Added together, we could see global oil supply increase 2% to 3% or more over the next 18 months, just as the world economy slows down.
I grew up on the Gulf Coast, beginning in Florida, then over to Texas, then part way back to Louisiana. We weren’t testing beaches, we were following boats. My stepfather joined our family when I was quite young, essentially becoming my parent. He took a job on a shrimp boat in the Florida panhandle and eventually migrated to the oil boats, which took him, and us, to other port towns.
It was the late 1970s, and the oil (NYSEARCA:USO) field was booming.
About the time I went to college, the oil field went bust. My dad, who’d moved up the ranks, was an anchor captain, which meant he could lead the team of ships that move oil rigs and set the anchors. At one point, he was one of just eight captains working in the Gulf of Mexico, and the only anchor captain. But it didn’t matter, there was nothing to move.
The problem wasn’t with the domestic industry, it was thousands of miles away in the Middle East. In response to the oil crises of the 1970s, the Sauds and others developed more fields and flooded the market with oil in the 1980s. It took years to absorb.
Over the next couple of years, we might get a condensed version of the same story.
A New Landscape
On our current trajectory, the U.S. will become the largest oil producer in the world by 2021. We’re already the largest energy(NYSEARCA:XLE) producer, which includes natural gas(NYSEARCA:UNG), and have been increasing our crude exports since President Obama opened that market in 2015. In a role reversal that has given me great joy, we’ve become the thorn in the sides of Middle Eastern countries as they struggle to hold back supply to support higher prices.
The less they produce, the more we produce. Prices remain stable, and yet less money flows to that region of the world.
But now there are new forces on the horizon.
In addition to new pipelines in North America, we’re also about to get more oil from deep water projects in Brazil and Guyana, which could add one million barrels of oil per day to the world supply in 2020, and another million barrels per day in 2021.
That additional supply would be on top of whatever increase comes from countries like Iran and Venezuela, where government policies have dramatically constricted the flow of oil.
Added together, we could see global oil supply increase 2% to 3% or more over the next 18 months, just as the world economy slows down. The IMF recently downgraded its world GDP estimate for this year to 3%, and lowered its estimate for 2020 to 3.4%. The bank cites things like the trade war as a hurdle for growth this year, but also notes that stubborn factors such as aging populations and low productivity growth are also to blame.
No Fun in the Oil Patch
The colliding forces will create a backlash that rips through the energy market, taking out marginal players who can’t survive as the price of oil drops through $40 per barrel.
The pain at home will be felt among oil producers, but refiners will be sitting pretty. The middlemen who make gasoline out of the raw stuff always seem to move gas prices down slowly even as the price of oil drops in chunks. The widening spread gives them a bigger profit.
It might not be a fun time in the oil patch, but it will be much worse overseas, where oil revenue flows into national coffers. Across the Middle East and North Africa, low oil prices can lead to geopolitical instability.
Earlier this year, the IMF projected that Saudi Arabia needed oil at $73 or higher to balance its books. Iran needed oil prices at almost $100, and that was before tough U.S. sanctions squeezed their exports. Now that number is north of $190, which won’t happen.
Countries including Angola, Libya, Nigeria, Qatar, and the United Arab Emirates depend on oil prices well north of $60 to balance their budgets. A prolonged drop south of $50, and even some months in the $30’s, will be so difficult that it might cause civil unrest, exacerbating already slow economic conditions.
OPEC just announced that it expects to lower oil supply by 2.2 million barrels over the next two years to counterbalance the increased supply from other producers. As the OPEC countries sell fewer barrels, they need to receive higher prices to get the revenue necessary to pay their bills. Those countries are in a tough spot, to say the least.
And Then There’s Russia
Russian President Vladimir Putin said last summer that Russia’s comfortable with oil around $60, and can function well, replacing its gold and forex reserves, with oil at $40. We’ll see if that’s true.
The one group that will do well as a whole is the energy-consuming public. Lower oil prices put a little more jingle in the consumer’s pocket, which allows them to spend more on other things. As long as they’re still employed during the global slowdown and their countries don’t suffer with civil unrest, they’ll have a little more cash to spend on other things.