In 2019, at least two headlines had the potential to send the oil price sky high: At the beginning of May, the US government announced its intention to send aircraft carriers and bombers to the Middle East. At the end of the same month, they announced that 1,500 US soldiers would also be deployed to Iran to underline the threats. Just a few years ago, each one of these two reports on its own would have sufficed to send crude oil markets skyrocketing. But this time the markets remained completely unimpressed. The price for WTI crude remained at around 61 dollars per barrel between the beginning and middle of May, then climbed to $63 for a short time before finally falling to $58 per barrel on 22 May.
All in all, the markets are nervous – between July 2018 and November 2019 the WTI price fluctuated between $85 and $44 per barrel – but political events leave quotations largely cold. Of much greater concern is the actual oil price, which has long been regarded as an important indicator of the state of the global economy. In the autumn of 2018, the prices went down to $43. In December, Opec therefore decided to cut production by 1.2 million barrels a day. As a result, but above all due to the surprisingly good economic data from China, WTI recovered to $66 per barrel (April 2019). The US Department of Energy reported the highest reserves since 2017 – a powerful signal against the background of the escalating trade dispute between the US and China and the already latent concerns about the global economy.
Concerns about Global Economy Depress Oil Price
With regard to investments and locations, however, the short-term development of crude oil prices is not a particularly important factor. Long-term expectations play a more important role here. Short- and medium-term forecasts carry the greatest risk of misinterpretation. Market researchers at McKinsey, for example, assume that the price of Brent crude oil will settle at $60 to $70 per barrel by 2020 – provided that demand remains stable and Opec members maintain their discipline. If the economy clouds over, market researchers expect a setback to $50. At the same time, McKinsey estimates that prices of up to $90 are also possible if oil production in Venezuela and Iran is further restricted.
A similar assessment is made by the American energy agency EIA, which expects a Brent price of $67 per barrel in 2020. The International Energy Agency IEA in Paris assumes that geopolitics are currently casting shadows over the oil markets and the economy is losing momentum. There are also new game changers in the oil market: in addition to growing awareness of the sustainability of oil and gas production, there are new environmental regulations, for example to reduce sulphur emissions from shipping. There the demand will shift from heavy oil with a high sulphur content to oils and ship diesel with a very low sulphur content.
Gamechangers are Reshuffling the Oil Market
The fact that Opec’s production cuts in recent years had only a minor impact is due to the American producers: if the price of crude oil rises due to a tighter supply, shale oil producers immediately fill the gap. According to McKinsey, a Brent price of $75 per barrel is necessary for sustainable economic investments in new fracking plants – albeit with a downward trend. Shale oil production has made the USA the largest producer nation again and that country could even become a net exporter again by 2021. IEA expects American frackers to increase their production from currently 7 million barrels per day to 12 million barrels per day by 2024 – assuming a price of $80 per barrel.
The trend towards shale oil also has consequences in terms of technology: While classic crude oil from maritime or continental deposits has a comparatively high sulphur content, shale oil contains significantly less sulphur and is easier to process. The IEA already sees the second wave of the American shale revolution: This will change international trade routes for oil and gas and also affect global energy geopolitics. According to estimates by the Energy Agency, the USA will cover 70 % of the additional demand for crude oil in the next five years.
From the mid-2020s, global oil demand will decline due to the electrification of the transportation sector, and petrochemicals will then become the biggest demand driver. McKinsey estimates that peak oil will be reached in 2033.
Second Shale Revolution
The development of natural gas is also interesting. Here, too, the geopolitical effects of the second wave of the shale revolution are already being felt – for example in the growing pressure exerted by the US government on customers in Europe to build terminals for American liquefied natural gas (LNG) and to abandon the Russian-German Nord Stream 2 pipeline project. If the American frackers expand production as expected, coal will be further reduced as an energy source for electricity generation. EIA expects the share to rise to a total of 37% (+2%) this year.
For the American chemical industry, the second wave of the slate revolution is also acting as a stimulant. In December 2018, the chemical association ACC counted more than 320 announced investment projects with a volume of more than $200 billion with which investors want to take advantage of low-cost shale gas. While in the past the chemical companies invested primarily in plants on the Gulf Coast in the south of the USA, the second wave could lead to a new focus on chemicals: The ACC estimates that up to 69,000 chemical jobs will be created in the four states of West Virginia, Pennsylvania, Ohio and Kentucky bordering the Appalachian Mountains due to shale gas deposits by 2025 and that 36 billion US dollars will be invested in new plants there. The association expects five new ethane crackers and two propane dehydrogenation plants. According to the ACC, a total of 431,000 direct and indirect jobs could be created with the shale gas-related investments currently announced in the USA. By way of comparison, 453,000 people were employed in the chemical industry in Germany in 2018.
Conclusion: The current oil price is volatile and subject to many influencing factors, of which the development of the global economy is the most important. The extraction of shale oil and gas has a global impact.
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