May 4, 2016

The Oil Era Is Coming to an End

Oleksiy Volovych

The history of world oil industry extends back about 150 years. In 1900, there were 10 oil-producing countries in the world, and they had produced a total of 12 million tons of oil. The world reached the level of oil production of one billion tons in 1960, when OPEC was founded. 100 years later, in 2000, there were already more than 100 oil-producing countries and the oil production level was near 3.4 billion tons. Over the 55 years of its existence, OPEC world oil industry has gone through a lot of turmoil, crises, ups and downs. Over the years, oil ceased to be an energy resource and is increasingly becoming an element of political influence and even energy weapons. Nowadays, oil, politics and morality have become virtually inseparable concepts.

Today, oil is still the most important fossil fuel to mankind. “Still,” because the world's oil reserves are steadily declining. The British company BP has estimated the world's proven oil reserves as of 2014 at 1.7 trillion barrels or 227.2 billion tons of oil. According to the company's forecasts, these oil reserves, at current production volumes, should be sufficient only for 40-50 years. Of course, the rates of oil depletion are different for different countries. One country has oil enough for 10 years, another — for 100, and its reserves depend on the intensity of its production. For example, Russia's proven oil reserves will last only for 21 years of production at current levels. With each year coming, explored, proven and developed oil reserves in the world are getting smaller. It would seem that if there is less oil, its price should constantly grow. But, strange as it might seem, the price of oil has been steadily declining over the past two years despite the fact that the volumes of its production are not reduced, but even grow. The volume of world oil production has increased from 83.1 million barrels per day (b/d) in 2010 to almost 100 million b/d in 2015.

So, the oil age is coming to an end. And good riddance! The burning of oil and coal for the last 150 years has led to terrible environmental changes on the Earth, and their further use in the present volumes may lead to a planetary catastrophe. Therefore, mankind should think about life without using oil as fuel. D. Mendeleev said: “Burning oil is equal to burning banknotes”. Although long overdue, but mankind realized it and began a long and hard struggle against adverse changes in the Earth's climate due to harmful emissions from the use of non-renewable fossil fuels, mainly oil and coal. One of the latest steps in this direction was signing by the representatives of 175 countries in the UN General Assembly of the Paris Agreement on Climate Change (April 22, 2016).

However, it is obvious that today majority of countries of the world are concerned not so much with environmental issues as with the problem of oil prices. Oil-producing countries are fighting for the rise in oil prices and consumer countries — for keeping those prices low. In February 2014, one barrel of crude oil cost on stock exchanges around 110 US dollars. Today, the price of Brent is around the level of 40 US dollars per barrel. According to the International Energy Agency (IEA), the excess supply of oil on the market is approximately 3 million barrels per day (b/d). Energy experts from many countries mention a lot of economic and political reasons for the decline in oil prices in the world market. Here are, in our opinion, the main ones:

The Reasons Why Oil Prices Keep Falling:

1. Growth of oil production in the United States. In 2015, the United States due to the “shale revolution” increased oil production to 14 million b/d, having beaten on this indicator Russia and Saudi Arabia. This became possible thanks to the introduction of new technologies in oil production, such as fracking — hydraulic fracturing of rock strata. Since the US consumes a large portion of their own oil, they have significantly reduced its imports from other countries. However, it seems that in the United States the growth of oil production was short-lived and did not last long due to the low oil prices. Indeed, in January-February 2015 the US mining shale hydrocarbons began to decline due to the fall in world oil prices. Thus, according to Citigroup Bank's experts, despite the withdrawal from operation of drilling rigs in the USA within the next two years (400 — before the end of 2016 and 600 — by the end of 2017), there will be a significant reduction in shale oil production in the United States, which will lead to a decrease in oil offer on the world market.

2. The growth of oil production in Iraq and Iran. In 2015, Iraq ranked second in the world having built up the volumes of oil production — from 3.3 million b/d in 2014 to 4.3 million in 2015, which even exceeds the level of oil production before the occupation of Iraq in 2003. After most international sanctions against Tehran have been lifted, Iran also began to build up oil production and brought it today to 3 million b/d, and it is certainly only a start.

