By on January 14, 2015

David Obelcz is back with Part Two of his series on oil prices. Part One can be viewed here.

In the 1966 Spaghetti Western classic The Good, the Bad, and the Ugly, the three principal characters come together in what is considered the most iconic standoff in cinematic history. Three parties hostile to each other and the first one to shoot is the most likely loser.

At no time in modern history has the overall global economy been so good and the commodity price of oil crashed so fast, and so hard. As of this writing short contract West Texas Intermediate (WTI) is below $46 USD a barrel with no sign of price support. We are deep into market crash territory with pumping out of the ground tipping over into a money losing proposition. OPEC nations, state producers, and global multinationals have each other in check on the world chessboard, and no one wants to move their pieces.

Although there are plenty of conspiracy theories on why the price of oil has declined so fast, it is the simple economics of supply and demand. Production over capacity has bloated from 700,000 barrels a day this summer to 1.3 million barrels. Although there is a growing list of drilling rig contract cancelations, existing production sources are pumping more. Over supply will continue to grow because the three goliaths of oil production (OPEC nations, state owned and corporate producers) are fighting to cling to their existing market share at any cost.

Russia has increased production through 2014 despite a battered Ruble and the price of oil sitting at less than half of where it needs to be to support the Russian government. Russian producers are hoping to capture more market share, ironically from the same western European nations that Moscow is growing increasingly resentful of, to help bolster overall revenues. The Putin government position to the Russian people is the price decline is an economic assault on their nation. This message resonates well outside of major population centers, but dissatisfaction and fear of a 1998 grade collapse are growing.

Vladimir Putin has enjoyed high approval ratings because the standard of living has improved dramatically under his leadership. For Putin to maintain power, he has to keep the Russian economy out of collapse and cannot permit a repeat of 1994 and 1998. Eleven-percent inflation, 17% interest rates, and a three-trillion Ruble budget deficit projected for 2015 is a tough hill to climb. Although the General Motors strategy of, “we’ll make it up in volume,” is folly, it keeps people employed and revenue flowing.

Saudi Prince Alwaleed bin Talal has stated that Saudi Arabia will not reduce production regardless of the direction of the market, and that oil will never be $100 barrel again. The reason behind this is the wellbeing of the Saudi royal family and the viability of the Saudi government is interdependent on national prosperity.

Compared to their neighbors, Saudi citizens enjoy a higher standard of living, which makes the average Saudi less likely to want to overthrow the existing, western friendly government. During the oil crashes of 1986 and 1998, the OPEC cartel, led by Saudi Arabia, agreed to reduce production capacity to help stabilize oil markets. A number of OPEC nations cheated and didn’t cut production, causing Saudi Arabia to permanently lose market share after each correction. Although you can make a strong case that the Saudi government turns a blind eye to those who fund radical Islam in other parts of the world, they are showing little interest in allowing it to ferment inside their own borders. For the Saudi royal family, heads could literally roll if their influence in the global oil market is lost.

In the Powder River Basin, Eagle Ford, Bakken, and the oil sands of Canada, leveraged producers and corporate interests are looking for long term return on investment, and increasingly economic survival. A growing list of analysts are saying that Texas should prepare for a recession, and the gravy train of $30 an hour day labor jobs in North Dakota are coming to an end. Smelling blood in the water against the other large producers in the world, the strongest players believe they can keep the pressure up until someone cuts production, and capture the smaller producers as they consolidate.

In prior oil crashes, ExxonMobil, BP, Chevron, etc. have treated commodity weakness as buying opportunities. Because major oil corporations are morphing into energy companies, are vertically integrated, and have record cash reserves, they can carry out a long term war of oil price attrition. The contract drillers, their suppliers, rig operators, and the support network are already reeling from the price collapse, but with a dividend yield of more than four-percent for blue chip oil stocks, shareholders will remain patient, for now.

No one wants to give up market share because no one can afford to give up market share. If anyone cuts production, the risk is becoming irrelevant in this post oil crash market. Anyone who yields market share today, yields it forever.

To get an idea of how much global production has grown, the U.S. Energy Information Administration (EIA) has tables of data you can download for fun and profit. Since 2008 US oil production has almost doubled. From September 2010, when the Great Recession started to wind down, to September 2014, US oil production has increased 31%, making the United States the largest oil producing nation in the world.

 

Top Five Oil Producing Nations
Country Production (thousands of barrels per day) Four Year Increase/Decrease
United States 14,246 30.80%
Saudi Arabia 11,558 3.98%
Russia 10,564 3.65%
Canada 4,612 27.86%
China 4,470 -0.03%

Source, USEIA – http://www.eia.gov, as of September 2014

Of the top ten oil producing nations, only Iran has had a statistically meaningful decline in production during the last four years. Recent reports of United States oil production growth slowing to the lowest level in 5 years makes for great headlines, but when you’ve grown 90% since 2008, you reach a point where deceleration is inevitable.

At the same time of this unprecedented expansion in production and the complex geopolitical situation of radicalization and militarization, oil consumption growth has dropped to just 2/10 of a percent through 2013. More remarkable, although all the data isn’t available, it appears for 2014 global consumption increases has flattened to zero, and may have even retracted.

China is expecting to grow by a relatively tepid 7%, India has cut their growth forecast in half, Japan is expected to be flat, and Russia is expecting to contract by 3%. Although the United States is enjoying strong GDP and job growth, conservation programs and increasingly stringent CAFE standards are having a real impact on consumption. In the January 13, 2015 short-term energy outlook released by the EIA, global consumption is expected to grow 900,000 barrels per day through 2015, even when factoring increased US gasoline consumption forecasts.

Top Five Oil Consuming Nations
Country Consumption (thousands of barrels per day) 2012 to 2013 Increase/Decrease
United States 18,961 2.55%
China 10,116 1.37%
Japan 4,530 -3.49%
India 3,509 1.71%
Russia 3,320 -2.21%

Source, USEIA – http://www.eia.gov, as of 2013

2015 is shaping up to be the 1967 of this generation. We are in a golden age of power and efficiency. Three-hundred horsepower is commonplace and 500 reliable horsepower, or more, is obtainable to a wider demographic than at any other time. Buyers can choose from the Charger, Challenger, Mustang, Camaro, Corvette, or SS if they want to get their ‘Merica old school V8 rear-wheel-drive on. The Hellcat, Shelby GT 350, magnetic ride control and manual transmission equipped SS, and C7 couldn’t have come at a better time. Never mind an almost endless list of sedans, CUVs and SUVs with performance numbers that makes a 1967 GTO gimpy in comparison.

Many who didn’t learn to drive in the Detroit malaise and British Leyland era believe a traffic ramp sprint to 60 MPH (or 62 KPH if you please) that takes longer than eight seconds is dangerously slow. The fears of a performance Armageddon driven by stringent global fuel economy standards appears to have been completely unfounded (your author, guilty as charged). A growing list of states is raising interstate speed limits and consumers are enjoying at least a short term gain in disposable income.

The love affair North America has with fullsize trucks will continue unabated, and will accelerate this year. Manufacturers with strong CUV and SUV line ups can look forward to growing demand in 2015, while mainstream subcompact, compact, and midsize sedan sales will slow. Think Jeep had a good 2014, wait until you see 2015. The General Motor twins of the Colorado and Canyon, as well as the Chevrolet Trax are, for the short term, ill-timed. For Ford, 2.7 liter Ecoboost engines in aluminum fullsize trucks might not be as strong a selling point if gasoline had taken a path in the other direction. For the growing list of diesel powered cars, trucks, and SUVs that United States buyers can choose from, the timing couldn’t be worse. The premium both in Average Transaction Price (ATP) and at the pump for diesel means that the math simply doesn’t add up.

But what about those cars which aren’t powered by gasoline, or are only partially powered? Tesla continues to benefit as a boutique luxury brand, and should be immune from current conditions. The Toyota Prius line up will further decline year-over-year in 2015. Low gasoline prices coupled with low ATP on Camry and Corolla makes the Prii a tougher sale. Chevrolet Volt version 2.0 is appearing at the wrong time. The Toyota Mirai should be immune to market conditions because of its green credentials and the future is now hydrogen fuel cell driveline. Because of its early adopter cred, the Mirai is likely a bigger threat to Tesla Model S sales than gasoline under $2 a gallon.

So what about the price of oil? With consumption growth not outstripping production through 2015 barring some huge unforeseen event, the price can only go down. History indicates the lowest it could go is about $23.50 a barrel, which when adjusted for inflation, is at the 1986 basement. I see oil finding support at $28 a barrel in the summer of 2015, and gasoline future dropping below $1 a gallon USD. The Midwestern states which typically have lower motor fuel costs could see the average price of regular gasoline hit $1.50 a gallon by the start of the summer driving season.

If you were thinking about a cross country road trip in a Challenger Hellcat, this is the year to do it.

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213 Comments on “Ur-Turn: The Truth About Oil, Part Two – The Good, The Bad, And The Ugly...”


  • avatar
    danio3834

    “If you were thinking about a cross country road trip in a Challenger Hellcat, this is the year to do it.”

    Don’t mind if I do. Although it would get better highway fuel mileage than my crew cab pickup.

  • avatar
    skor

    “Compared to their neighbors, Saudi citizens enjoy a higher standard of living, which makes the average Saudi less likely to want to overthrow the existing, western friendly government.’

    Ha! Oh, you’re serious. Let me laugh even harder, BLAHAHAHAHAHAHAHAHAHAHAHAHA.

    Ever been to Saudi Arabia? Ever been to Russia? I’m gonna guess negative to both. The Saudis, actual Saudi citizens, not guest slaves…..er, uh, I mean guest workers…..are some of the most entitled, whining, narcissistic, self important, legends-in-their-own-minds every to have wasted oxygen. Take away some of their comforts and see what happens to the ‘royal’ family which would have gotten their heads chopped off years ago if it wasn’t for their US supplied Delta team bodyguards. But you are so right, the people who put Hitler & Co out of biz, in subzero weather, are going to start a revolution because they can’t get the latest iCrap.

    • 0 avatar
      APaGttH

      …take away some of their comforts and see what happens to the ‘royal’ family…

      That is basically what I said above. Americans enjoy one of the highest standards of living in the world, and many would call us whining, self-entitled, narcissistic and self-important. These “awful” traits don’t negate that the average “middle class” Saudi has it was better than the average “middle class” Yemini, or, if you’re missing current events, Iraqi or Syrian.

      I also wrote, “For the Saudi royal family, heads could literally roll if their influence in the global oil market is lost.”

      I was not implying that the heads of dissident Saudis and their financial backers would roll, I was strongly implying it would be the Saudi royal family. As I linked to, the Saudi’s are already “shortening” dissidents at an accelerating rate. The funding of terrorist activity outside of Saudi Arabia, funded by Saudi Arabian citizens is well documented. The Saudi government has had a “not in our backyard” policy going back to the late 1980s. They know very well where their bread is buttered. Your response is odd to me as we are in complete agreement – how you missed that, I have no idea.

      …you are so right, the people who put Hitler & Co out of biz, in subzero weather, are going to start a revolution because they can’t get the latest iCrap…

      Not sure where you’re drawing that conclusion of “revolution” if the Russian economy collapses to 1998 levels. They didn’t start a revolution then either. However, if the Russian economy were to collapse, it would seem very logical that the love affair with Putin and his policies would be over. Putin’s continued leadership of Russia is attached intimately to the fortunes of this black commodity called oil. I’m quite integrated in Russian circles and my future bride is Russian – to answer part of your question.

      • 0 avatar
        skor

        The Russian economy collapsed in 1998 after the Russians imported a metric crap ton of Western financial advisers to help them set up a market oriented economy. What those advisers did was loot the place. Fool me once…..

        • 0 avatar

          Jeremy Sachs? He did his bit to bankrupt us, too. Same timeframe.

          • 0 avatar
            jimbob457

            Jeffrey Sachs?

          • 0 avatar

            Yes, sorry.

          • 0 avatar
            Kevin Jaeger

            I’m amused how so many people try to blame Western economists for corruption in places like Russia and Brazil. You know, free markets work well in less corrupt political cultures.

          • 0 avatar

            Where did I blame corruption on anyone? His policies, or not his, though I remember reading a lot about him and other whiz kids, in that timeframe, led us down some interesting paths. Freed the economy somewhat, let us breathe, improved a whole lot of things, but inevitably led this and other countries down holes that did us a lot of harm. This country went bankrupt twice, high unemployment etc.

            His version of the world led to the Asian crisis that crippled a lot of the developing countries. Non-sustainable.

            I take a more balanced approach. I’m not anti market, I’m not anti government. Both can work well.

            As to corruption it is a home grown phenomenon. We need no lessons fro foreign bureaucrauts.

            Get a grip.

      • 0 avatar
        jmo

        ” the people who put Hitler & Co out of biz, in subzero weather, are going to start a revolution because they can’t get the latest iCrap…”

        Ask the Romanovs. Putin and his oligarch friends could end up like the Grad Dukes, Counts and Princes of the Russian Empire of old.

        • 0 avatar
          28-Cars-Later

          Doubtful but I think this is what the State Department would prefer.

          • 0 avatar
            jimbob457

            I do beg to differ. The U.S. foreign policy establishment has generally opted in favor of political stability almost no matter what. Even Bush 41 tried, for a while, to hold the old Soviet Union together.

            War, it seems, has generally been bad for trade and for business in general. Despite occasional not-very-successful straying from the path, localizing wars and keeping the global peace seems to have worked O.K. for the last 80 years.

          • 0 avatar
            28-Cars-Later

            “The U.S. foreign policy establishment has generally opted in favor of political stability almost no matter what.”

