TIME Earnings

BP Is Paying Big Time for the Gulf Oil Spill

A BP petrol station in London.
Nick Ansell—PA Wire/AP A BP petrol station in London.

The spill has now cost BP a total of $54.6 billion

BP Plc’s woes show no sign of ending as the company swung to $5.8 billion loss in the second quarter, thanks to falling oil prices and another $9.8 billion in charges to settle the remaining U.S. government claims for the Deepwater Horizon disaster.

The loss had been expected since the company announced the settlement in June, hoping to draw a line under the worst environmental disaster in U.S. history. The spill has now cost BP a total of $54.6 billion, and thousands of private claims against it are still outstanding. The company warned again on Tuesday that the impact of still-outstanding issues on its earnings could be “material”.

The company’s operating business looked little better, after a quarter in which crude prices fell to their lowest level in six years in a heavily oversupplied global market. Underlying cost replacement profits, the measure tracked by most analysts, fell to $2.43 billion from $5.90 billion a year earlier (before the sharp fall in crude prices) and from $2.53 billion in the first quarter of 2015. The bottom line was saved by BP’s downstream division, which includes refining, gasoline distribution and oil trading, and which generated over three-quarters of total underlying profit. By contrast, the contribution from its stake in Russian oil giant Rosneft halved to $510 million and upstream profits fell by nearly 90% to $494 million.

And there’s more gloom ahead: the company expects refining margins to shrink in the third quarter, and the spot crude price has tumbled in recent weeks as world commodity markets have taken fright at the scale of the economic slowdown in China. It expects its output of oil and gas to be broadly flat in the current quarter.

Like every other oil company, BP is scrambling to cut costs. It cut its capital expenditure by 22% in the first half of 2015 to $9.1 billion, and now expects full-year capex to be less than $20 billion, down from $22.9 billion in 2014. Some of those savings are being diverted to pay for other permanent cost reductions: the company now expects restructuring charges of $1.5 billion this year, up from the $1 billion it announced in December.

This article originally appeared on Fortune.com

TIME brazil

These 5 Facts Explain Brazil’s Crippling Scandals

Brazil Dilma Rousseff
Giuseppe Lami—AP Brazilian President Dilma Rousseff speaks during a joint press conference with Italian Premier Matteo Renzi, at Chigi's Premier Palace in Rome on July 10, 2015.

From a tanking economy to rampant corruption scandals, the 'B' in BRICS is in trouble

There are a series of scandals growing in Brazil, Latin America’s biggest country and one of the world’s most important emerging markets. The fallout could bring down a president who was reelected less than a year ago. Here are the 5 facts that tell the story:

1. Brazil’s Economy

Scandals are most damaging when an economy is slowing down. Brazil had a $2.35 trillion economy in 2014, the seventh-largest in the world. But 2015 has gotten off to a rocky start; foreign investment is down from $39.3 billion in the first five months of 2014 to $25.5 billion this year. Overall investment in the country has fallen for seven straight quarters.

Even worse, Brazil’s currency, the real, has lost 20 percent of its value since January. This by itself isn’t a bad thing—a less valued currency should make its assets cheaper and more attractive to foreign investors. Instead, Brazil’s economy is expected to shrink 1.5 percent this year.

Political scandals, and the uncertainty they create, are helping to scare off investors. The most visible involves Petrobras, the state-controlled oil company. As the scandal has unfolded, Petrobras stock has fallen 60% over the past year, and the company has had to write off $2 billion in bribery-related costs, while grappling with low oil prices.

(World Bank, Economist, Google Finance, CNN Money)

2. Petrobras Investigation

Why is a corruption scandal involving one company causing such shockwaves? Because it implicates the country’s highest political officials. The scandal began in March 2014, when Petrobras’s chief of refining was caught in a money-laundering investigation. In a bid for leniency, he confessed that companies awarded contracts from his division had diverted 3 percent of each contract’s value into political slush funds. Most of the money went to members of the governing Workers’ Party or their coalition allies. Initial estimates value the bribes at nearly $4 billion. Over two dozen executives from Brazil’s largest construction companies have already been arrested, and more than 50 politicians are now under investigation.

