U.S. oil surplus eases prices in global crises

NEWSMAKER INTERVIEW:

Increased U.S. production is helping to create an oil surplus on world markets, driving down prices despite a myriad of threats to oil supplies, and doing more to crush Russia’s economy than the sanctions imposed by the U.S. and European Union, said Chris Faulkner, chief executive of Breitling Energy.

The growing oil surplus, in fact, may have forced Russian President Vladimir Putin’s hand, since it has made usually volatile global oil markets extraordinarily placid in the face of multiple threats ranging from Russia’s aggression in Ukraine to the terrorist takeover of northern Iraq, war in Israel, multiyear disruptions in Libyan oil output and lingering sanctions on Iran.

Before the war in Ukraine and other conflicts broke out this year, some models predicted oil prices would drop to as low as $60 to $65 a barrel, well below the approximately $114 Russia needs to support its economy and government through export sales, Mr. Faulkner said in an interview with editors and reporters of The Washington Times.

“Putin created an artificial price lift. He’s already short on the price he needs for his budgets, [so he] created a conflict that sustains the price of oil in an era when prices should be coming down,” he said.

Still, despite Mr. Putin’s efforts, oil prices have fallen to about 15 percent below Russia’s break-even point, in the process doing more to push Russia’s economy into recession than the series of U.S. and EU sanctions imposed since March, the Dallas-based energy executive said.

The price of premium crude in New York fell to $93 a barrel at one point last week, and premium crude prices in London threatened to break below $100 for the first time in years as the gusher of oil emanating from the U.S. infuses ample supplies throughout the global economy in the face of flat demand worldwide. Average U.S. gasoline prices also are falling precipitously: Since June they are down by 24 cents to $3.44, a six-month low, AAA reports.

“We’d be talking about a much, much lower oil price if we hadn’t been dealt these puzzle pieces that are all working together” to keep oil prices in the $100 range, Mr. Faulkner said, referring to the tensions faced by top producers from Russia and Iraq to Libya and Iran. “There’s always been issues in the Middle East, but you usually don’t see this many issues working congruently. I haven’t seen it before in my career in energy.”

Mr. Faulkner heads up a firm that has been at the center of the revolutionary shale boom that boosted U.S. production nearly to 9 million barrels a day — a level that threatens to unseat Saudi Arabia as the world’s top producer. He is sometimes called “Mr. Fracking” because he champions the controversial hydraulic fracturing technique used to extract the fuel by shattering bedrock shale to release the oil and natural gas trapped inside.

Oil and terrorism

Mr. Faulkner said the Islamic State — also known as ISIS or ISIL — the most potent terrorist threat to emerge in a decade, moved into the vacuum left by U.S. withdrawal from Iraq in 2011 and took over large parts of northern Iraq this year. The group has seized oil assets, including a refinery, parts of pipelines and about 30,000 barrels a day of oil production in the Kurdistan region of Iraq, and has been selling the oil on the black market to pay its expenses, he said.

“They’re selling it at a discount of between $30 and $40 a barrel through smuggling routes in Turkey, Kurdistan and Jordan,” he said. And though the terrorist group is not seen as strong enough to seize the rest of Iraq’s 2.5 million barrels a day of production, the small amount the Islamic State now controls is enough to yield about $1 billion of year in funds to support their brutal operations, he said.

“That’s a scary situation. That’s a lot of money for a terrorist group to have access to.”

In his travels in Iraq and elsewhere in the Middle East, Mr. Faulkner said he’s found allies are no longer certain that the U.S. will provide military support if they need it, creating openings for troublemakers. “The guard of the world may be asleep. It’s a very scary situation.”

“You have allies asking us, ’If ISIS invades, will the U.S. help us out?’ Most allies don’t know anymore. The answer used to be a solid yes. It’s because of the downsizing of the military, 20 long years of war, lots of debt” and other legacies of the wars in Iraq and Afghanistan, he said.

But even with the conflicts simmering, oil prices have been dropping fast enough that they are threatening even Saudi Arabia’s modest goal of keeping premium crude prices around $100, he said. The oil kingdom went on a social spending spree in recent years to prevent an outbreak of street protesters demanding regime change like the ones seen in other Arab countries during the Arab Spring, meaning the top oil producer now needs oil to stay above $80 a barrel to support its economy and spending obligations, he said.

Saudi role

Saudi Arabia for decades has acted as a sort of central bank in the oil world, turning on the spigots when more oil is needed to tame global prices, and throttling back when too much oil threatens to send prices plunging to levels that undermine the solvency of oil producers. But Mr. Faulkner said Saudi Arabia may, within a few years, lose the wherewithal to influence world markets the way it did in the past.

That is because the oil wells in Saudi Arabia are old and starting to run dry. The kingdom has not made a major new oil find within its borders in decades, even though its own consumption of oil has skyrocketed to about 15 percent of what it produces and could reach 20 percent by the end of the decade, he said.

