Count Harold Hamm, the billionaire CEO of
"Notice how it happened all at once," he says, starting off our phone call. The suddenness of oil's plunge followed the Saudi assertion a week ago that oil was in oversupply, they could live with $80 oil for a couple years, and didn't plan to cut their own output.
Empty talk, not market fundamentals, moved the price, says Hamm. "It's not supply-demand related." On the contrary, "this is one country, the Saudis, attempting to dictate world oil prices."
And it's not going to work, he says. If the Saudis really want to send oil prices lower -- as a method of applying political pressure to Russia and Iran -- they'll have to back up their jawboning by adding more barrels to the world market.
OPEC would like to grab back market share from U.S. drillers, but neither the Saudis, nor any other OPEC producer has any excess production capacity with which to push aside American barrels. So the hope is that they can slow the American oil boom by just talking prices lower, below the break-even point for drilling tight oil out of shale.
"The market is not in glut," says Hamm. "It's a case of the emperor has no clothes."
Indeed, the U.S. government's Energy Information Administration estimates that global oil consumption (91.5 million bpd) has kept pace with supply growth (91.8 million bpd).
And although fossil fuel demand is stagnant in developed nations like the U.S. and across Europe, it continues to surge in developing nations, with China's daily demand increasing by 370,000 barrels in each of the past two years, according to the EIA.
"We need more supply. It's crazy to think that China and India won't continue to demand more oil," Hamm says. "Even if overall economic growth slows, oil demand will grow, because they want something other than a bicycle; they want to farm with a tractor instead of oxen."
What's more, the oil industry is constantly fighting against natural production decline rates. Worldwide, output from the average oil field declines by about 5% a year. Declines are much steeper in the big new U.S. fields like the Bakken and Eagle Ford, where a well might come on line at 1,200 bpd, but lose half of that within four months. Even with technological advances to get more oil out of old fields, drillers need to bring on about 4 million barrels per day of new volumes, just to keep world production flat.
And although there remains some low-hanging "easy oil" to be harvested in Iraq and Iran, most new supplies will require sustained high oil prices to justify investment -- prices higher than the $100 or so that we've seen in recent years.
American drillers in Texas, Pennsylvania, North Dakota and Oklahoma, have shown how horizontal drilling and hydraulic fracturing can unleash a supply boom. Hamm's
The world should frankly be shocked that $100 oil hasn't unleashed a supply boom anywhere outside of the U.S. Take Venezeula, for example. That country depends entirely on oil revenues to keep afloat and supposedly has the world's biggest recoverable reserves, at some 500 billion barrels. And yet in the past decade Venezuela's output has slid from 3 million bpd to 2.5 million. Sure, Venezuela is run by buffoons, but you'd think that with the survival of their regime at stake, they would have figured out how to at least keep oil output flat. That Caracas is not squabbling with Kuwait and Abu Dhabi and Algeria over who should get more room under the OPEC member quotas to sell $100 crude to the world indicates that maintaining, let alone expanding, crude supplies isn't as easy as they'd like us to think.
Indeed, Hamm doesn't believe the oil industry dogma that the Saudis maintain an extra 2 million bpd of spare capacity they could turn on to meet a supply disruption, says Hamm. "They Saudis don't have the capacity. They are wide open."
In time, the Saudis will need to start their own horizontal drilling campaign like we've been doing in the United States, says Hamm. But they don't want to, because it would be expensive to ramp up, and the margins are much slimmer than what they derive from supergiant fields like Ghawar and Manifa. Such a move would indicate that even the Saudis had run out of cheap oil to exploit, thus requiring a structurally higher oil price for the Kingdom to balance its long-term finances.
With this latest effort to jawbone oil prices down, the Saudis "have overplayed their hand," says Hamm. "It will be increasingly challenging for them to simply talk down oil prices."
