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Geopolitical impact of lower oil prices – A personal assessment

By : Ziad Abdelnour| 4 November 2014
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It is a fact that the US has increased its production of oil quite dramatically over the last two to three years. It has actually increased it by the size of the Organization of the Petroleum Exporting Countries (OPEC) members or about two and a half to three million barrels per day.

So we are sitting today on around nine million barrels per day, which is third only to Saudi Arabia and Russia.

I believe that growth is still going to be happening, even if the oil price stays in the $80 to $90 dollar range it is right now.

There is indeed still a lot of production that is still going to be quite profitable in the United States and there is still going to be drilling. We have actually seen the rig rates in the United States kind of stay the same and that is really going to keep continuing to drive, maybe even adding another million barrels per day by the end of next year, which I believe will continue to add pressure on oil prices.

Saudi Arabia

Given the current situation in the good old USA, what is Saudi Arabia thinking?

I guess Saudi Arabia is now thinking that they do not want to cut production. They have done it in the past and they have actually gotten burned, especially in the 1980s. In 1981 they were producing ten million barrels per day, by 1983 they had dropped that to five million but the oil price actually decreased, so they did not actually get the desired effect and they continued doing so and cut their production even further by 1985. And then oil price kept on declining and they decided that this wasn’t working. Since then, they have been very hesitant to actually decrease oil production.

Besides, today the developing world is much bigger in terms of raw, physical consumption. In the 1980s they were still tiny and so while they were actually growing still it just wasn’t enough to move the register on the global demand side. Today it is. So that will at least allow us to avoid a scenario in which the prices continue to fall dramatically.

I hear a number of oil analysts talking about a possible US/Saudi- Iranian face off. I personally do not foresee this either as Saudi Arabia has never been a gigantic exporter to the United States. The United States has always been a huge producer of energy and it was as big as it is today. One has to keep in mind, in the early 1980s and 1970s at which time it was producing the same amount that it does today.

The market though that the US is I guess more concerned about is the foreign market in Asia, for example. While we would probably appreciate shale not actually happening in the United States, we should be much more worried about it spreading outside the United States where it would begin to cut into markets that we really care about, like in China.

Iran

I guess what Iranians are most concerned today and looking toward its a nuclear deadline on Nov. 24 hoping for an easing of sanctions. They are at about 1.5 million barrels per day. But even if we do have the negotiations continue, which is what we expect, we shouldn’t expect a huge influx of Iranian oil into the market any time soon.

At the end of the day, it will really depend on when exactly that kind of final deal occurs that actually allows the removal of sanction and the exports to increase…. but once we do have that deal we will probably see a very slow increase over the next six to twelve months, which will actually add maybe half a million to a million barrels per day.

This would be significant, obviously, but the kind of plans that Iranian President Hassan Rouhani has for oil production is in the longer term to increase it to ungodly numbers like eight to twelve million barrels per day, which will really depend on how big Iran can be in the next five years including but not limited to how much interest there is from international companies to actually go into Iran and help to do the same thing that we have seen in Iraq.

Just for the record, even in Iraq they have not really dramatically increased their production since they re-opened to Western investment in the late 2000s.

Venezuela

I am worried more about Venezuela as it strangely pegged their budget to $60 per barrel oil — Chavez’ legacy, essentially. But we know that their finances are not doing well.

It is a fact today that a lot of their off-budget financing for buying off political patronage, is not tied into that $60 per barrel. They need that money for their political system to be successful. That is what is going to push up their break even well over $100 per barrel. That is what is now in jeopardy.

So we are watching basically as Venezuela’s finances become more severe and constrained in the coming year, the selling of their Citgo Petroleum Corp. assets is going to be the big signal. Hence, we are closely monitoring that security climate in particular because if we see social unrest as a result of peak levels of inflation, it all comes down to President Nicolas Maduro to manage that.

Canada

Which brings us to our neighbor up north; Canada, which is in a bit of a peculiar situation, especially when it comes to that price benchmark.

Canada today is looking at around four million barrels per day in terms of their production. They want to increase that to six million barrels per day by 2030 or somewhere around that figure. It is kind of a slow progression that is not like what we are seeing in the United States, which is much quicker.

Canada has major projects that are 20-, 30-year projects that are coming online. And those are the ones that are a little bit more in jeopardy, but the thing that we need to keep in mind when we look at Canada is that because the pipeline infrastructure is not as developed as they would like, there are a lot of capacity and bottleneck constraints that keep them from getting the international price of oil. So they have actually been sitting at around $60 to $70 for a long time.

So, how does Canada break out of that pipeline isolation? I guess it depends a lot on midterm elections in the United States and how much freedom U.S. President Barack Obama has to pass Keystone XL.  Potentially, if he does not, the 2016 elections if a Republican or what kind of Democrat comes into office, those are the things that are still playing out. That is still something that is probably going to play out over the next three years.

In terms of the actual Canadian debate, a lot of that is going to hinge on their elections that are coming up in 2015. Right now the Liberal Party leader, Justin Trudeau, has a little bit of a lead over the current prime minister, Stephen Harper, who is much more of a defender of the pipelines. Trudeau is much more in favor of something to the United States like Keystone XL, but is not as much in favor of Canada-based pipelines such as the Energy East one, or any of those to the coast of British Columbia.

It is going to take a while for the politics to sort out. In the meantime that means a lot of stress on rail for transport for Canadian crude oil.

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