(Economist, WSJ)

3. Dilma Rousseff

This scandal could reach to the political mountaintop, because current Brazilian President Dilma Rousseff served as energy minister and chairwoman of Petrobras during the years of alleged corruption. There is still no evidence that Rousseff had knowledge of wrongdoing. But given the number of politicians from her Workers’ Party implicated in the scandal, a growing number of people say she is at least guilty of unpardonable negligence. Political opponents are calling for her impeachment, and the public’s suspicion is reflected in her poll numbers. In June 2012, Rousseff enjoyed a 59 percent favorability rating; in March 2014, around the time the scandal broke, her numbers had fallen to 36 percent. Her favorability rating has now plummeted to just 15 percent, according to Brazilian pollster CNT-MDA. Nearly 63 percent of Brazilians favor impeachment. On March 15, 1 million demonstrators gathered to protest Rousseff and the corruption of her government and the worst is probably yet to come.

(Financial Times, Bloomberg (a), Bloomberg (b), Reuters (a), Reuters (b))

4. Lula

Why? Because her mentor and political patron, former President Luiz Inacio Lula da Silva, is now being investigated for influence-peddling on behalf of Brazil’s construction giant Oderbrecht. Oderbrecht’s CEO was arrested last month on charges that he paid Petrobras nearly $155 million in bribes. When Lula left office, he held an approval rating of 90 percent, and Rousseff, his chosen successor, rode his coattails to the presidency. Rousseff should be worried; if Lula is indicted, he may blame Rousseff’s government, withdrawing his support for her. If so, Rousseff defenders within the ruling party may finally turn their backs on her.

Lula isn’t the only former president being investigated over Petrobras. Fernando Collor de Mello, Brazil’s president in the early 1990s, had over $1 million is cash and vehicles seized last week while investigators determine his role in Petrobras bribes.

(Wall Street Journal, Guardian, New York Times)

5. CARF and other scandals

Petrobras has dominated international headlines, but it’s not the only corruption scandal threatening the government. The latest involves the Administrative Council of Fiscal Resources (CARF), a division of the finance ministry. It’s alleged that some of its members, tasked with resolving tax disputes filed by corporations, ruled in favor of firms in exchange for 1 to 10 percent of the saved revenue. Over the last 10 years, the government is believed to have lost tax revenue of much as $5.8 billion. That’s nearly 50 percent more than the bribery figures associated with the Petrobras case. But because this case involves mid-level bureaucrats instead of top government officials, it receives far less attention from international media.

By the way, don’t forget Brazil hosts the 2016 Summer Olympics. Brazil has budgeted $8 billion for the Rio de Janeiro games—but Rio Mayor Eduardo Paes has bragged publicly that 57% of the financing will come from private sources instead of taxpayer pockets. Given Brazil’s current political climate, this news will raise eyebrows and new questions.

(Economist, Guardian)

 

TIME real estate

For $725 Million You Can Buy This Massive, Historic Texas Ranch

Texas, Your Texas
Donovan Reese Photography—Getty Images Texas cowboy on a Texas ranch.

It was a favorite of Will Rogers and Teddy Roosevelt

A Texas ranch featuring more than 1,000 oil wells, 6,800 head of cattle, 30,000 acres of cropland, and a tombstone for a horse buried standing up is on the market. You can get all this (and more!) for the cool sum of $725 million.

The ranch “takes days to see,” according to real estate broker Bernard Uechtritz. The W.T. Waggoner Estate Ranch is about 175 miles northwest of Dallas and covers 800 square miles, making it bigger than New York City and Los Angeles combined, reported Bloomberg.

The ranch is being sold whole hog, which means any buyer gets everything on the property, from the 29 tractors to the empty Old Taylor bourbon bottles that sit in an old hunting lodge. If Waggoner sells for its asking price, it will be the biggest publicly known sum ever paid for a U.S. ranch. The most paid to date was $175 million for a Colorado spread in 2007.

