Senators in the US have raised the prospect of an oil price war with the Middle East. The Senate held a crucial meeting on whether the decades-old ban on exporting crude oil should be lifted, with chair of the Senate committee on energy and natural resources, Lisa Murkowski, arguing the US should “compete against our foes in a way that doesn’t involve sending our troops in and boots on the ground”.
Murkowski is Republican senator for oil-producing Alaska and has been a long-standing critic of the ban. The issue has risen to the fore recently as some in Congress believe the lifting of Western sanctions against Iran will give the country undue advantage.
“We’re going to let Iran go out onto the global market and engage in sales of their oil, allowing them to amass resources and wealth as a benefit of this,” she says.
The US put a ban on domestic oil exports when in the grip of an energy crisis in 1970. A form of national security, the ban means it will always have a stockpile of crude and will not be left beholden to foreign suppliers.
Only refined products can leave the states, and these days it ships vast amounts of these.
While markets have been preoccupied with China’s stock market crash and rumblings of rate rises, the oil price has been quietly slipping to crisis levels.
This week Brent crude touched $48 a barrel, a level it last traded at in 2009. Prices came under pressure as Iran sanctions were ended, as experts believe there are thousands of barrels of oil stacked up at ports waiting to reach the world market.
Although the oil price has rebounded somewhat since, this volatility is causing on-going negativity among investors.
There is already far more oil on the world market than demand can absorb – and US companies have suffered enormously from this year of cheap oil.
A decade ago the US began a series of fracking projects in Texas and North Dakota aimed at creating a “shale oil” revolution – tapping new oil reserves from previously hard to reach places. This spawned a new generation of start-up oil companies, many of which took on large debts to finance their operations, and were banking on oil prices remaining around the $100 level.
Fracking has been such a success that last year the US overtook Saudi Arabia as the world’s biggest producer.
This splurge of oil put downward pressure on prices, and last June Saudi Arabia snapped. The gulf state heads up the powerful Organisation of Petroleum Exporting Countries (Opec), which controls 40 per cent of the oil market and meets regularly to set production levels among the grouping.
Rather than cutting production, over the last year Opec has continually voted to maintain high levels, ensuring there is a surplus on the market.
“Saudi Arabia has increased output, it is fighting for market share. That will keep prices weak for the next couple of months,” says Nitesh Shah at ETF Securities. He expects the price of Brent crude to remain around the $54 a barrel level for the next few months.
US shale companies are facing an on-going struggle to survive, as they are costly operations and need a high oil price to justify taking it out of the ground.
Russia and Iran are also hurt by cheap oil, both countries which Saudi Arabia loathes. For their part, the Saudis can easily tolerate cheap oil. They have $900bn of reserves stacked up, and it only costs them $5 a barrel to extract their supplies.
At the same time, demand for oil has been shrivelling as economic growth in Europe is next to zero. China, the world’s biggest consumer, is also facing an economic slowdown.
The country is also deliberately shifting its focus from grand infrastructure projects which use a lot of oil. There are only so many bridges, highways and new towns a country can build, so now China is waiting for greater utilisation of its existing infrastructure.