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How cheap oil is changing the world

Luke Vargas: On today’s show we’re looking at how cheap oil is changing the world. The days of $100 a barrel oil are over. Since 2015, prices have hovered around $50 as oil producers keep on pumping, often in a desperate bid to support government revenues. The new price landscape spells ruin for some, but opportunity for others.

How is cheap oil affecting life in America? What does it mean for the future? For the fight against climate change?

We’re taking on those questions next, on Wake.

We’re coming to you today from U.N. Headquarters in New York, and we’ve put together an all-star panel of experts here in the U.S. to talk about global oil.

But before we turn to them, joining us on the line from Oslo tonight is Thina Saltvedt, chief analyst for Macro Oil at Nordea Markets.

Thina, welcome.

Thina Saltvedt: Thank you.

Luke Vargas: You’ve got a broad, international view of oil markets as they stand right now. Give us the lay of the land on prices and on oil producer sentiment in May of 2017:

Thina Saltvedt: Let’s start with the price, and we can start with the American reference price, which is West Texas Intermediate. Today it’s around $45 a barrel.

What is happening at the market at the moment is a tug of war between the OPEC cartel – which accounts for around 40 percent of the world production of oil – and the American shale producers. We’ve had a period now for around the last two years, from around July of 2014, with the oil prices starting to move down sharply. And the main reason for the fall was a lot of production coming out from the U.S., the shale producers have turned on the taps, so we see lots of oil coming up.

I think that really surprised the markets, how fast they could increase production and how fast it went out to the market. So in order to not lose too much market share the OPEC cartel, which is mostly the Middle East producers, they wanted to fight back to keep their market share. And what they did was to flood the market with cheap oil.

That turned out to be an oversupply, so now the market is oversupplied with oil, it’s far too much oil out there and that keeps the oil prices low. So what they’re trying to do at the moment is to cut down on the inventories, to cut down on production.

The OPEC cartel actually decided at the very end of November in 2016 to try to push up prices again. They cut back on production. And that actually worked. They managed to push up oil prices until about $50 per barrel.

But it didn’t last for very long, because when oil prices started to move up, the very efficient U.S. shale producers started to turn up the taps again and now we see a lot more oil coming out from the U.S., and that makes it more difficult for the OPEC cartel to balance the market, to get oil inventories down to more normal levels. And that is what the whole tug of war is about at the moment.

Luke Vargas: Thina, I follow you on Twitter, and I must say, unlike a lot of oil analysts who I’ve spoken with, oil is far from the only energy form that it seems like you’re interested in. You’re sharing stories about how clean energy jobs are replacing coal jobs, electric vehicles in China, a bullish outlook on global wind energy production.

Do you see this commodity, oil, losing its central global importance anytime soon? Or is it going to be relatively the same industry we’ve known, just maybe with some new players in it like the shale producers in the U.S.?

Thina Saltvedt: Yes, you’re absolutely right. I think we’re going to see a big change in the oil market. Not today, not tomorrow, but in the next decades.

What we’re seeing going on at the moment is industrial revolution. New technology is coming on line. For example, electric cars, electric trucks. We’re seeing the cost of producing, for example, wind power or solar panel is falling sharply. The same with the electric battery – the cost of producing them are falling sharply, as well.

In addition, we’re seeing that the big climate changes are starting to affect us much more than they did before. So we need to change, and we’re seeing that green energy start to get much more competitive that it used to be.

And we can also see, for example, big investor funds especially in the U.S. are starting to focus much more on what is sustainable, what is sustainable energy, what is clean energy – to try and reduce CO2 emissions and start to avoid the climate changes before they really affect our lifestyle.

So I think, actually, before the end of the next decade, big changes in the industry, especially in the transportation sector which accounts for around 55 percent of the total oil consumption in the world, will change a lot.

For example, we have electric cars as I said, but also trucks, but also boats coming online, ships. You’ll see things like 3D could actually change our transportation sector radically within the next 15 years.

So I think we will reach a peak in oil demand before the end of the next decade, before 2030. And that will change the whole business in the oil industry and the price-setting mechanisms a lot within the next 15 years.

Luke Vargas: Thina Saltvedt, chief analyst for Macro Oil at Nordea Markets, calling us from Oslo tonight. Thina, thanks for staying up late to talk to us.

Thina Saltvedt: Thank you.

Luke Vargas: Let’s pick up on that with two oil experts here in the United States.

Morgan Downey is author of the book, “Oil 101,” and CEO of Money.Net. He was also, formerly, the Global Head of Commodities at Bloomberg, LP. Morgan, welcome to the show.

Robert McNally: It’s great to be with you. Thank you, Luke.

Morgan Downey: Thanks. Thanks for having me.

Luke Vargas: And also with us from the nation’s capital is Robert McNally, author of the great new book, “Crude Volatility.” He’s the president of the Rapidan Group and a former presidential advisor. He was George W. Bush’s top council on international and domestic energy from 2001 to 2003. Bob, so great to have you. Welcome.

Luke Vargas: Thina just described a bit of the recent history of oil – some panic among OPEC nations as U.S. shale challenges their dominance.
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