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Oil Market Crisis: Shock in Sight

Oil Market Crisis: Shock in Sight

By Raúl Zibechi *

On December 27, the ministers of the twelve countries that make up OPEC (Organization of Petroleum Exporting Countries) decided to maintain current production levels, although the price of a barrel of crude has been falling in the last semester, accumulating a fall of more than 30 percent. Despite the proliferation of crises with deep destabilizing capacity, in Ukraine and the Middle East, and the sanctions of the European Union and the United States on Russia, the price of crude oil continues to decline. It is not the first time that this has happened, since the price of oil is eminently political. Nor does it affect only hydrocarbons: the troy ounce of gold fell from 1,800 to 1,150 dollars, as well as the prices of agricultural products and minerals. However, some extraordinary situations are encountered in oil as it is a commodity that had the capacity, in recent history, to bring down regimes, raise governments and design the geopolitical map of entire regions. Just as we are witnessing a global geopolitical disarticulation, the oil market is going through a series of abrupt changes that, to some extent, help to explain the current situation. Perhaps a decisive change, in the short term, is that the Big Oil Party, the Grand Oil Party, as Michael T. Klare points out in an ironic allusion to the Republican Party (GOP or Grand Old Party), has obtained complete control of the parliament in the recent US elections. On the changes in the oil market abound the assumptions covered with rigorous analysis, which often hide some of the information or resort to conspiracy theories to explain what happens. To a large extent, this is a consequence of the opacity of the oil market, a highly cartelized sector, where decision-making power is strongly concentrated in a handful of countries and companies that place conditions on the rest on production quotas, marketing channels and currencies. in which you must trade. However, all of this is being battered by reality. Winners and losers With the price per barrel at $ 70, most OPEC countries will have enormous difficulties in balancing their accounts. The budgetary breakeven point for Iran is $ 140, for Algeria and Venezuela $ 121, for Ecuador $ 117, while Iraq, Angola, Nigeria, Saudi Arabia and Libya range between $ 106 and $ 90. Only Qatar and the United Arab Emirates can safely survive with crude below $ 70 (Russia Today, November 28, 2014). Although Vladimir Putin minimized the consequences for his country of the fall in the price of crude oil, Russia's budget for 2015-2017 (like that of almost all exporting countries) was made on the basis of a barrel at 100 dollars. According to the Russian president, whose country is not a member of OPEC but participated in the recent meeting of the organization, the world market will stabilize by mid-2015. The Minister of Economic Development, Alexey Uyukayev explained that a barrel at $ 70 implies the same price in rubles than what was quoted at 100, due to the devaluation of the Russian currency. "For the budget system, the price of oil denominated in rubles is much more important than the component in dollars" (Xinghua, November 29, 2014). He explained that this happens because the ruble is not tied to the dollar, to the point that multimillion dollar deals with China are priced, from now on, in yuan. One of the most affected countries is Venezuela. One of the most benefited, in the short term, the United States. And China, which is not talked about, has become the main importer of crude oil. Oil is equivalent to 96 percent of Venezuela's total exports and contributes to half of the state budget. This year the deficit is equivalent to 15 percent of GDP and inflation is around 60 percent annually. The economist Daniel López affirms that “if the price of a barrel remains in tone at 60 dollars, the social programs will suffer financially” (Deutsche Welle, November 28, 2014). Venezuela also faces a decline in oil production because there are no funds for prospecting and new facilities, in particular refineries for the processing of crude. This year, crude had to be imported from Algeria. The government of Nicolás Maduro is managing the sale of Citgo, the largest PDVSA subsidiary in the United States, which has three refineries and a network of 6,000 service stations, to raise fresh funds. According to López, despite the difficulties "we will not go bankrupt because there is money." He refers to China's recent $ 4 billion loan, which brought ailing reserves to more than $ 23 billion. OPEC, and Venezuela within the organization, had many doubts when it came to reducing production to prevent prices from continuing to fall. Vladimir Mílov, director of the Institute of Energy Policy of Russia and columnist for Forbes, estimates that "if OPEC tries to maintain current prices or raise them, it will have the opposite result", because consumption is stagnant and production does not stop growing. If they fight for an increase in crude, "it will give more security to US companies that are engaged in shale projects and they will further intensify production, leveling out the effects of quotas by OPEC" (Russia Today, November 28 2014). New technologies According to Mílov, a reduction of one million barrels a day in OPEC production, out of the 30 million produced by its members, implies a cost of 2.5 billion dollars a month for exporting countries, with no guarantee that they will achieve its objective. The data on the evolution of oil production and consumption for 2013 speaks volumes. Production grew slightly, from 86.2 million barrels per day in 2012 to 86.8 in 2013. Consumption went from 89.9 to 91.3 in the same period (1) The most notable thing is the evolution of the United States: in 2006 it produced 6.84 million barrels per day, which became 11 million in 2014, recovering its peak of production of 1970. Unconventional production is the great explanation (2). It is the only country whose production increases exponentially. It is thus close to self-sufficiency, situated at 18 million barrels per day, which it could reach before the end of the decade. Energy specialist Michael T Klare, provides data that say that large energy corporations are among the main sources of funding for the Republican Party. In the last electoral campaign, “87 percent of the 51 million dollars they contributed went to the Republicans” (Rebelión, November 22, 2014). The strategy in the last half century has been very clear: oil and gas were the pillars of national security, since privileged access to secure sources at preferential prices (Middle East) gave the United States a "competitive advantage in relation to the powers that be. rivals, "and more recently made Washington more capable" in the confrontation with hostile oil countries such as Iran, Russia and Venezuela, "says Klare. With shale gas and oil things changed, for the better. "Republican bosses argue that the best way to counter Russia's advances in Ukraine (or anywhere in Europe) is to accelerate the exploitation of unconventional