As the oil price has fallen past US$100 per barrel, then $80, now $50, one major newspaper has decided to stop talking of “psychologically important barriers”, which seem to be bypassed as easily as the Maginot Line.
Despite plenty of muttering about plots, in fact neither of the key players in this oil price crash actually did anything voluntarily to cause it. Unlike their actions in 1986 and 1998, the Saudis have not increased production sharply; rather they have trimmed it slightly but not made major cuts, active only in masterly inactivity.
And a cursory examination of the vagaries of US energy policy should dispel any idea of a coherent grand strategy. The thousands of individual shale oil producers are in cut-throat competition, not collusion.
If the US government had wanted to maximise its oil leverage, it would by now have permitted the Keystone XL pipeline, freed up US oil exports and opened more federal land to drilling. The current administration has had the sense not to do too much to discourage production, rather than encouraging it much.
The current price slump will clearly lead to delays and cancellations of high-cost conventional projects, with companies already postponing ventures in areas such as the Arctic and warning of a collapse in North Sea production.
Various eminent commentators differ on the impact on shale oil output. Falling prices must already have set back plans for shale developments outside North America. In the US, Citigroup’s Ed Morse suggests that production will continue to grow, as costs fall and drilling concentrates on well-established basins with existing infrastructure. Conversely, Reuters’ John Kemp sees production starting to fall by the end of this year if prices do not recover.
Does this matter for US strategic goals? Becoming self-sufficient in oil or gas should not be the goal in itself. Rather, the aim should be to maximise the gain of cheaper, more abundant energy to the economy and to exploit the opportunities to put pressure on energy-exporting rivals. This can be achieved yet more if prices stay low, even at the cost of falling US output.
The US has not had a strategy to increase production or crash prices, but having received the unexpected gift of energy abundance, policymakers have not been slow to try to deploy it. They have enforced sanctions against Iran and Russia that would have been unthinkable in a world of soaring prices and tight supplies. Meanwhile, Saudi Arabia has stumbled into a strategy of moderate prices that it should have adopted years ago.
The question is where a new equilibrium may be. In the next year or two, prices may bounce back strongly as a US shale sector riven by debt and bankruptcies is unable to repeat its feats. US liquefied natural gas may prove uncompetitive in Europe against Russian supplies and Opec countries may be able to repeat their strategy of restraining production increases and targeting high prices.
But even then they would know that keeping prices above $100 per barrel for a long time would be risky.
Or prices may settle at a lower level where robust demand growth can accommodate increasing production from Opec and a slower growth of shale oil output. By that point, economic pressure plus sanctions might have gained the US a favourable outcome in its disputes with Russia and Iran. Saudi Arabia and its Gulf allies would have reminded Opec rivals of their higher pain threshold.
Grand energy strategy without substance is not much use, as governments from Venezuela to Russia are now discovering. Rather than imagining that the global energy landscape can be dominated by seizing the commanding heights of the economy, the victors grasp unexpected opportunities to avoid previously impassable obstacles.
Robin Mills is the head of consulting at Manaar Energy and author of The Myth of the Oil Crisis
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