Nov
28

Saudis to OPEC: This Isn’t a Democracy

 
Yesterday, the Organization of Petroleum Exporting Countries’ (OPEC) decision to leave its production ceiling unchanged at 30 mbd was the latest indicator that politics and strategy within the “cartel” aren’t quite what they used to be. The market reaction was swift and dramatic. After Thursday’s decision was announced, Brent crude prices fell by $6.50 a barrel to $71.25, its steepest one-day fall since 2011. Meanwhile, West Texas Intermediate dropped below $70 per barrel for the first time since January 2010. These price drops came after oil prices lost 30-40 percent of their value from their 2014 high of $115 for Brent crude, the high water mark reached in June of this year. Part of the reason is that OPEC “agreed” to maintain its ceiling of 30 million barrels per day, at least 1 million above its own estimate of demand for its oil in the first half of next year. In the hours after the meeting, OPEC officials including Secretary-General Abdullah al-Badri attempted to emphasize that the group’s decision was not political, and that OPEC doesn’t seek a target price. This is in sharp contrast to what Saudi Arabia’s oil minister, Ali al-Naimi reportedly said behind closed doors, that leaving the production quota unchanged is openly acknowledging a “price war” with U.S. shale producers. "Naimi spoke about market share rivalry with the United States. And those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle," said one source quoted in Reuters. We’re in a brave new oil world, where OPEC has taken a fundamental shift in strategy. Rather than propping up prices, they are now going to intentionally allow prices to drift lower, creating short-term pain for themselves, but protecting their longer-term interests and ultimately the group’s market share. In this context, it’s worth examining why OPEC made the decision it did, and who are the winners and losers from the rollover. Losers Two-thirds of OPEC: Make no mistake, most of OPEC is extremely unhappy with yesterday’s outcome. When the meeting ended, reporters tweeted that Venezuela's oil minister Rafael Ramirez stormed out “red faced and looking furious,” while Iran’s minister Bijan Namdar Zangeneh openly told the press that the rollover was not what they wanted. “They” are Venezuela, Ecuador, Iran, Nigeria, Libya, Algeria, Angola, and Iraq—the “price hawks” contingency of the group—countries with high budget breakeven, some of which are producing low and declining volumes of oil, and are almost entirely dependent on oil revenue to finance their governments and keep their economies afloat. In the weeks leading up to the meeting, some of the more vocal members of this coalition, specifically Iran, Venezuela, and Iraq, all called for significant production cuts. Yesterday’s decision means the next few months (or years) will be painful for their bottom lines. "You think we were convinced? What else could we do?" said an OPEC delegate from a country that had argued for a cut. So how did the will of the few (or ultimately, the one) outweigh the will of the many? OPEC isn’t a democracy, and members do not exert equal influence over the group’s decisions. The biggest problem facing the price hawks is that none of them were able to offer to remove significant amounts of their own oil—they’re all pumping as much as they possibly can, and lower prices make it even more difficult for them to sacrifice any volume. Saudi Arabia, after years of being the only producer voluntarily cutting its own production to balance the market, would have had to remove close to 1 mbd of its own product in order to create a meaningful price impact. After years of shouldering this burden alone, the KSA’s message to the price hawks was clear: you’re on your own. But that’s only half of Saudi’s calculus. Even if OPEC had agreed on a cut and been able to push prices to more comfortable levels near $100 per barrel, they would only be perpetuating the conditions that enabled the success of their competitors. High-cost oil producers: In Reuters, Jeanine Prezioso writes, “For anyone doubting OPEC’s motives, it is now clear the cartel is attempting to push its competition out of the picture.” In the Financial Times, Anjli Raval and Neil Hume see the decision as OPEC’s way of “throwing down the gauntlet” to U.S. shale producers. Years and years of high oil prices incentivized producers to tackle more challenging resources and geologies, including deepwater, oil sands, and shale. Many producers in the latter category are small companies with large debts, who will struggle to weather months or years of low prices. Most forecasts say that Brent crude oil will trade between $60 and $80 per barrel in 2015, with an average price around $75. That might not be enough to sideline much existing oil production—but it will undoubtedly have a huge impact on two things: investment and profit margins. The Financial Times reports that OPEC’s decision threatens up to $100 billion in capital spending worldwide. Energy stocks took a beating on Thursday and Friday, ExxonMobil fell 4.3 percent, Chevron dropped 5.4 percent and Halliburton lost 11.1 percent. Noted petroleum economist Philip Verleger said that, with the WTI oil price below $70 per barrel, new projects become unattractive for many investors, who fear further falls. Wood Mackenzie, the energy consultancy, estimates that if Brent crude stays below $75-80, U.S. shale oil supplies could be reduced by 0.6 mbd by the end of 2015. Russia: Russia, although not an OPEC member, certainly had its fingers crossed for a cut, even volunteering to cooperate with the cartel and remove .3 mbd of its own production. Russia is in a uniquely challenging position, facing higher production costs as it moves into frontier oil reserves, high reliance on oil revenues to support its flailing economy, and high government expenditures thanks to its continued military incursions into Ukraine. Winners The global economy: All that said, the low-price environment is good news for oil consumers. So, basically everyone else. At least for now. In the United States, motorists are enjoying an average national price for regular gasoline at $2.79 according to the American Automobile Association. Americans spend roughly $1 billion per day on gasoline, according to OPIS, the Oil Price Information Service, so motorists are likely to save between $8 and $9 billion dollars on gas during November and December 2014. Many have connected low oil prices to a massive global economic stimulus package. Even before this week’s nosedive, Citigroup compared the oil price slump to a $1.1 trillion stimulus worldwide. But there’s a cause and effect relationship at play. Low prices are a result of two factors. One is high oil supply, but the second is sluggish global demand, as global economic growth forecasts were slashed in the second half of 2014. A rebound in the global economy will boost oil demand in the longer term. But aside from the global economy and motorists worldwide, there’s another winner. In one fell swoop, Saudi Arabia has created a profound challenge for its rivals in the present, hampered medium-term investment in other supplies, and boosted long-term demand for its critical product. Ultimately, they are the real winners, holding the world’s largest and lowest-cost oil reserves on an oil dependent planet.
Nov
21

