By on December 1, 2014

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TTAC reader (and Pontiac G8/Holden conversion owner) David Obelcz gives us his thoughts on the current situation in the world of crude oil – and how that will affect car enthusiasts.

Over the Thanksgiving holiday in the United States, Saudi Arabia blocked a proposed production cut by OPEC, sending oil prices plummeting around the world. As I write this the price of oil and gasoline futures are in collapse. West Texas Intermediate (WTI) futures are down over 10% to $66.15 a barrel on the near-month (January 2015) contract, Brent is at $70.15, and gasoline futures are down to $1.90.

To put this in some perspective, on January 3, 1986 a barrel of WTI was $26.00 – that would be $56.33 a barrel today, adjusting for inflation (remember this number, it will be important later). This was at the start of the 1986 oil crash, where the price for WTI would bottom out at $10.83 on July 23, 1986. Today as the Great Recession fades behind us, you can drive through the fringes of Phoenix, Las Vegas, or along the Treasure Coast of Florida and find grass growing through the cracks of subdivision roads for homes never built. In 1996 you could do the same in Houston, with blighted neighborhoods spotted with abandoned homes falling into ruin. The Gulf Coast economies were devastated, and it took Houston and the surrounding area more than a decade to recover financially. When prices crashed again in 1998, the Gulf Coast had a much more diversified economic base, so the blow wasn’t as hard.

As United States oil production skyrocketed post World War II, along with consumption, the easily tapped reserves coupled with swelling imports from the Middle East fueled the greatest economy in the world. In that era the big threat was all things Communism and nuclear annihilation. If we kept the Middle East countries rolling in cash for their oil, the United States could keep Soviet influence to a minimum. We drove GTOs, General Motors feared being declared a monopoly, men walked on the moon, and we watched the Indy 500 on our color TVs.

United States oil production peaked in 1970. Three years later in response to the Yom Kippur War, OPEC, along with Egypt, Syria, and Tunisia, declared an oil embargo that lasted from October of 1973 to March of 1974. The embargo caused the price of oil to quadruple, collapsed the United States stock market, plunged the country into its third worst recession in history, and planted the seeds that grew into today’s modern post-Soviet oil industry. In addition we got malaise era cars, an under 200 HP Corvette, the rise of the Japanese automakers, the 1979 Chrysler bailout, and Ford almost going bankrupt.

The 1979 energy crisis had an even bigger impact on today’s energy landscape. Although global oil production dropped just four-percent with the collapse of Mohammad Reza Pahlavi’s Iranian government, wide spread panic happened. In addition, President Jimmy Carter started the deregulation of oil prices in April of 1979. A year later the price of oil had almost tripled to $39.50 a barrel – that would be $114 today. History shows that the 1979 energy crisis was more manufactured, than the result of a true crisis in supply. With the damage done, there was another major recession.

The price of oil then started a near 20 year decline with peaks and valleys, including the 1986 oil shock valley, several peaks during the Iran/Iraq war when tankers were treated as military targets, followed by another oil price crash in 1998, then another price spike during the first Gulf War, and the latest price spike that happened before the Great Recession.

But something changed in 2005, United States total energy consumption peaked. A weak US dollar created a new normal in the price of a barrel of oil, and over the next decade Americans got use to the price at the pump.

In the 2007 State of the Union Address, President George W. Bush made what is called the “Twenty in Ten Challenge,” to reduce United States gasoline consumption 20% in 10 years. The same year the Energy Independence and Security Act was passed. Five years later US energy use had plummeted from 25% of global consumption, to 20%.

Just seven years after George W. Bush issued the challenge in his State of the Union address, total US energy consumption has dropped 20%, US oil consumption has dropped 14%. Even with expanding job growth, growing GDP, and growing exports – it wasn’t all about the Great Recession. The gasoline consumption picture isn’t quite as rosy, but it is down 6% from 2007 to 2013.

These improvements in the United States are largely due to dramatically improving fleet fuel economy in light vehicles, heavy trucking, and aircraft. Secondarily, energy consumption is down due to big improvements in appliance efficiency. Air conditioning remains the number one consumption device for electricity in American homes – cable TV set top boxes are now number two.

The point of this long background is that in 2015 the rules of how the price of a barrel of oil impacts the United States economy has changed. In 2014 total OPEC imports are projected to be at 1985 levels, and less than 40% of total US imports. In October of 2013, the United States reached a major tipping point, producing more oil than it imports. Refined petroleum products has been the largest US net export in terms of dollars, since 2011. When I consulted for Conoco in the 90s there was a lot of talk about shale oil reserves, but how it was not cost effective to tap them. Fracking has changed that, and the United States is currently in an unprecedented oil boom. In North Dakota if you have a pulse, you can work 80 to 100 hours a week, make $17 an hour at Walmart, and yet, there still remains a serious labor shortage.

China is now the largest car economy in the world, and we are seeing the impact from this in the United States. From tax friendly (in China) engines under 1.5 liters in American cars and CUVs, to interior and exterior design and features made for Chinese consumers carried over into other markets. Our declining dependency on foreign oil, and our concurrent shrinking consumption is a blessing, and a curse.

At $70 a barrel, fracking operations profitability start to become problematic. We know from over 70 years of history, that if pricing reaches a point where a certain production source becomes too costly, these sources are turned off, supply tightens, price increases, profitable sources are turned back on. We’ve seen this cycle of boom and bust multiple times since 1972. For a lot of complex reasons, the price of oil does not follow a rational price curve during these peaks and valleys, and both are dangerous to the economy. In the Gulf of Mexico, oil producers are already stacking offshore rigs, because the cost of production at some deep water sites is too prohibitive at current market prices.

At $70 a barrel, most OPEC nations can’t fund their governmental operations effectively. When this happens, OPEC has historically dialed production back, raising prices, but that didn’t happen. Only Kuwait and Qatar are in the black. But what is of bigger concern is at $70 a barrel, crude from the Canadian Oil Sands is unprofitable along with United States ethanol, found in 10% quantities at a gas station near you.

There are those who will say that the market is being manipulated to put the squeeze on Russia, Iran and ISIS (or ISIL or IS if you prefer). However Russian oil operations are still profitable at $50 a barrel, and Iran’s oil operations are unprofitable at almost any oil price point that the global economy can sustain, and remain healthy (Iranian crude is very heavy, very sour, hard to refine, and not preferred by buyers).

The Russian economy is definitely being squeezed by the plunging global oil prices, with the Russian economy generating 60% of its revenue from energy sales, 50% of that from oil exports, there is little motivation for Russian leadership to cause too many problems in Ukraine, or declare a Western Europe embargo. For now, the fear of the full Stalin treatment has kept the Russian elite quiet in their public criticism of Putin’s actions, but sanctions are taking their toll.

Saudi Arabia tipped their economic hand yesterday. They’ve declared a war on the price of oil and are willing to put their $576 billion in cash reserves on the table to slow down North American oil production. Economists predict that Saudi Arabia can fight a two year financial war of attrition in an attempt to slow down advancing United States, Canadian, and Mexican production.

You must always remember, oil is a global commodity. American buyers (meaning you and me) are cheap and we actually enjoy lower prices than most of the globe (if you eliminate third world Hell holes and banana republics). But oil and gas companies are not charities, they answer to shareholders. Fracking operations can be profitable down to as low as $45 a barrel, for existing wells. There is the technicality – existing wells. At $70 a barrel it is questionable that new wells will be profitable, and fracking wells have a short production life. If the producers become convinced that this isn’t a seasonable valley, decisions will be made based upon the quarterly balance sheet, and new wells won’t be created. With Saudi Arabia declaring financial war, don’t be surprised if you see new fracking operations slow down.

Supply will tighten, jobs growth in North Dakota, which is unsustainable, will level off, and eventually the price will start to climb back. Employment in the Oil and Gas Sector has grown 40% nationally since 2007, representing the lion share of all private sector job growth in the United States economy since the Great Recession.

There is the double edged sword. If the price of oil drops to under $60 a barrel, and US production is curtailed, the typical improvement in the US economy from each American getting a boost in disposable income, could be blunted with the loss of jobs in our booming energy sector. Think 1986.

For now, China is quite content growling at its neighbors over oil rights in the South China Sea, and letting western interests secure their oil contracts in the Middle East. They will also happily slurp up every drop the United States chooses not to use either through fuel economy improvements, or economic decline.

A serious oil bump is coming (I won’t say crash – yet , but bump) – and that’s problematic for the United States in particular. The economies of North Dakota and Wyoming have “bubble economy,” written all over them, and the benefits of the booming US oil industry have rippled through all sectors of the US economy.

Keystone XL has taken on an additional sense of urgency for Canada, because Keystone XL is not about reducing American oil imports from the Middle East and Venezuela by 40% (Middle East imports are already in freefall and Chavez is dead) or creating  American jobs. It’s about Canada getting its relatively expensive tar sand oil to markets willing to pay the price in Asia and South America. If American purchases of their more expensive oil declines in favor of cheap OPEC crude, the Canadian economy and the companies surrounding the industry will get hurt. That is what Saudi Arabia is banking on. If Saudi Arabia can hurt the economy of Iran in the process, and slow down the growth of religious extremism outside their borders, even better.

The real reality is this. The price of gasoline at American pumps will never return to late 1990s levels. It is an economic impossibility because the overall cost structure for production won’t support those price points anymore. In inflation adjusted dollars, another 18% drop in WTI futures prices will put us square into 1986 oil crash price points. Economics 101 and the laws of supply and demand always take control.

Enjoy the cheap gas for now, eventually it will go back up and when it does, it will go up fast and hard under the wails of peak oil, drill baby drill, and those pesky Chinese are using up the supply. Oh, it will likely put the globe back into another recession.

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183 Comments on “Ur-Turn: The Truth About Oil...”


  • avatar
    theupperonepercent

    I filled up at $2.90 a gallon.
    Granted: gas was $1.90 a gallon Premium in january 2009, but I can live with this over paying $3.35/ gallon.

    • 0 avatar
      Occam

      I was paying $4.55 for regular, six months before that. $1.90 or $3.35 are fine with me by comparison, especially if they don’t come with another “edge of the chasm” recession.

    • 0 avatar
      sportyaccordy

      2009 was another anomaly. Oil dropped down to like $30/BBL or something like that. $3/gal is def the new normal.

      • 0 avatar
        APaGttH

        In December 2008 WTI dropped to $30.28 a barrel. It had been as high as $122 a barrel in September of the same year.

        The massive drop was because of the global economic slow down and crashing consumption from huge losses in productivity.

        Additionally, almost all businesses operate on credit lines (there are advantages to this) and in December of 2008 if you didn’t have Dimon and Jesus on speed dial, you weren’t getting a loan from anyone. Even then, Dimon and Jesus might have a problem pulling the strings.

