The Price of Oil and history repeating?

[GarnerSmash]

The price of crude oil has fallen by 25% in recent months which has had a significant impact upon those nations that rely on its production as the basis of their economies. OPEC nations such as Venezuela and Nigeria are suffering significant impacts due to this downturn in price, yet despite this they failed to push through a motion recently at an OPEC meeting to reduce OPEC production and thus force the price back up. This motion was blocked initially by Saudi Arabia, the country with the greatest capacity to withstand this drop in price. On face value it appears to be a strange move. Why would a country take a financial hit when they can manipulate the market? There is an argument that there is a fear that a reduction in OPEC production will open the door to the US and the oil being produced from their fracking operations as well as future US production from further ocean shelf exploration and Mexican deregulation which will provide private companies with access to Mexican reserves for the first time. But surely this is a longer term problem and one that will not impact in the near future, thus making that argument redundant in the current climate?

There could be another factor at play here. In his auto-biography Ronald Regan apparently stated that the US and the Saudi’s agreed to drive down the price of oil in the early to mid 80’s to place significant financial pressure on a Soviet economy heavily reliant on crude oil sales that was already stressed from trying to keep up with the acceleration in US military spending as well as dealing with a protracted war in Afghanistan, remembering it is cheaper to support a guerrilla war than defend against it. This financial pressure directly resulted in the USSR finding itself incapable of being able to maintain their control of the Eastern Block due to the cost of military action required to do so, and thus led to the empowerment of Eastern Block countries and the collapse of the Soviet Union.

Since the fall of the USSR the Russian economy has become even more reliant on the sales of crude oil and gas. Today we can read about the all-time low of the value of the Russian rouble against the Greenback as a direct consequence of the drop in price of the value of crude oil and the currency has lost 42 precent of its value since January. Now the Saudi’s are blocking what seems a legitimate request to lessen production to drive the value back up again.

Sanctions placed on Russia by the West are having a significant impact on their companies being able to access debt relief facilities off shore, and when these creditors come looking for their money these companies will either default or ask the Russian government for a bail out, which they will scarcely be able to afford. The Russian expansion of their Gas pipelines to Europe via the southern stream pipeline is also no guarantee to go ahead and the Russian cannot afford to turn off their gas supply to Europe. The price of oil keeps dropping and the horizon promises the creation of new oil field off shore of the US and Mexico.

So, are the Russian’s being made to pay for their actions in the Ukraine, for their nose thumbing of the West and its desire for influence along its borders? Are we looking at a geopolitical play to bring about regime change in Moscow or more so a slap to the head for Putin to show him how perilous the Russian position actually is? Or am I reading too much into this?

How do we see this playing out?

 

[Tasmaniac]

I've been watching this for a while, surprising there hasn't been a thread already started on this.

Given the premise that's it's the Saudi's pushing things. The main schools of thought I've seen are:

1) Punish the Russians for backing Syria. This would also get an uptick of support from US who would like to see the Russians squirming over their support for Assad + Ukraine (with a corresponding downtick from the US because the low price is hurting the Bakken Fields oil extraction).

2) Suppress the US oil production expansion. I read an article (BBC news I think?) from a journo claiming to have a direct quote from the Saudi oil minister at the latest OPEC meeting in Vienna saying "It's all about squashing (my word) the US oil expansion". I've read several articles saying the Saudi's have heavily discounted shipments of oil to the US so they could compete/undercut the Bakken Oil suppliers, presumably to maintain market share in the US. (Obviously it's very dangerous for the Saudi's if the US becomes oil independent, might see a corresponding decrease in ME care factor which would leave the Saudi's swinging in the breeze).

Furthermore, rather than just their US market, there was speculation the US's next step (after achieving oil independence) would be to commence exports to Asia, competing with OPEC there.

