Dr. Daniel Fine on Oil and Gas: Prices and Supply Short of War in Middle East

One day after the OPEC annual meeting, although composed for publication two weeks ago, this column moves the clock forward to early 2018.  There is a background noise of regional “hybrid war” intruding on the market price of World and West Texas Intermediate oil.

Most analysts both commercial and government have failed to account for a Middle East “shock” or upset in the commodity market determination of oil and gas prices.  With Southwest and Dakota shale oil predominance, this “shock” is not about an oil supply disruption of imported foreign oil from OPEC Producers.  It is a test of confidence that domestic oil offsets Middle East oil dependence.

With the ISIS state having been destroyed in Iraq and Syria, the region reverts to the fundamental conflict over hegemony in the Middle East — Saudi Arabia against Iran.  The outline for the struggle for regional supremacy appeared after the Gulf War in the early 1990s.

Syria and Iraq both were ruled by Baathist parties which opposed one another.  Saddam Hussein managed Iraq and its Shia majority as a Sunni power-holder. Syria, then and now, is ruled by a non-Sunni minority which has doctrinal affinity with the Shia and its state of Iran political expression.
Syria and Iran formed an alliance nearly 30 years ago against the Saudi Arabia or Sunni concentration.  In the U.S. invasion of Iraq and elimination of Saddam Hussein, the Saudi – Sunni bloc lost a buffer against Iran.

U.S. foreign policy is anchored in support of Saudi Arabia's borders against Iraq and indirectly against Iran.
This diplomacy is based on favorable price and supply of oil to the United States with only two exceptions: the OPEC oil embargo of 1973 (five months) and 9/11 with Saudi nationals destroying the New York city Trade Towers.

In this Tuesday, Nov. 14, 2017 file photo, released by the Saudi Press Agency, Saudi Crown Prince Mohammed bin Salman meets with Egyptian Foreign Minister Sameh Shoukry in Riyadh, Saudi Arabia. (Saudi Press Agency via AP, File) (Photo: AP)
The “hybrid war” equates to the declaration by the Crown Prince that a Saudi Arabian “state of war” exists with Iran.  
“Hybrid war” is war without traditional weapons and deployment.  Cyber, disinformation, terror without “fronts” with troops and air staking out positions mark the character of the fight.
What is at stake for the United States, New Mexico, Texas and New Mexico? If there is OPEC solidarity to extend the agreement (Algiers) to reduce oil production by 1,800,00 barrels per day beyond March 2018, the price of oil WTI oil should reach $62.50 briefly. If there is a sense of conditional uncertainty, then the high $50 per barrel and a trading range.
However, the commodity traders set the price and they will begin to factor in the Saudi Arabia “hybrid war” against Iran as well as the Syria-Iran alliance coupled with Russian background support.  The price of oil will fall as the traders perceive that all this threatens the supply cutback agreement by OPEC.   

Without doubt Iran is able to add oil production and export to the “hybrid war” as an action-reaction.
Iran would break the OPEC supply reduction agreement by lifting over 4.2 million barrels per day production to 6 million (18 months). Commodity traders would click sell orders, driving the world price to $38.00 per barrel as “production at will” by OPEC and Russia returns to the 2014-2016 price trend. This will not reflect a world oil supply disruption of the United States. Shale oil output now supplants import dependency on foreign oil. This is also a demonstration of Trump-Zinke American oil and gas first as the realization of world oil and gas dominance.

Syria along with Iran has demanded that U.S. forces leave Syria.  Rebels in Yemen have launched a ballistic missile against Saudi Arabia.  Saudi Arabia has isolated Quatar. President Trump and the Congress will have added or revived sanctions against Iran to consider – how many oil export barrels will be tolerated?

It will be the Permian against the Persian Gulf in oil supply and prices. The Trump Administration has announced through Secretary Zinke that with American oil and gas world “dominance” there will be no need for “our sons and daughters to go to war”  over oil.
The late and lamented Tom Dugan would ask this writer every month after reading this column: what about the price of natural gas – his business in the San Juan Basin.

 If he were still at his desk at Dugan Production, I would add that the price of natural gas is up on “hybrid war” in the Middle East because of Qatar's export predominance in the world LNG market, Mexico's imports from the U.S. Southwest (60 percent of total consumption), continued substitution for coal, and a cold winter dipping into storage.  
The EIA (Federal agency) forecast early in the year of $3.60 per thousand cubic feet seems reasonable as 2018 high. 
How many more wells coal-bed methane wells Tom Dugan would now drill in his career of successful risk-taking? We are left what he and his “hands” did, which is not unsubstantial.

Daniel Fine is the associate director of New Mexico Tech's Center for Energy Policy. The opinions expressed are his own.

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