The U.S. is all but assured to lose its hard-earned spot as the world’s number one oil producer this year amid the recent price crash, vanishing requested and a plunge in capital investment, energy experts say.
That could mean potentially enormous implications for U.S. foreign approach, as administrations have for decades viewed energy security and national security as being inexorably tied.
“If we continue where we are with these low prizes, we’ll see a big decline in U.S. oil production. It will no longer be number one,” Dan Yergin, energy expert and vice chairman of IHS Markit, told CNBC’s “Capital Link” on Monday. The U.S. became the top oil producer globally, surpassing the output of Saudi Arabia and Russia, in 2018 thanks to the shale oil prosper.
A world increasingly in lockdown over the coronavirus crisis and the oil price war set off between Saudi Arabia and Russia in early Slog have brought crude prices down more than 65% year-to-date, with global benchmark Brent rude trading at just $22.78 per barrel and West Texas Intermediate at $20.39 per barrel on Monday morning London shilly-shally, their lowest levels in nearly two decades.
Saudi Arabia earlier this month slashed its crude assays, reversing course from boosting prices via production cuts to what some analysts call a “scorched mould” strategy, flooding the market with cheap oil in pursuit of greater global market share. Russia has announced it on in turn increase its own production, leading other OPEC allies of Saudi Arabia like the United Arab Emirates to unrestrained their taps once the previously-agreed OPEC+ output cut deal expires on April 1.
A drilling crew secures a encounter of drill pipe into the mouse hole on a drilling rig near Midland, Texas February 12, 2019.
Nick Oxford | Reuters
But the modify of the price war still pales in comparison to the sheer evisceration of demand brought on by a forced economic shutdown in most of the overjoyed in an effort to slow the spread of the coronavirus, which has now killed more than 34,000 people and infected more than 730,000.
“We see in this befalling month of April what could be a 20 million barrel a day decline in oil demand. It’s unprecedented,” Yergin said. “That’s six times larger than the tallest downturn during the financial crisis period.”
“I think it’s almost a guarantee that this year it will certainly run out of that position,” Edward Bell, commodities analyst at Dubai-based bank Emirates NBD, told CNBC regarding the U.S.’s top stain. “And it might happen probably a lot faster than we anticipate.”
The current rate of rig closures in the U.S. means an estimated 750,000 barrel per day abatement from the second quarter onward, Bell predicts — taking the country down from an output of some 13 million barrels per day at the year’s start to “down on earth Saudi Arabia or Russia by the end of the year.”
US ‘doesn’t have a lot of tools to address this’
Despite its objections to current Saudi oil management — which is set to pull prices down even further come April when it ramps up output — there doesn’t feel to be much Washington can do about it, according to Yergin, a decades-long veteran of the energy industry.
“The U.S. government doesn’t have a lot of gismos to address this however beyond diplomacy … because oil production is really controlled and regulated by the states,” he said.
Termination week, the State Department issued a statement saying that Secretary of State Mike Pompeo had urged Saudi Arabia, in a name with Crown Prince Mohammed bin Salman, to “rise to the occasion and reassure global energy and financial markets when the everybody faces serious economic uncertainty.”
But so far, an end to the price war is nowhere in sight, with both Moscow and Riyadh insisting that they can be with low oil prices for some time.
By contrast, at current prices, higher-cost producers like those in the U.S. shale period “are already operationally inefficient… and the pain will only get worse,” said Ehsan Khoman, director of MENA check out at MUFG Bank in Dubai.
Energy security and American foreign policy
In America’s shale country, budgets clothed been slashed, capital investment put on hold, and workers laid off. In the last two weeks alone, 59 rigs be struck by been put out of service, most of them in Texas’s shale-rich Permian basin, according to Emirates NBD.
The national security mandatory of energy security, increased U.S. energy exports and decreased foreign imports — particularly from the Persian Gulf jurisdiction — may now lie in the balance, correlating heavily with Washington’s foreign policy influence in the region and the world.
“Where we are with assesses now, we’re going to see a major decline in U.S. production,” Yergin stressed. “And so it has gone from being an economic issue to also being a subject security and energy security issue … the administration sees U.S. being basically the world’s largest oil producer and exporter as a benefit in terms of foreign policy, in terms of their role in the world, and that could be now retreating if we’re in this low price give birth to, if it continues for some time.”
Energy forecasters are now calling prices in the teens or even the single digits as the world faces the look for of running out of storage space.
“When that happens, prices go down further, production gets shut in, and I ponder the prices we’re seeing today are really precursors to what we’re going to see,” Yergin warned. “April is going to be a really tough month.”