By Ziad K. Abdelnour
The U.S. has increased its production of oil quite dramatically over the last two to three years, by about 2 and a half to 3 million barrels per day.
That means today we’re sitting on around 9 million barrels per day, which is third globally to only Saudi Arabia and Russia.
I believe that growth is going to continue, even if the oil price stays in the $80 to $90 dollar range it is right now. This growth in production will continue to add pressure on oil prices.
Let’s take a look at the current state of four fellow oil producers.
Given the current situation in the good old USA, what is Saudi Arabia thinking? They’re likely thinking that they do not want to cut production. They’ve done so in the past and have actually gotten burned, especially in the 1980s. In 1981 the Saudis were producing 10 million barrels per day; by 1983 they had dropped that to 5 million. The oil price, however, actually decreased, so they did not actually enjoy the desired effect. They cut their production even further by 1985, but the price of oil kept declining. Since then, the Saudis understandably have been very hesitant to decrease oil production.
Today the developing world is much bigger in terms of raw, physical consumption. In the 1980s, there was not the global demand we see today. So that heightened consumption will allow us to avoid a scenario in which the prices continue to fall dramatically.
What Iranians are most concerned about today is its nuclear-negotiation deadline on Nov. 24, hoping for an easing of sanctions. Iran is at about 1.5 million barrels per day. Even if negotiations continue, which is what I expect, we shouldn’t see a huge influx of Iranian oil into the market any time soon.
At the end of the day, it will really depend on when a final deal occurs that actually allows the removal of sanction and exports to increase. Once we do have that deal, we’ll probably see a very slow increase over the next six to 12 months, which will add maybe half a million to a million barrels per day.
This would be significant, but the kind of plans Iranian President Hassan Rouhani has for oil production is, in the longer term, to increase it to numbers like eight to 12 million barrels per day. Such a production level will depend on how much interest there is from international companies to go into Iran and help do the same thing we have seen in Iraq.
For the record, even Iraq has not dramatically increased its production since re-opening to Western investment in the late 2000s.
I’m worried more about Venezuela as it strangely pegged its budget to $60 per barrel oil – Hugo Chavez’ legacy, essentially. We know that the nation’s finances are not doing well.
A lot of Venezuela’s off-budget financing for buying off political patronage is not tied into that $60 per barrel price. They need that money for their political system to be successful. That is what’s going to push up their break-even point well over $100 per barrel. That is now in jeopardy.
So we’ll watch as Venezuela’s finances become more severe and constrained in the coming year; the selling of their Citgo Petroleum Corp. assets is going to be the big signal. We are closely monitoring that security climate in particular; if we see social unrest as a result of peak levels of inflation, it all comes down to President Nicolas Maduro to manage that.
This brings us to our neighbor up north, Canada, which is in a bit of a peculiar situation, especially when it comes to that price benchmark.
Canada today is looking at around 4 million barrels per day in terms of production. They want to increase that to around 6 million barrels per day by 2030. It is a slow progression that is not like what we are seeing in the United States, which is much quicker.
Canada has major projects that are 20-to-30-year endeavors now coming online – those are the ones that are somewhat in jeopardy. The thing we need to keep in mind when we look at Canada is that because the pipeline infrastructure is not as developed as they would like, there are a lot of capacity and bottleneck constraints that keep them from getting the international price of oil. So they’ve actually been sitting at around $60 to $70 for a long time.
So, how does Canada break out of that pipeline isolation? It depends a lot on the aftermath of the midterm elections in the United States and how it plays into the potential approval of the Keystone XL Pipeline. If Keystone doesn’t move forward, it likely will play into the 2016 elections and beyond.
In terms of the actual Canadian debate, a lot of that is going to hinge on that nation’s elections, coming up in 2015. Right now the Liberal Party leader, Justin Trudeau, has a slight lead over the current prime minister, Stephen Harper, who is much more of a defender of the pipelines. Trudeau favors a line to the United States, like Keystone XL, but is not as favorable toward Canada-based pipelines such as the Energy East project, or any of those to the coast of British Columbia.
It is going to take a while for the politics to sort out. In the meantime, there will be a lot of stress on rail transporation for Canadian crude oil to reach the market.
Ziad K. Abdelnour is a Wall Street financier, president and CEO of Blackhawk Partners, founder and chairman of the Financial Policy Council and author of “Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics.”