        The list of corporations that were floated during the darkest days of the Great Recession is pretty stunning.

        Historically WTI pricing for your reviewing amusement.

        http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D

    • 0 avatar
      ExPatBrit

      Think about January 2009 , and that cheap gas.

      Did you happen to notice the US economy imploding and millions of of people losing their jobs?

      Were those things were unrelated?

  • avatar
    jimboy

    Very well written and reasoned. Thank you.

  • avatar
    jacob_coulter

    Wow, amazing how the price of oil is cratering as a result of more domestic drilling and competition.

    Actually that’s not amazing at all, it’s what everyone with common sense has been saying for the last 30 years, but you had academics and elites tell us that it was all evil banker capitalists that made oil expensive and that increased supplies would do nothing to the price of oil.

    Apparently Saudi Arabia didn’t get the memo and is selling its oil at fire sale prices because it’s scared sh!tless about American oil.

    Looks like the drill here, drill now crowd was right all along. OPEC is being forced to lower prices in order to compete with American energy.

    • 0 avatar
      VoGo

      Jacob,
      The price of oil is driven by market expectations of supply and demand, and is very complex. While North American fracking is a factor in supply, it is one of many. There has been no American technology breakthrough or significant reserve found in the last few months to explain the recent slide in prices.

      Supply is driven by many factors, including the return of free flowing Libyan oil, increasingly desperate Russia and Venezuela, and US/Canadian production.

      Demand has been limited by recent reports of slow growth in Europe and Asia/Pacific economies.

      My personal take is that the biggest driver of falling oil prices which has not been discussed much is the realization that solar cell manufacturing follows Moore’s law, meaning that costs will decline by 50% every 18 months. Within a couple of years, solar will be the cheapest source of electricity for most economies, and increasingly drive out coal, gas and even oil.

      • 0 avatar
        jacob_coulter

        Uh, no, Moore’s law and solar panels have absolutely nothing to do with why Saudi Arabia is flooding the world with its’ oil at fire sale prices.

        US crude oil production has increased close to 70% since 2010, that’s why it’s now cheaper to fill up at the pump.

        Saudi Arabia wants to make domestic drilling too expensive to continue. It wants the a world where they control the price of oil through their Cartel, with American Presidents bowing at their feet (in some cases literally)

        An energy independent North America is better for the environment, better for the consumer, and better for national security.

        • 0 avatar
          VoGo

          Jacob,
          I heartily endorse the goal of an energy independent North America.

          The rest of your posts are simplistic and geocentric, and ignore the complexity of modern markets.

          • 0 avatar
            jacob_coulter

            Yea, we’ll see if in 2 years if solar is the cheapest source of energy.

            Good luck with that prediction.

            If you really think OPEC is taking this action because of concerns over solar energy, you’re delusional.

          • 0 avatar
            VoGo

            Jacob,
            I never wrote that solar will be the cheapest form of energy in 2 years.

            I also never wrote that the Saudis or OPEC were taking action because of concerns over solar energy.

            It would advance the conversation if you read more carefully.

          • 0 avatar

            “Enjoy the cheap gas for now, eventually it will go back up and when it does, it will go up fast and hard under the wails of peak oil, drill baby drill, and those pesky Chinese are using up the supply. Oh, it will likely put the globe back into another recession.” Sounds ominous, especially since we still pay around 7.50 USD per gallon here in the Netherlands (1.60 euro per liter). But I agree that alternative sources or perhaps some major disruptive technology may evenout dramatic price surges.

      • 0 avatar
        jdash1972

        The article is quite right. And oil has nothing to do with electricity production and solar cells have nothing to do with anything.

      • 0 avatar
        George B

        VoGo, Moore’s Law works because semiconductor process changes allow more transistors to fit on a wafer of silicon. More digital circuits from less raw material. This process most certainly doesn’t apply to solar panels which need physical size to collect energy dispersed across area.

      • 0 avatar
        redav

        The trend in lower PV cells has been a result of the Chinese subsidizing their manufacturing segment and flooding the market (just like Saudi is doing with oil). Their goal was to cut out US PV manufacturers, and they were mostly successful–note that GE had plans to build the nation’s largest PV factory in CO just a few years ago and have since abandoned and sold it.

        With their competitors under control, don’t expect China to continue to push the prices down, and so don’t expect solar to keep getting cheaper per Moore’s Law. We are still a ways away from PV being truly competitive with natural gas for electricity.

    • 0 avatar
      highdesertcat

      The Jonathan Grubers of the academic world think we’re all stupid. Drill baby, drill! I filled up at $2.459 this morning. Loved it!

      • 0 avatar
        CJinSD

        They’re right about a growing plurality of us, as they’ve assured with their long game in education.

      • 0 avatar
        ckb

        “The Jonathan Grubers of the academic world think we’re all stupid. Drill baby, drill! I filled up at $2.459 this morning. Loved it!”

        Looks like someone got to the comments section by blindly scrolling through 3 pages of well reasoned text outlining all of the historical precedents for cheap gas being a precursor to recessions.

        • 0 avatar
          TW5

          @ckb

          Like $140/bbl in 2008? or $100/bbl (real) in the late-70s and early-80s?

          The primary correlation between oil price and household expenditures is that the less we spend on gasoline the faster our economy and median income grows. The long-boom was built on gasoline expenditures less than 3% of household income.

          • 0 avatar
            highdesertcat

            For me, yeah, the lower the price of gasoline, the better. And, yes, I completely understand all the ramifications of the oil glut, low prices, and the pressure on the high cost extractors.

            That’s capitalism. The market will shake out the producers. The price of gasoline will go up in the future. It is inevitable.

            But let’s enjoy it while we can, and spend the money we have left over on stuff we always wanted instead.

    • 0 avatar
      APaGttH

      Actually, the drill here, drill now crowd have something wrong, and you missed probably the biggest point of what I wrote.

      For fracking to be profitable, WTI has to be at least $70 a barrel USD. If you create so much production that the price drops below $70 a barrel, it is no longer profitable to develop new drill sites.

      Fracking sites have a very short life, one to two years. This short life span makes infrastructure development incredibly challenging. It’s not cost effective to build a pipeline, for example, to a drill site that will only produce for a year.

      You base your assumption that drill drill here, drill now means that the drilling companies are charities. They aren’t. They’re are corporations who have to make a profit. They have bankers and/or shareholders to answer to.

      Drill here, drill now, only worked because the new normal for oil is around $100 a barrel.

      You are completely correct that energy independence is the way to go for any nation. But you’re looking at oil as a United States commodity, and not a global commodity.

      Saudi Arabia is buying time. They could care less about the United States government kissing their feet, contrary to your view.

      Back in 1991 when Saddam Hussein and Iraq invaded Kuwait, and the Saudi government looked at their massive wide open border, it was Osama bin Laden that called up and said, “hey, I can come home with the fighting force I developed in Afghanistan and we’ll kill Iraqi butt.”

      The Saudi’s said, “ya, you know what, you’re twenty shades of crazy and you can just stay there with your ideas on Islam and your ideas of a fighting war.”

      They called up NATO and said, “help,” and Osama bin Laden declared his war on the west.

      The Saudis care about keeping the likes of ISIS as far outside of public view and their borders as possible. If some choose to fund with deep pockets, they’ll do just enough to not upset internal political balance.

      The Saudis care the most about keeping their heads on their necks. Literally. They can do that by keeping the oil money rolling in and keeping the general population fat, dumb and happy (check out the obesity statistics in the Middle East – yikes).

      They’re buying time, until the Chinese have finished developing their 500 million strong middle class. When that happens you might be in for a shock.

      We already enjoy some of the lowest prices for gasoline in the world as I noted in the story.

      Drill baby drill runs the risk of a double economic whammy.

      Whammy one is when the bubble pops in the oil patch and the upper-Midwest. Whammy two will be when producers dial it back and the price goes back up. If it goes up too fast, recession in 12 to 18 months after the spike.

      We’re on the edge of the first part of that cycle. WTI appears to have settled into a new trading range of $63 to $68 now. That’s just enough for the Saudis to wage a long war of attrition, and enough to put the highly leveraged smaller operations in the Bakken out of business.

      • 0 avatar
        stuki

        None of Moses’ stone tablets contain anything about costs of fracking being $70/barrel as far as I’m aware.

        “Fracking”, is just one of a whole slew of technologies developed to get to oil in places where conventional wells were uneconomical, or plain useless. It’s still new, and rapidly evolving, technology.

        If you’ve been to North Dakota you’ll also very quickly realize the recent boom has taken place in an environment where simply getting there first and fastest, costs be utterly and completely damned, has been the name of the game. It’s the 90s dot-com mentality all over. Just frack-oil instead. If producers are profitable at $70/barrel now, you can rest assured they can stay profitable at lower prices, by utilizing such extreme cost cutting measures as not paying the dude washing their trucks $100K a year, paying less for each square foot of dirt than is common on Manhattan, and similar practices. But of course, whoknows if they’re even profitable now, or simply look like it because of all the funding they’;re sucking up at grossly subsidized rates.

        On a more systemic scale, noone knows what costs are, because there is no way to disentangle costs that are rather hard, from those that are simply inflated because of the National Idiotocracy’s obsession with printing money and handing it freely to anyone stupid enough to think North Dakota dirt is worth a million a square foot, just because some dude he spoke to in an elevator taught him how to spell frack correctly with some consistency.

        It’s the same problem plaguing Silicon Valley. On the face of it, it looks like a value creation machine out of this world, but if you subtract out the trillions of savings debased/confiscated from people with no upside from the show, who knows what is creating value, and what is merely getting rich off of having the savings of others redistributed their way.

    • 0 avatar
      APaGttH

      I wrote a reply to your post that the SPAM filter apparently sucked up.

      I’m sure it will get rescued in due time.

      Another thing beyond my reply that you ignore. US energy consumption is down 20%, oil consumption down 14%, and gasoline consumption down 6% despite an economy that has grown significantly since 2010, and a growing population.

      Part of the increase in supply is because of reduction in consumption. When you use less, you have more.

  • avatar
    jmo

    So…this is the QE driven hyperinflation I’ve been promised for the past 6 years…good to know.

    • 0 avatar
      Pch101

      The hyperinflation thing was obviously hype, but QE did contribute to higher oil prices and the tapering is causing those prices to unwind. QE was necessary, but it did come with a price.

      • 0 avatar
        VoGo

        PCH,
        Show evidence.

        • 0 avatar
          Pch101

          The relationship between money supply and exchange rates is Econ 201.

          Ditto for the relationship between US dollar strength and commodity prices.

          • 0 avatar
            APaGttH

            This. You’re 100% correct.

