A group of U.S. senators had a lot of energy questions on their mind and a handful of noted oil and gas consultants explained it all to them. But at the same time, they warned, the U.S. oil and gas industry can handle supply, so don’t set policies that would disrupt the shale revolution.
In other words, don’t release oil from the Strategic Petroleum Reserve (SPR).
The two groups met July 24 before the U.S. Senate Committee on Energy and Natural Resources. Chaired by Sen. Lisa Murkowski (R-Alaska), the stated intent of the hearing was to determine what really drives global oil prices and higher prices at the gasoline pump, and what, if anything, should U.S. policy be as a result.
Should the government sell crude out of the SPR, as President Donald Trump has suggested? How is industry accounting for continued increases in global oil demand? Can U.S. infrastructure, especially pipelines, keep up with surging shale output and exports?
“I think there’s no substitute for U.S. production, for as long as we need it, even as we seek to diversify away from oil,” Murkowski said in opening remarks.
Trump has called for lower pump prices, even suggesting that OPEC increase production to lower global oil prices.
The hearing occurred on a day when Trump initiated a Twitter war of words with Iran, whose leader countered with a threat to block oil vessels going through the Strait of Hormuz.
Oddly, the 12-month strip for crude oil did not jump at this ongoing geopolitical scuffle, closing at $65.82/bbl, about $3 lower than the near-month closing price.
“The triggering mechanism for [increasing U.S. production] is the market price, not a government mandate or political maneuver,” said Rusty Braziel, president and CEO of RBN Energy LLC, according to written testimony released in advance.
“Of course, that is not to say that oil markets are free from the intervention of governments, both friendly and less than friendly. Far from it. These markets are critically important to the global economy, which makes them frequent targets of government intrusion.
“A number of key players in the global market retain significant market power, regardless of U.S. shale. But that power has been restrained by U.S. shale development, and most likely it will be further checked in coming years as shale production continues to grow. That is a good thing for the United States,” Braziel said.
There are many reasons for the recent surge in oil prices, explained Jason E. Bordoff, founding director at the Center on Global Energy Policy and professor of professional practice in international and public affairs at Columbia University’s School of International and Public Affairs.
“First, and perhaps most importantly, the recent oil price surge was driven by President Donald Trump’s decision to withdraw from the Iran nuclear agreement and thus re-impose sanctions on Iranian oil sales. While there is great uncertainty about the ultimate impact of new sanctions, the market was understandably concerned about the potential hit to Iran’s oil production, and 2.2 million barrels of day of exports [as of June],” Bordoff said.
“Demand growth was strong in 2017 at 1.5 million barrels per day, notwithstanding all the recent talk that oil demand is on the verge of peaking. Indeed, oil demand growth in 2017 [at 1.6%] was much faster than the 10-year average [around 1.2%].
“If sanctions were to disrupt all of Iran’s current 2.2 million barrels per day of exports, today’s SPR could replace that volume for only 300 days, after which the United States would be left with no ability to respond to oil disruptions—including by hostile actors—anywhere in the world.
“The lesson is that policymakers cannot predict oil prices reliably, nor, in an integrated world oil market, can they guarantee consumers low prices. Oil prices will inevitably go up and down, perhaps with more volatility in the future than in the past. The best policy response to high oil prices thus recognizes the inevitability of future oil price shocks, and takes actions that may not be able to provide relief today, but can help protect consumers in the future from the next inevitable price spike.”
Several speakers commented on whether U.S. shale producers are indeed the new swing producers, taking that role from OPEC. Robert McNally, president of Rapidan Energy Group, who has been observing global oil trends for nearly 30 years, said shale cannot be the swing producer.
“Shale oil production is more responsive to price signals than conventional production, with lead times for new supply measured in months or quarters instead of years,” he told the committee. “But shale does not respond fast and large enough to prevent global inventory imbalances and large price swings.
“Shale producers are extremely diverse regarding resources and capital structure, they pursue growth targets instead of price stability, and they abide by punitive antitrust laws that prevent them from even appearing to cooperate in stabilizing prices.”
Leslie Haines can be reached at email@example.com.
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