Saudis Tell Shale Industry It Will Break Them, Plans to Keep Pumping Even at $20 a Barrel

When the Saudis announced their intention not to support oil prices when they were sliding towards $90 and plunged quickly through that level, we deemed the move to be a masterstroke. It served to damage both economic and political enemies. On the economic front, the casualties would include renewables, Canadian tar sands, and the US shale gas industry. On the geopolitical front, the casualties would include Iran, Syria, Russia…. and the US.

Even though Riyadh is nominally still an ally, relations with the US are fraught. The Saudis are mighty unhappy with America over its failure to get rid of Assad, its refusal to indulge Saudi demands of attacking Iran (our leaders may be drunk on power, but they haven’t quite gone over the deep end) and or indirectly working with Iran against ISIS (which started out as Prince Bandar’s private army and may still have the kingdom as a stealth patron). So the Saudis are not at all unhappy if the US suffers as a result of the whackage of its energy industry. First, that’s an inevitable outcome if the Saudis are to succeed in maximizing the value of their oil assets, which is a survival issue for the royal family. Second, since relations between the US and Riyadh are frayed right now, it is an opportune time to show that the kingdom is not to be treated casually.

Yesterday, the Saudis made it even more clear that they are not pulling out of their game of chicken with other energy producing nations. The Saudis will keep pumping and by implication, will force production cuts on others. But in its clever formulation, which has the advantage of being true but misleading, the Saudis insist that all they are doing is preserving market share. Key sections of the Financial Times report:

Opec will not cut production even if the price of oil falls to $20 a barrel, the cartel’s de facto leader said, spelling out a dramatic policy shift that will have far-reaching implications for the global energy industry.

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs.

“It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

He said the world may never see $100 a barrel oil again….

In the MEES interview, Mr Naimi said Saudi Arabia and other Gulf oil producers would be able to withstand a long period of low crude prices, largely because their production costs were so low — at only about $4-$5 a barrel.

But he said the pain will be much greater for other oil regions, such as offshore Brazil, west Africa and the Arctic, whose costs are much higher.

“So sooner or later, however much they hold out, in the end, their financial affairs will limit their production,” he said.

“We want to tell the world that high efficiency producing countries are the ones that deserve market share,” said Mr Naimi added. “If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”

We had argued that many US shale producers might still keep pumping at a loss, since they needed to keep generating cash flow to service debt. And if they still have open credit lines, they could also borrow to keep producing in the hope that they would ride out what would prove to be a short-lived downdraft. Many Wall Street analysts are predicting that oil prices will rebound in the second half of 2015 as energy producers cut back on output. But if too many suppliers all make the same bet, that they cna stay the course because someone else will make cuts, then output levels won’t drop as much as analysts anticipate and pries will stay low longer.

The stern words from the Saudis are clearly meant to speed up that process. We’ll see how quickly US producers act as if they have gotten the memo. A separate Financial Times story shows how a major Bakken player is slashing capital expenditures (which has ramifications for his suppliers and his employment level) but plans to produce more from fewer wells:

Continental Resources, one of the largest oil producers in the Bakken field in North Dakota which has been at the centre of the US shale resurgence, has cut its 2015 capital spending plans for the second time and intends to reduce the number of rigs it has operating by nearly 40 per cent….

Continental said late on Monday that it planned to spend $2.7bn on wells and other investment next year — down significantly from its previous plan of $4.6bn, which in turn was a reduction from its original target of $5.2bn.

It added that it expected to cut the number of drilling rigs it was using from about 50 today to an average of 31 for next year.

The company also said it expected to be able to cut the cost of its wells by about 15 to 20 per cent.

In spite of the planned fall in its capital spending, however, Continental still expects its average production next year to be 16-20 per cent higher than its average for 2014.

Notice that Continental plans to stay at cash flow breakeven:

Mr Hamm told the Financial Times the cut was intended to bring Continental’s capital spending “pretty close” to its cash flow from operations, so that it would not have to increase its borrowings.

But since shale wells show sharp production declines after the first two years, Hamm’s “do more with less” strategy looks to be a clever short-term expedient. He can’t afford to cut development for too long, or else his production in a year or a bit more will start to taper off.

And notice how his price forecast is consistent with current US conventional wisdom and at odds with what the Saudis have in mind:

Mr Hamm, who started out in the oil business driving a truck in 1963, said he had seen “about half a dozen” such cycles in his career. He added that he expected prices to settle again at about $85-$90 per barrel, and “eventually” return to the $100 per barrel level seen in June.

It seems reasonable to expect oil prices to their old levels in light of peak oil, but that belief may also reflect anchoring. Before the Saudi bombshell, Anatole Kalecki argued oil could fall to $20 a barrel if the OPEC regime didn’t hold. The Saudi “pump, baby, pump” strategy is tantamount to OPEC abandoning its cartel role. From Anatole Kaletsky in Reuters:

Low oil prices will last long enough for one of two events to happen. The first possibility, the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump. The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

Whichever outcome finally puts a floor under prices, we can be confident that the process will take a long time to unfold…

There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis. In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.

The Saudi determination to hold its position and force adjustment onto higher-cost producers makes this Kaletsky scenario seem more likely than it did when he wrote it. And that means optimistic US producers will have to wait much longer for their $100 a barrel payday than they expected and have to do a lot more creative production juggling in the meantime. As as shale producers have to contend with maturing debt, some may not be able to manage all the moving parts. As the Saudis hold to their guns, we can expect to see debt restructurings and asset sales. It won’t happen overnight but the combination of high debt levels, lack of access to cheap junk bonds, and a big fall in revenues means the air supply of these producers has been cut in a big way. Some will still prosper in these new conditions, but right now, we are seeing a lot of denial as to how much downshifting and reorganizing is likely to take place over the next eighteen months.

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140 comments

  1. Vatch

    Upside:

    * If fracking stops, there wiil be less groundwater pollution.
    * If the price of petroleum is very low, the Saudis will have less money to donate to radical Jihadis.

    Downside:

    * If the price of petroleum is very low, people will have less incentive to convert to renewables or to more efficient fossil fuel engines.

    1. optimader

      In the long play there will never be a more affordable time to convert to renewables/become more efficient if the currency of investment is put in terms of BTUs.

      So lets start the countdown on when this is transmuted into a “declaration of war” by the innumerate that wring their hands about that miasmic notion of American achieving “energy independence”.

      Considering the geriatric House of Sauds perimeter is secured entirely w/ US MIC widgets, a dangerous play IMO, and if one accedes to the theory of peak oil, an ultimately doomed one. Sure the least economically sensible unconventional plays will fail, but in the due course of time and $/bbl the same economic incentive lines will be crossed.

    2. lord koos

      Americans will get a much-needed break on gas and food prices. It’s another way to make the economy look like a “recovery” for the average person. Makes you wonder if this wasn’t done with secret approval by the US.

    3. different clue

      If the KSA can keep oil output high enough long enough to drive the price to $20 or less per barrel for long enough, then eventually some of those others drilling and pumping at costs above the sale price of oil will run out of money and have to stop. Unless they can get taxpayers to subsidize them no matter how low the price of oil goes.

      But if they can’t, then eventually fracking and deepest-sea drilling and other such things will reduce. It would be bad for people in those bussinesses, but if it cuts deep enough to exterminate the Canadian Tar Sands mining industry, and KEEP it exterminated; then it will be a long-term good thing for limiting the runaway carbon skydumping we currently see.

      And if the extinction of non OPEC oil cuts so deep as to restore OPEC’s monopoly position, then OPEC (KSA and others) will be in a position to re-raise the price of oil as high as they want. Hopefully high enough to reduce oil-use even further and reduce carbon skydumping even more.

  2. Z

    I’m of the opinion that this oil price collapse is not even partially the result of the Saudi’s dissatisfaction with the U.S.’s geopolitical decisions or an attack on the U.S.’s fracking extraction operations, but instead something that the Saudis are doing with the U.S.’s full blessing … and of course, Israel’s … to primarily weaken Russia’s economy and hence Putin’s power. And I see the whole Saudi’s pissed off at the U.S. theme as just a smoke screen to cloak the fact that they are working in concert with the U.S. to try to destroy Putin. It’s not as if the DC/Wall Street/Fed axis can’t rig the junk bond market to continue to benefit U.S. fracking companies and keep their operations going despite the oil price decline and limit the damage to the U.S.’s oil economy. If this is in fact the case, I’d hardly expect the Saudis or the U.S. to admit it and would expect this sort of counter-narrative of Saudi-U.S. dissension to be produced rather than out-and-out let it be revealed that the U.S., with the help of the Saudis and with encouragement from Israel, are rigging the oil markets to economically attack Putin and Russia.

