Artificial Intelligence (AI): Is It Good, Bad, or Game Changer?

 

Dr. Salman Ghouri

The world is undergoing a transformation driven by the exponential growth of artificial intelligence (AI)—a pace of change unprecedented in human history. Consequently, many people fear massive unemployment, along with other implications that could affect their livelihoods and quality of life. Is this truly the case? Yes—or perhaps not entirely.

The purpose of this short article is to explore the potential benefits of AI and its implications for human society. It is still too early to fully assess the potential benefits of AI, but they could be enormous.

A Brief Look Back

History shows that technological inventions have continuously improved economic productivity, efficiency, and quality of life. Many inventions that were once considered luxuries eventually became essential parts of everyday life. Electricity, automobiles, airplanes, refrigerators, washing machines, medical technologies, farming equipment, and countless household devices have all contributed to greater comfort, efficiency, and convenience.

Consider the invention of the typewriter in the 18th century, which transformed business communication. In the 1960s, pocket-sized electronic calculators emerged, followed by computers and laptops. When we were graduate students in the late 1970s, our professors—many of whom had been trained in the United States—would proudly demonstrate regression results generated by computers in seconds, replacing hours of manual calculations.

Did these innovations create mass unemployment? Or did they enhance human productivity and quality of life?

The answer appears clear: they improved our lives. While some occupations disappeared or declined, workers generally moved into other sectors and new occupations emerged.

Modern inventions such as smartphones, the internet, and applications such as WhatsApp and Facebook have made communication instantaneous and inexpensive. They have even reduced the need for travel, allowing people to see and speak with loved ones almost whenever they wish.

Every time humanity experienced a major technological breakthrough, people often believed that we had reached the peak of progress. Yet progress continued—and it will likely continue for generations.

Should we expect the same from AI?

The Rise of AI

AI itself is not new. Its foundations were established in the 1940s and 1950s, with significant advances occurring in later decades. However, investment and development accelerated dramatically in the 2020s, driven by advances in computing, transformer architectures, and large language models (LLMs) such as ChatGPT.

These systems demonstrate capabilities that increasingly resemble aspects of human intelligence, including language understanding, reasoning, pattern recognition, information synthesis, and, in some cases, creativity. As a result, AI is rapidly becoming integrated into countless sectors of society.

This exponential growth has generated both excitement and concern.

Many fear that AI could lead to mass unemployment, reducing consumer spending and potentially slowing economic growth. Yet history suggests that technological innovation does not necessarily destroy employment permanently. Agricultural innovations increased productivity while shifting labor into other sectors. Industrial automation eliminated some occupations while creating others. Medical advances increased life expectancy and improved human productivity.

The important question is whether AI will follow the same historical pattern—or whether it represents something fundamentally different.

Will AI Be a Game Changer?

Some argue that AI is fundamentally different from previous inventions and could cause widespread unemployment. We cannot realistically stop the development of AI, nor should we necessarily try to. However, policymakers, economists, philosophers, educators, and academics must urgently consider how society should manage its economic, social, psychological, and cultural consequences.

AI is already performing tasks once handled by receptionists, telephone operators, analysts, writers, programmers, and many other professionals. Autonomous vehicles, drone delivery, robotic automation, and AI-assisted decision-making are advancing rapidly.

The potential impact could be far greater than anything we have experienced before.

Consider something as simple as ChatGPT. Ask a question and, within seconds, you can receive an enormous amount of organized information. If you want to improve your writing, you can copy and paste your text and ask AI to edit it. You can ask it to prepare a birthday message, a condolence message, a business letter, or almost anything else you can imagine. In seconds, you may receive several formal or informal versions of your original thoughts.

This is only the beginning.

More sophisticated AI models are being developed for energy forecasting, refinery optimization, environmental analysis, medicine, agriculture, manufacturing, finance, and virtually every other segment of society.

Imagine, for example, a strategic planning department in an oil and gas company. Today, a team of senior professionals may spend months developing forecasting models, key performance indicators (KPIs), business plans, and refinery optimization strategies. In the future, sophisticated AI systems may perform much of this work, perhaps requiring only one or two professionals to supervise, interpret, and implement the results.

