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Michael Klare: Plunging Oil Prices – A Recipe for More War?

Yves here. I may be overreacting to the current wave of news, but China has been more of a driver of oil prices than most care to acknowledge. The rise to $147 a barrel was to a large degree the result of stockpiling of diesel for the Olympics; when that buying was over, crude prices beat a hasty retreat. China’s current level of investment spending, at 44% of GDP, is not sustainable. A sustained reduction in energy demand does not bode well for a rebound of oil prices to their former levels.

By Michael T. Klare, a TomDispatch regular, professor of peace and world security studies at Hampshire College and the author, most recently, of The Race for What’s Left. A documentary movie version of his book Blood and Oil is available from the Media Education Foundation. Follow him on Twitter at @mklare1. Originally published at TomDispatch
Prices
By Michael T. Klare

As 2015 drew to a close, many in the global energy industry were praying that the price of oil would bounce back from the abyss, restoring the petroleum-centric world of the past half-century.  All evidence, however, points to a continuing depression in oil prices in 2016 — one that may, in fact, stretch into the 2020s and beyond.  Given the centrality of oil (and oil revenues) in the global power equation, this is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geopolitical clout.

To put things in perspective, it was not so long ago — in June 2014, to be exact — that Brent crude, the global benchmark for oil, was selling at $115 per barrel.  Energy analysts then generally assumed that the price of oil would remain well over $100 deep into the future, and might gradually rise to even more stratospheric levels.  Such predictions inspired the giant energy companies to invest hundreds of billions of dollars in what were then termed “unconventional” reserves: Arctic oil, Canadian tar sands, deep offshore reserves, and dense shale formations. It seemed obvious then that whatever the problems with, and the cost of extracting, such energy reserves, sooner or later handsome profits would be made. It mattered little that the cost of exploiting such reserves might reach $50 or more a barrel.

As of this moment, however, Brent crude is selling at $33 per barrel, one-third of its price 18 months ago and way below the break-even price for most unconventional “tough oil” endeavors. Worse yet, in one scenario recently offered by the International Energy Agency (IEA), prices might not again reach the $50 to $60 range until the 2020s, or make it back to $85 until 2040. Think of this as the energy equivalent of a monster earthquake — a pricequake — that will doom not just many “tough oil” projects now underway but some of the over-extended companies (and governments) that own them.

The current rout in oil prices has obvious implications for the giant oil firms and all the ancillary businesses — equipment suppliers, drill-rig operators, shipping companies, caterers, and so on — that depend on them for their existence. It also threatens a profound shift in the geopolitical fortunes of the major energy-producing countries. Many of them, including Nigeria, Saudi Arabia, Russia, and Venezuela, are already experiencing economic and political turmoil as a result. (Think of this, for instance, as a boon for the terrorist group Boko Haram as Nigeria shudders under the weight of those falling prices.) The longer such price levels persist, the more devastating the consequences are likely to be.

A Perfect Storm

Generally speaking, oil prices go up when the global economy is robust, world demand is rising, suppliers are pumping at maximum levels, and little stored or surplus capacity is on hand.  They tend to fall when, as now, the global economy is stagnant or slipping, energy demand is tepid, key suppliers fail to rein in production in consonance with falling demand, surplus oil builds up, and future supplies appear assured.

During the go-go years of the housing boom, in the early part of this century, the world economy was thriving, demand was indeed soaring, and many analysts were predicting an imminent “peak” in world production followed by significant scarcities.  Not surprisingly, Brent prices rose to stratospheric levels, reaching a record $143 per barrel in July 2008.  With the failure of Lehman Brothers on September 15th of that year and the ensuing global economic meltdown, demand for oil evaporated, driving prices down to $34 that December.

With factories idle and millions unemployed, most analysts assumed that prices would remain low for some time to come.  So imagine the surprise in the oil business when, in October 2009, Brent crude rose to $77 per barrel.  Barely more than two years later, in February 2011, it again crossed the $100 threshold, where it generally remained until June 2014.

Several factors account for this price recovery, none more important than what was happening in China, where the authorities decided to stimulate the economy by investing heavily in infrastructure, especially roads, bridges, and highways.  Add in soaring automobile ownership among that country’s urban middle class and the result was a sharp increase in energy demand.  According to oil giant BP, between 2008 and 2013, petroleum consumption in China leaped 35%, from 8.0 million to 10.8 million barrels per day.  And China was just leading the way.  Rapidly developing countries like Brazil and India followed suit in a period when output at many existing, conventional oil fields had begun to decline; hence, that rush into those “unconventional” reserves.

