Joseph Rago who is a member of the editorial board at the
Wall Street Journal made a heroic effort to keep it “in the family,” so to
speak. The “family” being America and “it” being the power to influence the price
of oil on world markets … having wrested that power from OPEC.
Rago made the effort in an article he wrote under the title:
“The Oilman to Thank at Your Next Fill-Up” and the subtitle: “The 'accidental
CEO' Mark Papa says even he underestimated the shale revolution, which will
continue despite lower prices.” It was published on December 6, 2014 in the
Journal. There is one problem, however. It is that, when scrutinized, the
numbers tell a different story; and the real picture that emerges from the totality
of the work, differs from the one that is hyped.
The problem is that aside from a scant reference to Libya,
the American hero of the story, Mark Papa whom Rago quotes selectively, does
not seem to be aware of the existence of OPEC. This, despite the fact that Rago
wants the readers to believe is the unmentioned organization that Papa has
wrestled to the ground and trounced decisively. This being the case, the report
creates an incongruity – not because Papa said the wrong things or gave false
numbers – but because the narrative that Rago has spliced together from
cherry-picked bits and pieces, gives a distorted picture of reality.
This is what Rago quotes Papa as saying: “an additional
million barrels of new oil daily … Some of that is 'supply coming out of
Libya,' but the major driver is U.S. shale oil.” And the consequence is that
“WTI has tumbled by about $30 per barrel since June, after hanging out at $100
for three years.” Having made no mention of OPEC, the article leaves the
readers with the impression that the organization does not figure in this
scenario. But those who know the history of OPEC, and know the way that it
responds to price changes, quickly reach out to their calculators, and do some
crunching of the numbers to discover that Rago is deceiving his readers … and
does so deliberately.
Here is the true story. OPEC supplies the worldwide market
with 30 million barrels a day. Normally, it would have cut the production by a
million barrels to soak up the excess on the market, and thus would have
maintained the price at $100. But cutting the production by a million barrels
would have cost the members $100 million dollars a day. In choosing not to cut,
it cost them $30 dollars for each of the 30 million barrels they produce every
day. This is a loss of $900 million dollars a day ... 9 times the $100 million
they would have lost by cutting the production. In fact, OPEC would have cut
under normal circumstances but not this time. Why not?
The answer to that question is that OPEC – led by Saudi
Arabia – has always wanted to maintain stability in the oil markets because it
meant stability in the finances of its members, and certainty in the steadiness
of their development. Opposed to that idea are the speculators – mostly in
America but also in Europe and Asia – who thrive by the chaos they create when
they depress the price of a commodity at which point they buy low, and then
inflate the price at which point they sell high.
That is how a handful of people live the good life at the
expense of millions of others who lack the power to do anything to protect
themselves. Well, OPEC has been able to do something about it in the past. It
did it for the sake of its members, and did it for the sake of many others
around the world. It did it by putting some of the more reckless speculators
out of business, which is something it is trying to do again this time. Will it
prevail? Rago seems to say that Papa is of the opinion it will not, even if
nothing in what Papa has said suggests as much. In any case, we shall have to
wait and see.
Something else comes out the words of Mark Papa. It is that
under the most optimistic scenario which he envisages – mainly that the
reserves of shale oil and shale gas will double over the next few years – peak
unconventional oil will be reached in 50 years, and total depletion shortly
thereafter. This will make it less than half the time it took the planet to
reach peak conventional oil, and a fraction of the time it took to deplete it.