    Z

    1. participant-observer-observed

      Yes there are many more subtle dynamics here yet to see daylight.

      How about Russia and China buying oil without petrodollars, perhaps because they have lost confidence in the naked emperor known as Wall St-City of London nexus?

      This is where the $$$-pros among NC readers could help us to see more of the salient factors at play that apparently cannot be spoken in polite company yet.

      1. Yata

        JERUSALEM, Dec 14 (Reuters) – A new natural gas field off Israel’s Mediterranean coast may hold about 3.2 trillion cubic feet (tcf) of gas, an exploration group said on Sunday after analysing a 3D seismic survey of the area. If the estimate is accurate, reserves for the Royee prospect, located about 150 km (93 miles) offshore along its maritime borders with Cyprus and Egypt, would be the third largest discovered in Israeli waters, said Israel Opportunity , a partner in the group.

        http://www.rigzone.com/news/oil_gas/a/136370/Stakeholder_Israels_Offshore_Royee_Gas_Field_May_Hold_32_TCF

        1. Yata

          Meanwhile, Israel has made successive major discoveries in recent years – such as the Leviathan field estimated to hold 18 trillion cubic feet of natural gas – which could transform the country from energy importer into aspiring energy exporter with ambitions to supply Europe, Jordan and Egypt. A potential obstacle is that much of the 122 trillion cubic feet of gas and 1.6 billion barrels of oil in the Levant Basin Province lies in territorial waters where borders are hotly disputed between Israel, Syria, Lebanon, Gaza and Cyprus.

          http://www.theguardian.com/environment/earth-insight/2014/jul/09/israel-war-gaza-palestine-natural-gas-energy-crisis

        2. Yata

          These recent NG finds are substantial. The idea that they are able to move Israel from a net importer of NG, to a net exporter, should be a consideration in the politics of the region. This raises the interest of the Israelis from one of business interest to one of national interest.
          The geographical size of the Levant Basin leaves you to wonder how many other potential fields exist there.
          Without tripping too far into the world of conspiracy theory, this volume of NG looking for a market should be a factor.

    2. different clue

      Hmmm . . . you know . . . . the longer oil stays “lower”, the more oil China can buy, import, and store in strategic reserves. So China might be very happy with all this too.

    3. Yves Smith Post author

      No, the Saudis are not all that interested in Russia. That is the US’s pet project. The Saudis are very keen to hurt Syria and Iran, and are interested in Russia only incidentally for its support of Iran. The fact that Russia is suffering first is not because it was the main target, it was due to the fact that the sanctions made it more vulnerable.

      The Saudis are unhappy with the US. They’ve been VERY upset with our indirect cooperation with Iran over ISIS, which was and perhaps still is Saudi-backed. And Israel is too. I forget the particular incident, but the Israelis pointedly sat out a US incursion in the last six months as a sign of their disapproval.

      1. Paul Tioxon

        Yves,
        Syria is the most important Arab ally to Russia. It is a long standing relationship. It is why we want Assad gone. Along with him go the Russian’s influence. When the UN condemned the USSR invasion of Afghanistan, along with every other Islamic nation in the world, only Syria sided with them. It is also a port of call for the Russian Navy, giving them a stronger presence in the Mediterranean.

        http://www.usni.org/magazines/proceedings/2013-12/russian-navy-rebalances-mediterranean
        http://www.reuters.com/article/2014/01/17/us-syria-russia-arms-idUSBREA0G0MN20140117

      2. Z

        Yves,

        I don’t believe that the Saudis themselves are singularly interested in going after Russia and Putin but I believe that the U.S. wants them to drop oil prices to attack Russia’s economy and that the interests of those in power in the U.S., Saudi Arabia, and Israel are mostly intertwined and they are in direct conflict with the interests of Russia, Syria, and Iran. Yes, the Saudis and Israel may both be pissed off that the U.S. didn’t go after Syria and Iran more aggressively, but that doesn’t necessarily mean that the Saudis are even partly taking actions to punish the U.S..

        I’m certainly not sensing that the U.S. Government is pissed off that the Saudis are allowing the price of oil to drop so precipitously. Are you?

        Z

        1. Yves Smith Post author

          The US and Saudis are not on the same page on a lot of issues right now. With all due respect, you are operating from a dated view of the relationship. There are time the two countries have collaborated closely and times when the Saudis have set out to undermine the US. The Saudis feel they have a long list of grievances v. the US right now, which means they have no particular reason to curry favor. If what they do in their own interest happens to favor the US, fine, but there is no evidence that the Saudis were interested in hurting Russia in particular. Syria and Iran are far and away their biggest priorities, and the price cut whacks them plenty.

        2. zen

          Z ur rite it is a collabration between america and saudi to punish russia for not selling oil in american dollars.

      3. Fiver

        Yves claims: ‘No, the Saudis are not all that interested in Russia”

        The Saudis were up to their eyeballs in the effort to take down the Soviet Union, not through the oil price drop in the ’80’s so oft-cited by Reagan fans, but through its participation in the creation of a ‘mujahadin’ fighting force 100,000 strong, all indoctrinated via Massadra (quasi-religious/military training schools) with an ultra-violent, twisted caricature of ‘Islam’ the uneducated and illiterate tribes could carry with them into battle on behalf of their Saudi, US and Pakistani benefactors. The Soviets were driven out of Afghanistan, and within a short couple of years collapsed. Without even going into the deep connections between the CIA, Bin Laden, Al Qaeda, the Saudis and Israelis forged during this conflict, we can note that the Saudis also provided the jihad-power to foment the gruesome Chechnyan conflict with Russia, and that Prince Bandar openly threatened terror attacks to disrupt Putin’s Olympics. So Saudi/Russia enmity has deep, US-cultivated roots.

        I’ve noted every time this supposed Saudi ‘master-stroke’ has been presented that there is simply no way the Saudis are acting alone in this, for the simple reason that the Royals retain their thrones at the whim of US power. If the Saudi moves were in any way antithetical to current US goals, the US could put them into a much tighter box, much more quickly than anything so far done to Russia – in fact, now, with at least 2 million barrels a day of excess supply, now would be just the time for the US to slap the Saudis into line. Remember, Obama is no fan of fracking or oil sands oil, and it was evident to everyone the Fed had blown a bubble in shale oil that needed to be corrected at some point. The circumstances, with the end of QE, the intersection of the supply/demand curves apparent to all, the political changes with the Republicans now in control of Congress, the Iran nuclear talks extended for 7 months (a month ago) and other factors made this an opportunity the openly belligerent US could not resist. The Saudis have played the ‘bad guy’ many times before, and every time handsomely rewarded. This is a US/Saudi squeeze play aimed at buckling Russia, Iran or both. But it will not last. In fact, the idea that the Saudis would keep the price low for years is, I think, laughable, because the reason they’ve kept production much lower in recent years is to protect their own reservoirs from going into precipitous decline. The hope is for a knock-out, a strategy that reveals just how out of synch US neocons and fellow travelers are with the reality that Putin is going nowhere, Iran is going nowhere, Syria is one gigantic US/Saudi war crime, Iraq is a basket-case and Israel more fascistic with each passing day – in other words, the countries that created this geopolitical crisis, oil crisis, financial markets crisis, Central Banks crisis via a combination of military and economic attacks are going to be very sorely pressed to explain the monumental failures coming when it becomes apparent all around the US has made no forward progress on any of these critically important fronts, rather, has created a dauntingly bigger mess of things no amount of monetary idiocy is going to salvage.

