The articles that I want to highlight relate to a discussion that raged on in several energy- and oil-related outlets this week: are OPEC’s cuts working? Before that, a small background.
We don’t know what the price of oil would be right now without the cuts but prices did increase slightly from the point cuts were announced. One presumes this means they had some effect. That said, there are doubts over whether the cuts suffice. Check this article on the IMF’s blog or this article on IEA’s newsroom to review the fundamentals. Read the future of oil for a deeper insight.
I am on the side of those who doubt OPEC cuts can ever suffice. Speaking long term, if you cut production here, someone will raise it there. However, any cuts are bound to have an effect. But the problem is, three months is definitely too little time to say what that effect is. Despite, discussions about the effectiveness of OPEC’s cuts seem to have gotten analysts into a rather annoying cycle. We spend three months talking about the last OPEC meeting’s implications, then three months talking about the next meeting. Copy, paste; repeat.
All other issues are considered secondary.
But are they really? Particularly when we cannot even gauge the effect of the cuts in such a short span of time?
Just in case they are not, I want to make a note of three articles that I found this week which highlight considerations that should get more attention (comments under each article are my thoughts when/after reading them, NOT a summary of the articles).
Short term forecasts are necessary. But there are trade-offs between accuracy and the capacity to see into long-term trends. Particularly important to this is that the long-term impact of innovation is virtually impossible to predict. But can innovation inside or outside the oil industry render forecasts irrelevant?
- If so, should we even be making long-term decisions on the basis of short-erm forecasts?
Oil is a transport-driven fuel. To what extent is the need for re-thinking transport infrastructure relevant to future demand? The vehicles needed to connect places separated by long distances are different to those needed to interconnect communities next to each other. The likelihood of alternative transportation being used in one is much different to the likelihood of its use in another.
- What type of transportation infrastructure are we looking to develop right now?
U.S. ethanol exports rise 26% in 2016 to second-highest level on record, from @EIAgov (by S. Hanson & S. Hill).
Production of many alternative fuels seems to be increasing. The general tendency is to think that this is only a change in the total output rather than a relative change. The question that is not being asked enough, however, is whether there is a scale at which an alternative fuel reaches an inflexion point and suddenly takes over. Or rather, it is being asked, but mostly outside the oil community. If the answer favours non-oil fuels, however, the lack of interest in the question is likely to hinder the oil industry’s ability to respond to it. Depending on whether you like oil or not the answer to the question below is different. Regardless, the following question is valid…
- Do we want those in the business of oil to keep focusing on short-term issues at the expense of downplaying the discussion about long-term risks?
Is it possible to think of the oil industry overcoming its current crisis in the short term? If the answer to this question is not, changing the cyclical discussion about how much oil should OPEC cut for a debate about long-term risks seems wise.