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21st Century Energy Markets: University of California

Hydrocarbon Engineering,

Below are highlights from the testimony given by Amy Myers Jaffe, Executive Director, Energy and Sustainability at the University of California to the US House of Representatives hearing on ‘21st Century Energy Markets: How the Changing Dynamics of World Energy Markets Impact our Economy and Energy Security.’

“The decision by the Organisation of Petroleum Exporting Countries (OPEC) to reverse itself to favour market share over prices is a complex one. It is not at all clear to me, regardless of the media hype of that effect, that OPEC members are targeting US unconventional oil and gas production. While it is true that rising US oil production was what put OPEC under pressure in the first place, the decision by key member states such as Saudi Arabia, Kuwait, the UAE and Qatar, to allow oil markets to remain oversupplied is driven mainly by broader geopolitical concerns, many of which coincide with those of the US. These include increasing the pressure on Iran and Russia to come to the bargaining table and settle existing conflicts through compromise and diplomacy. Saudi Arabia also has strong unique geopolitical and national security interests to maintain its position as a major supplier of oil and thereby an important ally to the US. In 2014, US crude imports from Saudi Arabia has lost about 440 000 bpd of market share, with exports to the US dropping to 894 000 bpd starting last summer, their lowest level since 2009, according to US Energy Information Administration (EIA) data. Much of the Saudi oil was replaced by shipments from Canada whose exports to the US jumped to 2.956 million bpd, up roughly 340 000 bpd from a year earlier 2013.

“The combination of the stronger US oil and gas sector, and an aggressive Saudi oil policy, appears to be having some of the desired effects. Iran’s top leaders have in recent weeks implied that compromise could be elemental to P5+1 talks while Russia is facing increased financial pressure. Saudi Arabia and other Arab Gulf countries have amassed large floating oil stocks that serve as a deterrent to increased adventurism by either Tehran or Moscow, though it remains unclear if an end game with diffused conflicts will actually emerge. The US has hampered its potentially enhanced international stature by keeping its own oil surplus sheathed. US tight oil could be a greater benefit to US allies and free markets, were the Congress to lift the 40 year old export ban.”

Seeds of future instability

“The global oil market still faces key sources of instability for supply. With low oil prices, Venezuela’s economic problems have raised the risk of a severe political crisis. Lacking access to adequate finance, Venezuela’s oil industry will have difficulty maintaining oil output levels in the face of steep natural decline rates at its fields…The country, which faces the possibility of a sovereign default on its massive debt, suffers from an inflation rate of 60% and the population is suffering from acute shortages of basic foodstuffs and medicines.”

“Russia has so far avoided a similar kind of crisis as the falling ruble reduced the costs of doing business in the Russian energy sector, but eventually Russian output could also face financial hurdles as major Russian companies like Rosneft and Novatek face collapsing profits and are unable to raise external capital. Falling energy prices and plunging sales to Europe have also hit Russian gas giant Gazprom’s revenue, potentially depriving Russia of US$6 billion in revenues to the Federal budget this year alone. Average Russian natural gas prices to Europe are expected to fall by a third this year and sales to some key European clients are down by half as the slow economy, energy efficiency efforts, diversification to alternative supplies and a mild winter have eaten into Gazprom’s sales.”

“Iraqi and Libyan production is also under threat from the warfare raging in those countries where various parties are vying to control oil assets. Dangerously, the Islamic State (ISIS) temporarily gained control of Iraq North Oil Company’s 35 000 bpd Khabbaz oilfield near Kirkuk.”

“ISIS continued strategy to try to grab oilfields for its possible statehood underscores a grave danger for the region and a source of instability to global oil supply. If existing national borders and authorities are not considered permanent or authoritative, regional oil facilities will become both strategic assets and spoils of war in not only the greater battle for Syria and Iraq but potentially in the struggle for geopolitical power across the entire region. This turn of events is a serious challenge to stability across the Middle East and for the global oil market.”

“The concern that oil will drive military actions across the Middle East cannot be overstated. IS, led by former military leaders from Saddam Hussein’s brutal regime, clearly understand the importance of oil assets and revenues during wartime, given their history of the 8 year war with Iran and battle for Kuwait. ISIS oil related threat in the region has not been lost on other regional powers. Troops are already lining the Saudi northern border, and Iran has positioned troops to protect Iraq’s southern oilfields at a time when Basrah’s local leaders have been threatening to hold a referendum on whether to become a semi autonomous region like the KRG.”

Edited from testimony by Claira Lloyd

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