The ranch has a storied history and is going on the market after a local judge ordered the sale of the property, ending 20 years of litigation between dueling branches of the Waggoner family, which has owned the property almost as long as Texas has been a state.

Here’s just some of the interesting items that come with the sale:

  • IBM Selectric typewriter
  • 500 quarter horses (for which the ranch is known)
  • Pink poodle lamp
  • 1998 Bell 206B-3 JetRanger II helicopter
  • Dogs named Shoog, Bee, Jazz, CoCo, and Brute

Read more at Bloomberg.com.

MONEY stocks

Why Saudi Arabia Makes So Much Money on Oil

ngs27_0195
Reza—Getty Images/National Geographic Shaybah, Saudi Arabia. Shaybah oil field at sunrise.

Hint: it has to do with how many new wells the kingdom has to drill each year compared to other oil producers.

A lot of reasons have been given as to why Saudi Arabia is allowing the oil price to not only fall but remain weak. Some suggest it’s because it’s seeking to harm emerging rivals like the U.S. and Russia. Others have suggested that the move is because it wants to keep its regional rival Iran at bay. While both could be true, the reason Saudi Arabia isn’t worried about the oil price is because it doesn’t need a high oil price to justify the drilling costs needed to maintain or grow its production. This is due to the fact Saudi Arabia only needed to drill 399 new wells last year just to keep its daily production at 11.4 million barrels of oil. That’s a simply jaw-dropping number when we compare it to its two closest rivals, which are detailed on the following slide from a Schlumberger Limited SCHLUMBERGER LIMITED SLB 1.16% investor presentation.

Schlumberger Limited Saudi Arabia

SOURCE: SCHLUMBERGER LIMITED INVESTOR PRESENTATION

As that chart demonstrates, Saudi Arabia needed to drill nearly 90% fewer wells than the U.S. needed last year to maintain its global production lead. To put that into perspective, at an average well cost of roughly $8 million for a shale well in the U.S., it would have cost U.S. oil companies roughly $285 billion to drill those 35,699 wells. Meanwhile, at that same $8 million well cost it would have cost Saudi Arabia just $3 billion to drill the 399 wells it needed. That suggests at a $50 oil price nearly all of Saudi Arabia’s production is generating free cash flow, which the country can use for things other than drilling new oil wells. Meanwhile, at that same price nearly half of the cash flow generated by U.S. oil production would need to be reinvested in new oil wells. It’s why Saudi Arabia makes so much money on oil while others don’t have a lot left over, especially now that oil prices are lower.

Drilling intensity will only grow
Saudi Arabia doesn’t have to drill a lot of new wells to maintain its oil production because its production naturally declines by only 2% per year. That’s a much lower rate than the rest of the world as the global production-weighted decline rate is closer to 7% and heading toward 9% by 2030 according to the International Energy Agency. Meanwhile, the decline rate for shale wells is even higher, with first year production declines of upward of 90% being reported.

Thanks to its low decline rate, Saudi Arabia is in an enviable position as it doesn’t need to drill very many wells each year to maintain its production. That’s not the case for the rest of the world. In fact, increasing global drilling intensity, or drilling more wells each year, was the message of Schlumberger CEO Paal Kibsgaard in discussing the above slide on the company’s first-quarter conference call in response to an analyst’s question. He said:

What they’re saying with that slide is that, over time, basins mature. And in order to firstly maintain production, and subsequently increase production, which I think, in many of the land basins, we will be looking to do that in the coming years, you will have to increase drilling intensity. That’s the basic message. So I think you’re seeing that increase in drilling intensity happening in many basins around the world today. The drilling intensity is obviously generally far below what we are seeing today in North America land. But that’s basically because, in many — in most of the other basins, we are still working within the conventional resource base. And as you move from the conventional toward more unconventional, you will also generally see an increase in drilling intensity from that.

