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Commodities

Daniel Yergin: Crude's discount days are numbered

Daniel Yergin

WASHINGTON -- Crude oil prices will turn upward again next year as U.S. output declines, predicts energy expert Daniel Yergin. The author of "The Prize," a Pulitzer Prize-winning history of the oil industry, Yergin serves as vice chairman of IHS, a U.S. think thank. He recently spoke with The Nikkei.

Q: Crude prices have been dropping since summer. What is happening?

A: There are three things that brought us to these prices. First is this huge surge in supply -- U.S. oil production [is] up 80% since 2008. [That is an increase of] 4 million barrels a day. There have only been three other times in history, going back to the 1930s, when you've seen this kind of sudden surge in supply come into the market. That's the first factor.

     The second thing that happened, starting in about August, was a sense that the world economy was weaker. And demand was weaker. The third thing that happened was [that] Libyan production quadrupled. That was the trigger for the collapse. Then the Gulf Arabs, led by Saudi Arabia, made the historic decision to resign [from] their job, saying, "We're not the manager of the oil price anymore."

     If they'd cut production in November, they would have just had to cut production again, and they were going to lose market share not only against U.S. shale, but [also against] oil from all over the world, in particular Iran and Iraq.

Q: Your most recent book, "The Quest," mentioned that technological advancement boosted the oil supply. One example is U.S. shale. Do you think the shale revolution will continue?

A: I think right now you're going to see producers cut back. They're going to focus on their most productive assets and cut back on the other things that they're doing. This is a very innovative industry, so there's going to be a lot of focus on continuing to improve productivity and decrease costs. I think it's going to go through a difficult period, but I think this revolution's going to continue. Just not in a straight upward line.

Q: For U.S. shale producers to stay in business, does the oil price need to be more than $50 a barrel?

A: There are tiers. We thought that at $70 a barrel 80% of U.S. growth would continue. We think that up to $60, about half of the shale oil is economic. But what's going to happen is costs are going to come down. We did a scenario two years ago called Vortex which showed oil going below $50 a barrel. And no one took it seriously.

     Maybe the average price for oil will be in the neighborhood of $50 this year. Then next year we think we'll certainly see an oil price that might be 10-30% higher.

Q: Will we ever see $100 oil again?

A: One of the lessons in oil is never say never. Remember, the oil price went up on the emergence of ISIS (Islamic State group) to $115. You have to be aware that turmoil in oil-producing areas could be very important.

Interviewed by Nikkei staff writer Soichi Inai

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