The new production of American crude oil and gas will be tantamount to a revolution in the world market.
The growth of production of gas and crude oil in the USA has not yet produced all its effects on the energy market. The American press has followed in this matter a sort of “crescendo”.
Some time ago, they tried to reassure their readers: things will not change that much, the USA will import less energy, and will keep the sea routes open, as the USA foreign policy requires. Few days later, they wrote that the increase of USA production would reopen competition among producers of oil and gas. Now, they write that the growth of USA production and the weak energy demand in Europe will eventually reduce oil and gas prices, with the consequences still not completely visible yet. In any case, it seems obvious that we will not go back to the half of last century, when crude oil was sold for few dollars, and fuel oil stole the market of European coal.
However, a serious pressure on the oil price is probably inevitable, as producing Countries will not find it easy to limit their production in order to keep the prices high. The USA will reap all possible advantages of such a development, which has already given a new life to its petrochemicals, and it will eventually favour the consumers, too. To export oil it is necessary to keep the sea routes well open. To the contrary, the reduction of oil prices will affect first of all the big oil producers, and especially those of the Gulf (the best allies of the USA) all OPEC members, and Russia.
Abundance of dollar has brought the Gulf Countries to a very high level of consumption, has built new cities, created a huge financial structure, and a new class of rich citizens. These countries have solved all their internal problems, like, for example, the youth unemployment, by throwing dollars to them. This will not be anymore possible, because the income from oil will be in any case reduced. They could lower production to keep the prices, as they did sometimes, or could accept American prices, or even undersell USA crude to force everybody to educe competition.
However, none of these policies will have a positive effect on their economy. These countries will not be able to keep the social and economic level of the population and the recently created economic and social elites. In the smaller producing countries, the existing narrow elites will not be able to control the countries by distributing money. Clearly, a lower oil price of oil will usher a period of political instability. Russia will suffer even more from a lower oil price. Up to now, internal demand has been increasing in Russia, creating an increasing import of luxury cars, industrial machinery, and consumer’s goods from Europe. A reduction of the oil income will necessarily reduce the demand for imports, which will have a negative effect on European producers.
On the other side, the oil importing countries , and especially China and the rest of Asia , will pay less for their imports and will be able to increase their industrial production and their exports of manufactured goods. However, world total demand will not stay at previous levels, because of the decline of the high demand of the oil producers, up to now, an important centre of demand. Cheap energy will surely benefit the China’s economy, which has recently moderated its growth. To put it short, the foreseeable reduction of the price of oil will confirm the world leadership of two great countries, the USA and China. Europe and Japan might both enjoy limited positive effects of the reduction of the oil price.
They are both trying since long time to reduce the energy imports, by developing the renewable sources of energy, also because of the commitments to a lower emission of CO2. Their structure of energy consumption has already changed, and the demand of oil products and natural gas have been reducing since some years. In fact, Europe and Japan seem to have renounced economic growth. Japan is trying to move the country out of its long stagnation, while Europe is following a line of “austerity”. Which means, in practice, permanent recession, created by the rigid application of the strange economic concept nourished in the Germanic area of Europe.
A lower price of crude oil will not have any positive effect in an economy, which looks for a financial stability, and nourishes of a totally imaginary fear of inflation, and therefore does not develop its demand and its production. Europe will suffer also for the reduction of Russian demand, as Russia will not anymore be able to maintain the present level of imports. Japan, whose economy is very similar to the European one, has an economy basically dependent on internal demand, which does not grow much, and in any case the Chinese market is not open to them. China has solid ties with American industry, especially with the producers of electronics. In conclusion, one could say that the producers of energy will lose a good part of the key role that have had until now, and it is not clear yet whether such a change could happen without upsetting the present structure of the world economy.
Finally, what will happen to the oil companies? They have been talking recently of the increase of the cost of exploring and producing crude oil. The cost is going up, while the price will be going down? That could be a deadly combination. To maintain their solidity, the oil companies need in any case to find new oil reserves to compensate those already produced. Is it possible that this kind of work, which is time consuming, will be kept up if the sales of crude oil would not compensate the cost of the huge investment? However, the oil companies normally operate on the long term, and use “shadow prices” of crude oil in deciding the investments to be made. Such prices, that are simply used to study the future prospects, are surely much lower of the present prices on the market, and perhaps a reduction of the crude oil market price would not have serious negative consequences for them.