What Kibsgaard is suggesting is that as the world moves from conventional oil production, which is when an oil company drills a well to tap a massive underground reservoir of oil, to unconventional oil production, where the oil is tightly trapped in rocks, it will lead to increased drilling intensity. By increasing drilling intensity it will force countries and companies to divert more of their oil cash flow into new wells, which is what we’ve been seeing in the U.S. in recent years as it has shifted to unconventional wells. It’s a shift that Saudi Arabia won’t need to make for quite some time as it maintains the largest proven conventional oil reserves in the world.

Investor takeaway
Saudi Arabia is making a mint on oil production because it doesn’t need to drill a lot of new wells to keep its production steady. That’s not the case for the rest of the world, as oil companies will need to drill more wells each year just to keep up. It’s a trend that Schlumberger expects will keep it very busy in the years ahead as the leading oil-field service company will be assisting oil producers in drilling many of these wells.

Matt DiLallo has no position in any stocks mentioned.

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MONEY Gas

More Low Gas Prices Could Be Coming

A new global forecast illustrates the old law of supply and demand.

TIME portfolio

Documenting the Hard Life in Russia’s Frozen Arctic

“The Arctic is like a blank sheet on which you could see all the tensions of Russia played out."

The Soviet Union was known for its doublespeak, but when Moscow bureaucrats called the 7,000-km area of the Russian Arctic the “zone of absolute discomfort,” they were speaking the truth. Temperatures in the settlements of the far north, which spans from Alaska to Finland, can dip below –45°C in the winter. Living conditions are wretched, which is one reason Stalin used these towns as gulags. Descendants of some of the prisoners still live in these Arctic communities. Among the people who seem adapted to the conditions are the indigenous herders known as Nenets, who live in tents called chums.

Yet there are billions of tons of oil and natural gas locked beneath the permafrost—a fact that has drawn a new wave of workers to the Arctic, as the photographer Justin Jin documents. It’s not an easy place to work as a photographer—Jin once got frostbite from the cold metal of his camera pressed against his face—but the material is worth it. “The Arctic is like a blank sheet on which you could see all the tensions of Russia played out,” says Jin, who has worked in Russia for years. “You have the extreme expanse of space, the endless nature, the riches trapped in the tundra. It’s all the contradictions and juxtapositions of Russia.”

Justin Jin is a documentary photographer based in Belgium.

Bryan Walsh is TIME’s Foreign Editor.

MONEY The Economy

Iran Deal’s Sanction Plan Could Affect Oil Prices

An Iranian nuclear deal could bring an influx of oil, but when and how sanctions are lifted could also affect prices.

The deadline for a nuclear deal is June 30, which could lead to the lifting of sanctions on Iran. Oil is believed to make up 80% of Iran’s exports, and current sanctions have chopped those exports in half. Iran could potentially add another 800,000 barrels of oil a day to the market within six to nine months, according to Robin Mills, an energy strategist for Manaar Energy. Even though the potential for pumping oil in Iran is strong, deal makers are pushing for sanctions to be lifted gradually instead of immediately.

Read next: Gas Prices Have Probably Peaked for the Year

TIME Diet/Nutrition

This Is Why FDA Is Banning Trans Fats

The FDA is moving to eliminate trans fat, and here's why that's a good thing

On Tuesday U.S. officials announced that they are moving forward with a ban on artificial trans fat in the food supply. Over the next three years, food manufacturers must remove the primary source of artificial trans fat—partially hydrogenated oils (PHOs)—from their products. Here’s what you should know.

What is trans fat?
Trans fat is the byproduct of PHOs, and it’s created through a process called hydrogenation. Under certain conditions, sending hydrogen through oil can cause the oils to change in thickness and saturation and even become solids. This can give foods a certain taste and texture and it can up the shelf life of processed food.

