Menu Bar

Home           Calendar           Topics          Just Charlestown          About Us

Saturday, February 6, 2016

Drowning the Oil Industry

The Iranian gusher means prices won’t rebound anytime soon.

With oil cheaper than bottled water, the average American driver saved $540 at the pump last year.
But oil prices are also battering Alaska’s economy, rattling the stock market, and leaving thousands of workers in states like North Dakota, Oklahoma, and Texas jobless.

Can things get any worse for the oil industry and the folks who rely on it? Sure.

The biggest short-term reason is Iran. Having honored the terms of its landmark nuclear deal, the Middle Eastern nation is now at liberty to export more oil after years of sanctions. 

That’s why the commodity has slid as low as $26.55 a barrel — about half of what it fetched a year ago. And that was following a steep slide from the summer of 2014.

Iran has oodles of oil ready to ship at a time when global producers are already pumping 2 million more barrels daily than consumers need. 

The market is also bracing for a long-term gusher. Iran, with the world’s fourth-largest reserves, could eventually ramp up its exports by another million barrels a day.

“Unless something changes, the oil market could drown in oversupply,” warns theInternational Energy Agency, an independent analysis organization.

A consumption spike would change this equation. But demand for oil is unlikely to grow fast enough, especially with China’s economic slowdown.

Alternatively, production could stabilize or fall. The most logical thing would be for all major players to cut output in unison. 

They’d make more money while selling less oil.Venezuela, an oil-dependent country on the brink of hyperinflation, has urged fellow OPEC members and Russia for more than a year to take this step.

Russia, where the economy is so bad that soup kitchens are a hot trend, is warming to this idea. Yet there’s no evidence that a broad synchronized price reduction is brewing.

Mostly, it’s up to Saudi Arabia to make a move. It’s the world’s biggest exporter, and its production costs are among the world’s lowest. But the Saudis distrust Russia, dislike Iran, and want to extinguish our nation’s fracking-fueled oil boom.

As long as this global glut sticks around, prices will stay low or spiral further down. Many North American oil companies won’t extract profits or remain credit-worthy.

More than 40 U.S.-based oil and gas exploration and production firms went bankrupt in 2015. Experts generally expect oil prices to remain low for the rest of this year and probably longer.

So don’t be surprised if that bankruptcy wave becomes a tsunami in 2016. Or if U.S. production declines and more oil workers lose their jobs.

Until now, after oil prices have gone down, they’ve always bounced back up. But no law of physics mandates this gravity-defying pattern.

Sooner or later, better alternatives to powering transportation with oil-derived fuels will become dominant. Will electric vehicles charged with renewable energy, hydrogen fuel cells, or something else prevail?

Whatever technology supplants oil, it surely won’t foul land, water, and air to the same degree. It probably won’t subject millions of people to the economic hardship that accompanies oil shocks. And it might avert climate chaos.

Restoring prices to the $100-per-barrel range would keep more oil companies in business. But that wouldn’t solve the world’s real energy problems.

Columnist Emily Schwartz Greco is the managing editor of OtherWords, a non-profit national editorial service run by the Institute for Policy Studies.