The same principle could apply to education.

If AI can provide highly personalized instruction, explain complex subjects, generate study material, evaluate assignments, and assist students individually, will we still need traditional classrooms and large numbers of instructors in their current form?

Perhaps not.

And the same question can be asked across almost every sector.

This is where the unemployment concern becomes much more serious. In previous technological revolutions, displaced workers could generally move into other sectors that were less automated. But what happens if AI simultaneously transforms most sectors of the economy?

Will there be enough new occupations to absorb displaced workers?

It is difficult to know.

Therefore, policymakers must begin thinking beyond traditional economic solutions. If AI significantly reduces the need for human labor, society may need entirely new approaches to income distribution, education, employment, taxation, and social protection.

We may need to think outside the traditional economic framework.

Why AI May Be Fundamentally Different

My assessment is that AI is fundamentally different from many previous inventions.

In the past, we delegated physical labor and deterministic calculations to machines, but we generally did not delegate cognition itself. There were an input and an expected output, and humans understood and controlled the process.

That may no longer be the case.

We are entering an age in which machines can increasingly analyze information, generate ideas, recognize patterns, write, communicate, make recommendations, and perform tasks that once required human judgment.

For the first time, humanity may be developing an entity that could eventually become more capable than humans in an increasing number of intellectual domains.

That is something humanity has never experienced before.

In fact, many of the technological innovations we have adopted in recent years have already incorporated elements of AI, often without us consciously recognizing that we are interacting with intelligent systems.

Consider the devices in our homes. We may ask a voice assistant to play with the noise white or set a cooking timer. Smart lighting systems automatically turn lights on and off. Irrigation systems can skip watering when rain is detected. Thermostats learn our habits and schedules and automatically adjust heating and cooling to maintain our preferred level of comfort.

Even our entertainment systems increasingly anticipate what we might want to watch.

Have you ever discussed something at home and then opened your phone or YouTube and noticed remarkably similar recommendations?

Whether this results from AI-based recommendation systems, search behavior, advertising algorithms, or other forms of data collection, the broader point remains: intelligent technology has already become deeply embedded in our daily lives.

How AI Models Learn

Consider a simple example.

I recently watched a television segment in which an artist was painting on the street while other playing music. People from a technology company approached the artist and asked how much he earned each day. They reportedly earn approximately $200 daily.

They offered them $500 a day if they would wear special gloves while continuing to paint and play music.

The gloves captured their hand movements and transmitted the data to a computer system. After collecting this information over time, the system could begin learning the relationship between the artist’s movements and the resulting artwork.

Eventually, AI could potentially reproduce similar movements and generate similar images and play similar music.

This is a simple illustration of a much more complicated process.

Developing sophisticated AI models requires enormous amounts of data, extensive computing power, testing, validation, and continuous refinement. This is already occurring in fields such as energy, refinery operations, environmental modeling, weather and demand forecasting, industrial production, agriculture, medicine, and many others.

The more relevant and high-quality data a system receives—and the better it is trained and evaluated—the more capable it can become.

AI: The Convergence of Human Progress

What makes AI particularly remarkable is that it appears to converge with many of the innovations that came before it.

Humanity has accumulated centuries of knowledge about how things work, how products are designed, how businesses operate, how diseases are treated, how energy is produced, how agriculture is managed, and how societies function.

AI has the potential to bring much of that accumulated knowledge together into systems capable of analyzing and applying it at extraordinary speed.

With time, as more data is collected, processed, evaluated, and incorporated into increasingly sophisticated models, AI may become an extraordinarily powerful tool for improving human life.

This is both exciting and frightening.

Like previous technological revolutions, AI may ultimately make our lives easier, more productive, and more comfortable.

But unlike previous revolutions, AI may also challenge the unique role humans have traditionally played in thinking, analyzing, and making decisions.

That distinction cannot be ignored.

