OPEC could lose market share in a world awash in oil: Don Pittis - Action News
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BusinessAnalysis

OPEC could lose market share in a world awash in oil: Don Pittis

OPEC has been struggling to raise prices by limiting supply. President-elect Donald Trump's energy policies could boost consumption. It could be that neither approach will have the desired effect.

Neither OPEC's strategy nor Donald Trump's is likely to end the world glut of oil

Iraq's Oil Minister Jabar Ali al-Luaibi arrives in Vienna yesterday in advance of Wednesday's OPEC oil ministers meeting. (Heinz-Peter Bader/Reuters)

Canadian oil investors must feel like a kid repeatedly offered a toy and then having it snatched away.

Over and over again the world's oil producers, led by the oil exporting cartel OPEC, have held outhope that a cutback in production will send oil prices soaring again.

But again this week, as oil ministers from some of the world's biggest petroleum producers gather in Vienna Wednesday, there are growing doubts about whether there will be a deal. And even if there is a deal, it remains unclear whether it wouldhave a sustainedeffect on prices.

While OPEC aims for a production cut, president-electDonald Trumpsays he will lift restraint on consumption by getting rid of climate change rules.

Understandably, Canadian oil investors areeager for a bit of optimistic news. But there are signsthat neither Trump'sfuture policy northis week's meeting will do muchto change the long-term trend to growingproduction and slowing consumption.
President-elect Donald Trump, seen here during the election campaign at a Pennsylvania gas station, has promised to reduce regulations on energy production and consumption. (Carlo Allegri/Reuters)

In the past, oil prices, like most other commodities, have gone through cyclical swings.

At the peak of the cycle, high prices set producers to work finding new sources, eventually leading to a glut. Once the glut becomes apparent, falling prices lead to a decline in oil exploration and production.

Eventually as production declines, the glut becomes a shortage and the cycle starts again.

A look at historic price swings in the past indicates it's too early for the cycle to be complete. What OPEC is hoping is that it can use the same technique employed in what is remembered as the "oil crisis" of the 1970s.

Against the tide

Back then, sick of getting a low price for an essential industrial commodity, 14 of the world's largest oil producers cut back on production, forcing prices higher.

"Still, itis one thing to believe in any cuts that may be announced, and another to expect the cartel members to actually conform to their quotas," says Singapore-based analystNicholas Teo.

Previous studies have shown that the amount of oil pouring into the world supply is difficult to measure, and countries as hard-pressed as Venezuelawill be tempted to cheat on any quotas.

This time OPEC is trying to extend the deal to non-members, including Russia, a major exporter that has said in the past it can still make a profit at $40 a barrel.
Russian President Vladimir Putin has said Russia can continue to pump oil profitably at $40 US a barrel. (Sputnik/Kremlin/Mikhail Klimentyev via Reuters)

Trump has recently taken a few steps back on his anti-climate change stance, but even if he is able to lift restrictions, the production of that oil could add to the world glut.

According to Teo, if Trump encouragesmore frackingandshale oil development, itwould create a net increase in supply.

One of the reasons the glut cycle may havemore room to run this timeis the great leap in oil technology that happened during the recent boom. Fracking and horizontal drilling have opened up a wealth of new oil and gas from existing fields.

New oil discoveries possible

Geologists are also discovering new sources. What's being described as a "massive" potential find in the Wolfcamp formation in West Texas is similar to the Bakken formation in Saskatchewan, Manitoba and North Dakota, but three times the size.

Fracking isn't the only potentialsource of new production.

It may not be economic just now, but Canada's oilsandsreservesare provenand could be dramatically expanded using current technology. Improved technology could make that extraction easier,cheaper and more environmental.

And despite the current high costs and low price for oil, the Canadian industry is pushing for expanded exports and the construction ofnew pipelines. What is happening in Canada is happening elsewhere too.
From the luxury segment to lower-price runabouts, mainstream auto companies are bringing down the price of plug-in electrics and hybrids, reducing reliance on the gasoline-fuelled car. (Jacky Naegelen/Reuters)

According to market theory, artificially raisingprices should not have a lasting effect. Unless everyproducersigns a long-termprice-fixing agreement,higher prices will only encourage thoseoutside the cartel to produce even more. That's exactly what happened after the oil crisis.

Fixing prices above what the market is demanding now will only mean that the price fixerslose market share.

Canadian windfall

That would be a windfall forCanadian and U.S. producers, but bad for Saudi Arabia, whichmay be inclined to run through its huge reserves before the world gets serious about climate change. If it hangs on to those reserves while thedemand for oil and gas falls, the oil may be stranded underground forever.

There are already signs the world is using less gasoline. The International Energy Agency says soaring fuel efficiency and the falling cost of electrics could mean we may never use as much gas as we use today. Other studies have shown that total carbon production from fossil fuels has begun to level off.

It is likely that a deal in Vienna this week will boost the price of oil and the value of oil and gas investments at least in the short term.

But in the longer run, Canadian energy companies should focus on getting costs down while finding ways to make energy without producing as muchcarbon. Canadians might be wise to invest in such companies.

Follow Don on Twitter @don_pittis

More analysis by Don Pittis