            The same overall foreign policy establishment who invaded Iraq twice, occupied Afghanistan, encouraged revolts in Tunisia and Egypt, assisted the UK/France in toppling a stable Libyan gov’t via force, instigated a coup d’état in Ukraine, and so desperately wanted to attack Syria to the point where they backed the supposed enemy Al-Qaeda who then morphed into IS and conquered 1/3rd of Iraq? State department policy post 1990 has been anything but stabilizing. The only peace which has been kept since WWII has been direct conflict between nuclear armed nations due to the existence of nuclear weapons, not simply diplomacy (the 1962 crisis notwithstanding). Their existence has allowed conflict between them to be localized to other nations in the form of proxy wars in Egypt (1956 Suez crisis), Korea, Vietnam, Angola, South America (Operation Condor), Afghanistan (1980), Iran/Iraq (1980-86).

          • 0 avatar
            skor

            You mean like what they did in former Yugoslavia? The Yugoslavs managed to put together a reasonably functional socialist/market economy that was far ahead of the basket cases in the rest of Eastern Europe. Western German did a lot of biz with the Yugoslavs, and was looking forward to having the entire country enter the EU after the USSR went tango uniform. Unfortunately, some folks in London and Paris felt very threatened by this. They were convinced that it would place the Germans in too powerful of a position. The US state department knew very well that there were forces working to destabilize Yugoslavia, and they did zip about it.

      • 0 avatar
        mkirk

        …the biggest “comfort” we could take from the Saudi royals is the ability to go to sleep at night knowing they are safe from the likes of Isis. Perhaps it is time to utilize that to our advantage. Maybe the house of Said can get the Chinese and Russians to be there defense force for a change. Personally I would happily fork over what it costs at the pump to keep Cracking and US sources profitable if it meant the next round of deployments to Baghdad were a problem for the People’s Liberation and Red Armies versus me packing my damn duffle bag again.

  • avatar
    thegamper

    It will be an interesting saga to watch unfold. Part of me is kicking myself for not buying a more powerful car, part of me thinks that those who buy believing gas prices will remain low indefinitely will ultimately get what’s coming to them in due time. I also really feel that just like in the run up, the speculators shorting oil on the way down are just as much to blame for the price decline, or moreso, than actual oversupply problems. It certainly would be nice if oil remained below $100 indefinitely, however, everyone in the oil biz is in it to make money. They will figure out a way to get it…..in time.

    • 0 avatar
      APaGttH

      One way or another, supply will meet demand. If cheaper prices go on for years, demand will rise because the lower commodity cost will drive more use – it’s human nature. Problem solved and the price goes back up. To your point, those who buy a 13/20 MPG vehicle thinking the party will never end? Big surprise (and if there is a sharp increase in price, almost assuredly a recession to follow).

      However consumers have shown over and over again their memory is very short. If you’re in the pickup and SUV business in North America – 2015 is going to be a great year.

    • 0 avatar
      dwford

      Don’t regret your purchase. use the savings to further reduce your energy consumption for the inevitable future spikes. You’ll be well ahead of your neighbors.

  • avatar
    Landcrusher

    Perhaps you can explain how market share lost now is lost forever.

    Without getting to in the weeds, most people, including me really, don’t understand that the best markets for much domestic oil which cannot be legally exported is outside the U.S. and that U.S. refiners still prefer the imported stuff.

    • 0 avatar
      APaGttH

      Great question on why US refiners prefer “foreign” oil. That one I can answer.

      In very simple terms oil is graded on two axises.

      How much sulfur is in it – that is sweet (little sulfur) and sour (a lot of sulfur).

      It is also graded on how light or heavy it is. Light and heavy relates to the specific gravity of the oil. So light oil has a lower specific gravity, heavy a higher one (there are other characteristics but keeping this simple).

      If you a refinery owner, you refinery is going to be optimized for certain ranges. So the equipment needed to refine heavy, sour oil is different for light and sweet.

      US refineries are largely setup to deal with “mid-weight” (not the actual term) and slightly sour oil. This is the oil that comes out of Saudi Arabia and Kuwait. No surprise when you look at historically where imports have come from.

      For this reason, the light, somewhat sour oil out of the shale, although easier to refine, doesn’t provide the best yield. So the heavier oil is preferred.

      So that’s why the “best” oil for US refiners, isn’t the “best” oil.

      As for market share the simple answer is if I start buying from X I’ll keep buying from X unless X makes it harder to buy. Then I’ll buy it from Y. If two years later X makes it easier, I still have no incentive to buy from X. The price is set by global conditions so I’ll keep buying from Y. X has lost me as a customer. The Saudi’s have been burned more than once and they refuse to slow production down and lose share.

      Hope that helps (and hopefully I found all the s!ds in here)

      • 0 avatar

        Yes, that did help. Especially at the part explaining why the Saudis won’t back down this time.

        So that leads to the next question. What is the future of OPEC? If the leader of OPEC won’t back down, no chnace for cheaters, will the cheaters still have an interest?

        One further question. Will African and South American production make any dent in this? Last I heard, here in Brazil, we were weened from the Middle East stuff two decades ago. And mostly import the “poor” stuff from Africa and Venezuela, while we export our “good” stuff to make up the difference.

        One final question, tough one I know. How long do you personally feel until someone blinks?

        Thanks in advance!

        • 0 avatar
          APaGttH

          Some are saying OPEC is fighting to stay relevant. Some analysts are saying OPEC is already irrelevant.

          OPEC survives, strictly my opinion. Saudi Arabia can go a good two years at current market conditions before they eat through their cash reserves. Supply and demand will normalize.

          Wish I knew more about South American producers outside of OPEC but I don’t. Also my understanding that Brazil is pretty energy independent. A number of African producers are OPEC members – Algeria, Angola, Libya, and Nigeria. Garden spots of the universe ;-) Well OK, Angola has done a solid job of rebuilding.

          Fracking is changing everything. There are some stories about Russian influence in supporting anti-fracking activity around the world, especially in Eastern Europe. Turns out there is shale oil all over the place.

          How long? 18 to 24 months, strictly my opinion. Who blinks? Canada first, the oil sands are very expensive compared to other locations. If US new well production flattens out, the problem fixes itself.

          OPEC and Russia hold the line – but Putin’s political capital will likely be damaged.

          Winners? Just about anyone who buys anything. Between lower costs for energy, transportation, storage, fertilizer, and climate control. Balance sheets are going to look good.

          Michelin sure isn’t going to drop the price on tires, but their margins are certainly going to improve.

        • 0 avatar
          APaGttH

          Some are saying OPEC is fighting to stay relevant. Some analysts are saying OPEC is already irrelevant.

          OPEC survives, strictly my opinion. Saudi Arabia can go a good two years at current market conditions before they eat through their cash reserves. Supply and demand will normalize.

          Wish I knew more about South American producers outs!de of OPEC but I don’t. Also my understanding that Brazil is pretty energy independent. A number of African producers are OPEC members – Algeria, Angola, Libya, and Nigeria. Garden spots of the universe ;-) Well OK, Angola has done a solid job of rebuilding.

          Fracking is changing everything. There are some stories about Russian influence in supporting anti-fracking activity around the world, especially in Eastern Europe. Turns out there is shale oil all over the place.

          How long? 18 to 24 months, strictly my opinion. Who blinks? Canada first, the oil sands are very expensive compared to other locations. If US new well production flattens out, the problem fixes itself.

          OPEC and Russia hold the line – but Putin’s political capital will likely be damaged.

          Winners? Just about anyone who buys anything. Between lower costs for energy, transportation, storage, fertilizer, and climate control. Balance sheets are going to look good.

          Michelin sure isn’t going to drop the price on tires, but their margins are certainly going to improve.

          • 0 avatar

            Thanks!

          • 0 avatar

            As to Michelin, yeah, I know right?

            As to here when I said Africa I meant mostly Nigeria and Angola. We also seem to buy some from Venezuela and Mexico.

            Here, the state company Petrobras has had some big problems (corruption, price meddling ad nauseuam). However, they seem to have large reserves, whuch guarantees their future. They are also heavily invested in deep water pre-salt drilling. Seems, however, price of oil must be above 40 dollars to make that feasible.

            We were energy independent a couple of years back, but then the country grew, production didn’t keep up. Back to a negative balance in the oil item in the national budget.

            Also, seems there are some good shale sands in the south of the country, specially Paraná state. Not much has been done, as Petrobras has been heavily tilted toward the deep water stuff.

            Here we also have a big unresolved boo-ha-ha as to royalties.

            Will be interesting to watch that industry here.

            Stock price all time low for Petrobras. Time to buy it would seem…

          • 0 avatar
            redav

            Petrobras is in an interesting situation. They’ve basically stopped buying new equipment because they ran low on cash, and I’m sure the low price on oil is putting the hurt on them. But as you note, Brazil has a very different energy consumption market than other countries, and I don’t know all the other players/forces that affect them.

            I don’t do market analysis, so I can’t guess what will happen with them, but it should be interesting to figure out.

        • 0 avatar
          Pch101

          OPEC lost control of the oil markets when the world moved to market-based pricing. That was thirty years ago.

          The average person confuses the 1970s, when OPEC had the ability to strangle supplies, with the current market era when futures markets help to set the price. The market mechanisms of the last three decades make OPEC far less relevant.

          • 0 avatar

            That is true, but it would still seem undeniable OPEC still signals the markets and manipulates other companies’ and countries’ decisions. In that way, still relevant it would seem.

          • 0 avatar
            Pch101

            The OPEC members don’t always have shared interests. Cartels have a tendency to fail for that reason, as the members are tempted to cheat.

          • 0 avatar

            Yep, agreed that is why I asked the author. Seems like if the leader of the cartel won’t “sacrifice”, the cartel loses power. However, they won’t go away totally I think. Though the stranglehold is long gone, they still influence.

          • 0 avatar
            Pch101

            The current OPEC states have maintained about 35-40% market share over the last couple of decades. High prices, low prices, there hasn’t been much difference.

            I would say that they matter little. Demand for oil and demand for oil futures contracts are both more important.

            What we’re really witnessing is the collapse of the speculative bubble that began around 2005 (driven by expectations for China and the Iraq war) and that was reignited by the financial crisis and dollar weakening via QE. The US economic recovery brings an end to QE, which pops the bubble for good. This is similar to the dot.bomb that hit tech stocks — the stuff was overpriced on the fundamentals until Mr. Market eventually came to pay a visit.

            And it is no coincidence that oil prices started to dive with the end of US quantitative easing. Combine that with US tepid demand growth and recession fears elsewhere, and there is little reason for oil prices to soar anytime soon. Some of the current oil price may be an overcorrection, but we won’t be seeing $100/bbl again anytime soon. (Eventually, yes, but not yet.)

          • 0 avatar

            Food for thought. Thanks Pch.

            EDIT the added paragraph (only saw it now), lends even greter weight to your argument. Now I can buy it, almost totally, though I still can’t evaluate how much OPEC is by now a buffoon, or still a force.

            Thanks for the insights.

          • 0 avatar
            hybridkiller

            Pch pretty much nailed it.

            $45/barrel is unsustainably low, just as $120 was unsustainably high. Equilibrium is probably in the $70-$80 range medium-term.

            The Saudis know they can’t manipulate the market as they once could – cutting output right now would gain them little in the long run. Maintaining production levels has more to do with trying to maintain their revenue stream – they need the money, it’s that simple. Severe budget cuts for them raises the specter of social unrest – that’s their larger concern.

            Yeah I know they have a large cash surplus, but they could burn through that in a few short years – bear markets in oil can last much longer than that.

            They may be many things, but they’re not stupid.

          • 0 avatar
            jimbob457

            Uh uh. There are only a few things to remember.

            1. It takes about 90 days for a supertanker to go from the Gulf to Europe or Japan/China.

            2. Very few know for sure how much oil is actually being shipped at any given time, even out of the Gulf. It’s kinda a secret, often.

            3. Demand 90 days hence is always uncertain depending on weather and economic conditions.

            These three uncertainties (and maybe some political uncertainty) are what makes the oil trading market. All the rest has not changed very much since 1974 – OPEC is still a cartel, although with quite a bit less power than it once had.

            The oil business remains secretive. Lots of the published data from outside the US are, from time to time, bogus.

      • 0 avatar
        Landcrusher

        Right now, a lot of refiners are likely happy they have not reconfigured for the oil coming out of some of the shale plays, but you have to wonder why they never did. I guess that supports your market share explanation.

        What I’m afraid of is that so much of our good new jobs have been oil production that the traditional bounce from cheap oil will get dampened by the losses from oil production.

        We are also in a strange position where we are protecting the Kingdom and its shipping while they are using predatory pricing to knock our companies out of business.

        • 0 avatar
          APaGttH

          I’ve noodled on this one, and as a macroeconomic geek would say this is more in my wheelhouse than the dynamics of big oil (but big oil sure is tied to the macroeconomic health of the world).

          For the oil patch states – North Dakota, Wyoming, Oklahoma, and Texas in particular. And to a lesser extent their neighbors, South Dakota, Colorado, and Nebraska – local recession is practically assured. For Wyoming and North Dakota, the ridiculous salaries, real estate prices, and endless mountains of work weren’t sustainable anyway.

          The country has had regional recessions while maintaining overall growth. The significant increase in free capital for consumers to spend on other things will prop up the overall economy. Key regions in the fly over states and Gulf are going to hurt. There are already layoffs going on, wage cuts, etc.

          For those being laid off in North Dakota the situation for some is particularly dire. Part of the, “sorry the bottom dropped out and you don’t have a job anymore,” package includes losing their housing – which was company provided due to either insanely high prices, or no where for people to stay in the first place.

          • 0 avatar
            Lorenzo

            I wouldn’t wager a cent on recession in Texas. Most of it’s increase in production has been coming from the Spraberry play in the middle of the West Texas field that has produced about 30 billion barrels so far. Drillers bypassed the Spraberry since it required tech that now exists – horizontal drilling.

