Category Archives: Energy markets

Russia Can Survive An Oil Price War

Yves here. This article is an important sanity check on the impact of the current oil price war on Russia. We’ve seen similarly skewed conventional wisdom on the Saudis: “No, they can’t make it on a fiscal budget basis at below $90 a barrel,” completely ignoring the fact that the Saudis clearly believe it is in their long-term interest to suffer some costs to inflict pain on some of their enemies, and render some (a lot) of shale oil and alternative energy development uneconomical, which increases their ability to extract more in the long term from their oil asset.

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Michael Hudson: Putin’s Pivot to Asia

Yves here. Understandably, US reporting on the just-finished APEC summit focused on Obama’s objectives and supposed achievements. Russia has historically not been a major force in the region and thus received less coverage here. It was therefore surprising to see our man in Japan Clive tell us that Japanese media coverage of Putin at APEC was on a par with the column-inches given to Obama.

On Real News Network, Michael Hudson describes how Putin is shifting Russia’s export focus and economic alliances towards Asia, particularly China. Putin did better at the APEC summit than most Western sources acknowledge, and that could have longer-term ramifications for the US.

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Ed Harrison: Zero Rates, Resource Misallocation, and Shale Oil

Yves here. Established Naked Capitalism readers may recall that Ed Harrison was a regular and much appreciated contributor to the site, particularly in 2009 when I was on partial book leave writing ECONNED. Ed now focuses more on writing premium content, as well as producing RT’s Boom and Bust. But he is now posting occasional pieces on his non-subscription site, and has graciously allowed us to post them from time to time.

This article is a more systematic work-up of something that we’ve discussed short form and Wolf Richter has also written up: that of the dependence of the shale oil boom on reasonably high oil prices as well as cheap financing. And as predicted, shale oil producers have shut marginal wells, and even majors are cutting back on oil production.

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The Funny Math in the GOP’s Energy Agenda

Yves here. One of the new forms of political handicapping is forecasting which policies newly-ascendant Republicans will put in the forefront and how likely they are to make meaningful progress with them. Corporate taxes are clearly high on their wish list, and one where corporate Democrats will be keen to pretend to be forced to capitulate go along. Another is their energy agenda, which is basically, “let no environmental protection stand in the way of more extraction.”

Now having said that, the Obama position really wasn’t as different as Democratic party loyalists would have you believe. Obama was clearly all in for fracking, and as Gaius Publius set forth in a series of posts, clearly cooked the greenhouse gas emission figures by excluding methane, the most potent greenhouse gas. But even the awfully energy friendly Administration wasn’t as aggressive as the Republicans will prove to be.

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Saudi Cut In Oil Price for US May Lead To Price War

Yves here. We pointed out last month that the US was on the list of Saudi targets when it made clear it was not supporting oil prices at a level higher than $80 a barrel. Some readers rejected the idea that Riyadh would launch a price war to undermine the US, when in fact the desert kingdom has been mightily unhappy with US policies in the Middle East for some time (in case you managed to miss it, ISIS started out as Prince Bandar’s private army and odds are high that it continues to get Saudi support).

A major news story today, that the Saudis are letting oil prices drop further, provides more support for our jaundiced assessment last month.

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Federal Reserve Policy Keeps Fracking Bubble Afloat and That May Change Soon

Yves here.  This post highlights an issue that has also been flagged by Wolf Richter, that fracking depends on junk bond financing that has been made unnaturally cheap by the machinations of the Fed. Steve Horn conflates QE with the Fed’s super-low interest rate policy known as ZIRP, when they are distinct, but they have been implemented with the same idea in mind, that of encouraging investors to make riskier investments, particularly riskier loans.

Horn cites sources that suggest that the Fed could start undoing its  rock-bottom rates in 2015. Bear in mind that that’s a minority view.

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Michael Hudson: Europe to Pay for the Whole Mess in Ukraine

Yves here. This discussion with Michael Hudson on RT focuses on the real meaning of the Ukraine-Russia gas deal. One point that Hudson makes that readers might doubt is that Russia loves the US sanctions. I’m not sure “love” is the right word, but there is reason to think they aren’t working out as the US had hoped. First, they’ve greatly increased Putin’s popularity. Even the intelligentsia in Moscow, who were hostile to him, have largely rallied to his side in the face of foreign bullying. Second, the Western press may be overstating the amount of damage done to the economy by the sanctions. Arguably the biggest negative is the fall in the price of oil, which came about growth in Europe and China slowing, and the Saudis announcing that they’d allow the price to reset at a much lower level than most analysts anticipated. But the ruble has been falling, which blunts that effect, but increases the drain on FX reserves as Russia tries to keep it falling too far and will increase inflation. Third, the sanctions have allowed Russia to engage in protection of domestic industries as a retaliatory measure, for instance, blocking many food imports from Europe.

