Not so many years ago, the Peak Oil media bonfire was in part ignited by Matthew Simmons book “Twilight in the Desert”. Huge middle-eastern oil fields soon to water-out, extreme secrecy around the data on those fields – a ticking time-bomb for a world ‘addicted to oil’. So far as I know, there may be merit in many of the arguments. However, the world has changed.
In my post on Blind Spots, I discussed briefly how we all missed the oil price crash of 2014. One part of the equation I glossed over was the highly significant decision in November 2014 of OPEC, and in particular Saudi Arabia, to maintain production levels in face of declining prices.
As the historical price setter and swing-producer, Saudi was faced with a conundrum.
- If they cut production to help keep prices high, the US shale-oil juggernaut would have just kept going, leading to further oversupply – eventually lower prices, and reduced market-share (and consequent waning influence for OPEC).
- Conversely, maintaining or increasing production would protect market share, but inevitably drive prices down, handing the role of swing-producer to the US shale.
So heads was lower revenues, and tails it was lower revenues. Commentators are now generally agreed that over-supply caused the crash of 2014 and it is most similar to the mid 1980s. Back then, various conflicts in the Middle East had resulted in very high oil prices, which had driven supply substitution. OPEC had seen its market share and influence diminish as GOM, North Sea and Alaskan crude came onto the market. Over supply led to a decade long period of stagnant, low oil prices.
Yes, the challenge posed by US oil shale was new, but was this just another business-as-usual adjustment of policy to the classic boom and bust of the oil industry?
I’d suggest yes, but this view might be hiding a potentially a bigger concern.
Continue reading “Sunset in the Desert”