Don't look now but the oil market is collapsing

[King]

http://www.cnbc.com/id/102159466

OPEC is announcing price slashing just to stay competitive. Even without meeting the oil industry's choir demands for pipeline construction and expanded ANWR and offshore drilling, technological advances in drilling as well as increased energy efficiency standards since 2009 on new products are beginning to take their toll on big oil.

We could potentially see crude fall below $60 a barrel this winter and continue to plummet.

If President Obama does give in on Keystone XL, which I do still support, we could be seeing gas prices below $2 a gallon nationwide. Alternatively, if environmentalists are willing to wait it out, Keystone XL may lose business support as oil no longer becomes a profitable sector compared to other energy fields.

Despite this crash in oil prices, alternative energy is not being hurt in their profitability. Stocks of wind, solar, and the electric car company Tesla are still very hot mainly because their demand is now being drive by "it factor"--an Apple iPhone-esque desire by those with money to say they support wind and solar energy even if they are not the best bang for your buck.  

In a very Adam Smith way, "record oil company profits" may become a thing of the past and the invisible hand of the free market may be directing us to renewables very soon.

[Storebought]

I've read that OPEC lowering oil prices has nothing to do with staying competitive -- it's just Saudi Arabia trying to drive US shale oil companies out of business. It's basically dumping.

[King]

I've read that OPEC lowering oil prices has nothing to do with staying competitive -- it's just Saudi Arabia trying to drive US shale oil companies out of business. It's basically dumping.

In a vacuum, yes, but it's a desperation play by the Saudis. US shale has the upper hand. They're panicked about North America's energy outlook.

[dead0man]

The peak oil chicken littles continue to look silly.

[AggregateDemand]

I've read that OPEC lowering oil prices has nothing to do with staying competitive -- it's just Saudi Arabia trying to drive US shale oil companies out of business. It's basically dumping.

It's not dumping. They aren't selling below cost, and they aren't giving Americans price preference to abandon US tight shale. If Saudi Arabia cuts production, along with the rest of OPEC, they are paying to eliminate the glut. If the low price of oil reduces investment in the US, US production decline will pay to eliminate the glut.

This is a common theme in international economics. People take an antagonistic stance against mutually-beneficial trade with the US. We lean on them with the full weight of our economy, and we dare them to double down or to acquiesce. In some ways, this game is the reason oil is so expensive. First were the oil embargoes, countered with CAFE. Then we got into a currency fight with China, which the Chinese countered by traveling the globe to secure resources, though they didn't have the technology to exploit them. Ultimately, the global economy collapsed as commodities prices led to consumer weakness in the US. Nobody won, same story with the oil embargoes.

When it comes to oil geopolitics, the US and Saudi Arabia are on the same team. The US created CAFE 2025 to reduce the cost of oil and reduce our trade deficit. We have no plans to frack for another 50 years so we aren't going to complain if Saudi Arabia wants lower equilibrium price and higher marketshare. Besides, lower equilibrium price put immense pressure on our "friend" Putin, and it may force Iran and Venezuela to allow development by established petroleum corporations. Saudi Arabia and OPEC get more marketshare, the US gets cheap imports and we use fewer off them, China gets cheaper imports to fuel growth, Vlad gets disgraced, which could be more precarious than we realize.

[Brittain33]

How unfortunate for Russia.

[Storebought]

I've read AD's reply, but I'm not sure I agree with it. Saudi Arabia is selling (relatively-speaking) low cost oil only to North America, but they are raising their prices to their east Asian customers.

But on a broader point, I honestly don't see how Russia is involved with any of this. Russia mainly uses natural gas to screw its client states.

[Landslide Lyndon]

Excellent news.

[Adam Griffin]

Well, if we're being screwed with, can we just dump the SPR onto the market all at once and send things spiraling out of even the Saudis' control? I guess that'd make it worse, though, but I wonder what the inflation-adjusted average price per barrel is that's in the SPR right now...

[Brittain33]

I've read AD's reply, but I'm not sure I agree with it. Saudi Arabia is selling (relatively-speaking) low cost oil only to North America, but they are raising their prices to their east Asian customers.

But on a broader point, I honestly don't see how Russia is involved with any of this. Russia mainly uses natural gas to screw its client states.

Russia uses natural gas to mess with Europe, but oil sales fund Putin's government.

http://www.bloomberg.com/news/2014-09-25/russia-risks-recession-as-oil-drop-seen-squeezing-budget.html

[AggregateDemand]

I've read AD's reply, but I'm not sure I agree with it. Saudi Arabia is selling (relatively-speaking) low cost oil only to North America, but they are raising their prices to their east Asian customers.

But on a broader point, I honestly don't see how Russia is involved with any of this. Russia mainly uses natural gas to screw its client states.

I understand the price discrepancy, but dumping is designed specifically to eliminate a domestic industry in another country. The difference between oil prices is related to transportation and refinery infrastructure.

It's much cheaper for the US to use WTI, Bakken, and Western Select than to get imports from halfway around the world, especially since we don't really export our supplies. The US refinery infrastructure also spent a great deal of money to transition to heavy sour refining equipment to make use of relatively cheap Western Select from the Alberta oil sands.

The US doesn't really need Saudi crude, and US buyers don't want to pay for the shipping, insurance, etc to get the supplies to the US. Therefore, Saudi Arabia must discount the price of their oil. Only the spot price is less. After all of the other expenses, the delivered price is roughly the same.