        1. Crazy Horse

          Spot on, Fiver.
          I find the idea that the Saudis are independent actors in this price squeeze ludicrous. Anyone with a functioning brain cell– even the Obomber neo-cons— can see the fracking bubble for what it is. A Ponzi scheme. And if you are running a Ponzi the secret of success is knowing how to fold it in the middle of the night while the neighbor’s house is burning down to divert attention. So working with the Saudis to crash the price of oil has dual benefits— It launches a powerful weapon in the Obomber war against Russia, and provides cover for the collapse of the fracking charade which would happen anyway as wells run dry after a year or two of production and exponential increase in the number of wells becomes impossible no matter how fast the gnomes at the FED hit the Print key.

          While the Saudi Royals may depend for their very lives upon US support— think Gaddafi— they are not without leverage. People conveniently forget that the hijackers who provided cover for the controlled demolition US false flag attack on Building 7 and the Twin Towers were all Saudis. Be interesting to know which branch of the Bandar army recruited and financed them, promised them 17 virgins in the next life, and set them up to take the fall. That’s what I mean by leverage. Of course that is all so far in the past that nobody cares anymore. Much easier to believe the official conspiracy theory fabricated out of total implausibility and published as the 911 report.

          1. Yves Smith Post author

            Economists do not believe in bubbles, and no one in the officialdom believes in them either. And the US was making great political hay out of our coming oil independence and our fantasy of LNG exports.

            The US is not as omnipotent as you would like to believe. You are exhibiting a case of US exceptionalism. We can’t even get out military protectorate of Japan to sign the TPP, for instance.

            1. Paul Tioxon

              Yves,
              The American Hegemony is fractured. The US Government influence is declining with governments we are supposed to be on an allied basis. As you say, Japan does not follow our lead with TPP, Saudi Arabia is not much of a friend, especially in the face of our failure to execute the Project for A New American Century, and wrap up Iraq with a bow to be dominated by the Saudis and the US. Russia, in the vacuum of the agreed upon terms of victory after WWII at Potsdam, does not have the willingness to take cues from the US and does not care that its military moves scare all of Europe as well. One minute it helps disarm Syria of nerve gas and the next minute it annexes Crimea. The chaos that ensues when every nation thinks it can control events as well or better than if they worked with a superpower that would back them up is what we are seeing right now.

              Even Turkey seems fit to act as if it has not joined the EU. Israel’s right wing government still in shock that Mitt Romney is not in the WH, giving the good to go to bomb Iran, does not hide its animosity for any peace initiative from the US or Obama personally. This multi polar situation makes for chaotic foreign policies that are difficult to sort out, because they involve only one nation’s view of a good outcome, do not see an interstate system that all economically developed are a part of.

              Whatever the Saudis are primarily doing, they are giving a gift to every elected American politician, D or R, who are both claiming victory for their policies leading to lower gas prices. And the American public, who practically lives in their cars are getting a personal boost in income measured in hundreds of $/mo in savings at the gas the pump. While the policy makers may look for the downside to energy policy, the real relief on a personal level is giving a glow at every fill up.

              On a macro level, the money diverted from the oil companies towards where ever else is a considerable stimulus. If this is the Saudis trying to squeeze America, the only people going to get hurt seem to be the weaker independent drillers who will be crushed like bugs by debt and then bought up in bankruptcy court by hedge funds, major oil companies and I can only assume Sovereign Wealth Funds, seeking to replenish lost profits. American politicians, like Obama are claiming victory and punishing the XL pipeline as unnecessary for America. Conservatives are feeling vindicated that supply and demand is once again the iron law of economics that determines our political fortunes and fracking and drill baby drill are good for America. No need for nuance with either of those narratives.

            2. Crazy Horse

              You confuse propaganda intended to keep the sheeple confused— “oil independence” — “the new Saudi Arabia” “LNG exports instantly on-line to drive Russia out of the European market” — with simple profit and loss calculations that even officialdom and economists can understand.

              One does not need to believe in American omnipotence to grant the possibility that a client state monarchy and an Imperial Kleptocracy might collude in manipulating prices for what they see as their own ends. Indeed they would be exceptional if they didn’t do so!
              It is quite possible that neo-con fanaticism and hatred of Russia blinds them to potential consequences and that they have a misplaced sense of their ability to control events. But it is equally possible that they see throwing an ill conceived scheme like fracking— one that depends upon free money and an exponential increase in drilling rates–under the bus in exchange for a powerful weapon in their war on Russia.

              History clearly shows that attacks using sanctions and resource denial are acts of war, and usually morph into shooting wars.

              1. Yves Smith Post author

                You are missing evidence right before your eyes.

                The Saudis do not need to threaten or actually drive oil to $20 a barrel, which is a big opportunity loss, to hurt Iran and Russia if that were the aim. $80 would do. $60 is overkill.

                They DO need to drive it below $50 to shut off the air supply of the fracking industry. The Saudi price threat tells you who they are really after.

                And as we said, the Saudis are not a client state of the US. For instnace, they’ve been bucking us regularly in the UN Security Council. Even far more independent Japan does that only on those votes where it is the US and Israel versus everyone else.

            3. John R Bell

              What a strange comment. Economists do not believe in bubbles. Many may not but many do and because I was guided by those who shared the latter belief and had sound reasons for same I lost no money in 2008 and I did not have to wait quaking in my boots for a piece of the state managed and taxpayer funded bailout so that I might recapture much or all of what I had lost

        2. Doug Terpstra

          Larry Elliot of the Guardian (and Ellen Brown’s) analysis is very similar. Saudia Arabia is a willing pawn in a power play.

          Think about how the Obama administration sees the state of the world. It wants Tehran to come to heel over its nuclear programme. It wants Vladimir Putin to back off in eastern Ukraine. But after recent experiences in Iraq and Afghanistan, the White House has no desire to put American boots on the ground. Instead, with the help of its Saudi ally, Washington is trying to drive down the oil price by flooding an already weak market with crude. As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that they will become easier to deal with…

          http://www.theguardian.com/business/economics-blog/2014/nov/09/us-iran-russia-oil-prices-shale

        3. Yves Smith Post author

          The Soviet Union does not equal the Russia of today. And they were driven out BECAUSE the Soviets were the aggressor in Afghanistan, or did you forget that part? They first supported and then invaded on behalf of a government that was engaged in radically modernizing a traditional Muslim country. Let me repeat: the Soviets invaded a Muslim country.

          1. Fiver

            No, they did not. The CIA, according to none other than Ziggy Brez., went into Afghanistan – a good 6 months before the Soviets were asked (yes, asked) by the pro-Soviet Afghan leadership for assistance – and set about de-stabilizing the entire country. It was the US/Israelis, Saudis, Pakistanis that were responding to the overthrow of the Shah next door that set Afghanistan on fire and provoked the Afghan regime’s call for assistance. Ziggy is explicit on this and proud of it. What an idiot.

            1. Yves Smith Post author

              The Soviets signed their treaty with Afghanistan only as of December 1978. The government started calling for assistance almost immediately. The Soviets didn’t respond until December 1979. If you are claiming that the US destabilization is what led to the request for help, the timetable does not support it. However, the US efforts probably increased the urgency of the calls, or induced the Soviets to decide it was worth taking up this fight.

              1. kds

                The Russians were invited into Afghanistan by its leader. To stabilize the situation, caused by the Afghani gov upsetting the barbaric Islamic warlords, the Russians took over as their aid increased in response to U.S./Saudi intervention. Way to go Brezinski!

        4. Yves Smith Post author

          See the response here, which is misplaced:

          @Fiver 6:21, ask CIA if Saudi royals retain their thrones at US whim. They’ll tell you, subject to clearance and need to know, that the end of the House of Saud is THE thing that scares them most. They would not dare lift a finger against that regime. The financial racket of their banker betters would instantly implode.

          http://www.nakedcapitalism.com/2014/12/saudis-tell-shale-industry-will-break-plans-keep-pumping-even-20-barrel.html#comment-2377283

      4. Yata

        I’d like to count myself in as one the crowd that agrees with you, what happens is i’m left with the feeling we’re getting sold a half story here.
        What comes to mind is the Lehman / Bear Stearns eenie-meenie-miny-mo selection process, and Putin is getting “Dick Fulded” by some arrangement we’re not privy too.

        1. P Walker

          If you look at a map, the major oil producing fields in Saudi Arabia are in Shi’ite areas. Saudi Arabia fears Tehran is fomenting trouble in the region (think Bahrain).