            QE lowered the dollar which raised the number of dollars needed to buy any global commodity, including oil.

            With QE ending and the dollar strengthening (aided by economic slowdown for much of the globe) less dollars needed to buy global commodities,

            It is Economics 102 / 201 stuff

          • 0 avatar
            VoGo

            True enough, but the complete lack of impact from QE on inflation, exchange rates, etc. confounds Econ text books. We’re in uncharted waters.

          • 0 avatar
            Pch101

            “the complete lack of impact from QE on inflation, exchange rates, etc. confounds Econ text books.”

            The impact of QE on exchange rates was predictable and went as anybody who understands this stuff would have anticipated. QE effectively increases the money supply — increase supply without corresponding increases in demand, and the price of money (the exchange rate) falls.

            Smart saltwater and heterodox economists knew that QE wouldn’t impact inflation. It was only the freshwater economists on the right who were baffled. They don’t understand that the quantity theory of money does not adequately explain inflation.

            Inflation comes primarily from wage growth, and the Phillips Curve illustrates the inverse relationship between inflation and unemployment. A high inflation rate and high unemployment generally don’t go together — high unemployment reduces the value of labor, making inflation unlikely.

          • 0 avatar
            VoGo

            Interesting, PCH,
            I think you have the better argument today.

          • 0 avatar
            TW5

            PCH is having a laugh and indulging in a bit self-aggrandizing political backslapping.

            Conservative factions are aware of how QE effects the money supply. However, if the money supply increases without a complementary and proportional increase in the wealth, productivity, and resources that support the Greenback, the USD can hyper-inflate. The conservative argument; therefore, was that the helicopter drop is based upon the assumption of a previously-functional economy, not an economy racked by trade deficits and stimulus throughout the 00’s. Thus, spending on non-productive initiatives like Medicaid (ACA), unemployment, and SNAP could create dire long-term consequences, while spending on pro-employment initiatives would have bolstered the USD during QE.

            Though I didn’t subscribe to the hyperinflation scare, nor do I care to associate with the “conservative” wing of the Republican think-tank, if you consider how much we’ve spent and how little we’ve grown, you can see the strength of their argument. In fact, we may only have been spared from a hyperinflation spiral by the free-stimulus we are pulling out of tight oil formations in the Bakken and Eagle Ford regions.

            In general, the practice of borrowing money (QE), working less (falling labor force participation, particularly amongst the young) and spending more on non-productive programs (current entitlement spending patterns) is a formula for disaster. I’m only optimistic because I believe people will eventually grow tired of tormenting themselves with foolish counter-productive policy, but I can understand the pessimism of the militant curmudgeons who’ve witnessed the expansion of bad policy during the entirety of their adult lives.

          • 0 avatar
            TW5

            Spam filter working overtime. PCH is having a laugh.

            Conservative economists understand the concept of the money supply. Their argument was that federal spending patterns (Medicaid, SNAP, and unemployment, coupled with an economy struggling with trade deficits and stimulus spending during the 00s, would not product enough wealth to back the increase in the money supply.

            If productivity and wealth do not increase along with the number of dollars, the possibility of hyperinflation is real.

          • 0 avatar
            Pch101

            The only laugh that I’m having is at the right-wingers who refuse to learn from their mistakes. Getting it wrong time and again doesn’t teach them anything.

            Using austerity to fix DEflation makes no sense. Austerity is useful for INflation, but inflation is unlikely when GDP growth is near zero or negative and when unemployed workers greatly outnumber available jobs.

            The great inflation never happened. Anyone who understood economics knew that there wouldn’t be an inflation problem and why. But lots of people don’t understand economics, including some of those who claim to know.

          • 0 avatar
            VoGo

            PCH,
            Economists who predicted we would go through this level of QE and still have low inflation were in the minority, regardless of political stripe. It really has been a surprisingly effective policy.

            I do agree with you that many conservative economists work hard to get the data to fit their theories, rather than the other way around.

          • 0 avatar
            TW5

            @ PCH

            You mistakenly conflate anti-hyperinflation with austerity, but the actual concern was that productivity gains would not be sufficient to bolster all of the dollars we were printing; therefore, focus on job growth (surely that sounds familiar).

            I was never in the hyperinflation camp, but if you look at how much money we’ve borrowed and how tepid growth has been, you can see why people wanted to reorganize spending in DC before we started easing. By failing to emphasize job growth, the only thing we did was maximize our borrowing and fail to build a labor force capable of paying for SS and MED.

          • 0 avatar
            Pch101

            “You mistakenly conflate anti-hyperinflation with austerity”

            I would appreciate it if you would avoid strawman arguments.

            I didn’t confuse anything. The inflation panic was nonsense. Smart people don’t obsess about INflation in a DEflationary environment.

          • 0 avatar
            TW5

            I just explained why a reasonable person would worry about hyperinflation during a deflationary cycle, especially if they feel that the dollars are not being dropped into a viable economy and that stimulus plans are counterproductive. They may also be worried about the possibility of a USD sell-off by central bankers in Asia.

            We were borrowing at 8% of GDP and the growth needle was barely moving. If you at the data, you’ll see that QE did very little and that the recovery started gathering steam as oil production and fuel economy slashed consumptive oil imports.

            If you don’t want to acknowledge an alternative theory, that’s fine, but you can’t make sweeping generalizations that are largely ignorant of economic forces. Hyperinflation was possible, though, unlikely. I’m glad it didn’t happen, but I’m not going to fault people for saying it……unless they were hawking gold to paranoid retirees.

          • 0 avatar
            Pch101

            You have a tendency to espouse crackpot arguments, so you’re not the best judge of what is reasonable.

            None of the explanations for inflation were based upon anything sound. Not surprisingly, they all failed. Anyone who could tell a good argument from a bad one should have seen this coming, but getting these people to learn from their mistakes is impossible.

          • 0 avatar
            TW5

            PCH, your only rebuttal is “we were in a deflationary recession”. To imagine that this a unique perspective harbored by people with your political persuasion is juvenile and self-congratulatory. The cost of employment spending was nil, compared to expanding unemployment, SNAP, and Medicaid. If some people believed counter-productive stimulus was going to lead to a global sovereign-debt crisis followed by a USD sell-off, it’s their prerogative, even if they turn out to be wrong. In the beginning, before we started pumping free stimulus out of shale formations, it wasn’t completely out of the question.

            And they weren’t wrong because “deflationary business cycle”. They were wrong because no one can hedge against apocalyptic economic collapse, and they aren’t going to try, which means no sell-off of US Treasuries and no global down-grade of US debt.

          • 0 avatar
            Pch101

            “your only rebuttal is ‘we were in a deflationary recession’ ”

            Only on the internet can factual assertions throw some people for a loop.

            What is apparently even more radical is basing decisions on reality instead of something else that has no bearing on reality. Yes, let’s go fight the inflation that doesn’t threaten us, while ignoring the deflation that could actually destroy the economy — that’s brilliant thinking.

          • 0 avatar
            VoGo

            PCH,
            TW5 is merely representing the interests of his masters – they are afraid of inflation because it could erase their wealth, which they protect at all costs. So what if QE boosted the economy and added millions of jobs – it could have moved inflation above 2%, which might reduce the wealth of the Koch brothers.

          • 0 avatar
            Pch101

            I’ve heard that claim, but I don’t believe that’s it.

            This is more of a cognitive dissonance problem. You have a group of people on the right who simply refuse to accept the notion that a government and/or central bank can do anything positive for the economy.

            That one can show examples of effective government and central bank action or that there are examples of failure caused by non-intervention makes no difference. This is a religion based upon blind faith in markets, not a position that can be tempered by pesky things such as facts or history.

          • 0 avatar
            VoGo

            If you are correct, PCH, then Milt Friedman is the Led Zeppelin of economics. Brilliant stuff, but opened the door for a whole lotta [email protected]

        • 0 avatar
          highdesertcat

          He’s right, QE was necessary for a soft landing.

          I was against QE because it would not do diddly for ME, but it did help many others, directly or indirectly, and people like me paid the price for it in higher costs of everything.

        • 0 avatar
          Pch101

          Milton Friedman was probably right over the long run — if you keep printing money without regard for any other factors, then yes, you will have inflation.

          Excess inflation is the byproduct of market participants spending too much money. Usually, this is caused by low unemployment — a tight labor market bids up wages, and those wages burn holes in the pockets of workers who go spend the money and overpay for goods and services. It can also be caused by an oil shock with artificial restrictions on supply as we saw during the 1970s.

          We created oil trading to deal with the latter; the market mechanism weakens the cartel. That leaves wage growth as the key problem. But with people out of work fighting over scarce jobs, that wage growth doesn’t happen.

          What the QE opponents miss is that the central bank doesn’t just create money, it also destroys it. When the Fed starts raising rates, it is effectively destroying the excess money. The inflation threat goes away if the central bank knows when the flip the switch, and it’s clear that the Fed is pretty good at it.

      • 0 avatar
        sportyaccordy

        Then why are assets still expensive…. DJIA and RE are still up up up

        • 0 avatar
          APaGttH

          Because the U.S. economy is expanding at +3% per quarter, job growth is up, and the end of QE was already priced into the market.

        • 0 avatar
          Pch101

          Stock prices reflect the value of companies and future expectations of their performance. You can’t compare those directly to commodity prices.

        • 0 avatar
          highdesertcat

          sportyaccordy, there are three things that everyone needs all of the time; something to eat, a roof over their head, and someone to bury them when they die.

          My wife’s family chose the real estate market, the “roof over their head.”

          As fewer people can afford to BUY a home, the demand for rentals has skyrocketed. It’s a field day for landlords and rental companies. The company owned by my wife’s family is making out like gang busters as are most other real estate brokers and landlords. Greater demand than they have vacancies for.

          Apartments are springing up everywhere. Trailers are shipped cross-country to where the need is greatest, like the oil fields in the Northern States.

          We are charging $1400/month rent PLUS utilities for a 1972-built house that just 10 years ago was renting out for $400/month. Amazing!

          But buying a home is always better, if you can. Many people simply cannot come up with the monies involved to make that down payment and/or qualify for a mortgage.

          The stock market is up because there is a lot of cash money out there that is simply not being reinvested in business expansion or new hires. We keep a lot of cash on hand. It’s fungible and not easily traceable.

          Many companies are actually buying back their stock rather than expand or hire new employees. Hell, Apple is now valued at nearly 3/4 of a Billion dollars! Who’da thunk it?

          For those of us at the receiving end, like property owners with rentals, mortgage lenders and real estate brokers, these are indeed the “good old days” we will reflect on in the future. I have seen some deals go down that defied logic, but this is not the site for it.

          It may not be fair to the shrinking middle class, but that’s real life for ya!