Why is it bad for me?
Trans fat is linked to heart disease. This kind of fat has been shown to raise bad cholesterol and lower good cholesterol—which can increase risk of heart problems and even type-2 diabetes. Trans fat builds up plaque in arteries, which could eventually lead to heart attack. A 2014 study also suggested that eating a lot of trans fat could be linked to memory issues. In 2013, the FDA determined that PHOs do not meet their distinction of “generally recognized as safe” for human consumption.

What type of foods have trans fat?
Processed foods like baked and frozen products are most likely to contain trans fat. According to the FDA, here are some foods that commonly contain it:

  • crackers, cookies, cakes, frozen pies and other baked goods
  • snack foods like microwave popcorn
  • coffee creamers
  • refrigerated dough products like biscuits and cinnamon rolls
  • ready-to-use frostings

How much trans fat are we consuming?
The FDA says that between 2003 to 2012 the agency estimates that trans fat consumption has declined by about 78%. One recent March report found that 37% of foods in grocery stores may contain trans fat. Food companies are currently allowed to say they have zero trans fat, and label the product as such, if they contain less than 0.5 grams per serving. Many experts say trans fats are unsafe even at that level.

Will trans fat be completely eliminated?
Not entirely. Trans fat occurs naturally in meat and dairy products and may be produced at very low levels in some oils during manufacturing. Since 2006, the FDA has required that trans fat be listed on nutrition labels, so you can see if your snacks contain it.

Will the taste of food change?
Not in a way that you’re likely to notice. There are lots of alternative fatty products that can be used as replacements. Companies have known for a long time that the FDA was likely heading in this direction, and they still have three more years until the final deadline. That means they have time to change and refine their products without trans fat. Also, many companies have already started the process, with many eliminating the fat altogether. Other local governments, like New York City for example, banned artificial trans fat a long time ago in restaurants.

Read next: The FDA Finally Caught Up to Science on Trans Fats

Listen to the most important stories of the day.

TIME society

There’s No Such Thing As a Spill-Proof Way to Transport Oil

pipeline
Getty Images

Zocalo Public Square is a not-for-profit Ideas Exchange that blends live events and humanities journalism.

Even the world's first long-distance pipeline that crossed the Alleghenies in 1879 was prone to accidents and sabotage

To a historian of pipelines, last month’s Santa Barbara oil spill is a reminder that the more things change, the more they remain the same. Since their first introduction in the late 19th century, pipelines have leaked regularly and ruptured occasionally. While it’s true that improved technology and regulation have reduced spills significantly—much like flying today is far safer than in the early years of commercial aviation—the fact remains that there exists no such thing as a spill-proof pipeline. Recognizing this historical reality is crucial to crafting future policy.

Long-distance pipelines were developed in the late 19th century to compete with railroads for the conveyance of crude oil. The problem in the 1870s was not that railroads lacked sufficient capacity to carry oil or that they spilled unacceptable amounts (though they did, to be sure, leak considerably). Rather, the problem had a name: John D. Rockefeller. He’d built his Standard Oil empire by using bulk shipments to negotiate better rates on his oil deliveries than any of his competitors. By controlling railroad shipments, Rockefeller controlled the industry. Pipeline pioneers hoped that creating an alternative transport system would turn the tide in their favor. As a result, these pioneers cared primarily about two things: cost and competition. As long as small spills did not dramatically reduce profitability, environmental safety wasn’t high on their list of priorities, to put it mildly.

Long-distance pipeline dreams first became reality in 1879 in Pennsylvania. Led by Byron Benson and a group of colleagues unaffiliated with Standard Oil, the Tide-Water Pipeline represented a remarkable technological achievement that can be compared to the building of the Brooklyn Bridge a few years later. The project was so audacious that skeptical observers dubbed it “Benson’s Folly.” From January to May of 1879, scores of men and horses hauled thousands of tons of pipes through the wilderness of the Allegheny Mountains to complete the 106-mile route. Engineers designed new pumps capable of pushing the oil over an 1,100-foot elevation gain without exceeding the pressure limits of the cast-iron pipes. Most significantly, Benson and his team overcame intense competitive threats such as armed teams ripping up pipes and fraudulent land claims organized by Rockefeller and his railroad allies.