3. The growth of oil production in Brazil. In 2013-2015, Brazil increased its oil production — from 2.6 to 3 million b/d, becoming the leader in the ultra-deep drilling and offshore oil production. However, because the shelf extraction in deep water requires huge investments, which at the current low oil prices cannot pay for themselves, it is unlikely that in the near future Brazil will be able to significantly increase oil production.

4. The KSA's not cutting its oil production. Saudi Arabia could increase oil production dramatically, or reduce it, which consequently would result in a reduction and an increase in oil prices on the world market. However, for various reasons, despite the record budget deficit in 2015, so far Saudi Arabia adheres to the status quo in the oil industry. It seems that the Saudis decided not to sacrifice their niche in the global oil market to curb the fall in oil prices. Moreover, the Saudis are ready to a further decline in world oil prices, mainly due to the low cost of oil (about 5-6 US dollars for barrel), which is three times less than in Russia. With such a low cost of oil, the Saudis may be happy even with the price of 20 US dollars per barrel, while for Russia such a price would mean economic collapse.

According to some experts, Riyadh is ready to continue keeping oil prices low to unconventional oil extraction techniques, such as deep drilling or fracking, cease to be profitable. However, in our view, unconventional oil production technologies are the future of energy engineering, and these technologies will develop, improve and become cheaper, that is why it is impossible to stop their development.

5. Lower regulatory role of OPEC. Currently, 13 OPEC member countries together produce 32.3 million b/d of oil, which accounts for only one third of the current level of world production of 97 million b/d. It appears that OPEC, as a cartel, created to maintain high oil prices in favor of its main producers, is no longer able to stop the decline in oil prices. At present, almost every OPEC member country keeps production at the same level or even increases it. According to the leader of Tortoise Capital Advisors Rob Thummel, OPEC's importance as of a governing and coordinating body decreases, particularly after the failure of the meeting of leading oil-producing countries April 17 in Qatar.

6. Warm winter in the northern hemisphere. 2015-2016 winter in the northern hemisphere was so warm that the demand for oil products for heating systems in the United States, Canada, Europe, Japan and China fell considerably, which in turn also led to an excess of oil on the world market and thus to lower prices on it.


Comparative table of the characteristics of the oil industry of
12 countries with the largest proven oil reserves

(Prepared by the author according to the CIA-World-Factbook)



Proven reserves in billion barrels in 2015

Oil production million barrels in 2014

Oil exports in million b/d in 2013

Consumption of oil products in 2013






746.000 b/d





2.9 million b/d





2.4 million b/d





1.8 million b/d





750.000 b/d





467.00 b/d





2.8 million b/d





694.000 b/d





242.000 b/d





280.000 b/d





19.0 million b/d





10.4 million b/d


The Struggle for Oil Prices.

There is no doubt that oil producers are interested in keeping oil prices high, while its customers are interested in its low prices. And this causes a conflict of interests of producers and consumers of oil. Due to the fall in oil prices, the economies of South Africa, Russia, Brazil, Venezuela, Nigeria and Ecuador, as well as of many other countries, depending on their energy carrier exports, have entered into a recession. Dozens of companies have gone bankrupt and about 250,000 oil workers have lost their jobs. Multinational energy companies Chevron, Royal Dutch Shell and BP had to reduce their employees' salaries, but they are in a much better financial position than many small independent oil and gas producers. According to IMF estimates, the income of Saudi Arabia and its allies in the Persian Gulf in 2016 will decrease to 300 billion US dollars. It turns out that the presence of rich oil reserves in a particular country does not necessarily imply a prosperous economy. For example, Venezuela, which has the largest oil reserves in the world (about 300 billion barrels), is on the verge of economic collapse because of the low prices of oil and the state's inability to invest into development of new oil fields.