        2. Yves Smith Post author

          Saudi Arabia hates Iran with the passion of a thousand burning suns. It’s not entirely rational. The rational part is they are engaged in struggle to be the dominant force in the region.

          1. John Jones

            Thanks for the reply.
            If you get a chance to reply again.

            “The rational part is they are engaged in struggle to be the dominant force in the region.”

            Do you know why they want to be the dominant force in the region? Is it a reason like P walker above mentions or is it a matter of survival?

            1. NotTimothyGeithner

              150 years ago the Saudis were close to being exterminated by the Ottomans and Egyptians. The Sauds know they can be wiped out, and Iran with its religious-overseer democracy might be seen as an alternative arrangement for the locals especially the religious cooks who might wonder why they need a feudal arrangement to protect the region.

        3. flora

          The Persian (Iran) / Arab conflict is intense and goes far back in history, long before the creation of the modern states of Iran and Saudi Arabia.

  3. David Lentini

    Will David Ricardo Please Pick Up the White Couresty Phone.

    Gotta love this quote: “We want to tell the world that high efficiency producing countries are the ones that deserve market share,” said Mr Naimi added. “If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”

    Ah, for once I love the idea of comparative advantage. And how can our laissez-faire, free loaders marketeers disagree? How could Wall Street and Obama think they could defy Ricardo’s “Law”?

    1. cwaltz

      How dare you suggest the free market applies to other nations! That darn free market doesn’t it know we’re exceptional Americans and it should award us advantages.

  4. McMike

    And of course, all the free market fundamentalists are cheering this naked demonstration of economic self-interest and killer instinct for leveraging their competitive cost advantage.

    #notruescotsman

    1. Fiver

      The Saudis have been pumping billions upon billions of barrels of water into their reservoirs to pressurize them to keep the flow rate up for many years, and was the chief reason why Matthew Simmons believed the Saudis faced major risks of a precipitous decline, bringing on a huge shortage.

      http://www.chron.com/business/article/Matt-Simmons-energy-insider-who-issued-wake-up-1713409.php

      But I gather that was standard procedure for all older fields – fracking is US technology, and US technology and associated expertise would’ve been ‘best in class’ thus what Saudi Aramco would’ve used without the need to have CIA involved or the technology to be seen as a ‘booby trap’, as opposed to extremely short-sighted in not having an ‘off’ switch on production – unless there was inside knowledge in the industry itself in the US that revealed the risk involved, but was deliberately kept from the Saudis. As oil has been a strategic concern of the US since WWII, though, I expect the CIA has been up to its hair involved all over the world, and obviously in the Kingdoms.

      If it turned out that US oil expertise destroyed Saudi ability to control its own output on the downside back in the ’90’s (fracking is like QE – you cannot stop once you start), and the Saudis discovered it, it is not unreasonable to ask if 9/11 was their way of indicating just how upset they were. However, as noted in other comments, I think the US and Saudis are on the same side, both doing their best to convince Putin and Iran this is going to be a war of attrition they cannot endure rather than a maximum push for a take-down, as I think is the case. An enormously dangerous ambition.

  5. Max

    I’m sure Aramco will be there to help the faltering shale producers with new lines of credit just when they need it most.

    1. Paul Tioxon

      Sure, why not, China is so helpful with the Russian ruble crisis. It’s time for good neighbor gestures.

  6. Drew Guinan

    It always amazes me that we have considered Saudi Arabia an ally. While my memory is slipping, I seem to recall that virtually all of the terrorists who took part on 9/11 were Saudi Arabians and that for the most part the jihadists are radical Sunnis which is an outgrowth of the Wahhabi(?) sect which is practiced in Saudi Arabia. And where does there funding come from?

    Maybe this would be a good time to explore a tax on gas that would be high when the price of oil is low and would decrease when the price returns to $100 a barrel. WE certainly could use the proceeds for infrastructure projects.

    1. Doug Terpstra

      Saudi Arabia IS a KEY US/Israeli ally and a vassal state whose head-chopping monarchy depends wholly on the US military-CIA-Mossad for its survival…911 notwithstanding…(or as evidence?) Rest assured, Saudi Arabia does NOTHING without express US/Israeli approval. This is not the “free” market at work, but rather compelling evidence of the Empire of Chaos’s Great Game full-spectrum dominance imposed to force Putin’s submission and probably the breakup of the Russian federation. US and other producers will be protected by other means, including taxpayers covering derivatives insurance.

      1. Yves Smith Post author

        Huh? Please explain the oil shock of the early 1970s. Or Prince Bandar’s sponsorship of ISIS.

        The Saudis are not a client state. This is more like an unhappy marriage where the parties have too much in joint holdings for a divorce not to be massively messy and costly, so they stay together.

        1. Doug Terpstra

          I think what happened forty years ago under Carter and Cold War 1.0 was a different power dynamic, when, in a bipolar world, KSA had far more leverage/independence than it does today. Under neoliberal neocolonialism, the Kingdom’s very existence depends on the US.

          I’m not sure what you’re asking about Bandar Bush’s sponsorship of ISIS. I don’t think there’s any doubt about that, along with Israel. There’s ample evidence for both, as well as fungible US support for the amorphous “opposition”, which explains ISIS’s substantial US armaments. But this was almost certainly with US CIA collusion or assent in the push to oust Assad. That it slipped the leash and got out of control doesn’t negate US patrimony, just as the rise of al-Qaeda and bin-Laden, unintended or not, sprang from CIA funding of the Mujahideen in Afghanistan. We’re quite adept at creating our own enemies, indirectly of course. I

          I think all of this is directly related to geopolitical strategy contra Russia and Syria and only tangentially to market share market share. Ultimately it’s about full-spectrum dominance, which clearly includes market and dollar-dominance, but I believe Russia is the primary target. Mike Whitney and the Saker have made a pretty compelling case for that scenario. These days I’m far less likely to accept the simple market narrative.

          1. flora

            In addition to a virtual monopolist (Saudi Arabia) driving out competition, it’s interesting to think they might be playing their own Great Game vis US, China and Russia.

          2. Yves Smith Post author

            I don’t think you understand the Saudi position. They are a one-trick pony. Killing or at least seriously delaying widespread exploitation of shale gas is a matter of survival. If the US makes a profitable go of it, the race to develop will be off elsewhere. It’s already starting in the UK. By contrast, if the bubble pops (or is popped) and there are lots of bankruptcies and losses to investors and banks, that will cast a pall over the sector.

            They have no, repeat no, geopolitical power if their position as dominant oil producer ends. So establishing their ability to dictate energy development also preserves their geopolitical position.

            1. Fiver

              There are 3 ‘dominant’ producers, 2 ‘dominant’ exporters. Here’s one way to pose this:

              What would the US do if the Saudis just switched sides and threw their lots in with Russia and China, or even just China? The US could dial up Israel or Iran or even Russia to immediately attack, or attack itself. It could doubtless switch off the entire Kingdom cybernetically if it desired, freeze all assets, cut them off, starve them out, whatever, and the US public would fall instantly into line, having been so thoroughly indoctrinated in anti-Arab hostility over the long decades. With the Republicans effectively in charge, any perceived Saudi ‘attack’ on US oil ranks at least as high as jumping ship altogether, and just wouldn’t be tolerated. And in fact, you do not see big, puffy white guys pounding the table. Or key mainstream media. Or even most of the oil industry – not because gas is cheaper and the public would go batsy at the optics, but because this is ultra-high stakes for big US oil and finance, the targets being Iran (on behalf of Israel/neocons yes, but also huge potential profits) and now the super-bonanza of a de-Putinized Russia. Congress has already signed-off on a war with Putin. They aren’t many non-military clubs left in the US bag.

              1. Yves Smith Post author

                Your argument is bogus. If the Saudis switched sides to China, the US would not dare do anything. The US and China are too enmeshed for the US to act out. Look how the US has not dared to say a peep about the PUBLIC offer by China to give Russia currency swap lines. That is a very clear poke in the US eye.

                The Saudis wouldn’t switch sides to Russia because they are a second-tier power. Not strong enough to be a worthy ally. Plus they are buddies with Iran, which the Saudis despise. So that’s a non-starter for other reasons.

