There are strong indications that the price of oil may collapse in 2018. Recent developments point to an impending fall in oil prices, even though actual prices have been up lately.
The biggest damper on oil prices in the near future would be the United States becoming the number one petroleum producing nation. That will happen in 2018, the International Energy Agency (IEA) predicted.
How America can Keep Oil Prices Low
The IEA forecast that the USA might pump 10.4 million barrels of oil in 2018, which would overtake Saudi Arabia as the world’s largest producer, CNN Money reported. That can lead to far lower oil prices because America has absolutely no incentive to keep oil prices high.
Oil-production is a sideline for the United States; policymakers in the country generally ignore it. Worse, U.S. politicians have a strong incentive to keep oil prices low to keep gasoline prices low and voters happy.
That means there will be no government efforts to limit production in the USA like there are in Saudi Arabia and Russia. On the contrary, American politicians have a strong incentive to encourage more oil production; because it can lead to more tax revenue from oil exports and fuel taxes. Something to remember is that gasoline taxes pay for highway construction and maintenance in the USA.
Why American Oil Production will Increase
Another factor will be public pressure; there will be little or no public pressure to keep oil prices in America high. Instead, the pressure will be to lower them which will encourage more exports.
Beyond that American oil producers are private companies, the more oil they produce the more money they make. The market gives them a tremendous incentive to increase production.
Technology adds to this by making it cheaper to drill oil. As the price of production goes down the incentive to increase volume, and revenue, increases. Large producers have another incentive to increase production, high volumes drive out smaller producers, and help them capture more market sale.
An example of the way technology is lowering oil-production costs is automation. Robots called “iron roughnecks” reduced the demand for oil exploration crew members from 700 in 2015 to 177.4 in 2017, Scott Santens noted in Futurism. Such automation means cheaper production and lower oil costs.
How US Oil Production can Kill OPEC
Since American oil drillers are the most technologically-advanced they are in the position to have the cheapest production. That means US producers are in a position to pump vast amounts of oil at a very low price and still make money.
This ensures that Russian, Saudi, and OPEC efforts to jack-up prices by lowering production will fail. When those nations lower production, American producers will simply turn up the pump. To matters worse, the higher prices give the American producers more incentive to pump more oil.
Since Russia and Saudi Arabia will still have bills to pay, basic economics dictates that at some point they will have to increase production to cover expenses. We may soon see a situation where those countries, which have few other revenue streams, will have to match low American prices or shut down.
Why Oil Production from Developing Nations will Increase
More problematic are developing countries that depend on oil revenues to cover the costs of government. For example, a dictator who needs to pay the army to avoid a firing squad is likely to increase production to cover the soldiers’ payroll.
Something else to remember is that even very low oil prices coupled with a high-volume can still generate a lot of cash. There may not be enough money for schools and roads, but there will be sufficient funds to pay for the dictator’s private jet, bodyguards, Rolls Royce, and a villa on the Riviera.
Developing nations’ leaders have another option to pay their bills – that can drive down oil prices. They can borrow the money, which necessitates a steady stream of revenue to cover the loan payments. An oil-producing nation can borrow vast amounts of money, even with oil prices.
The necessity of paying off the loans will require the country to pump as much as oil as possible no matter how low the price falls. Corrupt leaders will not care because there will still be lots of cash they can steal, even at very low prices. Borrowing benefits crooked officials because the loans are often made in major currencies; such as the Euro or US Dollar which are easy to deposit overseas bank accounts.
OPEC’s Ultimate Nightmare: Chinese Oil Exports
America as number one oil producer is only the beginning of OPEC’s nightmare. There’s an even greater threat to it looming on the horizon – oil exports from the People’s Republic of China.
China is already is already the world’s fourth-largest oil producing country but it consumes all of that production. Electric cars might change that, and turn China into an oil exporter.
Beijing wants one out of five cars sold in China to be electric by 2025, The New York Times reported. That means up to one-fifth of Chinese vehicles will be running on something other than gas or diesel within 10 years. Logic dictates that Chinese demand for oil would fall by around one fifth if one-fifth of the vehicles are electric.
The oil those vehicles do not burn would have to go somewhere, probably to exports. Since the Chinese government has an aggressive push to go electric, its domestic demand for oil is likely to drop dramatically over the next decade. That means China can become as big an oil exporter as the US or Russia.
China as Oil Exporter will Lead to Super Low Oil Prices
That’s truly bad news for OPEC given China’s recent history. The Chinese export strategy one of high-volume production and low prices. They did it with everything from shoes to toys to smartphones, and logic indicates they would do the same with oil.
Oil exports would be a sideline not a revenue stream for China’s government. Faced with falling internal demand, Chinese oil companies will have every incentive to adopt the American strategy of pump, pump, and pump some more. Beijing will have a strong incentive to encourage this to generate export revenues.
In a few years, OPEC may find itself in a world where two of the largest oil-producing nations do not give a damn about the price of oil. Worse, like their American counterparts, Chinese leaders will have a strong incentive to keep oil prices low, to keep the people happy.
To survive the OPEC nations and Saudi Arabia will have to match the low Chinese and American oil prices or undercut them. We are likely to see oil prices follow the example of manufactured goods like clothing and fall to incredibly low prices.
Electric Cars will Make Things Worse
Widespread adoption of electric vehicles, which is now technologically possible, will cause a total collapse in oil prices by wiping out demand.
Several countries including China, Germany, India, France, and the UK have announced serious plans to scrap the internal combustion engine. Those plans are realistic because of recent technological developments.
The auto industry is going along several major manufacturers including Ford, Volkswagen, GM, Daimler, BMW, and Tata have well developed electric car plans. Volkswagen alone wants to invest €20 billion ($24.80 billion) and bring out 50 electric models by 2025, The Financial Times reported.
Elon Musk is effectively demonstrating that electric vehicles can do everything the internal combustion engine can. Elon has even rolled out an electric semi-tractor that major fleet operators; like Walmart, Sysco Systems and Anheuser Busch, are buying. What happens to oil prices when Tesla semis hit the highway in the People’s Republic?
China’s biggest electric car maker BJEV is even planning to cash in on Tesla’s (NASDAQ: TSLA) runaway share price with an IPO on the Shanghai stock exchange, Bloomberg Technology reported. BJEV’s offering might be worth $4.5 billion, cash which would fund more electric car research and development.
Stay away from Oil unless you plan to short it
These plans do not have to be completely successful, to greatly reduce oil prices. Simply replacing 10% or 20% of the internal combustion engines on the road, can lead to a dramatic decrease in demand for oil and send its price into the toilet.
Obviously, there’s a lot that can change in ten years, but it one reality is probable. A lot of people are going to make a lot of money shorting oil prices, oil company stocks, and the debt of oil-producing nations over the next decade. A lot of other people are going to see their oil-related investments become worthless.
Stay away from oil-related investments unless you plan to short them. The likely trajectory of oil prices in 2018 and for the foreseeable future is down and there is nothing that OPEC can do about it.