            The Spraberry field is like a layer cake, with multiple layers of oil bearing rock, similar in quality to WTI. If you own a lease – a surface area – you own many layers of producible deposits. when one play is spent, you drill down to the next layer and go horizontal, with the infrastructure on the surface re-used.

            The cost of production is guesstimated at $13-$17 per barrel, and largely makes the play profitable long after the Saudi cash reserves are drawn down. The huge margins are now thinner, but the profits are still substantial, and the remaining West Texas field is still producing, and it’s infrastructure is in place and paid for. IOW, it can outlast the Saudis too.

            The new Texas shale fracking in Eagle Ford will dry up for now, and the little guys in the Bakken are going to be clobbered, but they’ve already outgrown their pipeline capacity anyway. For Texas oilmen, if there’s money to be made, and where most of the new oil is coming from, there is, they’ll keep pumping like they always have in the past.

      • 0 avatar
        DC Bruce

        I have no idea what the initial in your moniker stand for, but I like the frog (or is it a toad?). More importantly, I’m glad I know whom to thank for a pair of very lucid articles on the current situation with respect to petroleum.

        So . . . thanks!

        It would be nice to understand the divergence between the drop in the price of diesel (such as it is) and the price of gasoline. So, that would be my suggestion for your next assignment, should you be so inclined.

        Regarding someone’s purchase decision on the next automobile, truck, SUV and whether they should pay a premium for fuel efficiency (e.g. diesel, hybrid), I have two thoughts.

        First, if you buy a thirsty vehicle, your family budget becomes more sensitive to changes in the price of fuel. So, if you want to reduce the risk of an upset to your family budget caused by a rise in fuel price, then avoiding a gas-guzzler is a good idea.

        Secondly, it’s worth the effort to quantify the change in dollars result from changes in the fuel economy of the vehicle you own, based on your own actual annual driving mileage. Under all circumstances, you will find that the savings from going to a, say 30 mpg vehicle to a 35 mpg vehicle are really quite small. On the other hand, going from a 15 mpg vehicle to a 25 mpg vehicle produces a pretty good savings. My own view is that, unless you’re interested in bragging rights or you drive 20,000 miles/yr. it’s really not worth it to go for a 30 mpg vehicle, especially since, if you drive that much (and are not a taxi driver) your driving is going to be more heavily weighted to highway driving that the “average” CAFE number.

    • 0 avatar

      https://www.google.com/search?q=opec+production+since+1973&tbm=isch&imgil=kyj3F-JoJn-hKM%253A%253BMIqPOu_HBg5XeM%253Bhttp%25253A%25252F%25252Fwww.wtrg.com%25252Fprices.htm&source=iu&pf=m&fir=kyj3F-JoJn-hKM%253A%252CMIqPOu_HBg5XeM%252C_&usg=__B0kQ8pP2761SeQCcHMYKJdiUJgM%3D&biw=1519&bih=725&ved=0CCsQyjc&ei=e723VNu1LNH2yQTZzILYAQ#imgdii=_&imgrc=kyj3F-JoJn-hKM%253A%3BMIqPOu_HBg5XeM%3Bhttp%253A%252F%252Fwww.wtrg.com%252Foil_graphs%252FPAPRPOP.gif%3Bhttp%253A%252F%252Fwww.wtrg.com%252Fprices.htm%3B800%3B600

      If it were about market share, why would OPEC be producing about the same amount of oil today as 40 years ago?

  • avatar
    Duaney

    With the tremendous oil production right here in the United States, I wonder if we’re still importing oil from the Middle East? I hope not.

    • 0 avatar
      APaGttH

      The United States is, but the number is plummeting. US oil imports total are projected to drop to 20% to 21% in 2015. The United States is projected to be “North American” dependent (that is the imports from Mexico and Canada could cover all import needs) by 2020 and fully independent by 2035. Those forecasts were based more on conservation than exploding demand when they were made – things are moving much faster than expected

      Fun fact if you live in the Pacific Northwest, almost every drop of crude oil comes from Alaska and Canada. Less than 10% is imported. Geography and cost structure creates a closed loop.

      Prices this low aren’t sustainable however. The geopolitical impacts in the Middle East in particular get pretty ominous if this is the new normal. Radicalization is all of our problem – and if the old systems fall apart, the movement will spread.

      • 0 avatar
        redav

        Indeed on the localization effect. When distribution from Alaska is distrupted, CA & the rest of the west coast sees a spike in gas prices that the rest of the nation doesn’t (because there’s a lack of infrastructure to get oil across the mountain states.

        Furthermore, going back to the point of refineries being set up to process certain types of crude, the CA refineries are set up for that Alaskan crude, so even if they wanted to import from say, Venezuela, they wouldn’t be able to work with it.

        It makes me wonder about the effects of the Keystone XL pipeline. Would the infrastructure motivate Canadian production to continue despite the low (and seemingly unprofitable) price? I don’t know.

  • avatar
    RogerB34

    FYI: The global economy is on life support including USA.
    Life support meaning dependent on central bank printing money, ZIRP and sovereign debt.
    Crude oil prices will recover.

  • avatar
    -Nate

    Let the weird comments begin =8-) .

    I’ll always try to own fuel efficient vehicles , even my 40 + year old pickup truck gets 20 MPG , I know that’s nothing these days but it’s what I like to drive , the rest : Diesels 25 ~ 34 MPGs , the metro 35 MPG consistently no matter how I drive it .

    Only the Russian Moto gets crappy fuel economy and I simply don’t care .

    -Nate

    • 0 avatar
      Drzhivago138

      What pickup is that?

    • 0 avatar
      Syke

      I’m the same way. My current standards for a daily driver are: four cylinders, manual transmission, daily 30mph or higher in my commute, and a reasonable level of enjoyment in my daily drive (handling & performance).

      I figure that, if gas is expensive, I’m paying less per fillup than the guy the next pump over. And if gas is cheap, I’m enjoying the general savings and still paying less than the guy the next pump over.

      Plus I’ve always enjoyed small cars over large ones. The only times I’ve owned eight cylinder cars they both were somewhat collectable (1937 Buick back in the late 60’s/early 70’s and a 1990 Grand Wagoneer in the mid-oughts).

  • avatar
    Hummer

    I want to know why people keep suggesting the American car buying public is short-sighted in relation to fuel efficiency and fuel cost.

    The sales of these vehicles were on the rise well before the fuel prices dropped, are you people expecting the sales of SUVs and trucks to suddenly be cut in half due to cheaper fuel?

    While we’re at it these individuals need to figure out how excel works and try calculating yearly fuel costs at $2, and at $3.50. Guess what, the amount is insignificant to anyone that can afford a large vehicle, give me a break with the mightier than thou warnings you people want to post.

    This really applies to people on other forums as many here understand this.

    • 0 avatar

      It’s not exactly that Hummer. People who buy the cars brand new “don’t care”. Then there are the others who care abd that is why sales drop after a sharp rise. But these are affected by “normalization”. If 5 dollars is the price of a gallon, first there is a drop, then there is a normal rise as people internalize that price and brush it off with rationalizations like yours. But simple fact is that the money is better spent elsewhere but that is besides the point.

      People who do get hurt are the second or third hand buyers. They pine after that big guzzler they can’t get brand new. If gasoline is 1.5, no problem, they have fun. If it goes up to 5, yes they do have problems. In extremis they can’t even sell the thing as they are upsidedown forever.

      That is the short-sightedness mentioned.

      • 0 avatar
        Hummer

        I typed up a response in regard to the prices of fullsizes, which as far as GM goes the 10 year old Silverados and Suburbans are still around 10k for trucks that aren’t high mileage.
        But I realize the original point I made is still very valid, the trucks are being ridiculed because of additional sales units over last year, all of the additional sales are new vehicles, and these are the ones most pointed at. The used vehicles also show to hold there value very well keeping a large number of potential buyers at bay. If the cost of use to the 2nd and 3rd buyer were a major problem then these older vehicles simply couldn’t maintain the resale values they enjoy.
        The amount of money I save going from $3.50 avg to the $2.09 I paid a couple days ago, in a years time would be about the amount of money many Americans spend on Beer and cigarettes each year, I don’t smoke, and I drink very rarely.

      • 0 avatar
        DC Bruce

        Marcelo-

        With respect, I think I have to disagree with your comment about 2d and 3d hand buyers. If the vehicle is a gas-guzzler, the resale price (paid by the 2d or 3d hand buyer) is going to be less than for the equivalent fuel-efficient car.

        This is not just economic theory; I’ve observed this in my own life. Especially in periods where the price of fuel goes up rapidly, as (in my experience) 1973 and 1978-79. People couldn’t give away their hulking Detroit iron (which, in those days, due in part to primitive emission control systems would average 10 mpg). But nice, fuel efficient cars, like Honda’s new (in 1978) Accord didn’t depreciate at all.

    • 0 avatar

      It’s not exactly that Hummer. People who buy the cars brand new “don’t care”. Then there are the others who care abd that is why sales drop after a sharp rise. But these are affected by “normalization”. If 5 dollars is the price of a gallon, first there is a drop, then there is a normal rise as people internalize that price and brush it off with rationalizations like yours. But simple fact is that the money is better spent elsewhere but that is besides the point.

      People who do get hurt are the second or third hand buyers. They pine after that big guzzler they can’t get brand new. If gasoline is 1.5, no problem, they have fun. If it goes up to 5, yes they do have problems. In extremis they can’t even sell the thing as they are ups!dedown forever.

      That is the short-sightedness mentioned.

    • 0 avatar

      !t’s not exactly that Hummer. People who buy the cars brand new “don’t care”. Then there are the others who care and that !s why sales drop after a sharp r!se. But these are affected by “normal!zation”. !f 5 dollars !s the price of a gallon, f!rst there !s a drop, then there !s a normal r!se as people !nternal!ze that pr!ce and brush !t off w!th rat!onal!zat!ons l!ke yours. But s!mple fact !s that the money !s better spent elsewhere but that !s bes!des the po!nt.

      People who do get hurt are the second or th!rd hand buyers. They p!ne after that b!g guzzler they can’t get brand new. !f gasol!ne !s 1.5, no problem, they have fun. !f !t goes up to 5, yes they do have problems. In extrem!s they can’t even sell the th!ng as they are ups!dedown forever.

      That !s the short-s!ghtedness ment!oned.

      • 0 avatar
        Lorenzo

        The spam filter is poking us in the “eye”s too? I thought it was only the “eye” after “ess” and in front of “dee”, forming the erroneous nickname of the guy who wrote the code, who was upset that people weren’t spelling his name “Sydney” properly.

  • avatar
    challenger2012

    Being in the oil drilling business, I have more to lose than most of you. What you are seeing played out is an economic war against America Industry, with low prices to used kill off competition for the benefit of the ME. If such behavior occurred in the US, there would be demands for government to step in a break up the monopoly. And while cheap fuel is a short term benefit, when hundreds of thousands lose their jobs, then governments a lose a tax base and social services costs rise; it will be a sour benefit. There will be tree huggers rejoicing because the big bad old oil companies are getting theirs. But as cheap crude kills of drilling and production, so too will it kill off bio-diesel makers and oil recyclers, electric car makers (for the masses) and other green industries. Right now, I have resumes out, expecting the worse. It may not be as much fun and games as presented. You wouldn’t plow over wheat and corn fields on the trust of our friends from the ME, who promise us to sell both products at a price cheaper than we could product if for ourselves?

    • 0 avatar
      Lie2me

      I hope there aren’t too many here so myopic not to realize your plight and others like you, when the price of anything important (food, energy) rises and falls dramatically over a short period of time it’s unsettling because most people realize that something is askew. I haven’t see anyone jumping for joy and running out and buying guzzlers. This may backfire in time with people becoming even more cautious while waiting for the other shoe to drop.

    • 0 avatar
      cartunez

      The market doesn’t exist to guarantee you a comfortable living. The market exist to find the best good/services at the best pricing and just like elevator operators had to find other jobs maybe you should be searching for your next big thing. This fear of the free market has to stop. Cheap fuel benefits everyone especially those lower on the social ladder. Any market that can’t stand on its own merit(s) can go the way of the dinosaur IMHO.

      • 0 avatar
        Landcrusher

        There is not now, nor was there really ever, a free market in oil. The current price is not all demand and supply, it is presently pushed down due to manipulation by one of the largest producers in order to squeeze out some of their competitors. This is exactly the sort of thing that forced the break up of Standard Oil.

        I’m not saying we should fight to raise oil prices, but it would be really wise, and uncharacteristic, of the oil hate crowd to start figuring out how to punish the Saudi’s when they try to reap what they are now sowing. It would also be good for everyone to be pointing out that while we celebrate the cheap oil prices, we ought to be working towards freer markets and stopping this sort of behavior.

        Right now, people overseas who want YOUR JOB, may very well be looking at what the Saudis are doing and figuring out how to get some for themselves. Don’t think you are immune.

        The answer is not the typical statist solutions. The answer is first educating people on what real free markets look like, the evils of state control of business, and why state influence of markets should ALWAYS be suspect.

        • 0 avatar
          cartunez

          Remove the politics and special interest out and bingo wham bam surprise you have a free market. It was foolish for anyone to create budgets based on $100 a barrel oil. That was very shortsighted and for the now the fat lady is singing. Do I pretend to know what the true price of oil should be of course not but I am enjoying the decline as should everyone.

          • 0 avatar
            Landcrusher

            It would indeed have been foolish to bet on $100 bbl. May I ask who you are aware that did? Certainly no one in Houston that was getting paid to plan projects.

            Not sure what to make about your free market statement. Actually free markets pretty much require a state for many reasons. To have a truly free market, the players have to be acting without duress. This ends the second a bunch of government types start making the decisions for the companies because that is the very definition of duress. I always like to remind everyone that Big Oil is not found on stock exchanges, its found at the UN and mostly made up of despots.

