The last 11 months have been an unlikely journey for oil, with its widely unanticipated price dive, Saudi Arabia’s uncharacteristic refusal to stem the bloodletting, and financial havoc for petro-powers and energy companies.
Citi’s Edward Morse forecast the price plunge, though he got the timing wrong. He told Quartz in an email that no OPEC member can maintain pricing influence for long, since the “US will come roaring back as prices rise.”
What Morse is highlighting is a unique characteristic of shale oil—extracting it is in some ways more like mining than drilling. This is because the oil is blasted out of dense shale, and then pumped above. The process is much faster and cheaper than the typical oil well, which can take more than a year to reach production. Over the past 20 weeks, drillers, responding to the price plunge, have idled 56% of the 1,609 rigs that were working US fields as of October, leveling out the surge in shale production.
But before idling their rigs, the drillers have also done about a quarter of the drilling work on dozens of new wells, and left them uncompleted; should prices rise far enough, and stay there—say above $60 a barrel—Morse and other analysts think the drillers may complete some or many of these wells in order to reignite their cash flow, and again flood the market with oil. Oil prices will then again plunge—and it will be US producers driving prices.
But doesn’t that ignore that Saudi started all this upheaval?
In a piece worth reading, Bloomberg’s Peter Waldman documents Saudi Arabia’s actions last year when the shale oil surge triggered a global glut. Rather than invoking OPEC’s usual tactic of cutting production, Saudi elected to cut its prices, maintain market share, and add to the flood of oil by opening its own taps to record production levels of 10.3 million barrels a day. When OPEC members Iran and Venezuela pushed for cuts, Saudi refused: it would keep the taps open and prices down until higher-cost producers, such as shale drillers, were forced out.
Mark C. Lewis, an analyst at Kepler Cheuvreux in Paris, argues that chronology shows that Saudi is still calling the shots. By the end of the year, he said, Saudi will prevail over shale drillers. “The fact is that the shale boom needs both high prices and low interest rates to sustain it. Otherwise it will turn to bust,” Lewis told Quartz. “And that bust is already beginning to happen, in my view.”
The debate over the longevity of shale will not be decided now, but over the coming months and years on the US oil patch itself. Regardless of how it ends, the war of words is likely to persist, driven by the very implausibility of the oil world’s convulsion—so unexpected is the state of affairs that even the soberest analysts seem prepared to consider almost any claim as part of a possible new orthodoxy.
What seems indisputably true is this: OPEC and Russia—the industry establishment—must accept the US as a new, fixed player in global oil. And US producers must understand that OPEC, and in particular Saudi Arabia, is not going to make the petro-club a comfortable place for them.