- January 5, 2016
- Posted by: Art Berman
- Category: The Petroleum Truth Report
Daniel Yergin and other experts say that U.S. tight oil is the swing oil producer of the world.
They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.
There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.
A swing producer must meet the following criteria:
- A swing producer must be a net exporter of oil.
- A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.
- A swing producer must be able to act authoritatively and quickly to increase or decrease output.
- In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.
- A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.
So, let’s go down the list for OPEC and U.S. tight oil.
OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.
Figure 1. OPEC and U.S. 2014 net crude oil exports.
Source: OPEC & Labyrinth Consulting Services, Inc.
(Click image to enlarge)
This will not be substantially changed by the repeal of the crude oil export ban because U.S. consumption of crude oil (16.3mmbpd) exceeds domestic production (9.2 mmbpd) by 7.1 mmbpd. If exports of tight oil increase, imports will have to increase by an equal amount to meet demand.
That should be enough to end the discussion about whether U.S. tight oil is a swing producer but I will finish going through the list.
OPEC exists because none of its members alone meet the criteria needed to balance the market and affect price. OPEC produces 31.4 mmbpd of the crude oil + condensate (47% of world production). It has approximately 1.5 million barrels per day (mmbpd) of spare capacity, and it has 72% (1220 billion barrels of oil) of the world’s proven reserves (Figure 2). The members of the cartel represent countries whose leaders have the authority to cut or increase oil production at will. Saudi Arabia alone has about $660 billion in cash reserves. It’s production costs are less than $10 per barrel.
Figure 2. Comparison of OPEC and U.S. tight oil production, spare capacity and reserves.
Source: EIA, Drilling Info & Labyrinth Consulting Services, Inc.
(Click image to enlarge)
U.S. tight oil accounts for less than 5% of the world’s production of crude oil + condensate (3.7 mmbpd). It has approximately 0.23 mmbpd of spare capacity and less than 1% of the world’s proven reserves (13 billion barrels of oil). U.S. tight oil producers do not and cannot act together. Tight oil producers spend twice as much money as they make, and have 5 times more debt than annual revenue. It’s production costs are $65-$70 per barrel.
U.S. tight oil is on life-support at $35 per barrel oil prices.
OPEC is a swing producer. U.S. tight oil is not.
Truth vs. Confirmation Bias
In April 2015, Yergin told CNBC, “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”
What he meant was that over-production of U.S. tight oil helped cause the global price of oil to collapse in 2014, to swing down. It had nothing to do with really being the swing producer.
That was a few days before CERA Week, the pricey annual love-fest that Yergin’s company IHS throws in Houston for the oil and gas industry to feel good about itself. It was a clever-sounding trailer to publicize the $7,000-per-ticket event.
Later, in June 2015, Yergin told the Wall Street Journal that “now the U.S. is a swing producer, albeit an inadvertent swing producer as it didn’t set out to take that role.”
A swing producer cannot be inadvertent. A swing producer deliberately increases or decreases its production to balance the market, whether for short-term price advantage, or for demand stimulation and long-term price advantage and market-share.
Either Yergin doesn’t understand what a swing producer is or his swing-producer comments were manipulative and meant to support some agenda.
Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye.
Yergin said the U.S. was the new swing producer. What was heard was that America had made OPEC impotent. It was repeated enough by the press and other supposed experts that its truth was confirmed because people want to believe it–even though it is untrue.
Confirmation bias is the tendency to find support for our preconceptions. It may make us feel good but it is a poor basis for decisions. Investors beware.
Image from Imgur.
“authority to cut or increase oil production at will” is very important. The US president does not have the legal means to instruct oil companies to produce more or less oil.
A swing producer may not always perform both functions (decreasing and increasing production) in all situations over time.
For example, Saudi Arabia was in oil-geological decline in 2006-07 and could not increase production. That resulted in oil prices going up – which caused the US recession end 2007. In so far Matthew Simmons was right.
At that time I wrote the following article with Gail the Actuary (Atlanta) in the Oildrum:
Did Katrina hide the real peak in world oil production?
My latest research:
Where actually is that much-hyped global oil glut?