            It is certainly possible to have wild swings in price in free markets, but this is clearly not one of these cases. This is a case of the price being driven into the dirt by the the policy and proclamation of a state. If a corporation pulled a stunt like that, it would likely be ruined.

            This has happened to chip manufacturers, textiles, agriculture, service providers, etc. Its quite pervasive. Just tell me what you do for a living, and I will see if I can keep you up at night with a scenario.

        • 0 avatar
          Big Al from Oz

          @Landcrusher,
          I read a very interesting article on why the Saudi’s have been manipulating the oil supply.

          There are some political reasons behind their logic.

          1. The Saudi’s aren’t happy with the Russians meddling in the Middle East. It appears the Russians support the worng team. Remember you have the Saudi’s (Sunni) and Iranians (Shiite) who don’t seem to be able to play together. So they are screwing the Russians and Iranians.

          2. ISIS have been “smuggling” oil in tankers across borders to support their barbaric criminal cause. The Saudi’s have made it unprofitable for ISIS to smuggle the oil, thus reducing a chunk of their funding.

          3. Apparently the Saudi’s aren’t to impressed with the condition of Iraq and some within the House of Said blame the US for this. Some felt that the “old” ways with Saddam was easier for them to manage.

          4. The oil frackers in the US. The increase in US oil production is chipping away at the Saudi’s market share. I’ve read that the Saudi’s require around USD$80 per barrel to fund their budget.

          5. The oil states on the Arabian Gulf have made a pact. I do think if one of them caves in their will be a drop in production. But as APaGttH highlighted their is still plenty of time and scope for the Gulf States to keep on producing crude at the current levels.

          I think the sh!t wil hit the fan when oil goes back over $80 per barrel. This must occur. Look at how much per barrel the Gulf States require to maintain themselves.

          I do think the frackers will be nervous for years after this subs!des. Fracking will not be as it was.

          How much is crude at the more remote fracking site returning per barrel? Remember this oil must be shipped many miles. So, some of these more remotes sites operators might be getting less than USD$20 a barrel or less if oil is at $46.

          That $20 must cover the operating costs of pulling that oil out of the ground.

          The frackers are doomed.

          • 0 avatar
            Landcrusher

            BigAl,

            I agree with all except doom and the emphasis or order. A lot of guys are going to lose big. The oil companies aren’t going to get it the worst. It’s their vendors.

            This could have all started over a cup of tea in the Kingdom. Look at all the ways it helps them. Now, who knows why they REALLY did it? Do they even know?

            It’s a gamble, IMO. If the Iranians pay some guys to reduce Saudi exports then the whole thing blows up in their faces (pun for emphasis). Our current administration does not impress anyone with power outside our borders. Our Navy is full of guys trying to figure out what to do when they get laid off.

            Will the Iranians be able to get something done before the price settles back up to the sixties? I dunno, no one pays me to figure this stuff out. I gotta believe the Saudis are paying a lot of guys to ensure this doesn’t happen and they better have doubled their budget.

          • 0 avatar
            DC Bruce

            A couple of thoughts here. First, the price of oil is, as economists say “highly inelastic.” What that means is that, in the short run small changes in the supply situation have a big effect on price. So, in the current situation, where there’s more production coming on line from Iraq, Libya and the U.S. and flat or falling demand, there will be a big hit on price. It isn’t like, all of a sudden, everyone parks their fuel-efficient car or truck or airplane and goes back to some thirstier version of the same.

            Secondly, regarding oil, drilling and setting up the well is a sunk cost; it doesn’t cost very much to keep pumping from an existing well. So changes in the price are not going to have an immediate effect on production. What will happen is that the number of new wells will fall rapidly because, at the current price, the cost of drilling and setting up a new well and operating is too high relative to the revenue from the anticipated production from that well. In the United States at least (and I suspect, elsewhere), the price of oil has never been stable, long before the advent of OPEC or anything else. Indeed, there is a regulatory entity called, amusingly, the Texas Railroad Commission, whose purpose it was to regulate Texas production in an effort to stabilize production. Even that didn’t work very well.

          • 0 avatar
            hybridkiller

            “First, the price of oil is, as economists say “highly inelastic.” What that means is that, in the short run small changes in the supply situation have a big effect on price.”

            You just contradicted yourself. I think you meant to say “highly elastic” – inelastic means resistant to big moves, not prone to them.

    • 0 avatar
      eManual

      We could increase our Strategic Petroleum Reserve (remember that from the 1970’s?) by purchasing low cost oil using our “Federal Reserve Notes” instead of giving the money away to the Banks and the Stock Market.

      • 0 avatar
        redav

        That’s basically dollar cost averaging for the govt, and by taking a chunk off the market, provide a little buoyancy to the price, which in turn supports that amount of production and the jobs/industry associated with it.

    • 0 avatar
      APaGttH

      I have to disagree. There is no economic war going on. US production has increased 90% since 2008, 31% since 2010. The gains in US production from 2010 to 2014 equal the entire production of Canada to put this in some perspective.

      In order to have shale oil production you need to have a high price. The high price driven up for a number of reasons brought a number of producers into the market. This has increased supply beyond consumption. Economics 101 – supply and demand.

      Oil has always followed a boom and bust cycle. Now, if the new normal for oil was $50 a barrel, that would make fracking unprofitable almost across the board. The new normal once we hit basement is probably somewhere around $70 to $80 – once that happens fracking will continue.

      There just isn’t anything sinister going on here.

      • 0 avatar
        eManual

        Thanks for the reply, but you maybe missing my point. I didn’t imply anything sinister about oil prices, only that purchasing at low prices using our Fed dollars (generated from thin air) gives the US a tangible asset rather than the present paper chase with the Banks and the Stock Market. In addition, the Strategic Petroleum Reserve would dampen these huge price swings, making long term capital investment (i.e. fracking) less risky.

      • 0 avatar
        ect

        You’re right. Much as we enjoy spinning conspiracy theories, reality is always much less entertaining.

        The Saudis are behaving in a logical commercial manner. After several years when supply could barely keep pace with demand, we’re now in a situation where supply exceeds demand. So prices fall. As the meerkats say, “simples”.

        OPEC now accounts for only about 40% of world crude oil production, and is as politically fractured as it has ever been. Saudi Arabia was asked to cut its production to keep prices up. They in effect said “why should we reduce our revenue, to help out those who want to maintain their own production levels make more money?” A mug’s game.

        When your product is a commodity – like oil, or steel for that matter – whether or not you make money money is a function of where you are on the industry cost curve, relative to where it intersects with market price. The Saudis are among the lowest-cost producers, which puts them in a very advantageous position. They don’t need to play games.

    • 0 avatar
      TW5

      Enough insular confirmation bias. This price is not the conspiracy and no one is declaring war. The conspiracy was the obviously unsustainable speculative brinksmanship that drove oil over $100 twice. The crash is just another bubble bursting. Plus, the US consumes 19m bbl/day, and since our oil is local, our producers have a cost advantage over producers with similar extraction costs.

      Saudi Arabia’s aggression towards the United States is just political puffery to obfuscate whatever back channeling is happening. Imagine if we retailed by mandating that 15% of every gallon had to be from a renewable algal source. The oil princes would be jumping from their skyscrapers.

      No one has taken the gloves off.

      • 0 avatar
        Landcrusher

        Nonsense.

        • 0 avatar
          ect

          Landcrusher, the market price of oil has moved, driven by our old friend the law of supply and demand. Much new supply + weak demand growth = falling prices.

          Most North American fracked oil is now on the wrong part of the industry cost curve, so can’t be profitable. This will have an impact, of course, but it’s one that is driven by market forces.

          • 0 avatar
            Landcrusher

            That’s only half the story and you guys know it. The price change is WAY over the demand change. The previous price was propped up by a cartel. The supply was being constrained in this country by the administration. Some companies found a way to get oil anyway, and now a government is changing their policy to squeeze those guys out of the market.

            It’s NOT a free market. This is nothing more than an ostrich being dropped off a cliff and a bunch of bird haters remarking how it’s flying. Nonsense.

            This is another government scheme, and I’ll be here when you guys want price controls or socialization of the oil companies like last time.

          • 0 avatar
            Pch101

            Oil should have never been $100. It’s falling to a level that more closely resembles equilibrium.

            If you can figure out that Tesla should have never been $290 per share, then you should be able to figure out that oil should have never been $100/bbl. The market got crowded by speculators who were playing short-term price movements instead of fundamentals, but now they’re scared and heading for the door (fortunately.)

            This stuff happens all the time with stocks, and periodically with commodities. The market is not always efficient.

          • 0 avatar
            Landcrusher

            First of all, nothing noted on this thread has defended the nonsense.

            As for your post PCH, is it your position that the OPEC cartel was not instrumental in driving the price over $100? Sounds like it is.

          • 0 avatar
            Pch101

            OPEC lost control over oil pricing decades ago. We now have exchanges that set the price.

            As I’ve noted, OPEC market share of oil production has been stable for over 20 years. They don’t have much market power.

            Speculators create froth because they are insensitive to the final price — they only care about the movement. Consequently, they are willing to overpay if they think that there is a greater fool who will pay more. These trades are usually short-term — they may hold the contract for seconds or minutes or hours — so the fundamentals don’t mean much to them.

            Hedgers don’t want to overpay — they’re hedging. Some speculators are needed for liquidity, but a bubble is a sign that there are too many of them.

            Right now, these guys have a contango problem. As was the case in 2008, some of these guys got stuck in bad trades and ended up owning the oil, which was presumably not their intent. It’s no wonder that prices are tanking.

          • 0 avatar
            Landcrusher

            so you are saying it’s the speculators that drove the price up, and OPEC wasn’t really a factor?

            I’m not going to argue that OPEC controls the price, only that they influence it, as do the speculators. its not like the speculators ignore OPEC in their prognostications.

            My point is that OPEC is at the very foundation of the supply situation. that big of a cartel simply negates the idea that it’s a free market. Period.

          • 0 avatar
            Pch101

            Quibbling over whether it is a “free market” is irrelevant.

            Bubbles throw the market out of whack for a time, but during normal times, oil prices are usually a function of demand for oil, dollar strength/weakness and the risks of supply constraints (i.e. another Middle East conflict.) Demand growth is usually fairly stable, so supply shocks are not likely now that oil prices are set through trading.

            OPEC would dearly love to set the price, but it no longer controls the pricing mechanism as it did previously. When OPEC began, it was negotiating with the “Seven Sister” oil companies over the price, but those days are long gone.

          • 0 avatar
            Big Al from Oz

            @Landcrusher,
            It’s the Gulf States that are working together on this one for the reasons I mentioned previously.

            Not the speculators. The speculators are responding to the action of the Oil States, the US, Russia, etc for not reducing supply.

          • 0 avatar
            Landcrusher

            Well, I think we all know why you won’t discuss the market. The rest isn’t even quibbling, it’s moot. We are done.

  • avatar
    kovakp

    Mr. Obelcz,

    You are a genuine Subject Matter Expert and a cool guy to boot. And you handle vitriolic dismissiveness with aplomb. Thank you for taking the time to provide this primer for ignorati like me.

    Personally, unless missile begin flying or local economies crash (even more) over this I won’t be impacted. Gas prices weren’t holding me back from buying a big V-8 guzzler to begin with. If we enjoy a period of low prices I’ll just bank a little more each month and be appropriately thankful for it.

    I’ve had my big engines in both trucks and cars; they were OK but now I’m too old to hoon or haul.

  • avatar
    sco

    “For the growing list of diesel powered cars, trucks, and SUVs that United States buyers can choose from, the timing couldn’t be worse”

    So true. Anyone who bought a diesel in the past few years expecting better mileage and slightly lower per gallon prices is now faced with diesel fuel that is almost $1/gallon more than regular(at least here in No Cal). Happened back in the late 70s during the last diesel boom as well.

    • 0 avatar
      eManual

      On a recent trip, I noticed $1/gallon difference was true for most Interstate truck stops. However, yesterday I noticed $2.59 for diesel vs. $1.99 for 87 octane at a downtown gas station that could only fill up the smaller (delivery trucks and cars) vehicles instead of the 18 wheelers.

    • 0 avatar
      krhodes1

      Diesel is falling too – it is just falling more slowly. Here in the Northeast, it will drop more rapidly once heating oil season (heating oil IS diesel up here) is over and demand falls off a cliff. Around here diesel has actually dropped $.25+ just in the past couple weeks. And over $1/gal since last summer. Historically, diesel here was priced about the same as premium gas in the winter and mid-grade in the summer, and I fully expect it to get there eventually this year.

      If I were buying a new car that had a diesel option, I would still buy it. Simply because I prefer the way diesels drive, and the added range. The cost of fuel is rounding error in the expense of a new car anyway.

    • 0 avatar
      DC Bruce

      Frankly, on a total operating cost basis, there has never been an economic case for diesel-powered cars in the U.S., except perhaps in the early 1980s, when primitive emission controls meant that an average-sized gasoline powered (and not over powered) medium to large sedan would achieve fuel economy of less than 20 mpg and a similar diesel-powered car (e.g. Mercedes 300D, 300SD; Audi 5000 diesel) would achieve an easy 30 mpg. And, in those days, diesel was cheaper at the pump than regular gasoline.

      The prevalence of diesel cars available from European manufacturers is entirely the result of the motorfuel tax situation in Europe, where diesel remains cheaper at the pump than gasoline.

      There’s no economic case for a Golf diesel in the U.S.

