Are oil producers caught in a perfect storm?

Oil was a hot topic at the global elite’s annual gathering in
Switzerland six years ago. It promises to take center stage again
this week at the World Economic Forum in Davos.
Only this time, instead of debating how to find enough energy to
power the global economy, executives and policymakers will
grapple with a supply glut that is hurting producers and could
fuel global deflation.
It’s been a remarkable reversal of fortunes. Back in January
2009, as Davos deliberated, President Obama was taking the
oath of office, promising to reduce America’s dependency on
foreign crude oil.
Fast forward to 2015 and U.S. shale producers are pumping
nearly 4 million barrels a day, more oil than Iraq.
The U.S. energy boom is not the only factor behind the dramatic
swing. Other producers, including OPEC, have been pumping
away furiously, taking advantage of prices around $100 a barrel.
Now the price has collapsed to below $50 as slowing global
economic growth, energy efficiency and alternative sources sap
demand.
Related: Falling oil’s next victim: banks
Relief won’t come from OPEC any time soon, either, if Saudi
Arabia and its Gulf neighbors have their way — and they usually
do.
Saudi Arabia, which has long played the balancing role in world
oil markets — pumping more when demand is strong, trimming
supply when it slows — has had enough. It’s time for other
producers, such as the U.S. and Russia, to do their bit, it says.
“We are not going to cut, certainly Saudi Arabia is not going to
cut,” Saudi energy minister Ali Al-Naimi told CNN in a recent
interview. The veteran minister went further, saying this was “the
position we will hold forever, not [just] 2015.”
As a result, the great and good that attend the annual Swiss
meeting are being forced to confront what will be a painful year
for oil and gas companies, and for emerging markets that
depend heavily on energy exports.
Tracking oil’s fall across four countries
The price collapse is already starting to bite, according energy
services giant Baker Hughes. This month saw the steepest
weekly drop in the number of U.S. oil rigs in service in nearly 25
years. Energy firms are shedding jobs.
Ahead of the Davos gathering, 300 energy executives polled at
an event in Abu Dhabi said they expected prices to remain
between $50-$60 this year.
Oil may eventually stabilize at a higher level of $70-$90 a barrel,
but those prices could be three to five years away, according to
Christophe Ruhl, head of research at Abu Dhabi Investment
Authority, the giant sovereign wealth fund.
That will only happen “when global demand is strong enough to
match … increased production growth in North America, which
we have not seen, and … OPEC production stabilizes at whatever
level they decide.”
Related: Russia facing deep spending cuts
A great deal could happen between now and 2020 in unstable
countries such as Libya or Yemen. Indeed, some experts say the
hard line being followed by major Gulf producers could spark
unrest in countries whose budgets depend on $100 a barrel —
including Algeria and Iran.
“If they inflict too much suffering on some of their neighbors,
those fires that they light with exceptionally low prices can
ultimately lead to radicalization and regional destabilization,
fundamentally threatening the global energy supply,” said Ali
Khedury, a former U.S. military advisor in Iraq and now CEO of
Dragoman Partners.
When oil averaged a record $100 or more for a record five years,
the industry calculated that prices were inflated by about 15%
because of the risk that the Arab Spring would disrupt exports.
Those fears have evaporated as excess supplies flooded the
market, putting pressure on industry executives and world
leaders who are trying to adjust to OPEC’s stand to protect its
market share.