Should the US Join OPEC? – Part One

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It’s not entirely a serious proposition — yet.

But the point is the global market for hydrocarbons is undergoing a fundamental change, and whether you are a major energy consumer or not, the impact will be felt throughout the manufacturing landscape.

In the short term, it is difficult to see how prices can go any way but up. As the Economist Intelligence Unit wrote last week, the price for dated Brent Blend averaged US $125.50 per barrel in March, up from US $119.70 per barrel in February and just US$107.90 per barrel in December 2011.

These price movements were driven in large part by fears of supply, particularly supply disruption due to the standoff with Iran, but also because of an accumulation of small disruptions in Africa, the Middle East and the North Sea. Output from Syria and Yemen has fallen as a result of civil unrest in these countries, and the pipeline carrying 260,000 barrels per day of South Sudanese oil has closed as a result of tensions between Sudan and South Sudan.

Production in the North Sea has been weak, and the EIU reports that exports from Iraq’s Kurdistan region (which account for about 75,000 barrels per day) have halted. In themselves, these disruptions amount to only about 1 million barrels per day, but they largely negate the increased output delivered by Saudi Arabia intended to calm fears of insufficient supply.

Nevertheless, the EIU estimates the market is likely to be in surplus this year and, providing negotiations with Iran proceed if not satisfactorily then at least without drama, oil prices should soften in the second half as weak demand meets ever-rising inventory levels.

We wrote last month about the rise in shale gas supplies and the possible consequences for US manufacturers able to access globally competitive energy supplies for the first time in decades. However, a number of articles have recently come out from academics and economists exploring the longer-term implications of not just shale gas, but also rising shale oil, tar sands and deepwater oil supplies on the north American market.

Not surprisingly, views vary widely as to whether oil prices could possibly follow natural gas and fall substantially from current levels. The concept of peak oil seems so deeply entrenched that not just investors, but many corporations have formulated their long-term strategy on a one-way bet for energy prices. But a few brave souls are suggesting we are in the very early stages of a new trend that could have profound implications over the next twenty years.

Nick Butler, visiting professor and chair of King’s Policy Institute at King’s College London, a leading British university, recently wrote in the FT suggesting the rise in production of shale oil and natural gas — not just in the US but also China and Europe — combined with falling demand due to more economical cars is heralding the onset of a long-term decline in global energy prices that could have profound effects both economically but also politically in the years ahead.

Continued in Part Two

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