THE airwaves and Twitter are full of commentary about how Saudi Arabia, the rest of Opec and Russia can balance the market by cutting production and raising prices, writes Ed Morse.
But the idea that these traditional producers can affect the markets on their own is based on old-world thinking where Opec’s low-cost producers and some additional traditional producers can impose their political will to counter market forces.
The unconventional oil revolution has rendered such thoughts obsolete.
In the new energy world order, the US, whose production was once half that of the other two producer giants, is on a par with them. And that makes a big difference.
The US did not count in the old world oil order. With its declining output, the US was a taker of prices; and with its permanent importer status, it was a bystander to global oil politics and production decision-making.
The shale revolution in the US has made a huge difference. The US is now arguably the largest oil liquids producer, if you take into account crude oil production and other supply such as liquefied petroleum gases, biofuels and the incremental volumetric gains from having the largest refining system in the world.
On paper the US might produce 9.3mbpd against Russia’s 11.1mbpd and Saudi Arabia’s 10.3mbpd. But add everything that looks and smells and is used as oil, and the US is the biggest of the lot, producing 14.8mbpd versus the kingdom’s 11.7mbpd and the 11.5mbpd produced by Russia.
In the new world there are three giant producers, whose combined liquids output is about 40pc of world markets
We are used to old thinking — a world of producers made up of Opec plus critical non-Opec producers including especially Russia, Mexico, Norway, Oman and maybe a couple of others.
The new order has rendered Opec irrelevant, an organisation crippled by disruptions and sanctions, with no will to work as one, able to be a negative force by bringing prices down, but incapable of finding a way to put a floor under prices.
In the new world there are three giant producers, whose combined liquids output is about 40pc of world markets.
All three of them play a role and one of them, the US, cannot constitutionally play a role to constructively counteract market forces. Indeed it is the very embodiment of market forces.
The three giants of the oil market are about the same size. But size is only one element. Who makes decisions is another.
In the kingdom of Saudi Arabia there is one decision maker on who turns the valves on and off. In Russia it is a bit more complicated, but at the end of the day it is a government that is in charge.
The third and biggest of the giants, the US, has production based on competitive decisions of hundreds of independent producers, which now, unshackled, can sell oil at home or abroad.
That makes an enormous difference, especially when considering the nature of marginal production in the US, which comes from shale resources.
These rocks are not only superabundant — they can be exploited at a relatively low cost.
Just compare an offshore well at a cost of $170m with a vertical shale well that costs less than $5m. A successful deepwater well can have a five-year payout, versus a five-month payout for a shale play.
Multiply that by hundreds of wells and hundreds of decisions and you get a new world order.
It is time to throw away the lenses of the 40-year-old world oil order and come to grips with the new and permanent realities of the market.
Ed Morse is the global head of commodities research at Citigroup.
Published in Dawn, Business & Finance weekly, February 1st, 2016