  • avatar
    tomLU86

    Great piece from Mr. Obelcz, thank you.

    In the wake of the embargo, the price of oil quadrupled from approx $3 to approx $12 per barrel.

    I’ve read that a key reason, generally overlooked, or omitted, was the Shah or Iran. While ostensibly America’s ally, and while HE (Iran) did not embargo oil (in fact, they supplied Israel also), I’ve read the Shah led the charge to raise the price.

    Make sense to me. No dummy, he, as his grandiose ambitions to recreate the Persian Empire required a big, expensive military. He bought (or ordered) 80 F-14s, under the guise of ‘containing the Sovites’ Expensive stuff. So he wanted expensive oil.

    The Saudis (royal family) on the other hand, want American protection, so they don’t want kill patron–just extract money.

    Had the Shah stayed in power, Iran might have expanded into Arab oil-producing areas, with interesting results.

    Any comment on the Shah’s role in raising the price from $2.80 to $11.80? Fact or conjecture.

    Thank you

    • 0 avatar
      APaGttH

      It’s a great question, and as a history buff I wish I could give you the answer you deserve, but I can’t.

      Prior to the Iranian Revolution, Iran was producing 6 million barrels of oil a day. When the Shaw of Iran’s government collapsed, the production dropped to 1.5 million barrels a day. This was in large part because the skilled workers and engineers fled the country. Who’d of thought that the Koran didn’t cover oil and gas upstream and downstream operations 101.

      This was the 4% global production drop I eluded to in my story. During this period the oil Iran was pumping was lighter and a lot sweeter. What they’ve got left is very heavy and very sour, very hard to refine.

      All politics aside, Iran has a shred of an argument for developing alternative fuel solutions for powering their nation. The oil they are sitting on is junk, and their oil industry is only viable at about $140 a barrel now. Again, I make that statement putting all politics aside – I’m not endorsing a nuclear power program for Iran (and trying to remain apolitical in both my piece and my replies)

      Iran dramatically ramped up oil production under Mohammad Reza Pahlavi’s rule. The United States was betting big on Iran in the region but as history as shown, the United States has an amazing capacity to bet on the wrong people when trying to influence other regions.

    • 0 avatar
      APaGttH

      I wrote a reply that appears the SPAM filter sucked up.

      I’m sure Derek will rescue it.

      • 0 avatar
        Lorenzo

        Are you proofreading to eliminate the deadly 3-letter combo? Just use your Asterisk between ess and dee with words like s*de, ins*de, cons*deration, and the like. Pretty much every time my reply disappears, it’s due to the deadly 3-letters.

        • 0 avatar
          shaker

          But I think that the spam filter will let you use “alluded” instead of “eluded” to indicate “refer to indirectly or by suggestion”…

          Great article, BTW!

    • 0 avatar
      jimbob457

      Belated response.

      Nothing very complicated about the 1973 oil price increase – US spare production capacity ran out. The sudden price run up was actually triggered by the Arab Oil Embargo. Notice the use of the word ‘Arab’. As far as the Shah is concerned, he appeared to be a tangential player, but then as now the inner workings of Iranian policy tend to be secretive.

      I do know that the Shah’s regime did not handle the ensuing sudden influx of oil money very well. Grandiose ‘development plans’ were often very wasteful and poorly carried out. Lots of graft and corruption. This is common during most oil booms, but it was particularly bad in Iran of that era.

  • avatar
    FractureCritical

    would be nice to see the current lame ducks in Congress/Senate push a federal gas tax increase. Given the huge roll-over in both houses and the current political climate with low oil prices, the increase would never be easier or less painful to the public.

    at $0.147/gallon, they could triple it in $.05 increments every month for the next six months and no one would even notice.

    • 0 avatar
      APaGttH

      I’m trying to be apolitical so I’ll wade into this one with a broad answer.

      We have to figure out something with the current gasoline tax, and I suspect the average Joe isn’t going to like it.

      Gasoline use is down 6% while population and road use is increasing. Additionally we have deferred so many repairs and improvements some issues are getting critical. In another couple of decades were going to be looking at needed improvements and repairs measured in trillions, and eventually we can’t ignore it anymore.

      With consumption dropping and use of infrastructure going up, something has to give. That is either alternative funding sources, a different tax model, or an increase of the tax.

      The unintended consequences of “Twenty in Ten” is that a 20% reduction of gasoline consumption results in a 20% reduction in collected motor fuel tax without a corresponding reduction in the actual use of infrastructure.

      You don’t need to be an economics major to figure out – problem.

      • 0 avatar
        Drzhivago138

        See, this is what we learned in Marketing 350 to be the “macro-micro” dilemma, which kind of makes my head hurt and reminds me why I couldn’t be a Marketing major.

    • 0 avatar
      Lorenzo

      They’re only lame ducks for their Congressional terms. Many still have potential careers in state government, but not if they vote for a federal gas tax increase. Direct taxes with obvious consequences are political poison.

    • 0 avatar
      TW5

      For the life of me, I will never understand why people believe that gasoline excise tax, a per unit tax designed to offset the cost of regulation and enforcement, is the proper way to fund federal roads. Consumption taxes fall on the middle class and lower classes at much higher rates relative to income. The lower-middle class has suffered enough. Slow your roll.

      • 0 avatar
        VoGo

        TW5,
        Taxes can have multiple uses. A gas tax can be used to offset the costs of regulation and enforcement (as can speeding ticket revenues), but can also be used to fund road maintenance and repair.

        Modern, logical governments in Europe use a tax on gas to change public behavior to favor efficiency and mass transit, which is why Europeans use about half the gasoline Americans do. This has the added bonus of effectively funding their health care, at costs which are half America’s, with similar results.

        If you are concerned a gas tax is regressive, there are lots of ways to address that.

        • 0 avatar
          TW5

          Thankfully, it’s not within the regulatory purview of the US Congress to tax certain behaviors out of existence, and then install a lower-middle class lifestyle that depends entirely upon public funding. Our government has ample funding to spend money on productive initiatives for the lower classes. Tax cupidity is not required or desirable, unless control is your primary objective.

          If it is desirable for people to use much less gasoline than they are using now, they should be paid for the positive externalities they generate, not taxed as though gasoline consumption is absolutely bad.

          • 0 avatar
            VoGo

            Your investment in your jargon overwhelms attempts to comprehend your response.

          • 0 avatar
            TW5

            If using less gasoline produces economic growth for the populace at-large and increases energy independence, people should be paid for fuel-efficient motoring with POS rebates or tax credits, not excise taxed into a public transit system, which only worsens road funding problems and makes workers dependent upon government transportation authorities and public sector unions.

            The goal is to empower people and create a wealthier society, not emulate the nearest placid Animal Farm.

          • 0 avatar
            VoGo

            TW5,
            Perhaps YOUR goal is to empower people and to create a wealthier society; don’t assume others share so narrow an objective.

            Personally, I aspire to an America that allows its citizens to be free from worrying about things like whether they can afford to take their kid to the doctor, or whether they’ll get evicted next month, or how to afford the next invented war.

            I’ll let you focus on creating more wealth for “society”

          • 0 avatar
            TW5

            ….and you further your objective by making people dependent upon the least dependable, most easily-influenced people, who frequently protect public-sector unions and corporate donors before they acknowledge that citizens exist? Don’t make people suffer for your own vain pursuits.

            Social policy is like medicine. Addiction and perpetual pill-taking are not the goal. The goal is to eradicate the ailment and get off of the pills asap. We have no chronic ailment, other than the aforementioned body of inept public “servants”.

          • 0 avatar
            VoGo

            I have no idea what you are talking about, TW5. If you could learn to drop all the jargon and use plain English, there’s a chance we can understand you.

            It sounds like you don’t like your government. If so, feel free to take the next flight to whichever country you believe is free of all the public “servants” that cause you such distress.

          • 0 avatar
            TW5

            Like or dislike isn’t even tangentially related to civics. I don’t like or dislike a flat-head screwdriver, and I don’t like or dislike government. You’re asking for a set of policy tools that don’t work, and I want no part.

            We’ve been trying to give people things like affordable healthcare, higher min wage, rent controls, and mortgage subsidies since the 1960s. It’s not going anywhere, except bankruptcy court. If we raise labor-force participation above it’s peak in the late-90s, we might get somewhere.

          • 0 avatar
            TW5

            Like or dislike isn’t even tangentially related to civics. I don’t like or dislike a flat-head screwdriver, and I don’t like or dislike government. You’re asking for a set of policy tools that don’t work.

            We’ve been trying to give people things like affordable healthcare, higher min wage, rent controls, and mortgage subsidies since the 1960s. It’s not going anywhere, except bankruptcy court. If we raise labor-force participation above it’s peak in the late-90s, we might get somewhere.

          • 0 avatar
            TW5

            Like or dislike isn’t related to civics. I don’t like or dislike a circular saw. You’re asking for a set of policy tools that don’t work.

            We’ve been trying to give people things like affordable healthcare, higher min wage, rent controls, and mortgage subsidies since the 1960s. It’s not going anywhere, except bankruptcy court. If we raise labor-force participation above it’s peak in the late-90s, we might get somewhere.

        • 0 avatar
          jimbob457

          Belated response.

          Uhhh… Isn’t highway infrastructure by its very nature local? If a state or local jurisdiction needs more highway money, raise state or local gasoline taxes. Wtp?

          As far as the social engineering aspect of a federal gas tax is concerned, maybe I should point out that in the US and Canada ALL of our infrastructure, including the spacing of our towns and the size of our very own back yards, was constructed on the basis of relatively cheap gasoline. Making gasoline artificially expensive with an increase in a federal tax is like burning down a bunch of houses.

          Happily, it looks like oil prices are receding from their recent cyclical peak. They always do.

  • avatar
    Pch101

    Oil markets become much easier to understand when one realizes that speculative trading is a primary component of price volatility.

    It would be suicidal for traders to bid up prices during a time that the end of QE is strengthening the dollar, and when Asia and China appear to be poised for a slowdown. Combine that with the downward trend in US consumption and you end up with less bullishness.

    Fracking doesn’t do much of anything. The one benefit is that getting oil from a place that isn’t the Middle East makes it less vulnerable to the political dramas of that part of the world. North American fracking and tar sands do help to make ISIS less of a concern for supply stability — nobody is worried about ISIS posing a threat to Texas or Alberta.

    • 0 avatar
      stuki

      Fracking is also another factor capping speculative demand.

      It’s still fairly new technology. Prices are still falling, and as of now, politics and general fear of potentially nasty unknowns has confined it mostly to the US.

      But the tech is universal, and will lead to greater total production in many other oilfields as well. Which does alleviate fears (and greed..) about the kind peak oil scenarios bandied about a decade ago.