Now all good well-indoctrinated neoliberals will say, “Trade protectionism merely allows domestic producers to become inefficient and uncompetitive.” It’s not so simple. Development economists are increasingly of the view that trade restrictions can help smaller economies develop domestic businesses to the point where they can compete in international markets, while if they foreign firms in, they’ll find it nearly impossible to build any local champions.

A colleague who does business in Russia but has no deep loyalties there, says he sees no signs of negative impact of the sanctions in Moscow (he describes it as now looking like any post World War II European capital). This is confirmed by recent surveys in Russia, so the lack of meaningful impact on Russian citizens isn’t an artifact of his seeing only the better parts of Moscow. Note that the latest EU forecasts anticipate very weak growth this year and next, as opposed to outright recession.

This visitor describes how the sanctions are helping Russian businesses. One of his friends has the Papa Johns franchise. They used to get their cheese from the Netherlands, but those supplies were cut off by the Russian sanctions against Europe. So they had to buy cheese domestically. It was cheaper but not as good. So he is working with the local farmers and cheese-makers to bring the cheese up to the standard of the cheese he used to import. So he expects to eventually have cheese that is lower cost than what he brought in and of comparable quality. And if he succeeded, the cheesemakers will be more competitive in Europe when the sanctions are relaxed.

The shorter version of this story is that Russia has a large enough domestic market and enough resources that unlike Iran, it may be closer to being able to function as an autarky when its imports and exports are restricted. The open question is whether it can go through the pain of a reset, with some serious and painful short-term dislocations, and escape the slow strangulation that the US claims it has imposed.

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Drilling Deeper: New Report Casts Doubt on Fracking Production Numbers

Yves here. We’ve discussed the fracking bubble intermittently, particularly that many of the valuations ascribed to shale gas wells don’t reflect how short their production lives really are. This report by Steve Horn of DeSmogBlog focuses on a related result from the same set of unrealistically high production assumptions: that overall fracking output forecasts are likely to prove to be high.

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Gail Tverberg: Eight Pieces of Our Oil Price Predicament

Yves here. As oil prices have come into focus as a result of a recent Saudi decision to facilitate a reset at a lower price per barrel, they’ve come into focus yet again as a critical nexus of economic and political power, and that’s before you get to the complicating overlay of climate change considerations.

This article by Gail Tverberg takes a more sophisticated, multi-persepctive approach than the overwhelming majority of articles on this topic. One of her big messages is that there is no way the world economy is getting divorced from oil any time soon.

Even so, I have some minor points of contention. For instance, she correctly points out that oil producers, even the Saudis, need oil prices to be at a moderately high prices to sustain national budgets. But Riyadh has a very low production break even point, a large cash horde, and plenty of borrowing capacity. The desert kingdom could afford a price war, say to hurt geopolitical enemies or to forestall investment in and development of alternative energy sources. Low oil prices make other energy sources look unattractive, and volatile prices also deter investment, making it well-nigh impossible to forecast cost advantages (if any) and end user takeup.

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Low Oil Prices Hurting U.S. Shale Operations

Yves here. In yesterday’s Water Cooler, Lambert posted a link from Bloomberg that indicated that oil at $80 a barrel would pop the fracking bubble, an outcome we’d discussed previously. Some readers in comments expressed doubts.

In fact, it was already happening as oil prices were falling from over $100 a barrel through the nineties. Seasoned energy hands had warned that shale operations could be shut down rapidly, and that has started to take place. However, the author of this article argues that the shutdowns are likely to be delayed and that most US shale operations have low break-even costs, insulating them from the impact of the oil price drop. However, he misses that another driver of the shale boom has been access to super-cheap credit and an overly-bullish mentality that has not factored in the short production lives of shale wells. The junk bond market has been much less accommodating of late, and if that skittishness continues, the prognosis isn’t quite as sanguine for the industry as Cunningham suggests.

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How Oil and Gas Leases for Fracking Rip Off Homeowners

Yves here. This post by Steven Horn about that shows the typical terms of an oil and gas rights lease for American Energy Partners buries the lead, in that Steve needs to give the context of how the lease came to be public before he turns to explaining how the lease rips off the party who signs it. Among other things, it requires the homeowner to have any mortgage made subordinate to the royalty agreement, something no lender will agree to. If the homeowner can’t get the subordination (a given), no royalties will be paid! As you’ll see, there are other “heads I win, tails you lose” terms in these agreement.

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Peter Van Buren: Seven Worst-Case Scenarios in the Battle with the Islamic State

Yves here. This post describes, in a general way, some outcomes of our current Middle East adventurism, with the Islamic State as its current nemesis. However, at least one of Van Buren’s “worst-case outcomes” strikes me as not bad, which would be a thawing of hostilities with Iran. But I don’t see how Israel tolerates that.

But the looming issue behind all of these scenarios is that the game is being played to justify continued large budget allocations to the military-surveillance complex. The cost of defending the American is more guns in the guns versus butter tradeoff.

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