Far from going out of business, American oil companies have stunned their global rivals by maintaining or even adding production as U.S. prices nose-dived. Photo: Getty Images
By
Russell Gold
When oil prices started to edge down a year ago, most energy mavens thought the drop would be small and short-lived.
Instead,
the price of crude has plunged by almost 60% from its 2014 peak—and
suddenly looks likely to stay low for months and maybe years to come.
The reason: In the global battle for market share, nobody has backed
down. Nobody has even blinked. Not Saudi Arabia, not the U.S., and not
even troubled producers from Russia to Iraq. Everyone who can seems
locked into pumping as much oil as possible.
Far from going out
of business, American oil companies have stunned their global rivals by
maintaining or even adding production as U.S. prices nose-dived from
$100 a barrel to $70 late last year to, as of Thursday, just above $40.
Even more surprisingly, the Saudis have actually increased their
production in the face of falling prices, in what analysts say is a
pre-emptive effort to keep competitors like Iraq from stealing customers
in Asia.
The result is the energy-industry version of trench
warfare, with producers all trying to gain an inch of market share no
matter the cost. And it is producing winners and losers around the
world, luring American drivers into gas-guzzling pickup trucks while
sending the Venezuelan economy into chaos.
While it might make
sense for producing countries or companies to cut back and erase the
glut, there is no political will or business rationale to do so,
analysts say, as all participants need to keep cash coming in.
“Everyone is in the mode of, ‘Oil prices are down and I need to
produce as much as I can to make up for it,’” said Jamie Webster, a
senior director at IHS Energy, an energy consultant. “That makes lots of
sense on a micro level, but on a macro level it brings us to the
situation we are at right now.”
Crude-oil markets were mixed on
Thursday, as the price of a barrel in the U.S. inched up to $40.94,
while the price of a barrel in Europe fell to $46.19. The price of
gasoline in the U.S. fell slightly to $2.65 a gallon, from $3.44 a year
ago according to AAA, and there were stations in 12 states selling
gasoline for less than $2.
Until last summer, global oil prices
had been relatively stable, shedding their historical volatility to
trade slightly above $100 a barrel for a few years.
But behind the scenes, the U.S. oil boom was unsettling things. Using
horizontal drilling and hydraulic fracturing, drillers found and pumped
millions of new barrels of oil.
Between 2008 and 2015, American oil production rose by 75%, topping nine million barrels a day late last year.
Meanwhile,
global demand for oil appeared to soften, and prices began to weaken,
too. Saudi Arabia faced a choice. It could cut production to prop up
global prices, which would allow Iraq and others to snap up market share
in Asia. Or it could maintain its output, even if that meant
oversupplying global markets and pushing down prices even more.
In a dramatic meeting of the Organization of the Petroleum Exporting Countries in November, the Saudis chose to stay the course and let prices fall.
But
recently, the country has done something even more unexpected: it has
opened up its wells. Last fall, at the time of the meeting, the Saudis
were producing 9.6 million barrels a day. Last month, it was 10.4
million barrels. OPEC, which no longer dictates production quotas for
its members, has a 30-million barrel a day output target that it
routinely exceeds.
At the same time, another OPEC member, Iraq,
also ramped up production. Losing ground to ISIS fighters in the north
of the country didn’t have a meaningful impact on its crude-exporting
facilities in the south. Output rose from 3.4 million barrels a day in
November to 4.1 million barrels last month.
Despite predictions, U.S. shale producers didn’t panic—and neither
did their bankers. Instead, they focused on lowering the cost of
producing oil. Service companies cut their prices to keep their crews
working. The pace of U.S. oil growth slowed but only showed signs of flattening in May.
U.S.
output may now be starting to fall, but many companies are still
increasing production. Some are cagily refusing to disclose their
drilling plans, perhaps hoping that others cut back first.
“It is hard to make a sensible outlook for next year,” Occidental Petroleum Corp.
Chief Executive Steve Chazen told investors earlier this month. “With the volatility of the prices, we are loath to say exactly what we are going to do.”
From
Moscow to Mexico City, governments are struggling with declining oil
revenue. Venezuela is suffering from triple-digit inflation and an
economy that the International Monetary Fund sees contracting 7% this
year.
“We’re battling an economic war against the fall in oil prices,” President Nicolás Maduro
said in a televised address Saturday. Earlier this month, the leftist
leader said he was campaigning for an emergency meeting between OPEC and
Russia to rescue oil prices.
Oil producers such as Egypt,
Angola, Gabon and Indonesia have cut domestic fuel subsidies as
crude-oil export revenue has tanked.
In corporate boardrooms,
falling oil prices have led companies to reconsider some of the complex,
expensive oil projects that looked feasible in an era of $100 crude.
They
have suspended work on $52.9 billion worth of deep-water projects that
could tap 2.8 billion barrels of oil, according to an analysis by Rystad
Energy in Oslo. They also pushed back $47 billion in oil-sands projects
holding 8.2 billion barrels.
The International Energy Agency, a
global watchdog formed by advanced economies, recently said it expected
global demand for oil to grow “stronger than anticipated” next year.
But
as the IEA forecast was released, China’s central bank devalued its
currency amid growing apprehension that the giant Asian economy was
slowing. Its increasing thirst for crude helped drive up global demand
and prices for the past few years.
Another wild card is Iran. If
sanctions are lifted under a nuclear agreement, Iran is expected to
increase its oil exports. This could add even more supply to a world
struggling to absorb current production.
—Summer Said, Drew Hinshaw and Kejal Vyas contributed to this article.
Write to Russell Gold at russell.gold@wsj.com
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