      • 0 avatar
        George B

        Stuki, what’s different in the US is private mineral rights and a large number of relatively small oil and gas companies. Those companies figured out how to make horizontal drilling and hydraulic fracturing less expensive. Other companies specialize in tertiary oil recovery from old oil fields. Both the owners of the mineral rights and local governments get their cut when the oil company makes money. The big government oil companies lack the same alignment of incentives that encourage the innovation that has occurred in the US.

        • 0 avatar
          stuki

          They may lack the incentive structure that encourages the risk taking required to create the new technology and procedures, but once they are in place and proven, the US developers will sell them to big national oils as well.

    • 0 avatar
      Crosley

      I guess they don’t teach Econ 101 at your University?

      For some reason, those on the Left think the laws of supply and demand don’t effect the price of oil. Unless of course when it’s a Democrat President near election time and they’re flooding the market with oil from the Strategic Oil Reserve. Then they absolutely believe in the laws of supply and demand and how it lowers prices for consumers.

      If you think the crash in prices is all due to speculators and NOT due to the fact that oil production in the US has nearly doubled, I’ve got some Solyndra stock to sell you.

      • 0 avatar
        Luke42

        As soon as you start trying to tell me what I believe, you’re just arguing with a strawman – rather than actual left-leaning Americans.

        It sounds good on Conservative talk radio, but it doesn’t change the minds of any “leftists”, help to find the truth, orzsolve any probrems. It was fun, though, back when I was a conservative.

        If you want to talk about supply and demand, we need to talk about it on a global scale, because tho commerce occurs on a global scale. The answers are for more complex than those which can be described just by the strategic oil reserve.

        The other thing is that no now oil is being made, and the stuff is really useful, so we need to make sure we don’t use it frivolously. Else, my son won’t get to buy affordable oil when he’s my age. Seriously, who took the conservation out of the conservative?

  • avatar
    STRATOS

    China is the biggest winner in this new low oil price time.They no longer have to shell out big money for oil plays such as oil sands.They can now buy quality oil properties for a fraction of what they were willing to pay before.

  • avatar
    Mandalorian

    Here in AL, we have some of the lowest gas prices in the nation. $2.45 a gallon yesterday. Breaking $2.00 in a month or two would not surprise me. I’ll be sure to take a picture so I can look back at it in 20 years.

  • avatar
    FreedMike

    Loved this quote…

    “Keystone XL has taken on an additional sense of urgency for Canada, because Keystone XL is not about reducing American oil imports from the Middle East and Venezuela by 40% (Middle East imports are already in freefall and Chavez is dead) or creating American jobs. It’s about Canada getting its relatively expensive tar sand oil to markets willing to pay the price in Asia and South America.”

    Golly gee, could this mean that all the 121,764 attack ads against Udall here in Colorado during the last election were…bogus? Nawwww, couldn’t be!

    Let Canada shift for itself. And enough with the “Keystone XL creates jobs” argument already. That’s pure stupidity. If Big Oil shills – I mean, the Republican Party – wants Keystone XL, then let people know it’s being done to make Canadians rich.

    • 0 avatar
      PrincipalDan

      Wait you want Congress to do something? You mean treating each other like you wouldn’t urinate on the other guy if he was on fire isn’t an effective governing strategy?

    • 0 avatar
      mtmmo

      “And enough with the “Keystone XL creates jobs” argument already.”

      State Department’s Environmental Impact Study: “During construction, proposed Project spending would support approximately 42,100 jobs and approximately $2 billion in earnings throughout the United States.”

      Never let the truth get in the way of ignorance! Now carry-on.

      • 0 avatar

        “State Department’s Environmental Impact Study: “During construction, proposed Project spending would support approximately 42,100 jobs and approximately $2 billion in earnings throughout the United States.””

        Those would be short term jobs (18 months to 2 years) Long term estimates are for 40-50 jobs past initial construction.

        I say the pipeline should get Federal approval but should require local approval, a step they are trying to avoid, as some states have been opposed to the project.

    • 0 avatar
      dash riprock

      Have a real hard time understanding the hate for pipelines. Keystone will add 1/2 of 1% to the existing pipeline infrastructure in the US.

      Where the Oil sands oil ends up is really determined by the global market not by a pipeline.

      If the oil is needed by Gulf Coast refiners, it will be refined in the US. Heck that may even mean that jobs will be created.

      BTW….numerous American companies operate in the Oil Sands. It is not just some Canadians getting rich from their development, thousands of American manufacturing jobs have been created in the past 20 years. Of course, investigating that would require time and a open mind.

      • 0 avatar
        APaGttH

        There is some talk that is beyond open dreaming that if Keystone XL were to fail, that the Canadians would go east, and build infrastructure for both oil and LNG to ship to Western Europe. There are problematic issues with that (extreme tides in the east and unpredictable weather).

        The other issue is the LNG infrastructure would take about 10 years to fully develop, and even then it’s darn hard to ship en masse to supply Western Europe. The plus side is it would give the NATO bloc other options for energy purchases than Russia and its aspirations of a return to Soviet sized glory.

        Huge irony that the NATO bloc needs of staying warm in the winter is helping fuel the growing problem on their eastern border.

      • 0 avatar
        DeadWeight

        Warren Buffett loathes pipelines because they are more efficient oil delivery conduits than shipping oil by rail, and he has huge stakes in two of the largest railway corporations in the U.S. There’s a reason he threw his weight behind Obama in two presidential election cycles now.

        Warren knows Keystone and other pipelines would undermine his railroad profit model.

        • 0 avatar
          APaGttH

          Warren Buffet has come out in public support of Keystone XL – multiple times.

          http://www.cnbc.com/id/101460011

          http://www.forbes.com/sites/zackomalleygreenburg/2014/03/03/warren-buffett-is-still-bullish-on-rail-and-keystone/

          The idea that Buffet is pro-railroad and the current administration is against the pipeline to help Buffet make more billions is simply not true.

          The meme that was spread was ginned up in the conservative blogs with no factual basis.

      • 0 avatar
        Pch101

        In addition to environmental concerns, the primary agenda of the opponents is to reduce tar sands output. If the oil can’t be moved easily, then future production should be curtailed because it is largely landlocked without a pipeline to move it, and there are only so many routes available.

        On the other hand, the supporters want to be able to command higher prices for the oil and to keep producing. The claim that it will result in lower fuel prices is the opposite of the truth — Keystone will give tar sands oil access to higher-price markets — while the promises about jobs are grossly exaggerated.

        • 0 avatar
          dash riprock

          No, the Oil sands oil will be moved to market. The question will be by what method and routing. Oil by rail is not the most cost effective way to transport oil, but it is an alternative. Sadly oil by rail has even more downsides. Google Lac Megantic to see what the high flashpoint Bakken oil that was being transported by an US railway through Quebec can do.

        • 0 avatar
          dash riprock

          The Oil Sands oil will get to market. If not by Keystone than by a combination of Pipe, rail, tanker. So, the question really is what is the safest, most environmentally sound way to do it.

          Google Lac Megantic to see what US Bakken oil being transported by a US owned railway did to a scenic(well at one time) Quebec town.

          • 0 avatar
            danio3834

            As long as it is profitable to do so, yes it will. If they can’t build additional pipeline capacity through the US, they’ll build it straight out to the coast. The US has to decide if they want first crack at it by allowing more of it to their refineries before it gets shipped overseas. The localized lower prices at the midwestern refineries that can accept the excess at the moment won’t last forever.

          • 0 avatar
            Pch101

            Rail is costly and capacity is limited. Pipelines reduce costs significantly, plus they allow for greater capacity.

            The inability to use a pipeline raises the breakeven point, which should cap production; similarly, building a pipeline will lower those costs and encourage production. So it matters to both sides, although oil prices could go low enough to make the whole argument moot.

      • 0 avatar
        APaGttH

        I wrote you a reply, the SPAM filter gobbled it up.

    • 0 avatar
      kkt

      If tar sands oil can be profitably brought to market, it will be very hard to stop it. If we stop it from coming through they Keystone XL pipeline, they could send it by pipeline to Ontario and then through the Great Lakes. Or by rail through the U.S. or to Prince Rupert or any number of other places.

    • 0 avatar
      Roader

      Yes, they were bogus along with the 121,764 attack ads against Cory Gardner about birth control.

      Nawwww, couldn’t be!

  • avatar
    PrincipalDan

    What goes up, must come down, what goes down, must come up…

  • avatar
    johnharris

    Oil is a commodity, and commodities are always volatile. The article does a great job of articulating the complexity of commodity pricing. Never make the mistake of projecting that pricing graph very far into the future! Ask anyone who bought gold in 2012…

    I run a small boats-and-accessories business. A few years ago we did a careful analysis of gas prices as it related to our business (which includes a lot of mail-order shipping and a lot of road trips with a heavy trailer), and the conclusion was that gas had to hit between $5.00 and $5.25/gallon to really upend the apple cart. This little honeymoon of low prices won’t last long.

    Looking at historical graphs that adjust for inflation, it’s interesting to note that the trend over 100 years has been steadily downwards.

  • avatar
    Crabspirits

    Actually, if Facebook is to be believed, it’s because of Obama.
    Thanks Obama!

  • avatar
    mike978

    Great article. Two questions though.

    The Economist and others say Russia needs oil to be >$70 a barrel to pay their expenditure. I was wondering where the $50 figure came from.
    Also I agree the Saudi’s are using some of their cash pile to drive down US oil drilling. But that is only temporary, because if the oil isn`t drill now because it is uneconomic at $65 a barrel in 4-5 years time when oil goes back up to say $100 a barrel then the production restarts and this will put downward pressure on prices then.

    • 0 avatar
      APaGttH

      Great question, and the answer is – both are right.

      Two factors. You have certain sources in Russia where production costs are profitable if oil were to drift as low as $40 a barrel. Other offshore sites are more costly and are already unprofitable. The other factor is as the Ruble goes down, it can buy less, so the commodity price has to go higher to generate the same currency adjusted revenue. So the $70 per barrel is based on a Ruble declining further, which is probably likely.

      Another way to put it, established wells in the United States can be profitable to operate at $45 a barrel. Fracking needs to be around $70, some deep water wells need to be closer to $100. So the math of what will work across the board is fuzzy.

      It’s a wide delta, but I wouldn’t argue my life on someone saying $50 versus $70. My view on where the Ruble will go is probably more optimistic, and there is data that analysts paid to do this for a living have access to, that I don’t.

      I guess your second part is less of a question and more of a statement and yes you’re correct. But what Saudi Arabia is trying to do is protect their market share. There are a number of shale oil producers and explorers who are very highly leveraged, low prices are going to kill them. These guys will go bust, or sell their drilling rights to others at fire sale prices to stay afloat.

