Opinion: Saudi Arabia Continues To Turn Screws On US Shale
13 May 2015
by James Stafford of Oilprice.com
Saudi Arabia continues to ratchet up production, taking market share away from US shale producers. According to OPEC's latest monthly oil report, Saudi Arabia boosted its oil output to 10.31 million barrels per day in April, a slight increase over the previous month’s total of 10.29 million barrels. That was enough for the de facto OPEC leader to claim its highest oil production level in more than three decades.
Saudi Arabia has increased production by 700,000 barrels per day since the fourth quarter of 2014 in an effort maintain market share. The resulting crash in oil prices is forcing some production out of the market, and Saudi Arabia intends for the brunt of that to be borne by others.
There is a lag between movements in the oil price and corresponding changes in production. OPEC says there was a 23-week time lag between the fall in rig counts and the resulting dip in oil production in the United States. But the effects of the oil price crash are now being felt. New data from the EIA says that US oil production is declining. Having already predicted a 57,000 barrel-per-day decline for May, the agency now says that another 86,000 barrels per day in output will vanish in June.
In other words, as Saudi Arabia ramps up, US shale is being forced to cut back. This story has been told many times over the past few months, but the data is finally confirming the success of Saudi Arabia’s strategy, albeit a minor one thus far.
But at the same time, Saudi Arabia’s (and OPEC’s) influence is much more limited than it was in the past. Despite Saudi Arabia producing at its highest level in more than 30 years, oil prices have climbed back from their lows. WTI has jumped more than 36 percent since March, now trading above $60 per barrel. Brent has surpassed $66 per barrel, up more than 26 percent in two months. That is obviously good for Saudi Arabia, but oil prices may not have stayed low enough to do real lasting damage on US shale.
The rise in oil prices came despite Saudi Arabia's best efforts at flooding the market. There are several reasons for this. First, demand is starting to kick back in, which is soaking up some of that extra crude flowing around. Refinery throughputs are at three-month high, with 92 percent of refining capacity in use.
A few other contributors to higher oil prices came in the form of a stronger-than-expected economic performance in Europe, as well as monetary stimulus in China. Both of those developments indicate stronger demand for oil in the months ahead. OPEC forecasts demand for 2015 to rise by 1.18 million barrels per day, an upward revision from previous estimates, and a higher rate of growth from last year's 0.96 million-barrel-per-day increase.
Another reason for higher prices is that the US dollar has weakened a bit, and since oil is priced in dollars, a weaker dollar translates into higher prices.
Also, on the supply side, until May US producers managed to steadily increase output, achieving gains in efficiency that kept production flowing even though rigs fell out of service.
Nevertheless, Saudi Arabia may still have the upper hand. Oil inventories in the US are still at 80-year highs, which should keep a lid on prices. That will continue to inflict damage on US drillers. Several companies have declared bankruptcy, the latest being American Eagle Energy Corp., a Colorado driller. More could soon be coming. Some companies have hedged their production in order to protect themselves from the downside of oil prices. But as those positions expire, more will become exposed to low oil prices.
OPEC and the International Energy Agency project that global oil production is still 1.5 million barrels per day higher than consumption. The glut isn’t over yet.
Moreover, hedge funds have piled into long positions on crude oil. The record level of bullish bets on oil prices suggests that oil has been pushed higher by speculation. That means that a correction could push prices back down, as has happened in the past.
In summary, while foregoing price targets, Saudi Arabia has managed to maintain its market share throughout the oil bust, with adjustment coming from higher cost producers. That’s exactly what it set out to do.
Please let me live long enough to see the day we're not dependent on these bastards and oil, in general. I don't want to prop up their regimes I don't want to be involved in any more oil wars, and I want to see the US stop spending our resources in the region to "keep it stable"...which only blows up in our face and makes them hate us.
Please just get the F out of there and stop using oil.
Posted by: DaveD | 13 May 2015 at 10:01 AM
As soon as USA-Mexico-Canada can produce enough oïl for their combined needs, we should pull out of the middle East and let them fight their own wars.
That could happen by 2020 or even before if the price of Oil is maintained at $80+.
Posted by: HarveyD | 13 May 2015 at 02:02 PM
That will only happen if the crop of current politicians who want the US to control the world will let go when we no longer need middle east oil. I think South America will free itself of energy dependence before we do. http://cleantechnica.com/2013/01/06/94-renewable-energy-by-2017-is-goal-for-nicaragua/
Posted by: JMartin | 13 May 2015 at 02:21 PM
The US gets a lot of low cost energy from coal and gas so I don't think it really needs low cost oil to remain competitive, especially in a lot of knowledge and high value sectors.
