Oil prices are plunging, and so is the cost of gasoline. While this is pleasant in the short term, on a longer time scale it carries considerable risks: war, recession and possibly a protracted energy crisis.
We alluded to this in an earlier paper, claiming that the price of oil would continue to decline, due to a growing disconnect between supply and demand. We suggested that the oil glut could lead to a conflict between Saudi Arabia and Iran – -causing a sudden oil shortage and an energy crisis.
Events since have made that scenario more likely, but even without it the situation would still deteriorate:
- Oil producing states continue to pump oil at the maximum rate. With sanctions on Iran now lifted, another million barrels per day (BPD) will be added to supply in the first half of the year.
- The official (“spot”) price is currently near $32/barrel. But the price actually paid to OPEC producers averages $22.50. In the U.S. it varies from $12 to $28 a barrel, depending on oil quality – same as OPEC.
- The budgets of producing countries are based on oil revenue. Current or lower oil prices are inadequate to cover outlays, leading to economic, social and political disruption.
- A potential global recession is reducing oil demand, adding to the pressure on prices.
This puts the oil industry in severe difficulty, with growing impact on employment, profits and stock markets.
All the above trends reinforce one another, and we are nearing a flash point. Up to now the surplus oil has been stored, but storage capacity is running out for both crude and oil-based products such as diesel or gasoline. China and Europe are topped off, and the U.S. is running out of room to put the oil. Once the last tanks are filled the price will crash and a full-blown crisis will ensue.
Events in Libya are a case in point. In 2012-2013 it produced 1.5 million Barrels per day (BPD) of high-quality crude. Current production is one quarter of that. Expert personnel has left, facilities are destroyed or damaged, and maintenance neglected. Political chaos has crippled the oil industry.
Economic and social problems are not the only adverse factors. Low prices result in falling investment, personnel cuts and the cancellation or postponement of projects. Reversing such losses in a highly technical, capital intensive industry takes years. The U.S. would doubly suffer from such a crisis. Not only would its own oil industry be damaged, but as the country imports nearly half of its oil needs, the general public would be hit as well by price hikes and/or shortages.
We are looking at a very unpredictable, and dangerous, energy supply future. Is there a solution to this predicament?
Yes, but it requires both clear thinking and political courage.
Let us backtrack a few years, to when prices were (relatively) stable. How was this done?
OPEC (Organization of Petroleum Exporting Countries) basically set the oil price twice a year. Each country was assigned a given fraction of total OPEC production, which itself was matched against global demand to determine the price. Saudi Arabia was the policeman. If some members produced over their quota, the Saudis would increase production and crash the price, inflicting financial pain on all. There always was some cheating, but the system worked – until Saudi Arabia resigned its role of policeman and raised its own production to the maximum, with the rest of OPEC following. The motive: to punish Russia for its support of Syria, and to drive the American fracking companies out of business.
Now everybody, OPEC included, is suffering.
The only solution – other than war, mayhem and destruction as in Libya – is to recreate a coalition of oil producing countries strong enough to play (at least until the crisis is resolved) the role formerly played by OPEC. There are two pre-conditions for such a scheme to work:
- This “ad hoc cartel” must command a share of global oil production equal to, or preferably larger than, OPEC’s.
- It must have enough authority to have its “suggestions” obeyed.
The only way such a scheme would work is to have the U.S. and Russia running it:
- Both are superpowers
- Each produces 10 million BPD. In addition, the U.S. is the world’s biggest oil market.
- Between them they would be able to pull in the bulk of other producers: Canada, Mexico, Britain, Norway, Brazil, Australia, Nigeria, Angola,
the former Soviet republics, and probably Iran and Iraq.
- The U.S. already has domestic experience with such a system. In 1930 the discovery of the giant East Texas field crashed the oil price, nearly destroying the industry. The federal government set up, and strictly enforced, a production quota system for the oil states, which remained in place from 1933 to WWII.
- The scheme is in everyone’s
Now as then we cannot afford to lose a vital industry and endanger our energy supply. It is time for new – and quick – thinking and action.
In previous articles, we discussed that Russia and the U.S. should be natural allies and that cooperation between the two could bring stability to an unstable world. Here is a great opportunity to develop cooperation and solve a serious problem for the good of the entire globe.
Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.