The great fortunes of the oil industry date back to the 1800s. At first, there was kerosene, used as fuel for lighting; then, with the proliferation of internal combustion engines and diesel engines, oil became a major source of energy. With industrial innovation, oil has become the main raw material for the chemical industry, producing major products ranging from fertilisers, synthetic rubber, plastics, textiles, medicines, detergents and insecticides.
A Not So Brief History
The first well was dug in the US in 1859. The race for oil wells caused the rapid amassing of large fortunes, whose largest recipient was an enterprising industrialist: John D Rockefeller. The company he established, Standard Oil, soon became a veritable empire. However, the US government forced him to dismantle it in 1911. The big oil-related interests organized themselves into huge multinational companies, dominated by a group of seven, known as ‘the Seven Sisters’.
In the Middle East, the oil story begins in the last decades of 1800, with contentions between the Germans, the Russians and the British to obtain concessions for oil exploration from the governments of the Ottoman Empire and Persia. This situation began to change after World War II, when new opportunities presented themselves to the states in the Middle East, with the birth of national oil companies smaller than the Seven Sisters.
For many years, oil companies agreed to avoid competition, working to establish an oil price that was high enough to provide them with high profits. As for the countries’ own raw materials, their governments could only receive a small percentage of the profits which were obtained by larger companies who sold the countries’ oil.
In 1950, the Iranian Government decided to nationalise its oil industry. However, Western countries agreed to boycott Iranian oil, thus contributing to an economic crisis in the country. Little by little, though, Arab governments began to get tired of receiving only a small proportion of a product which, after all, belonged to them.
In 1960, in Baghdad, five oil producing countries (Saudi Arabia, Venezuela, Kuwait, Iran, and Iraq) gave rise to OPEC. In 1973, during the Yom Kippur War between Israel and the Arab countries, OPEC agreed on a series of very radical measures: reduced exports and increased taxes on the income of companies, above all driving for a strong increase in the oil price. This led to the first oil shock.
The consequences of this strong and sudden increase were important, as oil-producing nations ended up with vast quantities of ‘petrodollars’. The petrodollars were spent on modernisation and for the economic and social development of these countries. Significantly, a greater extent of the Arab capital was invested abroad or otherwise placed in major financial markets.
Another preferred direction was represented by armaments: in Iran and Iraq, century-old poverty was accompanied by enormous expenses to obtain the atomic bomb. After 1973, the developed importing countries reacted in various ways, in an effort to reduce their dependence on an unstable region like the Middle East: boosting research and the use of alternative energy sources (coal, nuclear energy, hydropower, geothermal, solar, the wind, etc.) and developing energy-saving technologies.
A second oil shock came in 1979, with the victory of the Khomeini revolution in Iran and the establishment of a strongly anti-Western Government and, later, with the onset of the war between Iran and Iraq (1980-1988). This time, however, OPEC fell into a crisis because the differences between its members were increased, due to the problems connected with the management of oil wealth and international politics (like the Palestinian question). It was no longer possible to establish quotas and prices inside the OPEC organisation.
Since then the price of oil has undergone numerous fluctuations, up to the new crisis caused by the Iraqi invasion of Kuwait in 1990. However, it was a short-term phenomenon.
Today the price of oil is settled on the basis of keen competition between the different producers, OPEC and non-OPEC. One of the biggest news items regarding oil today is the imminent IPO of Saudi Aramco – the Coca-Cola of black gold, as Warren Buffet put it. In March, the Director General of the Saudi company Saudi Aramco, Amin Nasser, said the company will be listed locally and abroad in the second half of 2018.
Investment fund managers and institutional investors are already excited and expecting a market capitalisation from $1trn to $1.5trn from the IPO, which will nonetheless see the sale of just 5% of the assets of the Saudi company, according to findings from a survey published by the investment bank EFG Hermes, based in Egypt.
Aramco has recently formally nominated JPMorgan Chase & Co, Morgan Stanley and HSBC as international financial advisors for its IPO. The trio joins Moelis & Co and Evercore, who had already been appointed independent financial advisers. Selling 5% of Aramco represents a pivotal point of the ambitious economic reform agenda ‘Vision 2030’, presented last April 2016 by Deputy Crown Prince Mohammed Bin Salman. The reforms aim to radically transform the Saudi economic system, currently based on the energy sector and on income from real estate investments, by building an industrial fabric and a private sector (which is at the moment marginal at most).
Saudi’s $7bn Renewables Push
Saudi Arabia intends to deploy $7bn into renewable energy projects this year.
Editor’s Remarks: The drive will focus on building solar plants and tenders are to be issued later this year for eight separate projects with a total capacity of 4.125 gigawatts. The move is part of a wider drive to feed the kingdom’s growing demand for energy, which is currently eating away at oil the country intends to export. This latest move is also part of Prince Salman’s wider plan to diversify the economy and rely less heavily on crude production. This strategy has played out in a number of ways to date, including heavy investment into SoftBank’s $100bn Vision Fund.
Read more on Renewables:
Oil Prices Climb to Three-Year High
Oil prices climb to a near three year high with Brent Crude trading at just under $70 a barrel. The recent rally has led to highs of $69.62 per barrel, up from $67.69 at the beginning of the week.