      I agree 100% with the view that we’re going to see industry consolidation. All Saudi Arabia has to do is disrupt the market. Fracking wells have a short life, one or two years, so Saudi Arabia can win this short term war of attrition.

      However, they’ll never win against the reality that US energy consumption is in decline, despite the growing use of energy consumption devices and a growing population. These trends will continue.

      If the Saudis can buy enough time until China’s 500 million strong middle class develops, they’re as snug as a bug in a Persian rug. If the Saudis can’t keep their population fat dumb and happy (relatively speaking) then the lunatics will start to run the asylum. The Saudis fear of the likes of AQ and ISIS outweigh their distaste of dealing with western interests.

      It all makes for very strange bed fellows.

      • 0 avatar
        mike978

        Thanks for the good reply. Certainly agree consolidation will come and that buying time is all the Saudi’s may want.

        • 0 avatar
          APaGttH

          I have a very good friend who does currency trading to make a living. I’ll reach out to him on his opinion on the Ruble.

          • 0 avatar
            Pch101

            The biggest problem with the ruble is Vladimir Putin. Just as long as he behaves as he does, you can expect the ruble to take a hit. And he isn’t going to bend anytime soon.

        • 0 avatar
          APaGttH

          He’s replied to me that he doesn’t follow the Ruble. However he feels that the US dollar will continue to strengthen and drive pressure on other currencies, including the Ruble.

          He feels US monetary policy has changed beyond the ending of QE, even if the Fed hasn’t come out and just said it.

        • 0 avatar
          APaGttH

          Here is a current events story on the Ruble.

          Down 15% vs. USD just last week and at an all time low.

          So I’m guessing that’s where they are getting $70 a barrel versus $50.

          http://www.komonews.com/news/business/Russian-ruble-takes-a-nosedive-as-oil-price-drops-284354921.html

      • 0 avatar
        28-Cars-Later

        @APaGttH

        Do you see the Saudis or other Gulf States simply buying the failing small cap frackers at fire sale prices and then waiting for the price to go up again?

        Also, have you read Twilight in the Desert by Simmons?

        • 0 avatar
          APaGttH

          Yes on one, no on two.

          I also could see Asian interests buying up some of the Bakken operations if we get to fire sale for these companies. Those with just terrible balance sheets and so prospects on claims will just go belly up – if prices stay here for a few quarters.

          • 0 avatar
            28-Cars-Later

            I read it three years ago and have since lent it out so I am unable to quote, however if I recall he argues the Saudi oilfields are living on borrowed time. I’m paraphrasing but from the 1930s until 1973 the five major fields were run by the US owned and operated Aramco, and starting in 1970 the Saudi gov’t starting hinting at an ownership stake and threatened nationalization. Simmons had data which showed from 1970-73 the Aramco management during this time decided to maximize profits and turned on the taps to “full power” which had never been done. Evidently the key to the ridiculously cheap Saudi oil was not the amount as much as the cheap production as the oil literally flowed out of the pipes due to natural pressure in the oil wells themselves. By turning the taps to full blast they inadvertently damaged this natural pressure which was not discovered by the Saudis until after 1973. Sometime after 1973 they began to inject seawater into the fields in order to make up the lost pressure, but somehow this weakens the field. He also asserts after 1981 the oil production data the Saudis release is bogus (1980 being the year of 100% Saudi takeover of Aramco) and they have dramatically overstated their known reserves. I cannot speak to the validity of the book’s claims, but I think you would find it very interesting as Simmons includes a great deal of verifiable geological data in the third section of the book to back up his claims.

            http://www.amazon.com/Twilight-Desert-Coming-Saudi-Economy/dp/047173876X

            http://en.wikipedia.org/wiki/Saudi_Aramco

  • avatar
    johnhowington

    cant say i’m shedding any tears over strip mining becoming unprofitable. bravo saudi’s.

  • avatar
    Omnifan

    Gas won’t hit 1990 levels in Michigan because the politicians are talking about a .40/gallon tax increase. That is to take advantage of the falling prices.

  • avatar
    CoreyDL

    This reminds me of a fun Flash game that’s been around a while. It’s cartoony and dark and doesn’t require a download. So it was perfect for me in college. Fun to balance your limited oil and capital resources with expanding and expensive drilling techniques, while keeping shareholders and politicians happy. And occasionally you can just grease The Hill.

    Have a play!

    http://www.molleindustria.org/en/oiligarchy/

  • avatar
    TW5

    What does Saudi Arabia win by flushing $500B down the drain in an attempt to cull the US oil investment? It will take them 10x as long to recoup the expenditures, if oil rises another $10-$15 per barrel. Furthermore, OPEC benefits when the US has an oil production agenda at high production costs.

    Saudi Arabia is looking for buyers, and they are looking for political leverage after an historic swing in the US Congress. My guess is that they want to kill the Keystone XL Pipeline to stop Canadian oil from reaching the Gulf of Mexico or maybe they want to kill CAFE 2025.

    • 0 avatar
      APaGttH

      All Saudi Arabia is doing is buying time.

      China is adding four million people a month to their middle class. Imagine a city of Houston popping up, every single month. 48 million a year. China’s GDP has passed the United States and is now the largest economy in the world. Never mind the billion people in India (although their road infrastructure largely still sucks). It is projected that China’s middle class will settle in at around 500 million people total, and a lot of them will want cars.

      All Saudi Arabia has to do is buy time until new markets develop so they don’t lose global market share. They don’t care who buys the oil, they just want people to buy it.

      They need to maintain market share to keep the religious nutters from running amok within their boundaries. They are quite content to turn a blind eye to those who write checks to religious nutters in other parts of the world. Those who are writing the checks are equally content to do so as long as they remain fat dumb and happy and can write the checks. If you upset that balance the Saudi royal family, government and supporters might start losing their heads, literally.

      I wrote a longer reply on this issue above that hopefully will get rescued from the SPAM filter. It isn’t always just about the Benjamins.

      • 0 avatar
        Pch101

        I believe that you are giving the Saudis far too much credit.

        The individual OPEC members need all of the money that they can get. Since none of the members will make unilateral cuts — why would they? — the status quo remains.

        Saudi Arabia has to deal with market forces. The Saudis don’t really have much control over the price of oil. They can’t unilaterally fix the economies of Europe or Asia or do the other things that are needed to bolster demand. They have even less control when their fellow OPEC members won’t agree to a strategy.

      • 0 avatar
        TW5

        On the contrary, Saudi Arabia and Venezuela are heavily invested in the Gulf of Mexico, and they’ve signed many long-term contracts with refineries in the region. The last thing they need is a glut of Western Select flowing into the Gulf and disrupting their contractual negotiations. They were not particularly happy about the southern-most portion of the XL, which has already been completed to relieve the oil glut in Cushing.

        They do care about who buys the oil because the customer determines where the oil is going and how much it will cost to transport and refine. SA recently went on a refinery construction glut because they got tired for working around the infrastructure limitations of their customers. I doubt they can afford to lose the refining capacity in the Gulf of Mexico.

        If they are only trying to buy time, why don’t they cut production? The likelihood of a technological breakthrough that puts tight oil and oil sands production costs on par with Saudi fields is basically nil. They are aiming for something else. Perhaps to force Canadian oil to the West Coast where it can go to China, and Saudi Arabia can supply the US. Maybe they see a global slowdown on the horizon and they believe $60 oil is the only way to avoid another Asian crisis.

        • 0 avatar
          VoGo

          Everybody is creating some fascinating rationales for Saudi behavior. Sometimes the simplest reason is the most compelling: Saudis are just trying to retain revenues. With prices low, they need to increase quantity to keep the money flowing in the right direction.

          • 0 avatar
            APaGttH

            There is a lot of history in the last twenty years to support the Saudis overall fear religious extremism in their own country – while happily turning a blind eye to fund it elsewhere. OBL reached his tipping point when the Saudis refused his help in dealing with Saddam and the invasion of Kuwait, and instead went to NATO and the US.

            With that I said in order to keep things in order, they have to maintain market share for the oil they do sell. When you’re in a war of supply and demand, and supply outstrips demand you either restrict supply or lower price. They went the latter.

            But I do believe there is more at play here than just market share.

        • 0 avatar

          Didn’t they cut production last time and get burned by it?

  • avatar
    Conslaw

    Now, while the price of oil is low, is the time to implement a carbon tax. We can implement higher fuel taxes without raising the price of fuel higher than the recent average price. The taxed price acts puts a damper on demand and operates to mitigate commodity oil price hikes. It is simply fair to incorporate into the price of oil, coal and natural gas a pricing element to reflect the external cost of the fuel on the environment, especially (but not exclusively) the climate. The limiting factor in fossil fuels is not how much we can afford to pump from the ground, it’s how much we can afford to pump into the air.

    If we can show that the foreign suppliers are engaged in cartel activities, it justifies imposing a tax on imports of petroleum. The import tax will make it harder to “break” the U.S. Producers. In return, the U.S. producers will have to back a relatively small, but increasing carbon tax on all carbon fuels. If the producers agree to a tax for energy security, maybe even the Keystone pipeline can win approval.

    I live in Indiana. In east-central Indiana, there was a natural gas boom similar to what we are seeing in North Dakota. Producers were wasteful of their product, in just a few years, when the gas ran out, the economy in the region just died, creating ghost towns out of cities like Gas City. It would actually be in the best interest of the folks in North Dakota to slow down a bit and have a longer-term perspective. Just because we have discovered new reserves of fuel that we can extract in the U.S. doesn’t mean we have to extract it as fast as we can.

    • 0 avatar
      28-Cars-Later

      The power to tax is the power to destroy, so no thanks. Maybe if we lose the dozen other little to big taxes which plague us every day it would be more appealing.

    • 0 avatar
      TW5

      Are carbon emissions the only side effects of burning oil? The obvious answer is “no” so you’re actually taxing economic productivity along with carbon emissions. Furthermore, the founding father of pollution taxes warned against arbitrarily assigning a price to the unknown value of an externality. To address the problem, people invented cap-and-trade, which merely creates the perverse incentive of rewarding people for polluting less than their neighbors.

      We know, with relative certainty, the value of reduced oil imports and lower household spending on gasoline. Pay people to make it happen.

      For instance, suppose we issued a $200 per mpg point-of-sale rebate for combined mpg over 25mpg, capped at $5000. If every car qualified for the maximum incentive, it would cost us just $90B per year. New car fleet economy would double in 1 year. We’d have demand stimulus for auto segments struggling with slumping demand. We’d have an oversupply of used fuel-efficient cars to help the lower classes and young drivers. Oil imports would plummet along with household gasoline expenditures.

