Peak Oil Price? Winners And Losers At The End Of The Era of The $100 Barrel

What if the world never again sees sustained prices for oil over $100 per barrel?

What if—absent exogenous black-swan events like major wars—oil never sells for much more than $50 per barrel for decades into the future? Who wins? Who loses?

Short answer: The winners are consumers everywhere, and American businesses that produce oil. The losers are nations that are oil monocultures, and businesses or policies everywhere anchored in expensive oil.

Is such a scenario likely? Or is the current price collapse a kind of inverse bubble?

History is often meaningfully predictive. In the roughly 150-year history of oil prices there have been just three short periods where oil sold for over $50 per barrel (measured in inflation-adjusted terms). It happened first for about 20 years after 1860 at the dawn of the oil age, followed by nearly a century with oil cycling around $20. The second price bubble, triggered by the ’73 Arab oil embargo, lasted only about a decade followed by nearly 25 years during which price averaged about $35/bbl. The third, recent price bubble has lasted just under a decade.

One should consider the possibility of at least another 20-plus year run at prices sub $50. Maybe it’s another one-century run.

But is there enough oil in the world and can technology extract it at low cost?

We don’t intend here to fully deconstruct the persistent promotion of the myth of imminent limits. (I’ve covered this, as have others.) Suffice to note that there are thousands of billions of barrels of physical hydrocarbon resources in the United States alone, never mind our friends north and south of our borders.

Oil production itself, though, is determined by the availability of technology to economically convert resources into mapped-out “reserves.”

The impact of technology on “reserves” is easy to see in hindsight. In the 1970s when we were told that America was running out of oil, official U.S. reserves stood at about 35 billion barrels. From 1970 to the present the U.S. produced roughly 200 billion barrels. And official U.S. reserves today? About 35 billion barrels. It’s like a magician pulling an unending ribbon from a top hat, except that ‘magic’ here is technology, not some chimerical planetary limit.

Technology unleashed the oil era in the first place. Technology propelled each subsequent expansion in capabilities to find, obtain and transport oil from ever-deeper levels in the earth and ever-different geologies.   And we know that it was U.S. shale technologies that upset the global apple cart. (For a view on the U.S. transformation and export implications, see my previous column here.)

Essentially all, not some, of the net new production in world oil supply over the past half-dozen years came from America.  U.S. shale businesses—it bears noting, using resources on state and private lands; output from federal land declined—not only offset declining production elsewhere, but also met demand from economic growth, and then some (hence the current storage challenge.) World prices would have soared instead of collapsing this past year absent supply growth in the U.S.

All this suggests that for scenario planners in both industry and government the salient question is: do you think we are at the end of technology? Or, alternatively and not credibly: do you think that we are uniquely at the end of technology just in the oil fields?

New technologies invariable offer lower cost ways of doing old things. This is a centuries long race to the bottom. All businesses compete essentially by offering the same or better service or product at a lower cost. It has always been thus. At least it has been in free market economies.

Let’s stipulate that it is at least as likely—if not arguably more likely—that technology forces have not finished playing out. And the U.S., and others (in particular our friends in Canada and Mexico) will continue to deploy new oil technologies.

We already know that a lot of the shale fields are comfortably profitable at $50 and even $40/bbl using yesterday’s technologies. Tomorrow’s technologies will lower that breakeven. This will be good news for the thousands of American shale oil businesses where growth, and survival, depend on the basic market principle of making a profit, even at lower prices.

But oil monocultures need, and have become addicted to, extreme prices in order to survive.

According to the World Bank (and others have made similar estimates) nearly every member of OPEC, and Russia, requires oil to be priced between $100 and $180/bbl to fund their national budgets.

The effects of the U.S. oil tsunami are still playing out. Consider that two thirds of all the world’s oil is produced by just 10 countries, only the first two of which are net importers: America, China, Saudi Arabia, Russia, Canada, Iran, Iraq, UAE, Venezuela, and Mexico. Just three of this group of 10 are market economies and one of those, America, will before long join the other two democracies, Canada and Mexico, as a net exporter.

And for these three market economies in the big 10, while the oil industry is important (and in the U.S., recently, the brightest growth sector) it is far from determinative of national economic survival. The oil business as a share of GDP is under 10% for Canada and the U.S. and only slightly more for Mexico. Meanwhile for the other seven in the big 10, oil is responsible for 25 to 50% of their entire national GDP, and from 70 to 95 percent of all merchandise exports.

Fatih Birol, the Executive Director of the International Energy Agency, recently said that America would never replace Saudi Arabia as an oil exporter. That may or may not be true, but it is functionally irrelevant.   What really matters is who tips the scales on the balance between supply and demand, and thus determines price.   The finger on the scale used to be exclusively the purview of a few oil monocultures. It is clear now that the game has permanently changed because of shale technologies in the hands of thousands of American companies. And there is nothing more frightening to a monopolist than a thousand hungry entrepreneurs. <>

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