Flipping Fleets: The Case for Electrification

 

The Department of Energy (DOE) this week released information that it is launching a Funding Opportunity Announcement (FOA) entitled “Alternative Fuel and Advanced Vehicle Procurement Aggregating Initiatives.” While it might not have the catchiest title, or even sound like a particularly exciting development in the ever-evolving electric vehicle space, this particular FOA could be a small move with big implications. According ...

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Nov
21

Automakers Remain Determined on Hydrogen Fuel Cell Vehicles

 

The hydrogen car is back. This week, Toyota Motor Corporation unveiled its brand new Mirai fuel cell vehicle (FCV) to go on sale next fall in California. Toyota’s new FCV will retail for $57,500 before government incentives, and the company has promised a larger network of hydrogen distribution stations to accommodate early fuel cell adopters. On the same day that ...

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Nov
19

A Look at the Next Generation of Electric Vehicles

 

People began filling the main atrium of the National Building Museum early on a chilly Wednesday morning, greeted by the welcome sight of a table full of DC’s famous Astro Doughnuts and hot coffee. While tasty creations are the norm at many district events, these in particular had a unique story. All the appliances needed to make these confectionaries drew ...

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Nov
19

Low oil prices: Help or hindrance for the P5+1 and Iran?

 

Next Monday, November 24, is the deadline for negotiations between Iran and the P5+1 (the United States, United Kingdom, Russia, China, and France + Germany) regarding Iran’s nuclear program. The recent plunge in oil prices has battered Iran’s economy, and ample supplies have further reducing the global economy’s reliance on Iranian crude oil and products. In this context, it’s worth ...

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