The GERM Report

-What would Heidegger say?

-We might have a shale oil problem. We might not.

Crude oil prices continued to test new highs in the Tuesday session, with Brent long ago leaving the psychological level of $60 per barrel in the rear-view mirror. Estimates form S&P Global Platts show crude oil inventory levels could show a drawdown for the week ending Feb. 5. But it’s largely the consensus that OPEC discipline is enough to keep the market in check that’s supporting the price of oil. Will it run too hot? It depends on how you look at the problem.

Brent crude oil was trading at around $61 per barrel in the waning hours of the Tuesday session, up some 0.6% as of 2:40 p.m. ET. Year-to-date, Brent is up nearly 18%, continuing with the late-2020 bull run.

Platts expects EIA data to show a 2.7 million barrel drain on commercial crude oil inventories for the week ending Feb. 5. Gasoline stocks are expected to show an increase, though other products followed crude oil lower. If confirmed Wednesday by US government data, the rally would almost certainly be extended.

Shale drillers can break even at around $50 per barrel. That’s supported at least in theory by the steady gains in the North American rig count. Nevertheless, shale oil production is still below year-ago levels, but given the lag time from drilling to output, there could be a supply-side problem by the second half of the year.

That could be a concern for Russia and Saudi Arabia, the co-chairs of the committee monitoring market conditions for the OPEC-led effort to keep the market in check. But it’s not. Except when it is. We have ourselves a little bit of a levels of analysis problem.

Levels of analysis address perception. Here, we can look at something at the systemic level, the subsystem level or the environmental level (or any other nomenclature, depending on what you read.) That’s reminiscent somewhat of the problems solved by Martin Heidegger, who suggested the tenets of Western philosophy missed the mark because his predecessors weren’t asking the proper questions.

At the systemic level, we don’t care about Russia or Saudi Arabia as much as we do about OPEC+. Does OPEC+ have a shale oil problem? No. Not at this level. We don’t care about individual producers here. There’s enough cheating and compensation going on among the two dozen or so producers involved that issues related to market reach are so diverse that it individual needs become a distraction. At this level, we might not even be concerned about OPEC+ as we are with supply and demand in the OECD. Or at the global scale. It depends on how you ask the question.

At the subsystem level, we still might not care as much about Saudi or Russian concerns as we would about the interplay among all the various producers. How influential is Iran and how much of its oil could come on the market once sanctions are eased? What does that factor mean for Libya, the great OPEC albatross? How about Iraq, which can barely make ends meet under the OPEC+ restraint. Do we have a shale oil problem here? Maybe, but there might be too many instances of internal bickering to make it resonate.

What about the environmental level? If we look at the levels of analysis problem through the lens of international relations theory, we can break the levels down to the international system, the interplay between various state actors and the individual actors themselves. Here, we may have a shale oil problem. We saw that play out on the other side of the coin last year when individual Texas oil companies and Texas commissioners wanted their own version of OPEC. For OPEC, Saudi Arabia may be concerned too about rival producers. We could see the bromance between former President Trump, the Saudi kingdom and Russia early last year as Exhibit A.

There’s a complexity beyond the headlines. If we’re good at this, we need to be prepared to evaluate the utility of each of the toolboxes we’re presented with. If we aren’t, we run the risk of answering the same questions over and over and consistently coming up with the wrong answer.