In VIenna yesterday, OPEC admitted that its command and control approach has been trumped by the innovation of American Shale Gas wildcatters. A global glut produced by fracking has forced the once all-powerful oil producing cartel to abandon its strategy of restricting supply to force prices higher. This edition of the Rational Perspective explains how the new era for oil prices is a result of the unleashing of human potential, the most powerful of economic forces. Â – AH
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ALEC HOGG: Good morning. It’s Friday, the 28th of November and this is The Rational Perspective. I’m Alec Hogg. The story today is about the ability of human beings to overcome (even impossible) odds – the unleashing of human potential -, giving us a consequence that no-one would have thought possible.
In 2006, Goldman Sachs, perhaps the biggest name on Wall Street, got its researchers to have a look at the future price of oil and came to the conclusion that $200.00 per barrel was in prospect. They called it peak oil and it was something that went around the world. There was only so much oil available and far too much economic growth. As a consequence, demand would exceed supply and we would have oil prices that would make it impossible for anyone to own anything bigger than a 4-cylinder motor vehicle.
Well, yesterday in Vienna, the fallacy of that approach was confirmed when the organisation of petroleum exporting countries admitted that they could not influence the price of oil as they produce about one-third of the energy requirements of the world in that sphere. In fact, they now know that they have to be price-takers, rather than price-makers. This is unheard of (or would have been unheard of) just ten years ago. What changed was the uleashing of human potential, particularly in the United States where, from 2006 onwards, the Shale Gas and Shale Oil revolution started gathering momentum. People saw the oil price was high and the old adage of ‘a cure for a high oil price is a higher oil price’ became reality as what are now known as the frackers, got involved in finding ways to liberate the gas that was trapped in Shale, many kilometres under the ground.
There’s a wonderful book by Gregory Zuckermann, which I’ve read, called The Frackers and it’s worth getting hold of it if you want to understand the Energy Revolution. It details the way these wildcatters went into unleashing the lower price of oil in a way that many of them almost went bankrupt. In fact, some of them did, but huge fortunes have been made by those who got into the game at the right time.
The reality of all of this though, and what it means to you and I, is that we have now entered a new era. The oil price dropped sharply in the last couple of days. It was above $80.00 per barrel – running into the OPEC meeting. It now looks like $75.00 per barrel might be the recent high as it continues to slide. A figure of somewhere between $50.00 and $60.00 per barrel is what the OPEC members are expecting that it might get to, before the frackers in the United States start coming under pressure.
The first area to start feeling the pinch would probably be in Canada, where the oil sands producers need about $60.00 per barrel (for most of them, anyway), just to stay in business. If you were to see the oil price fall below that level, that would put pressure on those and going further down, would clearly put pressure on the Shale Gas frackers in the United States and indeed, elsewhere. We’ve seen some – perhaps – reluctance on the part of the Chinese to get as aggressively involved in its own fracking plans, primarily based on a concern that the oil price is now starting to slide.
All of this, of course, means that the promise of a Shale Gas Revolution in the Karoo now becomes a lot less certain. Perhaps it’s a message that the legislators in this country will appreciate, given the eleventh hour changes to legislation, which actually, put a whole lot of the exploration (or the potential for exploration) in the Karoo on hold. There are opportunities. The energy equation is changing, and the unleashing of human potential has done it.
This is The Rational Perspective.
