About The Author Essays Example

Analysis on the Article ‘Who Will Rule the Oil Market?’ by Daniel Yergin

Summary
Most people wonder why the price of fuel has steeply declined. In the past, one would expect that after a few price drops, the price would bounce back usually more than what it has marked down. However, today, the expected bounce back is not happening. Today, fuel prices are unusually low. While everyone is quite happy with the declining price of fuel, the oil industry is experiencing a disruptive scenario. In the midst of an unusually low oil prices, Daniel Yergin offers an explanation and a predicament of who will benefit most from the seemingly remarkable oil price decline in his article ‘Who Will Rule the Oil Market?.’ This article was published in the opinion section of New York Times, an authoritative and credible online news organization on January 23, 2015. Yergin observed that the declining prices of oil has been attributed to two of the latest technology in oil and natural gas extraction called horizontal drilling and hydraulic fracturing or commonly called as ‘fracking’. Because of this technology, excessive amounts of oil can be commercially produced, which provides production advantage in terms of volume for the United States, whom, Yergin points out to be the country that have benefited from these drilling technologies. Unfortunately, the increased production became more of a financial drawback when viewed through the perspective of traditional oil producers such as Saudi Arabia, Iran, Venezuela and other OPEC countries. With the United States producing more than their share of the demand side due to their advanced drilling technology, OPEC countries would have to deal with declining market share and the steadily declining oil price. Yergin’s argument is quite timely. While consumers revel on the decreased oil and petroleum prices, producer countries, on the other hand, are struggling to cope with the excessive supply that is projected to hurt their respective economies. It can be observed based on the article that the author’s intention is to make his readers become aware of the current scenario in the oil industry, which he believe, may shape the future world politics and economy.

Dr. Daniel Yergin is an author and a columnist and is revered as a leading energy expert in the world. He is a Pulitzer award winning author for his book “The Prize: The Epic Quest for Oil, Money, and Power”. As an executive vice president for IHS Cambridge Energy Research Associates, he serves as a leading advisor of governments, private institutions, companies and financial institutions around the world in energy, power and related topics. Aside from being vice president for IHS, Yergin is connected with several organizations mostly corporate entities who seek his advice and opinion on matters regarding his expertise on energy and power. Yergin’s education is also exemplary. According to his profile, he holds a degree of Business Administration from Yale University and has acquired his Ph.D. from Cambridge University. Based on his credentials, it could not be argued that Yergin is an authority when it comes to discussing any topic regarding the oil industry. With his experience and knowledge about the oil industry, there is no doubt that Yergin’s opinion is authoritative. The article discussed in this paper, therefore, is an article that came out of an expert’s opinion. And though the author may have his personal opinion regarding the issue being discussed, most of his claims can be considered as facts or can be relied upon.

Impact of New Drilling Technologies

In order to understand Yergin’s point of view, it is crucial to investigate two of the drilling technologies that Yergin has pointed out as the major reason for this surge in supply, which led to the decline in oil prices. First it should be noted that most of the world’s largest oil reserves are found in shale formations, a dark fine-grained sedimentary rock composed of layers of compressed clay, silt, or mud. There are several methods used in finding potential sources of oil reserves. Conventional methods include physical inspection of surface features such as the presence of sedimentary rock, potential reservoir rock, potential traps and hydrocarbon-bearing source rocks. Modern methods include seismic surveys using sonar technology to identify rock formations beneath the earth surface. It is also possible to estimate the extent and volume of the reserve by using seismic surveys. With the use of new mapping technologies, geological surveys can determine potential reserves. However, these reserves are sometimes found on location wherein conventional drilling could not reach. Before the new drilling technologies have been employed, oil producing countries would have to contend with the reserves that are conveniently located wherein they can perform conventional drilling. Conventional drilling methods utilize bore holes that are directed vertically to penetrate the oil reserve. Although this method is the most convenient, it requires several bore wells and accurate drilling in order to produce a significant amount of oil for extraction. In conventional extraction, drilling must be made directly on top of the reserve and should at least be made in close proximity with each other. It should be noted, though, that oil and natural gas are contained in porous rock formations and are buried deep below the earth’s crust. In using conventional extraction technologies, extensive geotechnical information is needed to accurately pinpoint the location of the bore hole and it takes several wells, as the state permits, in order to maximize production. Otherwise, another hole would have to be drilled until production reaches economic levels. Another drawback in conventional drilling is that, it cannot penetrate hard to reach reserves in those locations wherein vertical drilling could not be economically and environmentally accomplished. Because of these drawbacks, oil production has been quite steady with most of the volume of oil produced coming from traditional oil producing countries. Horizontal drilling and Hydraulic fracturing, on the other hand, have been developed almost parallel with each other. Horizontal drilling is the process wherein specialized drilling mechanisms are used that enable drillers to maneuver and extend the bore holes horizontally deep within the bore hole. Horizontal drilling enabled well operators to drill with increased control over the angle of the bore hole, which significantly maximized oil and gas recovery. Hydraulic fracturing, on the other hand, is used to complete the process of horizontal drilling. After the holes are bored, water, combined with chemically treated fluids and sand are then pumped using very high pressures to create cracks in the shale while the sand automatically fill in the gaps to keep the fractures open. The main concept behind fracking technology is to create a much larger surface for natural gas or oil to flow into; thereby recovery is maximized while minimizing economic wastes. Unlike the trial and error process of drilling bore holes for optimal production through conventional drilling methods, horizontal drilling and hydraulic fracturing enable the correction of error making radial adjustments to the direction of the drilling. This technology also offers flexibility and extended reach without having to drill again. As a result, a functional well made using this method can produce huge volumes of natural gas per day in volumes that has never been realized before.