The Real Danger

The convenience of technology has already come with considerable costs.

Our memory capacity, for example, appears to be less actively used than in the past. We once memorized telephone numbers, spelling rules, directions, grammar, and other information. Today, we rely heavily on smartphones, search engines, GPS, and digital assistants to store and retrieve information.

Without realizing it, we have become dependent on these technologies—sometimes to the point where we may not even remember our own phone numbers.

More troubling is the potential erosion of independent human thinking.

We increasingly rely on technology for quick answers, analysis, recommendations, and even decision-making. If we stop exercising our own cognitive abilities because machines can do everything for us, those abilities may gradually weaken.

The danger is not simply that AI becomes smarter.

The danger is that humans may become less capable because they stop thinking for themselves.

If we become completely dependent on AI systems, we could eventually become slaves to the very technology we created.

A major technological failure, cyberattack, systemic error, or malfunction in a highly interconnected AI-dependent society could have consequences far beyond anything we have experienced before.

Can We Control the Pace?

A moderate and balanced approach to AI development could allow society to adapt gradually rather than react in panic.

But uncontrolled development could create serious risks.

AI is advancing at extraordinary speed. At some point, its capabilities may exceed our ability to fully understand, predict, or control its behavior.

Science-fiction movies have long imagined machines becoming powerful enough to threaten human civilization. Those stories are fictional, but the underlying question is no longer purely fictional:

What happens when the systems we create become more capable than the people who created them?

We do not yet know the answer.

Perhaps humanity will adapt, as it has adapted to every previous technological revolution. Perhaps AI will become one of the greatest tools ever created for improving human civilization.

Or perhaps we will discover that intelligence itself is the most powerful technology humanity has ever developed—and therefore the one that requires the greatest responsibility.

Conclusion

AI should neither be feared blindly nor embraced uncritically.

Its potential benefits are enormous. It can improve productivity, accelerate scientific discovery, enhance medicine, transform education, optimize industries, improve resource management, and make everyday life easier.

But the risks are equally significant.

The possibility of widespread displacement of human workers, increasing dependence on machines, erosion of independent thinking, concentration of economic power, misinformation, privacy concerns, and loss of human control must all be taken seriously.

The objective should not be to stop AI.

Instead, humanity must learn how to develop, regulate, and use AI responsibly.

The central challenge may not be whether AI will change the world. It almost certainly will.

The real question is:

Will we control AI—or will AI ultimately control us?

Is this how the world ends?

Or will humanity, as it has done throughout history, adapt to a new reality and continue striving for a better and more comfortable life for future generations?

Only time will tell.

And, somewhat ironically, this article was also edited with the help of AI.

Note:-

The intention of this short article is to explore some of the issues being debated by the public regarding the possible implications of AI for society, particularly the concern about unemployment. This is not a technical paper, nor is it intended to predict the precise nature of future AI models. Rather, it is a personal reflection on the opportunities, challenges, and questions that AI is already bringing to human society.

The Implications Of U.S. SPR Withdrawals

 

The Strategic Petroleum Reserve’s (SPR) oil is sold competitively when the President of the United States of America finds, pursuant to the conditions set forth in the Energy Policy and Conservation Act (EPCA), that a sale is required. In the past, oil resources were withdrawn from the SPR to meet domestic oil requirements – such as Emergency Drawdowns, Non-Emergency Sales, SPR Modernization Sales, and Mandated Sales.  In March 2022, such orders were issued by the President of the United States, Joe Biden. President Biden has decided to open the SPR to mitigate the consequences of the Russia-Ukraine conflict that led the United States and its allies to put harsh economic sanctions on Russia. Consequently, these sanctions, and not unexpectedly, tight oil and gas supply in the international market has raised international energy prices. 