Excitement in western Pennsylvania ran high on May 28, 1879, when the pipeline operators started the great pumps and inserted oil into the lines. The oil moved at a slow pace of about a half-a-mile per hour and several people began walking along with the oil. But within two days, the pressure in the pipes rose rapidly and the pumps had to be stopped. A crew opened the pipeline and discovered some pieces of wood and rope stuck inside the line. Company officials suspected sabotage, but could not rule out careless workers. Though company reports do not mention the amount of oil lost, there is no doubt that significant quantities of oil flowed onto the ground when the pipes were opened. Even before the first oil reached the end of the pipeline, therefore, a spill had occurred.

With the obstacles removed, the pumps turned back on and the oil began moving again. On the evening of June 4, a large crowd gathered in Williamsport. At around 7:20, the pipes released a strange whooshing noise and oil soon began to flow into the collecting tanks below. People filled souvenir bottles with the oil and newspapers report that a “spirited celebration” followed. The era of pipelines had begun.

Once pipeline technology had been proven, Rockefeller quickly moved to build his own extensive network. Within five years, he had reasserted his dominance of oil transport, though now more than three-quarters of oil traveled through pipes rather than on rails. Like the Tide-Water, Rockefeller’s early pipelines exhibited a pattern of slow and steady leaks punctuated by dramatic bursts. Small leaks caused by poorly sealed joints or defects in the cast-iron pipes were so common that they rarely appear in the historical record. More consequential leaks obtained brief newspaper mention but little call for change in industry practice. In March 1885, for example, one of Standard Oil’s pipelines burst on a farmer’s property. Sparks from a locomotive ignited the oil leading newspapers to describe “a terrific conflagration [that] raged for 20 hours.” Just over one year later, the same pipeline ruptured resulting in “farms deluged with oil and huge bonfires of crude petroleum burning for three days.”

Why did early pipelines fail so often? In part, because oil spills were endemic to all aspects of the industry. At the time the Tide-Water Pipeline was under construction, oil producers in western Pennsylvania were spilling an estimated 5,000 to 12,000 barrels of oil every day as gushing wells spewed petroleum before they could be capped and hastily erected storage tanks leaked steadily. To put this into context, the equivalent amount of oil lost in the 1986 Exxon Valdez disaster was spilled every month in western Pennsylvania. At oil refineries, residual traces of petroleum that could not be sold as products were frequently dumped into nearby rivers. For most in the loosely regulated early days of the oil industry, spilling some oil here and there was far more profitable than investing in the expensive technology necessary to control a finicky liquid.

Over time, pipelines have become more reliable, featuring better welding of their joints along with extensive monitoring systems. However, the development and implementation of these technologies has rarely happened on its own; in most cases, regulations and public pressure have been necessary to spur change. Without strong penalties, it is cheaper for companies to allow small leaks than to build better pipelines.

Yet despite improvement, pipelines remain imperfect. In the United States, a pipeline spill occurs nearly every day, with over 1,400 accidents in America between 2010 and 2013. Historian Sean Kheraj has recently demonstrated that even a pipeline that has operated with a 99.999 percent success rate in Canada has averaged a spill-and-a-half a year and discharged about 5.8 million liters of oil over the past 40 years. A very low failure rate (one likely to be understated as it relies so heavily on self-reporting by leakers), therefore, can still produce heavy environmental damage.

How, then, should we think about pipeline spills? One option is to consider reverting to shipping oil by railroad. As it turns out, such an experiment is underway. The shale oil boom in places such as North Dakota has recently generated large increases in petroleum production at sites with little pipeline infrastructure. Much of this oil is traveling by railroad, and the environmental consequences have been mixed. Several high-profile derailments and explosions have demonstrated that railroads—particularly those operating on old tracks—create similar risks as pipelines. Accidents are more common on railroads than pipelines, though the average quantity of oil lost is much higher in pipeline incidents than on railroads. Neither system is perfect.

