As the year is drawing to a close, The Fuse is looking back at 2017’s critical developments in global oil markets, alternative transportation, and the geopolitics of energy. This past year, news surrounding energy security continued to occur at a rapid pace, with OPEC extending its production cuts (twice), car companies outlining their strategies for electric and autonomous vehicles, and geopolitical supply outages increasing oil prices. We’ve published numerous stories and infographics, commenting on the major energy security issues of the day. While we take pride in all of our content, below are 10 standout pieces from 2017. Please enjoy, and thank you for reading The Fuse.
- Jonathan Chanis, It’s Déjà Vu All Over Again: OPEC, Petroleum Investment, and the Threat to U.S. Consumers and Energy Security
The petroleum business has always dealt with a volatile investment cycle. Companies need large-scale funding and projects take years to complete, making it difficult for the industry to plan long term. This piece explores how OPEC’s policies over the decades have distorted the oil investment process and how underinvestment during the weak market of 2014-16 is setting the stage for higher prices next decade. Since it was founded in the 1960s, OPEC has played a large role in contributing to the extreme shortages and surpluses in the global oil market.
Key Excerpt: OPEC’s efforts to keep the market undersupplied, its refusal to open most of its acreage to private oil companies, and its general lack of competency in balancing investment with demand have made the markets more volatile and less secure for energy consumers. The famous 1973 Foreign Affairs article heralding the impending oil supply crisis was titled: “This Time the Wolf Is Here.” Well, it is slightly too early to say the wolf is once again at the door, but he is certainly circling the house.
Countries that rank low in cyber readiness account for more than 44 million barrels per day, approximately 45 percent of the world’s daily oil production. This is worrisome because if hackers are successful in shutting down supply in one of world’s major oil producers, prices would rise significantly. The feature looks at why OPEC countries are unprepared for cyber attacks and how their governments and state-run oil companies are combating this threat. With the increase in automation and information technology, oil-producing countries will only become more vulnerable.
Key Excerpt: Connectivity opens opportunities for hackers to find exploits. Geographically distributed online architectures—called supervisory control and data acquisition systems—enhance network efficiencies, and enable top-down decision-making. However, the diffusion of these virtual systems creates pathways for hackers to access unguarded systems, a notable contrast with older, closed-circuit networks. In the Middle East, the high concentration of oil and gas networks and the increasing levels of sector-wide automation create opportunities for actors who are intent on disrupting supplies.
Autonomous vehicles have immense potential to alter how we travel. They have the potential to cut fuel consumption, limit congestion, and significantly reduce the number of deaths on roadways. They will also bring profound changes for the disability community, given that many face transportation barriers when looking for employment. The Department of Labor’s Office of Disability Employment Policy (ODEP), along with Securing America’s Future Energy (SAFE), hosted an online dialogue to promote ideas around AVs helping members of the disability community seek stable, long-term employment. This feature explores how issues such as wheelchair access, government policy, affordability and access in rural communities, and other challenges will be crucial in overcoming transportation obstacles for the disabled.
Key Excerpt: Nearly one in five Americans, or 57 million people, have a disability according to Census Bureau data. Over 15 million Americans face transportation barriers, including 6 million individuals with disabilities. Lack of timely and affordable transportation access creates a significant challenge to long-term employment. Paratransit options through public transportation in certain cities provide some assistance, but they are far from ideal—it’s not uncommon for such services to require four hours every day in commuting time (two hours in each direction). Upgrading a personal vehicle to become wheelchair accessible could cost $100,000 per car.
- Matt Piotrowski, North Dakota’s Economy Looks to Escape Oil’s Boom-Bust Cycles
Shale oil output in the Bakken fields of North Dakota was a huge boon for the state’s economy when production was rising and prices were high. But North Dakota took a significant hit when the market fell sharply in 2014, causing many workers to leave the state and triggering a large hole in the deficit. The state’s fortunes have turned around, thanks in part to the rebound in prices and greater fiscal austerity. Moving forward, the state will continue to adapt to a new normal by managing its resources and finances prudently to deal with price volatility and developing deeper economic diversification.
Key Excerpt: The state was not shock-proof. Since oil prices fell in 2014, the number of total jobs in the Williston area declined by a third, and transient workers who were laid off left the state. Most of them had resided at “crew camps” and didn’t move to North Dakota permanently. As a result of those workers fleeing the Bakken area, North Dakota has had to contend with declining revenues from the sales tax. The state has also suffered from a loss of windfalls from production and extraction taxes.
- Nick Cunningham, U.S. Poised to Play a Dominant Role in Global Gas Markets for the Foreseeable Future
As the U.S. has become an energy superpower, the country has reaped the benefits of exporting supplies. U.S. refined product exports have been high for some time, while crude exports rose significantly this year. Now, the U.S. is also sending LNG to customers overseas, including Europe. The first cargoes landed in Europe this year, eating into Gazprom’s European market share. Exports should continue to rise. The International Energy Agency and others expect the U.S. shale gas revolution, despite a number of bumps over the years, to persist.