There are two factors that simultaneously occurred and accelerated the withdrawals from the SPR from March 21 to July 2022. During this period, inflation remained above the target rate of 2%. The real problem is mainly associated with the aftermath of COVID-19. The supply chain issues, stimulus over an extended period, and low-interest rates have helped to reinvigorate the U.S.  economy, but have led to a prolonged period of high inflation. Economic stimulus and rising oil and gas prices have further aggravated domestic inflation causing hardship to domestic consumers. In fact, it gradually increased from 2.6% in March 2021 to 9.1% in June 2022. At the same time, WTI was also trending upward, rising from around $60/bbl in March 2021 to over $100/bbl most of the year 2022 (see Figure-1 & 2). To provide some relief to domestic consumers, the United States withdrew 169.768 million barrels from the SPR during this period. As a result, the SPR reached the low level of 468 million barrels at the end of July 2022. More recently, there were reports that there were only 427.2 million barrels of fuel left in the reserve fuel stocks of the United States that could cater to about 50 days of the U.S’ daily oil consumption.

This year’s SPR withdrawal constitutes the largest-ever withdrawal on record. An argument can be made here that the U.S. government has taken proactive measures of economic sanctions on Russia and was quite aware of the consequences. 

Whatever the argument, the message is clear to OPEC and Russia that if they try to manipulate oil production for higher oil prices, the U.S. will counter it by releasing crude from its SPR. The only danger is how much SPR can be released risk-free, from a strategic perspective, and how long will it take to replenish SPR reserves.

Surely, it will take many years or decades to refill the SPR to roughly 700 million barrels. The speed of replenishment depends on many factors. However, the biggest factors are oil prices and the development of domestic inflation. Excessive withdrawals could be risky, as Russia could intentionally prolong the conflict with Ukraine. This strategy provides more leverage to OPEC to manipulate oil production to push oil prices even higher. Such a strategy by OPEC and Russia may create further oil and gas shortages in Europe in particular. As expected, OPEC and non-OPEC allies, also referred to as OPEC+, announced on October 5, 2022 that they will cut oil production by 2 million barrels a day (mmbd) starting in November. With the rise in oil prices, global natural gas and electricity prices will also rise. If the upcoming winter in Europe is harsh, consumers suffering from fuel shortages will be test cases for their respective governments. Furthermore, at some point, the U.S. will not have the luxury of additional SPR releases to keep oil prices in check and to provide relief to domestic consumers. Prolonging such a strategy may backfire. Therefore, the U.S. should adopt a strategy of increasing domestic oil production to reduce oil import dependency and have more flexible strategic options.     

Figure-1: Historical relationship between SPR (thousand barrels) and WTI $/bbl on y-2 axis) (Source: EIA).

Figure-2: Historical relationship between SPR (thousand barrels) and US inflation (inflation y-2 axis) (Source: EIA).

Fundamental Problem

The question is how long can the U.S. government continue to rely on SPR releases? Is it sustainable? 

Figure-3 depicts the historical monthly average trends of United States oil consumption, total oil production, shale oil production, and WTI. Since January 2010, U.S. oil import dependency has been on the decline, due to a substantial increase in U.S. shale oil production, as well as stable oil consumption which mostly remains around 19 to 21 million bpd.

Since 2014, the U.S. shale industry has developed into a more mature industry which currently produces around 8.7 million bpd out of a total of 11.79 million bpd. While considerably lower than its production peak of 13.3 million bpd in January 2022, the U.S. oil import dependency declined to 42% at the end of July 2022, as compared to 71% in January 2010. As such, the solution is not forcing the oil companies to curtail product exports or forcing them to stockpile more fuels in U.S. storage tanks but rather to address the fundamental problem. 

I think relying too much on SPR may only solve the short-term problems at hand. Instead, the underlying problem needs to be addressed. There’s a need to develop a two-pronged long-term strategy to reduce oil import dependency and reduce reliance on the SPR in the future. First, the oil industry needs to invest in upstream operations, and focus on finding and developing more reserves. To do this, the government needs to open new acreage in federally controlled areas as well as provide some incentives to oil and gas companies to invest in exploration, development and production activities. Secondly, the U.S. needs to develop a strategy of accelerating the use of electric vehicles (EVs). The government should provide incentives for electric vehicle buyers as well as for companies that install EV infrastructure. A speedy penetration of EVs will surely displace a considerable amount of oil in the transportation sector. However, both parts of this strategy take a considerable amount of time to be implemented, and lower crude prices may lead to both slower adoption of EVs and a lower upstream oil and gas capex.   

