If demand for shale gas catches on, oil cartel may struggle to keep its relevance.
Cartels succeed under two conditions.
First: Can the cartel control the supply of the product it wants to monopolise? De Beers did this with diamonds; OPEC with oil. It also means that consumers should not easily find substitute products either.
Second: The cartel must guarantee demand for its product even at higher prices. Oil meets the two conditions. Coal does not. Too many countries export coal. The top 10 exporters account for just 13% of global exports.
With oil, the top 10 account for a whopping 69% of global exports. Hence in 1960, when Iraq, Kuwait, Iran, Saudi Arabia and Venezuela – expanded later to include Qatar, Indonesia, Libya, the United Arab Emirates, Algeria and Nigeria – decided to form OPEC (Organisation of the Petroleum Exporting Countries), they could form an oil cartel.
The trigger came in 1973, when OPEC declared an oil embargo to protest against the support Israel got from the US and Europe in the Yom Kippur War. Oil prices shot up four-fold – from $3 to $12 a barrel. They have kept climbing since then, even touching $145 in July 2008 and then slipping back to under $100. But nowhere close to the $3 in the pre-OPEC days.
Even the US did not mind much, even though it depended on oil imports till last year. This was possibly because of the profits its oil exploration companies got from OPEC’s oil fields. Moreover, through a combination of diplomacy, technology and protection, the US ensured that oil supplies for its own needs were never jeopardised.
But shale gas could change everything. Just look at the list. None of the shale gas producers is a major oil exporter. And except for Algeria, the others aren’t even OPEC members. Shale gas could reduce the demand for oil. In a few years, surplus production and competition could drag down oil prices further. OPEC could lose relevance.
A lot will depend on how China and Australia play their cards. Will they be able to develop their own technology to prevent overdependence on the US? Marketmen are closely watching the terms China will announce for its third shale gas exploration licences. Australia too has big plans, but its gas is still very expensive.
However, the top 10 shale gas deposits – not all will find export markets – account for a staggering 79% of global reserves. Hopefully, many more countries will discover shale gas.
Hopefully, coal will become the new benchmark for gas prices as the US Energy Information Administration predicts, ensuring that gas prices remain under $5/mmbtu.
Unless, of course, producers of shale gas and conventional gas decide to form another cartel.
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