This is more or less where things stood in early 2014, when the price pendulum suddenly began swinging in the other direction, as production from unconventional fields in the U.S. and Canada began to make its presence felt in a big way.  Domestic U.S. crude production, which had dropped from 7.5 million barrels per day in January 1990 to a mere 5.5 million barrels in January 2010, suddenly headed upwards, reaching a stunning 9.6 million barrels in July 2015.  Virtually all the added oil came from newly exploited shale formations in North Dakota and Texas.  Canada experienced a similar sharp uptick in production, as heavy investment in tar sands began to pay off.  According to BP, Canadian output jumped from 3.2 million barrels per day in 2008 to 4.3 million barrels in 2014.  And don’t forget that production was also ramping up in, among other places, deep-offshore fields in the Atlantic Ocean off both Brazil and West Africa, which were just then coming on line.  At that very moment, to the surprise of many, war-torn Iraq succeeded in lifting its output by nearly one million barrels per day.

Add it all up and the numbers were staggering, but demand was no longer keeping pace.  The Chinese stimulus package had largely petered out and international demand for that country’s manufactured goods was slowing, thanks to tepid or nonexistent economic growth in the U.S., Europe, and Japan.  From an eye-popping annual rate of 10% over the previous 30 years, China’s growth rate fell into the single digits.  Though China’s oil demand is expected to keep rising, it is not projected to grow at anything like the pace of recent years.

At the same time, increased fuel efficiency in the United States, the world’s leading oil consumer, began to have an effect on the global energy picture.  At the height of the country’s financial crisis, when the Obama administration bailed out both General Motors and Chrysler, the president forced the major car manufacturers to agree to a tough set of fuel-efficiency standards now noticeably reducing America’s demand for petroleum.  Under a plan announced by the White House in 2012, the average fuel efficiency of U.S.-manufactured cars and light vehicles will rise to 54.5 miles per gallon by 2025, reducing expected U.S. oil consumption by 12 billion barrels between now and then.

In mid-2014, these and other factors came together to produce a perfect storm of price suppression.  At that time, many analysts believed that the Saudis and their allies in the Organization of the Petroleum Exporting Countries (OPEC) would, as in the past, respond by reining in production to bolster prices.  However, on November 27, 2014 — Thanksgiving Day — OPEC confounded those expectations, voting to maintain the output quotas of its member states.  The next day, the price of crude plunged by $4 and the rest is history.

A Dismal Prospect

In early 2015, many oil company executives were expressing the hope that these fundamentals would soon change, pushing prices back up again.  But recent developments have demolished such expectations.

Aside from the continuing economic slowdown in China and the surge of output in North America, the most significant factor in the unpromising oil outlook, which now extends bleakly into 2016 and beyond, is the steadfast Saudi resistance to any proposals to curtail their production or OPEC’s.  On December 4th, for instance, OPEC members voted yet again to keep quotas at their current levels and, in the process, drove prices down another 5%.  If anything, the Saudis have actually increased their output.

Many reasons have been given for the Saudis’ resistance to production cutbacks, including a desire to punish Iran and Russia for their support of the Assad regime in Syria.  In the view of many industry analysts, the Saudis see themselves as better positioned than their rivals for weathering a long-term price decline because of their lower costs of production and their large cushion of foreign reserves.  The most likely explanation, though, and the one advanced by the Saudis themselves is that they are seeking to maintain a price environment in which U.S. shale producers and other tough-oil operators will be driven out of the market.  “There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including U.S. shale, deep offshore, and heavy oils,” a top Saudi official told the Financial Times last spring.

Despite the Saudis’ best efforts, the larger U.S. producers have, for the most part, adjusted to the low-price environment, cutting costs and shedding unprofitable operations, even as many smaller firms have filed for bankruptcy. As a result, U.S. crude production, at about 9.2 million barrels per day, is actually slightly higher than it was a year ago.

In other words, even at $33 a barrel, production continues to outpace global demand and there seems little likelihood of prices rising soon, especially since, among other things, both Iraq and Iran continue to increase their output.  With the Islamic State slowly losing ground in Iraq and most major oil fields still in government hands, that country’s production is expected to continue its stellar growth.  In fact, some analysts project that its output could triple during the coming decade from the present three million barrels per day level to as much as nine million barrels.

For years, Iranian production has been hobbled by sanctions imposed by Washington and the European Union (E.U.), impeding both export transactions and the acquisition of advanced Western drilling technology.  Now, thanks to its nuclear deal with Washington, those sanctions are being lifted, allowing it both to reenter the oil market and import needed technology.  According to the U.S. Energy Information Administration, Iranian output could rise by as much as 600,000 barrels per day in 2016 and by more in the years to follow.

Only three developments could conceivably alter the present low-price environment for oil: a Middle Eastern war that took out one or more of the major energy suppliers; a Saudi decision to constrain production in order to boost prices; or an unexpected global surge in demand.

The prospect of a new war between, say, Iran and Saudi Arabia — two powers at each other’s throats at this very moment — can never be ruled out, though neither side is believed to have the capacity or inclination to undertake such a risky move. A Saudi decision to constrain production is somewhat more likely sooner or later, given the precipitous decline in government revenues. However, the Saudis have repeatedly affirmed their determination to avoid such a move, as it would largely benefit the very producers — namely shale operators in the U.S. — they seek to eliminate.

The likelihood of a sudden spike in demand appears unlikely indeed.  Not only is economic activity still slowing in China and many other parts of the world, but there’s an extra wrinkle that should worry the Saudis at least as much as all that shale oil coming out of North America: oil itself is beginning to lose some of its appeal.

While newly affluent consumers in China and India continue to buy oil-powered automobiles — albeit not at the breakneck pace once predicted — a growing number of consumers in the older industrial nations are exhibiting a preference for hybrid and all-electric cars, or for alternative means of transportation.  Moreover, with concern over climate change growing globally, increasing numbers of young urban dwellers are choosing to subsist without cars altogether, relying instead on bikes and public transit.  In addition, the use of renewable energy sources — sun, wind, and water power — is on the rise and will only grow more rapidly in this century.

These trends have prompted some analysts to predict that global oil demand will soon peak and then be followed by a period of declining consumption.  Amy Myers Jaffe, director of the energy and sustainability program at the University of California, Davis, suggests that growing urbanization combined with technological breakthroughs in renewables will dramatically reduce future demand for oil.  “Increasingly, cities around the world are seeking smarter designs for transport systems as well as penalties and restrictions on car ownership. Already in the West, trendsetting millennials are urbanizing, eliminating the need for commuting and interest in individual car ownership,” she wrote in the Wall Street Journal last year.

The Changing World Power Equation

Many countries that get a significant share of their funds from oil and natural gas exports and that gained enormous influence as petroleum exporters are already experiencing a significant erosion in prominence.  Their leaders, once bolstered by high oil revenues, which meant money to spread around and buy popularity domestically, are falling into disfavor.

Nigeria’s government, for example, traditionally obtains 75% of its revenues from such sales; Russia’s, 50%; and Venezuela’s, 40%.  With oil now at a third of the price of 18 months ago, state revenues in all three have plummeted, putting a crimp in their ability to undertake ambitious domestic and foreign initiatives.

In Nigeria, diminished government spending combined with rampant corruption discredited the government of President Goodluck Jonathan and helped fuel a vicious insurgency by Boko Haram, prompting Nigerian voters to abandon him in the most recent election and install a former military ruler, Muhammadu Buhari, in his place.  Since taking office, Buhari has pledged to crack down on corruption, crush Boko Haram, and — in a telling sign of the times — diversify the economy, lessening its reliance on oil.

Venezuela has experienced a similar political shock thanks to depressed oil prices.  When prices were high, President Hugo Chávez took revenues from the state-owned oil company, Petróleos de Venezuela S.A., and used them to build housing and provide other benefits for the country’s poor and working classes, winning vast popular support for his United Socialist Party.  He also sought regional support by offering oil subsidies to friendly countries like Cuba, Nicaragua, and Bolivia.  After he died in March 2013, his chosen successor, Nicolas Maduro, sought to perpetuate this strategy, but oil didn’t cooperate and, not surprisingly, public support for him and for Chávez’s party began to collapse.  On December 6th, the center-right opposition swept to electoral victory, taking a majority of the seats in the National Assembly.  It now seeks to dismantle Chávez’s “Bolivarian Revolution,” though Maduro’s supporters have pledged firm resistance to any such moves.

The situation in Russia remains somewhat more fluid.  President Vladimir Putin continues to enjoy widespread popular support and, from Ukraine to Syria, he has indeed been moving ambitiously on the international front.  Still, falling oil prices combined with economic sanctions imposed by the E.U. and the U.S. have begun to cause some expressions of dissatisfaction, including a recent protest by long-distance truckers over increased highway tolls. Russia’s economy is expected to contract in a significant way in 2016, undermining the living standards of ordinary Russians and possibly sparking further anti-government protests.  In fact, some analysts believe that Putin took the risky step of intervening in the Syrian conflict partly to deflect public attention from deteriorating economic conditions at home.  He may also have done so to create a situation in which Russian help in achieving a negotiated resolution to the bitter, increasingly internationalized Syrian civil war could be traded for the lifting of sanctions over Ukraine.  If so, this is a very dangerous game, and no one — least of all Putin — can be certain of the outcome.

Saudi Arabia, the world’s leading oil exporter, has been similarly buffeted, but appears — for the time being, anyway — to be in a somewhat better position to weather the shock.  When oil prices were high, the Saudis socked away a massive trove of foreign reserves, estimated at three-quarters of a trillion dollars.  Now that prices have fallen, they are drawing on those reserves to sustain generous social spending meant to stave off unrest in the kingdom and to finance their ambitious intervention in Yemen’s civil war, which is already beginning to look like a Saudi Vietnam.  Still, those reserves have fallen by some $90 billion since last year and the government is already announcing cutbacks in public spending, leading some observers to question how long the royal family can continue to buy off the discontent of the country’s growing populace.  Even if the Saudis were to reverse course and limit the kingdom’s oil production to drive the price of oil back up, it’s unlikely that their oil income would rise high enough to sustain all of their present lavish spending priorities.

Other major oil-producing countries also face the prospect of political turmoil, including Algeria and Angola.  The leaders of both countries had achieved the usual deceptive degree of stability in energy producing countries through the usual oil-financed government largesse.  That is now coming to an end, which means that both countries could face internal challenges.

And keep in mind that the tremors from the oil pricequake have undoubtedly yet to reach their full magnitude.  Prices will, of course, rise someday.  That’s inevitable, given the way investors are pulling the plug on energy projects globally.  Still, on a planet heading for a green energy revolution, there’s no assurance that they will ever reach the $100-plus levels that were once taken for granted.  Whatever happens to oil and the countries that produce it, the global political order that once rested on oil’s soaring price is doomed.  While this may mean hardship for some, especially the citizens of export-dependent states like Russia and Venezuela, it could help smooth the transition to a world powered by renewable forms of energy.

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21 comments

  1. PlutoniumKun

    Yves, I’m not sure you are correct to say that Chinese stockpiling before the Beijing Olympics was a major driver of oil demand – so far as I am aware China actually had very little oil storage capacity (something that is rapidly changing as the CCP realised it was a strategic weakness). In fact, Chinese purchases for building up capacity is probably the key driver in stopping a complete collapse in 2015. Many analysts are anticipating a significant downward shock as soon as the Chinese fill their newly built storage facilities.

    The broader point is true though, that China has become a ‘swing buyer’ in the way Saudi Arabia is a ‘swing producer’. I think Chinese demand may well already have peaked – if predictions are right and growth is down to 2%, I suspect this is the end of consistent high growth for China, and pollution concerns will lead to increasing restrictions on car purchases in China. Its an open question though as to whether India will step into the breach as a major buyer.

    Its worth noting however that recent assumptions that tight oil production in the US will hold up may be incorrect. Current low prices have only been here since 2014. A tight oil production well only produces about 2 years worth of crude without refracking, so we are still seeing production levels from wells paid for in 2014. The drop off from a fracked well can be very rapid. Without consistent investment, the fall off in production from tight oil reserves could well be shockingly rapid, and we may well see this start to happen within a year or so. Since the companies themselves are very tight lipped about it, its very hard to make any predictions. In global terms, however, this may well be offset by Iranian oil.

    A related issue is natural gas, specifically LNG. Prices are catastrophically low in the US, but are holding up elsewhere (hence the Qataris are not suffering as much as the other Middle East states). Companies like Shell are investing heavily in taking over existing LNG facilities, seeing it as a sort of hedge. So far, demand for LNG is rising very rapidly in Asia, and is likely to continue to do so as the Chinese seek to address air pollution and the Japanese continue to struggle with getting their nuclear reactors going again. But gas investments are notoriously slow to get going because they require far more basic infrastructure investment that petroleum, so its hard to see what direction that market will go.

    1. Yves Smith Post author

      China did not stockpile oil in 2008. It stockpiled diesel in a big way. That is what this post said. That was enough to drive demand. I also said that in my 2008 posts, based on contemporaneous evidence.

      I’ve said repeatedly in posts during the oil run-up, which I said (arguing with Krugman in particular) at the time was a bubble (I shorted oil close to the peak, at $142) that oil storage is limited and not efficacious. Contrary to conventional wisdom, oil is nasty to store.

      1. PlutoniumKun

        Thanks Yves, I wasn’t aware you’d posted on that. It is rare that demand for a refined oil product impacts upon crude prices (because a disproportionate demand for one product produces an unwanted surplus of the other crude splits), but its certainly true that retail diesel prices in Europe rose substantially relative to gasoline in Europe at that time. At the time, the sources I was reading attributed it to refinery bottlenecks, but if it was China buying up refined products, that certainly makes sense as an explanation.

      2. Synapsid

        PlutoniumKun, Yves,

        It’s good to see this article here.

        As to oil storage in China: the goal is to have three months’ supply in store. China has been buying at the ongoing low prices, and building more storage in order to keep buying. Once the goal is met I’d expect a drop in Chinese draw on the oil market, more oil on the market (other things being equal) and low prices.

        The response of the shale/LTO community to increased oil prices, as they come about, is not going to be a simple one. Those who have lost jobs because of the price downturn aren’t all going to sit around and wait, and a good deal of the expertise in the field is held by those who are at or near retirement age (this has been a major topic of discussion in the oil industry for several years now, since well before the downturn.) Companies are failing now under large overhangs of debt, even as they keep drilling for the cash flow to keep the lights on, and rate of failure may well increase; rigs that are idled now will not all be kept operable (many are being cannibalized–this is nothing new); and there’s the question of where the money would come from.

        The oil patch is always happy to eat its own and what that means is that the assets of failed companies (who’d want the companies themselves?) will be acquired by others, and the majors are there and waiting, as well as unlisted, non-public companies that did not join the stampede, for conditions to yield prices that just can’t be resisted. The assets aren’t going away. ExxonMobil, Shell, ConocoPhilips: they need only wait, along with the non-pubcos who have fat checkbooks. And investors looking for yield will always look at an industry beginning to recover.

        The world of LNG has some changes coming. Australia and the US are both building up export capabilities and they, plus the current world leader Qatar, are set to make available more LNG than there is current demand for. Demand will increase as economies improve, and the greatest demand is likely to be in south, southeast and east Asia. (The same can be said about coal.) The other major markets are going to be Europe and Latin America. As more buying shifts to the spot market and away from long-term contracts, as is happening, a very flexible system should emerge. I’ve no feel for the future of the LNG market but I don’t expect a lack of growth in it.

        Oh, and I’m no expert.

        1. PlutoniumKun

          Thanks Synapsid,

          Just a few random points – you are right about the issue of retirements – a family member is an off-shore drill foreman and he just retired. He says there is a big ‘generation gap’ between those who gained their experience in the 1980’s and more recent drillers. Because of very low prices in the 1990’s, there is a big hole in the generation of skilled workers coming through. Once his generation retires (and they are doing so), you are left with relatively young and inexperienced workers. Off-shore and fracking drilling is very specialised, its as much of an art as a science.

          I’m not so sure that drilling can be started up again so quickly as you suggest if there is a few years break. For one thing, the major companies no longer have in-house know-how – for years now they’ve been hiving things off to sub-contractors, and if those companies dissolve, it will be very difficult to get teams together. Many will have gone off to do other things, such as building wind farms. During the last period of low prices, most of the off-shore rig manufacturers shut up, leaving only the Koreans with capacity, which greatly delayed the ramp-up, and may well have contributed to later price spikes.

          Another key issue is the Saudi’s. Contrary to general opinion, the aim of the Saudi’s is not to destroy the tight oil industry and oil sands – thats too politically risky. The aim is to give investors a bloody nose and to point out that they can give another one some time in the future. So even if there is a substantial rise, investors may be loath to provide financing for fear that the Saudi’s will respond accordingly. By then, there may well be much better things to put money into (such as renewables).

          As for LNG, the feeling I get is that the industry sees demand as almost limitless, especially in Asia. But we could well see exactly the same process take place, where there is grotesque over investment. Its very hard to say. Normally, natural gas infrastructure only gets put in place when there are guaranteed long term markets (the Chinese did this for the Qatari’s) due to high costs and long lead in times. One wonders in a world of commodity gluts if anyone will want to commit. There are a lot of jigsaw pieces that need to fit together for everyone to invest in LNG, which is a very expensive form of energy. Renewables probably make more sense for most of Asia. Even the financial markets seem to consider Shells big investment in LNG as being something of a panic move.

          1. Synapsid

            PlutoniumKun,

            I agree that there won’t be a rapid pickup in the shales–that was what I was pointing at. The assets will be picked up when prices are very attractive but moving to begin developing them will be delayed as you describe. The majors stopped doing their own oilfield work a decade or more ago and the oilfield-sevices sector is being as hard hit as the rest of the industry right now, so time will be required. Even Schlumberger can’t do it all by itself.

            I like your point about the Saudis, and on top of that plan I would set Mohammed bin Salman, the deputy Crown Prince, Minister of Defense, and head of the new council that has oversight of Saudi Aramco, while in his thirties. I have this lurking thought that he might be a loose cannon masquerading as a wild card, and that makes him scary, in my book. We can only watch.

            I have jaundiced hopes for rational behavior in the Investoriat; what you say makes sense, but too much investment hasn’t, when it comes to energy. We’d be better off if that changes but I suspect a fair dose of the irrational. Again.

            At the moment LNG is too expensive to be embraced gladly in eastern Asia but that’s the big picture. The agility that the spot market makes possible might lead to flourishing sales in fairly small regions. I’ve no data to offer but I expect a greater degree of flexibility in the LNG trade than has been the case so far. Think, for an example, of Turkey. Ankara has been looking for enhanced NG supply, since shooting down Russia’s bomber, in Azerbaijan, Qatar, and Iraqi Kurdistan. That’s via pipeline, and cheaper than LNG, but pipelines themselves are expensive, and vulnerable, and take time to plan and build. If Turkey were to build up its storage capacity then Cheniere and other LNG suppliers might look tempting, as secondary sources or fallback. We see something like that in the Baltic right now. There’ll be lots of detail in the developing LNG world, I’m thinking.

            Many current projects won’t get off the ground, there are too many of them, but Petronas has committed to going ahead in northern British Columbia and that’s a big project, bringing NG from the Horn River plays, and they haven’t been rushing at all but have instead been doing very thorough planning. Serious intent and national money there–it’s worth paying attention.

  2. Steven

    The driving force for power and prosperity going forward will be scientific discovery and the general level of scientific and technical literacy – not oil. Access to inanimate energy sources – whether from (relatively) cheap oil or renewables – will remain the sine qua non for a modern economy, of course. But the source of Western civilization’s wealth and power was not oil per se. It was, rather, using machinery powered from inanimate energy sources to produce life’s necessities – ‘better, faster, cheaper’.

    For more than 200 years the ability to make a monetary profit from this process has been what sustained a social order based on money and credit, AKA ‘capital’. It has also sustained the illusion that the source of the West’s power was its money – how it allocated its capital, not scientific and technical proficiency. As Oscar Wilde put it the powers that be (PTB) in the West knew “…the price of everything and the value of nothing.”

    The spate of off-shoring by the United States and more recently by other either now or soon to be former ‘industrial democracies’ is just a graphic illustration of Wilde’s observation. Former Treasury Secretary (and Goldman Sachs co-chairman) Robert Rubin years ago made an observation something to the effect of ‘symbol manipulation i.e. financial engineering, not the old-fashioned kind, is where all the action (i.e. money) can be found these days.’ (I would really appreciate a citation.)

    Apparently Rubin and his ilk thought their power and their privilege of creating money out of nothing could be preserved by converting the necessary parts U.S. economy into a giant armory and letting the rest rot on the vine. Now they seem surprised as the PTB in China attempt to leverage the wealth and power Rubin and his 0.001% buddies off-shored for their own ends.

    And the rest as they say is – or will be – “the end of history”.

    1. MyLessThanPrimeBeef

      The driving force for power and prosperity going forward will be scientific discovery and the general level of scientific and technical literacy – not oil

      Science and the pursuit of power – that’s the ugly naked truth.

      Power to destroy, subjugate and dominate…power to create inequality, for those who possess, first or exclusively the data.

      We tell lies to ourselves that all is beautiful how those involved in it practice Science.

      1. Steven

        It doesn’t sound like we disagree about much, except perhaps the possibility of harnessing the future of scientific inquiry to human needs rather than those of power-hungry politicians and global corporations.

  3. susan the other

    Since when did low prices for any commodity lead to war? I can see how oil creeping back up to 115$/bl two years ago might have lighted John McCain’s little fuse to agitate the Russians and why oil at 140$ could have made it a strategic goal. But it looks like both Bush II and Obama chose to control oil with the market – Bush bringing “this sucker down” by crashing the US economy which crashed the global economy, and Obama opening the floodgates for drillers and wildcatters and Canada, etc. That seems to have eliminated the need for war imo. The oil producers might want to go to war to loot each other maybe. But why go to war to accumulate more of a soon-to-be useless (in two or three decades) commodity? Peak Demand.

    1. fajensen

      Since when did low prices for any commodity lead to war?

      The fuse was lit at the time when populations in the middle east grew well beyond the carrying capacity of their lands and they began to rely ever more on oil money to buy food for their people.

      Egypt (yes, Egypt was an oil exporter) and Saudi Arabia have 90 and 30 millions, respectively, that they have to feed and keep “gainfully occupied” somehow. If oil goes out of fashion, they cannot do that anymore and they have to shed the surplus population rapidly – the traditional way is to start a war with someone and use the surplus people to steal their land & resources. The borders around Europe is going to get really hot within 5 years.

      1. susan the other

        I’m hoping we all see the futility of this thinking. In a world that is shutting off CO2 (because we all enjoy breathing), the countries we need to help are those that lived off fossil fuels. They also have depleted their water supplies. They are now in the process of sending their best and brightest off as refugees or terrorists (?). It’s not 1932 anymore. No nationalism nonsense is going to save the situation. Only cooperation, and science. What we need is a goal. Goals are very complex and require good faith or they become just more trash. Let’s define what a goal is: it is to establish a range of well being for humanity. And accomplish it within the bounds of a healthy environment. I can go along with that and I betcha “ISIS” can too, once they are detoxed from their present insanity.

        1. fajensen

          There is no time.

          It took more than 40 years for Saudi Arabia’s Wahhabi’s, Egypt’s Sayyid Qutb *and* the help of a cabal of Western Oil interests and “anti-communists” knocking off all potential attempts at civilized leadership, to turn the Arabs and the Middle East into what they are now.

          It will take much longer to turn back the clock to happier, saner times – and we haven’t started one little bit of the way.

          On the contrary, “we” are *still* doing “Regime Change” and “Counter-terrorism” all over the place and “they” are glorifying barbarism, murder and mayhem in the name of God (partly as payback). The Libya f.i.a.s.c.o. is never mentioned or discussed, neither is Saudi’s war in Yemen nor Turkey’s war on it’s Kurdish population and support for ISIS a hindrance for doing business – unlike with Russia.

          That whole fat mess is the on-going work of Globalist Leadership. Obviously nationalism is coming back in full force because people will use the means that they (still) have to oppose what they see as a catastrophic failure. Hell, some Muslims want to solve all their problems by regressing to year 700 AD, it is totally natural that the same kind of people “here” likes 1938 a lot better than the dysfunctional mess that we have right now.

    2. Synapsid

      susan the other,

      What opened the floodgates was an oil price above $100 a barrel for three years running and being able to borrow practically cost-free because of very low interest rates. That ease of borrowing is the reason some 40 companies (with more to come) working the shales are in or heading for bankruptcy, with huge debt overhangs–the fingerprints are more those of the Fed than of the White House.

      The current Administration has indeed been friendly to the energy industry (a saying in the oil patch is “It’s nice to have a friend in the White House”) but it didn’t cause the explosion in shales. Money did.

  4. Oildusk

    This was a very well written article on the topic. Thanks!

    In general, many of the economic observers of these events underestimate the impact of annual oil decline rates. They are lower with conventional fields than they are for shale oil wells, but still sizeable. If sufficient annual reinvestment rates do not occur to maintain current production, it will fall in whatever countries do not make the requisite investments. These oil reinvestments are now competing with social needs and government budgets in a number of these countries and seem much more likely not to be funded. The fact that the financing of major energy projects have been seriously disrupted for the next 10 years, will create reductions in future global production rates that will generate situations where supply trails demand and prices will spike.