                And you are simply wrong re the Saudi status. See this from later in the thread:

                @Fiver 6:21, ask CIA if Saudi royals retain their thrones at US whim. They’ll tell you, subject to clearance and need to know, that the end of the House of Saud is THE thing that scares them most. They would not dare lift a finger against that regime. The financial racket of their banker betters would instantly implode.

        2. Doug Terpstra

          I might add that ISIS proved a convenient vehicle for ousting Maliki, for waging Iraq War 3.0, and re-engaging regime change in Syria. IOW, I don’t buy the official narrative of ISIS as new super-villain du jour either.

          1. Fiver

            ISIS has CIA/Mossad/Saudi Intelligence written all over it. Even a cursory look at the winners and losers makes it evident, biggest winners being the GWOT military/security complex and US/Western domestic demolition of various civil and democratic rights.

  7. Howard Beale IV

    As ong as the Saudi’s keep pumping and we dial back, what’s the worry? At some point the Saudi’s will start to run dry-then what? What no one is really saying out loud is the fact that since the price of oil is so low, that its prima fascia evidence that the global economy…sucks-but not only for Russia, but for Iran, Iraq, and Nigeria to boot.

    1. Yves Smith Post author

      1. All the meaningful job growth in the US post-crisis has been in energy producing states.

      2. The shale producers are very levered. If the Saudis keep oil down long enough, you’ll see bankruptcies and potentially bank failures. The oil bust of the early 1980s wiped out pretty much all the banks in Texas and Oklahoma.

        1. Yves Smith Post author

          A regional oil bust is not a systemic event. The Fed would have no justification for the use of its “unusual and exigent” powers. And its market interventions have been crude (no pun intended), not targeted. Plus on a practical level, it has nowhere to go with interest rates at zero and last quarter GDP at 5%. It can’t be cheerleading the economy and then bail out non-systemic banks and CLOs.

          1. Z

            First if all, I don’t believe that the Fed alone rigs the markets and I’d imagine you don’t either. There obviously is an interplay between the Fed’s money being dished out, through various schemes, and the banks and the banks in bidding up the markets. I also believe that the Fed, wall street and the U.S. government work together at times to “rescue” the markets from their freedom (not to mention the help that is also often available to them from other countries’ central banks such as Japan’s and the UK’s.). And I don’t believe that all the actions of the Fed or the treasury or wall street are on the up-and-up … that we know all that they do … and that we know all the times that the Fed use their “unusual and exigent” powers. Heck, look at all that we have learned over the past few years that was never voluntarily made public by the the Fed, wall street and their government. And of course the Fed’s fairly open interest rate manipulations are not the only tactic they use to manipulate the markets and the economy.

            I’m of the belief that powered by the Fed’s monetarily making capabilities of the world’s king fiat currency that those three entities working in concert …. hell, even the lawless Fed itself … is capable of basically manipulating and rigging any market, regional or otherwise. I believe that they are basically immune from any laws damn near no matter what they do so they have no fear of carrying out covert, illegal market manipulations.

            Z

            1. Yves Smith Post author

              The US government propped up housing via mortgages, which is a US market, and the US stock market. That worked because housing is 0%+ financed by debt these days, so housing has become a financial asset in the US.

              Oil is a global market. The fall in Chinese consumption is what started this.

              You can’t prop up a physical market via financial markets, or at least not for any length of time (witness the finance-influenced oil bubble of 2008, which ran for about six months)

          2. Z

            I would think that rigging the junk bond market that funds the fracking companies would prevent a lot of economic damage to the petro-regions in the U.S.. It would help those companies roll over their debt until the price of oil goes back up. And I can’t imagine that putting a steady bid under those markets would be beyond the capabilities of the Fed/wall street/U.S. treasury axis.

            Z

      1. Optimader

        There is huge petrochem facility investments in play in texas right now, in the BBs. Less expensive crude =more economical feedstock and surly they will have more margin to capture. More value added going on in texas than in the 80’s

  8. marc b.

    I don’t understand the politics of this. Who/what is responsible for the continued reign of the Saudi degenerates? They have to continuously export their own ‘angry young males’ to the epicenter of this or that jihadi meat grinder just to avoid a coup.

    1. NotTimothyGeithner

      Remember the U.S. has been instrumental in taking out direct competitors or isolating competing models. The Baathists have been attacked. Military dictatorship was supported for 30 years in Egypt. A democratic Egypt would be a huge threat. The Palestinians are being kept under foot, and Iran despite being Shiite is still a much more democratic, Muslim country. It has to be isolated to keep people from getting ideas.

      The Saudis in exchange pay for lobbyists, weapons they will never use, and probably hookers. They also do a good job of flattery and know how to play on American views of ourselves as guardians of civilization.

    2. Chauncey Gardiner

      marc b,

      Re: … “I don’t understand the politics of this.”

      I don’t either. Implications for the KSA and its key external constituencies of a decline in the price of oil of the magnitude suggested in this article would practically dictate that we continue to live the Chinese curse of interesting times. Given the dependence of the House of Saud on oil revs just to maintain internal civil stability, the curse would seem to apply to them as well. As we go along it will be particularly “interesting” to see the choices made not just in Riyadh, but also in Tel Aviv, Manhattan, the greater DC metro area, Beijing and Houston, among other “thought centers”.

      The history of M.E. rulers who have attempted to chart their own course h/b mixed at best. So either their strategic approach is not for the faint of heart (i.e., they’re living in the other “Magic Kingdom”), or they have friends in all the right places.

    3. Yves Smith Post author

      What about an authoritarian rule don’t you understand? The Saudis have a big sovereign wealth fund, so they can draw on that to keep domestic spending up to keep the country together. And look at what happens in a country where you had an authoritarian regime removed. We saw that in Iraq. Democracy does not spring up in a country with no tradition and no self-governing structures. You get disarray and sectarian fighting. Iraq had a higher standard of living under Hussein than it has now. There are worse things than authoritarian rule (at least as far as the man in the street is concerned), as counterintuitive as that might seem.

      My understanding is that the likely critical point is when the current king, who is well liked but in his late 80s, dies. The Crown Prince is unpopular and perceived to be thuggish. That’s when things might start to unravel.

  9. JW

    This is really all about economics of production, nothing to do with politics.
    Look at oil production as a merit order, where the cheapest ‘base load’ producers should be ‘on’ all the time to near their maximum production. The more expensive producers should be operating as ‘swing’ producers meeting the variations od demand. This way you optimise SRMC and LRMC across the global industry.
    US producers of ‘fracked’ oil have been operating ‘base load’ ie as much as possible. They have needed to do so to meet their financing requirements, which in turn has been heavily subsidised by ZIRP and NIRP. However it has meant that the most economic producers then also are forced to produce the ‘swing’ in the demand requirements which is globally uneconomic.
    Unsuprisingly the Saudis object to this and want to reassert their position as cheap ‘base load’ producers. This has been interpreted as ‘protecting market share’ , which is somewhat inaccurate.
    The real question should be, in such a merit order, who gets paid what? Should everyone including the base load producer get paid marginal selling price, ie the highest price paid to the swing producer? Or should there be a graduated purchase price depending on the LRMC of production depending on where the producer sits in the merit order. Thus the Saudis could keep their ‘market share’ but be paid a lower price reflecting their SRMC, and high cost swing producers paid a higher price reflecting more their LRMC and the benefit they provide in producing at the margin.
    The ‘average’ purchase price for oil would be lower than the heights reached by Brent over the last few years under such a pricing system , and thus the comments by the Saudis that $100 Brent may never be reached again.
    Their real aim is get all players to talk about these pricing economics, it does little good for any company, nation or the world not to do so.

    1. Yves Smith Post author

      It has not been “interpreted”. The market share argument is line the Saudis are pushing. The post makes clear that we don’t buy that cover story. But otherwise what you say is sound.

  10. Robert Dudek

    Can someone please explain how the Saudis can maximize their oil assets by driving down the price? Logic would suggest that if you have a finite resource, you maximize value by maximizing average sale price over the life of the asset.

