Sunday, October 5, 2014

The Grand Game - Oil in Disarray

Subtitle: Precision Directional Drilling Causes Oil Price Decrease

It has been a while (four years) since I last wrote on the Grand Game, where renewable energy, nuclear power, oil, coal, and natural gas all compete for shares of the world's energy needs.  Previous articles on the Grand Game may be found here (see link).   This week has seen a flurry of articles on the weakness of OPEC, and the looming oil price collapse.   (see link for one of many such articles)

The reasons for the impending oil price reduction, or collapse as it may turn out, are fundamental economics of supply and demand.  Demand is stable or slightly falling, while world supply is increasing as US domestic oil production due to precision directional drilling and hydraulic fracturing brings more oil to the surface.   On a side note: hydraulic fracturing, or "fracking" as the media terms it, is not the key.  It does little good to fracture an oil-bearing formation if the oil well is vertical and pierces only a small part of the oil-bearing rock.  The key to the recent increased oil production is precision directional drilling, in which the oil well travels horizontally through the oil-bearing rock.   

Meanwhile, new cars are achieving ever-increasing miles-per-gallon ratings.  In the commercial aviation field, more and more ultra-efficient aircraft are flying, including Airbus' A380 and the Boeing 787.   However, the biggest influence is the increased oil production in the US.  

World oil price hit a low point this week, with the benchmark crude reaching $90 per barrel, representing approximately 10 percent decrease from recent prices.   It will be very interesting to see if OPEC members can reach some agreement on reduced production levels in an effort to increase or maintain price.  Or, perhaps the member countries will splinter and engage in a production war, each trying to sell as much as possible while prices plummet. 

On an editorial note, the price of oil has many ramifications.   The primary impact is on the cost of delivered goods since most goods move to their destination by petroleum-powered transport.  The transport usually takes the form of diesel-powered trucks and trains.  Also, ships and barges burn fuel oil.   Consumers who drive cars also enjoy reduced prices at the gasoline pump, leaving more disposable income in their wallets.   Industries do not burn much oil in modern times, and very little electricity is produced from oil so there is not much benefit for them.   

One of the major benefits is the price of natural gas, which in some instances is tied to the price of oil.  For example, Russia recently contracted to supply China with great quantities of natural gas, with the price of the gas being tied to the price of oil.    Since natural gas is used for electric power production, lower oil prices will have some impact on electricity prices. 

Long-term, OPEC has warned that low oil prices will create an oil shortage.  OPEC insists that few, if any, investments will be made into new production unless the price is obtainable to justify the spending.  

OPEC will meet again in November, 2014.   The results of that meeting should be interesting. 

Roger E. Sowell, Esq. 
Marina del Rey, California

copyright (c) 2014 by Roger Sowell -- all rights reserved

No comments: