Yves here. You need to read past the breathlessness to get at the good bits.
Originally published at City A.M.; cross posted from OilPrice
The new OPEC deal to cut oil output – the cartel’s first since 2008 – amounts to nothing less than Saudi Arabia’s surrender to the power of American shale.
It has come about due to Riyadh’s belated, horrified understanding that it has utterly lost control over the energy market, running through its capital reserves in the process. Rather than young, feckless Deputy Crown Prince Mohammed bin Salman using Saudi Arabia’s John D Rockefeller strategy to permanently drive U.S. shale out of the energy market, the exact opposite result has occurred. Unwittingly, the Saudis have made the Americans the new global energy swing producer, the permanent ceiling for the global price of oil.
This, in its way, is as momentous a shift in global power as the stunning recent Brexit and Donald Trump votes. Whereas Brexit showed Europe to be in absolute decline, while the election of Trump brings to an abrupt end 70 years of the U.S. as the global ordering power, the Saudi’s meek surrender brings to a close the long age of OPEC domination of the world’s energy market. This year truly has seen the death of one world order, along with the uncertain birth of another.
The details of the new OPEC pact make it clear that even this belated effort to quell the self-imposed bleeding brought on by Saudi attempts to drive U.S. shale out of the energy market – by, in Rockefeller style, over-producing to drive down prices and eradicate their competitors – is problematic at best.
OPEC as a whole agreed to cut 1.2m barrels per day (bpd) from production from the beginning of the new year, with the Saudis themselves bearing the brunt of the cuts with a personal reduction agreed to at just under 500,000 bpd. But as OPEC now accounts for less than half of all energy output in the world, it is a very weakened cartel, dependent on the kindness of strangers to survive.
Externally, this means Russia. The new global energy reality has been forthrightly addressed in the accord, as the interim deal is contingent on securing a further 600,000 bpd in cuts from non-OPEC members, with Russia expected to contribute 300,000 bpd to this total.
Unsurprisingly, the Kremlin is less than enthused, as Russian oil minister Alexander Novak blandly said that at best his country would only cut its production gradually, due to “technical problems”. OPEC isn’t much of a cartel if it is utterly dependent on major (and generally unwilling) outside players such as Russia to make its internal agreements work.
While the Saudis are hoping to persuade the Russians to go along with their fragile deal, to reach even this stage meant Riyadh wholly giving way to their hated enemy within the cartel, Iran.
Just recovering from years of sanctions due to its nuclear programme, all this past year as the Saudis have frantically tried to reach an OPEC-wide deal to cut their ruinous losses, Iran has held firm that it has no intention of hurting its just unbound economy to take one for the team. In the end, the Saudis had to meekly acquiesce, allowing Iran to continue to ramp up production, helping their sworn enemy in a way that must have put the House of Saud’s teeth on edge.
So even after surrendering to Iran, and assuming the Russians can be generally corralled to accept cuts of their own, there is a final problem with the Saudi inspired OPEC accord. The cuts are estimated to leave global oil production at 32.5m bpd, a historically high rate of supply unlikely to lead to much of a rise in the price of energy at all.
Even if prices sustainably drift upwards, all this will do is make American shale – far more price sensitive and far more capable of being quickly brought on line than the fixed rigs of the OPEC member countries – turn the spigots back on, with its production rising and the price consequently falling.
The Saudis, having utterly lost the plot, are now – as the problems inherent in this deal make all too clear – trapped in a world where they no longer control the global energy scene. It seems even the surrender terms the OPEC deal represents will not be accepted by Riyadh’s competitors. And they have no one to blame for this state of affairs but themselves.
Along with Europe as a great power, and America as the world’s ordering power, the myth of Saudi energy dominance is the third great dinosaur to be felled by the asteroid that is 2016.
I’m convinced that the hidden motivation for invading Iraq was to take Iraqi oil offline. Iraq’s oil production went down by about 2 Million BPD after the invasion and didn’t resume to pre-invasion levels til 2010 or 2011. That much production taken offline at the margin (where pricing happens!) resulted in $140 a barrel oil in 2007, and the largest profits in the history of corporations for the oil majors in 2005 – 2008.
And who was behind the invasion? Oil men in the White House (who profited mightily their friends and themselves), taking out the worst enemy of the House of Saud. And consider also where the 9-11 money and people came from.
Also, IMHO, $140 a barrel oil was another precipitating factor in the crash of 2008. Not generally recognized as it was engineered using the military resources of empire for private profit. And the empire controls mass info most effectively.
There was a “hidden motivation for invading Iraq”, that accounted at least in part for the decision, but I don’t think it was “to take Iraqi oil offline”.
At the time Cheney and everybody else who knew anything about energy were hearing about “Peak Oil” – the idea that the great conventional reservoirs were being drained and not replaced despite the industry’s best efforts. So oil would become progressively more expensive, and the US economy – 75% dependent on crude imports – would strangle. In this context, there was a geopolitical case for having Iraqi oil under US control.
The application of fracking to the shale oil deposits changed all that, and bought the US a couple of decades before the crunch sets in.
and shale oil in the US couldn’t get off the ground without high oil prices ;)
Cheney’s Wyoming, a major shale oil producer. Gee, what a coinkydink…
“Dick Cheney deserves a fair trial” is my favorite bumper sticker.
Just think: if the US had plowed all that War on Terror money into renewables…
Bush truly missed the moment, that Kennedy-esque message, that we were going to defeat the cause of the World Trade attacks, not the symptoms. Mandate that all Federal fleets must be run on electric/hydrogen, and give the plum contracts to his boys at Exxon, et al, so they could be on the forefront of the new energy market. Oh well.
We didn’t get $140.00 oil till after the 2008 crash when Wall Street took the bailout money and filled tankers and tanks with oil creating artificial scarcity and an oil bubble to make up for their losses in the real estate bubble. The Great American Greed Machine, Goldman Sachs Vampire Squid scamming the world. Supply and demand indeed, otherwise know as wealth extraction.
No, that is not correct.
Oil peaked very briefly at $147.00 in July 2008, before the Sept-Oct crash and before any bailouts.
The bubble was to a significant degree due to China stockpiling diesel for the summer Olympics, which started in August 2008. It was also due, as Ambrose Evans-Pritchard discussed, to a fair bit of monetary easing going into commodities.
About fucking time if you ask me. House of Saud is, with Washington hawks, are behind many of the ills of our current global landscape.
Unfortunately we are still too dependent on oil, but as we are in a state of increasing entropy and chaos, the importance of the energy needed (which the current industrial civilization is struggling to keep flowing in sufficient quantities at adequate levels of activity to ‘keep growing!’ in a balanced and distributed way; and will continue as long as the population does not self-regulate a bit), paradoxically (as it’s importance will decrease when it matters the most materially), as an strategic factor.
There is no “energy” left to fight useless wars for the benefit of the oil cartels (both western corporations and banana republics/monarchies). So we are due to keep flipping in a downtrend with decaying economic activity and higher stocks.
If the US, China, India, and Europe focus on developing renewable energy sources while US and European shale producers can generate enough oil and gas to be largely self-sufficient, then OPEC and Russia could become irrelevant within a decade as they would have no pricing power and their highly undiversified economies would struggle to stay afloat.
I think the left is missing the big picture on how to win the war by turning the war over renewable energy into a battle about greenhouse gas emissions. GHG is a polarizing issue with business and much of the electorate, and so it immediately creates strident, emotional opposition. I think a much better strategy would be to turn it into a national security issue whereby we focus on defunding the most destabilizing states. US, Europe, China, and India would all become winners in this world state of affairs. It also should help stabilize many areas of Africa as they could focus on decentralized agriculture and industry instead of oil and gas production which tends to allow for centralized corrupt power structures.
The large energy companies can focus their business on “energy” in total instead of just oil and gas. Oil and gas could then be used for things where they really are the best option as opposed to the only option which is where it stands now in many cases.
I agree. This was the political situation up till the 1990’s at least.
Then “the left” got “globalization” on its little mind and on top of that, USSR collapsed which de-funded the leftist elites and think-tanks. The smart people left and “the left” degenerated into being the opposite of whatever “the right” happens to spout. Since then, “the left” has been not only a joke for embracing things like Islamist values but neoliberalism’s little helper to boot.
“The left” of today just can’t do one damn thing – of course they will push the pious way to failure with climate change to avoid considering that all that oil money basically goes to our sworn enemies, whether these be the Koch brothers or the house of Saud.
Because having limits of who we deal with is something “the right” believes in. To “the left” this would be “pandering to racism”.
What needs to be done has to come from “us”, outside of the mostly dead “left-right” divide.
I think its true that SA has been greatly weakened, but I don’t think its correct to give victory to US shale, which has its own problems, not least a production ‘roof’ created by a lack of refining capacity.
The power of SA was always based not on the overall share of the market, but the reality that their oil is by far the cheapest to produce (very accessible and easy to refine), and they are the only major producer historically who kept lots of spare capacity to allow them to influence the market. This is still very much the case – Saudi oil is far cheaper to produce than shale oil and always will be, it simply requires far less energy to pump and refine. The problem for SA is that their economic ineptness means that they need much higher prices to keep the House of Saud in power. They’ve allowed the cost of running their country to run far too high and there is no prospect of them addressing this without creating a revolution. It was in fact the Arab Spring that really killed SA – they had to spend countless billions keeping a restive population happy for fear of a revolution, and now they can’t row back on the promises made. As Divalab above suggests, the US controls world oil prices by way of military pressure on other countries, not through control of its own very large production.
I simply don’t think its true to say that shale oil is a swing producer. For one thing, there are far too many operators to allow its production rate to be controlled for market purposes. And for a variety of reasons, it has little international market penetration (mostly because it has to be mixed in with heavier crudes for refining).
This is, though, a victory for shale oil in the sense that the vast weight of QE has kept the operators going long enough to survive the SA onslaught. But in one respect the Saudi’s won – they did enough financial damage to ensure that it will be a long time before any investors see unconventional oil or off-shore oil as a sure fire investment. But this is more likely to benefit the Russians and other relatively cheap producers such as Venezuela and Iran than the US.
But the overarching issue in this is demand. It is striking that the big drop in prices didn’t increase demand nearly as much as it should have. I strongly suspect world demand has peaked and that this will increase a long term decline in oil prices, with regular major ‘blips’ caused by a lack of investment in supply.
December 6, 2016 at 6:42 am
insightful analysis – thanks
Thanks – you just answered the question I had for the most part.
I was wondering how this was possible for merely economic reasons as the shale plays require high prices to turn a profit and the expected supply is much lower than the Saudi oil. It seemed like the Saudis could still boost supply and sell at lower prices that were still profitable for them as they’d been doing but I wasn’t aware of the other expenses they’d incurred which required them to sell at higher prices too.
I still wonder though if behind the scenes Uncle Sugar made the Saudis an offer they couldn’t refuse so that the US could go keep prices just high enough for just long enough to pump the shale plays at a profit while supply lasts. Something along the lines of “Nice airforce you’ve got there keeping you safe from the ayatollahs – be a shame if something happened to it.”
Hard to believe it was all carrot with no stick involved.
“I simply don’t think its true to say that shale oil is a swing producer.”
I don’t think the author meant they could set prices anywhere they want. For a while now, people have been trying to estimate what the breakeven oil price is for US fracking. Seems to be somewhere between $40 and $50. So if oil prices rise above these levels, then frackers open the spigot and there is sufficient volume to cap the world oil price.
Maybe that’s too simplistic. You can’t be heavily indebted and sit around pumping nothing waiting for prices to go up. At some point the banks/investors turn off your money spigot. But then after a trip to bankruptcy court, the judge will sell off all your oil property to someone with money – and volia – no oil was harmed in the process and is ready to be pumped under new management.
Bloomberg did an interesting analysis on this that was published earlier this year. The really interesting thing in this analysis is that there is no single “break-even” price. Instead, there is a continuum of breakeven prices so it is more like a CVT transmission than a standard gear shift. There were significant differences on breakeven prices for wells, even within a county as little details like school district taxes came into play. So more oil gets pumped from newly-fracked wells at $55/bbl than at $30 but there are still new wells being drilled at $30.
I think the Saudis bet on light-switch pricing where the fracking would hit the off switch, say below $45/bbl at which point the drillers would fold up their tents and go home bankrupt. Instead they discovered it was a dimmer switch where the most efficient drillers in low marginal cost location could keep going, which makes the process of bankrupting and shutting down the shale producers much more difficult. It was always a race between the Saudi/Russia/Iran budget requirements vs. the shale producers ability to survive $40 oil. I think we are now at a point where oil will be at equilibrium at $45-$55 for a while as that appears to be the efficient price point for the major producers.
There’s the additional complexity of short well life too. About two years I think. So they have a high density of short lived wells on top of a tight oil field. So they have to drill new wells fast just to stay even. But cutting back production is easy! Just not good for the cash flow.
But I expected Exxon to end up with the whole shootin’ match anyway.
But it does appear around $50 seems to be a good aggregate price.
For ever long our “proven and probable” reserves hold out.
This link shows how fast the shale producers react to small changes in price. Anytime it goes up a couple of bucks in the 1-2 year futures, it is pretty clear that producers jump in to lock in sales for production that they can now drill for now and produce over the next couple of years. Historically oil field plays took much longer to develop.
I think the majors will end up buying the leases for the $50+ production areas where the small players can’t hang on during price drops. But the smaller players in the $30 break-even markets are probably buying new toys now.
Shale did something interesting in that it created a whole bunch of small players, each acting in their own interest, with a wide array of break-even prices. This has moved the oil pricing from oligopoly-based to something resembling an actual free-market. This has completely baffled all of the players as it appears they have no idea what a free market actually is. They still think that a memorandum of understanding is all they need to set prices.
Demand will also be reduced through the increase of electric vehicles over the next decade. While EV’s are currently only a minor contributor to reducing oil consumption, the recent dramatic improvements of battery storage suitable for vehicles are likely to be in production in the next 3 to 5 years.
The great game of oil will transform and likely yield to better transport energy systems in this next decade to the extent that there really will be stranded assets and only the lowest cost oil sources will be worth exploiting.
The takeaway for me from the above story is that this latest OPEC deal is fragile as shoji paper and unlikely to stick for long.
I always saw the recent low oil prices as part of a deal between the US and Saudi Arabia primarily aimed at weakening Russia after their Crimean intervention in early 2014. Part of the deal was that the US would commit to continuing their support for rebels in Syria and would have to give tacit support for the Saudi intervention in Yemen.
Furthermore low oil prices put more economic pressure on Iran to come to the bargaining table and eventually accept the Iran Deal.
And while the US shale industry was going to take a beating, these are basically heavy polluting red state businesses that mostly support Republicans. So Obama didn’t really care. Also I’m sure Obama would have been happy to have the domestic boost to the economy during the 2016 election cycle.
The cost of all this to the Saudis was the short term economic damage done to their economy due to low oil prices.
But Russia did not buckle under this economic pressure; to the surprise of no one with even a cursory knowledge of Russian history. But now with Trump coming to power in the US and either Fillon or Le Pen in France, the Syrian adventure is soon coming to an end with Russia winning, Assad staying in power, and Saudi Arabia being the geopolitical losers. And so the deal is over — with the US / Saudi side having very little to show for it at the end of the day.
I’ve heard a similar theory (low oil prices as a way to weaken Russia and Iran) from my uncle. He also threw in Venezuela and Brazil as other countries seen as thorns on their side by Washington that would have been (and were) destabilized by oil prices being cut in half.
The part I wasn’t sure about was if the Saudis were really sufficiently motivated to weaken Iran that they would be willing to threaten their own domestic situation, but with Syria and Yemen being bonuses like you described it makes a bit more sense.
I find it hard to believe that American Shale plays are easy to turn and off like a water faucet when prices return to profitable levels. How long can unproductive labor sit on the sideline waiting for the go signal? How long can a company maintain shale plays with minimal capital spends before the spot becomes less than fully productive. I must admit that I’m not aware of the technological implications of suspending a shale play and quickly flipping it back on.
Its not easy to control a shale well if its fracked in the same way you can adjust flow from a conventional well. What they can to is frack and cap a well, and anecdotally this was done a lot over the past few years, so there could be a lot of capped wells just waiting for the spigot to be opened once the price rises high enough (or the investor gets desperate enough).
But the main issue for control of tight oil in the US is not technical, its economic. Saudi Oil is almost entirely controlled by Aramco, the state oil company. They produce exactly how much they want to produce. But with tight oil plays there are a lot of operators, all with cash flow issues, all wanting to sell what they have. If cash flow is tight enough, they will even sell at a loss. There is no one (or small group) of players with sufficient market power to reduce output.
The drilled uncompleted oil wells (they’re called DUCs) you refer to have not been fracked, only drilled and then capped. Capping a fracked well could degrade it. Last I looked, there were over 1000 DUCs in North Dakota, where the practice is most widespread.
The idea is that when price per barrel of oil reaches some figure then fracking crews will be brought in and the wells fracked and put into production. As was mentioned, though, layoffs have caused a lot of people to leave the oil&gas industry and there aren’t a lot of fracking crews waiting to go back to work; those working are mostly in the Permian Basin in Texas and New Mexico. Training up new workers takes time and crew productivity can start out pretty low.
The sweet spots for oil are not where the DUCs are; wells where significant production was expected were not the ones that were capped–they were developed in order to keep the lights on. When the DUC backlog is cleared there’ll be more production but the total amount might be surprisingly less than hoped for.
Yes, you are right, once fracked it can only be capped for a limited time, I should have emphasised that. And you are also right that most crews have now gone to west Texas.
Incidentally, a family member of mine has been in the drilling (natural gas) business for 4 decades and he says the knowhow and infrastructure hasn’t dispersed yet to the point where it can’t be easily retrieved, but based on what happened in the early 1990’s it won’t be long before it does. There is also a similar problem with off-shore drilling as a lot of rigs are way past their sell by date.
There have been a lot of shale oil related bankruptcies in the past year or two. In addition to any engineering issues associated with reactivating shale drilling, there will probably be legal and financial issues. A couple of articles about the bankruptcies:
Apparently the second link is a subscription site. Sorry — I wasn’t prompted to login the first time I linked to it.
People are so polite on this site.
Of course, I don’t see the moderated comments.
This diagnosis strikes me as premature. We need to see the effect of raising interest (if and when this raise starts) on the funding for American shale.
Not sure about this article, I mean, the Saudis/OPEC *were* the ones able to plummet the price of oil when this whole thing started.
I see the good points but I am not persuaded that the House of Saud or Opec for that matter, has really lost.
Fracking has deep structural flaws that are now becoming readily apparent. The environmental costs alone are huge but the fact that it has such a low lifetime and return means that it is never going to be a long-term competitor. Moreover the price cuts, even if they are over, did fatal damage to some of the shale producers and, to my mind, killed off most of the smaller players. This may just be a nonexpert opinion but I think that the damage will kill off Fracking as a serious threat for some time, if it ever returns at all.
If you think about it, this is a lot like Uber vs. the Medallions. Uber, like the frackers, was succeeding in disrupting the industry. But it did not do so by actually underselling it or by coming up with a better business. It was just able to fund a boom strong enough to displace alternatives.
Unlike the Medallions however OPEC can, and did, coordinate a response, one big enough to expose the faulty cost equation for what it was. Only the very large players (read. established oil companies) could ride it out. They are the only real winners here.
Given the permanent damage that the price plunge has done to many shale producers
Starting with splitting the cost of the Afghan adventure with the US back in the 80’s, KSA has been supporting expansion of Sunni Islam throughout the world, from funding Madrassas throughout Asia, to supporting ISIS in Iraq and Syria (and likely their analogues throughout Africa), to building mosques throughout the West, to donating to charitable foundations of powerful Western political figures. (Their support of the Muslim Brotherhood comes and goes). One would imagine that such a widespread geopolitical effort might require substantial funding, but whether that’s a drop or a quart in the vast bucket of the oil market is hard for me, at least, to tell. Still, it’s another line in the ledger of the KSA’s budget.
At this point, it seems that US shale drillers need low interest rates more than high oil prices.
If we get a few Fed hikes and yields go up at the long end of the curve because of Fed and a big Trump stimulus, we may see just how durable the US shale industry really is.
This article strikes me as another subtle attempt to get investors to sink more money into shale oil. Notice the propaganda phrases that play on patriotic emotions – “power of American shale”, “the Saudis have made the Americans the new global energy swing producer”, “far more price sensitive and far more capable of being quickly brought on line than the fixed rigs of the OPEC member countries.” This article is a play for investors – propaganda to make investors think that somehow the US fracking industry is healthy – that frackers have won when in fact they are on the ropes and up to their ears in debt that can never be paid. The fracking growth model required drilling more wells each year – exponential growth of well drilling – which was not sustainable. When you frack a well, it sustains high output for only about a year then product falls rapidly – so you have to drill more wells the next year. A second frack might work but it is also costly. Investors saw the growth, but didn’t look at the business model – or if they did, they knew to get out early. The sweet spots that made the scam look real were limited and were running out. If the Saudis hadn’t increased production, the fracking industry would have crashed of its own weight in a year or two. The business model required more investors each year to keep it going and the Saudis put an end to that. Frackers were able to use contract clauses to hold off going into bankruptcy, and the most recently fracked wells produced for another year, but now the wells are drying up, new wells were not drilled and production is falling – new investors are not there but the debt is still there. Like all bubbles it was built on credit, and debt requires debt payments which can’t be made without the new money from investors. This article strikes me as a last attempt to get sucker investors to jump back on the fracking bandwagon. New investments might help frackers spin-off worthless subsidiaries and let the parent companies suck a bit more money from investors. The scam was attempted by Occidental Petroleum in CA with regards to the Monterey Shale – but the scam collapsed when the inflated reserve numbers were shown to be made up before most of the investors were lined up. Occidental managed to spin off a worthless shell company with a debt restructuring that allowed it to bilk the early investors even after the scam collapsed. The article is correct that we shouldn’t expect the global oil cartel to get their act together anytime soon, prices will remain low. But that is bad news for shale oil which required monopoly pricing to make it work. It is only in an oil man’s fantasy that “the Saudis have made the Americans the new global energy swing producer.”
This makes sense, thank you.
James ,I couldn’t agree more. No matter who comes along to challenge your take on things, it won’t change the fact that the your narrative is as plausible (more so IMO), as the tripe in the trade article in question.
For one thing, I find it odd, if not amusing, that everyone seems to have forgotten the who and why OPEC was created in the first place.
Beyond that, the is celebrating the ultimate version of rearranging the deck chairs on the Titanic because, in addition to the chairs, others are busy punching more holes in the haul and calling it a victory.
Like the Anton Chigurh character in No Country for Old Men ,way too many people have convinced themselves, that the coin determines our fate and we are powerless to do anything, including denying our culpability as its agency.
No better investment than speeding up ones own demise ,while turning ones own back yard into a toxic shite hole.
It seems to me that you get a very warped view of today’s oil market by counting barrels. The important quantity is something like net energy or surplus energy. A barrel of fracked shale oil is equal in volume to a barrel of SA oil but the net energy is much less. A similar analysis is useful for evaluating biofuels. The net energy in a barrel of biofuel is almost zero and yet we get to count the fossil fuel input barrels and the biofuel output barrels as both contributing to “all liquids”. It’s double counting and it leads to bad investing and bad policy. Of course, calculating net energy is complicated and would lead to many inconvenient conclusions. So not many people even try.
Net energy impacts are masked by the difference in pricing per calorie for natural gas and oil in the United States.
Calorically, 6 MCF provides about the same energy as 1 barrel of oil. However, when oil prices are at $50, and natural gas prices are at $3.50 an MCF, the actual ratio is something closer to 14, not 6.
Consequently, those investments where you can utilize 6 mcf of natural gas to produce a barrel of oil (for example by heating heavy oil underground) don’t work on a net energy basis, but do still work on a price basis.
Outside the U.S., natural gas prices are often more closely aligned with oil prices and these same energy dynamics don’t work.
Personally, I’m less concerned about the carbon consequences of these issues than I am the long term scarcity of fossil fuels which often took many millions of years to mature underground.
Those are very useful comments. Although I believe the same issues arise when comparing net energy in conventional nat. gas versus fracked, shale gas. All of the sweet spots are exploited first and then the energy surpluses just gradually descend until there are no surpluses. As Nicole Foss put it, the beer in the glasses is gone, now we are sucking it from the carpet.
But it isn’t only carbon consequences involved in staying on fossil fuels – they provide the basis for the overwhelming majority of products and waste products that have collectively ruined so much of the world’s water, air, soils, fields and forests, an always-increasing toxic chemical brood occupy the human and every other living body in their thousands, wherever these industries exist.
This could explain the sudden rush by Congress to extend sanctions on Iran.
KSA wasn’t just fighting USA shale. They were fighting the USA’s central bank, and other major world central banks. Easy money kept shale going during KSA’s output binge.
If it had only been a competition of who can pump cheaper oil for longer without going under, KSA would have won.
But that wasn’t the real question. The real question was, “Can KSA pump oil cheaper than the Fed, BoJ, PBC, and ECB can pump money?”
The second factor in KSA’s production binge was geopolitical: a way to weaken RF and Iran. This was meant to help KSA and the Gulf barons in the Syrian and Yemeni wars, while also helping the Glorious Neoliberal Empire in Ukraine and Venezuela.
The Trump election may have torpedoed the geopolitical rationale. If Clinton had won, an all-round escalation of geopolitical conflict could have been counted on. Since Trump won, that’s no longer something to count on.
However, since it’s possible that the Trump Admn. might take a hard line on Iran, maybe KSA no longer has to battle the Iranians with prices, since the USA might re-sanction them. That would hurt Iran’s economy without the KSA needing to much additional sacrifice. That might also be Trump’s way of giving a sop to the Saudis after disappointing them in Syria.e
New fracking plays in East Texas and Oklahoma are being pursued with undiminished vigor (and money), despite more expensive costs to extract the petroleum.
Daniel Yeltsin reports that the oil shortage in 1973 that led to, among other things, stagflation, never was more than 3% of global supply, so the price can be more sensitive to oil withheld.
Finally, 350.org reports that we need to leave all new oil in the ground or risk climate meltdown. Marx and Engels joked that market capitalists would haggle about the price of rope on the way to the gallows. I don’t think they’re far off here.
1) Fracking is — on the economics — closer to traditional mining than traditional oil drilling.
It’s the hit rate. Frackable strata are thin, but extensive, very much like a coal seam.
Traditionally, even in known oil country, there is a significant ‘dud’ rate. A fair number of holes hit pockets of salt water, pitiful production — or none at all.
In contrast, the dud rate for fracked wells is amazingly low. The drilling tip is guided up and down — on and on — until it hits the pay zone.
This reality is why frackers kept plunging ahead, even with borrowed funds.
2) Unlike most conventional production, fracking only produces sweet, light crude oil. This is due to the very nature of tight deposits. Heavy crudes can’t pass through such tight sands — even with the help of fracking. Your only shot is with strata that produce light, sweet crude oil… which sells at a tidy premium.
3) Fracked production up in the Bakken suffers from a ‘transportatino tariff’ — in that it has to travel by truck and rail to reach any refinery.
In the immediate future, this ‘tariff’ will go away, as pipelines of substantial size are now almost complete. For some fields, the cost to market has been ~ $ 10/ bbl.
4) Globally there is no chance that peak demand has been reached. India is just beginning its breakout into modernity. ( as in automobiles )
So KSA is going to find that demand growth lies entirely to the East. ( China, India, ASEAN )
5) KSA is NOT a low cost producer. Riyadh is permanently saddled with a ramping population of perpetual dependents. So she needs $100 per barrel… PERIOD.
The King’s ‘social overhead’ is a base ‘FIXED COST’ that keeps going up year after year. You ought to think of it as his social rent. The second he stops paying it, his head goes on the chopping block — literally.
You know, Russia has been a Favorite Strategic Enemy of the US for so long (like since the Czars) that I often forget there can be actual reasons for it, too.
The best part of this article for me is reminding me how deeply wedded the governmental policy is to energy-extraction policy, and why, given their energy extraction economy and competition with US production, US policymakers might continue to regard Russia as a strategic opponent.
Oh, sure, sure, Putin’s not a nice man, but the real crime in the eyes of our controlling political classes is touching the oil market. Good reminder.
This is fundamentally wrong in its assumptions thus wildly presumptive at best.
There is no good reason to believe the Saudis are independent actors in any of this. The US could effectively shut off any or all operations in Saudi Arabia, cut the Saudi State off entirely from the oil fields, round up the Royals, freeze every nickel they own in place, or any of a variety of other means through which to impose its will over a country with a useless military, a population heavily dependent on foreign workers and zero love lost all around. It’s a partnership based for decades on an identity of interests regarding oil, oil power and who possesses same. To believe the Saudis would unilaterally attack US oil interests would only be persuasive if there was absolutely no other possible explanation. However, there is one that better aligns with all the facts.
Deliberately taking out Iraqi production for a decade under the guise of ‘war on terror’ pay-back was one necessary condition for US fracking to take off. Another was extremely cheap, then historically extremely-cheap-for-the-height-of-a-boom cheap, then super ultra-cheap money. Libya and other destabilizing operations in oil producing nations managed to extend the fracking boom. However, the world hadn’t stopped in the meantime, and anyone who had oil pursued development. It would’ve been obvious to insiders (oil, finance, State) long ago that peace meant production would over-shoot supply absent coordination.
We are essentially asked to believe the Saudis sided with Russia (which like everyone else – foolishly in my view – pumped full out) against the US light crude industry, rather than that the US pressed the Saudis to inflict serious economic damage on Russia (and others) while hitting the other twin stone targets of de-financializing a whopping bubble in oil directly tied to Fed policies as well as dealing with what most cogent observers were arguing at the time was also already a specifically ‘fracking’ bubble, meaning there was a crash and consolidation coming to the industry regardless. In addition, fracking (and tar sands) are such environmental disasters a very substantial political constituency want clean alternatives. There is a further angle, that being that the G20 had committed itself to ‘stimulus’ of some sort in late 2014, the amount set at $2 trillion. I feel compelled to point out finally that the ‘consensus’ view of Government and private sector economists and analysts generally was that low oil prices would provide a major boost for consuming economies I also point out that not one national Government or leader, or mainstream opposition party of any oil producing nation on good terms with the US said a single word against the Saudis even though this savaged their own oil industries.
So, not a chance this was an independent, Saudi move. As we know, Russia dug in, as did all other producers. The subsidy levels keeping some of these operations around the globe going must be phenomenal by now, but deemed vital. The geopolitical stresses, though, have been building all the while, with the focus on Syria, where the Saudis, Qatar, GCC, US, Russia, Israel, Iran, Iraq etc. all have huge stakes, and all year long the tide has been turning against the nominal goal of the US-led coalition of States and proxy jihadist groups in taking down Assad. There have been efforts all year long to broker a deal, but only with the election of Trump have the Obama Admin and Saudis felt sufficiently pressed to deal.
As it’s in every oil producer’s interest to have higher prices, not go broke pumping irreplaceable reserves at give-away prices, that is where prices are headed under any functioning cooperative agreement – but not so high yet as to re-ignite investment into the real threat for oil states, which is alternatives. Every field being pumped full-out is also potentially damaged, so cutting production for many older fields will be slow and/or difficult. Alternatively, it is entirely possible higher prices return with a renewed ‘war premium’ and re-financialization, except the target is not Assad, but Iran, or Iraq again, or Libya and Venezuela + Angola, or a blow-up in sub-Russian Central Asia. The Saudis (wink) could rocket prices simply by cutting production back to where it was optimal for their own field-preservation.
None of this addresses the demand side, which is equally problematic. What is certain, though, is that global oil has a powerful friend in Trump. I suspect a failure on the demand side globally will generate forceful action on the supply-side – we’ve been here before.