[○∙◄☻¥tπ[╪AV┼cVê└]

Republicans don't care. Keystone XL is like Benghazi to them, something they'll mindless pursue regardless of external factors.

[Simfan34]

I've read that OPEC lowering oil prices has nothing to do with staying competitive -- it's just Saudi Arabia trying to drive US shale oil companies out of business. It's basically dumping.

In a vacuum, yes, but it's a desperation play by the Saudis. US shale has the upper hand. They're panicked about North America's energy outlook.

Isn't shale only profitable around $65 a barrel, though? If they pump enough to get it below that we'd be the ones in trouble, no?

[memphis]

The peak oil chicken littles continue to look silly.

Do you think the supply of oil is infinite? We've made some enormous technological advances that allow us to get previously unobtainable oil. Doesn't mean it will last forever.

[King]

I don't worry about peak oil because I'm fairly certain that these technological advances have prolonged our supply of oil long enough that when we do hit peak oil we won't really be relying on it anymore.

It seems to be working out.

[memphis]

If you've been following the long term trend of gasoline prices and worldwide usage, the overall message is very much that it hasn't been working out.

[AggregateDemand]

Do you think the supply of oil is infinite? We've made some enormous technological advances that allow us to get previously unobtainable oil. Doesn't mean it will last forever.

We can make as much oil as we want. Whether or not bio-crude makes sense from a cost or ecology standpoint is another matter, but we aren't going to run out.

[King]

I'm being very America-centric in my optimism. Elsewhere isn't our responsibility.

[traininthedistance]

I don't worry about peak oil because I'm fairly certain that these technological advances have prolonged our supply of oil long enough that when we do hit peak oil we won't really be relying on it anymore.

It seems to be working out.

I think it's entirely fair to speculate that the housing bubble and 2007/2008 crash had a lot to do with taking endless oil for granted, building in the most disposable, short-sighted, wasteful manner possible to take "advantage" of that, and at the first hint that the gravy train wouldn't last forever and supply matters, folding like a cheap tent.

Now, the Kunstlerian prediction of peak oil = post-apocalyptic Judgment Day, no.  There's enough room for technological advancement and the dismal science in general to prolong the horizon, to let us muddle through for the time being, and if we're not dumb about it to let us switch over in time.  But we have to actively learn our lesson and not be dumb about it.  If we just blindly put our faith in "the market" and "technology", there's going to be another Lehman Bros. coming down the pike, and another, and another– and in the meantime, we'll waste resources that could go towards that technological advancement, or to creating a truly durable improvement in the lives of real people, chasing the dragon of another 90s-style exurban boom mirage.  It won't be an all-at-once crash, it'll be a slow, bumpy roller coaster down.  And it'll be a damn shame.

[Small Business Owner of Any Repute]

The good news is that a sharp dip in this market will probably help out low- and middle-income Americans immensely. Oil is such a big part of heating bills in the Northeast, and gasoline expenses are such a major part of the average household budget.

I get really excited when gas decreases significantly in price because it means I have more money every month. Gas is one of the few things I buy regularly, and when it's markedly cheaper it feels like I'm doing better financially.

[Simfan34]

Citigroup seems to agree with King's bullishness.

[King]

You know the old Atlas adage, "as goes King, so goes the country."

[Simfan34]

You know the old Atlas adage, "as goes King, so goes the country."

One of the interesting findings of the report is that we are going to have to lift the export ban by 2015, because otherwise the excess supply would drive down prices to where it will become unprofitable and kill the boom. Of course that will be mitigated by the fact shale's breakeven price, as we get more infrastructure in place, may drop to $35 by 2020, which changes its economics completely.

I don't know how much of an effect on other sectors their forecast includes (the lower energy costs are, the more competitive our manufacturing sector becomes), but the idea of our trade deficit narrowing to 0.3% is tantalisingly close to zero. We'd become something of a petrostate. I'd support starting a SWF, actually, but we'd need to somehow get the politicians' hands out of the pot. Either way, we have a bright energy future ahead of us.

East Africa (no, not Ethiopia), is another area where they seems to be a lot of untapped potential, some of it might be coming online by then. Prices are going to be going down unless China or India sees an unforecasted spike in growth.

I agree with traininthedistance obviously, that we shouldn't use this an excuse to revert to the suburban idyll... ick. I really hope that doesn't happen. I'm also skeptical of the "green tech is growing because of coolness". There's a lot of hype, sure, but they'll be expected to really get near the costs of conventional power generation soon or there will be a bust. Tesla, anyway, is powered by electricity... powered by natural gas plants.

[Simfan34]

Also I'm actually writing a paper on another time the Saudis, this time with our backing, flooded the market with oil (or at least threatened to); this was the mid-1970s and my man, Shahanshah Aryamehr, had decided that the Iranian economy was going to grow 25% annually and needed the money to pay for the (inflated) Five-Year Plan. We balked and the Saudis made sure OPEC didn't agree to raise prices. The rest is history.

Now it seems to be repeating itself, funnily enough. But here, the Saudis deserve to be screwed over (well, so do most people who think they can get an economy to grow at 25% for five years straight, but I'll make an exception for the Shah).

[Mehmentum]

Question, will this further hurt the coal industry?