American Oil and Gas Reporter - January 2015 - 61

Leaving OPEC production aside for the moment,
what supply and demand factors are at play that could
impact oil prices in 2015? How might the collapsing value of
the Russian ruble at the end of 2014 impact the global market?
What other geopolitical forces could influence the market this
year?
BOOK: Demand does not just seem weak to us, but it also
looks different. A decade ago, this kind of price collapse might
have unlocked significant discretionary transportation demand in Organization for Economic Cooperation and Development countries. With today's lower prices, people may be flying more, driving more and buying more, but two price spikes
in a decade have left behind a more efficient fleet of planes, cars
and freight haulers.
For example, our models show light-duty fleet efficiency gains
accelerating in the United States-a gain of about 0.4 miles per
gallon per year in 2014, rising to gains of 0.75 mpg/year by the
end of the decade.
Western price sensitivity may be muted by efficiency, but nonOECD demand remains very tightly correlated to gross domestic product growth. That is good news during a global recovery,
but Asian demand growth appears to be suffocating beneath two
layers of non-U.S. economic weakness: intrinsic slowdown (especially in China), and reduced European demand for Asian exports.
Geopolitically, we still suggest that the biggest story could be
the U.S. "pivot to Persia." March looks increasingly likely to bring
an Iran nuclear deal (or a form of ongoing crisis "management"
that negotiators refer to as a "deal"), but the architecture of the
bargain we expect to see also seems increasingly likely to backload sanctions relief, meaning a trickle rather than a splash of Iranian crude coming back to the market.
Russia's currency weakness puts a premium on export sales
of crude in dollars, but the money may not go into the oil fields.
Leaner cash flows could sow the seeds for underinvestment in
Russian wells and faster-than-expected declines in the near future. In our view, sanctions could have the biggest intermediateterm impact. President Obama now can arm-but not necessarily fire-a new sanctions weapon sent to him by Congress: the
Ukraine Freedom Support Act (S. 2828), which has provisions
that could prevent Russia from backfilling lost western technological and financial support for its frontier oil projects by turning to other countries.

The mentality of policymakers toward natural gas has
progressed from supply scarcity to supply abundance. As a consequence, the first of several large U.S. liquefied
natural gas export facilities is scheduled to come on line in 2015,
with more to follow over the next several years. Will a similar
shift in the political and regulatory mindset occur for crude oil?
What are the main obstacles to U.S. crude oil exports becoming reality? Apart from oil exports, what key domestic policy and
regulatory issues do you see emerging?

Outlook 2015
BOOK: Crude oil export policy appears to be moving slowly
in Congress. Republicans may be about to take control of the Senate, and tight oil may have broadened the geographic scope of U.S.
oil drilling, but production remains heavily concentrated. Ten states
account for 94 percent of onshore volumes, and several of those
states (especially Louisiana and Pennsylvania) are home to significantly larger national shares of refining capacity than onshore
production. In short, only a handful of senators may have strong
fundamental reasons to support crude oil exports.
Resource biases are not much more favorable in the House of
Representatives, where shorter terms may make members more
sensitive to the consequences of political risk-taking. Senators represent entire states, including their industrial bases. By contrast,
House districts are set in proportion to population, which means
that most congressmen (Republicans and Democrats) represent
voters in urban areas far from the sites of oil production.
That said, we continue to see signs that the Obama administration may be willing to consider an incremental approach to liberalizing crude oil exports, and low prices could increase that willingness. The White House appears willing to preserve (if not enthusiastic about encouraging) the economic benefits associated
with unconventional oil and gas production growth. For this to
remain possible in 2015, Republicans in Congress need to keep
oil exports from acquiring the polarizing politics that surround
issues such as climate change and the Keystone XL pipeline.
Speaking of which, Senate Republicans plan to prioritize authorizing Keystone XL, but they also plan to leave the bill open
for amendments on the Senate floor, potentially making the bill
even more of a lightning rod for controversy. It is not clear whether
the GOP can muster a veto-proof majority (67 Senate and 290
House votes), even if a bill is passed. That means the drama could
continue unless the White House decides to take the issue off the
table by approving it so Republicans cannot.
Otherwise, most of the big policy issues looming in 2015 look
to be regulatory in nature. We expect to see the imminent unveiling of the Obama administration's methane strategy, which
could involve expanding the green-completion rule, new regulations under the Clean Air Act's Section 111(b) and/or 111(d),
or all three. The Bureau of Land Management is due to finalize its hydraulic fracturing rule and propose a new flaring policy for federal and Indian lands, both of which are likely early
in the year. The Department of Transportation has a rail-car rule
to finish, notwithstanding the efforts undertaken by North Dakota in December.
Finally, with regard to LNG, Congress looks poised to pass a
bill expediting authorizations of exports to non-Free-Trade-Agreement nations, but any policy uncertainty could have a disproportionate impact at today's crude prices (a $40 a barrel price reduction represents a decline in oil-linked prices of about $3 an MMBtu at a 13.5 percent slope).
The Department of Energy has commissioned a second outside study of the economic impacts of LNG exports. We expect
it will favor exports, but we cannot be sure it will arrive at the same
distributional conclusion as its predecessor, which weighted aggregate economic benefits ahead of sector-specific impacts. As
a result, we could see further discussions about whether LNG exports remain consistent with the public interest.
JANUARY 2015 61

American Oil and Gas Reporter - January 2015

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