Economic Analysis

The impact of employing hydraulic fracturing and horizontal drilling technologies in the United States is quite phenomenal. As observed by Yergin, oil production in the United States increased drastically that by 2014, the United States is producing an output greater than any oil producing countries in the world. This increased production implies additional jobs and investments, which contributes to the economic boost brought by the new drilling technologies. Aside from oil production, hydraulic fracturing and horizontally drilling has also been primarily employed in the extraction of natural gas, which is quite abundant in North America. For the same reason, the demand that would have been supplied by oil coming from the OPEC countries have been sufficiently mitigated either by natural gas or oil coming from North America as well. Because of its massive deposits of natural gas and oil, with its technological advantage, the United States is foreseen as a key player that would benefit in the current oil price decline. Evidently, the United States can now effectively compete with the ongoing market price of oil without compromising its profitability since lower production cost decreases its operational expenses. Also, it should be noted that the United States is one of the largest consumer of oil and petroleum products. With its increased home production, and an efficient transport and oil delivery systems, oil producers in the U.S. and North America could carry its product efficiently near its markets. It is, therefore, reasonable and only logical to think that the United States is the likely country that will rule the oil market. Yergin’s argument can also be further analyzed using simple economic analysis. In economics, the relationship between supply and demand have been substantially studied and established. In a way, this relationship applies to all goods and services. One particular theory about the relationship of price versus demand is the ‘price elasticity of demand’ theory which classifies demand as elastic, inelastic or unitary. A demand is deemed as elastic when it changes substantially due to a change in price. An inelastic demand, on the other hand, is a relationship wherein there is only a small change in the demand even if the price of the commodity changes. However, when demand changes in the same percentage as the increase in price, the relationship is termed as unitary. Oil consumption is comparable to electricity consumption wherein studies have shown that the quantity demanded by consumers does not drastically change when pricing is increased or decreased. Unlike other goods wherein consumption increases significantly when the price is lowered, the oil industry would likely suffer a drawback in the present scenario because profit is tied up to the volume of demand and its relationship with the current price. This observation suggests that oil consumption follows the inelastic demand at a certain degree although it may vary between residential, commercial and industrial consumers. It does not matter then if the price of oil is low or high since most consumers would tend to consume their normal usage. For the same reason, in order to compensate for the price decrease, oil producers need to find additional demand. Unfortunately for OPEC countries, demand does not change drastically while the number of oil producing countries is steadily increasing their production due to the new technology. Oil prices, according to Yergin, will further deteriorate if the sanctions are lifted from Iran as Iranian oil floods the market. In order to boost oil prices, it is expected that OPEC would intervene and cut their production down. However, at the pace of how oil is being produced in the United States, it is possible that they would lose their market share permanently. Oil demand has also suffered because of the mediocre economic development in countries where demand is expected. Countries such as China and Japan who have been importing oils from OPEC countries are observed to have been slowing down, which could also mean decreased demand for oil.

Foreseen Impact to the Economy of the Middle East and the Oil Industry

It seems that another Gulf war is on the making but this time it would be on competing with oil prices and market share. The question is what will happen to the economies of Middle Eastern countries if this oil pricing trend continues? Before the discovery of oil, most of the Arab countries are sparsely populated with little economic opportunities. Its population lives on fishing, subsistence agriculture, seafaring and pearl trading. It can be deduced then that before oil was discovered, most of the Arab population in the Middle East lives in poverty. When oil was discovered in 1960’s, the region experienced an unprecedented economic growth. Foreign investors interested in the exploration and extraction of oil began to extensively invest in the region. With little alternative for diversification, oil producing countries in the Middle East have been highly dependent on oil for their economic development. With the current trend, it is quite evident that oil producing countries in the Middle East would suffer from the impact of oil price decrease. It is quite unlikely that the Middle East would be able to compete with the United States in terms of market share unless they lower down their oil prices further. If no intervention is made, the oil price war will further worsen. In the end, oil importing countries will benefit while oil producing countries without any alternative economic sources would significantly experience an economic drawback.

Conclusion

Yergin’s article ‘Who Will Rule the Oil Market?’ is a timely and relevant opinion on the current status of the oil industry. As he observed, the ongoing excessive production of oil due to the advent of hydraulic fracturing and horizontal drilling is devastatingly affecting the economies of oil producing countries in the Middle East while benefiting the oil industry of the United States. These oil producers, on the other hand, will not concede as to who will decrease their production so that oil prices will stay high as based on the law of supply and demand. As a result, oil importing countries are benefitting more from the price wars between North America and the Middle East and it is not foreseeable when this price war will end. Unless intervention is made, the disruptively new drilling technology will continue to make oil prices low, which will adversely impact the economies of countries that will be on the losing side of the market share.

Works Cited

Bloomberg Businessweek. Daniel H. Yergin Ph.D. n.d. January 2015 <http://www.bloomberg.com/research/stocks/people/person.asp?personId=4171541&ticker=IHS>.
Garner, D. Visions of an Age When Oil Isn’t King. September 2011. January 2015 <http://www.nytimes.com/2011/09/21/books/the-quest-by-daniel-yergin-review.html>.
Yergin, D. Who Will Rule the Oil Market? January 2015. January 2015 <http://www.nytimes.com/2015/01/25/opinion/sunday/what-happened-to-the-price-of-oil.html?rref=opinion&module=Ribbon&version=origin®ion=Header&action=click&contentCollection=Opinion&pgtype=article>.