    1. guest90

      The Saudis are protecting their market share. It is true that in the short term they are not maximizing their assets, but their strategy is a long term strategy. If they can remove the competition from the market – namely US shale oil – then they can have more control over the price of oil. Basically, with less competition they can set the price of oil by cutting or increasing production.

      The Saudi Oil Minister’s quote says it all: “If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”

        1. Crazy Horse

          Aren’t we forgetting about the third leg of the triangle being targeted by this price war? Venezuela. Fourth largest oil reserves on the planet. Economy on the ropes. Class-divided populace. Target of previous US coup attempts. And their oil is the heavy variety for which the Gulf Coast refineries are designed. Once Venezuelan oil is securely in the hands of Big Oil it can become a medium cost producer with far greater legs than North Dakota shale, and keep the Koch Brothers refineries humming for decades. And as a side benefit provide jobs for the army of private contractors needed to maintain the right people in power in Venezuela.

          More than one path that human greed can devise to further runaway climate change—-.

    2. Ben Johannson

      The Saudis don’t prioritize maximum profit but stable profits over the longer term. Quarter to quarter thinking is for CEOs.

    3. different clue

      Well . . . this is my amateur inexpert opinion, as a hospital pharmacy technician. The Saudis hope to keep the price below costs of “unconventional” and even non-OPEC “conventional” production far enough long enough to bankrupt and exterminate much of that non-OPEC production. Once it has been exterminated beyond any hope of being brought back without at least several years lead time, then the KSA and other KSA-minded OPECkerheads will be in a position to raise their oil price as high as they please, maybe just below the price where others would re-invest in “unconventional” oil all over again, and maybe not even stopping there.

      1. Robert Dudek

        But as soon as the price goes back up, the high cost producers will come back online. It doesn’t sound like a winning strategy, as there is a technical limitation as to how much they can produce .

    4. cnchal

      . . . how the Saudis can maximize their oil assets by driving down the price?

      Perhaps the Saudis have realized that high prices bring more energy competition, and not just from more oil. The more competition oil gets from renewable energy, the less need there is for oil.

      If this trend were to continue, it is plausible that Saudi oil reserves would at some point become worthless, hence the current pump and dump.

      In addition, it is an open question as to whether humanity will burn all the oil available. The Saudis want to make sure as much as possible of theirs gets burned, just in case humanity stops.

  11. Chris

    I wonder to what extent the Federal Reserve and/or the D.C. oligarchs will try to subsidize U.S. shale production in the name of “energy independence.” If they can pay sugar barons to protect them from cheap Cuban/Brazilian sugar cane, why not bailout Continental?

    While I don’t see the Obama administration stooping this low, I can easily envision another round of ‘drill baby drill’ clownery coming out of the GOP just in time for the 2016 election.

    Only this time the mantra will be “subsidize baby, subsidize!”

    1. NotTimothyGeithner

      Are you kidding? Obama is using North Korea as a threat for a future bailout of defense. Voters aren’t in the mood for industry subsidies, and the newest members of Congress ran on anti-bailout rhetoric. Of the GOP primaries, the pre-bailout voters lost. There might not be a coalition especially for an industry so heavily a part of the Dakotas.

      1. Chris

        I really wish I were kidding … while there would be pressure from environmentalists not to bailout Texas and the Dakotas, once the pubbies take over in January they’ll try to do it in some sneaky fashion. Most of the new GOP House and Senate candidates were backed by Chamber of Commerce money, and they’ll be looking to collect on their bets.

        1. Doug Terpstra

          They’ve already done the bailout! That’s why emergency derivatives reform was passed in the recent [Cronibus] budget bill was passed, so that taxpayers would retroactively pay for Wall Street’s bad bets.

          The evidence of US collusion in oil-price fixing is compelling. If US frackers are hedged by taxpayers, we should ask who’s harmed and who benefits? It’s quite obvious who’s harmed most: Russia, Iran, Syria, Venezuela, Brazil. And in the long run the long run, the Kingdom and the US win as the petrodollar maintains primacy.

          And BTW, I wouldn’t put any bottom on Obama’s limbo skills in service of the oiligarchy.

          1. Fiver

            I was waiting for someone to bring this up. It’s astonishing how little press the oil derivatives taxpayer guarantee is getting.

            It appears the faces of power think people have been so numbed by so many varied shocks this century they can slip a multi-trillion dollar money bandage out the door and into the massive hole in Wall Street’s balance sheet without nobody raisin’ an eyebrow. But what’s better is that this stealth, pre-emptive move absolutely guarantees banks and producers run amok dumping and pumping and dumping not just the old garbage, but a tidal wave of new crap designed to blow up.

            1. Doug Terpstra

              Alas, “the faces of power” would be correct. Even the brightest among us will not raise an eyebrow to connect the bright flashing dots. Perhaps the dots are too numerous and too thick; it’s not a forest really, just a large crowd of individual unrelated trees. I think the pattern will reveal itself soon enough.

  12. afisher

    Harold Ham of Continenal Resources / OK has said that he is cutting spending by 41%. Maybe it is just because of his recent divorce – or an Oil guy being a realist and sending a message to others. Only time will tell.

    1. Harry Mudd

      Hamm’s move will cause a huge ripple effect in the oil/gas industry in Texas. The oil industry has a huge number of small companies serving the big boys.

  13. joecostello

    There’s a little confusion about the decline rates of these fracked wells. Understand basically their peak is around the first month and then declines set in. 50% or more for first year and up 80-90% in by end year three. Here is good chart from Eagle Ford but similar for all – http://fuelfix.com/blog/2014/09/29/eagle-ford-continues-to-gush-despite-rapid-well-declines/

    So in thinking about this its important to remember its just not end of two years or end of first year production goes down, it starts declining almost instantly, and continues every day. This is why they need to keep constantly drilling, and of course, ever increasing debt, just to keep up with the decline. Now, there’s at least in the Bakken some hundreds of wells that have been drilled but not yet operational, so those can be brought online, but decline once drilling stops will be relatively rapid.

    The FT has a new amusing story of this being a showdown between the Sauds and Hamm of CLR, nothing is further from the truth, because that’s no fight, its already over, CLR cut their capx budget in half already. The fight is how long the Sauds can keep getting less money and more importantly their allies, who will almost all start hurting before them, the old majors are already throwing up their hands and cutting capx across the board.

    Most importantly, there is no “glut” and as all this capx is cut, its setting up for a relatively near future major supply problem, that is if the global economy doesn’t head south in a bigger way.

    1. lord koos

      But, the further the global economy sinks, the less oil will be consumed, putting shortage farther into the future. Putting disaster as far into the future as possible seems to be the main policy these days…

  14. gerd

    Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

    I am not buying this. The Russian sanctions have not reduced their current output, exploration yes, production no. And Iraq has only been minimally impacted by the civil war as most of their oil is in the south while ISIS are active in the north. The lifting of Iran sanctions and the end of war in Libya would help supply, but with a new US congress I don’t see sanctions lifing and I also don’t expect the civil war in Libya to end anytime soon.

    I believe that what you see is what you get right now.

  15. kevinearick

    The real economy is taking another leg down, because real estate inflation, another communications bubble, and Pharma pot, the source of stock inflation and pension checks on the margin, are no substitute for work. Hopefully, you have been learning to fish, to build your own food bank. Even the Food Bank Board is showing its teeth now. Take care of that canary.

    The unified field equation is an LC circuit creating heavier elements and smaller particles. The critters blow their bubble by adding redundant resistors every time their redundant resistors blow up, creating a bang. DC is a tiny part of the circuit, not the universe.

    Government has taken over most of the economy, its largest expenditure is pension related items, and America is marching to the tune of fascism, under feudalism, which should be no surprise under condition of global communication failure. You might want to jump, forward, or not.

    It’s always a food war – no nutrition, no functioning brain cells. Drug cultures always end badly.

    Russia isn’t crashing its own currency by accident.

  16. plantman

    The idea that the Saudis are calling the shots, presumes that Saudi policy (on critical issues like oil prices) is independent of the US.

    I think that is very unlikely. So far, we have not heard even a peep out of Obama or Washington on the matter.
    I think that shows that they are “okay” with the results…. and that this is what they actually want.

    If Obama was unhappy with the Saudis action, he would say so, which is to say, that the policy coincides with Washington’s broader geopolitical strategy.

