Oil will not end, oil era would

Updated January 20, 2019

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Now that a third party, independent audit has confirmed that the Saudi-proven crude reserves are a little above what Riyadh has been claiming, the question that is coming into circulation is why the Saudi clout on the oil markets, and hence its geopolitical weight, has been on a slippery slope over the last few years?

Most would agree that Riyadh has definitely lost some of its crude-related political weight over the last few years. Despite Saudi insistence for a firmer US military response against President Bashar Al-Assad regime, the then Obama regime did not go beyond the red line as Riyadh desire. It was because Washington was no more dependent on Saudi crude like it was a decade or two ago.

Riyadh was not in a position to force Washington to change the political course in the region while the crude bond between the two countries was gradually withering away.

The US Energy Secretary during Obama’s first tenure, Steve Chau, in a conversation with this correspondent, frankly admitted this.

The Saudi grip on oil markets has slipped. A number of factors have contributed to this. One of the most important and crucial factors contributing to it has been the growing US crude output – courtesy the shale revolution.

The presence of crude has been acknowledged in shale deposits for decades.

Yet, cracking up the reserves was not economically feasible, until the shale revolution overtook the industry. So huge has been the impact of the shale revolution that the US is now the world’s largest producer of oil.

The $100 era during 2007-08 contributed immensely in making the shale revolution happen. Fixed costs on shale development projects, courtesy horizontal drilling and fracking, became possible.

And once the fixed cost was calculated, it was a matter of playing with the variable cost to bring new shale projects online.

The revolution seems almost unstoppable at this stage.

New Energy Information Administration projections are now saying that over the next few years the US production could even exceed 16-18 million barrels per day (bpd).

This was inconceivable even a few years back. The US is also emerging as an exporter of crude products and that a market share battle could very much be on the crude horizon between the Organisation of Petroleum Exporting Countries (Opec) and the US.

And today, the US, and not Saudi Arabia, is playing the balancing act in the global crude markets. This in itself carries significant geopolitical consequences.

And the US is not the only challenger to the Saudi dominance of the global crude balance.

Russia has also forged ahead of Saudi Arabia in crude output - relegating the oil kingdom to the third position - as far as the global output is concerned.

But Saudi control over the global crude demand-supply scenario is not only under attack from the supply side, it is also facing a challenge from the demand side.

Global demand is also under a cloud, with some experts now insisting that demand destruction may already be in the works.

And the reason for this speculation is apparent. Demand is basically - as yet - based on the transportation sector. This sector is responsible for almost 70 per cent of global consumption and any changes in the dynamics of this sector are bound to impact the global consumption, hence crude demand projections.

Environmental consideration, gas emission, rising global temperatures and growing emphasis on efficiency are all contributing to this.

In recent months, growth in the use of electric vehicles all over the world including the developing world, with China playing a lead role, is beginning to impact the crude consumption patterns.

Last year, the Chinese sales of EVs crossed the 1m mark. The state of the global economy is also impacting the ‘crude psyche’ of the world.

Industry veteran Sheikh Ahmad Zaki Yamani, the Saudi oil minister during the 70s and early 80s, has been saying for ages now, ‘coal did not end, coal era did’ implying that oil will not end but oil era would.

The diminishing clout of Riyadh on the global crude markets apparently represents the advent of this new era.

That means despite having immense reserves, the Saudi impact on crude markets and hence the regional geopolitics would go down and not up.

Published in Dawn, January 20th, 2019