The Changing market of energy and the U.S.

The U.S. producers want to become one of the large exporters of hydrocarbons, wile, the price of oil is getting more and more detached from reality, and is not sustained by the level of demand.

The new technologies to produce gas and crude oil are changing the USA’s position from importer to exporter of gas and oil.  The American public opinion is not   concentrated anymore on the control of pollution, but rather   on increasing production of oil and gas, and reaching   the self-sufficiency in energy. This concept has been   debated for long time: during the presidency of Bush son a big study was prepared about the feasibility of energy self-sufficiency. It   had no practical result. To find a period of energy self-sufficiency in energy of the USA we have to look back more than an half a century, when crude oil production obtained by a large number of relatively small producers was just enough to supply the country.  The cost of internal production was however higher than, say, the Gulf states production, and, eventually, the small internal producers were able to persuade the government to close the American market to crude oil   imports.

To day, the production of shale gas and oil, still under technological development, are   actually making it   happen, and we are not coming back to a 1950 situation. The increase   of the gas and oil production in the US is reducing the imports of energy, while   the increasing supply of petrochemical feedstock has given a new boom to the country’s chemical and petrochemical industry. Today, the producers of oil and gas do not want to isolate the market of the USA, but want   to become exporters of   energy. The Obama Government does not seem to have decided on the matter, but the pressure to export is very high.

The USA producers want to become one of the large exporters of hydrocarbons, and it’s very difficult to imagine   what can thwart their intention. Their decision has already affected another big oil producer, Russia, which has reorganised its industry to withstand the competition, by concentrating almost all production into Resneft, a company fully controlled by the State. So, the supply of oil and gas seems to be abundant, and the international market well provided.    

On the side of demand, however, oil is pretty weak almost everywhere, in Europe and in Japan, and also in the US, due to the high price and, in Europe, to the crowding of the cities. New technologies have been applied to engines, and cars are now lighter and much less demanding of gasoline and gasoil. Moreover, electricity producers use less and less fuel oil, while coal’s low price has made coal electricity quite competitive. The same is happening to gas. Demand is not increasing, at lest in Europe, where   a strange price competition   has developed   between pipe gas and ship gas, in which the first is much dearer, and the second is cheaper, but its supply is not large enough.

To sum up, the energy situation is not stable, and the supply is clearly overtaking demand. At the end of   winter, when household heating stops, the price of energy will be under pressure, which might create a problem, or a number of problems, to OPEC countries. They are witnessing the strong development of Iraq, which, if one believes the International Energy Authority, will greatly increase its production the near future.

Oil is today quite abundant. It is true that a number of the new   discoveries of oil and gas are deeper and in difficult locations, in deep sea, and Arctic environments, and therefore quite high in cost. However, the bulk of oil being produced now does not seem to be in a condition of increasing costs. Moreover, the technical development of production and refining has made it possible to produce and to process economically   even the heavier crudes, which some years ago were   in fact “failed explorations”.

This abundance of supply   conflicts directly with the futures market, which is by definition set to increase the price of oil. That price is therefore getting more and more detached from reality, and is not sustained by the level of demand.   Many big producers, the USA, Russia, Iraq and other new ones are not tied by the OPEC agreements and quota, and can   very well be interested in volumes and not so much in prices.

If we look at gas, the market now is a paradox in which the largest gas supplier, Russia, quotes   a price tied up to the oil price, while the ships coming from other producers sell at   quite lower prices, a situation that cannot go on for ever. The OPEC countries are seeing their share of world production decrease, a situation that makes us remember the effect of the North Sea Oil on the price of crude, about thirty   years ago, when Saudi Arabia had to  abandon the OPEC quota system,  and to sell its oil  on the price of the North Sea oil. OPEC countries   may now be fronting   a difficult choice.  They can, on one side, try to keep the price, by reducing their production, hoping that the world economy will eventually start up again and create another boom of energy consumption.

This solution would require a complex internal negotiation between the various members to define which producers must reduce and of how much, and that will increase the differences between them, which were somewhat reduced   recently, between “doves” and “falcons”.  Alternatively, they can partially abandon their previous system, and make their oil negotiable after the first sale, like everybody else does.  In doing that, they would find the real price and the real level of demand in the market for their crude, and would avoid the crash that would happen otherwise.

Setting up a proper market for their crude, given the possibility of resale, the OPEC Countries would become the price makers, reducing  the ups and down which would happen when producing countries resist on an impossible price, and then come crashing down, cutting production.  Such a new market would reduce the speculative effect, which is an important factor in depressing    consumer’s demand, and will give the producers a clear picture of the value of their crude.

A price of oil that would reflect the state of demand as it is now would   be lower than the present price, and will stay lower until the demand picks up. Such a price would help the international economy to get out from the present situation, and especially for Europe, where many countries are   suffering a   depression. A reduction of the energy cost in Europe would give a new impulse to industrial production, and would reduce the cost of transport, which is relevant for the exports; it would represent a welcome relief to the great number of people who are compelled to use the car to go to work. It would sound, perhaps, as the first sign of the end of the European economic stagnation, especially the fixed people income, which have felt the depression more than anybody else.

Marcello Colitti

Economist. He was President of Enichem. His last book is "Etica e politica di Baruch Spinoza". Member of the Editorial Board of Insight