    1. RUKidding

      I’ve noticed the same silence from the Village other than Happy Talk about lower gas prices at the pump, along with exhortations to the useless eaters to get out there and consume, consume, consume, damnit! It’s Christmas, you lousy lazy freeloaders, spend already!

      This is what those who squat behind the puppets in the District of Criminals want. Not sure why, but their compliance with it speaks volumes to me. Everyone appears, rather, to be extoling the fabulousness of cheaper gas at the pump and nary a peep about issues with fracking, which was to be our great salvation on the road to fabled fictional fairy tale energy independence.

    2. lord koos

      I have thought this since the start of the oil price decline. There are too many positives for the US — cheaper gas gives the masses a break on gas and food prices and makes the so called recovery more believable, and at the same time hurting Russia — it’s all good..

    3. Jackrabbit

      Yes.

      Adding: Saudi and neocon “anger” with America over Obama’s Iran peace initiative make little sense to me. Does anyone believe that narcissist Obama, who loves to be admired by the wealthy and powerful and has been very accommodating to the neocons otherwise, suddenly got some balls and stuck his political neck (and future pay-offs) out to make peace with Iran? It seems more likely that the pretended discord provides cover against domestic critics in each country. KSA leadership does NOT want to be seen as close with USA or Israel, USA leadership does NOT be seen to be seen as ‘doing the bidding’ of KSA or Israel.

      =
      =
      =
      H O P

      1. Doug Terpstra

        You always see thru the tangled web, Jackrabbit, though I must say, in this case, the pattern is practically self-evident. It surprises me that so many assume the Saudi monachy is somehow autonymous, and these events are a result of free market forces unrelated to Ukraine, Syria, Iran, Russia, and the imperial agenda. I suppose that makes the official 911 narrative more palatable as well. Coincidence theories are more comforting.

      2. Working Class Nero

        Remember that lower oil prices much the threat of war against Iran that much more believable. Before, when oil was high, people said that war with Iran was not possible since it would destroy the global economy. Now war with Iran might be the very thing necessary to save US shale oil.

        Be that as it may, my money has been and will continue to be on a peace deal with Iran. The deal will be along the lines that Iran gets to continue with “peaceful” nuclear power (while kind of renouncing nuclear weapons), it and Syria join the US empire, Iran and Syria cut-off Hezbollah and in return the US / Israel / Saudi Arabia cut off the ISIS.

        But never forget, each dollar oil prices shed makes ever more possible an attack on Iran.

    4. Yves Smith Post author

      Obama does not dare threaten the Saudis. They aren’t a client state.

      One possible reason that there has been no official reaction is that the Dems are in charge and Big Oil backs Republicans. So the Dems don’t mind the oil patch getting whacked. And the economists that advise policymakers are clueless about finance, so all they see is more $ in consumer pockets. They don’t see the magnitude of job losses, and damage to banks and levered investors, both directly (oil/gas plays) and indirectly (like real estate lending in the boom areas).

      As I wrote above:

      You are missing evidence right before your eyes.

      The Saudis do not need to threaten or actually drive oil to $20 a barrel, which is a big opportunity loss, to hurt Iran and Russia if that were the aim. $80 would do. $60 is overkill.

      They DO need to drive it below $50 to shut off the air supply of the fracking industry. The Saudi price threat tells you who they are really after.

  17. susan the other

    We should nationalize our oil industry. It is a no-no for our banksters to make these kinds of bets on commodities – they can’t stuff those derivatives/junk bonds/etc in their depository so then technically the Fed/Treasure can’t bail out this behavior so since oil is strategic and critical to the country we should waste no time nationalizing the industry.

    1. John Zelnicker

      Actually, the Cromnibus bill that was just passed has a provision (written by Citibank) that specifically allows the banks to place their derivatives business in the depository subsidiary. Not sure if it applies to junk bonds, but they aren’t as big a book as derivatives. And the banks have found ways to play the commodities, see the ownership of aluminum storage facilities by Goldman Sachs.

  18. Luke The Debtor

    Stranded assets? If by that the Reuters author means “cut India off from Canadian oil” then that sure seems to be US policy.

    Unwanted coal? Hmmm…coal is king. Literally. China produces and burns half the world’s coal production. The increase in CO2 from this is ignored by the liberal climate fear mongers because heir true source of disdain for plant food derives from the power of the oil companies.

    Obviously the now non-QE price will be set by other factors.

      1. cwaltz

        You have to laugh. Apparently the liberals are supposed to hop on some planes and head to China to protest for a government that isn’t their own to do something about climate change. I mean seriously. Apparently it’s not enough to press OUR OWN GOVERNMENT to try and push themselves and others to look at the environmental damage that is occuring due to CO2 levels. As I said, it’s enough to make someone giggle.

        1. James

          No, but it does point out the stupidity in protesting climate change in a nation which, although it was the leader in initiating such dirty technologies in the first place, and which is still by far the primary beneficiary of those same technologies for the foreseeable future, still balks at controlling it’s own emissions on the basis of the “unfairness” of permitting still developing nations to merely do some fraction of what it has already done. The problem isn’t liberals or fear mongers, but rather the US government and one would presume its electorate who supports them. In the end, the politics of climate change won’t matter, just the actual facts. And the facts, unfortunately, are mostly in already.

        2. Luke The Debtor

          I honestly don’t know what liberals are “supposed” to do. I’m pointing out the hypocrisy.

    1. different clue

      Which liberal “climate change” fearmongers have maintained a studied silence about Chinese carbon skydumping? Are there any specific examples of this liberal silence which can be linked to?

      By the way, it isn’t “climate change”. That is the weasle Luntz-phrase for it. It’s called global warming. Or man made global heating, if you prefer.

      1. Luke The Debtor

        I don’t think anyone is being silent, I think the Chinese energy growth is being ignored. Why? Because the real hostility derives from the economic and political power of oil.

  19. McMike

    Of course, when WalMart drives out the local competition by temporarily lowering prices and absorbing losses in order to have long term pricing power and market share, it’s totally rational, even celebrated.

  20. MyLessThanPrimeBeef

    China should save a lot of dollars from cheap oil

    They can recycle that money to Russia and, at the same time, have enough left to build up their strategic oil reserve (if they have one).

    Remember the lesson, the Chinese would be smart to do so – the oil in the Caucasus was a country (USSR) too far for The Wehrmacht and Imperial Japan was doomed from the start for lacking enough fuel to last a long war (actually anything but a short blitzkrieg).

    I see one winner for all the work put in by the worker-bees at Chaos In Action – The Middle Kingdom.

  21. Yata

    “Meanwhile, Israel has made successive major discoveries in recent years – such as the Leviathan field estimated to hold 18 trillion cubic feet of natural gas – which could transform the country from energy importer into aspiring energy exporter with ambitions to supply Europe, Jordan and Egypt. A potential obstacle is that much of the 122 trillion cubic feet of gas and 1.6 billion barrels of oil in the Levant Basin Province lies in territorial waters where borders are hotly disputed between Israel, Syria, Lebanon, Gaza and Cyprus.”

    http://www.theguardian.com/environment/earth-insight/2014/jul/09/israel-war-gaza-palestine-natural-gas-energy-crisis

  22. Jay M

    seems like back in the day you wanted to come back as the bond market
    right now, central banker
    nxt prz–nyc police union spokesperson?

  23. Make Volodya's day

    @Fiver 6:21, ask CIA if Saudi royals retain their thrones at US whim. They’ll tell you, subject to clearance and need to know, that the end of the House of Saud is THE thing that scares them most. They would not dare lift a finger against that regime. The financial racket of their banker betters would instantly implode.

  24. VietnamVet

    This is a great post.

    Some pieces of the puzzle are clear. Saudi Arabia’s support of ISIS cut the Shiite crescent to their north and Assad’s land line to Iran. The oil price cuts screws their expensive competitors. This is very short term and cut-throat. One thing, for sure, oil is finite and the cheap fields have all been found and exploited. Energy costs are going to wildly fluctuate and the price will rise unless the world comes under the grip of deflation. The question is how much will the price change, when, and who goes bankrupt.

