$80 per barrel oil
Over the past year the price of a barrel of crude oil has risen from $50 to $80. The latter figure is substantially below the $100+ that “black gold” averaged during 2011-2014, but hugely higher than the low of $25-minus thee years ago.
conventional wisdom upended
Two pieces of conventional wisdom about oil have changed during the past half-decade:
–effective shale oil production technology has shelved the previous, nearly religious, belief in the near-term peaking of world oil productive capacity. More than that,
–the development of viable electric cars has won the world over to the idea that a substantial amount of future transportation demand is going to be met by non-petroleum vehicles.
new meaning for “peak oil”
The “peak oil” worry used to be about the day when demand would outstrip supply (as emerging economies switch from bicycles/motorcycles to several cars per household–just as conventional oil deposits would begin to give up the ghost). The term now means the day (in 2040?) when demand hits a permanent peak, and then begins to fall as renewable energy supplants fossil fuels.
new OPEC solidarity
When Saudi Arabia, the most influential member of OPEC, said during the recent supply glut that its target for the oil price was $80 a barrel, I thought the figure was much too high. Why? I expected that the cartel wouldn’t stick to mutually-agreed output restrictions (totaling 1.8 million daily barrels) for the years needed for oversupply to dry up and the price of output to rise. That was wrong.
I think the main reason for OPEC’s uncharacteristic sticktoitiveness (first time I ever typed that word) is the realization that petroleum is going to yield to renewables as firewood was supplanted by coal in the mid-nineteenth century and coal was replaced by oil in the mid-twentieth.
There are other factors, though. The collapse of the Venezuelan government means that country now produces about a million barrels a day less than two years ago. Also, Mr. Trump’s aversion to all things Obama has prompted him to pull the US out of the Iranian nuclear agreement and reinstate an embargo. This likely means some fall in Iranian output from its current 4.5 million or so daily barrels, as sanctions go back into effect. Anticipation of this last has upped today’s oil price by something like $10 a barrel.
adding 600,000 barrels to OPEC daily output
Just prior to the Trump decision on Iran, Russia and Saudi Arabia were suggesting publicly that the coalition of oil producers eventually restore as much as 1.5 million barrels of daily production, as a way of keeping prices from rising further. Mr. Trump has reportedly asked the two to make any current increase large enough to offset the $10 rise his Iran action has sparked.
Unsurprisingly, his plea appears to have fallen on deaf ears. Last Friday the cartel announced plans to put 600,000 barrels of daily output back on the market–subject, I think, to the condition that the amount will be adjusted, up or down, so that the price remains in the $75 – $80 range.
The old OPEC dynamic was Saudi Arabia, which had perhaps a century’s worth of oil reserves and therefore wanted to keep prices steady and low vs. everyone else, whose reserve life was much shorter and who wanted the highest possible current price, even if that hastened consumers’ move to alternatives.
Today’s dynamic is different, chiefly because the Saudis now realize that the age of renewable energy is imminent. Today all parties want the highest possible current price, provided it is not so high that it accelerates the trend to renewables. The consensus belief is that the tipping point is around $100 a barrel. $80 seems to give enough safety margin that it has become the Saudi target.