By William Mills
Reports of oil prices dropping as low as $50 a barrel are shocking the City.
Is there any truth behind these figures?
The biggest recent event impacting on the world energy market is the US boom in natural gas production by hydraulic fracking where water and chemicals are pumped under ground to force trapped deposits of gas to the surface.
US natural gas cannot reach European and other export markets until Cheniere Inc’s LNG terminal in Louisiana ,comes on stream in 2015. However the abundance of US natural gas has had a knock on effect with other energy supplies. Coal has been exported instead creating downward pressure on world prices.
Oil production in the United States has risen while Saudi production has contracted by up to 1.5 million barrels a day in the last six months.
It is predicted that oil supply could exceed demand by as much as 10% over the next three to five years. In 1985 a 2% shortage saw prices rocketing from $50 to $150 a barrel. By 2008 prices fell to as low as $30.
Canada and Brazil
If oil prices drop that low Canada and Brazil’s oil production is no longer cost effective.
Although the fracking boom has created jobs and wealth for the United States, it has not been without an environmental cost. The fracking industry has been plagued with secret settlements by aggrieved landowners claiming their land was polluted. A number of State regulators have tried to order individuals to give evidence at hearings only to have fear of non disclosure ligation hamper their efforts.
Next year a US new federal government report into water contamination is eagerly awaited by industry insiders and residents alike. In the meantime individual state regulators are increasing the pressure with New York and California introducing moratoriums.
Although natural gas is in abundance in the United States at the moment, none the less the price last winter increased substantially. A mixture of a hot summer between Fort Worth, in the south, and Chicago in the north followed by a cold winter certainly put pressure on the prices. But low prices have also brought the drilling industry to its knees. Runaway production has been brought under control to try and bring prices, hovering around $4 a unit, up to a level where renewables become profitable.
New pipelines coming on stream to Mexico and Canada are further tightening supply along with fracking restrictions near built up areas.
The energy markets are certainly worth watching.