Saturday, January 31, 2015

What’s behind the oil price drop?

Josh S

The recent drop of over 40% in oil prices only presages increasing price fluctuations in the future.

The price drop has been caused by decreased international demand due to sluggish economies, and to serious overproduction.

The production increases have been mainly due to a massive increase in oil shale drilling in the USA, which now produces over 30% of the world’s oil, and is the largest producer of oil and gas. Increased prices this century, and the development of fracking technology, have made the extraction of oil from previously unviable shale deposits profitable.

20,000 new wells have been drilled since 2010.   In the Bakken field in North Dakota-Nebraska, the number of wells increased from 200 in 2005 to 78,000 in 2014. Not surprisingly, this oil rush in the Bakken is accompanied by the highest worker fatality rate in the US. This is besides the environmental consequences; serious spills of highly saline fracking residue have occurred as recently as early January 2015, and last July. Another spill in 2006 is still being cleaned up.

Shale oil comprised 0.5% of world production in 2008, but 3.7% in 2014. It involved 20% of world oil investment  in 2013.

Shale oil wells are quick and relatively cheap to initiate. A well can be drilled in a week for as little as $1.5 million. A field can be developed in a few weeks. Compare this to conventional drilling: Exxon Oil and Russian company Rosneft recently took 2 months and $700 million to drill one well north of Siberia.

Shale wells typically have a very short life: output usually falls by some 60 – 70% in the first year.

US shale oil companies carry huge debt. Shale accounted for 20% of the world investment in oil production last year. Total US debt for oil exploration and production has doubled since 2009.

Several hundred wells have already closed down in the past few months, and the number of drilling applications in the Bakken field dropped by 40% in November alone. This trend is expected to continue; many companies are likely to go bankrupt at current prices.

This situation presents a serious dilemma for US imperialism.

As world (over)production levels are maintained, as insisted on by Saudi Arabia, many US companies will go bust and US production will decline significantly.

However, the US and its allies and clients, like Saudi and the Arab oil sheikhs, want to weaken rival oil-dependent countries such as Russia and Venezuela.

The Future

Some capitalist mouth pieces, such as The Economist magazine, pronounce hopefully that shale oil, of which there are enormous deposits across the globe, will ensure stable supplies for the future and an end to price volatility.

However, given the complete anarchy of capitalist investment and production cycles, as capital desperately chases the highest returns regardless of need or rational planning, and the ease and speed of opening shale oil wells, increasing overproduction and price fluctuations are far more likely.

The oil boom – bust cycle, and the price instability, will become worse, not better. And these will have flow-on effects to the rest of the world’s economies, and to the pressures on people’s livelihoods.

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