Friday, October 23, 2015

Economy: The Days Of Opec Are Counted

(Drivebycuriosity) - "Opec is about to crush the US oil boom", writes Bloomberg (bloomberg). The media service reports that the cartel has been raising oil production in the recent months and so enlarged the oversupply on the global oil market. OPEC is pursuing lower oil prices in order to make US oil production unprofitable, explains Bloomberg.

I think that the days of Opec are counted anyway. There are at least 2 trends which are working against the cartel and which could destroy it in some years:

1. The costs of fracking are falling. According to most sources  today the costs to extract an extra barrel of oil (break even point) in the US vary around $60 - with a range of range from around $40 to more than $70 a barrel (marketwatch).  At current oil prices - in the moment of writing the US Type of oil WTI costs about $44 - many wells are unprofitable and are getting shut off. This explains the slight fall of US oil production since summer. But, the productivity of fracking is rising swiftly which leads to shrinking costs. (economics21  oilprice). A study by BP explains that fracking is "a standardized, repeated, manufacturing process" and "manufacturing productivity has led to a trend decline in the prices of goods relative to services" (forbes).

So the break even point has been moving lower and will continue to fall in the coming years.  If the oil price doesn`t drop much deeper, the US production will come back. Opec is not only fighting new producers, the cartel is also struggling against the technological progress.

Falling costs of fracking also raise the chance that in the coming years the US oil producers will  be accompanied by oil producers from China and other countries."In June 2013, the United States Energy Information Administration (EIA) released a world shale oil and gas reserve assessment that showed 32 countries outside the United States have substantial reserves locked up in 137 different formations - units that can be exploited using Bakken-like technology....The EIA placed China third behind Russia and the U.S. in tight shale oil reserves - with 32 billion barrels considered technically recoverable." (bismarck).

2. But Opec has not just the problem that producers from outside the cartel will pump more oil thanks to the technological progress. I think that in a few years the demand for oil could start shrinking. A huge amount of the commodity is used for distilling gasoline. But soon the world might burn less gasoline thanks to the advance of electric cars. Tesla, the pioneer and market leader, plans to introduce a more affordable model in 2017 (price about $35,000 huffingtonpost). Apple is supposed to produce electric cars beginning in 2019 and other automakers are working on electric cars as well. It is likely that electric cars will become common after the year 2020. Self-driving cars, which need less gasoline because they drive more efficient, will also put a dent into the gasoline demand (medium).

The energy for electric cars - and other uses of electricity -  comes already from power plants which burn natural gas, which is abundant in the US and Russia. The cost for alternative energies like solar and wind craft also are falling (more technological progress) which will reduce the demand for oil further.

So, Opec has to fight not only with producers outside the cartel, the organization also will have to face a shrinking demand for their products. I reckon that Opec will lose - the already reduced - control of the oil price not far in the future.

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