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Saudi Arabia’s Gift To America’s Shale Producers

Mark P Mills, Forbes

It’s amazing how fast we’ve come to take for granted that the United States is now a petroleum-exporting nation. The first crude exported in over 40 years left the Port of Corpus Christi for Italy on a small tanker on December 31, 2015. Exports have risen so fast that now America ships out more petroleum than nine of OPEC’s 14 member nations.

But the latest and literally really big news: This week at the Louisiana port called the LOOP, for the first time ever, a supertanker – the Saudi-owned VLCC Shaden — was loaded with American crude and departed. Destination: China.

The LOOP, the only U.S. port able to accept a supertanker, came online in 1981 at a cost of $2 billion (inflation adjusted) in order to import oil. With the shale gusher continuing, and supertankers the cheapest way to transport oil, the LOOP’s owners sensibly reconfigured the terminal for exports. The future? The Energy Information Agency (EIA) new Annual Energy Outlook 2018 forecasts the U.S. will become a net energy exporter by 2022 (counting natural gas where the U.S. is already a net exporter).

See my Manhattan Institute paper from six years ago in which I forecast the U.S. could and would become an exporting nation, followed by another policy paper calling for the LOOP to be reconfigured for exports.

The Shaden’s voyage comes on the heels of a public spat last month between the Saudi oil minister, Al-Falih, and the International Energy Agency (IEA) over the IEA’s January 2018 report calling America’s shale growth “explosive.” Al-Falih accused the IEA of an “oversized focus” on shale, saying, “we should not be scared.” For its part, the IEA responded: “U.S. shale in the past decade is one of the biggest game changers in oil production history.”

Let me go one step further: The growth of U.S. shale hydrocarbons is the most energy that has been added to world supply in such a short time in all of history, for any kind of energy. The only event that was close was the rise in output in the 1960s from Saudi Arabia’s massive Ghawar oil field. The latter event reset the economics and geopolitics of global energy markets for a half century. The former will too.

Whether you are an investor or a policymaker, trying to sort out shale’s implications for energy markets (more on the investing part shortly) entails a kind of intellectual whiplash. We’ve lived through decades of hearing that the world and especially the United States would soon run out of oil, an ostensibly prohibitively expensive resource. That conviction has driven decades of policies and hundreds of billions of public and private investments intended to replace oil.

Meanwhile, every credible forecast sees global oil consumption inexorably rising. It’s not hard to figure out why. A doubling in the number of cars in the world will push oil demand up no matter how fast batteries get built or how successful Tesla becomes. (For more on that arithmetical reality, see my earlier column.) And a doubling in forecast global air travel will lead to aviation oil demand rising by an amount nearly as great as automobile demand. You can take to the bank that lithium won’t replace hydrocarbons to propel A380s and Boeing 787s.

Last month China, now the world’s biggest importer, set new records buying nearly 10 million foreign barrels per day. While China’s energy growth rate has slowed a little, its demand is still forecast to double over the next 15 years. Then comes India, already importing 50% as much oil as China, on track to double in just a decade.

Still, there is a school of thought that batteries and renewables will expand enough to soon cap and decrease oil demand. But even the most optimistic predictions don’t foresee peak petroleum demand for two decades. For investors and producers that means 20 years of growth. For the record, political aspirations aside, civilization needs so much more energy that the real future is one where both energy domains grow.

With the world already consuming nearly $5 billion of oil every single day, the addition of America as a new supplier is good news for consumers everywhere. The only way oil prices are moderated is when producers supply more than the market needs. The inverse, a supply shortage whether caused by financial or political crises, or by cartels turning down the spigot to manipulate markets, leads to higher prices. Which brings us to a price forecast, at least a short term one.

The second gift the Saudis are handing to America is the planned IPO of Saudi Aramco, or at least part of that behemoth (likely the refining part). For the near-term future, this IPO is the single biggest determinant for oil prices.

An IPO is the fastest way for the Saudis to generate billions of new dollars for domestic programs. Not incidentally, the bet is that the New York exchange gets the listing because a huge financial platform (NYSE is the world’s largest) is needed to handle the world’s biggest oil company, and what will be the biggest IPO in history with a guesstimated $1 to $2 trillion market value.

There is a lot of speculation about whether an IPO will happen this year or next. But it’s no secret that the Saudis want OPEC to cooperate to hold production down to avoid over-supplying markets in order to keep petroleum prices up. The goal is a goldilocks zone: not high enough to hurt global economies, not so low as to discourage potential investors about the IPO’s value.

The problem (for the Saudis not consumers) is that the goldilocks’ price is deep in the pay zone for U.S. shale producers.

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