Figure-3: Historical monthly trends of USA total oil production, consumption, Shale oil production (mmbd) and oil import dependency (%) (Source: EIA).

Figure-4: USA Shale monthly trends – mmbd relationship to WTI (Source: EIA).

Implications of OPEC-+ Production Cut

I think OPEC has not learned from its past mistakes, as it is not a good time to cut oil production by 2 million bpd in November 2022, especially at a time when global economies are under pressure. While higher oil prices at this juncture may bring much needed oil revenues to (national) oil companies and OPEC members, this will come at the cost of accelerating a global recession, bringing more misery to consumers. Consequently, it will weaken global oil demand and oil prices. Oil prices in the range of $70-$80/bbls at this difficult time could be a win-win situation for both producers and consumers, and shield global economies from collapsing. Consequently, the U.S. should take its own measures to enhance its domestic oil production, encourage EVs and halt further releases of the SPR. Running down the SPR will allow OPEC+ more flexibility to play around with production.

  

This article was published in Oil Price in October 10, 2022

The Implications Of U.S. SPR Withdrawals | OilPrice.com

Has OPEC learned from past mistakes?

The recent partially post covid-19 global recovery witnessed sudden spike in oil demand. The lack of past investments in oil and gas industry and supply chain constraints led to surge in oil prices. This was expected to happen. The sudden oil demand exceeded supply, leading to higher oil prices. Consequently, this led to debate and seasonal analysts, particularly investment bankers and other consultants, who are forecasting oil prices may reach $100/bbl. The recent tussle between United Arab Emirates (UAE) and Saudi Arabia on production quota no doubt further strengthens their arguments.

This is quite possible, as oil revenues is the major contributor in economic development of most oil producing countries, particularly OPEC members. To balance their budgetary requirements, some countries look $100/bbl oil or even more. The higher oil prices surely facilitate in achieving this goal. However, the global economy is still vulnerable and not fully recovered from Covid-19 and following different variants. The question one needs to ask is whether OPEC will repeat their past mistakes to achieve such level of oil prices by manipulating oil production?  If yes, then do we expect revival of US shale oil industry and subsequently collapsing of oil prices? Or OPEC might have lessons learned and may not allow oil prices to surpass over $70/bbl for considerable months.

Both the scenarios are possible, it requires a number of months for US shale oil industry revival and number of years for new oil discoveries and development and production.

Possible Rebound of US Shale Oil Industry

Persistently lower oil prices from 2014 to 2016 and eta of covid-19 led to underinvestment in upstream and fewer Final Investment Decisions for oil projects. Investments in upstream, for example, plunged from $1079 billion in 2014 to $900 billion in 2015 and then further down to $583 billion in 2016. This is because lower oil prices severely affect the revenues, cashflows, and profitability of oil and gas companies. That leads to fewer resources being available for future investment in exploration and production activities. The question now, is what will happen to the oil and gas industry post-COVID-19? Should we expect the regime of higher oil prices to linger or will oil prices slump back into $60/bbl or below? 

Figure-1 & 2 clearly demonstrates that US shale oil production in the past has increased/decreased with number of months lags in response to increase/decrease in oil prices. My assessment is that OPEC members have already learned from their past mistakes and surely will not allow oil prices to surge beyond $70/bbl for considerable months. The reason is that they know global economies are still vulnerable and weak. The combined impact of higher oil prices and covid-19 may adversely impact the revival of global economies. They are quite aware of the fact that sustained higher oil prices will allow US shale oil industry to rekindle its lost glory.  In addition, speedy penetration of electric vehicles (EVs) and significant increase in the role of renewables could eventually impact the global oil demand. 

