News of the size of oil reserves in the Delaware Basin (New Mexico’s share of the Permian) while OPEC was deciding how many barrels it will cut from the world market to lift prices caused epic confusion – and revelations of how little “authorities” and the media understand petroleum economics.
The New Mexico media, which relies mainly on interviews with petroleum industry spokespersons, got it wrong.
Government numbers came out as 46 billion barrels (Permian total) with 26 in New Mexico. This means nothing but oil in good rock along with technical recovery as an estimate. Some excited “authorities,” who should know better, exclaimed that there was more.
However, the estimate is based on the application of technical means to recover the oil. The reserves of real oil depend on ultimate economic recovery. This means technical based on geology, plus economics. A high price will recover the billions of barrels while a low price will not.
In short, the numbers reflect the rocks without economics.
The Delaware reserves plus the Texas Permian are now there to expand supply over 12 million b/d in the United States.
This writer has warned that world oil demand is sluggish and imprecise with only references to legacy guesswork that the developing world plus China demand will support prices long term or forever. Yet, world oil consumption has increased only 5 percent in the last 10 years.
OPEC, with Saudi Arabia as its leader, has expired as the world administrator of the price of crude oil. At its December meeting in Austria, Qatar quit after nearly 70 years and announced concentration in LNG production and world export as the existing market leader.
OPEC emerged with a serious factional split between OPEC original and OPEC with Russia. There would have been no agreement without Russia and its old Russian Federation members as producers. Moscow is the new world oil price-setter indirectly while OPEC Original becomes a collaborator in cartel for now. Simply put, Saudi Arabia no longer is the “residual supplier” alone.
The production roll-back of 1.2 barrels per day by both “OPEC” is not enough for “balance” supply and demand for world crude oil. It is being tested daily by commodity traders. In a briefing to New Mexico independent and small producers before the meeting in Austria, this writer warned that 1.7 million b/d was needed for balancing stabilization. Without that size of a production and export reduction, the average price of WTI oil in 2019 will average $50 per barrel.
Nearing 12 million b/d and over the Permian producers voluntarily will be required by this price to revise capital spending and place production into DUC (non-completions) and storage. There is doubt that the export of tight or shale oil would continue if the Brent price falls lower and loses its premium over WTI. A net cutback of Permian between 500,000 to 750,00 b/d should be a non-OPEC response to an oil glut even more serious than 2014.
Saudi Arabia is untouched as an American strategic ally in confronting Iran in the Middle East as a hegemonic threat.
Despite some Republicans and the Democratic Party in Congress, violation of human rights over the death of a Saudi journalist and critic of the Crown Prince will not override U.S. national interests in the Middle East.
President Trump has not deviated from post—World War Two foreign and defense policy.
Trump wants low oil prices for American consumers and forced OPEC this summer to pump more to offset export sanctions on Iran.
Still, with OPEC under a deep division which no President could achieve since 1973, Trump as a geopolitical manager of world oil has removed about 500,000 b/d between January and December of 2018. America, via Trump and without a formal cartel alignment, determines much of the price of world oil.
The United States and its Southwest tight and shale oil has changed from dependence on world oil to domination. Never again can OPEC engage the U.S. in a price and market share war as it did in 2014-2016 through supply acceleration in an oversupplied world market.
WTI emerges as the new world price. It is American barrels that set the price and OPEC is a price-taker. Since there are nearly 50 billion barrels in reserve in New Mexico, how will the Permian producers set a return on investment in a free market for petroleum?
Dr. Daniel Fine is the associate director of New Mexico Tech’s Center for Energy Policy and the State of New Mexico Natural Gas Export Coordinator. The opinions expressed are his own.
During President Donald Trump’s summit in Helsinki with Russian President Vladimir Putin, both leaders made controversial statements leading to accusations of treason. USA TODAY
The opposition in Congress wants to see a transcript of what President Donald Trump and Russian President Vladimir Putin talked about for two hours alone. No doubt some of that time was spent discussing OPEC and the price of oil.
This is above all an issue now for the first time in world petroleum history because Russia has become part of OPEC in the agreement to manage world supply of oil and, indirectly, its price.
OPEC and Russia produce almost half of the supply of world oil. At full capacity, and spare capacity added in, they would be slightly over 50 percent. For now, OPEC plus Russia is the world price-setter for oil.
Shale and tight oil, mainly from the Southwest and North Dakota, along with conventional oil production in the United States, should account for 12 percent later this year if prices stabilize.
This was the reality of talk between Putin and Trump.
