The New Oil Sector, Fracking.

The New Oil Sector, Fracking.

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The demand for commodities is often cyclical, such as price fluctuations. In the oil market history repeats itself. In 1985 Saudi Arabia was the biggest oil producer, OPEC, rose production to increase supply, inducing a slump in prices and hurt their competitors. And it did. In 2015, the core of the story resembles again, but a new actor has revolutionized the game: fracking. Unconventional extraction techniques have made the United States become the world’s largest oil producer and have changed the oil map. According to data from BP, Saudi Arabia 30 years ago it drew about 3.601 million barrels a day, a quarter of its production only five years before. This fall was not accidental: in 1973 OPEC declared an embargo on exports to the USA, Canada, the Netherlands and Japan, in retaliation to Washington’s support for Israel in the Yom Kippur War. The decision paved the way for the entry of new countries on the market: Mexico, the United Kingdom, Norway, the Soviet Union and the United States through Alaska.  These countries increased global supply during the following years of the embargo.

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Western oil bonanza did not last long. The following year Riad flooded the market with 5.208 million barrels: the oversupply led prices to collapse, down by half. OPEC strategy worked: the crash forced many Western producers out of business by high costs. 30 years later, the dynamics that regulate the market are similar. In the second half of 2014 the price of Brent crude fell 50% to $ 60. OPEC did not change its production to induce an oversupply and low prices that penalize their new competitors. The oil market has turned a corner after the emergence of this technique, with which traditional producers suffer. The intensive use by US companies of hydraulic fracturing or fracking, on the ground -the introduction of a mixture of chemicals and water that breaks the rock to extract US CRUDE pushed production to 11.644 million bpd and he has become the world’s largest producer.

Costs down

“Unless there is a change in US policy, fracking will live in the future. The production costs for companies using it are gradually diminishing, “said Simon Henderson, director of Energy Institute Washington think tank. In late June there were 859 active oil wells in the US, 1104 less than a year earlier becoming first oil production in front of Saudi Arabia. The fact that the US does not need to import more oil has transformed international trade flows. “Nigeria, an important member of OPEC [produced 2.361 million barrels] had in the US the main destination of its exports. Now the market that emerges most strongly is Asia. So the geographical position of Nigeria has gone from a handicap advantage, “says Ariel Bergmann, an economist at the University of Dundee (Scotland). Demand from China, India and the booming economies of Southeast Asia amounted to 29.858 million barrels a day in 2014, 21% more than 10 years earlier.

This evolution seems far from stopping. The consultancy IHS figure 140,000 million barrels that could be drawn outside the US due to fracking. And the weaker OPEC members seem most damaged by the expansion of a technology that, according to Jamie Webster, his spokesman, “is extensive and enduring.” The ratio of savings to GDP of Saudi Arabia was 17% in 1985. In 2013 (the latest figures available) rose to 44%. This, along with a public debt among the lowest in the world, let hold prices down. However, other traditional producers, “and cut costs, and many, like Venezuela, struggling to sustain their economies and not lose market. For Saudi Arabia this scenario is far, “says Webster. Continue calibrating production to induce changes in prices, since oil in the country strategies are decided at the state level and are fast. In contrast, in the US depend on a multitude of companies and are not as homogenous, detailed Bergman, who adds: “The fracking has changed the map of world oil.”

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