The crude reality about oil

It is a bad habit to quote yourself, but I couldn’t resist it. Last year I wrote that “The global picture concerning our most important fuel is changing rapidly.

Ten years down the line, when Kenyan oil deposits are ready for production, oil might not have as high a value as it does now…Kenya is not as yet out of the woods concerning oil. It is not guaranteed that we will be an oil producer, or that our oil will be worth producing…”

How right I was, and even sooner than I anticipated. It did not take a lot of insight to deduce that American hydraulic fracking was a global game changer.

If you increase the supply of a product while demand remains constant, the prices will fall.

Once it was within America’s grasp to be energy secure, it would go for it. In the 1970s, petroleum exporting countries in the Middle East nearly crippled the area’s economy due to reduced production. America can now claw back its trade deficit.

NEW MINING WAYS

The US can now even speculate a return to manufacturing. The world’s shining beacon on the hill cannot afford to let itself be beholden to anyone. America is the latest petrostate on the world stage.

Peak oil, the idea that we will have a shortage of flammable carbon and its prices will rise, is now known to be misguided. We have trillions of barrels of the black stuff .

We have new ways of detecting where it is, better ways of drilling for it, and a greater hunger for it. It is still mid-morning in world oil production, with no sunset in sight. The new reality is wreaking havoc on oil producers’ balance sheets.

The ruble is in rubble and Russia is in a shambles economically. The lights will soon be out in Venezuela as commandante (Nicolás) Maduro runs down the legacy of the Chavista revolution as the money runs out.

In July, I remember reading that Saudi Arabia, the world’s poster boy for one-trick resource economies, was trying to attract more tourists who weren’t pilgrims.

It must really puzzle the thousand or so hereditary princes over there. Why don’t people want to go to a country that still refuses to even allow women to drive? How many tourists are attracted to countries where sobriety is enforced by the lash? I imagine the market isn’t large.

THE OPPRESSIVE SERVANT
Oil is an oppressive servant and it still clings to countries rested under authoritarian jackboots and all countries that have beheadings in the statute have significant oil reserves.

The truth is that the reserves so far discovered cannot radically alter the northern Kenya economy away from agriculture.

Our reserves are reckoned by the Institute of Economic Affairs to be middling. We will find that Kenyan oil production is slightly lower than Ghana’s but will not reach the destructive heights of Angola, Nigeria or Libya.

We know they are searching for oil in Elgeyo Marakwet and exploring for gas in Lamu, and that our hydrocarbon riches might increase but as things stand, proclamations of an “oil curse” is wishful thinking.

At full tilt, assuming a generous split deal with the government and oil producers, annual oil production would just about cover our education budget. The oil deposits discovered so far cannot radically alter our fortunes.

BUDGET SLASHED
While we still rely on oil to be sent over in supertankers, a decline in oil prices is a good thing. Kenya currently goes through more than 30 million barrels annually, and a decline in the cost would benefit us all.

As a potential oil producer, this is a bad thing. There is a point below which oil costs become an unviable.

Due to the nature of Uganda’s crude oil and its location, The Wall Street Journal figured that it would only be viable if prices remain above $80 (Sh7,200) dollars a barrel; recently touched $60 (Sh5,400) dollars a barrel.

Tullow has already sunk an estimated billion dollars developing Ugandan oil fields.

If the prices continue to fall, it is not hard to imagine that investors will walk away. The drop in oil prices is already reflected in the share prices of companies searching for oil in Kenya.

Tullow has already slashed its exploration budget. There will be fewer investors willing to scour the country for oil if the depressed prices continue.

DRY PATCH

Petronas, Malaysia’s national oil supplier, has said that it would reconsider less valuable finds around the world due to current prices.

Willingness to risk searching for oil only makes sense when the crude price is above $100 (Sh9,000) dollars. Unless you are in Iraq, where more than 70 per cent of all potential oil wells yield oil, speculating for crude is a risky affair, with a high failure rate.

Only the largest companies will be able to risk doing so because their size protects them from the immediate shocks of low prices. When the price of crude is $60 (5,400), the risk becomes too much and investors walk away.

The oil industry swings wildly between feasts and famine, and we are set for a dry patch.