Pricing power in the oil industry is shifting, and will shift more.
Currently Russia is undercutting Saudi pricing on petroleum sales to Asia (China and India) which also is the largest future market for oil and gas. Russia is selling its oil so cheaply that even the Saudis are buying Russian petroleum on the cheap and selling theirs at full market price sanction-free.
As the petroleum market tightens with the shift to renewable energy sources and electric vehicles, the Saudis will need to reclaim their Asian markets from Russia. This will involve a price war similar to the one that collapsed the USSR. China and India are transactional allies of Russia and will go with the sweetest deal. This is why China has been courting both Saudi Arabia and Iran recently. Russia is over extended and China is already mobilizing its 'Plan B' to keep the pipelines full if Russia collapses again.
Obviously this article is primarily about the economic forces at play, but it's really not a coincidence that at the same time this is happening, KSA is spending gobsmacking amounts of money on sportswashing, preparing itself to have some external support when these anti-OPECs start to turn the screws.
Another thing that should be mentioned is that OPEC is a cartel of (mostly) illiberal authoritarian/monarchic countries it is unfortunate that they have this power over world's oil market. But with technological transition of world, it's actually relief that OPEC's power is diminishing. Another Biden term (more legislation like IRA, CHIPS etc), more tech transition in China (adoption of clean energy and EVs etc - already happening at good pace) & general global trends (if US & China can hasten the process) will further weaken OPEC, and it's a good thing for the world. Wonder how world will look like in 5 years.
Interestingly, US foreign policy recently pivoted away from Middle East (the foolish & wasteful military adventures) because Oil is losing relevance in changing energy dynamics of the world. New US foreign policy is reflected in Bidenomics and security of Liberal allies (NATO & Asia Pacific).
Does that bar chart have a version with labels that could be used instead?
There’s a missing chapter in the history of OPEC. Early in the new Millennium, the Saudis chose to pick a fight with the west and started seriously turning off the oil taps. Apparently, the Saudi didn’t have knowledge of or didn’t respect an American technology that was invented in the 1980s by Harold Hamm: fracking. It didn’t see much use because oil-price levels wouldn’t support the cost of fracking and pressure pumping geologic formations that trapped significant amounts of oil. Anyhow, this extreme oil shortage eventually drove the price of WTI to $147.00/bbl. Banks threw money in every direction in the Permian Basin, The Dakotas, and the Canadian tar sands (similar process of two horizontal drills, then steaming, not pressure-pumping, oil out of the heavy tar sands to the lower drilling track). Cripes, they were even digging it up from surface mines and cooking the oil out of it. Workers were paid six-figure salaries just to drive trucks. Sound expensive? Indeed, but the Saudis made it all possible by significantly restraining supply. Like all bubbles The Shale Gale made the U.S. the world’s swing producer in an incredibly short time. Like all bubbles it popped. But this created a problem for the Russians years later when it invaded Ukraine and began significantly restricting the amount of natural gas to Ukraine and the EU. Same problem. The price of natural gas shot up and thousands of natural gas wells that had been capped when The Shale Gas Bubble popped, were put back into service (it’s relatively inexpensive to uncap a well, fish it, and begin producing). The technology, transport, and infrastructure for LNG had been building-out for a couple of decades. Even though Europe was limited in the number of LNG terminal ports, it was enough. American producers forecast they could have 90% of the Russian gas supply gap filled for the EU by January. (Australia was also shipping LNG.) A relatively mild European winter helped, ironically probably owing to climate change. Long story short, the Shale Gale, like the Dot Com Bubble, rapidly built-out a lot of new infrastructure and refined new methods of horizontal drilling (one drilling pad radiating multiple drilling lines like the spokes off a wheel hub [very cost effective]). So, a ceiling on the price of oil and natural gas exists. The Saudis picked a fight and they’ve been punch-drunk since the advent of The Shale Gale. The Saudis are no longer the world’s swing producer.
And once OPEC's power is broken, the US can go back to treating the Middle East like we treat Africa: ignoring them.
Couldn’t happen to a nicer bunch of chucklefucks. My heart bleeds as I play a sweet, sad tune of my own composition on the world’s smallest violin, crafted by the most highborn scions of Svartalfheim.
What are your thoughts on shale oil production in North America and how this might have affected oil prices as compared to events in the 1970s?
Lower oil prices could have the added benefit of curbing the appetite for expensive interventionist military endeavours by the oil countries.
Seems like a great time to let more Iranian oil onto the market & break OPEC for good
Like the view, cheap oil, or natural gas, would be a boon as one gets rid of coal.
Great article. The hand writing is on the wall “the global shift to electric vehicles now looks unstoppable”.
Even China is moving business out of China:
Tesla is encouraging Chinese suppliers to set up facilities in Monterrey, Mexico, in preparation for the construction of a fifth gigafactory, according to a 36Kr report. The new plant will play a pivotal role in Tesla’s next growth phase. Since the successful launch of its massive plant in Shanghai, the company has focused on streamlining production by promoting the relocation of selected supply chain partners. Sources say Tesla’s request is urgent due to the demand to fulfill large production orders.
China's CATL and Thailand's Arun Plus have entered a collaboration agreement for cell-to-pack (CTP) batteries. The partnership aims to address local electric vehicle production demands and assist Thailand in becoming a Southeast Asian battery production hub. Under the terms of the agreement, CATL will provide Arun Plus with CTP battery pack production line expertise and share its technology.
— Tech Node Briefing
Former Russian from oil industry here. India and China as buyers are terrible for russia (what is goood!). Russian oil companies does not nees rupees, they need roubles to pay exploration and export taxes, salaries, etc. and convertible currency to but what they need and pay dividends. Indian Central Bank does not allow free trade of rupees and russian oil companies now sit on piles of this cash useless for them. India is exporting services and russian oil companies does not need anything what Indian manufacturers agree to sell for rupees. Even worse with China - Chinese companies always demand dollars or euros and do not take yuans unless China wants to sell something what cannot be sold for dollars (=low quality or unneeded stuff). It's not an international trade but humiliation of russia. Interestingly it was russia which asked for trade in ruppees and yuans. And when China sells to russia oil and industrial equipment the terms are unheard: full prepayment, long delivery times, no fines for delays, etc. But russian oil companies cannot stop selling for nothing - shutting down the wells is politically a fiasco and you also never return back the oil output of the wells shut down. Even best technologies lead to significant decreases of oil output when you later revive the wells.
Isn't the end of COVID restrictions a more obvious candidate for "positive supply shock"?