Regardless of whether shipped by pipeline or railroad, a clear historical lesson is that greater public scrutiny and regulation of oil transporters reduces the frequency and severity of spills. Citizens are well within their rights to insist that government agencies require pipeline companies to do better.

But this is not all. Simply demonizing pipeline operators for their spills is a convenient way for citizens to ignore their complicity in environmental degradation. Oil is transported in such massive quantities because the vast majority of Americans demand to use it regularly. Our everyday actions, including driving cars and surrounding ourselves with plastics, undergird a world in which pipelines appear as a ubiquitous feature of our landscapes.

There’s a parallel here to another liquid Southern Californians—and many of us throughout the Southwest—have to import to ensure survival and economic prosperity: water. Most of us are aware that our choices as water consumers—to move to arid lands, water lawns, and support a massive agricultural industry in formerly dry areas.—aggravates the tightness of water supplies and contributes to our recurring droughts. It would be good to think similarly about all that oil coursing into our region’s veins, and become more serious about cutting back on our consumption.

Christopher F. Jones is an assistant professor at Arizona State University. He is the author of Routes of Power: Energy and Modern America. He wrote this for Zocalo Public Square.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME energy

OPEC Set to Play the Waiting Game in Oil Market

An OPEC flag blows in the wind in Oran, Algeria.
Adam Berry—Bloomberg via Getty Images An OPEC flag blows in the wind in Oran, Algeria.

Continuing low oil prices is the only way for OPEC to increase its market share

Following OPEC’s decision not to cut production at its June 5, 2015 meeting in Vienna, oil prices should likely continue their descent that began in early May (Figure 1). Prices may fall into the $50+ per barrel range since there is no tangible reason for their rise from January’s $46 low.

EIA and Labyrinth Consulting Services, Inc./Oilprice.comFigure 1. Brent crude oil spot price May 1- June 1, 2015

Saudi Arabia’s longer view of demand and market share dominated the decision not to cut.

World oil production has undergone a structural shift from supply dominated by relatively inexpensive conventional production to increasingly more supply coming from expensive deep-water and unconventional production. Most conventional oil is located in the Arabian, Siberian and North Caspian basins (Figure 2) while deep-water and unconventional production is focused along the margins of the Atlantic Ocean and in North America.

UCGS/Oilprice.comFigure 2. Location map showing Arabian, Siberian and North Caspian sedimentary basins

This shift is at the root of the current price conflict between OPEC and North American oil producers. Since 2008, OPEC liquids production has been fairly flat until mid-2014 (Figure 3). Non-OPEC production outside of North America has been flat. Most production growth has occurred in the U.S. and Canada but it is not only from tight oil.

EIA and Labyrinth Consulting Services, Inc./Oilprice.comFigure 3. World liquids production since 2008 showing OPEC, non-OPEC minus the U.S. and Canada, and the U.S. and Canada

The competition for OPEC market share is from Canadian oil sands, Gulf of Mexico deep-water and tight oil production. U.S. plus Canadian production has increased 6.2 million barrels per day (mmbpd) since January 2008. OPEC production has increased 2 mmbpd over that period with 1.3 mmbpd (65%) of that increase since June 2014.

Lower oil prices over the past year (Figure 4) have not yet resulted in any observable decrease in North American production. Higher prices over the last few months further complicate the situation for OPEC. The global production surplus has gotten worse, not better, in recent months but prices rose based on sentiment.

EIA and Labyrinth Consulting Services, Inc./Oilprice.comFigure 4. Crude oil prices since June 2014

It is true that U.S. production may be falling but a 3-month lag in reporting prevents us from seeing this. It is also true that OPEC may have limited capacity to increase their production further although Middle East rig counts have never been higher.

The only way for OPEC to significantly increase its market share is to undermine North American expensive oil production with low oil prices for at least another 6 months. This is why a production cut at this time made little sense to them.

This article originally appeared on Oilprice.com.

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