Commodity down cycles are nothing new to industry veterans, former U.S. Energy Secretary Spencer Abraham told a crowd of executives and observers at The Economist’s recent “The World in 2016 Breakfast” in Houston. It’s the nature of this particular downturn, especially the shifting perception of price, which sets it apart.
“The interesting thing about the cycle, unlike any that I’m familiar with, is that from the standpoint of the United States, we have spent decades in which as a matter of public policy, as a matter of politics, all of the political community has been excited when the prices of commodities were low,” Abraham said. “When I was energy secretary just 10 years ago, we regarded creeping prices of gasoline as a bad political signal for the American electorate.”
The last decade of rapidly increasing oil and production from the exploitation of shale plays has enabled a dramatic sea change, he said.
“We’ve gone from a country where low commodity prices were considered to be very positive for the economy to a situation where there’s a much different feeling about it today,” said Abraham, who served under President George W. Bush and also served as a U.S. senator from Michigan. “Now in Texas, stronger prices have always been pretty good news, but for American politics that’s not been the case.”
Abraham, now chairman and CEO of The Abraham Group, a Washington-based strategic consulting firm, also sees significant shifts in OPEC’s approach from building a floor under prices to maintaining its grip on market share. Saudi Arabia, in particular, has altered its philosophy in reaction to increases in oil production in the U.S. and Russia, and the potential for increased output elsewhere.
“I don’t think the Saudis in particular or OPEC as a group are prepared to back off of their policy,” he said.” My feeling is that their hope is—and it’s already happening—you’ve seen significant reductions in capital expenditures among the major oil companies around the world. You’ve seen some of the high-cost projects, particularly the offshore type projects, curtailed.”
A number of other factors on the demand side are the reverse of just a few years ago, Abraham said. Rising global demand has been hindered by a weakened European economy and slower, though still relatively strong, growth in China. The regulatory environment—particularly environmental regulations—hinder increased production, he said.
Abraham took issue with a suggestion by Economist Executive Editor Daniel Franklin that OPEC was no longer able to act effectively as a cartel.
“I think it’s behaving very much like a cartel,” he said. “People who are saying that OPEC’s dead are exactly dead wrong. What OPEC has done is just evolved—they’ve evolved with the change in the global marketplace.”
OPEC members’ priorities have shifted, he said, from maintaining a limited amount of volatility of prices and stability, to taking advantage of their roles as low-cost producers and force higher-cost producers to make significant cutbacks in their investments.
The strategy “is perfectly consistent with a cartel,” he said. “It’s just a cartel that’s adapted to the times.”
The times have seen a slump in commodity prices that might appear inevitable to old hands in the oil patch, but have stunned relative newcomers whether in the corporate, investment or analyst communities, Abraham said.
“Veterans of the industry realize that, understand that they have to have a hedge policy, but also the need to weather the storm and I think Houston has proven itself to be extremely resilient in terms of weathering these storms,” he said. “The good news is that as the global community continues to grow, the kinds of products that are manufactured here in Texas are going to be highly sought-after products. And if the United States were to ultimately lift the ban on exporting crude, it would make a very positive change.”
Which Abraham believes will happen, he said in response to a question from Franklin. The trigger, he believes, will be the nuclear deal with Iran.
“It’s going to be very hard for political figures to maintain a policy that says Iran is capable of exporting its crude oil and Texas isn’t,” he said. “It doesn’t hold up politically now. One of the advantages of the low-price environment is that it’s a little easier to make the case.”
Joseph Markman can be reached at jmarkman@hartenergy.com.
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