US shale oil dream shattering

I am a student of geopolitics and also write a blog, ‘Geo Politics in South Asia and MENA’. Spending nearly 30 months in trying to understand the dynamics of the area of my interest I have reached a conclusion, the US has created more foes than friends.

Going a little further in history the other glaring examples are sponsoring proxy war in Syria, toppling regimes of its own ‘installed rulers’, attacking Iraq for alleged possession of weapons of mass destruction and Afghanistan for providing refuge to Osama bin Laden and its Ambassador supporting rebels in Libya.

The worst victim of its hegemony is Iran, the country facing the worst sanctions for more than three decades simply on the pretext (having no grounds whatsoever) that it is a threat for the kingdoms located in Arabian Peninsula and Israel. The Muslim Arabs have been so thoroughly brain washed that they now openly say ‘Iran is a bigger threat as compared to Israel’.

The supported Saudi Arabia in keeping crude oil prices high with two motives: 1) to sell more arms to Saudi Arabia and other Middle Eastern monarchies and 2) to attract investment in shale oil and gas for freeing itself from imported oil.

After having achieved the status of largest oil producing country in the world now the United States wants: 1) to teach a lesson to Iran and Russia already facing tough economic sanctions and 2) to test the lowest price level at which production of shale oil and gas remain economical.

It is no secret that the United States enjoy power to cause disruption in global oil supplies by asking its ‘operators’ in Iraq, Syria, Libya, Nigeria and Sudan to enhance level of their activities, imposing stringent sanctions on Iran and Russia. However, this is one side of coin and the other should also be looked at dispassionately,

To begin with, Saudi Arabia has supported the United States in keeping crude oil prices high to achieve its motives that include 1) buying more arms, 2) punishing Iran, 3) mobilizing funds for the rebels and 4) continue the legacy that it enjoys power to determine oil price. However, attaining the status of largest oil producer has shattered Saudi dream because Middle East has gone very low on priority list of largest oil consuming country, the United States.

When it comes to ‘business interest’ even the best friends turn the worst foe that is the inference on could draw from current Saudi-US rift. Saudis have a grudge against the United States which refused to attack Syria and helped in easing sanctions on Iran, is now capturing its share in oil market. Let one point be kept in mind that United States is curtailed import but has not started exporting oil as yet due to ban on oil export. This ban could be removed any minute.

The United States also suffers from an illusion that low crude prices will have adverse impact on Saudi Arabia, Russia and Iran. It is true that Saudi revenue will decline substantially in the short term but higher cost of production of shale oil may lead to many delinquencies and may deciding to stop production. Production of shale oil at US$60/barrel is not economically viable.

Russia will also face reduction in revenue from oil but it continues to enjoy control on gas being supplied to other European countries. An attempt to stop/curtail supply during winter can help in getting the sanctions removed and the added advantage is that lower oil prices can usher greater economic activities in the country, help in producing exportable surplus and improving competitiveness in the global markets.

A closer look at Iran highlights: 1) probability of easing economic sanctions due to the United States no longer being dependent on Middle East for supply of oil, 2) European countries having keen interest in investing in Iran’s energy projects offering very attractive returns, 3) Iran also making concerted efforts to boost non-oil exports and 4) supporting Saudi Arabia in maintaining current level of OPEC production to ease tension between the two countries.

Almost all the non-oil producing countries are more than happy with the decline in crude oil prices as they these are able to accelerate economic activities, airlines able to wipeout accumulated losses and benefit of lower cost of production to help in improving purchasing power of domestic consumers.

To conclude, I would like to refer to a news item released by Bloomberg. The United States is becoming victims of its own success. At prices hovering around US$70/barrel, drilling is close to becoming unprofitable for some explorers, said Leonid Fedun, Vice President and board member at OAO Lukoil (LKOD).

In Russia, where Lukoil is the second-largest producer behind state-run OAO Rosneft (ROSN), the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than US$4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

At the moment, some producers in the United States are surviving because they managed to hedge the prices they get for their oil at about U$90 a barrel, when those arrangements expire, life will become much more difficult, said Fedun.