February 16 this year, the RF Energy Minister A. Novak and Oil Minister of the KSA Ali al-Naimi during talks in Qatar agreed to freeze production of oil at the level of January 11, 2016. Later, Qatar and Venezuela also agreed to freeze the production of oil, but Iran immediately rejected the proposal. Since the beginning of 2016 the Minister of Energy A. Novak has visited virtually all the major oil-exporting countries with the aim of persuading them to reduce oil production, in order if not to raise the price of oil, at least to fix it at a level of not less than 30 US dollars per barrel, otherwise the economic situation in Russia can rapidly deteriorate. However, A. Novak's efforts turned hollow. According to some experts, the decline in oil prices to 22.5 US dollars per barrel will lead to the collapse of Russia's financial system and economy as a whole.

The lack of understanding between major oil-producing countries is also influenced by the political component.

Recently, Saudi Arabia's traditionally strained relations with Iran and Russia have got even more complicated, mainly through the opposing positions on the situation in Syria, Libya, Iraq and Yemen. For a long time have been poorly concealed the cooling of relations between Saudi Arabia and the United States, although formally they are “allies”. The relationship was not improved even by President Obama's fourth visit to Riyadh on the 21-22 of April, where he took part in the US — Persian Gulf Summit and met with all the monarchs of the Gulf Arab countries. At that summit, B. Obama and Arab monarchs agreed to work together to adapt their economies to low oil prices. However, in our opinion, there is no sufficient reason to believe that there is a secret agreement between the United States and the Arab countries of the Persian Gulf to keep oil prices low just to inflict maximum losses on the Russian economy. On the other hand, the USA and Russia, which are world leaders in oil production, taking into account the aggravation of their political relations, approaching the Cold War, will not be able to agree on the mutual limitation of oil production.

The Meeting of Leading Oil-Producing Countries in Qatar.

April 17, Qatar's capital Doha hosted the meeting of Energy Ministers of 18 leading oil-producing countries. The aim of the meeting was to agree on a moratorium on oil production until October at the level of January 2016 with the signing of the document. These are the first for the last 15 years talks between the delegations of countries within and outside OPEC. The participants of the meeting produce more than 60 % of oil. From the very beginning, the meeting was postponed for 6 hours after Saudi Arabia the last minute decided to amend the final draft of an Agreement to freeze production. The KSA's Oil Minister Ali al-Naimi told about the Saudi side's demand to all OPEC countries to join the decision to freeze the level of oil production, Iran included, although the Saudis had been ready to sign the Agreement without the participation of Iran, doubting Iran's ability to dramatically increase oil production. It seems that now there are fewer doubts.

As you know, Iran's representatives have repeatedly stated their refusal to freeze the level of oil production, until it grows to the level of 4 million b/d, which had been prior to the introduction of international sanctions against Iran. Due to the severe internal military and political situation, Libya did not participate in the meeting of Ministers in Doha.

So, the meeting of Energy Ministers of major oil-producing countries in Qatar ended without results because the participants failed to reach an agreement on freezing oil production, for which hoped world markets. Here is Bloomberg Agency's estimate of the results of the meeting of leading oil-producing countries in Doha: “Big deal, which was discussed in February as the first coordinated action between OPEC and other oil-producing countries for the last 15 years, fell victim to tensions between Saudi Arabia and its main regional opponent — Iran”.

Minister of Energy of the Russian Federation A. Novak has accused Saudi Arabia and several Gulf countries in disrupting the signing of an agreement to freeze oil. According to some experts, Doha's failure would mean the restoration of the struggle for markets between main oil producers. The world oil market immediately reacted to the failure of the talks in Doha. April 18 the price of Brent crude oil has decreased by 6 %, to a level of 40.16 US dollars per barrel. However, April 22 the price of Brent crude oil on London's ICE exchange rose to 44.9 US dollars per barrel, while the price of WTI oil at trading on the New York Mercantile Exchange (NYMEX) rose to 43.7 US dollars per barrel. In our opinion, in the next few months the price of oil will fluctuate up or down in the range of 5-10 US dollars per barrel, but not more.

