The New King of Oil


The New King of Oil

Written by Alfonso Elizondo


The United States is trying to dethrone Russia and Saudi Arabia as the kings of crude oil production in the world. In 1975 it stopped being the world leader when it was surpassed by Russia and Saudi Arabia. According to Rystad Energy’s vice president of markets, the fracking revolution is turning the United States into a world energy power and Donald Trump has made his country less dependent on foreign oil, including oil from the Middle East.


In 2015, US oil production fell sharply after OPEC, led by Saudi Arabia, launched a price war with the aim of recovering the large market share it had lost due to shale production and other oil production systems that generated clean energy. That caused a massive oversupply so that oil plummeted from $100 per barrel to a minimum price of $26 per barrel.


The Energy Information Administration (EIA) recently projected that crude oil production in the United States would increase by an average of 10 million barrels per day in 2018. So, oil rose above $61 per barrel in January 2018 for the first time in two years. This rebound has also been driven by the explosion of a pipeline in Libya and the protests in Iran.


Unlike OPEC and Russia, which agreed to extend oil production cuts to the end of 2018 to control prices, Trump has promised to initiate an era of ‘American energy dominance’ where one of the keys is to reduce the bureaucracy surrounding oil extraction, while Saudi Arabia and Russia are working on a long-term pact that could extend control of world crude oil prices for the next 10 or 20 years, according to Reuters reports.


Saudi Arabia Crown Prince, Muhammed bin Salman confirmed that both countries are in talks to create a short-term alliance. In the meantime Russia – which is not a member of OPEC – has worked alongside the group of 14 member countries to seek an agreement for 10 to 20 years, and the US would be excluded from that Treaty.


The agencies that study oil production say that Saudi Arabia recruited Russia and other non-OPEC countries to help reduce the oversupply when oil prices, which were over $100 per barrel in 2014, dropped below $30 per barrel in 2016. Since then it has recovered to reach $70 per barrel, but prices were controlled by the huge production of shale oil in the United States.


According to Daniel Yergin, vice president of the construction company IHS Markit, OPEC countries want to institutionalize this relationship and for the Treaty to not be a one-shot deal. Robert McNally of the consulting agency Rapidan Energy Group said that Riyadh wanted to help with the boom and bust cycles that are typical of oil markets by limiting the rise in prices and helping to raise prices when they are low.


McNally reckons that it would require an alliance between Russia and Saudi Arabia to produce additional oil when there is a high rise in prices. A long-term pact between Moscow and Riyadh could co-opt Russia into the OPEC cartel, strengthening it, while Russia would be strengthened in the Middle East where the United States has been the power that has dominated the oil market.


The idea of this alliance comes at a critical moment when both powers do not agree in their view of the Syrian conflict, with Riyadh supporting the rebels fighting against Syrian President Bashar al Assad, and Russian and Iranian forces backing al Assad.


Addendum: It is very difficult to predict what will happen in the short term, but there is no doubt that this conflict is the main point in global geopolitics at this moment in history.