March 10, 2015

Economist: Saudi Arabia is to blame for low oil prices

By Amy Robinson
Farmer Staff Writer

With concern rising over the current oil prices and the unknowingness of whether they will continue to drop or eventually start climbing again, the Watford City Area Chamber of Commerce and the Watford City Economic Development Corporation felt it would be the perfect time to bring in an expert on the topic. Dr. Loren C. Scott was the featured speaker at last week’s event and left the audience not only more informed, but with an optimistic outlook for McKenzie County.
“My full interest in the oil and gas industry really blossomed once I went to Louisiana State University,” said Scott. “I thought it was a very fascinating field to study. And my father was a ‘pump man’ who worked in the oil field in Texas when I was a boy. My first summer out of high school, I worked at a drilling rig in Colorado - which made me really want to go back to school. It was a fun experience, but I realized I didn’t want to be out on a drilling rig, so I went back to school instead.”
From blossoming at LSU to getting on a plane headed to Watford City, Scott arrived last week with high hopes for the people of McKenzie County and knowledge attained over a 40+ year career that he looked forward to sharing.
“What makes me get on the airplane and fly and come to Watford City is watching the reaction of the audience,” says Scott. “I use a lot of humor. I like to see the audience laugh and smile. It’s heady stuff, but it’s fun. And I wanted the people here to leave with an understanding of why the oil prices fell. I wanted them to leave with a little bit of optimism of those prices coming back up. And I wanted them to walk away with a general optimism about McKenzie County.”  
Scott’s presentation in Watford City last Wednesday specifically centered on McKenzie County and the Bakken area. He showed a comparison of oil prices from 1980, when the price of oil was about $20. The average price in 2014 was around $100, and according to a projection report, the price of one barrel of oil for 2015 would be $95 and $90 in 2016. However, that was the projection before the fall of oil prices.
This information led into Scott sharing with the audience the oddities associated with oil, starting with shale plays. Since 2008, shale plays in the United States were responsible for a 70 percent increase in U.S. oil production - the highest growth of any country in the world over that period of time.
Scott said this growth was due in part to one main factor. The U.S. oil imports dropped from 66 percent to 43 percent in just six short years. Therefore, Saudi Arabia was losing money.
“There’s one country behind it - Saudi Arabia,” said Scott. “They’re trying to kill the edges. They want to reduce oil production in the U.S. They are going to eliminate that threat to their international market share. What is in danger right now in all the oil areas are the edges, and that’s basically my argument.”
Additionally, each shale play is different. Technology is not as easily transferable, he explained. In North Dakota’s Bakken Field, there is a hard rock shale. In 2003, 10,000 barrels of oil a day were produced. By 2015, that number would increase to 1,200,000 barrels of oil a day being produced - a 120-fold increase. North Dakota surpassed Alaska as the third largest source of domestic oil in March 2012. And large amounts of “associated” natural gas were being produced as well.
In Louisiana, in comparison to the Bakken hard rock shale, there is the Tuscaloosa Marine Shale - a clay shale. He presented the differences in shales and how it takes completely different processes and machinery to extract the oil out of those shales, resulting in different plays and different break-even prices.
For example, Scott showed that the average break-even oil price by play expanded from Monterey, Calif., at $36, to the Bakken (N.D.) at $50, to Tuscaloosa, La., at $92. He even showed a breakdown of break-even prices within plays in the Bakken; Dunn County’s break-even price is $29, McKenzie County’s break-even price is $30, and McLean County’s break-even price is $77. The counties where the break-even prices are higher, is what Scott considers to be the ‘edges,’ where the cost of oil production is substantially higher.
“This past summer, a couple companies went to the Department of Commerce,” said Scott. “Since it has been illegal to export petroleum since the 1970s, they wanted to know if they skimmed the ‘stuff’ at the top (which is the volatile propane and butane of the oil), could they export it if it were considered to be petroleum ‘products?’ Exporting petroleum products wouldn’t be illegal. So, the Department of Commerce said ‘sure, why not?’ Which is when Saudi Arabia said, ‘oh I don’t think so.’ Saudi Arabia was already losing money from the U.S. market. They weren’t about to allow us to touch their international market.”
Which led Scott to explaining why he believes oil prices dropped so quickly and how that was directly related to the rise in U.S. production.
According to Scott’s ‘Saudi Math,’ if the Saudis produced 9.0 mmb/day and kept 2.9 mmb/day for their own internal needs, that would leave 6.1 mmb/day available to market and at $90/barrel, they’d have $549 mm/day for their budget.
Now, if they raised their production even a little bit to 9.76 mmb/day and kept the same amount of 2.9 mmb/day for their own internal needs, but lowered the price to $80/barrel, they would still bring in the same amount of $549 mm/day for their budget.
And lastly, if they decided to increase their amount of oil production substantially to 12.4 mmb/day, kept the same amount of 2.9 mmb/day for their own internal needs, and lowered the price substantially to $57.80/barrel, they would still bring in the same amount of money for themselves - $549 mm/day.
“It shows that Saudi Arabia has all the oil they want to produce, and just by increasing their production and lowering their price, they are still making the same amount of money for themselves,” explained Scott. “Now, there is pressure from the other 12 countries/members of the cartel because they can’t produce the amount of oil Saudi Arabia can. With the amount of pressure from the other countries now, after eight long months of these oil prices falling, Saudi Arabia will start to allow the prices to go back up. It’s the same thing that happened back in 1981, the last time there was a sharp drop in the oil prices. They went from $37/barrel to $10.50 by the summer of 1982.”
According to Scott, the lowering price of oil was to kill off the ‘edges’ of the shale plays, which would reduce oil production for the U.S. The Saudis wanted to get back into the U.S. market in addition to the international market.
“There’s hope that oil prices will get back up to at least the $65 or $70/barrel price range this year,” says Scott. “We might also see it go back down if Saudi Arabia sees people going to the edges.”    
Scott reiterated his hopes that the decline will be short-lived, and among the places in the U.S. – why McKenzie County is doing pretty well. But more importantly, he wanted to convey to the general public that this area is the driving force of the oil right now and that this area is currently driving a tremendous boom.
“Whether this is going to bust, boom, or level off,” says Scott, “there’s a lot of money here that people have to think through before going forward with their projects or developments, etc. People want to know how they should think about this market right now. When people hitch their wagon to a roller coaster - they aren’t just hitching it up to a nice straight road that slowly and steadily goes up. It’s going fast and people have to be careful in what their plans are and what decisions they make. But people should be optimistic about McKenzie County. When I was driving around Watford City, I was so impressed with the challenges the leaders here have had and are still currently facing. They’ve had to dance on their toes lightly. And they’ve been able to do that here.”