The MSC Wiley Lecture Series hosted two speakers on Thursday evening for a lecture titled “Under Pressure: Oil Prices, OPEC and Fracking.”
While low prices for oil and gas prices have been a welcome relief for consumers as of late, they have created turmoil in the global market.
“Oil is a global business,” said Jim Krane, Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy. “What we’re doing here in this country has a global impact. The story behind this drop in oil prices and big supply story is complex and involves balancing myriad sources of supply with equally myriad sources of demand.”
Head of the Department of Petroleum Engineering at Texas A&M Daniel Hill said the United States is producing way too much oil in the wake of the fracking boom, which has contributed to the drop in price. He cited the Eagle Ford reservoir and Permian Basin in South Texas and the Bakken reservoir in North Dakota, each producing upwards of one million barrels per day, respectively.
“U.S. oil production for the last 25 years has experienced a long decline,” Hill said. “Oil production has been declining since 1971 until about 2005 when shale activity began. There’s been an amazing increase in the production of crude oil.”
Hill said the excess supply of U.S. oil, paired with production spikes in Brazil and African countries such as Algeria and Nigeria has further affected the price.
Krane said the drop in price could also be attributed to the actions of the Organization of Petroleum Exporting Countries, OPEC, specifically Saudi Arabia.
In an OPEC meeting on Nov. 27, Saudi oil minister Ali al-Naimi took oil off the market and forced prices back up. Krane said there are three possible reasons why OPEC behaved this way.
The first, Krane said, is they wanted to help the global economy. Krane said global economic growth wasn’t as strong as OPEC wanted to see, especially in China and other parts of East Asia.
“OPEC gets most demand from East Asia,” Krane said. “That is the growth market for them and they tend to look pretty closely at that part of the world.”
The second reason, which Krane said is likely the true reason for OPEC’s behavior, is a need to protect market share. Krane said this was also a result of geopolitics.
With oil production rising in non-OPEC countries such as the US, Canada, Brazil and Nigeria, Krane said the Saudi’s didn’t want to see further new supply of oil coming onto the market.
Krane cited a quote from Naimi himself, where he justified raising production. Naimi said if they reduce outputs, Russia, Brazil and the U.S. shale producers would take their market share.
“The Saudi’s didn’t see reason to take supply off the market when non-OPEC countries would increase production and fill that gap,” Krane said. “They would be relinquishing their market share to these non-OPEC countries.”
Krane said shale is becoming the new swing producer in the market for oil, meaning it adjusts its production to balance markets and keep price volatility out of global markets. This is due in part to North American shale producers being among the first to react to the market.
Reiterating the importance of the oil and gas industry, Hill said, according to a forecast produced by Exxon Mobil, oil and gas will comprise 60% of the global energy mix by the year 2040.
“That’s a little more than it is right now,” Hill said. “The actual volumes are even larger.”
Krane finished with some good news, comparing today’s global oil market to conditions experienced during the oil bust in the 1970s.
“Shale is proving to be nimble, it can come back quickly when prices allow,” Krane said. “This isn’t something we saw during the last big oil bust. From 1973 to 1979, big projects couldn’t be taken offline easily, unlike shale. The market was much less price-responsive in the ‘70s.”