OPEC could lose market share in a world awash in oil: Don Pittis

Canadian oil investors must feel like a kid repeatedly offered a toy and then having it snatched away.

Over and over again the world's oil producers, led by the oil exporting cartel OPEC, have held out hope that a cutback in production will send oil prices soaring again.

But again this week, as oil ministers from some of the world's biggest petroleum producers gather in Vienna Wednesday, there are growing doubts about whether there will be a deal. And even if there is a deal, it remains unclear whether it would have a sustained effect on prices.

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While OPEC aims for a production cut, president-elect Donald Trump says he will lift restraint on consumption by getting rid of climate change rules.

Understandably, Canadian oil investors are eager for a bit of optimistic news. But there are signs that neither Trump's future policy nor this week's meeting will do much to change the long-term trend to growing production and slowing consumption.

In the past, oil prices, like most other commodities, have gone through cyclical swings.

At the peak of the cycle, high prices set producers to work finding new sources, eventually leading to a glut. Once the glut becomes apparent, falling prices lead to a decline in oil exploration and production.

Eventually as production declines, the glut becomes a shortage and the cycle starts again.

A look at historic price swings in the past indicates it's too early for the cycle to be complete. What OPEC is hoping is that it can use the same technique employed in what is remembered as the "oil crisis" of the 1970s. 

Against the tide

Back then, sick of getting a low price for an essential industrial commodity, 14 of the world's largest oil producers cut back on production, forcing prices higher.

"Still, it is one thing to believe in any cuts that may be announced, and another to expect the cartel members to actually conform to their quotas," says Singapore-based analyst Nicholas Teo.

Previous studies have shown that the amount of oil pouring into the world supply is difficult to measure, and countries as hard-pressed as Venezuela will be tempted to cheat on any quotas.

This time OPEC is trying to extend the deal to non-members, including Russia, a major exporter that has said in the past it can still make a profit at $40 a barrel.

Trump has recently taken a few steps back on his anti-climate change stance, but even if he is able to lift restrictions, the production of that oil could add to the world glut.

According to Teo, if Trump encourages more fracking and shale oil development, it would create a net increase in supply.

One of the reasons the glut cycle may have more room to run this time is the great leap in oil technology that happened during the recent boom. Fracking and horizontal drilling have opened up a wealth of new oil and gas from existing fields.

New oil discoveries possible

Geologists are also discovering new sources. What's being described as a "massive" potential find in the Wolfcamp formation in West Texas is similar to the Bakken formation in Saskatchewan, Manitoba and North Dakota, but three times the size.

Fracking isn't the only potential source of new production. 

It may not be economic just now, but Canada's oilsands reserves are proven and could be dramatically expanded using current technology. Improved technology could make that extraction easier, cheaper and more environmental.

And despite the current high costs and low price for oil, the Canadian industry is pushing for expanded exports and the construction of new pipelines. What is happening in Canada is happening elsewhere too.

According to market theory, artificially raising prices should not have a lasting effect. Unless every producer signs a long-term price-fixing agreement, higher prices will only encourage those outside the cartel to produce even more. That's exactly what happened after the oil crisis.

Fixing prices above what the market is demanding now will only mean that the price fixers lose market share.

Canadian windfall

That would be a windfall for Canadian and U.S. producers, but bad for Saudi Arabia, which may be inclined to run through its huge reserves before the world gets serious about climate change. If it hangs on to those reserves while the demand for oil and gas falls, the oil may be stranded underground forever.

There are already signs the world is using less gasoline. The International Energy Agency says soaring fuel efficiency and the falling cost of electrics could mean we may never use as much gas as we use today. Other studies have shown that total carbon production from fossil fuels has begun to level off.

It is likely that a deal in Vienna this week will boost the price of oil and the value of oil and gas investments at least in the short term.

But in the longer run, Canadian energy companies should focus on getting costs down while finding ways to make energy without producing as much carbon. Canadians might be wise to invest in such companies.

Follow Don on Twitter @don_pittis

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