      Paying people to perform is far more effective than taxing them away from something else.

    • 0 avatar
      TW5

      Is pollution the only consequence of burning gasoline? You’re taxing economy productivity along with pollution. Furthemore, the godfather of pollution taxes and negative externalities policy warned against arbitrarily assigning a tax value to an unknown externality.

      • 0 avatar
        VoGo

        The only US pres1dent who successfully implemented a carbon tax was Clinton, who also pres1ded over the highest economic growth in memory.

        You can be just as productive commuting to work in a Leaf or Prius as a Suburban or Durango. More productive if you take the train.

        • 0 avatar
          TW5

          He presided over historically low gasoline prices, as well as a crisis in Asia that sent capital flooding into US tech stocks. Serendipitously, the tsunami of capital flooding into the US, managed to boom the economy into the onerous tax increases of 1993, which effectively balanced the budget**.

          Carbon taxes had nothing to do with it.

        • 0 avatar
          TW5

          Clinton presided over historically low gasoline prices, and an Asian crisis that sent money flooding into tech stocks. Serendipitously, we boomed our way into the onerous income tax increases of 1993.

          Carbon tax was irrelevant.

  • avatar
    cartunez

    Oil is down because of the current strength of the dollar or should I say the lack of strength in any other fiat currency. I don’t dwell on it but I do enjoy not spending as much at the pump. Everyone claims the wanna help the poor but then when a commodity like Oil goes down they say the sky is falling. The poor are especially sensitive to the price of gas as they usually have to travel farther for lower wages. Personally I can’t wait for gold prices to fall. I would enjoy getting my hands on under 500 an oz gold.

  • avatar
    FormerFF

    “Employment in the Oil and Gas Sector has grown 40% nationally since 2007, representing the lion share of all private sector job growth in the United States economy since the Great Recession.”

    I can’t find any supporting data on this. It looks to me like the total increase in direct employment in the oil and gas extraction industries is at most 200,000 jobs, which is only a few percent.

  • avatar
    28-Cars-Later

    Excellent article.

    I have two tidbits:

    -You gloss over the details of the 1997 ASEAN crisis which essentially produced the oil price fall of 1998. I find this odd since you go into such rich detail on the 1986 crash.

    -I found what I believe is a typo for “1986” since you reference 1986 and then in a later sentence 1998:

    “In 1996 you could do the same in Houston, with blighted neighborhoods spotted with abandoned homes falling into ruin.”

    • 0 avatar
      APaGttH

      Not a typo.

      Was pointing out that a decade after 1986 you could still see the impact of the oil crash in the Gulf Region. I use to go to a certain unbuilt subdivision off of Highway 6 on the west fringe of Houston to run hot laps through the abandoned streets. ;-)

      What’s interesting is I was concerned as I reread (I actually did three edits and I thank TTaC for their patience as I fired off rewrites) during my edits that the paragraph was confusing.

      My concern was correct – lesson learned for the future if I write more.

  • avatar
    orenwolf

    Extremely well written and thorough. Thank you!

  • avatar
    thegamper

    The result of the current market winds will be to lift restrictions on exports of US shale oil and other natgas/petroleum products. Thus flooding the Saudi’s high price markets with cheap(er) North American products. It will bring world market to equilibrium and prevent the collapse of the booming US energy sector.

    That is my opinion anyway. It seems like a good response to what the Saudi’s are doing.

    • 0 avatar
      APaGttH

      No.

      The Saudi oil isn’t high priced. It’s far cheaper than US shale oil and even cheaper than Canada tar sand which is cheaper than US ethanol which is cheaper than Venezula which is cheaper than Iraq which is cheaper than Iran.

      Keystone XL would enable Canadian tar sand oil to be far more easily processed and exported, but that doesn’t change the fact no matter how you want to torture economics 101 that it costs about $85 a barrel to get a barrel of oil from sand out of Canada. Nothing that the Saudis do make that more expensive or cheaper. The cost to extract is a fixed cost only impacted by regulations (up or down), technology improvements (typically down) and the value of local market currency to the USD (as the price of a barrel of oil is tied to the value of the US dollar).

      You can’t mess with the laws of supply and demand.

  • avatar
    Big Al from Oz

    APaGttH,
    A very good article.

    I do mostly agree with your sentiment and the direction we are heading in.

    The Canadian tar sands are quite costly to process due to the energy intensiveness of the operations.

    I have also read articles of late that some smaller operators on the periphery of this fracking business have stopped/slowed buying engineering supplies, stores, etc for either production or exploration.

    This is in Texas. I’m not too sure about the Dakota fields. I would suspect the same.

    The larger players are still in the game with the fracking.

    One are of your commentary I do disagree with though, which is quite subjective on your part. That is the view the world has regarding the pricing of oil. I do think commodity pricing overall impacts all economies and not just primarily the US’es.

    The comment regarding the decline in US oil in the recent past decade or so isn’t just driven by the US’es ability to use the energy more efficiently. It is also driven by the fact the US’es economy has shrunk as a ratio of global GDP.

    In other words, the US isn’t really smaller physically, but smaller isn’t so much the big fish in the sea.

    Keep up the good work.

    Oh, have a look at the pressure natural gas is having on the cost of crude. It’s a “new” and quickly rising competitor.

    Alan

    • 0 avatar
      Roader

      “The comment regarding the decline in US oil in the recent past decade or so isn’t just driven by the US’es ability to use the energy more efficiently. It is also driven by the fact the US’es economy has shrunk as a ratio of global GDP.”

      Non sequitur. A country’s economic size in relationship to the rest of the world has nothing to do with its energy efficiency. That is, the US economy could be ten times larger – or ten times smaller – yet still use N units of energy per N dollars of GDP.

      • 0 avatar
        Big Al from Oz

        @Roader,
        My comment was in relation to this comment in the article; ” Five years later US energy use had plummeted from 25% of global consumption, to 20%.”

        As the US becomes a smaller part of global GDP it will naturally have reduced consumption of resources, even oil.

        It’s not that the US economy is smaller per say, but it is smaller and less relevant in how it impacts the global markets.

        This was evident during the GFC. The Chinese and some others made up and increased the use of commodities, even though the US, EU and Japanese economies didn’t.

        I do think as we continually globalise the US’es influence will slowly diminish. Even with this current “glut” of oil what can the US do? It is powerless.

        • 0 avatar
          Roader

          OK, Al. I took your comment literally. Your explanation makes sense in that context.

          Re: energy globalization: The US’s net energy imports have halved from 25% to 12.5% in the past five years and we’ll likely be a net energy exporter five years from now. I wouldn’t call that either diminishing influence or powerless. Quite the opposite. I believe it was this year that the United States became the largest oil & natural gas producer in the world, surpassing the Russian Federation.

          Happy days are here again. It’s almost as if we’re repeating moving from the Carter malaise era to the optimism of the Ronald Reagan presidency, despite our idiot federal government.

        • 0 avatar
          Roader

          [First reply got et up by a spam filter? Second time today.]

          Yeah, Al, your comment makes perfect sense in context. But as far as:

          “…the US’es influence will slowly diminish. Even with this current “glut” of oil what can the US do? It is powerless.”

          Umm, from all accounts this year the US became the world’s largest petroleum producer, snatching that title away from the Russian Federation. “Powerless” doesn’t quite describe that transition.

          “Incredibly sweet” is a better fit.

  • avatar
    Roader

    Excellent article. Something funny here:

    “Air conditioning remains the number one consumption device for electricity in American homes – cable TV set top boxes are now number two.”

    A room A/C is 1000 watts I’m guessing; central is at least 2500. A set-top box is 35 max.

    What am I missing?

    • 0 avatar
      APaGttH

      Click the link and read – number two in the above text goes to the study that covers it – set top boxes use a stunning amount of electricity. The short answer is cable companies don’t give a crap and consumers have no real choice.

      • 0 avatar
        Roader

        I did read the link. The link quotes yet another link to an LA Times article that gives zero evidence of how a 35 watt appliance uses almost as much energy as a 2000 watt appliance. Telling, though, was the big, bold cutout:

        “It is a classic case of market failure. The consumers have zero information and zero control over the devices they get.”

        Considering the lack of supporting facts, I assume it’s just another case of the Times’ socialist ideocracy.

      • 0 avatar
        Roader

        [First reply got et up by a spam filter?]

        Yeah, I clicked the Faux News link. And clicked the link again, an LA Times article that provides zero evidence that a 35-watt set-top box uses almost as much energy as a 2000-watt air conditioner. The only “evidence” I can find is:

        “It is a classic case of market failure. The consumers have zero information and zero control over the devices they get.”

        It sounds more like the Time’s regurgitating their typical socialist idiocracy rather than actual physics or accounting.

        • 0 avatar
          APaGttH

          A ten second Google search came up with this:

          http://www.howtogeek.com/197733/ask-htg-do-cable-boxes-and-dvrs-really-use-that-much-power/

          Then there was the own admission from the cable and satellite industry and this agreement reached:

          http://www.energy.gov/articles/us-energy-department-pay-television-industry-and-energy-efficiency-groups-announce-set-top

          Then there is this piece from Xcel Energy.

          http://connect.xcelenergy.com/minnesota/tv-energy-guide/

          And this…

          http://abcnews.go.com/blogs/business/2012/12/your-tv-set-top-box-never-sleeps-and-it-costs-you/

          When I did a search for “cable TV box electric use debunked” nothing came up to debunk the studies. No one argued against the findings on consumption.

          • 0 avatar
            Roader

            Hmmm. 35 watts vs. 2000 watts.

            Do the math.

          • 0 avatar
            danio3834

            I would think that the televisions themselves would be a greater overall consumer of electricity with a consumption in the range of about 300 watts and an average daily use of 5-6 hours.

          • 0 avatar
            APaGttH

            @Roader

            Just because 35 watts you keep 35 watts saying a figure 35 watts over and over 35 watts again while providing 35 watts no support 35 watts of your evidence 35 watts nor provide 35 watts any links 35 watts that disproves the multiple 35 watts studies 35 watts on this point doesn’t 35 watts mean you 35 watts are providing anything 35 watts factual.

            I have 35 watts provided multiple 35 watts sources 35 watts quoting 35 watts at least three different studies 35 watts that supports 35 watts the findings 35 watts on the electrical 35 watts consumption of cable 35 watts set top boxes.

            It is incumbent 35 watts upon you 35 watts to provide sources 35 watts that disprove 35 watts the studies done 35 watts by power utilities 35 watts, researchers, 35 watts, the government, and 35 watts the cable industry itself 35 watts.

            You can’t 35 watts dismiss 35 watts multiple, independent sources 35 watts and then dismiss them 35 watts because it doesn’t support 35 watts your unsubstantiated 35 watts position.