“They think they can get to [top production of] 12 million barrels a day, but I don’t think they can. They don’t have the ability to be the world’s savior of oil production anymore,” he said. “Their fields are in decline.”

Even the kingdom’s gargantuan Ghawar oil field — the world’s largest and most productive — is in “heavy decline” and can no longer be tapped as a kind of bottomless pit by oil-thirsty consumers around the world, he said.

Mr. Faulkner got into the oil and gas business in 2004, back when it looked like the U.S. might become the world’s largest importer of liquefied natural gas because its own conventional oil and gas fields were in sharp decline. But then the fracking revolution changed all that, unlocking the oil and gas trapped in shale bedrock underlying large swaths of the U.S., from New York to California.

Today, in less than a decade of fracking, the U.S. has catapulted over Russia to become the world’s largest gas producer. It also was able to revive faltering oil production to levels not seen in decades — enabling the country to cut back on oil imports and become virtually free from dependency on Middle Eastern oil for the first time in more than a generation.

While the shale revolution has brought about some economic miracles, Mr. Faulkner said it has been a hard fight all along the way because of the political power of the environmental groups that have fought drilling companies like Breitling tooth and nail in every state and town where they seek to operate.

The fracking wars

Environmental groups like the Sierra Club used to court companies like Chesapeake Energy, the largest producer of natural gas and a pioneer in the fracking business, because gas is cleaner to burn than coal or oil and generates fewer carbon emissions that contribute to global warming. But that all changed when they realized that widespread fracking could put off for decades the day when the world runs out of oil and gas and must switch to renewable forms of energy, he said.

“The environmentalists realized one day fracking was going to allow the idea of ’peak oil’ to be dismissed, allow the U.S. to have a massive surplus of natural gas and be in [a] position of overabundance and exuberance rather than fear and lack of supply, which we saw in [the] 1970s.”

They’ve been fighting the fracking industry ever since, occasionally winning skirmishes in states such as Colorado and New York, where antidrilling sentiment is strong.

“Environmentalists run a great ground game,” though the facts don’t support their charges that fracking contaminates groundwater and causes other health problems, he said. “I live on top of the Barnett shale,” which underlies the Dallas region and where there’s been extensive fracking in more than 19,000 wells in the last decade. “I don’t think I’m drinking chemicals. What reason do we have as an industry to contaminate drinking water?”

While drillers do put some chemicals into the sand and water mix that they shoot into wells at ultrahigh pressure to fracture the rock, they take safeguards to protect groundwater and other drinking water sources.

“We’re not fracking in the same manner today as they used to” in the 1940s when the industry first started fracking wells and used dynamite, napalm and “all sorts of things we are not allowed to use today,” he said. “The technology has progressed” and become much safer to the point that the U.S. Environmental Protection Agency has been unable to document any contamination of drinking water by the industry, he said.

Obama and energy

While President Obama often boasts about the boom in oil and gas production that has occurred since he took office in 2009, Mr. Faulkner gives him little credit.

“Obama has made a lot of great sound bites about, ’During my term we’re producing more oil and natural gas.’ In my mind, we’re doing that in spite of the president and his policies. Federal land production is down 40 percent — that’s what he controls. He doesn’t control mom and pop in Texas or anywhere else in the U.S. Mom and pop control their own land, and they make the decisions to allow us to drill. That’s what’s been happening,” he said.

“The president has done one thing: Through fuel economy he’s lessened our demand for gasoline. He’s lessened our need for oil, and that’s great,” he said.

The biggest problems facing the fracking industry today involve too much of a good thing, Mr. Faulkner said. So much oil and gas is flowing from North Dakota, Texas and other top drilling sites that it’s barely profitable for natural gas producers to keep drilling. Moreover, producers don’t have good ways to transport all their fuel to market, and many refiners are so glutted with oil that they cannot stockpile any more.

Pipelines cannot be built quickly enough to funnel the fuel to consumers, creating bottlenecks like the horrendous one in the Northeast during the “polar vortex” last winter, when demand for natural gas to heat homes and fuel power plants exceeded the available space in pipelines feeding gas to the region. That sent spot-market prices for gas soaring and nearly exhausted stored reservoirs of gas.

While many pipelines are being built, a key one that would help ferry North Dakota’s Bakken shale oil to refiners on the Gulf Coast along with Canadian crude oil — the Keystone XL pipeline — has been stymied by the president and his environmental allies for six years. That has forced the industry to employ far more expensive and dangerous means to get the fuel to market: the railroads.

And with unprecedented millions of gallons of fuel being carried by rail around the nation each day, that’s creating not only the danger of exploding fuel trains but problems for farmers who also depend on rail lines to get their produce to market, Mr. Faulkner said. Some farmers in North Dakota have had to stop producing wheat because they can’t afford to compete with oil companies for the limited trains available, he said.

“One bad decision leads to another.”