    This is in conjunction with the obvious attempt at regime change in the Kremlin. The world is infected with unregulated monopolistic capitalism. Rather than structured rationale change to address money, energy and climate problems; we’ve been hijacked onto a roller coaster ride to hell.

  25. Chauncey Gardiner

    Further to your last sentence, Vet, who writes the speeches for these guys… Hill & Knowlton? The Saudi oil minister’s’ speech sounds more than a little like Mario Draghi’s speech a little over two years ago: … “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

    http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html

    Saudi Oil Minister Ali al-Naimi:

    “It is not in the interest of OPEC producers to cut their production, whatever the price is. … Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

    Marshall McLuhan: … “The media is the message.”

      1. nat scientist

        The road is where you get hit. Home sweet home is when you turn it down and replace the narrative with music. Oil is a racket with cash transacting out-of-sight in foreign banks.

  26. Old Hickory

    It’s been obvious to some that the Kingdom of Saud has been the enemy of the USA for decades. Strike that, by “the USA” i mean the common people not the 0.1%. The very rich and their lapdogs in the USG like the arrangement just fine. Which is why the US Govt supports their regime even though the Saudis persecute women, homosexuals, and all anti-Islamists esp. Christians, . Thought the NYT, for example, was against anybody who’s anti-gay. Guess not, if they are Sauds. The oil war is just the latest assault. We invaded the wrong country in 2003.

  27. drfrank

    Hello! The Saudi are not our friends. For generations, going back to grandpa Prescott Bush, the US has been dependent on their oil. They are sometimes a friend and sometimes an enemy, as it suits them. Among other things, with their petro dollars, they and other Gulf States export radical Muslim fundamentalism and fund jihadist terrorism, to say nothing of their militant hatred of Shiites. What Yves posits posits is economic warfare. I see it as a NATIONAL SECURITY ISSUE which requires a US government response. I kinda liked the idea of US energy independence. I thought it could bring a reorientation of US foreign policy away from perpetual war, a reduction of the defense establishment, good jobs in industries where cheap energy and hydrocarbon feedstocks make for competitive advantage, investment in long-lived infrastructure. So I would say the policy failures here are that fracki g was not regulated so as to minimize environmental damage and that the development was permitted to be financed in an inherently unstable way given the necessity of drilling a lot of short-lived wells. As for air pollution, we need both alternatives and emissions’ control. But fundamentally, if Yves is correct that the Saudi are deliberately targeting a core US industry, the fact that they are able to do so points to terrible US policy failure.

  28. Steven Greenberg

    It is interesting to watch the game play out in the comments section. The game may have the long name “My explanation is the one and only explanation, and yours is irrelevant.”

  29. Steven Greenberg

    I should have included Taleb’s thinking that you can be on pretty safe ground explaining what has happened, but you are on much shakier ground when you try to explain why it happened. He likens it to seeing a puddle on the floor and trying to explain the shape of the ice cube that melted to form the puddle.

  30. nat scientist

    Such a weapon of mass destruction of US vital self-sufficiency in Energy blatantly waged by a medieval cult of social crime beheaders ought at least be sanctioned rather than meekly accepted like a victim. This is General Smedly Butler in reverse; quelle irony. Whose god do we pray to to save US from our Saudi masters!

  31. nohomehere

    yves, Do you have any solid figures on just how much us oil consumption has dropped since the beginning of the depression, in other words if oil stays cheap how much of a consumption increase will that create % wise, visa a versa How much is demand responsible for this saudi / OPEC MOVE? Secondly, How much does this help the euro zone as supply of their energy demands go as they depend on Russia, doesnt this kinda make it difficult for Russia to , as they say , turn the valve off? As, they will be hard pressed and need thoses euro’s, foreign currencies to keep the ruble from collapsing, is it strange that opec would want to help europe yes? no? could you address these questions for me? thanks a admirer!

  32. Jackrabbit

    I wrote this in todays links post but it seems that this is the more appropriate place

    = = = = =

    Why did it take so long to explain that oil prices are coming down because of a slow economy? Saudi Arabia could’ve just said the same from the get-go (months ago). Instead, for weeks we got pundits dissecting the US-Saudi relationship and insisting that the Saudi Arabia is angry with US for its Iran overture and/or is targeting US shale oil.

    In fact, I initially thought that the oil price drop was mostly due to a weak economy but I changed my opinion because the price drop has been too quick and the Saudis seem uninterested in stabilizing the market at a profit maximizing price.

    The Saudi’s don’t need to bankrupt American frackers. They only need to make it uneconomical to drill the next well. As was noted by an NC reader in a comment days ago, frackers need to continually drill because the wells run dry. And OPEC countries were begging Saudi Arabia to relent when the price was in the 80’s.

    The weak economy ADDS TO SAUDI POWER to drive down prices. But it is not the determining factor in how low the Saudi’s will take the oil price.

    Should we simply ignore the devastating effect that sanctions + the dramatic drop in oil have on Russia, Iran, and Venezuela? … or that the Obama Administration has not complained about how quickly the price has fallen when the much of the growth of the US economy has been due to fracking? … or the new Cold War and the developing neocon nightmare of Russia aligned with China, India, Iran, etc?

    Also, see my comment above.
    =

    Lets not forget other famous counter-factual “truths” from recent history:

    – They hate us for our freedoms.(after 9-11)

    – Change you can believe in (end of wars / transparency / closing Guantanamo / etc.)

    – Global warming is a hoax.

    – TARP made money. (after bailouts and backdoor bailouts)

    – Radiation is good for you. (after the Fukushima meltdown)

    Readers feel free to cite more.

    =
    =http://www.nakedcapitalism.com/2014/12/links-122414.html#comment-2377555
    =
    H O P

  33. biglimo joe

    A long but good read all the way down. Comments from obviously very smart people. Not one, however mentioned Cuba. Venezuela has been the major financial benefactor of that corrupt and bankrupt joke
    for decades since Russia lost interest after going broke themselves. Communism never has and never will work. Only corrupt and greedy big oil/banks/pharma and the military/industrial/CIA complex like we have here in the good ol’ USA will ever work. War is good business; invest your son. Be the first one on your block to get your kid home in a box. Obama normalizes with Cuba; on cue Venezuela stops giving Cuba money
    ergo Wall Street and the banksters, Golden Sacks move in to “Help Cuba return to normalcy and prosperity”
    (And line the pockets of Citibank and Chase with windfall profits). Were the Cubans to “Nationalize” new US Businesses, well, that would be considered an act of war and Obama would just have to send in all the troops just home from Afghanistan. One should not forget that wars are not really fought over “Human Rights” or “Weapons of Mass Destruction”. Adolf Hitler needed the oilfields around Mosul to provide fuel
    for his Panzer Divisions. Obama and Bush are simply marionettes; what is happening today would happen
    anyway, even if Socks the cat was president. In Washington DC, nothing is ever what it seems. The truth?,
    “Hell, you can’t handle the truth”! Pay your taxes and shut your mouth.

  34. Tom

    If this is really what the Saudis are trying to do, then they aren’t very bright. This is how protectionist mercantilists would do things, not capitalists. Hopefully some American capitalists will buy all the oil that the Saudis sell for $20 per barrel and store it, then sell it when the Saudis are tired of taking losses.

    1. Yves Smith Post author

      This quote is from 2008. Dan Dicker debunked the conventional wisdom among investors that oil could be stored. It can’t be, readily. That is why is is normally “stored” by keeping it in the ground:

      From Dan Dicker at TheStreet.com($):

      “…in the world of energy trade, there is lack of fungibility that has always broken down thus: Electricity, non-storable — Natural gas, more storable — Crude oil, mostly storable

      Although easiest of the three, oil storage has been historically inelastic, no matter the price… Over the last 4 years (and for most of my trading life) forward stocks have always hovered between 50 and 55 days — storage is expensive and limited, and just not efficacious.

      This is why, at least in my view, that supply arguments are often overblown in oil pricing theory — supplies remain closely aligned to demand and rarely overrun — as OPEC members have time and again explained but are ignored. This is why President Bush can walk in to a meeting with Saudi ministers and be patted on the head like a silly schoolboy — “you don’t understand, Mr. President — we’ve got nowhere to SELL any more right now” and Bush will run home and talk about increasing domestic supply as if he hasn’t heard a thing”

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