It's the conspiracy theories around why Saudi Arabia is keeping oil prices low that make the saga so intriguing. Data shows the Saudis have raised their monthly production levels throughout this spell of cheap oil.
The desert kingdom has been blessed with abundant, easy to access reserves of black gold, which are believed to cost around $10 a barrel to take out of the ground. So with oil hovering around $30, it’s still a profitable venture to keep pumping. For countries with offshore or shale oil reserves, where the black stuff is buried deep and needs specialist technology to get it out, the costs have historically been closer to $70-$95 per barrel to extract.
So Saudi’s wanton pumping of oil to keep prices depressed has been widely considered a strategy to push shale and tar sand producers out of business. And the US has been touted as the chief target, as the country overtook the desert kingdom as the world’s largest producer of oil just before the price war began.
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But since the US is a long-standing Saudi ally, there’s a theory that oil is being used as a weapon of foreign policy, with the real target Russia and Iran – both of which are long-standing foes of both the Saudi and US governments. But there’s also a theory that the age of oil is coming to an end – and Saudi Arabia knows this. Long-serving former energy minister Sheikh Yamani said he believes demand for oil will run out long before reserves are exhausted.
“Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil,” he said.
The idea is gaining credence in investment circles. “When you have Mark Carney, the governor of the Bank of England making a keynote speech warning of the risks associated with ‘stranded’ fossil fuel reserves, you know the topic is no longer a niche concern,” says Charlie Thomas of Jupiter Asset Management.
And there are several reasons why. It’s partly predicated on the idea that the commodities boom which drove oil prices higher was a short-term blip driven by trading and hysteria over “peak oil”, the idea that we’d run out of black gold too soon – rather than a structural shift towards greater commodity use.
But there’s also the notion that up to 80 per cent of the world’s fossil fuels can never be burned, if we are to avoid catastrophic climate change.
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Additionally, there have been great leaps made in alternative energy. The price of renewables has come down massively, making them economically compelling. “I can’t see oil going back to $100 in a very long time, possibly ever. There’s been a societal change. Five years ago, electric cars were for tree huggers. That’s no longer the case, and renewable energy is increasingly competitively priced,” says Richard Philbin of Wellian Investment Solutions.
That dynamic played out with coal. The UK has large reserves of coal, but shifted away as it became uneconomical to rely on it. There’s a saying in investment, “if you go long commodities, you go short human ingenuity”.
In other words, the price of the commodity will always fall as the technology to take it out of the ground gets smarter – so betting that commodity prices will rise is foolish. For proponents of this idea, the decade-long commodity supercycle was an aberration, and is long dead and gone. “There is limitless oil. We will never run out. What we will run out of is the need for it,” says Alan Durrant of Harwood Capital.
The age of oil won’t be over for all countries. Many will continue to rely on more expensive, outmoded forms of energy. But in advanced economies reliance on oil may dwindle, as the shift towards cheaper, cleaner and more efficient energy continues.