Crude slump will worsen before it improves

January 9, 2015 12:13 PM

The real cause of low oil prices

In November, OPEC decided to not cut production. Despite the myriad of theories surrounding their choice, might they have made their decision based mostly on simple economics?

The U.S. shale boom has seen huge hype, but the numbers speak for themselves. Such overflowing optimism may have been unwarranted. No sector is in greater need of a discussion of harsh truths and a reality check than renewable energy.

In a third exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman explores how the oil price situation came about and what was behind OPEC’s decision, what the future may hold and why the U.S. exports debate is nonsensical. He also discusses what lessons to take from the shale boom, the influence (or lack thereof) of technology, and how changes in the global energy might surprise you.

OilPrice: The current crude oil situation: What is your assessment?

Arthur Berman: The current situation with oil prices is really very simple. Demand is down because of a high price for too long. Supply is up because of U.S. shale oil and the return of Libya's production. Decreased demand and increased supply equals low price.

As far as Saudi Arabia and its motives, that is also very simple. The Saudis are good at money and arithmetic. Faced with the painful choice of losing money while maintaining current production at $60/barrel or taking 2 million barrels per day off the market and losing much more money, it's an easy choice: take the less painful path. If there are secondary reasons like hurting U.S. tight oil producers or hurting Iran and Russia, that's great, but it's really just about the money.

Saudi Arabia met with Russia before the November OPEC meeting and proposed that if Russia cut production, Saudi Arabia would also cut and get Kuwait and the Emirates to join them. Russia said, "No," so Saudi Arabia said, "Fine, maybe you will change your mind in six months." I think that Russia and maybe Iran, Venezuela, Nigeria and Angola will change their minds by the next OPEC meeting in June.

We've seen several announcements by U.S. companies that they will spend less money drilling tight oil in the Bakken and Eagle Ford Shale Plays and in the Permian Basin in 2015. That's great, but it will take a while before we see decreased production. In fact, it is more likely that production will increase before it decreases. That's because it takes time to finish the already-started drilling that's started and decrease drilling in 2015—and both of these need to happen before we finally see a drop in production. Eventually though, U.S. tight oil production will decrease. At about that time—perhaps near the end of 2015—world oil prices will recover somewhat. OPEC and Russian cuts after June and increased demand because of lower oil price will help as well. U.S. companies will then drill more in 2016.

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About the Author

James Stafford is the London-based editor of Oilprice.com.