“The quickest way—the only way—stop drilling! When the world has more of a product than it knows what do with—stop producing it. Producing light oil at $1.75, and napthene base crude at $1, isn’t adding to the bank accounts in the same ratio as $3.50 and $3 did.”—Editor Ray L. Dudley, The Oil Weekly, June 11, 1921.
World Oil will celebrate its 100th anniversary in 2016. We plan to include, in each of the first six monthly issues, a special section covering a different period of our history, culminating in the 100th anniversary issue in July 2016. I have responsibility for the “Early Years” (1916-1938). It has been a fascinating task to go back in time, flipping through vintage issues of what was originally The Gulf Coast Oil News (1916-April 1918), which then became The Oil Weekly (April 1918-July 1947), and finally, World Oil since July 1947. Throughout this period, and until his death in 1957, Ray L. Dudley was the founder-editor and then publisher. His role as a passionate advocate for our industry is evident from the quote at the beginning of this editorial.
What is striking in a review of the past 100 years is the cyclical nature of our industry. Time and time again, the demand and supply curves diverged, leading to either a price boom or crash. Human nature being what it is, the oil producers and consumers behaved in exactly the same manner during each of these cycles. Low oil prices prompted the consumers to consume, thereby raising the demand. The producers then overproduced, pushing the supply over the price precipice. Unfortunately, prices are quick to crash, but slow to recover.
Supply-demand gap. According to the International Energy Agency (IEA), the world demand during third-quarter 2015 was 95.17 MMbopd. At the same time, supply was 96.76 MMbopd. This is a gap of only 410,000 bopd. Other industry forecasters suggest a wider gap, as much as 1.5 MMbopd. Add to this the specter of Iran dumping a 90-day supply of crude oil into the international markets once the sanctions are lifted. Regardless of the actual numbers, the reality is that the oil commodity traders perceive a gap that is likely to grow, due to a recessionary China and increasing OECD energy efficiency.
Who will succumb? The question in everyone’s minds is how will the global supply shrink? Saudi Arabia is expected to continue to resist pressure from other OPEC members, such as Venezuela and Iraq, to reduce production. Saudi’s quest for higher market share, at a lower crude oil price, defies logic. “The time value of money is not shared in the rest of the world,” explained Chesapeake CEO Doug Lawler. “It is beyond me that you would want to maintain the current 10 MMbopd of production at $50/bbl, rather than cut 1 MMbopd and earn $80/bbl for 9 MMbopd of production. I can do that math, so it doesn’t make sense to me.”
Hurt by sanctions, Russia is hell-bent on producing as much crude as possible, to garner revenue at any price. Russian oil production of 10.776 MMbpd broke a post-Soviet record in October, according to data from the Energy Ministry’s CDU-TEK unit. Even corruption-stricken Petrobras has reported an increase in pre-salt production, to a new record of 1.0 MMboed. U.S. shale producers have slashed the active rig count, finally registering a slight decline in U.S. production. However, the shale producers, for the most part, are viable above a break-even price of $50/bbl. As such, the large U.S. independents are also highly resistant to reducing their production.
Deepwater at the deep end. While numerous deepwater projects are coming to fruition (e.g., Chevron’s Jack-St Malo and Lianzi, Exxon Mobil’s Erha North Phase 2), most IOCs have reported either lower profits or losses in third-quarter 2015. Production decline from the IOCs will have to await a slow attrition of deepwater project cancellations and FID slowdowns. It will take at least a year, or more, for this non-OPEC, non-NOC production to start declining, and for crude prices to start recovering.
History repeats itself. However, humankind refuses to learn.
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