Standup9ja: Will Nigeria Survive The Death Of Big Oil?
For the second time in seven months, OPEC and its non-member
collaborators agreed last month, to continue to “do everything necessary” to
drive an increase in global oil prices. As with their agreement late last year,
members are expected to maintain a 1.8 million barrels a day reduction in
output levels up to March next year.
As an oil producing economy who’s near-total dependence on
earnings from the stuff meant that we went through the last crisis in the
market on life-support, this is great news. It helps too that OPEC’s decision
to exclude both Libya and Nigeria from the production-cutting arrangements
conflates with our pacification of militancy in the oil-rich Niger Delta region
to hold out the prospects of improved oil production and ancillary increase in
foreign earnings.
Still, despite its best efforts, the new oil producers’
arrangement has not moved the price of oil beyond the US$50 per barrel (pb)
mark. In part, this was because the cutbacks in production which was agreed on
were not enough to dent the pre-existing glut in the oil market that had helped
push prices down in the first place. Now, giving that most OPEC members need
oil to sell at about US$100pb if their respective budgets are to break-even,
US$50pb oil simply won’t do. On the other hand, further production cuts will
hurt most members, especially Saudi Arabia, and so are unlikely.
Nonetheless, by far the biggest source of downward pressure
on global oil prices over the last three years, is the result of oil
exploration and production in the US. In turn, much of this owes to hydraulic
fracking of shale oil deposits. Not too long ago, this new technology was
considered too expensive to be anything but a sideline to the global oil
market. Yet, supply of U.S. shale oil ultimately played a crucial part in
ending the global commodity super-cycle. Today, shale oil production in the US
is nothing of the marginal play that it was supposed to be, and the U.S. has
ridden on the back of exploration activities to become one of the world’s
leading producers of the stuff.
Only last week, drillers in the U.S. were reported to have
added 11 new rigs to their operations. According to data from Baker Hughes, an
energy services company, this then makes last week’s addition the 20th week in
which U.S. drillers have added additional capacity back-to-back. With
production in the U.S. adding another 500,000 barrels per day (bpd) last week,
the U.S. Energy Information Administration now expects output in the country to
reach 10 million bpd in 2018.
If OPEC underestimated the production threat from shale the
first time, it has done so consistently thereafter. First, the sense was that
below US$70pb, the shale industry will go bust. And go bust a lot of them did.
But the market then adjusted, and producers have continued to leverage
financial engineering opportunities to continue financing their operations, while
deploying an assortment of hedging instruments, to help manage price
fluctuations.
If shale is the oil industry’s worst near-term bugbear,
sundry other gremlins loom over the longer-term. Demand, for instance, for
fossil fuels will be undermined by the increasing roles played by renewables
(wind, solar, waves, etc.) in the global energy mix. Considerable efficiencies
in these technologies have seen them account for a larger share of generation
in both the OECD countries and China. True, intermittency is still a worry —
electricity generated by renewables, is by definition unpredictable (solar, for
instance tapers off at night), even as most grids were originally structured to
deliver steady output to their consumers. But then bigger and more efficient batteries
and snazzy engineering fixes mean that even this might not remain a problem for
long.
Bigger and more efficient batteries also support the threat
to big oil from another new sector. Electric vehicles (Tesla’s market
capitalisation only recently overtook Ford’s, despite the former producing far
fewer cars than the latter) would eat out of this pie too. As would
expectations of improvements in the energy efficiency of the Chinese and Indian
economies. It would seem on current trends, that these biggish rapidly-
developing economies would start using up far less energy in producing more
goods at an earlier stage in their development than most industrialised
economies did.
Big oil, therefore might be witnessing its last hurrah.
Oil-dependent economies like ours should worry. For while oil may have warped
our internal workings, its abundance has helped hold together social
organisations devoted solely to rent-seeking. Without a pivot towards saner
husbandry of the economy, and away from oil, the demise of big oil might
presage the unravelling of this space.
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