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Shell May Cut Upstream Oil Operations By 40%

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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Dream Of U.S. Energy Independence Is Dying Along With The Shale Revolution

It was a revolution; a game-changer. The shale industry that transformed American oil was on its way to upending the world by first rendering the United States energy independent, and then turning it into the most formidable energy power on the planet. Then, a double disaster struck.   Now, there is talk about the previously unthinkable: production cuts.

When Texas railroad commissioner Ryan Sitton last month floated the idea of a joint production cut between Texas and OPEC, many immediately opposed it, including, notably, the American Petroleum Institute (API). 

"You're facing a situation where there's so much demand destruction from people staying home because of COVID-19 and there's so much oil flowing right now with no place to go," Commissioner Sitton told the Houston Chronicle. "The supply chain is facing a problem and it backs up all the way to the gas stations."

It is undoubtedly a complex problem. U.S. production is still close to record-highs hit last year even with rigs being idled at a fast pace as companies brace for the worst of the crisis. Storage is running out, although, according to data from the EIA and Labyrinth Consulting that energy expert Art Berman posted on Twitter yesterday, there is still ample space in U.S. oil storage facilities. Prices are lower than breakeven levels. Something's got to give.

Initially, the U.S. industry—and Washington—believed what had to give would be OPEC and Russia. They were the ones that have been controlling prices in concert for years now. It was their job to put a floor under the benchmarks yet again. It is this reliance on OPEC and Russia that is the clearest sign yet that America is not as energy independent as it might like to believe.

Related: Is Gazprom’s LNG Megaproject Doomed To Fail?
The reason for this is simple. As Columbia University scholar and former energy official David Sandalow put it in a recent article, "So long as significant portions of our economy are powered by oil, we will remain subject to the ups and downs of global oil markets."

The United States last year became a net exporter of crude oil and oil products. Yet it is still importing oil—including, surprisingly, from Russia—at a rate of more than 6 million bpd. Continued imports are one aspect of the incomplete energy independence. It is hypothetically possible to bring imports down to zero at some point in the future. What cannot be brought down to zero is the dependence of any one oil-producing economy on international oil prices. Being an exporter of the most traded commodity is a mixed blessing. It's good when prices are high and not so good when they tank.

Washington's reaction to the latest events in oil is a clear enough indication of this dependence and its unpleasant nature. Last week, media reported that the U.S. oil industry had started a lobbying offensive against Saudi Arabia and Russia, calling for sanctions and tariffs on imported oil to get the world's number two and number three top producers to limit production. 

If anyone thinks that there's something missing, they are right. The U.S. oil industry, like the U.S. President, is calling on other producers to limit their production, but there is no official word—besides Sitton' s—that the U.S. is ready to join the cuts. It reflects the dominant, long-standing mentality: OPEC manipulates prices through production adjustments. OPEC—and its partners—should act now.

Related: Will This Be The Slowest Year Ever For Oil & Gas Mergers?

Low oil prices are bad for every producing nation, especially if they are as low as they are now. This means that every producing nation has a vested interest in production cuts. However, this is not the only consideration, at least from the Russian and, to a lesser extent, the Saudi perspective.

The oil price war was called by many a war on U.S. shale. Although last week Saudi Arabia lashed out at Russia for allegedly unjustly accusing Riyadh of playing against U.S. shale, weaker U.S. shale is even better for the Saudis than it is for the Russians. The former have a higher breakeven price than the latter and are more vulnerable to competition from the United States. If OPEC+ now agrees to cut production without asking the U.S. to do the same, it would effectively hand over the crown of the global oil decision-maker to Washington. While Saudi Arabia may be on board with this, Russia may have misgivings.

A lot of geopolitics revolves around oil. It's not surprising since the world runs on oil. But because of that close connection, it is often hard to see where oil ends and geopolitics begin. All producing nations want prices higher than they are now. Yet from a geopolitical perspective, some may be willing to suffer another few weeks of superlow prices to make a point, the point being that no one country could or should have the final word on how much the whole world produces.

By Irina Slav for Oilprice.com

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  • Mark Potochnik on April 07 2020 said:
    The answer is wind + Solar + batteries.
    The cost drop is something that oil can not compete with.
  • Bill Simpson on April 08 2020 said:
    Electric cars will soon take over the roads. The more expensive gasoline gets, the faster it will happen. I would even buy one, once the price drops some, in a few more years.
    A well built electric car could last a lifetime, anywhere they do not use salt on the roads. The only maintenance they would need would be tires, some suspension parts (which I just changed myself on the old Expedition) and eventually, a new battery pack. Seats and carpets will need a change, or two, during the cars lifetime. Companies that will change them for you in two hours will pop up in every big city. Some company will make a standard model, like the old VW Beetle. Millions of the same vehicle could significantly lower the unit price.
    Electric vehicles have no cooling system to leak and maintain, no expensive complex transmission, no exhaust system, no motor oil to change and eventually start to leak, and only a handful of moving parts, compared to a car driven by an internal combustion engine.
    The ICE is doomed for cars. They will still run trucks, trains and tractors, but that will be about it. Even railroads might go electric, if the government gives them the money to convert to electric locomotives. Those are better than diesel too. Electric motors just run and run. Think how long refrigerators last - decades.
    Most of aviation will eventually go away, after automation moves factories near where the final consumer of the product lives. That will take another 25 years, but it is coming. Airliners will not disappear completely, but there will be far fewer flying than there are today. Where I live, hotter temperatures are no longer a future concept of some scientist. It is beginning to set heat records year after year. People are starting to actually feel global warming.
  • Jonathan Cooper on April 08 2020 said:
    The US can not control its oil production because 1) it violates US anti-trust law! Producers can not collude to lower production and thus drive-up prices! 2) we have hundreds of small, medium, and large independent companies producing, which is different from Saudi and Russia where production is government controlled. If we (who would that be - this guy from Texas? What about production in PA, WY, LO, etc.), or the US government called for production cuts, which companies would reduce production? Even at $25 - 30 per barrel, most producers cover their direct variable costs, and thus it is adventageous for them to continue to produce.

    This oil price war is not an American thing - it is between Russia and Saudi. Let them fight it out... And btw, since the US economy is so strongly diversified, the US economy actually benefits on an overall basis from lower oil prices - look it up!

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