History has a knack for repeating itself.
We’ve seen it happen time and again. It feels like an inevitable cycle, and there’s no immediate solution to this problem.
It’s happening right now, as a matter of fact.
All we need to do is take one look at the OPEC. They’re doomed to the same fate we’ve seen play out more than once before…
You see, the OPEC is following in our footsteps.
A few weeks ago, we talked about how the organization inherited Middle Eastern oil industry from the original Seven Sisters… but they took their lessons from somewhere else.
Blueprint for Failure
Without question, Texas is the epicenter of the U.S. oil industry. Even today — more than four decades after our country hit peak production — the Lone Star State produces nearly one-quarter of our crude oil production.
Forty years ago, we knew it was necessary to control production in order to control oil prices. Back in the 1930s, during an oil boom due largely to field production in East Texas, there was a distinct threat of oversupply.
Through the National Industrial Recovery Act (NIRA) in 1933, state quotas were set up. When the NIRA was put down by the Supreme Court, another law called the Connally Hot Oil Act of 1935 was passed to keep a tight lid on supply.
Of course, there was a snag in all of this…
We know the Peak Oil story well enough by now. The 10 million barrels produced in November 1970 was the maximum point. Things were downhill from there, and without that spare capacity, the United States lost its hold over the global oil markets.
The nail in the coffin was the Texas Railroad Commission’s decision to set proration (which restricted a field’s production) to 100%. In other words, there was no limit set on how much producers could pump from Texas fields, and it was the beginning of the end for U.S. production.
Over the decades that followed, Texas producers were drilling more than ever before…
Yet despite those factors, production followed an inevitable decline curve:
Power shifted to the Middle East. But soon enough, the OPEC will have the exact same problem — even if they don’t care to admit it to the rest of the world.
The organization is hanging by a thread right now.
The Peak Oil Trap
Make no mistake; the OPEC may have 12 members, but one holds the power. (We’ll save the question on Kuwait’s war-torn oil industry for another time.)
Saudi Arabia is the only member with any significant spare capacity.
One problem, however, is that the quality of this extra production isn’t the light, sweet oil coveted by refiners. In fact, we just bore witness to this issue firsthand when 1.3 barrels of light crude from Libya were shut-in, and the OPEC was unable to compensate for the loss.
The European refineries (where much of Libya’s oil production was headed) weren’t able to handle the heavy sour crude from the Saudis.
And there’s another matter we have to take into account: OPEC members are notorious for cooking the books.
By closely guarding their field data, we can only speculate on how bad the situation has gotten.
But the Saudis won’t be able to keep up this charade for long. Some projections are that Saudi production will top 15 million barrels per day in the future.
I think we all know that won’t happen. And the Libyan crisis proved just how vulnerable the Saudis are.
The Aftermath of an OPEC Collapse
We’re not the only ones who recognize the OPEC’s fate.
By 2035, approximately half of total global energy growth will come from just two countries: China and India.
True to form, China’s need to secure future energy supplies has included more reliance on the OPEC. China’s oil consumption alone is expected to double to 13 million barrels per day within the next twenty years, with imports making up nearly 80% of that volume.
It’s just another reason China has been desperate for future energy security.
Not only is their nation’s credit a little better than ours, but China is flooding cash into future oil supplies — be it the $16 billion they’re spending to develop Venezuela’s heavy oil assets, the 300,000 bbl/day refinery they’re building in the Guangdong Province with Kuwait, or the billions pouring into the Canadian oil sands…
Nothing is out of bounds for the Chinese.
Now think of the consequences of an OPEC collapse, the point at which its top producers are unable to reverse the peak — a point in time that is closer than we’re led to believe.
Until next time,
Editor, Energy and Capital