Jack Worthington's Social & Investment Commentaries

RT News “OPEC is a struggling dinosaur in the age of shale”

Posted in Investment & Social Commentaries by Jack Worthington on December 9, 2014

RT News “OPEC is a struggling dinosaur in the age of shale” – My recent interview with RT News regarding geopolitics in the world oil industry.

Unlike classic microecon in the relatively free market West, the true “microeconomic” cost of production for a sovereign oil producer, is the cost of retaining political power for the current regime.  I.e. what amount of government spending on social safety net programs must that government provide to retain power / prevent overthrow.

To reasonably forecast the world oil price in the current environment, one should estimate budgetary costs in US$ per barrel terms for the major OPEC and non-OPEC producers, and compare with the classic microeconomic costs for “free market” shale producers in the US.  How long can the sovereign producers of OPEC, et al, keep overproducing to keep prices far below their true cost of production (social stability)…in an effort to drive marginal US shale producers out of the market?  It’s a time forecast.

When the price of oil eventually rises as a result of this short-sighted, short term strategy, free market producers re-enter and drive prices lower again…a vicious cycle for high cost producers…they must overproduce again to drive “marginal” US shale producers back out of the market…temporarily.  The piper will eventually need to be paid; i.e. “high cost” sovereign producers will need to re-adjust their societies expectations in the new age of shale.

Some argue that new shale production is a temporal blip on the screen.  The new shale tech we see in the venture capital pipeline is truly extraordinary.  Expect continued and significantly increased dislocation in this industry, and social instability in sovereign producers, as the world energy map continues to change.

In 2011, prior to the US Presidential elections, I made this exact prediction, produced a video presentation, and suggested a path forward which might help to smooth the transition for all countries involved.  Few people will listen to anyone who suggests US energy independence is a significant threat to world peace if not handled with the utmost wisdom.  It’s like I attacked motherhood or apple pie.

Well…here we are folks.  Enjoy that apple pie…but the ala mode topping might not be to your liking.

JW

NY, NY

9 Dec 2014

 

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