Figure-1: Us Shale oil production trends by basins

Figure-2: Historical relationship between WTI and US shale oil production

In the past, the US shale oil industry response to higher oil prices as illustrated in Figure-1. Figure-2 depicts US Shale oil production did increase with 6-8 month lags (though lags vary from basins to basins) in response to higher oil prices. The question is can we expect US shale oil industry enhance their investments in response to higher oil prices? Well, it depends on companies’ financial health (for more details). Generally, most suffered heavy losses and in the process of consolidating their cash flows and clearing off their debts. They might be cautious in sudden increasing their investments in drilling of new wells. Nevertheless, their first priority would be to target drilled and uncompleted wells (DUCs). If the expectations are that oil prices to remain over $65/bbl for considerable period, one could expect increase in drilling activities and higher U.S. oil production. In fact, in response to recently higher oil prices Permian basins production is already showing signs of recovery.  In addition, the number of oil and gas rigs in the United States is up to 5 this week, according to Baker Hughes. This is just a meager increase, but total rig counts up to 484, as compared to 231same time last year (Figure-3).

 

The U.S shale oil production peaked in January 2020 to 9.15 mmbd and then declined to 6.55 mmbd in February 2021 in response to plunging oil prices. However, since than shale is on the upsurge. By June 2021, it already hit 7.77 mmbd. The EIA’s estimate U.S. total oil production for the week ending July 7 was 100,000 bpd higher than the previous week at 11.4 mmbd. A sign of recovery as oil production by the end of May 2021 was dropped to 10.8 mmbd. Since then, it is on the rise.    

  

Figure-3: Historical relationship between WTI and total rig counts

If OPEC hasn’t learned from their past mistakes and failed to resolve dispute on quota amicably, they are adding uncertainty to oil market. The element of uncertainty at this juncture when global economies are in the process of reviving may hinder this recovery process. The covid delta variant is already a sign of hazard.  They may gain out of this strategy short-term., eventually they may have set themselves up for failure. Not only from expected increase in US oil production but this time damage could be deep due to other factors. The world is already witnessing higher inflation. Even developed countries like USA is not spared. For example, the annual inflation rate for the United States is 5.4% for the 12 months ended June 2021 after rising 5.0% previously, according to U.S. Labor Department data published July 13 2021.  The higher oil prices, delta variant and constraints on supply chain will further push the inflation. This will eventually create weak global oil demand and in turn subject to downward pressure on oil prices.

Now its up to OPEC members to look for short term gains or long-term losses!

 

 

 

 

 

Dynamics of Oil & Gas Industry - A New Cycle Awaits Oil Price Revival

Dr. Salman Ghouri


The world would soon bounce back from this pandemic, albeit the recovery would be rough and painful. The current regime of lower oil prices may not last forever. In fact, it may rebound due to the dynamic nature of oil and gas industry.

The exploration and production activities are mainly driven by the current and future expectations of oil prices, availability of resources and other important drivers. History informs us that higher oil prices led to phenomenal investments in upstream operations and vice versa. Going back to the recent past, persistently lower oil prices during 2014/2016 led to underinvestment in upstream and less FIDs finalized in exploration and development activities. Investments in upstream for example, plunged from $1079 billion in 2014 to $900 billion in 2015 and then further down to $583 billion in 2016. Why? Lower oil prices severely affected oil and gas companies’ revenues, cashflows, and profitability. Therefore, less resources were available for future investment in exploration and production activities.

The question is what will happen to the oil and gas industry post-COVID-19? Should we expect the regime of lower oil prices linger or the revival of oil prices? 

No doubt COVID-19 has devastated the global economies. The economic, social, and mental damage caused by COVID across the world may take years to bring us back to pre-COVID environment.

The partial and complete shut-down for months not only severely impacted the small, medium to large scale businesses but also resulted in high unemployment with many more at risk of losing jobs. For example, U.S Labor Department reported that total nonfarm payroll employment fell by 20.5 million in April, and the unemployment rate increased by 10.3 percentage points to 14.7 percent. This is the highest rate and the largest over-the-month increase since January 1948. The changes in these measures reflect the effects of the COVID-19 and efforts to contain it. Employment fell sharply in all major industry sectors, with particularly heavy job losses in leisure and hospitality.