      As a current pickup truck shopper (looking for a tow vehicle from my Airstream), I’m wrestling with this dilemma right now. Economically, a diesel 3/4 ton can’t be justified, but towing with a diesel is a lot more pleasant, because you don’t have to rev the piss out of the engine to achieve the necessary power and torque. Mitigating this somewhat is the fact that some truck gas engines are specified for mid-grade gasoline, which is a bit more expensive than regular.

      • 0 avatar
        hybridkiller

        “There’s no economic case for a Golf diesel in the U.S.”

        Strictly speaking that’s true (at present, things change), but it also depends on the amount and type of mileage driven. For me it makes sense, as I’m doing 20K+ miles a year and 80% of that is highway driving. I frequently make the same 600 mile trip and typically average no less than ~48 mpg, and often >50 under ideal conditions. That cost-per-mile (in my region) equates to a 38-40 mpg gasser. Sure there are plenty of non-hybrid cars in that range, but none that I know of that compare favorably with the Golf’s torque-rich engine performance and driving dynamics, not to mention interior refinement and list of standard equipment.
        And with most in-town/suburban driving it still gets me 35-40 mpg.

        Once we get past heating oil season and back into summer vacation mode, the current disparity between diesel and gas prices will likely shrink back to the 10-15% it’s been until recently.

        Even forgetting about fuel efficiency the car is still easily worth the $26K I paid for it.

  • avatar
    jimbob457

    Fracking brings the ability to mine source rock. This more than doubled the resource base for crude oil and natural gas given yesterday’s prices.

    Traditional producers, some of whom are unpopular here in my high school, reacted in the only way they were able. They let the price fall to drive the new competition back into the ground.

    A halving (or even a bit more) of oil prices is to be expected. This is exactly what fracking did to spot natural gas prices at Henry Hub in south Louisiana just a few years ago.

    Sadly, at least from the standpoint of producers, mining booms do not last forever. This one is over.

    P.S. Actual bumper sticker seen on a then almost new 1984 Mercedes Benz 420 in Highland Park, Tx:

    “Please God, let there be just one more oil boom. This time, I promise, I will not piss it all away.”

  • avatar
    an innocent man

    I hate to ask and abuse the generosity of your time, but I’m too curious: In what way, if at all, does any of this impact the Marcellus natural gas play? Is there any link or correlation between it and shale oil production? I’m not involved whatsoever in that industry, but I’m from that area of Pennsylvania and was curious on any thoughts. And thank you for the insights.

    • 0 avatar
      eManual

      I’m not an energy expert, but my guess is that the Marcellus gas would substitute for fuel oil heating (and some standby electric production) typically used in the Northeast. IIRC, there is some problem getting that gas through the network of pipelines to such places as Boston. As such, the effect would be very secondary to global oil prices.

    • 0 avatar
      APaGttH

      Absolutely no idea. How is that for an answer. I know that the glut for natural gas is even bigger than oil and prices have tanked.

      On the subject of tanks, I somehow suspect that when I go to refill the gas grille this spring, the price won’t be any lower.

      • 0 avatar
        Toad

        Refilling a propane tank at Costco was about $15 last summer; current price is just under $12. Texas propane spot price per gallon went from $1.06 in June to $.59 in December.

        Grilling should be that much more enjoyable in the spring.

  • avatar
    SCE to AUX

    My household fleet’s fuel consumption has dropped in half over the last 3 years, while driving the same miles. I hope to keep it that way.

    Pure EVs from Tesla and Nissan haven’t been hurt by low fuel prices yet (the Leaf just set an annual sales record), but the next few years will be very interesting in the EV market.

    It’s possible that pure EVs are succeeding BECAUSE of low fuel prices – i.e., some people may be fleeing from its price volatility, knowing it will go back up. Sort of like how the wisest people run away from the beach when the water suddenly recedes during a tsunami.

    • 0 avatar
      clivesl

      I think it’s simpler than that. I think that in terms of what most people are looking for in their commute a pure EV is simply better than an ICE.

    • 0 avatar
      APaGttH

      For Tesla and the Model S, if you’re plunking down north of $70,000 for a car in the first place, you’re not caring if gasoline is $3, $5, or $1 a gallon.

      If the prices stay here, Tesla has a harder time launching a mainstream model because the, “look at the money you save,” math doesn’t add up as well.

      The Leaf is bought by people who generally want to save the planet – so again – the price of gas is a lesser factor. Same for the Volt and for the Volt I have some bias – I’m a not a fan of version 2.0

    • 0 avatar
      redav

      I maintain that people who buy (or consider buying) EVs are generally not doing the math to see if they are cheaper. Rather, I think they are mostly doing it for other reasons, such as public perception, it’s the newest/coolest thing, environmental concern, simplicity of not going to gas stations/reduced maintenance. Rather, because they have a higher initial cost, I suspect most people just assume they are most expensive when in reality–with gas prices at their prior levels–EVs are already cheaper over their full lifecycle than their gasoline equivalents.

      If money is not the deciding factor for the purchase of an EV, then the change in a money factor (gas prices) should not affect their sales. Additionally, it appears that the EV bang-for-the-buck is about to go way up with the high-range & reasonably-priced new models about to hit the market. Reduced range anxiety & lower purchase price might be more influential than comparative gas prices, in which case EVs sales would increase.

  • avatar
    jrmason

    I can’t believe I’m gonna be the first to say it out of almost 30 posts….

    Heeeyy Blondie!!!

  • avatar
    28-Cars-Later

    “If you were thinking about a cross country road trip in a Challenger Hellcat, this is the year to do it.”

    I was thinking this!

  • avatar
    Elorac

    Awesome analysis – expertise like yours is what makes this community such a pleasure to read.

    Patently selfish follow-up question:
    How do I, as a casual investor, profit from this situation? My first instinct would be to look into buying oil as a commodity (USO ETF, etc) if I can hold on to it for a few years. But perhaps not worth it?

    Wait for energy stocks to stabilize and buy low?

    • 0 avatar
      APaGttH

      HA! The future Mrs. APaGttH and I have had these very conversations. If I could connect those dots together, I’d be a very wealthy person right now.

      My strategy is to hope I got the price of the barrel of oil basement right, follow it down and when it hits buy into what should be battered oil stocks. My daughter owns CVX (been investing since 12) and here 2-1/2 year performance is about -4% – however with a dividend yield in excess of 4%, she is doing better than if we put some of her cash into a USAA savings account.

      The big oil companies aren’t going to go out of business, and as I’ve gotten older long term buy and hold has become my strategy. So I see buying opportunities in blue chip oil companies – IF you can accurately predict the bottom.

      Consider this point to, everything is tied to the price of oil. Transportation, storage, climate control, fertilizers in food production. So basically any company not tied to the oil industry is going to benefit from reduced operating costs. Tie in improving consumer sentiment in the United States and airline stocks become interesting.

      I’m not a stock advisor – so take this all with HUGE grains of salt. For example, I thought that FedEx was a no brainer stock before the holidays due to plunging fuel prices. The holiday retail sales data that came out today sucked. For FedEx to go up not only did they need reduced costs, they also needed to ship more holiday packages – appears that didn’t happen this year.

      Oh well.

      • 0 avatar
        DC Bruce

        Chemical companies (Dow, Dupont) use feedstocks from petroleum, so their costs should go down. On the other hand, so do their competitors’ so maybe its a wash.

    • 0 avatar
      APaGttH

      HA! The future Mrs. APaGttH and I have had these very conversations. If I could connect those dots together, I’d be a very wealthy person right now.

      My strategy is to hope I got the price of the barrel of oil basement right, follow it down and when it hits buy into what should be battered oil stocks. MyHA! The future Mrs. APaGttH and I have had these very conversations. If I could connect those dots together, I’d be a very wealthy person right now.

      My strategy is to hope I got the price of the barrel of oil basement right, follow it down and when it hits buy into what should be battered oil stocks. My daughter owns CVX (been investing since 12) and here 2-1/2 year performance is about -4% – however with a dividend yield in excess of 4%, she is doing better than if we put some of her cash into a USAA savings account.

      The big oil companies aren’t going to go out of business, and as I’ve gotten older long term buy and hold has become my strategy. So I see buying opportunities in blue chip oil companies – IF you can accurately predict the bottom.

      ConsIder this point to, everything is tied to the price of oil. Transportation, storage, climate control, fertilizers in food production. So basically any company not tied to the oil industry is going to benefit from reduced operating costs. Tie in improving consumer sentiment in the United States and airline stocks become interesting.

      I’m not a stock advisor – so take this all with HUGE grains of salt. For example, I thought that FedEx was a no brainer stock before the holidays due to plunging fuel prices. The holiday retail sales data that came out today sucked. For FedEx to go up not only did they need reduced costs, they also needed to ship more holiday packages – appears that didn’t happen this year.

      Oh well.
      daughter owns CVX (been investing since 12) and here 2-1/2 year performance is about -4% – however with a dividend yield in excess of 4%, she is doing better than if we put some of her cash into a USAA savings account.

      The big oil companies aren’t going to go out of business, and as I’ve gotten older long term buy and hold has become my strategy. So I see buying opportunities in blue chip oil companies – IF you can accurately predict the bottom.

      Consider this point to, everything is tied to the price of oil. Transportation, storage, climate control, fertilizers in food production. So basically any company not tied to the oil industry is going to benefit from reduced operating costs. Tie in improving consumer sentiment in the United States and airline stocks become interesting.

      I’m not a stock advisor – so take this all with HUGE grains of salt. For example, I thought that FedEx was a no brainer stock before the holidays due to plunging fuel prices. The holiday retail sales data that came out today sucked. For FedEx to go up not only did they need reduced costs, they also needed to ship more holiday packages – appears that didn’t happen this year.

      Oh well.

    • 0 avatar
      APaGttH

      HA! The future Mrs. APaGttH and I have had these very conversations. If I could connect those dots together, I’d be a very wealthy person right now.

      My strategy is to hope I got the price of the barrel of oil basement right, follow it down and when it hits buy into what should be battered oil stocks. My daughter owns CVX (been investing since 12) and here 2-1/2 year performance is about -4% – however with a dividend yield in excess of 4%, she is doing better than if we put some of her cash into a USAA savings account.

      The big oil companies aren’t going to go out of business, and as I’ve gotten older long term buy and hold has become my strategy. So I see buying opportunities in blue chip oil companies – IF you can accurately predict the bottom.

      Cons!der this point to, everything is tied to the price of oil. Transportation, storage, climate control, fertilizers in food production. So basically any company not tied to the oil industry is going to benefit from reduced operating costs. Tie in improving consumer sentiment in the United States and airline stocks become interesting.

      I’m not a stock advisory – so take this all with HUGE grains of salt. For example, I thought that FedEx was a no brainer stock before the holidays due to plunging fuel prices. The holiday retail sales data that came out today sucked. For FedEx to go up not only did they need reduced costs, they also needed to ship more holiday packages – appears that didn’t happen this year.

  • avatar
    jrmason

    While I’m happy to see gasoline at such low prices I’m genuinely irritated to see diesel fuel so disproportionately higher. There is now an average of $1.50 difference between 87 octane and highway fuel in my area. There should be more of a surplus of the #2 than gasoline given the US burns many times more gas than diesel. There is no logical reasoning for this.

    • 0 avatar
      Japanese Buick

      It’s not just diesel. Regular gas is coming down fast but the premium grades that a lot of performance cars use is staying high. The spread between 87 and 93 octane used to be 30-40 cents a gallon. Now it’s 50-70, and since regular is declining the size of the spread as measured in percentage is soaring. Simultaneously all the gas stations around here are replacing their marquee signs that show the price of all grades with ones that just show regular. In fact the surest sign that a gas station is jacking up the spread is one of those marquee sign replacements.

      I’d be curious to hear the expert take on that.

  • avatar
    TrailerTrash

    But this is the big question…was all the “SKY IS FALLING ( we are running out of a limited resource)” just so much bullcrap as I thought?
    After all that nonsense about our ability to keep using oil…we now have this pump till the pump burns out and then keep on pumping some more beause we have lots to pump??!!!
    Really..what IS the TRUTH!?
    Do we or do we not have enough oil?
    And all the ranting about large SUVs nothing but regulation and volume/production control?
    Was it all a manipulation and never supply and demand?
    Was supply really JUST a matter of holding back on pumping and NOT truly the volume of available oil?
    Will they suddenly decide to once again control the pumping and design yet another false price level based solely upon their randomly and selfish production levels?
    Total bull….

    • 0 avatar
      Kevin Jaeger

      Yes, it was all BS. The late, great, economist Julian Simon explained all this in “The Ultimate Resource”. The main obstacle to producing affordable energy is government regulation.

      • 0 avatar
        cartunez

        Amen Kevin

        • 0 avatar
          hybridkiller

          Sure we have plenty of oil – for maybe another 20-30 years. Google the term “peak oil” and educate yourself. Most of the larger oil fields that have been pumping for many decades are past peak and in decline (Saudi Arabia included). Individual shale wells only produce for a few years, so they’re a limited resource as well – gotta keep drilling new ones.

          I know, all that data is fabricated by Masons, or the Black Helicopter People, blah blah whatever…

          • 0 avatar
            jimbob457

            Informed persons know about fracking and its implications. To them “Peak Oil” is a joke – an historical curiosity. If you bet real money on “Peak Oil”, you are screwed.

    • 0 avatar
      APaGttH

      When I was working as a consultant for Conoco more years back then I care to admit, the reserves in this area where known even then, but considered inaccessible.

      Factors that held that back was lack of technology to access, cost structure compared to other sources, and easier reserves to access in areas like the Gulf of Mexico.

      When the new normal for oil became $80 to $120 a barrel, and technology in horizontal drilling and fracturing shale deposits became viable, there was both a cost and technology incentive to go after these reserves.

      So the oil was always there, but oil producers aren’t charities. They need market incentives to go after those reserves, and technology to make it viable. Ten years ago that didn’t exist.

    • 0 avatar
      APaGttH

      When I was working as a consultant for Conoco more years back then I care to admit, the reserves in this area where known even then, but cons!dered inaccessible.

      Factors that held that back was lack of technology to access, cost structure compared to other sources, and easier reserves to access in areas like the Gulf of Mexico.

      When the new normal for oil became $80 to $120 a barrel, and technology in horizontal drilling and fracturing shale deposits became viable, there was both a cost and technology incentive to go after these reserves.

      So the oil was always there, but oil producers aren’t charities. They need market incentives to go after those reserves, and technology to make it viable. Ten years ago that didn’t exist.

    • 0 avatar
      krhodes1

      Oil simply isn’t a really limited resource, no matter how much the shrub huggers wish it was. The more it costs, the more of it there is, and the more incentive there is to not use it and use something else – supply increases and demand decreases at the same time. We can’t “run out” of oil, it will simply get too expensive to use for casual things. Like powering cars. If oil was $500/bbl, we would all be driving Teslas and there would be a supercharger on every street corner. But even $100/bbl oil is cheap enough.

      Cheap easy to get oil that bubbles up out of the ground like in the Beverly Hillbillies WAS a limited resource though. We now have the technology to get oil out of difficult places (10K ft under the ocean, fraking, tar sands), at a price. The ultimate source if oil got expensive enough would be to mine hydrocarbons from Jupiter’s atmosphere. If it came to that I doubt we’d be burning the stuff in cars though.

  • avatar
    eggsalad

    “. . . believe a traffic ramp sprint to 60 MPH (or 62 KPH if you please) that takes longer than eight seconds is dangerously slow.”

    If you can’t get to 62 km/h (38.5 mph) in 8 seconds, your car IS pretty dang slow. Much like my ’77 M-B 240D – that was the slowest car I’ve ever owned, and the 0-60 mph time was around 25 seconds.

    • 0 avatar
      APaGttH

      Touche and good catch my friend! Yes, 8 seconds to 62KPH would be pathetic. 100 KPH is the correct answer I was looking for (and in hindsight, have no idea where 62 came from). I actually spent a lot of time being careful not to say “America” and otherwise internationalize – but you made a good catch here.

      Derek – if you’re reading this could you edit that paragraph.

  • avatar
    Master Baiter

    Wait, I thought oil was going to be $200/barrel because of China demand? At least that’s what the headlines on Drudge said when oil was at $140/barrel and rising.

    • 0 avatar
      ClutchCarGo

      And not just China demand but Obama’s energy policies. Newt, Lee, et al were predicting an oil apocalypse back in 2012 if Obama was re-elected.

      • 0 avatar
        Japanese Buick

        I suspect these particular stickers have declined in value. Or found new distributors: http://holycoast.blogspot.com/2011/04/gas-pump-activism.html

        But seriously, Newt, Lee, etc have simply pivoted to suddenly realizing that low oil prices are actually a bad thing. Because Fracking, or something. Which is as close as they will ever come to admitting that Obama’s energy policy has helped bring them down.

      • 0 avatar
        APaGttH

        The person sitting in the White House has very limited control on the commodity price of oil.

        1) Monetary policy – by far has the biggest impact that the White House controls. With the end of QE III and the soft landing that QE I, II and III gave us, the US dollar is strengthening. Depends on your philosophy if this is good or bad. Strong dollar equals lower import and commodity costs, and it has a direct impact on the cost of oil. Weak dollar means more manufacturing jobs and more exports. Generally, a strong US dollar is better for consumers, a weak US dollar is better for multinationals.

        2) Regulatory policy – environmental, drilling rights, etc. Lets remember that Bush (43) dialed back Area 181 in the Gulf of Mexico to help Jeb. It is pretty fascinating that the drill baby drill people like the idea, as long as drill baby drill is happening somewhere else. When faced with Clinton oil lease sales off the west coast of Florida, the state government had a fit and one of the first things Bush (43) did when entering the White House was canceling the lease sale in Area 181.

        Lets remember who did the US Energy Independence Act (Bush 43) in 2005, and who created the green energy investment programs (Bush 43) in 2007. Those same programs had mandated use (also done by Bush 43) that carried into law as the Great Recession started. Let’s also remember who made the 20 in 10 challenge (Bush 43) in the 2007 SOTUA where Bush challenged to reduce US gasoline consumption by 20% in 10 years – and driving that change through stringent CAFE regulations. Who drove a green agenda again? US gasoline consumption is down 6%, US fleet economy is at record levels – these don’t happen over night and these gains can go to the prior administration. If anything, “drill baby drill” and the fracking explosion has happened under Obama’s watch. You certainly don’t hear screams about tapping the North Slope of Alaska, or the protected waters of California, or natural gas wells off the coast of Cape Cod anymore.

        3) Political policy – and this is a lot more intangible. This is more about direction as the elected leader, but a President can have a policy vision all day long. If Congress won’t pass legislation to support that policy, the needle doesn’t move. Whether this was Reagan vs. O’Neill, Clinton vs. Gingrich, or Boehner vs. Obama – we’ve seen this play out over and over again.

        There were a lot of predictions by so called experts on what would happen if Obama was reelected in 2012. A vast majority didn’t come even close to coming true.

        The collapse in oil prices has zero, zilch, nada, nothing, to do with Obama reelection in 2012. There are pages and pages of excellent debate above to support that view point.

        For the record – no fan of Obama

      • 0 avatar
        APaGttH

        The person sitting in the White House has very limited control on the commodity price of oil.

        1) Monetary policy – by far has the biggest impact that the White House controls. With the end of QE III and the soft landing that QE I, II and III gave us, the US dollar is strengthening. Depends on your philosophy if this is good or bad. Strong dollar equals lower import and commodity costs, and it has a direct impact on the cost of oil. Weak dollar means more manufacturing jobs and more exports. Generally, a strong US dollar is better for consumers, a weak US dollar is better for multinationals.

        2) Regulatory policy – environmental, drilling rights, etc. Lets remember that Bush (43) dialed back Area 181 in the Gulf of Mexico to help Jeb. It is pretty fascinating that the drill baby drill people like the idea, as long as drill baby drill is happening somewhere else. When faced with Clinton oil lease sales off the west coast of Florida, the state government had a fit and one of the first things Bush (43) did when entering the White House was canceling the lease sale in Area 181.

        Lets remember who did the US Energy Independence Act (Bush 43) in 2005, and who created the green energy investment programs (Bush 43) in 2007. Those same programs had mandated use (also done by Bush 43) that carried into law as the Great Recession started. Let’s also remember who made the 20 in 10 challenge (Bush 43) in the 2007 SOTUA where Bush challenged to reduce US gasoline consumption by 20% in 10 years – and driving that change through stringent CAFE regulations. Who drove a green agenda again? US gasoline consumption is down 6%, US fleet economy is at record levels – these don’t happen over night and these gains can go to the prior administration. If anything, “drill baby drill” and the fracking explosion has happened under Obama’s watch. You certainly don’t hear screams about tapping the North Slope of Alaska, or the protected waters of California, or natural gas wells off the coast of Cape Cod anymore.

        3) Political policy – and this is a lot more intangible. This is more about direction as the elected leader, but a Pres!dent can have a policy vision all day long. If Congress won’t pass legislation to support that policy, the needle doesn’t move. Whether this was Reagan vs. O’Neill, Clinton vs. Gingrich, or Boehner vs. Obama – we’ve seen this play out over and over again.

        There were a lot of predictions by so called experts on what would happen if Obama was reelected in 2012. A vast majority didn’t come even close to coming true.

        The collapse in oil prices has zero, zilch, nada, nothing, to do with Obama reelection in 2012. There are pages and pages of excellent debate above to support that view point.

        For the record – no fan of Obama

  • avatar
    jimbob457

    Fracking brings the ability to mine source rock. This more than doubled the resource base for crude oil and natural gas given yesterday’s prices.

    Traditional producers, some of whom are unpopular here in my high school, reacted in the only way they were able. They let the price fall to drive the new competition back into the ground.

    A halving (or even a bit more) of oil prices is to be expected. This is exactly what fracking did to spot natural gas prices at Henry Hub in south Louisiana just a few years ago.

    Sadly, at least from the standpoint of producers, mining booms do not last forever. This one is over.

  • avatar
    Athos Nobile

    Mr Obelcz, great writeup. I was looking forward to read this and you didn’t disappoint.

    I’ll have my wife read it as for family reasons, she’s very interested in where the market is going.

    I don’t think we will see the prices go down to the $9 we saw back in 1997. I agree with you that this will bottom out at around $20-30.

    Countries like Venezuela will have a tough tough time ahead the next 2 years.

    I have one question, but this is more related to global petrol (gasoline) prices. Why an oil price slump like this one hasn’t translated in a similar fall to petrol prices?

    Down Under here, I saw at the beginning of 2014 a scary ~$1.6 a litre and we’re sitting at ~$1.10 ATM. If oil prices get to say $30, I would expect the petrol to dip below the $1 mark, maybe in the 80 cents zone, but somehow I don’t see it happening.

    • 0 avatar
      hybridkiller

      The cost of oil accounts for ~65% of the price of gasoline. So a 50% drop in oil price does not equate to a 50% drop in the price of gas.

      • 0 avatar
        jhefner

        Also expect some states and the federal government to raise fuel taxes to take advantage of low prices and increase revenue. Might not be entirely bad IF it is spent on infrastructure improvements.

    • 0 avatar
      APaGttH

      In many parts of the world, the price of petrol has a thick layer of taxes on it. Because of this a reduction in oil prices doesn’t relate one to one at the pump.

      In the US the 10% ethanol mandate will add to the cost, as ethanol is currently more costly to make than gasoline.

      Don’t get me started on E10 and E15, farm subsidies and corporate welfare.

  • avatar
    mkirk

    So would you say this is cyclical then? Gas will remain cheap…domestic sources shut down, oil goes up, domestic sources ramp up…rinse and repeat. Isn’t it much cheaper to restart those wells and wouldn’t that fact keep OPEC from raising prices beyond the threshold that domestic production is profitable? The technology is now there so the genie is out of the bottle so to speak. No matter what happens, the US has the ability to produce a significant amount of petroleum on our own. This combined with the fact the Saudi Royal family only sleeps at night knowing they are safe from being overrun by ISIS thanks to the US taxpayer should do something ultimately to keep all this in check. They are not stupid…as disfunctional as the relationship between us and the Saudis are I can’t imagine they’d rather deal with Moscow or Bejing to keep the threats out but if they do, and the world goes to crap, we have the ability to produce a lot of energy between us and Canada and that alone has got to worry them somewhat. Sure they can sell it all to China, but how will China react to becoming the keepers of order in the middle east?

    • 0 avatar
      Landcrusher

      First, production takes more time than flipping a switch. Yes, you can take up slack by restarting some wells, but the game has never really worked like you would think because nothing about it is quick. You tell me how much oil you need in 2020 and how much you will pay, and I will be happy to provide if the price is right. (and I aint even in the AWL BIZNESS!).

      Remember all the talk about why opening up more land to drilling won’t help because it will take five years to get the oil so, we aren’t opening more land? That was from the left.

      Remember how we shouldn’t bother with Keystone because it won’t do anything to lower prices at the pump? (Like that had anything to do with it btw.)

      Well, what’s going on now means our capacity to get oil out of the ground is going to now be pretty much a five year from now thing. In about 18 to 24 months, the Saudi’s can raise the price back up, and ride $150 bbl prices for a few years.

      • 0 avatar
        Japanese Buick

        @Landcrusher: “Remember all the talk about why opening up more land to drilling won’t help because it will take five years to get the oil so, we arent opening more land? That was from the left”

        And in retrospect it was the right decision. That oil would be coming online in a depressed market tha wouldn’t be able to sustain it.

        • 0 avatar
          Landcrusher

          No. There would be less fracking for expensive oil and more easy to get oil as well as more deep offshore oil. At any rate, how do you look at a situation where a government is manipulating prices and think we are ever better off with government planning supply issues?

          This idea that oil under fifty is just a supply and demand thing is pure and simple ignorance. The supply situation we have, as well as much of the demand situation is more about government than markets. I’ll agree government does have some reasons to affect demand due to pollution, but this whiplash is government and more government.

      • 0 avatar
        Pch101

        Here’s a hint: When prices crash, it is almost always a demand/ bubble story. Not supply, but demand.

        You should have already noticed that gold prices have been diving for awhile and the commodity currencies are losing against the US dollar. Oil is part of this broader pattern; if anything, it should have happened a bit sooner.

        This would have happened sooner had the economy been addressed more aggressively. Austerity slowed the recovery, which led to extended QE, which kept oil prices high.

        • 0 avatar
          jimbob457

          This one is primarily a supply phenomenon based on fracking.

          I am sure you know something important. It just does not happen to have anything to do with the oil industry.

          Don’t lose sight of the obvious. QEII, get serious. Lower oil prices ARE a huge fiscal stimulus – at least in most of the places that need it.

          • 0 avatar
            hybridkiller

            Global oil prices are about the commodities markets – more specifically, the psychology of futures trading.
            If you understand the relevant market forces you don’t need to know [email protected]#$ about the oil industry.

          • 0 avatar
            Pch101

            When prices crash, they are indicative of a bubble that has popped. And bubbles are a demand phenomenon.

            QE weakened the dollar; ending QE has been strengthening the dollar. (The reason for this relationship is obvious if you understand exchange rates.) If you haven’t noticed that the dollar has been rebounding against the commodity currencies, then you need to pay attention.

            The world does not revolve around the US. There has been no surge in global oil supplies as the result of US fracking. Except for the fact that the US isn’t located in an Arab war zone, there are no particular advantages to US-sourced oil for global oil markets.