    In addition, the latest low oil prices have made potential investors in the oil and gas industry considerably more wary. Even if prices seem to be at higher levels, the uncertainty that low prices could return at any time drives greater risk and higher investment hurdles to make these types of investments.

    In addition, I’d anticipate that the oil producing companies will start making rational decisions again in the near future and think twice about trying to flood the market. The oil consuming countries have been the beneficiaries even though their oil industries have been allowed to be hammered by this situation. How long does OPEC really intend to punish itself? Any companies driven out of business in the US, will likely either be recapitalized or have their assets sold to another company that can develop them when the prices dictate. They are wasting their time and hurting themselves.

  5. flora

    Very good post.
    I’ll add this factoid. We’ve been here before – in the early 80’s. Quick summary from Wikipedia on the 1980’s oil glut.

    “The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s energy crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel ($101 per barrel today), fell in 1986 from $27 to below $10 ($58 to $22 today). The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the crises of the 1970s, especially in 1973 and 1979) and the energy conservation spurred by high fuel prices.The inflation-adjusted real 2004 dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986.

    It’s interesting, to me at least, that’s the time when financialization of the US economy began. Seeing this post along with the “Larry Summer’s is Wrong” post makes for an interesting pair of articles.

  6. Jim Haygood

    ‘Now that prices have fallen, [Saudi Arabians] are drawing on [forex] reserves … those reserves have fallen by some $90 billion since last year.’

    So is China, which has run down its forex reserves by several times that amount, defending the yuan peg.

    Most of these dwindling reserves are USD denominated, and constitute part of the monetary base in the countries that hold them.

    Shrink the global USD monetary base, and what do you get? That’s right, the D-word: deflation.

    J-Yel talkin’ rate hikes; next year she’ll be doin’ QE-squared, as her crusty old sidekick Stanley Fischer shrieks [waving his cane for emphasis],

    “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

    1. MyLessThanPrimeBeef

      Not much (human) labor left to liquidate. And many smaller farmers had liquidated their farms (involuntarily) a while back.

      I could see Old Master paintings or Qing Familie Rose being liquidated though.

      Liquidate your Andy Warhols, your Jackson Pollocks, your Zhang Daqians… Liquidate, liquidate, liquidate!1!

  7. Dave

    I find the discussion/debate about the effect on prices caused by fundamentals to be utterly quaint :)

    From Standard Chartered’s Paul Hornsell,
    “Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the USD and equity markets,” Horsnell said. “We think prices could fall as low as $10/bbl before most of the money managers in the market conceded that matters had gone too far.”

    Welcome to the centrally planned world… rip capitalism

  8. Lord Koos

    I’m as worried about the USA getting into a more serious war as a way to distract the citizenry from their ever-declining prospects. War is often the end result of economic disaster…

  9. Fiver

    Much that is good here. But the key remains the motivation for the Saudi full-production decision – and what will persuade them to ease back, that is, if they can ease back without killing their reservoirs. I’ve read fairly detailed arguments to the effect that if the Saudis had wanted simply to maximize the value of its resources, opting for the course pursued was not just the least good, but was actively most self-damaging.

    Since to my mind, the notion that the Saudis would move alone on something this big has never flown further than the end of my foot, very large US interests had to have been in support of this gambit. To me, it looks more and more as if, just Iraq was termed by a senior figure at the time as the ‘skittle’ which would take out all the other pieces, so this oil shot was/is supposed to clear the board – look at the list of non-Saudi/GCC producers: Russia & the ‘stans, Brazil, Venezuela, Iran, Angola, Algeria…and Libya, Iraq, Indonesia – in a no-new-China, stalling global economy, the biggest disaster cap opportunity in Big Oil/Big Money/Big Military’s great history practicing the Craft just sort of, you know, presented itself.

    But so far, none have capitulated, so both ‘unfriendly’ and ‘friendly’ producers are going all-in in terms of supporting their domestic industries financially, dangerously so – most up to their eyeballs in US dollar debt, the Fed floating the view just this past week that a faster, not slower pace of interest rate hikes is in store. Bam! Slam! Pow! Kabboom!! There is very literally a world of pain ‘out there’ now, and much, much more to come to undeserving people everywhere until some reasonable accommodation can be reached at a price all can tolerate, as well as high enough to prevent the global fossil fuels industry from fatally undercutting alternative energy by keeping costs too low for so long that too many global economies politically fail to act to save this planet.

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