The price of oil has been a depressing case for a while now. Three years ago, overproduction led to an oil glut that had already seen a five-month slide. However, in November 2014, the Saudi-dominated oil consortium, OPEC, refused to slow production, leading to a Thanksgiving bloodbath with prices tumbling nearly 15% by Christmas.
From summer highs of $101.94, prices continued to fall reaching lows of $34.37 at the beginning of 2016. It was not until November of the same year that OPEC conceded to international pressure and curbed output.
If the rally continues, oil prices could potentially surpass $70.15, not seen since the Thanksgiving meeting.
Turmoil in Iran: Will It Push Global Oil Prices Higher?
The price of oil finished 2017 with a mini rally. The new year has started with protests and instability in Iran. Some analysts believe this might drive the oil price even higher – but the opposite actually looks much more likely.
Is the Recent Recovery Temporary?
U.S. oil prices have been on a steady rise in recent months and as expected ended 2018 strongly, above $60 a barrel. According to The Independent, the good news has continued into the New Year, and on Tuesday this week prices opened higher than at any time since 2014, driven in part by OPEC and Russian supply cuts but also by news from the Energy Information Administration (EIA) that the huge U.S. stockpiles are now falling.
Since 2016, US oil production has rocketed by 16% to almost 10 million barrels per day. In October crude exports rose to a record two million barrels per day, with production slated to rise as much as 20% over the first half of 2018. This means US supply is now close to parity with top producers, Russia and Saudi Arabia, and, according to the IEA earlier in the year, will likely create a supply surplus in the first half of 2018.
But is this recovery only temporary? And how will the Iran situation play into this backdrop?
Iran May Not Increase Prices
The demonstrations in Iran initially began in response to high food prices and the weak economy, but in recent days the rallies have taken on a distinctly political dimension. Protesters have begun chanting anti-government slogans and hundreds of people have been arrested. To date, more than 20 people have been killed in clashes with the Revolutionary Guard and the protesters show no signs of backing down.
This is turning into the biggest show of public defiance since 2009 and the Iranian leadership has been quick to respond, blocking access to social networks including Telegram and Instagram on Sunday. Though Iranian officials appear conciliatory, acknowledging the protesters’ grievances, one should not bet on this approach lasting very long at all.
Meanwhile, there are reports that the protests sweeping the nation are being used as a cover for militants operating within Iran, giving them the opportunity to strike at key infrastructure and oil production facilities. Ansar al-Furqan, an al Qaeda-linked jihadist group based in Iran, claimed to have blown up an oil pipeline near Omidiyeh in the southern Khuzestan province, the scene of other attacks by Arab separatists.
Traditionally, Middle East turmoil pushes up the price of oil, and the current spate of protests in Iran have undoubtedly played a part in recent price hikes. But while bad news from the Middle East can prompt an initial buying frenzy, sending prices soaring, there’s no reason to believe this hike is anything other than temporary.
In fact, in June last year, when the Middle East was at its most tumultuous, Brent crude remained unmoved. Years of oversupply kept reaction muted, and many market watchers now expect any further gains to be within a tight range.
The substantial growth spikes of the past are now unlikely and there is, in fact, a reason to believe that the world is on the cusp of big price fall.
Temporary Price Rises Prompt Selling
There are some good reasons to doubt that recent rises are part of a sustainable upward trend. Higher prices may tempt OPEC producers to cash in, release more output, and cause the production deal to fail. The non-OPEC producers (such as Canada and Brazil), not bound by the deal, will see the rises as an opportunity to increase production, and higher prices have already led many US drillers to boost activity.
But by far the most significant indicator of price slump caused by over-production is what’s happening in the US shale sector. Technology and new government regulation are two major forces that could tip world oil prices into a catastrophic slump.
To date, oil giants have been slow to capitalise on the opportunities presented by shale. But over the last six months, they’ve begun to focus on creating efficiencies by taking offshore automation and digitisation technologies and adapting them for use in shale drilling. For example, shale oil drills can now plunge deeper into the earth, pivot and tunnel sideways for miles until they hit an oil pocket.
The US isn’t the only country that appears to be taking energy security more seriously. The EU is also now looking at ways to bolster its own supplies, which could lead to a shale or renewables push in the UK and on the continent. Some people have also recently started looking at alternative, cost-effective renewable sources, like biogas Anaerobic Digesters. This could further increase new competition for oil.
This push by the big players in the US oil industry will bring more wells to production at a lower cost and could ramp up future output and company profits. In addition, the Trump administration is focused on oil. It has already approved the controversial Keystone XL pipeline, brought forward plans to allow oil drilling in the Arctic National Wildlife Refuge in Alaska, and is reported to be considering loosening offshore oil drilling regulations. These moves could easily cause an oil race and create a huge over-supply.
While the turmoil in Iran is playing into the price rises that have been seen in recent days, it’s only a small part of a very big picture. Rather than focusing on how the Middle East affects prices, the world should be lifting its vision and focus on the US and the major non-OPEC nations. It’s what they do next that will determine what happens to prices in global oil prices in 2018.
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