Trump-Putin summit kicks off in Helsinki
Russian President Vladimir Putin and U.S. President Donald Trump shake hands before a meeting in Helsinki. Brendan Smialowski, AFP/Getty Images
Putin, with OPEC, controls the price of world oil. America is not the price-setter: it is the price-taker.
But President Trump is the first U.S. President to take on OPEC. He has said that OPEC prices are “artificial” and as such violate free trade in oil.
This was true under the Obama presidency in 2014 when OPEC, following Saudi Arabia, set out to destroy shale oil producers in America in a price war against high-cost American producers by increasing production at a time of world-wide oversupply.
Recall, the downturn in the San Juan and Permian basins.
Trump and Interior Secretary Ryan Zinke have made an energy policy of domination which now includes having an edge in price-setting. They want more oil even if it means lower prices as supply challenges demand.
No doubt, Trump explained this to Putin and inferred that Russia might leave its de facto membership in OPEC.
How would Putin reply, if asked by Trump? His reputation is such that he sees an opening and prompts Trump to consider ending some sanctions against Russia in oil exploration and production. Why not allow Russian oil companies to borrow to finance capital projects in Western banks? Why not re-open Exxon-Mobil Arctic oil joint projects? Is more Russian production of oil another way to lower oil prices at the pump and upend OPEC?
News of the Trump administration’s invitation to Russian President Vladimir Putin to meet with the president in Washington appeared to catch Dan Coats, the Director of National Intelligence, off guard as he attended a security forum in Colorado. (July 19) AP
Trump could sense a deal but one which would rattle Republicans back in Washington. His official domestic political opposition no doubt would block any such deal unless Trump is out of office either through impeachment or in 2020.
There is a Congressional process in Washington to place OPEC under American Anti-Trust laws. The Administration would sue the sellers of OPEC oil in U.S courts.
Sounds easy, but similar to 1973 it failed in the embargo crisis by OPEC of oil exports to the United States. Apart from the legal process, how would OPEC oil be treated if it were re-exported from Mexico or Nigeria, for example.
If imports from OPEC-Russia were to stop, American self-sufficiency together with Canadian imports and other non-OPEC producers with slightly higher prices would replace OPEC oil.
However, if OPEC itself dissolves there would be individual producers prepared to sell their oil as former members of OPEC. This would resemble a free market in world oil and Trump would have an American First triumph in which the price oil is more likely to be real than artificial, that is, market-derived from free-flowing supply and demand.
Dr. Daniel Fine is the associate director of New Mexico Tech’s Center for Energy Policy and is the State of New Mexico Natural Gas Export Coordinator. The opinions expressed are his own. Find more columns by Dr. Fine at www-daily-times.com or read Energy Magazine back issues in our Special Publications
San Juan and Delaware basin oil producers have sharply reduced costs through efficiencies. American higher-cost production shows no sign of a decline while OPEC lower-cost production increases in spite of lower prices. Saudi Arabia has decided to fight the Americans for market share.
The outlook for Iraq places still more production in the global market. Iraq production, now at 4 million barrels per day and rising, could reach 6 million in two years. The Iranian Oil Company could attract BP and Total to invest capital and technology if sanctions permit. This would drive Iranian production to equal Iraq. In the short-term Iran has the capability of expanding exports by 1.2 million barrels.
Should the “deal” fail or be changed by Congress to a phase-in of Iranian oil exports over a longer period of time and the White House goes along, the price of oil should recover to $60 per barrel. This is a long-shot scenario, however.
There will be more Middle East production for export than anticipated and its impact on American shale oil production will be a three-year, low-price oil regime. On the other hand, the current price war is moving quietly to an old variable. From 2009 to early last year, Saudi Arabia and the Gulf States assumed that American shale technology (horizontal drilling and hydraulic fracturing) was unsustainable. They changed course last year and resorted to the price war for market share.
The reason for this change in strategy was first, the decline ratio of shale horizontal wells; and second, the regulatory obstacles. Simply put, OPEC perceived the environmental/global warming/climate change political group mobilization as capable of winning tighter federal regulations that would cause higher costs to the oil industry stopping the “technology play.”
OPEC now regards the appearance of new methane rules as a revival of its earlier “unsustainable” scenario. Methane mitigation regulations can setback natural gas production but also the associated gas from oil production. San Juan Basin oil producing formations are heavy in associated gas. If methane emissions, leaks or flaring persist, OPEC calculates, it will cause regulatory intervention as part of the new International Treaty on Global Warming.”