Blind-sided by technology

An oil drilling rig near Cabimas, Venezuela. PHOTO/AP

"The price of oil will hit its floor and it will rise again," President Nicolas Maduro assured Venezuelans, whose shaky economy depends critically on a high oil price. "Venezuela will continue with its social plans. Venezuela will move forward."

No it won't, and neither will Russia, Iran or Nigeria. The only major oil exporters not in deep trouble are the Arab countries, whose governments have room to manoeuvre because of low production costs, small populations, and big foreign currency reserves.

Since June, the cost of a barrel of Brent crude, the benchmark for world oil prices, has fallen by almost a quarter, from around US$110 a barrel (where it was stuck for the past four years) to just above US$80 a barrel. Last month, for the first time in decades, Nigeria exported no oil to the US. Even at a big discount, Americans don't need it. And the main reason for all that is fracking.

American production has almost doubled in the past five years thanks to the new drilling technologies, and the US overtook Russia this year to become the world's largest producer of oil and gas combined (Saudi Arabia comes a distant third). With production soaring and world demand for oil stalling due to slow economic growth, a collapse in prices was inevitable. The question is how far they will collapse, and for how long.

The answer is probably not much further, for the moment - but they could easily stay down in the US$75-US$85 range for a couple of years. The reason is that the "swing" producers (mostly Arab), who could theoretically push prices back up by cutting their own production, have clearly decided not to do so.

Their concern is for the long-term power of the Opec cartel, which used to be strong enough to set the price of oil. That never will be true again unless they can drive the (mainly American) frackers out of business.

Saudi Arabia and its allies hope a prolonged period when the price of a barrel of oil is lower than the cost of getting that barrel out of the ground by fracking will ruin this new industry and bring back the Good Old Days. Dream on.

The Saudi strategy won't work because some 98 per cent of US crude oil and condensates has a break-even price of below US$80 per barrel. Indeed, 82 per cent of American production would still be turning a profit at US$60 per barrel.

Even with its huge foreign currency reserves, Saudi Arabia probably cannot afford to keep the oil price low enough for long enough to break the American frackers. (Its own break-even price for conventional oil is US$93 per barrel). And the Iranians, Nigerians, Venezuelans and Russians, who depend on oil revenues for half of their national budgets, will be screaming for higher prices before they face riots.

So this is not a transient event; it's a revolution. The Organisation of Petroleum-Exporting Countries (Opec) came into its own when the US ceased to be the dominant global producer in the early 1970s. With the re-emergence of the US as the biggest producer, Opec's clout is bound to shrink - so oil prices will probably stay well below US$100 a barrel for the foreseeable future.

This will be a boon for countries that depend on imported oil such as India and China. It may also liberate the US from its compulsion to intervene repeatedly in Middle Eastern disputes that are really none of its business.

And it may be a disaster for repressive and/or corrupt regimes in countries such as Russia (break-even price US$105 per barrel), Nigeria (US$119), Venezuela (US$121) and Iran (US$140).

It also means worries about "peak oil", and the underlying calculation that the world had only about 40 years' worth of proven oil reserves left, can be set aside for a while. We are already up to 53 years of reserves, and we are finding new oil faster than we are using existing reserves.

Of course, a broader view would find little reason for rejoicing. Our global civilisation depends on fossil fuels for 85 per cent of its energy, and our annual emissions of carbon dioxide and other greenhouse gases are still rising.

Just another 25 years of that will deliver us to the "point of no return": 450 parts per million of CO2 equivalent in the atmosphere. That would raise the average global temperature by 2C and trigger natural sources of warming that it will be impossible for us to turn off again. Runaway warming is not a happy prospect, so it is unseemly to celebrate the news that we have even more oil to burn - and cheaper oil, at that.

On the other hand, it would be entirely appropriate to celebrate the news that other new technologies may open up a better escape route from fossil fuels. Solar power, wind power, nuclear fission, and hydro power all have a role to play in that task, but the Holy Grail for half a century has been fusion power. It may be much closer than we thought.

Gwynne Dyer is an independent journalist whose articles are published in 45 countries.