My big takeaway from Davos was this: the global oil industry is largely recovered from the shock of the collapse in oil prices and is facing the future – volatile though it may well be for a while – with a sense of realism and determination.
The consensus that emerged from the many brainstorming sessions relating to oil and energy was that the worst of the falls in the price of crude was over, and that now the inexorable economic logic of the industry implied an upwards trend for the rest of this year and next.
In the words of one expert: the cure for the low oil price is … the low oil price. That’s not as paradoxical as it sounds.
At current prices – Brent is trading at just under US$50 a barrel at the moment – oil production in several sectors of the industry is only marginally profitable. American shale projects, many of the world’s deepwater fields, expensive and difficult fields in Russia, for example, are all beginning to look uneconomic at these prices.
Producers in the Middle East, on the other hand, can still make money from their easy access and low-cost fields, even if not as much as before when the price of crude was $100 or more.
So, the argument goes, Arabian Gulf producers simply need to keep producing at current levels and prices, forcing high-cost producers out of business thereby reducing global supply, in turn causing prices to rise according to the laws of supply and demand.
It’s a simple strategy, which Saudi Arabia and Opec seem to have taken to heart. At Davos, representatives from both were adamant: they did not deliberately enter a price war against American and other high-cost producers.
Instead, it was pointed out how "illogical" it would have been in November to cut the amount of "cheap" oil produced mainly by Gulf countries in favour of expensive supplies in the United States and Russia. Opec's decision to maintain supplies back then was a simple exercise in protecting market share in a difficult pricing environment.
All were agreed that the era of $45 a barrel was a temporary phenomenon. Before the end of this year, “uneconomic investment in expensive upstream production” – euphemism for shale – would fall back and global production levels would start to fall again.
At one session in Davos, the current “crisis” in the oil industry was put firmly in context by one of the biggest producers in the world, Saudi Aramco.
The phase of seriously falling prices which began in September was due to long-building inequalities of supply and demand, a Saudi executive pointed out, but it had a geopolitical trigger: when the Middle East’s worsening tensions in Syria, Iraq and Libya failed to affect supply to any meaningful degree, the old bogeyman of Middle East insecurity was shown to be a “paper tiger”.
The other message from Saudi Aramco was that any period of depressed prices should be regarded as an opportunity to make the regional oil industry more efficient in the long run. In previous periods of low prices, producers have cut investment, halted projects and laid off workers in a knee-jerk reaction to falling profits.
Now, the Saudi oil giant said, there was an opportunity to invest in refineries and petrochemicals plants to tackle the issue of subsidies, and to push through the long-term replacement of oil by gas for domestic consumption. All these measures are far-sighted and ultimately for the good of producers and consumers.
That message – that the current period of low prices was an opportunity for long-term investment and efficiency – was even learnt by the Russian energy executives at Davos. Peeved though they understandably were to be classed among the “losers” in the global energy stakes, the Russians, too, believed there was an opportunity to make their production more efficient. It was in Russia’s best long-term interest to have stable oil prices around the $70 to $80 level, they said, rather than go through the wild gyrations implied by a $110 to $45 price range.
All in all, there was a remarkable degree of consensus among the oil executives in Switzerland. It is a good sign that the current difficulties will be overcome in the near future.
fkane@thenational.ae
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