Just in time for summer driving season, oil prices are moving up again.
Brent North Sea crude, the global standard, is selling for over $67 per barrel. West Texas Intermediate (WTI), the primary U.S. grade, is over $59. At Christmas Brent was at $50, WTI at $42.
What’s driving prices higher is a curb in Saudi exports, the complete collapse of Venezuela, and lower short-term forecasts for U.S. shale production.
Analysts now say oil majors like Exxon Mobil (NYSE:XOM), which I wrote about last month, are now in position to become the new OPEC. They are taking control of Permian production from independents and driving the global price.
Maybe they can become the new OPEC. But all OPECs have a sell-by date.
The Second Fracking Boom and Oil Prices
I’ve written many times this decade about how the 2010s are a reversal of the 1970s, when OPEC took command of the market, backed by U.S. arms.
This time it’s U.S. technology, specifically fracking, pioneered by an oilman I interviewed back in 1980, the late George Mitchell, which is taking over. Fracking first produced a natural gas glut in the Appalachians. Now it’s producing an oil glut in West Texas, where conventional wells that just sucked oil from the ground had been depleting for decades.
You can find the story on the Energy Information Agency Web site. New wells are producing more fracked oil and gas every year, and there are more of them, while “legacy” production continues to fall. U.S. oil production has more than doubled in this decade and continued to rise even after prices busted in 2014.
The price bust destroyed small producers like Sanchez Energy (NYSE:SN), which grew on debt when times were flush but now faces de-listing. Oil majors that husbanded capital during the boom, and through the early years of the bust, like Chevron (NYSE:CVX), picked up some bargains. Today’s Permian producers can make money at $26 per barrel, half what the product is going for.
The only limit seems to be pipeline infrastructure. Kinder Morgan (NYSE:KMI) is getting pipelines out as fast as it can but in the near term supply is constrained. Natural gas is being flared, or being burned off at the wellhead, at a rate not seen since the height of the boom.
Alternative Energy and Oil Prices
The latest oil boom comes 40 years after the Iranian revolution and the second oil shock.
But there’s growing competition for oil and gas from renewable energy.
Solar energy can now be produced at 13-17 cents per kilowatt hour, without federal subsidies. Wind power is even cheaper. Spot prices for electricity in Texas can now turn negative when the weather is right.
Storage has been the limit for renewables, but breakthroughs in storage technology such as fuel cells are being announced every day.
The cheapest renewable energy remains efficiency. Thanks to higher mileage cars, LED light bulbs, better appliances, and intelligence in devices using energy, U.S. electricity demand is only now breaking through its 2007 peak .
The thumb holding prices down gets bigger every year. The Sun shines, the wind blows, and we live on a molten rock. There is no energy shortage.
The Bottom Line on Oil Prices
Since the start of 2019 shares in Exxon Mobil are up 18%, and those of Chevron are up 14%. Given the recent good news from the oil patch these shares can continue to rise through the summer.
But the end of the boom is already in sight. Venezuela will come back online. The Saudis’ ability to limit production is limited. Iran wants back into the market. U.S. reserves have doubled, thanks to fracking. New oil discoveries are being made around the world, even in areas where demand is rising, like India.
More important is that renewables, especially efficiency, are going to keep working their magic. The only thing keeping oil and gas competitive today is 100 years of infrastructure. That can be replaced in the next 10.
That’s why the gains in these stocks are as small as they are. Oil is a commodity for which demand is slowly falling, for which supply is starting to look unlimited.
That’s not a good long-term outlook for prices.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.