The other oil debate
While analysts debate how far and low prices can go and the impact of that for OPEC and the expected reaction by the organization when it meets in Vienna later this month, another debate is raging in the US given the shale oil bonanza that has increased the country’s domestic production, cutting on imports and having generally a positive impact on the economy.
It was from the start that the strong oil prices have put a floor for the expensive shale oil revolution to emerge by using horizontal drilling and hydraulic fracturing to be an economically viable operation.
It was in 2008 that the flow of the oil and gas released from the rocks in Texas and North Dakota started to show up making impact on the US oil industry scene as it managed to increase that production by 3 million barrels per day (bpd) to 8.5 million, the highest level of domestic production in close to three decades.
One outcome of such development is the sizable reduction in imports and a country like Nigeria that used to be among the top five oil exporters to the American market has seen its exports dwindle to zero in July.
Moreover, there is the remarkable impact on the economy in terms of providing job opportunities, cut in imports that helped in closing the trade deficit.
However, with the drop of the price of the barrel some 25 percent since June and the great potential that such decline will continue well through next year, calculations started to focus on the direct impact of that fall.
The first to watch was the rig activity where 19 rigs were removed by the week ending Oct. 17 compared with the week earlier, bringing the total to its lowest level in six weeks.
And if the price trend in its current level without showing a reversal another 100 rigs will be out of business before the end of the year.
As a result output that is expected to exceed one million bpd this year is slated to drop to 963, 000 bpd in 2015.
It is very hard to pin point at specific blanket price level that could render some sale oil operations out of business as calculations vary.
The highest may be in some Louisiana fields that can break even only for a price level of $92 a barrel, while others are far below aby $20 a barrel.
In nearby Canada, industry experts, including the International Energy Agency, the western consumers’ watch dog, concluded that more than 25 percent of its sand oil will not commercially viable at a prevailing price of $80 a barrel.
On the other hand output from the shale oil is difficult to sustain, given its nature compared to the conventional oil as it declines by a rate of 80 percent or more in four years, which is three times faster than conventional oil. With such a performance shale oil needs to generate some 1.8 million bpd every year simply to sustain the current level of the domestic production.
Interesting enough to note that of the issues started to dominate the hot debate is what to do to protect this burgeoning industry from being undermined by the drop in world oil prices.
Again the issue of lifting the ban on oil exports and levying an import tariff are seriously considered. Memories are still fresh with the Arab oil embargo that followed the Arab Israeli war of 1973 and one of the reactions to that move that has shocked the US was to impose an embargo on oil exports.
The move was seen then as a national security issue, but time have changed as energy secretary Ernest Moniz told a congressional committee recently that, “those restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, on oil disruptions… When the reason for the law changes, the law should change.”
However, such argument is seen by others as a way to further the interests of the oil industry at the expense of the consumer, who should benefit from any drop of oil prices and one way to do that is to continue the ban, forcing the companies to cut down on their selling price to the public.
Senator Edward Markey, a democrat argues that, “oil should be kept here in America to benefit our consumers.
Aside from the direct benefit to consumers, others are still raising the banner of the national security and the good impact expected on the economy by protecting the domestic industry.
That industry, they argue, have created some 100, 000 jobs, investing billions of dollars in the industry’s infrastructure and reducing imports by close to half to some 5 million bpd, which has a direct impact of reducing US trade deficit by an estimated $200 billion a year.
Their bottom line is to “de-link” from the global market and pursue American personal interest, another form of isolationism, but the global nature of the oil industry and its cutting across the borders impact particularly in prices renders such approach ineffective.
At the heart of all this is the America’s belief in free market, which will be put to test.
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