(Newswire.net — December 18, 2014) — Psychology rather than economics will determine the winner of the oil war, experts say. According to Oilprice.com, US will lose the oil war because “the US shale producers are motivated by economics, and all other things being equal will have an incentive to cut production at or around the point where production cost exceeds sales price.”
On the other hand, the OPEC countries are motivated by social imperatives, Roger Andrews a retired mining geologist and geophysicist wrote for Oilprice. He said OPEC countries have “historically used their oil wealth to finance social programs, build infrastructure and subsidize basic foodstuffs and other items such as gasoline (which costs one cent/liter in Venezuela)”.
As long as the oil price exceeds cash production costs, which it does in all OPEC countries, they in fact have an incentive to increase production, Roger Andrews estimated.
In the US, experts agree that almost all US shale oil production is economic at crude prices of $70/bbl, but 40% of it becomes uneconomic at prices below $60/bbl and almost 90% of it at prices below $50/bbl.
The OPEC countries, however, have two different production costs, according to Andrews. One is the cash production cost, which is usually much lower than the cash production cost in US shale projects. The other is the “budget breakeven” cost, which is the oil price needed to cover production costs plus social spending which is usually considerably higher than the cash production cost in US shale projects.
Andrews points out that estimates defers from OPEC sources to US sources which is, Andrews said, more reliable. Thus, for his estimation he used ‘oil price needed to balance fiscal 2015 budget’ numbers provided by the Wall Street Journal.
The more a country depends on oil, the more it is hit by the price decline. Of OPEC countries, Kuwait is the most oil-dependent economy, closely followed by Libya and Angola. Under sanctions, Russia’s economy is suffering; however, Russia is the least oil-dependent country, so they have time.
The primary use of sanctions against Russia is to undermine their attempt to trade oil using their own currency because they need a stabile currency to trade, which is the petrodollar. However, the main issue for the US is time, actually the lack of it, since America’s economy is highly dependent on the oil price. If this low price per barrel scenario continues long enough, experts estimate the whole US economy will be compromised.
Andrews estimates that “no OPEC country is going to stop pumping because of economic constraints, nor is any OPEC country facing budget shortfalls – which is all of them except for Kuwait and Qatar – so no one is going to cut production in an attempt to drive up the oil price.”
Andrews says, that Venezuela and Nigeria are prime candidates to buckle under pressure and Iran is a follower. He estimates, that low oil prices could be with us for some time.