NEW YORK — Two years on from the oil price crash, crude continues to hover around $40 per barrel. With uncertainty caused by Brexit and the flare-up in terrorism, the outlook for the oil market is unclear. The Nikkei recently spoke with energy analyst Daniel Yergin to get his take.
Q: What is your read on recent oil prices?
A: Certainly, I don’t think we’re going go back [to extremely low prices]. I think we’re now in a recovery phase. The market is going to get back into balance. In the short term, it’s now susceptible to the weakness in the global economy, and Brexit, and these other factors. But U.S. oil output is down over a million barrels a day from April of 2015. We think that in the second half of the year, oil prices would be the $50 to $55 range.
Q: What sort of impact do you see from Brexit?
A: It can’t be good for the global economy, but in terms of demand it’s not going to have a big impact. Obviously, this is going to raise the question of Scotland, and then question of: “Whose oil is it, anyway?” I think part of the whole argument for Scottish independence was based upon $100 oil or $120 oil — in this price range. The Scottish economy would be in very big trouble [if it breaks away now]. In other words, Scotland still needs Britain.
But the mindset of the oil industry today is very different from it was two years ago. And one of the things of the last year and a half that’s quite remarkable is that political risk has kind of disappeared from the oil price.
Q: According to one research company, the oil and gas industry will cut its spending by $1 trillion. Is there a risk of sharply higher prices because of that?
A: I think there is. You have to think about this in terms of scenarios. Our IHS number is in the period 2015 to 2020. During that period, that spending is going to be $2 trillion lower than had been estimated before the price decline. And that’s a 44% decline. We’re not going to see the investment that’s required to meet the need for new supplies. When we look out we see the need, over the next five years, to add maybe 5 [million] to 6 million barrels a day of supply. And that’s going to require investment, and the industry isn’t yet in a position to make those investments. Three years from now … we [will] have a tighter market, and a tighter market would be vulnerable to disruptions of some kind.
Q: What is your impression of Saudi Deputy Crown Prince Mohammed bin Salman?
A: Well, I think he has a lot of dynamism, a lot of drive, and he has a very clear view of the necessity to dramatically change the Saudi economy. And I think it’s obviously driven partly by the demographics. Their goal is to not only be the most important oil country in the world, but also to be one of the most important countries in global finance. And I think, in a way, that [the country’s] investment in [ride-sharing service] Uber is a symbol of that.
Q: How well do you think he will cooperate with other OPEC countries?
A: I think the focus now is on [Saudi Arabia’s] own oil development. We think that the kind of traditional OPEC collaboration of the past is going to be a lot less important, and Saudi Arabia is going to focus more on volume and focus more on market share. And, of course, cooperation is made much more difficult by … the great tension between Saudi Arabia and Iran.
They may well increase their production beyond where they are now. … Market share is very important for them. Saudi Arabia needs the oil revenue in order to diversify its economy away from oil. It sounds like a paradox, but it’s the reality.
Q: Won’t OPEC have an important role in managing the market?
A: For now, OPEC is out of that business. I think the market manager is no longer OPEC, the market manager is the market. And so I think that means Wall Street has a lot more impact because of the financial futures markets and so forth, [which] will have a lot to do with the oil price. And I think that OPEC now is more like an association and a framework rather than — it’s not managing supply to balance the market. I think it was historic[al]. In November of 2014, it gave up that role.
We have to look at the oil market in a different way now, not only think in terms of OPEC, but think of “the big three.” And the big three are Saudi Arabia, Russia and the United States. We may have to change our frame of reference, our paradigm.
Q: How do you see China’s increasing oil imports?
A: In the period from 2004 to 2014, 48% of all the growth in world oil demand was in China. It’s going to be a different picture going forward. So Chinese demand will grow, but it will not be as hungry as it was before.
The market that people are now — really starting to focus on is India. And in the first quarter of this year, Indian demand grew more rapidly than Chinese demand, although the economy is only one-third the size. We have India crude demand nearly doubling to around 6.5 million barrels a day in 2040. Up from around 3.6 million barrels a day currently.
Indian demand is going to be a very important factor in the oil market in the next 10 years. The Middle East producers have a new focus on India.
Q: Do you think the U.S. shale industry is through the worst?
A: Yeah, the worst of times was February of this year. I think around $50 [per barrel] … you will see some activity starting up again. I mean, some people, in some places … can make money at $40. But I think for most people the break, you know, to really step up investment — it would be between $50 and $60.
People first thought the U.S. would be a swing producer, and I think we feel that’s not quite the right term, because it’s not like something where you can just push a button and bring it back. So what we say is that the U.S. is the short-cycle producer. That’s the key concept to understand its role in the market.