gas reserves and export the surpluses obtained as liquefied natural gas," Klare continues. This new strategy aims to separate Europe from Russia, Moscow's main market on which the entire continent depends, but also to damage the Russian economy. To top off the bet, cheap energy means that companies that migrated to Asia return home. In this way, a double objective is achieved: to corner Russia, the main strategic adversary, and to counteract the rise of China, the main economic rival. The republican bet goes further, with a virtual integration of the oil systems of Canada and Mexico under the dominion of the American multinationals, since the Aztec country decided to open its state companies to foreign investment for the first time since its expropriation in 1938. Only National legislation has yet to be modified, which since the Arab oil embargo of 1973-1974 has prevented the export of oil and natural gas as a preventive measure. One of the main consequences of the US energy policy is that the producing countries grouped in OPEC are no longer in a position to regulate the oil market. The twelve countries that make it up produce barely a third of global oil and their production is beginning to decline. "We are entering a new era for oil prices, where the market itself is going to manage supply, not more Saudi Arabia and OPEC," said Mike Wittner of the Societé Generale in New York (Valor, November 28 2014). A disjointed market To the extent that an actor, or a small group of actors, does not appear with enough capacity to bring order, the oil market is increasingly chaotic. The data indicates that something new is happening: Saudi Arabia no longer sells most of its oil to the United States but to China; The United States reverts its acute dependence; China and Russia signed a mega gas agreement for 700,000 million dollars to be paid in yuan, with which China secures a source of supply and Russia ceases to depend on the European market; Saudi Arabia is already the sixth largest oil consumer in the world (it went from 1.4 to three million barrels per day from 2001 to 2013), thus reducing the exportable surpluses of the leading producer; the same happens with Russia, the second producer. Once again, China is the big winner (both for the deal with Russia and for cheap oil), while the European Union is in serious difficulties, as Russian supplies are not safe and Washington's promise to sell it gas of shale is hardly a promise. Two facts converge: a new geopolitics of oil and the crisis of the industry itself. "The oil industry was saved thanks to shale oil, but it will also be lost because of shale oil," estimates the monthly bulletin of the European Laboratory of Political Anticipation (Geab 89, November 17, 2014). The market crisis can be visualized in a graph where investments and production appear. Until 2006 increased investment led to increases in production. From that moment on, both lines are close to crossing in 2010: the production of the eleven main companies falls drastically despite the fact that investments continue to grow. The big oil companies are in debt and are starting to sell their assets. But the crisis affects shale operations in a very particular way, since "they run the risk of not being profitable if the price of a barrel settles below $ 80 in the long term," says Geab. To the difficulties on profitability must be added the criticism and protests about the pollution it produces. Some specialized publications point to a slowdown in drilling. There are those who claim that it is a mirage, since unconventional oil and gas production grows abruptly, but they tend to fall in the same way and in the short term. “The most optimistic estimates predict the increase or constant production until 2020 (only); others believe that a fall from 2016 is likely, ”insists Geab. It appears that Saudi Arabia, the country most affected by shale oil, is behind the drop in prices as a way to discourage the unconventional industry. The law of the fittest The report of the company Sanford C Bernstein & Co. last month, establishes that Saudi Arabia, Iran and Iraq “can maintain production with a barrel at 30 dollars, while some American producers need a price higher than the 80 dollars ”(Valor, November 28, 2014). The International Energy Agency maintains that the cost of oil production in these countries oscillates around 10 or 20 dollars a barrel, while the unconventional has costs higher than 70 or 80 dollars. In the same direction, the vice president of the Russian company Lukoil is convinced that the current OPEC policy of dropping prices will bankrupt the United States shale industry and that prices will rise again "in 2016, when the OPEC completes its objective of cleaning up the US marginal market. " If this were the case, some of the interference that the US strategy in the Middle East is suffering is understandable. However, analysts at Norway's largest bank, the dnb asa, recall that much of the United States' production can be maintained even with a barrel at $ 42, while Goldman Sachs assured that prices will fall further, "Until there is evidence of a slowdown in production in the United States", which could once again add up to one million barrels a day in 2015 (Valor, November 28, 2014). We are facing a war of prices, trade and strategies, which is ending the deregulation of the oil market. It is at this point where the main difficulties intersect. If the architecture of energy governance creaks, like the whole system, the problem is that the new girders that underpin a new system are not being guessed. The petrodollar, which formed the core of that architecture since 1973, based on the alliance that the United States and Saudi Arabia established in 1945 at the end of the Second World War, is crumbling with incredible speed. "In a deregulated system of access to energy resources", concludes Geab, "the law of the fittest prevails." Those who suffer the most are those who do not produce oil or gas, like Europe, and those who do not have the military power to impose their will. Once again, the Russia-China alliance has the two decisive factors, to which can be added the growing association of interests between Chinese and Saudis. According to analysts, we would be close to a shock in the oil market, with a domino effect on stock markets around the world. This time the epicenter of the future crisis would not be the real estate or banking sector, but the energy sector. We must not forget that the world order born in the Second World War had the Gordian knot in oil that is beginning to untie.

- Raúl Zibechi, Uruguayan journalist, writes in Brecha and La Jornada. Member of the ALAI Council. Notes (1) “Statistical Review of World Energy 2014”, published by BP, former British Petroleum, at www.bp.com The difference between production and consumption is due to changes in inventories, consumption of additives and substitute fuels. (2) Unconventional oil and gas, shale or shale in English, obtained through the method of hydraulic fracturing or fracking, by which rocks are broken that release gas thousands of meters deep.

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