The re-opening of the British
embassy in Tehran
over the weekend must have jolted the sensitivities of oil commodity traders
the world over, as it provides a tangible reminder of the fact that more,
rather than less, oil is destined for the world markets. The embassy opening is
on the back of the recent western agreement with Iran that will, if and when
finalised and ratified by all parties, allow it to begin exporting oil again.
And apparently the country badly needs the revenue, even at current prices.
The precipitate fall in the
black gold continues apace, for this and for a number of other reasons. The
main one is a panic over the place that the Chinese economy occupies in terms
of energy demand. Many years of doubtful and incomplete economic data out of China
is exacerbating the current market panic and this is felt nowhere more than in
oil prices. If $40 has been breached, what guarantees are there that $20 is not
now on the horizon?
Supply war pits shale oil against traditional
producers
None, is the answer. Demand
is diminished and supply shows no sign of abating. Apart from Iran , shale oil producers in the US seem to be taking something of the same attitude
to supply as the big iron ore miners in Australia
and Brazil
took recently in regard to their smaller competitors. In spite of falling
prices they ramped up production, depending on their superior economies of
scale to assist them in enlarging their market share – a euphemism for
effectively driving smaller producers to the wall.
It is now suggested that, due
to greater experience in shale oil extraction, improvements in technology and
because of the completion and capitalization of more expensive early stage
activities, the marginal cost of shale oil production is reaching that magic
figure of $20 per barrel. This would allow shale oil companies to continue to
produce, not to make profit, but to pressurize drillers in the Middle East . This, in turn, motivates Saudi Arabia
and other countries to continue to pump oil, purely in order to maintain their
position in the global markets.
From the point of view of
western consumers, this is good news. For the traditional producers, things
could get a lot worse before they get better.
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