The highest cost producer is the one to falter first… and the last to come back on line. I blame the “energy” banks so desperate for yield with the Bernanke put and Yellen call tamping returns down to the barely over inflation, for trying to juice the shale economy.
The rapid increase in shale drilling is causing large displacements in transportation, refining and causing the kind of bottlenecks that have them wasting gas with flaring and absolutely killing pure nat gas plays.
The additional downside is that prior to 1992, royalty owners could bank on 1/8 or 3/16th of the proceeds. Today with post-production costs running 20% – 50% or more, and increasing over time, PLUS the fact many leases allow the operator to use gas for free for the compressor and to fill their NG trucks and pickups, the effective royalty is typically less than 10% rather than that touted by the producer. Look at all the lawsuits.
And for landowners, many now have vacated drilling pads with little chance they will be drilled in the next decade. Who is going to reclaim those? At what cost? How long before a court orders them to clean them up? And if they file bankruptcy they will never be cleaned up and the royalty owner won’t get paid.
I rolled over to the Forbes print of the article. They printed more there than you have here — is that intentional?
I especially enjoyed the extra material on D. Yergin. This man is such a putz. Perhaps shill is a better designation.
I produced the 64 hour documentary “Sworn to Secrecy,” which covered the covert side of warfare in the Twentieth Century. It played for years on The History Channel back when THC was actually doing historical programming instead of ice-road truckers. I started reading Yergins’ second tome, “The Quest.” I had to put the book down after the first number of pages, because Yergin had completely blown the behind-the-scenes diplomacy on the first Gulf War. He simply made up his own version. Makes one wonder about the rest of his history of oil. But I digress.
Anyway, great explanation of the meaning of “swing producer.” Thank you for clarifying.
Two quick questions:
1) Do you think the recent change allowing U.S. oil to be exported has something to do with the quality of the high API shale oil? I have heard from several sources (unconfirmed) that many of the refiners in the U.S., especially the Gulf Coast Refiners are turning away some of this high API shale oil or that which is blended with Canadian oil sands (to try and make an average blend) which is missing middle distillates. Is there just too much of this type of oil that domestic refiners do not need?
2) Have you heard some of the recent news how the Oklahoma Corporation Commission has now forced a few companies to shut down a percentage of deep-waste water injection, as well as producing wells due to a connection to increased earthquake activity? It seems to me if the studies that are being done presently do show increased earthquake activity due to deep-water injection and subsequent damage to the public buildings or infrastructure, could this be one hell of a bad deal for many resource companies if a precedent is shown to exist?
Appreciate you response.
Can’t speak for Art but regarding earthquakes, geologically there is every reason to think a relationship exists under the right circumstance. In the Guy, Arkansas case all the injection wells had to be shut down and the seismicity has been reduced. While site specific, the bigger question is just how much water is too much. Reading through O & G Investor it is apparent many of the players are reporting 6:1 to even greater water to oil ratios and for a 100 bbl per day well, that means about 600 bbl – several truck loads to dispose of. And as wells take less fluid to reduce earthquakes, costs of disposal can overwhelm wells quickly.
You used an obviously fake UFO image to illustrate your point of belief over logic and rationality.
Where do you stand on our ability to eventually conquer flying through the universe? Considering it was only 100 years when the Wright Bros barely got off the ground and within 100 years, men set foot on the moon and now Elon Musk has his sights set on Mars. So where will our space travel ability be in say another 1000 years?
So where will our space travel ability be in say another 1000 years?
Interesting thought. I will be a room temperature long before then, but if we are indeed “resource limited” and continue to increase the population as we are doing, the question is how can we afford it? In another 1,000 years, if I believe the doomsday crowd, we’ll all have burst into flames from global warming.
Art – thanks for your reasoned analysis – i’m really enjoying your blog.
I have 2 questions:
1. Do you have any view of any bow wave of production coming online now (non-Shale) I.e. production sanctioned over a year ago during higher oil prices but just coming online now?
2. What price would companies stop pumping because they cant even cover opex? It looks like drilling has capitulated from your recent article showing the recent drop in rig count but at what price of oil do you think globally some producers would literally shut off the pumps?
$20? Maybe… I bet some wells are pumping at or below their operating expense now.