            Oil is following the path established by gold and the commodity currencies — they’re all falling. There was a bubble, and I think that we can say that it has finally ended. Commodity bubbles take years to pop, and this one was a bit overdue.

          • 0 avatar
            jimbob457

            Trading is one thing. It is the quick and the dead. Making investment decisions that tie up real capital for many years is quite another.

            The car makers are of necessity of the latter persuasion. Maybe $48 oil makes a more appropriate baseline assumption than $100?

          • 0 avatar
            hybridkiller

            The reality is that there are at least a dozen different factors that came together to create a “perfect storm” for a bear market in oil.
            Sure supply is one of those factors, but it’s only a piece of the larger picture.

          • 0 avatar

            It is only a “supply Phenomenon because OPEC decided not to curtail its own production to maintain equilibrium. Drill BAby Drill only worked because OPEC allowed it to work. They create or allow a glut every now and then to drive out competitors, so the price will rise again.

          • 0 avatar
            jimbob457

            @Pch101

            I done tried to warn ya. I’m not sayin’ I would bet the farm against $60, but a return to $100 is unlikely absent war.

            You gotta think “Source Rock”.

        • 0 avatar
          an innocent man

          @PCH Has demand really dropped that much since the price collapse began circa June?

  • avatar

    For the life of me, I fail to understand people’s obsession with market share as it regards the global oil market. OPEC today produces about as much oil as they did 40 years ago. Look it up. Since then they have grown from 5 to 12 members. The population of the world as doubled. Global petroleum consumption has increased by a factor of 2.5. OPEC knows oil is a finite resource.

    ITS NOT ABOUT MARKET SHARE despite the public posture of the Saudi prince. What is happening now is a replay of what the cartel has done previously. And why do cartels engage in cartel behaviour? ANSWER: To bankrupt competitors. To stymie investment in competitive technology. This time around the Saudis can look like they’re helping the Administration, because they are. They are helping the U.S. punish Russia, Iran and the terrorist groups it funds, not to mention its nuclear program, and Venezuela. At the same time, the U.S. economy gets a shot in the arm leading up to the 2016 elections. The Administration isn’t happy about the reduction of interest in all things green, but they can’t have everything.

  • avatar

    Funny that TransCanada has a sponsorship banner on this page. Wonder how they will service their debt when there is not traffic on their pipeline because sand ans shale production isn’t viable at current global oil market prices?

    Wonder why “TransCanada” wants to build a pipeline “Trans U.S.” instead of “TransCanada?” They can refine in Canada. Small detail? Why would they give the U.S. such a “gift?”

    • 0 avatar
      juicy sushi

      Why on earth are you assuming there are plans for only that one pipeline?

      I realize Canadian politics aren’t really something anyone (even Canadians) likes to read about, but a pretty cursory glance would show some pretty ferocious back-and-forth over “TransCanada” pipelines to the Pacific, and the Atlantic.

  • avatar

    Look for there to be huge incentives available on fuel efficient vehicles to avoid HUGE CAFE fines. The cost of these will result in price increases to “heavies.”

    • 0 avatar
      Athos Nobile

      So this is the best time to get an econobox then. New or used.

      • 0 avatar
        jimbob457

        Yep, wrong product at the wrong time.

      • 0 avatar
        kovakp

        I don’t think we get to buy econoboxes any more, just econoblobs but when *haven’t* they been a good idea?

        Just drive something relatively small and sippy for a “What Me Worry?” lifestyle. Saves all this anguished mentation.

        • 0 avatar
          krhodes1

          Better yet, arrange your life such that you don’t HAVE to drive very much, and drive whatever you darned well please because the price of gas doesn’t matter at that point. Whether I drive my 14mpg SUV or 35mpg car makes zero difference to my monthly budget, when both of them sit for weeks on end.

          • 0 avatar
            Landcrusher

            Yes, +1000. I will say if you can arrange a pleasant drive to work that’s great, but really, figure out how to live close to your work. It’s nothing to do with gasoline and everything to do with living well.

  • avatar
    jimbob457

    Yep, the wrong product in the wrong place at the wrong time. No biggie. Buy your straw hats in the Fall. Enjoy.

    If you drive a lotta miles, maybe you need good gas mileage? So, even $1.50 per US gallon still makes good sense for you? Go for it.

  • avatar
    Lorenzo

    It’s been said that if you get ten economists together, you’ll get thirty answers (look up the “third hand of economics”). I think TTAC has greatly expanded the multiplication factor on this topic.

  • avatar

    RE: “Monetary policy – by far has the biggest impact that the White House controls.”

    Except, the White House doesn’t implement monetary policy.

  • avatar
    Landcrusher

    I love the flip flop. Supply has been constrained for years by a cartel of governments. Who gets blamed? Exxon and speculators etc.

    The cartel now stops the constraints and the haters of the oil companies are all free market fans. The Internet remembers boys. In a few years when the price goes back up and you try to flip flop again you better change your screen names or your tune.

  • avatar
    bd2

    It’s not just supply-demand (wouldn’t be so volatile).

    A large part has to do with the immense amount of $$ flowing into oil futures since 2000.

    Speculators have not only inflated the price of oil, but other commodities as well.

  • avatar

    RE: “OPEC lost control over oil pricing decades ago. We now have exchanges that set the price.”

    HUH? What exchanges? OPECs spigot has IMMENSE influence as evidenced over the recent action to maintain production. It ain’t about market share. It never was. OPEC will regain some market share after some competitors and high cost producers are driven from the market. That alone will cause prices to rebound.

    RE: “As I’ve noted, OPEC market share of oil production has been stable for over 20 years. They don’t have much market power.”

    Again, it isn’t about market share. OPEC, particularly the Saudis, understand they are sitting on a finite resource. They would prefer to produce less at a higher price per barrel rather than to maximize current production. OPEC produces about as much oil now as they did in 1973. Look it up. This is by their choice. in 1973 they had 5 members. They now have 12. The population of the earth has doubled since then. Energy consumption has more than doubled. Yet, they produce about the same now as in 1973. AND they occasionally allow a glut to drive out competitors. So who will suffer most this time around? OPEC members Venezuela and Iran. Also Russia. The EV industry. The alternative fuels industry. Frackers. Shale and sands producers. When the smoke clears the price will be able to be maintained for a spell.

    What a surprise when cartels engage in cartel behaviour.

    • 0 avatar
      Pch101

      If you haven’t figured out that we now have exchanges where oil is traded, then that would suggest that you haven’t read the business section of a newspaper since the 1970s.

      • 0 avatar

        There are have always been “exchanges” if you want to use that term for the various ways oil is bought and sold. You make it sound like there was some kind of sea change in the way oil is transacted which had a significant influence on market price.

        RE: “OPEC lost control over oil pricing decades ago.”

        They never had “control.” They have always had influence, since their formation. And they still do as evidenced by their recent action to continue production. Perhaps you believe what the Saudi Prince said about market share?

        RE: “We now have exchanges that set the price.”

        And what did we have previously to buy and sell oil? Exchanges don’t set the price. The market participants due via bidding.

        • 0 avatar
          Pch101

          No, we didn’t used to always have exchanges. Go Google it.

          • 0 avatar

            Exchanges? Spot Markets? Over the Counter deals? Whatever euphemism you want to use, there is nothing in the ever changing method of buying and selling oil that has cause OPEC to lose the influence they hold over the global market price of oil which they accomplish with their spigot.

          • 0 avatar
            Pch101

            The modern oil market is only a few decades old. Before that, it was dominated by cartels (OPEC during the 1970s, and western oil interests before that.)

            Go do some Googling. You would benefit from the education.

          • 0 avatar

            Whatever the euphemism you want to use for the global oil market, I’d like to hear your explanation for how “exchanges set the price.”

          • 0 avatar
            Pch101

            If I have to explain how exchanges act as price setters, then we’re in real trouble here.

          • 0 avatar
            ect

            “No, we didn’t used to always have exchanges. Go Google it”

            “If I have to explain how exchanges act as price setters, then we’re in real trouble here.”

            “You have your work cut out for you. It’s pretty obvious that you’re not grasping this at all.”

            All of this is nothing but obfuscation – what you’re really saying is that you don’t know what you’re talking about, have no evidence to present, but wil never admit when you’re wrong.

            ruggles presents reasonable argument, backed by logic. You respond with childish drivel and ad hominem attacks that reveal much about your own character and insecurities, while revealing nothing about your supposed target.

            I’m sure you’re not a stupid person, but you’ve got a lot of growing up to do.

        • 0 avatar
          hybridkiller

          “They have always had influence, since their formation. And they still do as evidenced by their recent action to continue production.”

          I disagree with this notion that market manipulation is the primary motive behind the Saudi refusal to trim output levels, for three reasons:

          1. Historically, CUTTING output WAS OPEC’s standard response to an oil price slump (as we all know, in an effort – usually successful – to prop up prices). Despite all the speculation about them trying to drive expensive-to-produce sources like shale oil out of business, it’s a pretty thin argument as to why they would now do the EXACT OPPOSITE of what they have always done in the past – ESPECIALLY considering their somewhat degraded capacity to impact global markets.

          2. Crude oil isn’t going back to anywhere near $100/barrel any time soon (for reasons already discussed), so OPEC/Saudi attempts to drive up prices will have a relatively limited impact – and would likely be a wasted effort since the consensus is that oil prices will rebound regardless.

          3. Despite having substantial cash reserves, the Saudis have to worry about maintaining their domestic spending through what could potentially be a multi-year bear market in oil. Cutting production now gains them little, and further reduces their revenue stream at a time when they need to keep spending up on employment and social programs in order to avoid social unrest.

          Obviously OPEC crude is a finite resource, but I’m betting that climate change mitigation and geopolitical concerns will keep the momentum toward renewables and reduce global demand for fossil fuels faster than reserves become depleted.

          And I think the Saudis see this as well. So for them it’s essentially “smoke ’em while you got ’em” (pardon the paraphrase).

          • 0 avatar

            The Saudis have MANY motives. Current events provide the excuse for them to do what they wanted to do anyway.

            What’s the purpose of having a cartel if you don’t engage in cartel behaviour? There is more to a monopoly or a cartel than providing price cover for your competitors Driving out competitors by underselling them for a spell is typical behavior. This is the third time OPEC has done this in my memory, possible the fourth.

            RE: ” it’s a pretty thin argument as to why they would now do the EXACT OPPOSITE of what they have always done in the past – ESPECIALLY considering their somewhat degraded capacity to impact global markets.”

            Except they have done this before. What do you think has degraded their ability to impact global markets?

            RE: “Crude oil isn’t going back to anywhere near $100/barrel any time soon (for reasons already discussed), so OPEC/Saudi attempts to drive up prices will have a relatively limited impact – and would likely be a wasted effort since the consensus is that oil prices will rebound regardless.”

            Driving out high cost producers will cause the price to rise anyway. By my reckoning we are in for 18 to 24 months of global moderate oil prices. A lot can happen in that time. What happens to EV investment when consumers aren’t driven by high fuel costs to buy them? Alternative fuels investment? I suspect the bankers for TransCanada are hoping they don’t have to finance Keystone. The traffic Keystone is supposed to transport won’t exist in a low global market price environment. The Saudis aren’t unhappy about that. Keep in mind, these people have the best economists money can buy.

            RE: ” Despite having substantial cash reserves, the Saudis have to worry about maintaining their domestic spending through what could potentially be a multi-year bear market in oil. Cutting production now gains them little, and further reduces their revenue stream at a time when they need to keep spending up on employment and social programs in order to avoid social unrest.”

            You can bet they’ve calculated it all out.

            Again, OPEC produces about the same amount of oil today as they did 40 years ago. Ask yourself WHY. The other times they maintained production to allow the global market price to drop caused ethanol plants to go BK and high cost producers to do the same.

            “Is this recent Saudi Arabia unilateral export crude oil price cut intended to force the OPEC Cartel to once again follow their lead or is this action repeat of a historic strategy to reduce the ability of non-OPEC countries such as the U.S. to maintain current domestic crude oil production levels?”

            “During the late 1970’s the ex-situ shale oil production technologies and pilot projects were successfully developed and major Industrial production projects were approved-initiated by many Upstream Oil Production Companies. One of the critical economic performance factors of ex-situ shale oil development was ‘production costs’. In 1980 market crude oil prices were over $30 per barrel and expected to increase further. Ex-situ production breakeven costs were about $30 per barrel. If World market prices continued to increase as projected, the economics of ex-situ shale oil production would become increasingly attractive. Unfortunately the combination of early 1980’s economic recessions, declining world crude oil demand, and OPEC oversupplying the markets led to a long-term decline in market prices. These factors effectively shutdown all the ex-situ shale oil production projects in the early 1980’s.”

            http://theenergycollective.com/jemillerep/2146151/are-declining-oil-prices-increasing-risks-opec-us-energy-security-or-clean-fuels-

            Or read anything by James Woolsey, Anne Korin, and Gal Luft on the subject.

  • avatar

    http://www.wsj.com/articles/SB10001424052748703806304576243010385191274

    Woolsey and Korin

    Some might recall Woolsey from his stint at CIA. The CIA has an extensive research staff to divine the motives of OPEC. After all, oil economics is a matter of national security.

    • 0 avatar
      hybridkiller

      “Except they have done this before. What do you think has degraded their ability to impact global markets?”

      And your point is? Permanent shifts in supply dynamics courtesy of shale oil and tar sands, a 10 year long trend of falling US demand for gasoline, the slow but steady incremental shifts in global industries toward development and use of renewable energy – OPEC has zero control over any of those things. Hell, the Saudis themselves are spending 12-figure money to convert their domestic electric grid to renewable energy. I think we can both agree they see the writing on the wall.

      “You can bet they’ve calculated it all out.”

