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OPEC Won’t Slow Down Oil Production Growth

Oil and Gas
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“Please God, give me another oil price rise. I promise not to screw it up again.” This is the plaintive cry Texas oilmen have attached to their vehicles ever since the mid-1980s, when oil prices fell off a cliff from a high of US $33 per barrel to US $7 per barrel.

Commodity Cycle

Oil prices work like all commodity prices. High prices encourage more exploration and investment in new production. When this new production comes on stream, supply starts to overtake demand and pushes down prices. At low prices, the economic feasibility of many existing production projects falls, with the result that some may be shut down while others continue producing at a loss. Oil companies do not invest in new exploration, the overall production level falls, demand catches up with supply and oil prices rise. This cycle has occurred many times since the 1950s and 1960s, when representatives of several multinational oil companies would meet monthly in London and post the oil price, in much the same manner as gold dealers post the gold price today.

Arab Oil Embargo

On its creation in 1960, the Organisation of Oil-Producing Countries (OPEC) was more concerned with ensuring that its member governments were paid higher taxes and other fees by oil company concessionaires producing the oil in their countries. They had little effect on the world oil price. Matters changed after the 1973 Arab-Israeli war, when the Organisation of Arab Oil-Producing Countries (OAPEC), not OPEC, imposed an oil embargo that contributed, together with an existing inflationary spiral, in quadrupling oil prices.

New Offshore Production

Oil was discovered in the North Sea and offshore Alaska in the late 1960s. The 1970s oil price meant these expensive offshore projects could be developed. They came on stream in the late 1970s and gradually caused the 1980s price fall. Oil exploration in the 1970s identified more oil and gas prospects worldwide. Once in production, these fields contributed to a further price fall.

State-Sponsored Research

At the same time, the U.S. government sponsored research into hydraulic fracturing – fracking – that would take until the 2000s to be used commercially and return the U.S. to the top league of oil producers. Fracking has been a tried and tested technique in oil production from vertical wells since the early 1900s. The research was aimed at making it effective in horizontal wells.

The Brazilian government also supported expensive research into deep-water oil and gas production, which would yield results from the 1990s in more production offshore of Brazil, West Africa and the Gulf of Mexico.

Hoping for Lower Taxes

Today, the fortunes of U.S. oil producers, and indeed oil producers anywhere in the world, depend first on geology – you either find oil and gas in a place or you do not – and the government’s policies on taxation, the environment and safety. All of these measures add the cost of developing a field and to its profitability as world oil prices fluctuate.

Whatever power OPEC had in manipulating oil prices and affecting the profitability of oil projects existed between the mind-1970s and the mid-1980s. But no longer. If that Texas oilman wants to boost his oil production, he needs to channel his pleas to his own government rather than hoping for divine intervention.

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