Sometimes the powerful let slip what they are really thinking and often times it is missed in the day to day inundation of information that passes in front of our eyes. Here is one such “paradigm shifting tidbit”.
Today, Saudi Arabia’s oil minister laid the facts bare. The biggest oil producer in the world now thinks that oil dominance is over.
The implications are potentially “revolutionary” in how the world will function going forward.
The Saudi comments of course make sense to any independent observer, but to come from the owners of the biggest store of oil on the planet and the biggest producers … its a bit like GM saying the future of transportation is in public transport and not the family car.
In brief here is what this could mean:
1. The Saudi know they have a crap load of oil that they still need to sell before oil loses its role.
2. If the role of oil will diminish it makes sense to sell as much as you can now, and make sure you keep market share and not let others steal your revenues. This will be the Saudi approach.
3. The Saudis (as the lowest cost producers) will attempt to keep prices low enough to put higher cost producers out of business and make sure that there is no appetite for new exploration in higher cost jurisdictions.
4. The US shale oil business grew like nuts on technology and very cheap credit. Now low prices mean not only that the boom is over, and that companies will go bankrupt, but also that there will be severe implications to investors and banks that funded the blowout. A lot of money will disappear, and not come back.
5. Countries that have benefited from high oil prices (Norway, UK, Canada, Brazil, Russia, Mexico etc.) will suffer. Developing countries with high imported oil bills will benefit immensely. Countries with lots f sun could do well.
6. The move to renewables will slow a bit, but the technological advancements will keep pushing costs down. Ethanol may be in trouble, with all it implies for mid western corn farmers.
7. Energy costs will stay low for a while. It will take a couple of years for the weakest to be eliminated, for exploration to dry up and for depletion to lower production to meet demand.
8. When prices do go up watch the major low cost producers keep a lid on prices to protect market share.
It is important to realize that the decline in prices has more to do with the owners realizing that the they need to move a lot of stock before what they are selling goes out of style. It is not due to a sudden discovery of new oil — although US shale oil did upset the supply demand balance in the near term, and force the hand of the Saudis to move earlier than they would have liked to. But now that they have made their move, the readjustments will be epic.