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Page added on February 2, 2017

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The Oil War Is Only Just Getting Started


It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how U.S. shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The U.S. rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who’s winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia.

Although this view that low-cost producers would try to seize more market share comes from an oil major with significant interests in Russia and Iraq, for example, BP may not be wrong in predicting that the abundance of oil resources would prompt the lowest-cost producers to pump the most out of low-cost barrels before the world starts to unwind from too much reliance on oil.

Oil demand growth is expected to slow down in the years to come. BP pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone”.

Middle East OPEC production growth would account for all OPEC output growth by 2035, BP reckons, noting that other OPEC production typically has a higher cost base and its market share would drop.

The U.S. liquids production is expected to rise by 4 million bpd to 19 million bpd by 2035, with growth mostly in the first half of the period, driven by tight oil and NGL output.

So, both OPEC’s Middle East members and the U.S. are seen increasing oil and liquids production in the next two decades.

However, OPEC – especially Saudi Arabia – has the recent bitter experience of its pump-at-will policy for market share backfiring on its economy when oil prices crashed.

Another market-share war would involve too many unknowns, including supply-demand basics, leaner and meaner non-OPEC producers, oil price effects on oil-revenue-dependent economies, or rationale for investments in higher-cost areas.

OPEC’s decision to deliberately cut supply and abandon the strategy of pursuing market share at all costs is currently benefiting the cartel’s competitor, U.S. shale.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

“The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.”

Five or ten years from now, a possible market share ‘oil war’ would take place on a totally different battleground, and some regiments or battalions may lack essential armory to wage such war.

8 Comments on "The Oil War Is Only Just Getting Started"

  1. paulo1 on Thu, 2nd Feb 2017 9:35 am 

    I simply do not see how US production will rise to 19 bbl/day by 2035 at these prices…or any prices.


  2. paulo1 on Thu, 2nd Feb 2017 9:36 am 

    Obviously…meant 19 million bbl/day

  3. joe on Thu, 2nd Feb 2017 10:28 am 

    I don’t agree that there are ‘low cost’ producers. It might not cost much per barrel for to extract easy oil. But the cost of living for some countries is rising as they develop their economies and grow their populations. Relying on oil and some trade like tourism is fine but not sustainable. Do their projections also allow for the impact, however small, of renewables and electric cars. Couple of percent of oil sales missed and they blow their national budget.
    The cost of delivering each barrel of oil should include the cost of government for these nations, that will give a closer picture. I believe easy oil extraction true , costs are more or less where they are now, and likely to rise.

  4. Boat on Thu, 2nd Feb 2017 3:07 pm 

    Next year projected sales of sand for fracking is expected to double. An indication of fracking gone wild. GE is bringing the digital world to fracking. Rough estimates suggest a potential 10-20 percent savings from current inefficient practices. Tech and innovation is a hallmark of American companies. Welcome to the future.
    7 billion for south of the border fracking efforts. Mexico has opened up fracking opportunities for international oil companies.

  5. Bob on Thu, 2nd Feb 2017 3:33 pm 

    The Legacy Oil fields have a depletion rate of 5 to 7% a year. Project this forward 20 years and tell me what sort of world we will live in then. Hint: It won’t be the world of Happy Motoring. Every year we use more oil there is less oil left to use in future years. At some point it runs out. It is really that simple. To think that we will be increasing oil production thru 2035 beggers the imagination.

  6. BobInget on Fri, 3rd Feb 2017 11:16 am 

    Automation, super-computers are already bringing down the cost of drilling.

    Next on the agenda, self driving tankers, automated refineries, last mile retail delivery. Ultra deep Arctic water drilling will return with melt with even more sophisticated equipment.

    WHEN, not if, sea levels rise, refineries will need to be rebuilt further from new beaches. New pipelines will be needed to replace those not designed for under-water operations.

    Demand sectors for oil as sole transportation fuel
    are already changing. As there are more then Two Billion cars, trucks, aircraft, ships, RR locomotives,
    motorcycles, generators, tanks and other war machines on the planet, transition will be in decades,
    not years.

    Yes, even more then wars, foreign and domestic our two ‘black swans’ remain artificial intelligence and changing climate.

    Economically, we have yet to figure out how to deal
    with new challenges.

  7. Davy on Fri, 3rd Feb 2017 1:06 pm 

    “Economically, we have yet to figure out how to deal with new challenges.” Yea, Bob, as I read your unfolding account above I was getting ready to give it a title for your new fictional account of modern man in the years ahead. Bob, really, some of this will surely happen but we always get back to the issue of scale and time frame. IMO we are not going to get ahead of that curve. We are already behind the curve and slipping. We can only hope because the alternative is ugly.

  8. Bill on Fri, 3rd Feb 2017 8:44 pm 

    Thank god. I’m sending this piece to my kids with a bottle of Fiji water and a couple good for a sushi roll

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