Key Excerpt: The U.S. is set to become one of the largest LNG exporters in the world by 2022, rivaling Qatar and Australia for the top spot. The U.S. will account for 40 percent of the total increase in gas supply over that timeframe, more than any other country. This suggests the faltering U.S. production levels in 2016 were an aberration, a side effect of both low natural gas prices and the collapse of oil prices, which cut the output of associated gas.
- Matt Reed, Trump vs. ISIS Oil
Terrorist group ISIS saw many battlefield defeats this year. The U.S. started attacking the ISIS oil trade in September 2014, but the campaign was cautious for the first year. However, in October 2015, the launch of Operation Tidal Wave II, designed to cripple the ISIS oil trade, increased the pressure on ISIS. The U.S. started hitting oil wells by the dozens and trucks carrying oil by the hundreds, and in 2017, strikes against ISIS oil rose sharply.
Key Excerpt: There’s no doubt ISIS oil production and revenue fell dramatically last year. Going into 2017, the only question was whether a new U.S. president would stick with the old game plan or double down on a winning strategy. The numbers tell us that President Trump doubled down–with gusto. Add up the ISIS oil assets hit since 2014 and you’ll find two out of every three were damaged or destroyed in the first six months of this year.
China has now overtaken the U.S. as the world’s top oil exporter, marking a historically significant milestone in Chinese history and the world economy. This feature explores the geopolitical ramifications of this shift. China’s growing economic clout will extend the reach of the Chinese yuan, solidify an increasingly central role for China in international events, and give China more influence in oil markets. At the same time, it will also expose Beijing to domestic and international unrest, conflict, and other unintended consequences.
Key Excerpt: The most challenging aspect of increased reliance on imported oil is the political and investment risk that comes with closer ties with oil-producing countries. The Chinese strategy is complex and relies heavily on regional organizations to solve problems. However, in the case of the Middle East, in the era of renewed Sunni and Shi’ite conflict, the regional powers often have diametrically opposed agendas. A growing footprint in conflict-prone places may only heighten the potential for instability, forcing China to act to protect its citizens and economic interests.
- Matt Piotrowski, Permania Isn’t a Panacea for the Long Term
Shale has upended the global oil markets this decade and significantly improved U.S. energy security. Yet there is ongoing debate about whether shale will be able to stabilize oil prices for the longer term. A number of market watchers believe that growth in the Permian will be a savior for the oil markets well into next decade. But declines at existing fields, both conventional and unconventional, and continued strong demand growth mean that a supply-demand gap will eventually form, even if growth meets the high end of expectations in West Texas.
Key Excerpt: Even if you assume the Permian grows by the most optimistic scenario of a 1 mbd annual increase over the next decade, the world will still need at least 3-3.5 mbd of other new supply per year to accommodate demand growth and offset declines during that timeframe. The Permian will be the most closely watched production area in the coming years (except for maybe OPEC heavyweight Saudi Arabia, of course), but it shouldn’t be seen as the panacea to cap prices over the longer term. The global oil market has to deal with a lot of other trends outside West Texas that may cause a supply gap and price spike down the road.
Every year at the world’s premier energy conference, CERAWeek, top CEOs, analysts, and OPEC representatives gather to discuss the state of the oil industry. The mood at the conference in 2017 was relatively upbeat since oil prices had rebounded significantly from their 2016 lows. But also at the event, there was more discussion of a coming transportation revolution that consists of electrification and automation that will likely significantly affect oil demand.
Key Excerpt: The oil industry is encouraged by the return of stronger-than-anticipated demand growth, with high profile industry representatives ranging from the Executive Director of the IEA to the Saudi Energy Minister to the CEO of one of the biggest U.S. shale independents making the case that concerns about peak demand should be all but completely dismissed—good news for an industry that depends on sustained demand global demand growth for its product. But in a side panel removed from the conference’s primary keynotes, transportation experts laid out a very different vision for the future of mobility, expressing confidence that—at least in urban centers—a shift towards efficient, autonomous, electric vehicles is a matter of when, not if.
The initial public offering (IPO) of Saudi Aramco is at the center of the Kingdom’s “Vision 2030” strategy, which targets economic diversification and reduced reliance on oil export revenues. Even though the plan would shield the country’s economy against the negative effects of low oil prices, opening Aramco to an IPO may not sit well with many inside Saudi Arabia. This article explores internal doubts about the public offering, difficulties with assessing Aramco’s valuation, and the Saudis’ role in OPEC if and when the IPO is launched.
Key Excerpt: Although Vision 2030 has been widely touted since its April 2016 reveal, the Saudis have barely acted upon it despite their desire to reform many times over the years. Even with the current plan’s veneer of potential, the recent rumblings of opposition within the nation and the plan’s implications for Saudi Arabia and OPEC’s futures show that its ultimate implementation has many challenges yet to overcome.