      Again, your point is? The smartest analysts and traders in the business don’t have a crystal ball. I believe the Saudis are smart enough to plan for a worst-case scenario – no more and no less.

      As to this whole issue of them trying to kill shale oil, I think it’s a red herring. Oil falls below profitability threshold, shale production shuts down – price rises much above that threshold, it comes back on line. The upshot is that the additional available supply from shale oil and tar sands points to a lower-than-historical equilibrium price for the foreseeable future. That’s a permanent shift, and it’s one that, again, is out of OPEC’s control.

      • 0 avatar

        Except there is no permanent shifts in supply dynamics with the global price at this level.

        What on earth does a “falling demand in the U.S.” have to do with anything? Global demand certainly isn’t trending downward. What do you think happens if the U.S. supplies ALL of its domestic consumption? The trend toward renewables slows remarkably with oil prices this low.

        The Saudis own the crystal ball. They ARE the crystal ball.

        Of course, they can’t kill shale and sands. They can sure as hell slow it down. What traffic will travel over Keystone at prices this low? WHy would lenders want to loan money for it when it is clear OPEC can BK it?

        OPEC doesn’t “control” anything. But they can certainly strongly influence it. “Control” is a relative term.

        The issue for the U.S. is NOT our dependence on foreign oil. The issue is our dependence on the global price of oil as influenced by OPEC.

        You sound like a guy who thinks “Drill Baby Drill” is a winning strategy.

        You don’t need a WSJ subscription to read stuff from Luft, Korin, and/or Woolsey. Buy the book, “Turning Oil into Salt.” Its cheap. Go to YouTube and do a search. Its all out there, and it makes perfect sense.

        • 0 avatar
          hybridkiller

          “Except there is no permanent shifts in supply dynamics with the global price at this level.”

          Nobody seriously thinks it will remain at this level for long. The permanent shift has occurred with respect to the upper end of the trading range, not the bottom.

          “What on earth does a “falling demand in the U.S.” have to do with anything?”

          Oh gee, I don’t know, a leading indicator of falling global demand perhaps? China is the fastest growing consumer of oil, but arguably the progress that took the US 50 years to achieve in terms of energy efficiency gains China will do in <20 – they won't have nearly as much ground to cover as we did, and they don’t have to contend with the political gridlock that slows down progress in the US.

          "The Saudis own the crystal ball. They ARE the crystal ball."

          That's the most ridiculous thing you've said yet. I don't even know what that means…

          "The issue for the U.S. is NOT our dependence on foreign oil.”

          Not any more it would seem.

          "You sound like a guy who thinks “Drill Baby Drill” is a winning strategy."

          If that's how you read my remarks then your deductive skills need some serious work – I’m an enthusiastic proponent of alternative/renewable energy, and I think climate/environmental concerns are now the primary driver of progressive energy policies. Fossil fuels will be a marginal energy source in another 50 years, and likely a lot sooner.

        • 0 avatar
          jimbob457

          @Ruggles

          “You don’t need a WSJ subscription to read stuff from Luft, Korin, and/or Woolsey. Buy the book, “Turning Oil into Salt.” Its cheap. Go to YouTube and do a search. Its all out there, and it makes perfect sense.”

          I dunno. Never heard of these characters (except for Woolsey who is hardly an expert on the oil business), but Dan Yergin is an old friend of mine, and his view is that fracking has fundamentally shifted the long run petroleum supply curve to the right by quite a bit. I have seen the same thing for myself.

          In any mining industry, once you start mining source rock (and this what fracking does), all previous bets are off. Whether the new oil price settles out to be $40 or $50 or $60 or whatever, it will remain low for a very long time – absent, of course, some major supply interdiction. For all intents and purposes, this oil boom is over.

          Cheaper oil? This is bad for Texas, Louisiana and North Dakota but good for the rest of the US. Good for Europe, China and Japan, but bad for Russia and OPEC. Bad for EV’s, hybrids and little turbo diesel crackerbox cars, but good for the motor vehicle industry as a whole. It may also be bad for certain lobbyists like Luft and Korin who might need to change jobs.

          I can understand why the average Joe might be skeptical and suspect that the current collapse in oil prices might not last. But, why is it that supposedly educated and informed persons cannot tell the difference between a price decline caused by weaker demand (which usually rights itself fairly quickly) as opposed to this one which resulted from a long term and more-or-less permanent increase in supply? This is Econ 101. Did they not take Econ 101?

          • 0 avatar

            Actually, Woolsley IS an expert on the oil business and other energy concerns. So was my father, a past President of the API Standards division, and my uncle who retired as Vice Chairman of Phillips Petroleum. Good friend Tom Kontos, an oil and minerals economist now specializing in the auto wholesale business also understands the oil business better than most. So did my best friend’s father, Chief Geologist for Phillips before he passed away.

            As far as fracking being a game changer – It is more of a game changer when the global market price and availability of water allows it. Another friend is in the business of fracking in N Dakota. He has sent pics of how fracking has laid waste to the countryside. It ain’t pretty. And he is in the business. Another friend sells 300K gallons of fresh water each day to frackers in W. TX. How long do you think that goes on?

            “From Wiki: Woolsey is a national security and energy specialist and former Director of Central Intelligence who headed the Central Intelligence Agency from February 5, 1993 until January 10, 1995.”

            One thing you can count on – After a spell, OPEC will go back to restraining production to bolster the market price.

            I guess it must be Econ 201 where we studied cartel behaviour. OPEC produces about as much oil today as it did 40 years ago. They curtail production to maintain price except when it is their goal to drive out competitors. That’s what cartels and monopolies do.

            It is NOT good for the auto industry for consumers to start buying heavies in great numbers again. It just sets them up for the next shock.

            Luft and Korin aren’t lobbyists. Did you make that up?

    • 0 avatar
      hybridkiller

      “Unfortunately the combination of early 1980’s economic recessions, declining world crude oil demand, and OPEC oversupplying the markets led to a long-term decline in market prices. These factors effectively shutdown all the ex-situ shale oil production projects in the early 1980’s.”

      That was then, this is now. The recent shale boom is largely a result of new drilling technologies that have unlocked vastly greater reserves, making it economically viable in ways undreamed of 30 years ago.

      btw, I’d love to read that WSJ article, but I don’t have a subscription.

  • avatar

    I presume when you refer to “the modern oil market” you refer to the transition from the 7 sisters dictating prices to a market where those with the highest reserves and lowest production costs hold sway. Whether there are direct spot market purchases between two parties or futures contracts with the price arrived at via open bid, the market dynamics that results from the most powerful cartel doing what cartels do isn’t changed by the form of transaction.

    In short, I don’t think there is a universally agreed upon date that separates the “modern oil market” from “the old oil market.” It could be when OPEC disrupted the strangle hold the 7 sisters had on global oil prices. It could be after the Yom Kippur war. It could be based on a variety of things. The method used to transact business has evolved over time. Certainly, the establishment of the International Petroleum Exchange, and other such entities was part of the evolution. But futures contracts already existed.

    Again, what does this have to do with the global market price of oil? Its just another method of establishing a price in a competitive bid environment.

  • avatar

    RE: “Except there is no permanent shifts in supply dynamics with the global price at this level.”

    Nobody seriously thinks it will remain at this level for long.

    How long is “long.” It will be long enough to temporarily blunt a variety of initiatives if history is any indication.

    RE: “What on earth does a “falling demand in the U.S.” have to do with anything?”

    Oh gee, I don’t know, a leading indicator of falling global demand perhaps? China is the fastest growing consumer of oil, but arguably the progress that took the US 50 years to achieve in terms of energy efficiency gains China will do in <20 – and they won't have as much ground to cover as we did.

    Leading indicator? Lets see how $2.50/gal fuel impacts consumption. You are actually saying that because demand has slowed in the U.S. that you think that indicates demand will fall internationally as well? If so, what on earth are you smoking.

    RE: “The Saudis own the crystal ball. They ARE the crystal ball.”

    That's the most ridiculous thing you've said yet. I don't even know what that means…

    What is ridiculous is the idea that OPEC is capable of such enormous impact on the global oil market that they don’t need a crystal ball to predict the future. They can create it on their own.

    RE: “The issue for the U.S. is NOT our dependence on foreign oil. The issue is our dependence on the global price of oil as influenced by OPEC.”

    No argument there, and I've said nothing to indicate otherwise.

    "You sound like a guy who thinks “Drill Baby Drill” is a winning strategy."

    If that's how you read my remarks then your deductive skills need some work. Fossil fuels will be a marginal energy source in another 50 years, and likely a lot sooner.

    Sounds like you think you have the crystal ball. One doesn’t need deductive skills to observe what happens during OPEC caused or allowed “gluts.” One can use the past to gauge how long this current situation might go on. You can use the past to gauge the impact on alternative fuel investment. Same with the impact on high cost producers.

    The following makes me question YOUR deductive reasoning. “That was then, this is now. The recent shale boom is largely a result of new drilling technologies that have unlocked vastly greater reserves, making it economically viable in ways undreamed of 30 years ago.”

    This “new tech” is viable only when the market price is high enough to support it. At $85. production begins to wane. At $65. most fracking is no longer viable, although production will limp along for a while until major capital investment like repairs and maintenance is required. BTW, some friends in W TX have a water concession business. They sell 300K gallons of potable water PER DAY to the frackers. Tell me against how fracking is a game changer.

    I’ve lived through a few of these. The disruption isn’t anything you can imagine unless you’ve lived it. If you had lived in the oil patch through the late 1980s you’d be telling me about it rather than the other way around.

    Our government needs to get involved more heavily in promotion of alternative fuels. Just getting Congress to pass the Open Fuel Standards Act would be a major step in the right direction. Who do you suppose is holding that up?

    • 0 avatar
      hybridkiller

      You’re clearly an intelligent, educated guy. But with all due respect it’s become apparent to me that you’re firmly stuck in the past with regard to your conclusions. History is relevant and informative, but its lessons must be reconciled with current realities.

      And btw, I was there waiting in line for gas in 1979 – and yes, I was driving the car. I may have fallen off the turnip truck as they say, but it wasn’t yesterday.

      At least it seems we agree that alternative and renewable energy is the way of the future.
      I wish you well.

      • 0 avatar

        Yes, the lessons of history need to be resolved with current realities. The current reality is that high cost producers are out of business when the current low global market price of oil is maintained for an extended period of time. Investment in alternative fuels is stymied. Interest in conservation wanes. etc. etc. etc. This is not lost on the Saudis.

        1979 was a result of the Iranian hostage crisis. The mid 1980s was a result of an oil glut, which laid waste to the oil patch. It caused massive layoffs and early retirements to oil company employees, including my father. It laid waste to my home town. It drove many people I know well into bankruptcy. Consumers started buying heavies again. Ethanol producers also went BK. There was extensive consolidation among the oil companies. There will be many similarities this time around. Of course, there was no EV business then. Consumption spiked while the public was lulled back into a false sense of security. Small cars were worth nothing on trade.

        My conclusion is that there will be many things happen this time around that mirror what happened then. In fact, its already happening. Like the President said, “Don’t get used to it, it won’t last.” But a lot of healthy initiatives will get put on the shelf for a while.

  • avatar

    http://www.vox.com/2014/12/16/7401705/oil-prices-falling

  • avatar
    jimbob457

    @Ruggles
    “Luft and Korin aren’t lobbyists. Did you make that up?”

    “GAL LUFT and ANNE KORIN are Co-Directors of the Institute for the Analysis of Global Security.

    The Institute for the Analysis of Global Security (IAGS) is a Washington based non-profit public educational organization dedicated to research and public debate on issues related to energy security. The IAGS seeks to promote public awareness to the strong impact energy has on the world economy and security and to the myriad of technological and policy solutions that could help nations strengthen their energy security.

    The organization publishes analysis on the broad spectrum of energy security issues, including books, book chapters, and reports. With numerous media appearances and an in-house online publication – the Journal of Energy Security – the organization is a source of information for reporters, policymakers and the general public. Commentary and opinion pieces by IAGS experts have appear in publications including the New York Times, Wall Street Journal, Washington Post, Washington Times, Los Angeles Times, Baltimore Sun, Philadelphia Inquirer, Business Week, Foreign Affairs, Foreign Policy, The American Interest, Commentary Magazine and Time Magazine. IAGS’ experts are frequent guests on major television and radio networks.”

    My apologies. How could I have ever mistaken these two fine persons seeking to educate the American public on such vital issues for something as crass as lobbyists? I gather they must do all this pro bono? Nobody paying their salaries and expenses?

  • avatar

    RE: “Demand 90 days hence is always uncertain depending on weather and economic conditions.”

    What difference does it make what demand is 90 days out. The contracts are delivered on a particular date. Of greater concern is a place to store the oil once it arrives.

    RE: “OPEC is still a cartel, although with quite a bit less power than it once had.”

    Not as powerful? Yet, the Saudi announcement had immediate and dramatic impact.

    RE: “The oil business remains secretive. Lots of the published data from outside the US are, from time to time, bogus.”

    Yes, and OPEC members cheat. I’m sure we aren’t getting sound data from ISIS. But we have a pretty good idea.

  • avatar

    RE: “Informed persons know about fracking and its implications. To them “Peak Oil” is a joke – an historical curiosity. If you bet real money on “Peak Oil”, you are screwed.”

    Yes, intelligent people know fracking is expensive, uses a lot of water, and makes a huge mess. It ain’t even that popular in Texas in areas where people actually live. The rabbits don’t complain much.

    But I have no idea what you mean by betting on “Peak Oil.” You can bet for it, or against it. Either way, you’re betting on it. One way or the other mankind will wean itself off of fossil fuel. The primary issue is whether we do it on our schedule, or have it forced on us.

  • avatar

    http://autosandeconomics.blogspot.com/2013/10/the-fundamentals-of-global-oil-economics.html

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