I think the Saudi's realize this and are very concerned that the sentiments of DaveD will take hold in a major way. The net premium for a PHEV like a volt is only a few thousand dollars if that. The cost of owning and using the latest smart phones is probably significantly more for he average consumer. A small shift in consumer attitude could easily have a huge impact on oil demand. Some poor countries that need low cost energy might take up some of the slack, but I'd expect (maybe hope) China and India to resist going too far building economies based on oil consumption. Perhaps the US worries about losing competitive edge by allowing their competitors cheap energy by reducing consumption?
Posted by: Calgarygary | 13 May 2015 at 02:51 PM
China and India will become the major oil and energy users in less than 10 years.
Low oil and energy prices will benefit them the most.
Posted by: HarveyD | 13 May 2015 at 07:20 PM
I don't want to be involved in any more oil wars..amen
Posted by: SJC | 13 May 2015 at 07:26 PM
Even if the USA were able to avoid buying oil from the middle east, the erst of the would wouldn't, especially China and India.
So they would still have vast amounts of power and money.
They "bribe" western governments by buying arms from them so the western governments are not likely to rock the boat unless something really awful happens.
Even if we get electrified cars, or find a really cheap way of making ethanol or H2, we will still need liquid HC fuels for long distance trucks and planes so I don't see the demand going away any time soon.
And if it goes away in the west, there is still the rest of the world to get off Gasoline.
Posted by: mahonj | 14 May 2015 at 01:01 AM
The world will end its addition to oil when self-driving BEVs take over as they will because the economics is much better as shown below.
Specifically, an autonomous BEV taxi will cost you 0.16 USD per mile to drive. A self-owned Camry will cost you 0.41 USD per mile or about 500 USD per month if you drive 15,000 miles per year (= ($0.41*15,000/12). Finally, a human operated taxi Camry will cost you 1.41 USD per mile which is representative of actual taxi rates.
Reducing the cost of taxi driving from 1.41 USD to 0.16 USD per mile using an autonomous BEV taxi is simply revolutionary. The world will change for the better as a result. Fewer traffic accidents, no air pollution from land transportation, no import of oil for making transportation fuels, no wasted time by traffic congestion. Time spend for transportation can be used productively to sleep, eat, work or for entertainment or education. The average American household can reduce transportation expenses from 500 USD per month per car needed in household to 200 USD per car (= ($0.16*15,000/12). This is as big as it gets for the automotive industry.
Documentation for costs to drive one mile:
1) Life cost to own Toyota Camry: 65,133 USD = (23,000 USD for Camry + 16,000 USD for life gasoline + 4,800 USD for life maintenance + 21,333 USD for life car insurance).
Life cost per mile: 0.41 USD = $65,133/160,000 miles service life.
2) Life cost of Toyota Camry with human taxi driver: 225,133 USD = (23,000 USD for Camry + 16,000 USD for life gasoline + 4,800 USD for life maintenance + 21,333 USD for life car insurance + 160,000 USD for taxi driver).
Life cost per mile: 1.41 USD = $225,133 /160,000 miles service life.
Now consider a fully autonomous taxi with an ultra durable 24kwh lithium titanate battery (10,000 cycles) giving it about 85 miles of range and a service life of 850,000 miles. With autonomous driving the range issue and charging time issue no longer exists as you can change the vehicle in seconds to go an additional 85 miles and keep doing it until you reach your destination. This is the BEV conception that will wipe out any gasser on the market because its total cost per mile is unbeatable by any gasser.
3) Life cost of autonomous BEV taxi: 133,467 USD = (35,000 USD for BEV taxi + 28,800 USD for life electricity + 17,000 USD for life maintenance + 56,667 USD for life car insurance - 4000 USD scrap value of battery).
Life cost per mile: 0.16 USD = $133,467/850,000 miles service life.
Add 1) Toyota Camry assumptions: 1) Service life is 160,000 miles. 2) Long-term price of gasoline is 3 USD. 3) It gets 30 mpg so 16,000 USD spend on gasoline = (160,000/30)*$3. 4) Maintenance cost for oil change, tires, brakes, coolant, etc is 300 USD per 10,000 miles so 4,800 USD = (160,000/10,000)*300 USD. 5) Insurance cost is 2000 USD per 15000 miles so life car insurance is 21,333 USD = (160,000/15,000)*$2000.
