This article by Dr. Daniel Yergin was originally published in the Wall Street Journal on December 16, 2015.
What will the global oil market look like in 2016? This year is closing out with the industry in turmoil. The price of oil is hovering in the mid-$30s a barrel, supplies are swamping the market, the US is on the cusp of ending its decades-old oil-export ban, and geopolitical rivalries continue to sow uncertainty.
The lifting of the US ban on crude exports is likely to be part of the omnibus spending bill Congress is working on this week, one the White House signaled it is inclined to sign. This important step reflects recognition of the new reality in world oil: the US shale revolution and its impact on global markets. Although it would have seemed unthinkable only a few years ago, the US has shot up to rank as one of the “big three” petroleum producers, along with Russia and Saudi Arabia.
Ending the export ban, a relic of the 1970s, will help eliminate the discount on domestic crudes that has been hurting US producers. But it is highly unlikely to increase prices at the pump because US gasoline prices key off the global crude price, not the domestic one.
Among the advocates for lifting the ban have been the European Union and Japan. It isn’t that they expect the volume of American exports to be high, but rather that these exports will further diversify the global market and thus contribute to energy security. Had the ban remained in place, the EU would have insisted on it being one of the key issues in negotiating a new US-EU trade agreement. Maintaining the ban also would have left unanswered a most perplexing question posed by Sen. Lisa Murkowski, chairman of the Senate Energy Committee, earlier this year: Why remove sanctions on Iranian oil as part of the nuclear deal, but leave “sanctions” on US oil exports?
With prices in the mid-$30s a barrel, the Gulf countries, led by Saudi Arabia, continue to say that they would consider cutting output, but only if others do the same. There is little sign of that happening. Venezuela, an OPEC founder, rails against the market-share strategy and stridently calls for production cuts. But it might as well be talking to the wall. President Nicolas Maduro’s socialist government, defeated this month in parliamentary elections largely due to gross economic mismanagement, has no ability to make cuts.
Iran calls on its Arab neighbors to cut back. Yet at the same time it is gearing up to increase its own exports as fast as possible once the sanctions are lifted, likely sometime in the next few months. The Arab Gulf producers certainly don’t want to cut their output to make room for Iran, with which they are fighting what they see as a proxy war in Yemen. That underlines another critical point: that this battle for market share also represents a geopolitical struggle in the Middle East.
In the past six months, Russia, the world’s largest oil producer, has received a series of high-level visitors from the Gulf. No doubt oil has been a subject of conversation, although Russia has consistently conveyed that it will not cut production. It seems more likely that these trips reflect a geopolitical rebalancing, building new links with Russia.
The Gulf countries are reacting to the nuclear deal with Iran—and what they perceive as improving relations between the US and their arch rival. They see Iran as embarked on a campaign to be the regional power and, in the process, encircle them. For Gulf nations, the war in Yemen is aimed at preventing Iran from establishing a protectorate on the southern border of Saudi Arabia.
Unlike in Saudi Arabia and Russia, output in the US is declining. Between 2008 and April this year, the US added 4.6 million barrels a day of new supply—nearly doubling its output. But with oil now below $40 a barrel, producers are struggling to adapt and in some cases even to survive. Output is down about 400,000 barrels a day since April. And it looks as if US production will average about 8.8 million barrels a day in 2016, down from 9.3 million in 2015.
The global demand for oil is increasing. Growth worldwide in 2015 was twice that of 2014. This year US motorists will drive more miles than ever before, according to the Federal Highway Administration. SUV and light-truck sales rose to 60% of the US auto market in 2015, from under 50% three years ago. With oil prices this low, don’t expect this trend to end soon.
While there are specific causes for the oil-price collapse, it is also part of the general commodity rout across the global economy. The IHS Materials Price Index, which tracks commodities (including energy), is down 55% since July 2014. The decisive factor is the slowdown in the Chinese economy, which had been driving the supercycle in commodity prices, along with the overall slowdown in global economic growth and overcapacity for commodity production.
Expectations of future oil-price increases have dampened due to large and still growing global inventories, which at some point will flow back into the market. But the most important question for 2016 is: When will Iranian exports ramp up—and by how much? Tehran is determined to move quickly.
“Our only responsibility here is attaining our lost share of the market, not protecting prices,” Iran’s oil minister, Bijan Zanganeh, has declared. “It’s our right to return to the level of production we historically had.”
This ramp-up will occur only after “implementation day” of the nuclear agreement. Iranian President Hassan Rouhani is striving to get the nuclear compliance done before the country’s parliamentary elections in February to show voters that his government can deliver concrete results that will better the economy.
The lifting of sanctions on Iranian exports, if that does occur, will mean still more supply and a new stage in the battle for market share in world oil. It is a battle that will be shaped by prices—and by the geopolitical rivalries across the Gulf.
By Daniel Yergin, vice chairman of IHS, December 16, 2015