Yesterday after an OPEC meeting the oil price fell dramatically. Brent crude fell by almost $6/barrel in one day and there is talk of it going as low as $60/barrel. The latest falls come after around a 30% fall in the oil price since the summer.
What’s with the oil price if we are running out of it? The latest falls are due to OPEC not agreeing to price cuts, but the fundamental issue is that since the summer the Saudis have been pumping more oil. This has coincided with what is probably the near peak in US shale oil production which most analysts think will be in decline by 2018. The question is why are the Saudis doing this when they need much higher oil prices for their economy? No one seems to know for sure, but the reasons could be the following;
- Geopolitical – to damage the economies of Russia and Iran and bring them to the negotiating table. Iran has had lower output for years due to international sanctions and its debatable how much the lower oil price will hurt them. There is no question about the effects on Russia though. Around 85% of Russia’s export earnings come from oil and gas, most of this being from the oil, the gas seems to make them very little money. Whether this is good news is debatable, countries with tanking economies tend to seek foreign diversions and the lower oil price has not stopped continuing intervention in Ukraine so far.
- Economic. The global economy is slowing down even the BRIC countries are now facing economic trouble. This is certainly part of the reason for the fall.
- The Saudis want to finish off the US shale oil industry. Whilst the rumours are the US government has persuaded the Saudis to pump more oil, this is one reason being suggested. Whilst the production price has fallen (supposedly) of shale oil to below $80 or even $70/barrel with sweet light crude being less than $70 as I write this there is every reason to think the shale oil industry will be devastated if this low oil price continues.
This brings me to a couple of my own ideas.
- The Saudis want to finish off electric cars. In the paper yesterday there was a report saying sales of electric cars were really taking off. This is despite range anxiety and still very high costs of the cars cf. conventional fossil fuel cars. There are reasons to think over the next year or so the price of batteries will plunge. If so electric cars will look a lot more viable. Since most of the world’s oil is used for transport this is a huge threat to Saudi oil hegemony.
- Next year there are the critical climate change talks in Paris. Cheap conventional energy has to be a threat to a climate agreement since it makes the alternatives so much more expensive.
None of these ideas are mutually exclusive. As we have blogged on here recently there are good reasons to think the oil price decline maybe temporary. It depends on how long Saudi Arabia can hold its nerve. Once they agree cuts the oil price will soar again. As a last point despite a large fall in the future traded price of natural gas over the last year or so there have been no cuts in energy prices here. Funny that.
Peak oil is not dead but only resting…