At what oil price will shale revolution get derailed?

Saudi Arabia, the world's largest oil producer at 10 million barrels a day (mbd), did not yield to the pressure of cash-strapped Iran, Venezuela and Nigeria to raise the energy price by letting the Organization of the Petroleum Exporting Countries (Opec) cut output quota of member-countries. A 45 per cent fall in crude oil prices since June is playing havoc with the finances of several Opec members. Nigeria was forced to devalue its currency. Highly dependent on income from oil and gas exports, non- Opec member Russia, already a victim of tightening US and European Union sanctions, is taking further knocks, as the oil price continues to slide. Going by a Bank of America (BoA) report, oil is still to find a bottom and prices could hit $50 a barrel next year. As the Opec decision not to make market intervention by way of production cuts will have "profound and long-lasting" implications for the world economy, it also signifies effective dissolution of oil cartel, says BoA. Many had earlier questioned the efficacy of Opec as a cartel, especially in the context of the US now boasting oil output of nine mbd, largely on the back of a shale revolution, now taking roots in many other countries. Progress in securing energy from non-conventional sources, such as wind mills and solar cells, also continues to reduce global dependence on oil.
 

IMPACTS OF OIL PRICE SLIDE

• A 45 per cent fall in crude prices since June is playing havoc with the finances of several Opec members
• Bank of America report says oil prices could hit $50 a barrel next year  
• The US’s shale oil output is 9 mbd
• With rise in oil production in the US and other parts of the world, the share of Opec in world oil supply has come down to 30%
• BoA says 15 per cent of US shale oil producers are already losing money and nearly half of all shale operations will face financial difficulties if oil prices slip below $55 a barrel

Wind energy is meeting nearly five per cent of the current US electricity demand. Financial consultant Jamal Mecklai informs quoting the National Renewable Energy Laboratory that the US has the potential to generate onshore wind power that is "nine times larger" than the country's current total electricity consumption. With rapid progress in technology, which involves major investments, cost of deriving energy from non-oil sources has started falling rapidly. High oil prices of the 1970s triggered investments in alternative sources of energy with leadership coming from the US. Blending of ethanol derived from sugarcane, maize and empty palm fruit, bunched with petrol and diesel is pursued with vigour across the continents. Over 90 per cent of cars sold in Brazil are fitted with flexi-fuel engines good for running on any degree of ethanol blended with petrol. As this is proving light on car owners' pocket, ethanol use is having a benign impact on the economy and environment.

In all this will be found the reason for Riyadh to let oil prices decided by the market and not making attempts to manipulate prices by restricting Opec production. With rise in oil production in the US and other parts of the world, the share of Opec in the global oil supply has come down to 30 per cent. This, and also demand for oil now growing sluggishly because of the poor showing of the global economy have denied Opec the vantage position to move the market, production cuts or not. In the past, however, whenever Opec would cut production quotas, some member-countries would stealthily produce more, in violation of the expected discipline. Saudi Arabia, as a result, would find its share of the world oil market reduced. Yet another compelling reason for Riyadh not to play ball on production quota cuts and allow prices to fall is to ensure big energy firms, private and state-owned would rein in investments in exploration and drilling of oil in inaccessible zones.

Years of gestation and billions of dollars of investment in pumping oil from the Arctic or remote areas of Russia will make sense if oil stays above $100 a barrel. If low oil price experiences of the past are any guide, then investment to discover oil finds in difficult terrains or secure the fuel from a new source, such as tar sands in Canada, will shrink. On the other hand, high oil prices in the 1980s resulting from rigorous production curtailment by Opec with Saudi Arabia giving the lead gave a major boost to investment. Many believe Riyadh is bent upon rendering operation of a large number of shale oil producers unviable. Opinion is split as to what price of oil shale operators will stop generating enough cash to go on sinking new wells. BoA says 15 per cent of US shale oil producers are already losing money and nearly half of all shale operations will face financial difficulties if oil prices slip below $55 a barrel. Citigroup disagrees to say shale operations are robust enough to survive nearer to $40 a barrel. The Economist says tongue-in-cheek, Riyadh is taking the brunt of low oil prices to do to "shale firms" finances what fracking does to rocks."