While at a global level, the International Labor Organization (ILO), reported that some 1.6 billion workers in the informal economy, representing nearly half of the global labor force are in immediate danger of losing their livelihoods due to the COVID pandemic. Aviation industry is however, one of the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages that so far has occurred on the remaining industries.

The oil industry is yet another front-line sector that is severely affected. The lower oil and gas prices over the past few months not only resulted in high unemployment (the U.S. Labor Department reported that unemployment in mining, quarrying, and oil and gas extraction rose from 1.9% in January to 10.2% in April 2020.) but also significantly reduced companies’ revenues, profit, and cashflows. As such, most of major, independent as well as NOCs already incurred huge losses. For example, Occidental Petroleum Corp. reported a net loss of $2.2 billion, BP  reported $4.4-billion net loss in the 1^st quarter, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced. Italian oil and gas company Eni SpA (E) reported its first-quarter net loss was 2.93 billion euros, compared to net profit of 1.09 billion euros a year ago.

While many will go out of businesses as they cannot withstand losses due to significantly lower prices – that falls below their break-even level.

A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. As such, many companies have already abandoned or deferred their major projects.

What does it all mean? It simply means that less resources are available for future investments in exploration and production (E&P) - hindering companies’ future investment’s ability. That is, subsequently inadequate resources would affect the supply side which is now in surplus.

The world in post-COVID-19 recovery phase would be needing enormous financial and energy resources to rectify the damages caused by COVID-19. During this recovery process, global oil demand slowly moves towards normalcy and may over-shoot supplies. As less resources at oil industry disposal to enhance production (at least in the short run). Furthermore, there is always a lag involved, i.e., there is no magic switch to turn on and off. It takes number of years in developing prospects, acquiring lease, seismic data acquisition & processing and drilling exploratory wells. In addition, shale oil wells that were forced to shut-down may not be able to produce the pre-shut-in level. In fact, less production but with an additional cost. COVID-19 may have also disrupted the manufacturing sites (where plants & equipment for future delivery are under construction) that might delay the project’s completion date. The list goes on and all of these surely would impact the supply side.

The world has witnessed various cycles in the past. Yet the current cycle is deep and rough as it is accompanied with COVID and excess supplies. The oil and gas industry faced with double dip dilemma. COVID on one hand, impaired global oil demand while excess supplies caused by OPEC’s strategy further exacerbated the problem – causing oil prices to plunge below $20/bbl. The time-scale of oil price recovery depends how quickly global economy revives; how fast surplus oil is consumed due to increase in demand and strict compliance of OPEC- plus to agreed production quota.

Whatever the time-scale may be, a new cycle awaits and the world would soon witness increasing trends in oil prices till a new equilibrium is restored, albeit at a higher price.

Three Scenarios That Could Push Oil Back Above $30

Dr. Salman Ghouri

Asia is home to 60 percent of the global population and is the largest consumer of total primary energy, oil, coal, and renewables. It is also the third-largest natural gas consumer behind Europe and North America. As more natural gas becomes available in the form of LNG and piped gas, the region will soon become the world’s largest consumer of natural gas as well. Despite being the world's largest consumer of oil, the Asia Pacific region only holds 2.8 percent of global oil reserves and only produces 7.63 million barrels per day (mmbd) compared to its oil consumption of 35.8 mmbd. That is an enormous amount of oil it has to import on a daily basis.

