Orhan Sattarov, head of the European Bureau of Vestnik Kavkaza
The collapse of oil prices on the world market threatens to disrupt the American “shale boom,” the influential German newspaper Frankfurter Allgemeine Zeitung reports. The massive increase in oil production in the US in recent years has completely changed the world energy market. Against the background of decreasing prices for energy, oil production in the United States is at risk of becoming unprofitable. Abdalla Salem El-Badri, the OPEC Secretary General, announced at the Oil and Money Conference in London that the drop in oil prices will affect primarily the shale oil industry. “If prices continue to remain at $85 and below, we will soon see the disappearance of a great many investments and oil from the market,” the newspaper quotes Abdalla Salem El-Badri. The OPEC Secretary General, however, warned against panic on the market. “The strong change in oil prices cannot be justified by fundamental data. Supply and demand continue to grow,” El-Badri said.
Thanks to the fast growing oil shale mining, the U.S. will probably become the world leader in oil production, leaving Saudi Arabia behind. Since 2008, the volume of US crude oil has increased by about 50%. This energy breakthrough has a giant effect on the U.S. economy. Economists estimate that half of all the US economic growth in the last year was due to the production of shale oil and gas. The OPEC Secretary General is not alone in seeing risks for the shale oil industry in the current situation. Experts on commodities at the Deutsche Bank forecast that at $80 per barrel, about 40% of the shale oil industry will become unprofitable.
The reason is that small businesses play a large role in the production of shale oil. However, due to small capital they cannot survive any long-lasting decline in oil prices. The U.S. investment bank Goldman Sachs in its forecast for the first quarter of 2015, lowered the price of WTI crude oil from 90 to 75 dollars per barrel.
A price war between Saudi Arabia and the American shale oil industry is becoming more and more apparent. The Saudis are currently not showing any readiness to reduce oil production in order to stabilize prices. Thus, Saudi Arabia and the United States seem to be waiting for the other one to fail. Saudi Arabia needs oil to be priced at $95 per barrel in order to meet its budgetary expectations. Other OPEC members, such as, for example, Iran, Venezuela and Nigeria, require to have oil priced at from 120 to 140 dollars per barrel. Therefore, everyone is waiting for the next OPEC meeting scheduled for November 27 to resolve the situation.
At the same time, according to Ayman Asfari, the chairman of the British oil company Petrofac, many producers of shale oil are already facing financial difficulties due to the decrease in oil prices. John Knight, the director of the strategy department at the Norwegian group Statoil, in his turn, believes that there will be no global decline of U.S. shale gas production, despite existing difficulties. Marianne Kah, the chief economist for the American oil company Conoco-Phillips, has a more optimistic forecast. She believes that the smaller producers of US shale oil will face serious problems only in the next year. “It will not happen as fast as many believe,” she said.