Loren Steffy: How greater inter-dependence will transform oil markets in 2016

OTC 2016
Opinion by Energy Voice

On the last afternoon of 2015, an oil tanker filled with light, sweet crude from South Texas’ Eagle Ford Shale formation eased out of NuStar’s North Beach terminal in Corpus Christi, and headed for Trieste, Italy.

ConocoPhillips sold the oil aboard the tanker Theo T to the Swiss trading firm Vitol – the first major export of U.S. oil in four decades.

As we head into 2016, the world faces one of the freest oil markets we’ve ever seen. From the earliest days of oil production, many countries, beginning with the U.S., enacted strong government controls over their domestic oil markets. Later, that control shifted to OPEC and, more specifically, Saudi Arabia, which maintained a vise-like, if imperfect, grip over supply.

But the year that is now winding down was one in which OPEC’s grip loosened significantly as production increased from new oil sources, primarily shale formations in the U.S. Mexico, which led the trend toward nationalization of oil resources in the early part of the last century, opened its fields to foreign investment. Then, in the final weeks of the year, the U.S. Congress voted to end a four-decade ban on oil exports, paving the way for the Theo T’s historic voyage.

The U.S., which for years has only been a price taker in the global market, is poised to become a key seller, one whose production may be able to respond more quickly to price fluctuations than any source of supply outside of Saudi Arabia.

U.S. production will be hitting a saturated global market just as sanctions are lifted on Iran and that country, too, ramps up exports. Meanwhile, Saudi continues pumping apace and weaker OPEC members like Venezuela are desperate to sell as much oil as possible at any price to prop up their ailing economies. The U.S., it seems, couldn’t have picked a worse time to enter the export market.

So far, the prospect of exports has caused futures for light, sweet crude – the type produced in most American oil fields — to rise about 10 percent. In dollar terms, that may represent less incremental revenue than the oil industry spent lobbying Congress during the past two years to lift the export ban.

The U.S. Energy Administration estimates that domestic production would have to top 10.6 million barrels a day before exports began to translate into lower pump prices for U.S. consumers, but production peaked at 9.6 million barrels in April. In other words, consumers may see few immediate benefits at the pump. The biggest ramifications are likely to be political, but again, not in the way many Americans have been led to believe.

Proponents have promised that exports will generate billions in new jobs, tax revenue and increased gross domestic product. That seems like wishful thinking in today’s market. After all, even with the production gains from hydraulic fracturing in recent years – almost 1.4 billion barrels from 2008 to 2014 – the U.S. still imported almost 3.4 billion barrels in 2014, and that isn’t likely to change. In fact, if oil prices keep falling, U.S. imports could actually rise.

But markets want to be free, and lifting the U.S. export ban is a step in the right direction. In the year ahead, a major American producers and consumer will, for the first time since the Beatles charted, be fully engaged in the global market. And the cartel that has tried for far too long to control supply and demand for energy will find it far more difficult, if not impossible, to maintain its grip on the market.

More oil from more producers means that OPEC’s control continues to erode. From its earliest days of fracking, U.S. politicians loved to tantalize voters with the prospect of “energy independence.” It was always the wrong goal. The Theo T’s journey ushers the U.S. into a new era of energy inter-dependence.

In 2016, if current production trends continue, we will see new political alliances formed based on this shifting global oil market.

We are already have a hint of some of these changes. The nuclear deal with Iran, for example, wouldn’t have been possible if the U.S. still needed the support of Saudi Arabia, which opposed the deal. Similarly, the civil war in Syria has prompted new frictions between Turkey and Russia. When Turkey downed a Russian jet it claimed entered its airspace, Russia imposed sanctions and threatened to shut off the flow of natural gas, for which Russia is Turkey’s primary source.

But Turkey has other options thanks to the discovery of the huge Leviathan field off the coast of Israel. Relations between Turkey and Israel have been strained since 2010, but the two countries have begun talks over gas exports. Changing energy supplies in the region also could encourage greater flexibility on an accord for resolving the 40-year separation of Cyprus.

Global demand, of course, remains weak, and as it picks up, prices will rise. But they will rise in a different kind of market, one in which OPEC control is muted and the free market, at long last, has a louder voice. That, over the long term, should benefit consumers both in terms of prices and energy security.

Loren Steffy is a managing director with the communications firm 30 Point Strategies. He is a writer at large for Texas Monthly and the author of Drowning in Oil: BP and the Reckless Pursuit of Profit and The Man Who Thought Like a Ship. Follow him on Twitter: @lsteffy; on Facebook or at lorensteffy.com.