In the above video, Richard Swan, director of Platts global oil news, offers some keen insights about the world’s oil markets and the importance of OPEC in balancing supply and demand to establish a price that is “acceptable” to both consuming and producing nations. OPEC has a long running goal of trying to ensure that oil prices are set high enough to provide them with as much revenue as possible without being so high that they encourage the development of effective alternative energy supplies.
Of course, many people have misunderstood exactly which alternative energy sources are of the greatest concern when it comes to OPEC’s ability to sell as much oil as possible at the highest price that the market will bear.
As demonstrated by the most effective “energiewendes” (energy transitions) ever undertaken — France’s nearly complete shift from oil to nuclear energy in its electrical power system over a 20 year period and the US’s complete replacement of oil in aircraft carriers and submarines — uranium is one of the primary threats to OPEC’s market domination.
These days, the conversation among energy pundits often centers around unconventional oil from source like tar sands and shale rock as the alternatives that most directly take markets away from OPEC oil when oil prices are high enough to make those much more effort-intensive sources economical. Swan circles around the situation but does not connect the dots very well. World oil prices, as established by OPEC production quotas and world events like sanctions on Iran, war in Iraq, and regime change in Libya have been stable at a relatively high level for the past several years.
During the same several years, production from oil sands in Alberta and shale rock in Texas and North Dakota has steadily increased. The often mentioned production gain in those unconventional resource fields would not have happened without the steady high prices. There is no such thing as a creative entrepreneurial spirit that create a profitable business by squeezing oil out of oil sand and shale rocks if the world price was $80. That is the consensus estimate of the break even cost of production.
No one should ever buy into an industry sponsored story that there have been large discoveries in the Bakken or the Athabasca. People have known about the large quantities of oil in those formations for many decades; they even knew how to get the oil out. As oil and gas enthusiasts repeat every time someone challenges the safety of hydraulic fracturing or in-situ resource heating, the technologies have been known and used in special situations for more than 40 years. The missing ingredient for a growing application of the technologies has been a high enough market price to make the effort profitable. (The Eagle Ford Formation is a very recent discovery, but its development has also been enabled by high prices.)
As Swan points out, if Iran, Libya and Iraq all develop their production capability back to the level that they have traditionally been allowed to produce via the OPEC quotas, there will be pressure on the other suppliers to reduce their production to provide room in the market. The other alternative, the one that consumers might prefer, would be a dramatically lower price to encourage economic recovery and a growth in overall oil demand.
That might damage recent gains in North American production if world prices fall below the unconventional oil break even point.