I  certainly didn’t see this coming.  Oil prices at a four year low of  85 dollars per barrel (= $85/b), when they were more than $110/b in the middle of this summer. Perhaps I will have to stop calling myself the leading academic energy economist in the world, and go into some sort of humility mode. The kind I learned in Hardt Kaserne (Germany) shortly before leaving Uncle Sam’s Army might be appropriate. For instance, in my forthcoming book. ENERGY ECONOMICS AND ECONOMIC THEORY (2014), and the book that I am still polishing up, ENERGY ECONOMICS: A MODERN SHORT COURSE (2015), I claim that OPEC is absolutely capable of defending an oil price of $110/b if push comes to shove, and perhaps higher, even if the global economy becomes a bit shaky.

The problem may be that the underlying economic and financial market mechanisms  in the global economy at the present time cannot be described as just  a ‘bit’ shaky, but there are latent menaces and suspicions and unease that have been picked up by the markets. And so, even with the rifle-play north of Baghdad – which under normal circumstances would boost the price of oil – that price keeps drifting downward, and may in fact continue to do so.

Although I wouldn’t bet on it! President George W. Bush had to visit the Saudi King in 2008, and with his hat in his hand ask for enough help in the form of an increased production of oil to depress the price of that commodity, but it is unlikely that the Saudi chief will soon find it necessary to fit himself into the seat-of-honor on the Royal Dreamliner, or whatever his ride is called, in order to pay the President of the United States a return courtesy call, and ask for a reduction in the output from America’s newly found oil bounty.

According to (Senior) Professor Kjell Aleklett of Uppsala University, who recently was at the Energy Institute of the University of Texas (Austin) as a visiting professor, the countries in the Gulf – i.e. the Gulf Cooperation Council (GCC) economies – possess about 40% of the remaining oil reserves, but rather than increasing the rate of depletion of these at the present time in order to attempt to compensate for the falling oil price, it is likely that they will turn to their financial reserves to avoid modifying their budget plans, at the same time hoping or believing that the oil price will change direction.

An approval of this strategy has been registered by Masood Ahmed, the IMF’s regional director, which is refreshing for me to hear, because for the most part, when it comes to energy economics, the top brass of the IMF and the International Energy Agency (IEA) are the last people that I pay any attention to.

Professor Aleklett also notes that production costs of the GCC countries vary from $5-15/b, which may or may not be true. But if this is true, which is certainly possible,  then you can ignore the talk of an OPEC collapse that has circulated through the corridors and restaurants of power in the major oil importing countries since October of l973, when the OPEC countries took charge of the oil and oil producing assets in their countries. You can also ignore the talk about Russia collapsing because of this-or-that taking place in their oil and gas sector, or because of sanctions, or because of friction between Russia and its oil and gas customers, because in the long run there is hardly a country in the world in a better position where these items are concerned.

In my books, articles and lectures I have tried to make it clear that, as an American citizen, I am as glad as glad can be that the U.S. has enjoyed such success with their production of shale oil and gas, even though my joy is considerably reduced when I hear the stupid arguments offered for exporting these commodities.

However the shale situation is going to require further clarification before we know exactly what we are dealing with. Both OPEC and Professor Aleklett have referred to shale oil as a “bubble”. In his opinion – and perhaps the opinion of at least some of his Texas associates – U.S. shale oil requires an oil price of $80/b to be profitable. But there is some kind of deleterious production constraint in the shale sector due to the high rate of natural depletion (or decline), and so even if the oil price falls, drilling must continue in order to prevent a suboptimal production outcome. (This is the so called ‘Red Queen Effect’ mentioned in the important work of David Hughes, formerly with the Geological Survey of Canada, and now at the Post Carbon Institute. It has also been mentioned in the work of Bloomberg journalists.)

At the same time I must confess that some of the numbers associated with this ‘suboptimal effect’ are so large that I make a point of never citing them, but at the same time I accept that  it is not a question of whether this effect exists, but to what extent. Perhaps, before the long Swedish winter is over, I might be able to answer that question.

REFERENCES

Aleklett, Kjell (2014), ‘Oljeprisfallet oroande tecken’. Svenska Dagbladet (17 October).

Banks, Ferdinand E. (2015). Energy Economics: A Modern First Course. (In Process).  

Energy and Economic Theory. (2014) Singapore, London and New York. World Scíentific