The oil price is like the two inseparable sides of a coin: one side is economics and the other is geopolitics.
The United States understands this dictum well. That is why it has been manipulating global oil prices in order to achieve its geopolitical objectives. The U.S. has at its disposal two weapons: one is the false information it spreads through the U.S. Energy Information Administration (EIA) about increases in U.S. shale oil production and U.S. oil stocks using mainstream media in an attempt to depress oil prices; and the other weapon is the petrodollar.
In the 1980s the United States in connivance with Saudi Arabia manipulated the oil price causing it to crash to $10 thus leading to the collapse of the Soviet oil-dependent economy and thereafter the Soviet Union itself.
Now Washington is at it again. And once again it has set its sights on Russia. There are visible parallels between the current manipulation of oil prices and sanctions pressure on Russia and the situation in the 1980s when Washington also used sanctions and manipulated oil prices to precipitate the collapse of the Soviet economy and the subsequent political turmoil.
But Russia has been gradually diversifying its economy since the oil crash in 2014 and has adjusted to low oil prices and sanctions. Russia’s economy could now live perpetually with an oil price of $40 a barrel or less. Moreover, the Russian economy is back in growth having achieved a 2.5 percent growth rate in the second quarter of 2017, the fastest since 2012.
Because of U.S. manipulation, crude oil prices have been hovering between $45 and $51 a barrel, unable to break through the $60 barrier despite very positive oil fundamentals and the Organization of the Petroleum Exporting Countries (OPEC) production cuts.
The Energy Information Administration (EIA) has been announcing regular increases in U.S. shale oil production at a time when production has been in decline. U.S. shale oil production peaked at 4.9 million barrels a day (mbd) in 2015 and has since fallen by 1 mbd to 3.90 mbd in 2017 whilst total U.S. oil production has declined from 9.42 mbd in 2015 to 8.49 mbd in 2017.
U.S. oil production this year is on course to be significantly lower than official forecasts while drilling costs are starting to rise. As a result, U.S. oil production is projected to decline further by 360,000 barrels a day (b/d) this year.
It is no coincidence, therefore, every time the oil price shows signs of rising, the EIA announces a huge addition of a few million barrels to U.S. oil stocks. An addition to stocks could only happen in three ways: one, if the United States is producing far beyond its oil needs. This is not the case otherwise it would not be importing between 7-8 mbd. The other way is that the U.S. is importing a great deal, taking advantage of low oil prices thus increasing its stocks. If this is the case, then the rising demand for imports should push the price up.
A third way is that U.S. oil demand is declining thus adding to stocks. This is not true either, as U.S. oil demand has been steadily growing by 1.54 percent annually for the last four years. Furthermore, the U.S. gasoline demand of 9.842 mbd in July 2017 was the highest on record.
The United States is also able to manipulate the oil price through the petrodollar by which oil is priced. Raising the value of the dollar exerts a downward pressure on oil prices. Conversely, by devaluing the dollar, the actual purchasing power of the oil revenues of members of OPEC declines against other world currencies forcing them to raise oil production to maintain revenue thus depressing the oil price.
The shale oil industry needs an oil price ranging from $50-$55 a barrel to be sustainable. But the oil price has been hovering between $45 and $51 recently. If that is the case, how is it that the U.S. oil industry continues to claim producing more oil, even when some companies are not even making money?
The short answer is that they have been given a long leash by Wall Street. The Wall Street Journal (WSJ) says that although Wall Street has showered the shale oil industry with billions of dollars in capital since the start of the shale revolution, generally shale oil production is still not profitable. At today’s prices, the WSJ says, “most producers are losing money on every barrel they pump.” Investors are starting to question the viability of the shale oil industry. And when the financiers lose interest, the shale revolution will be over.
A couple of notable developments took place in the past month or so. Pioneer Natural Resources, a top shale oil producer at the Permian in Texas, raised concerns when it told investors that its Permian shale wells were coming up with a higher natural gas-to-oil ratio, a potentially worrying sign. This means that the shale wells are depleting fast.
But the newest sign of trouble comes from the WSJ which just reported that more oil producers are shunning shale drilling and using their scarce dollars to reinvest in older conventional wells. Tapping them again with new drilling techniques is a profitable play considering the low investment required. One company told the WSJ that the old well essentially breaks even at $15 per barrel.
Moreover, U.S. crude inventories have been steadily declining for the last eight months dropping by 70 million barrels (mb) from 536 mb to 466 mb between March and August this year, equivalent to 518,000 b/d. Still, the EIA continues to announce huge additions to U.S. oil stocks.
This begs the question about how the EIA can square its inflated claims with these pessimistic reports about the future of shale oil production.
Of course, the mainstream media play a crucial role in depressing the oil price either out of ignorance, vested interests or being paid to do so. They are fed with reports from the EIA about oil trends which appear innocuously authoritative when in effect they are a pack of false information data.
Hardly a day goes by without another media report about the impending demise of oil as a result of the explosive growth of electric vehicles (EVs). Except it isn’t true. U.S. gasoline demand just hit a new all-time high despite EV sales that tripled in the U.S. from 2012 to 2016.
Still, the media continues to bombard the global oil market with headlines like “Goldman Sachs warns of peak oil demand by 2020,” even though that headline doesn’t reflect the facts in the market. Sensationalism dominates the news, and the idea that oil demand will begin to decline shortly is definitely sensationalistic. That is one reason oil prices have remained depressed, because mainstream media perpetuates expectations that oil’s days will soon be at an end.
*Dr Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at the ESCP Europe Business School in London.