According to the Qatari Energy Minister Mohammed al-Sada, who is currently the President of OPEC, the oil market leaders need more time to think over and agree on a joint strategy in terms of oil production. Previously, it was agreed to hold the next meeting of Energy Ministers of the major oil-producing countries in early June. But it is unlikely that by then Iran will be ready to negotiate freezing its oil production. Therefore, most likely the agreement between major oil-producing countries to freeze oil production can be signed without Iran's participation.


Forecasts of oil production and oil prices in 2016.

In early April of this year OPEC forecasted a decrease in the growth of world oil demand in 2016 by 1.2 million b/d, which would amount to 94.18 million b/d. Demand for OPEC oil this year is expected to reach 31.5 million b/d, that is 1.8 b/d more than last year. Oil production by the countries outside of OPEC, according to the cartel, will be reduced this year by 730 thousand b/d — to 56.39 million b/d. However, according to some experts, in 3-4 years the oil market could face a shortage of supply due to insufficient investment in developing new oil fields in 2015-2016.

According to a survey conducted by Reuters in February 2016 among the 30 leading economists and analysts, the price of oil in 2016 will average about 40 US dollars per barrel. The average forecast price of Brent crude oil benchmark for 2016 has fallen to 40.10 US dollars per barrel, while in 2015 the average price of Brent was 54 US dollars per barrel. The forecast growth for the US benchmark WTI crude oil in February 2016 fell to 38.90 US dollars per barrel. Analysts do not expect significant growth in global oil demand over the medium term due to slowing growth of economy in China and Latin America, increasing energy efficiency and switching to renewable and alternative fuels in developed countries.

According to forecasts of the head of the IEA Fatih Birol, the global oil market will remain weak this year, and its recovery will not happen until 2017. At this, oil prices will not get near 80 US dollars per barrel before 2020. According to him, in 2016 global investments in oil and gas industry will be radically reduced to unprecedented levels. China's economy, according to him, is still strong and will keep growing by 6.5-7 % per year, which will help stabilize the global economy.

According to the forecasts of one of the world's largest investment banks Goldman Sachs, in 2016 oil prices could even fall below the cost — to 20 US dollars per barrel, as part of oil storage tanks in many countries is already full. Morgan Stanley — another powerful US bank holding company — predicts a drop in crude oil prices to 20-25 US dollars per barrel against the background of strengthening of the dollar rate. Analysts from Citigroup Bank raised the forecast of average price of Brent crude oil for 2016 to 43 US dollars per barrel, and for WTI crude oil — 42 US dollars per barrel.

According to the medium- and long-term forecasts by Cambridge Econometrics British consulting firm, production of crude oil and the prices of it will largely depend on effectiveness of measures to combat climate change in the world within the next 15-35 years. In case if the countries of the world fail to fulfill the obligations aimed at overcoming the negative climate change, global oil demand will rise from 94 million b/d in 2015 to 112 million b/d in 2030 and to 151 million b/d in 2050. In this scenario, the oil price will rise and will exceed 90 US dollars per barrel in 2030, and 130 US dollars per barrel in 2050. If the world develops low-carbon economy, energy saving and ecological technologies, the oil consumption will be considerably less and in 2050 will remain at the level of 2015, i.e., no more than 90-100 million b/d. If the energy development goes this way, in 2030-2050 oil prices will average 80-90 US dollars per barrel. However, in our view, the drawback of this forecast is that it does not take into consideration the significant percentage of exhaustion of the world's oil reserves by 2050.



In our view, even if OPEC countries and a few other major oil-producing countries agree in early June on the limitation of oil production at a certain level, their agreement will not significantly affect the global oil market and in particular the oil prices. The matter is that today the situation in the global oil market has changed dramatically and OPEC established back in 1960, is actually unable to influence it. OPEC is unlikely to adhere to the established oil production quotas and determine the price of oil for a long time. With the depletion of oil reserves, oil's role in the global economy will decrease, which will inevitably lead to weakening of the positions of OPEC.