            The only thing 35 watts that comes close to supporting 35 watts is a couple of stories 35 watts that says that cable boxes 35 watts that are non-HD and 35 watts and non-DVR 35 watts which is barely 35 watts any of them anymore 35 watts consume around 35 watts when 35 watts in stand by mode.

            The course of this argument 35 watts is so silly anyway 35 watts because the point 35 watts is that 35 watts many electrical devices 35 watts have advanced 35 watts significantly 35 watts in how little power 35 watts they use. My circa 2008 47″ 1080P TV 35 watts uses 8X 35 watts the power 35 watts of of circa 2012 35 watts 55″ TV 35 watts as an example.

            Oh – and 35 watts.

          • 0 avatar
            Roader

            2000 watts divided by 35 watts = 57.

            A 35 watt cable set-top box would have to run 57 hours per day to equal the same amount of energy used by a 2000 watt air conditioner running for one hour per day.

          • 0 avatar
            Pch101

            “a high-definition cable or satellite set-top box when combined with a high-definition DVR uses up 446 kilowatt hours per year. That’s more than a new Energy Star rated 21 cubic-foot refrigerator, which uses 415 kWh per year”

            The key word is “DVR.” It’s basically a computer that is operating 24 hours per day. If the math above is correct, then it is consuming 51 watts per hour, not 35.

            http://www.cnet.com/news/study-dvr-set-top-box-use-most-energy-at-home/

          • 0 avatar
            Roader

            Nothing in this article about a DVR, but 446 kilowatt hours/year divided by 8760 hours per year = 51 watts.

            2000 watts divided by 51 watts = 39. A cable box with an internal DVR would have to run 39 hours a day to equal the energy use of an air conditioner running one hour per day.

          • 0 avatar

            Roader,

            Set top boxes run 24/7 in most houses and consume a large percentage of their wattage even when off. AC may run a lot down south but in most of the country it’s used 2 months out of the year. Which is how you end up with the figure.

  • avatar

    There is NO point to playing “chicken” with the Saudis. Maybe half of the recent US rigs need to shut and go on vacation for weeks. Canada too. The “free-market” can deal ya nothing but “12s” all night and its best to just walk away and come back another day.

    Now would be a good time for our gutless Congress to throw a nickle or two at the Fedgastax that hasent moved from 18c/gal (24 for diesel) for TWENTY years to work on our pathetic infrastructures $2TRILLION backlog. TTACs is, one blown tire or bent rim or unplanned “General Lee” event is easily worth a buck a week.

  • avatar
    highdesertcat

    Happy Days are here again, indeed!

    The irony for me is that my wife started working from home on 1 Oct 2014 and our consumption of gasoline is near nil. We may go to town maybe once a week or less.

    Today being payday I cashed out my bank accounts like I do every month and was amazed at how much money I still had left from last month, and the month before!

  • avatar
    jimbob457

    Most all of what was said in both the article and the subsequent commentary is basically true, imho.

    One additional important point. Fracking is not just some oddball mining technique that is applicable to a few geologic sweet spots. It has general application.

    This means that the current dilemma of the Saudis and other traditional oil and gas producers is not just a short-run problem. It is inherently a long-run problem. Fracking technology is not rocket science, and it should eventually transfer with little problem to other lands.

    I have seen what fracking did to the US natural gas market. Granted, producing liquids is more complex than producing gas, but it shouldn’t be any surprise that within a few years fracking broke the oil price as well. As always, the exact timing was political. No kidding. See $10 oil and the Jordanian succession in the 1990’s.

  • avatar
    SaulTigh

    I bought a 5.0L Ford F150 in May on a 1.94% loan and gas around here is down a whole $1 since that time. I for once may have timed something just right. Glee!

  • avatar
    reclusive_in_nature

    Loving the veiled butthurt coming from the Church of Manbearpig, “tax fuel to influence Americans’ behavior” crowd, and my personal favorite, the anti-SUV and powerful/large car crowd.

    I hope every sub-$3.00 a gallon gas station sign you people drive/walk/bus by feels like a giant middle finger waving right in your faces.

    May it last as long as it can.

  • avatar

    Thanks Obama.

  • avatar
    cartunez

    I have a Accord Hybrid and Land Cruiser either way is fine with me.

  • avatar
    JD321

    And here I was hoping oil prices would go to $200 a barrel in order to starve the retarded chimps (aka, The Poor) off the roads…the same stupid public school parasites that demand to be taxed/owned even more. :)

    two reasons why you owners are lowering the cost of oil:
    1. To try and stop the global economy from collapsing.
    2. To mess with Russia. Your owners want to expand Western Europe past Moscow so one political psychopath named Putin can’t threaten to murder millions of people by stopping oil and gas supplies to Europe in the middle of winter.

  • avatar
    ihatetrees

    >>A serious oil bump is coming (I won’t say crash – yet , but bump) – and that’s problematic for the United States in particular.<<

    'Problematic' for the US? Maybe for a few states and Canadian provinces. But for the US as a whole – that's horse hockey.

    Low oil prices benefit the vast majority. Period.

    Outside the obvious consumer side of lower energy costs (which is huge in itself), there are other significant unseen benefits. Lower manufacturing costs and cheaper raw materials have given manufacturing (in the midwest and certain north east areas) a huge lift.

    Welders in ND may take a hit to their ~$100K/year, 70+ hours per week lifestyle, but skilled trades in most of the rest of the nation are trending toward full employment. Good luck finding new tool makers in certain areas without paying a premium to BOTH the new hires AND your current employees (so they don't jump).

    OK. So oil patch states like ND and Wyoming (and the western Canadian provinces) will go through a boom-bust contraction. Sure, the TeeVee and j-skool economic illiterates will play out the distress as prices fall and more transient workers pack up. But not seen by these dopes are the 10 other workers benefiting from low cost power, plastic and other raw materials that flow from cheap oil.

  • avatar
    jpone

    Great article. I’ve been digging into this oil stuff lately because I’m in the process of buying investment property in Austin, TX. The real estate market there has booming for the last several years. I’m trying to figure out if cheap oil is going to whack Texas as hard as it did in the 1980s.
    In the everything will be alright column:
    -TX state budget is only 8% funded by oil related tax revenue
    -Austin is less of an oil city than Houston.
    -TX govt. has a healthy rainy day fund for this very reason

    In the run away column
    -The TX economic miracle has basically coincided with fracking over the last 8 years.
    -Only 2 months inventory of resale houses in Austin. 6 mo is normal.
    -Lots of high paying tech and university jobs there
    -Fastest growing city in the US

    What do you think?

    • 0 avatar
      jimbob457

      Don’t do it. If you do, you will end up as the bigger fool left holding the bag. I experienced the 1980’s in Austin real estate. Percentagewise the impact will be less this time, but 50% of screwed is still screwed and broke to boot.

  • avatar

    1.65 euro per liter here in the Netherlands. So, that is still close to $8 per gallon.

  • avatar
    Chocolatedeath

    One of the longest articles I have read in a while. Thanks. It was interesting and I didnt start looking at other sites or get up in the middle. Very informative. I dont pretend to understand such things as oil prices but I enjoying looking at different views of why things are the way the are.

  • avatar
    Sparafucile

    I don’t see anything about a significant component in the pricing of oil.
    Speculation.
    Since we don’t buy oil directly from the producer or have it custom refined for us ( although I would like some 100 octane gasoline ), someone else has to own it from the well to the refinery. In that stage it’s a commodity, so when it looks like the price will rise, people make a speculative investment and buy oil. That demand is what drives up the price so quickly. I’m not knocking that because this gives us an uninterrupted supply. When the price starts to fall fast enough to scare investors, it plummets as the speculators try to cut their losses. The added incentive is with excess oil not being refined, the owner/speculator has to pay to store it until a refiner needs it. It’s much more complicated then even this verbose article describes.

    Iraq supplies are in danger of ISIS control. Political events like these usually have the speculators buying. In this case nothing seems to be able to stop the plunge to the bottom.

    Though the Russians aren’t losing money selling oil, they no longer have the Oil income to cover all the other bills.

    Delivery fleets are converting to natural gas, which we are up to our eyeballs in. Also people are converting to gas heat which frees up more oil to be refined into transportation fuel as opposed to heating oil.

    If the Saudis are gambling their cash reserves to put US drillers out of business, they may have sealed their own fate. Their infrastructure is in bad shape and they need to invest their reserves in that to keep production up in future years.

    People still haven’t adjusted their budgets for long term cheap gas. If it goes back to $4 it won’t be such a shock.

    The real problem is the reduction in coal production, which is powering the AC and set top boxes. Drastic changes in regulations will skyrocket the cost of electricity, until we start using our transportation fuel to make electricity, at whatever that equilibrium is.

    Fracking technology is new and the cost to frack new deposits will be driven down, just like the price of PC’s or their replacement by tablets.

    Of course a big component to the price of gas is demand, and many people are still unemployed, so haven’t been commuting for a couple of years now. It takes a long time to replace old vehicles. While manufacturer’s fleet mileage has gone up ( at great economic cost) I haven’t seen a number for average fuel economy of vehicles on the road. I can’t buy a new one. Not that many new more efficient cars have replaced less efficient cars. I would wager total miles driven is still down.

    Of cour4se as supply goes down, prices will rise and production will go up. That again is where the speculator comes in, distorting the real economic price of a barrel of oil.

    Also consider the oil bubbles created the local real estate bubbles, as when 10 more house are needed, 50 get built. The bust is inevitable, just hastened by the oil bust.

    • 0 avatar
      TorontoSkeptic

      I know this thread is old and dead but… I just want to point out that fracking technology is not “new” at all, the basic idea has been around since the 19th century and it’s been used successfully since the 1940s. Even the really large-scale fracking has been around since the 60s, it just wasn’t economical.

      Otherwise I completely agree on speculation. A 40% drop in 3 months doesn’t happen because production changes (and it really hasn’t even changed very much!). It’s about perception, who’s long/short, who’s moving out of commodities, perceptions of Chinese demand, etc.

  • avatar
    johnny ringo

    This is an excellent article, I think there are several factors at play; oil prices have fallen because there’s currently a glut on the market caused in part by fracking in the U.S and Canadian production from the tar sands. By keeping production at the current level the Saudis are hoping to drive down the price to the point where fracking becomes unprofitable..I think the Saudis are also worried about the religious extremists-ISIS-in their backyard who are largely financing their operations by selling oil on the black market.
    Gasoline prices where I live have now fallen to about $1.87 a gallon which is great, but don’t expect it to last. Correct me if I’m wrong, but I’ve read that the Saudis can sell oil profitably at prices as low as $20 a barrel which is well below what fracking operations need-about $70 a barrel to remain profitable.

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