 500 for
2012 (3). The United States was aware of that situation and therefore adopted
two measures: a) not prevent the financial crisis of 2008 and b) develop
fracking, a fact that began to bring down oil prices from July 11, 2008, time
as mentioned above, reached the highest price in history: $ 147.
9. Conclusion
United
States, by mean of fracking, prevented
the explosion of oil prices and the collapse of the world economy; that is the
reason why oil prices have not exceeded $ 500 and for now remain below the
barrier of 80 dollars, the marker that determines the profitability of
fracking.
(2) UK
became a net importer of petroleum products in 2013
(3) Fracking is what has
prevented an explosion in oil prices
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