Exclusively For Offshore Post: Declan is an internationally recognised journalist of more than two decades, having worked for the BBC and ABC News, focusing on all things business and global economics.

Declan Curry

Does Anyone Actually Want Higher Oil Prices?

Published at 11:28AM - 19/04/16

It’s hardly a surprise that the oil producing nations failed to reach an agreement to boost oil prices at the weekend. For starters, they were talking about the wrong thing.

All that was on the table was a freeze in production. That doesn’t count for much when Saudi Arabia is pumping out vast quantities of oil already. They needed to consider big cuts, not just a freeze, if they were determined to reflate the oil price.

The OPEC Gentlemen’s Agreement

Any deal would also need to have teeth; there have to be consequences for nations that promise cuts but then deliberately refuse to deliver as they desperately guzzle cash from oil consumers.

OPEC and the others came nowhere close to that, either. All they considered was a gentlemen’s agreement: ineffective, unenforceable and pathetic. They need to take a leaf from the European Central Bank’s book: the only way to intimidate the markets into doing what you want is to brandish a big bazooka, and make them think you would actually fire it.

Competing Agendas

Enforcable cuts were never an option because the different nations had too many other competing agendas.

Russia needs barrels of cash to repair the financial damage caused by its adventures in Ukraine. Iran wants to re-establish itself as a major oil producer so it has to pump as much as possible, as quickly as possible, irrespective of the impact on the price. The Saudis need money to pay for their year-long proxy war with Iran in Yemen, and the fragile ceasefire that followed it.

Saudi Arabia also needs to show it is still the premier power in the region. It won’t cut production if that could reduce its dominance over Iran. A low oil price also minimises the financial benefit that Iran will achieve now that global sanctions have been lifted.

Saudi Oil Vs US Shale

And Saudi Arabia has an American shale oil industry to strangle. The search for shale oil and gas in the USA has been funded by borrowing; the Saudi-provoked collapse in the oil price means less money flowing back to repay those debts.

American shale companies owe well above $200 billion between them. When you owe the bank $200, you have a problem; when you owe the bank $200 billion, the bank has a problem.

Some companies have already failed to pay their interest on time, and the cost of new borrowing is rising steadily, hampering future exploration and restricting fresh revenues. Lenders are often reluctant to turn their paper losses into hard cash, and none of them will want to pull the rug out first – but once one bank acts to shut down a shale company, the others will surely follow – and quickly.

If shale oil’s house of cards is collapsed, that could give a much bigger boost to the oil price than any old OPEC meeting. The Saudis may not have to wait too long.

The Love Of Cheap Oil

So the world carries on swimming in oil it doesn’t want and can’t use – to the delight of consumers and governments everywhere.

They LOVE cheap oil.  It costs less to fill up the car; it’s more economical to move goods from factory to warehouse to shop; it should be cheaper to generate electricity and produce the essentials of everyday life, like plastics or chemicals.

In the UK, the USA and other developed nations, low oil prices have stimulated the economy and boosted growth by putting money back into people’s pockets, and making business cheaper to run.

The Cheap Oil Dark Side

The public, governments and your customers would like these low oil prices to continue for ever. But you in the oil & gas industry know there is a dark side to cheap oil. The extraction of oil becomes increasingly uneconomic in technically-challenging fields, including the North Sea. The search for new, future sources of oil is curtailed. Cheap oil could mean less oil in the future.

Spending on equipment – and the people who use it – has been cut savagely, squeezing companies all along the supply chain, all across the globe. There have been far more job losses in Britain’s oil & gas industry – 65,000, according to the lobby group Oil & Gas UK – than there are jobs under threat from the current crisis in Britain’s steel industry. Yet the prospect of job cuts in steel is met with alarm and outcry; on oil job losses, the public has been largely mute.

The Public’s Opinion

This has irritated many who worked – or used to work – in Britain’s oil industry. Of course they deserved more sympathy in the tough years they’ve just endured – but they didn’t get it because the public does not like the oil industry very much.

In the days of high oil prices, all drivers saw was the eye-watering cost they paid at the pump and the stratospheric profits that the likes of BP, Shell and Exxon used to make, and they drew a direct connection between the two.

You know the oil industry doesn’t work like that: the oil explorers don’t set the market price, the petrol retailers make just pennies in profit on each litre they sell, and the bulk of the price British motorists pay is actually tax, which is handed over to the UK Government.

You know that; many motorists do not, and that’s partly the fault of the oil industry for not showing us more clearly how it works on the inside. Transparency has its benefits. Secrecy makes people think the worst of you.

Tomorrow’s Big Problem

Cuts in production and exploration today always cause problems tomorrow. The Russian oil giant Rosneft warned just a few days ago of future oil shortages if prices stay below $50 a barrel. The search for new sources of oil has stalled in more expensive fields. Even when demand picks up and the oil price recovers – as it surely will, oil is a cyclical business – the industry may not be able to respond quickly enough.

The loss of skilled workers as the industry cut back in recent years could mean the skills required to scale-up exploration and production simply won’t be there in sufficient quantity.

It’s a lesson the industry should have learned when it cut too deeply during the period of low oil prices in the 1990s; the jury has yet to decide if the lessons were learned or implemented this time around.

To rehire those workers, to restart the search for oil, to make sure we avoid rationing and shortages, the oil price has to go back up. That means waiting for China’s economy to revive. It means firm action by OPEC. It means intimidating the markets with a show of force. But outside the markets – in the real world of politics and consumption – it also means the oil industry needs to explain to the public, government and its customers that dearer oil is good for them. Has that conversation even begun?

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