While in the 1960s, OPEC countries had been producing about 70 % of oil in the world, today their share has decreased to 30 %. While at the moment of creation of OPEC in 1960, there were no more than 30 oil-producing countries in the world, now their number has exceeded 100. Small oil-producing countries will never be able to limit oil production, as the restriction would lead to a total collapse of their economies.

Besides, in our opinion, it is unnatural when the price of oil is determined only by the producing countries, without participation of the consumer countries. Accordingly, instead of OPEC cartel, a global organization should be created which would unite, say, the top 20 oil producers and 20 of its largest customers, as well as oil and gas equipment manufacturers. For example, Japan, whose economy depends on energy imports for 90 %, produces the best oil and gas equipment in the world. Thus, as there is a direct mutual relationship between producers and consumers of oil, the volumes of oil production and the price of it should be determined by them together.

Selling oil at 120 US dollars per barrel at the cost of production being 5-10-20 US dollars per barrel, provides a huge monopoly super-profits for its producers, and this is abnormal, immoral and unacceptable. According to experts, the price of oil higher than 100 US dollars per barrel, creates a great danger to the world economy, and is fraught with new turns in inflation on a global scale, the collapse of plans for development in many countries, and strengthens geopolitical risks, as part of petrodollars is used to support Islamist terrorist groups, to foment local conflicts and wars, — exactly what we are witnessing today in Syria, Iraq, Libya and Yemen.

So, the reduction in oil prices to balanced, optimal and cost-effective levels, will contribute to the economic and military-political stability in the world, and especially in the Middle East. On the other hand, the major oil-producing countries' relying exclusively on profits from the sale of energy carriers, leads to scientific, technological and industrial lagging behind, which we see today in Russia, Venezuela, Libya, Nigeria and the Gulf Arab countries.

The problem is not that oil will be depleted in 30-50 years in the world, the problem is that in case of further use of oil in the current scale, in 30-50 years the Earth will become uninhabitable for people, because due to the climate warming, large areas of land will be under water, and the people have nothing to breathe with. Therefore, oil production should be limited, and even reduced, not in order to prevent a further fall in oil prices, and, accordingly, to reduce the profits of major oil-producing countries, but in order to save the Earth and humanity from disaster. And the remains of oil should not be burned in cars, but should be used to make a variety of much-needed items: synthetic rubber, plastics, polymers, fertilizers, detergents, etc.

Today, even Saudi Arabia, the world's largest oil exporter, has plans in 2040 to abandon the use of oil as a fuel and to become a “world power of solar and wind energy” and in the future to export electricity instead of oil. In early April of this year Saudi Prince Mohammed bin Salman stated that, his country is preparing for “the twilight of the oil age”, and therefore intends to establish a special fund of 2 trillion US dollars, which will be used to save the country from dependence on oil. The selfish attitude like “there is enough oil so far” is extremely immoral, as it shows neglecting the fate of future generations, actually of our great-grandchildren and great-great grandchildren. To save itself from disaster, mankind should realize that the oil era is coming to its end, and transition to a large-scale use of renewable and alternative energy sources and improving energy efficiency should be intensified.

Among the alternative and non-traditional energy sources, I'll mention just one — gas hydrates — similar to ice-like molecular gas (mostly methane) compounds with water, which are formed in oceans and seas at great depths. According to experts, there are 2.4 times more hydrocarbon resources in gas hydrates than in free gas, oil and coal taken together. Experts predict that the amount of methane in gas hydrates may be enough for all mankind for 6,000 years. Today, experts recognize marine gas hydrates a promising alternative fuel. France, Germany, USA, Canada, Russia, Iran, India and Japan are actively working on their exploration and development.

The volume of deposits of methane hydrates on the Ukrainian shelf of the Black Sea is about 25 billion cubic meters of methane in gas hydrate reservoirs located along the occupied by Russia southern coast, especially in the Sorokin depression 2 km deep. If we take that Ukraine needs 25 billion cubic meters of gas per year, then 25 trillion cubic meters of methane extracted from gas hydrates, would be enough for 1,000 years. But for this we need to free our Crimea from the Russian invaders.

And we certainly will!