Add 2) Toyota Camry taxi assumptions: 1) Service life is 160,000 miles. 2) Long-term price of gasoline is 3 USD. 3) It gets 30 mpg so 16,000 USD spend on gasoline = (160,000/30)*$3. 4) Maintenance cost for oil change, tires, brakes, coolant, etc is 300 USD per 10,000 miles so 4,800 USD = (160,000/10,000)*300 USD. 5) Insurance cost is 2000 USD per 15000 miles so life car insurance is 21,333 USD = (160,000/15,000)*$2000. 6) Hourly pay to chauffeur is 20 USD and hourly markup for time wasted and taxi company overhead is another 20 USD. Operating hours in service for life of car assuming 40 mph is 4000 hours =(160,000/40) so total life cost of chauffeur and taxi company overhead is 160,000 USD = (4000*($20+$20)).
Add 3) Fully autonomous BEV taxi assumptions: 1) Service life is 850,000 miles (= 85 miles battery range*10,000 deep cycles) which corresponds favorably to warranty for Toshibas lithium titanate batteries (see http://www.scib.jp/en/product/detail.htm). 2) 0.28kwh is used to drive one mile (=24kwh battery/85miles range), 3) electricity cost is 28,800 USD = (12 cents per kwh * 0.28kwh* 850,000 miles) which could be much lower off peak, 4) maintenance cost for tires, brakes, coolant, etc is 200 USD per 10,000 miles so 17,000 USD = (850,000/10,000)*200 USD, 5) scrap value of battery after 850,000 miles is 4000 USD. 6) Insurance cost is 1000 USD per 15000 miles so life car insurance is 56,667 USD = (850,000/15,000)*$1000. The lower car insurance for autonomous vehicles assumes that they are twice as good as human drivers to avoid accidents. 7) The Leaf sized vehicle costs 35,000 USD with a 24kwh battery. It is assumed 12000 USD (=24kwh*$500) can be attributed to the battery pack, 6,000 USD for autonomous technology (computers, sensors and redundancy of critical systems) and 17,000 USD for other car expenses. All costs are including gross margins.
Posted by: Account Deleted | 14 May 2015 at 02:02 AM
I think the future of oil demand will depend largely on whether the governments in US, China and India choose to become aggressive with policies to discourage its use. Japan and the EU use substantially less oil per capita than the US and I believe it is because they make more of an effort.
Henrik's calculations illustrate that their are many other possibilities, and if the leaders of the major countries push their societies in those directions then its bad news for oil.
Jet fuel, where there does not appear to be many substitutes, accounts for less than 10% of US oil demand. usually about 1.5 mbpd according to eia. I think this is less substantial than most assume. Diesel is about 4 mbpd and is probably mostly used in transportation and agriculture. A good proportion of the diesel could be replaced by natural gas which is gas cheap in the US anyways.
It seems their are options out there so if society sees the consumption of oil as a problem it is not a case of no available options, especially in the long term.
Posted by: Calgarygary | 14 May 2015 at 07:03 AM
From what I am reading about India in both solar and wind, they may be less dependent on oil than the US in the near future. China's leaders may be doing everything they can to grow the economy, but they are not foolish enough to build that economy on dependence on the Middle East for the long-term.
Posted by: JMartin | 14 May 2015 at 07:34 AM
And I hope Hendrik is correct. Not only do the economics of self-driving vehicles look good, but the societal benefits for an aging population argue for self-driving taxi's -- safe, secure, and they won't drive through the front of the building.
Posted by: JMartin | 14 May 2015 at 07:37 AM
I don't quite follow your logic: an ageing population argue for someone else to drive them, but it does not have to be a self driving car, it could just be a conventional human directed taxi.
The problem is the cost, and that could be reduced by signing up to monthly service agreements (so many trips to the supermarket, post office, church etc / month).
It may (will) turn out that self driving taxis will be cheaper, but in the short/medium term, what you want are rules / experience is setting up service agreements between taxis and old people.
Posted by: mahonj | 14 May 2015 at 04:17 PM
I was probably not very clear. Not only will many elderly need the lower cost, but some of them will fear getting in a taxi driven by a stranger, particularly an Uber type operation. But they may be fine with riding a car that drives itself, after they try it once or twice.
Posted by: JMartin | 14 May 2015 at 09:01 PM
My vote is for autonomous city e-buses, autonomous mini e-buses and autonomous UBER style taxis starting as soon as possible (by 2020?).
Current drivers can be progressively retired and/or retrained to take better care of our elders, disabled, roads, bridges, schools and public buildings.
Posted by: HarveyD | 15 May 2015 at 07:15 AM
Goals are great, aren't they, JMartin?
Posted by: Larzen | 18 May 2015 at 10:24 AM