Asia’s High Oil Import Dependency and the Strait of Hormuz

In 2018, over 78 percent of Asia-Pacific oil demand - 28.17 mmbd - was imported. Of those imports 20.7 mmbd, or over 73 percent of regional oil demand, transited through the Strait of Hormuz - a very narrow ally connecting the Persian Gulf with the Arabian Sea and a critical route for global energy security and international trade (Figure-1). This small ally is about 21 miles wide at its narrowest point and due to depth restrictions is only about two miles wide in each direction for tankers. This supply chain is the backbone of Asia’s economic prosperity - China, Japan, India, South Korea, Singapore and Taiwan are just a few of the countries that rely heavily on this strait. It is also the major supply route for oil and gas exports to Asia from the Gulf. Any disruption in the Strait of Hormuz, a major chokepoint for oil and trade, can lead to substantial supply delays would shift market sentiment dramatically. While there are alternative routes, they are significantly longer and more expensive. A disruption in this area could also expose oil tankers to theft from pirates, terrorist attacks, political unrest (in the form of wars or hostilities), and shipping accidents that can lead to oil spills.

Figure-1: Crude oil, condensate and petroleum products transported through Strait of Hormuz. Source EIA

Three scenarios that could send oil prices higher

Out of the many possible scenarios that market observers must consider, the three listed below are the most likely to send oil prices higher. The first is based on market fundamentals, the second on natural disaster, and the third on human intervention.

Market fundamentals

It is now obvious that global oil demand is significantly lower than supply. Even the OPEC+ agreement to cut 10 mmbd wasn’t enough to balance markets. As long as supply remains significantly higher than demand, prices will remain in the twenties or even lower. In order to bring the market back into equilibrium – oil production has to fall substantially, or demand must begin to bounce back. If OPEC+ and other non-OPEC actors including US shale oil producers decide to cut oil production in the range of 20-25 mmbd for a couple of months or until the surplus is exhausted, then oil prices should recover. These sweeping production cuts would be good for the entire oil industry. A cut of this size would see prices move back into the $30 to $50/bbl range in a relatively short period of time.

If, however, other oil producers are hesitant to take part in a second OPEC+ cut, we will likely see the cartel remain with its existing strategy of a 10 mmbd production cut. The world will continue to experience a surplus of oil supply and low prices will persist until the market finds its new equilibrium. As global storage reaches capacity we will see unplanned shut-downs which will hurt the oil industry at large and shale producers in particular. Many smaller producers will be forced to shut down temporarily while others will go out of business. Oil prices will remain low for an extended period of time as the world waits for global oil demand to return and the impact of the COVID-19 pandemic to fade.

Natural disaster

The second possible scenario is that COVID-19 hits the supply chain directly – namely at an oil production site or refinery – partially halting production and refining operations. This kind of dramatic event would instantly increase oil prices into the thirties. If this outbreak persists for weeks, it will eventually send oil prices to over $40/bbl irrespective of surplus. Nevertheless, such an increase will only be short-lived as demand would remain depressed and eventually production would come back online.

Human intervention

Back in September 2019, Saudi Aramco oil facilities were attacked – disrupting a significant amount of oil. These attacks led to relatively large daily price change and lots of intra-day trading volatility. In light of this attack and many similar ones in the past, the third possible scenario is human intervention. If Iran overreacts to recent tension in the Gulf and closes the Strait of Hormuz to hurt Gulf oil exporters, for example, the impact on the oil market would be very noticeable. Iran is unlikely to escalate tensions to the point where it closes of the Strait of Hormuz as it would severely damages its own economy with such a move. In the extreme scenario that this does happen however, it will be considered a direct challenge to the U.S. This may lead to further escalation in the Gulf and could even lead to a proxy conflict. In this scenario, oil prices would bounce back above the thirties and could even reach above $50 per barrel.

All three of the above scenarios will lead to an increase in oil prices as the market is forced to quickly adapt to a new supply-demand dynamic. The time scale of each scenario varies depending first upon the sentimental impact and then upon how quickly it can bring global supply back into balance with demand. Scenarios 2 and 3 will be short-lived as they fail to solve the fundamental problem of a surplus in supply. The option of a coordinated effort between all oil producers appears to be the optimum solution for those looking to increase oil prices to $30 and beyond. Such coordinated efforts would also save the oil industry from further demolition.

By Salman Ghouri for Oilprice.com - published on April 27, 2020
https://oilprice.com/Energy/Energy-General/Three-Scenarios-That-Could-Push-Oil-Back-Above-30.html