I don't fully understand all the implications of this Bakken Oil stuff, I've seen quotes saying Bakken production costs are as low as $45/Barrel (seen higher quotes too, $55, $65, up to $80, obviously varies). The point is the impression I had was it's actually cheaper for the US to pump Bekken oil than for many conventional suppliers (of older oilfields) around the world, so how can the rest of the world undercut Bakken Oil? I've seen some comments which indicate that the Bakken Field production is (financially) highly leveraged, a lot funded by bonds which aren't far off 'junk' status, so I think this is where the pressure is supposed to come from. The Bakken suppliers need to make fat profits (operationally) to finance their high interest bonds, no fat profit means can't finance their bonds and the whole thing implodes and production has to be shutdown. But even then, surely it would only be temporarily? As long as the oil is in the ground and it's cheap to extract, the Bakken producers would only need a small price hike to be back in business. So there's at least one, or more angles I don't understand here.

3) Hammer Iran, for the Saudi's this is a good enough reason on it's own, you can double this up by remembering the nuclear negotiations going on at the moment, the Saudi's won't like anything less than full stripping of all nuclear technology from Iran (or as close as they can get), so maximising pressure on Iran at this stage works for them. Less money for Iran is also less money for Syria (since Iran helps funds Assad, or at least funding those fighting with Assad).

4) Reinforce discipline in OPEC (Re: only pumping quota), many members pump above their agreed quota's, thus undermining the whole cartel philosophy. Most of these members are in a lot worse position Re: meeting national budgets at lower oil prices than the Saudi's, so by keeping the price down long enough they than screw the other OPEC members hard enough that they have to comply with their agreed quota in order for the Saudi's to take action themselves.

Low oil prices certainly make for interesting times in the oil rich authoritarian regimes around the world, plenty opportunity for car crashes to come. Probably a month or more ago now I read the Venezuela Oil minister requested an emergency OPEC meeting to push up the price of oil, due to their high social policy spending, Venezuela is one of the most vulnerable countries to sustained low oil prices (and they don't have the fat sovereign wealth fund to rest on in the short term).

Low oil prices also knock onto lower world gas and coal prices, which hurts those who export them as well (like Australia).

 

[telsor]

Low oil prices also knock onto lower world gas and coal prices, which hurts those who export them as well (like Australia).

5) Make alternative energy less attractive by having the 'normal' energy sources cost less.

 

[smokingjacket]

5) Make alternative energy less attractive by having the 'normal' energy sources cost less.

One of the best things about alternative energy sources is reducing our reliance on anti-market cartels.

I'd rather rely on the sun and wind than the Saudi royal family.

 

[illavitar]

Does anyone know what is cost a month ago by the barrel? It's only dropped from 1.50 to 1.29p/l yet barrel prices are now below US$80 :S

Servo's possibly keeping prices illegally inflated and stealing from the consumer?

 

[Tasmaniac]

Does anyone know what is cost a month ago by the barrel? It's only dropped from 1.50 to 1.29p/l yet barrel prices are now below US$80 :S

Servo's possibly keeping prices illegally inflated and stealing from the consumer?

It was $100/barrel very recently (maybe 2 months).

Not defending greedy bastards, but remember the Aussie Dollar has been on the slide too. If Oil (in USD) drops, but the AUD/USD exchange rate drops then that will cancel out some/most/all of the drop in oil price (depending on which has dropped further, as a %).

Also remember a big chunk of the price we pay for petrol is the refining cost, this doesn't change just because they are refining cheaper oil.

 

[Todman]

I'llage the cost of oil will continue to drop, and probably leveling around the $40 US mark. It will make the over expensive, heavily subsidized renewables unmarketable.

 

[Tasmaniac]

I'llage the cost of oil will continue to drop, and probably leveling around the $40 US mark. It will make the over expensive, heavily subsidized renewables unmarketable.

Surely it wouldn't go that low (or stay there), at $40 every major oil exporter in the world in an impoverished 3rd world country. Would truly be a 'new world order'.

 

[Play by Numbers]

I'llage the cost of oil will continue to drop, and probably leveling around the $40 US mark. It will make the over expensive, heavily subsidized renewables unmarketable.

So you are excited about financial devestation, sliding standards of living, economic issues for Australia, all so an unalected brutal cartel can continue to profit from the primacy of oil production, all to spite renewables and energy independence.

YOu are genuinally sick

 

[Todman]

$40 US is still historically high price for Oil.

 

[Lebbo73]

So you are excited about financial devestation, sliding standards of living, economic issues for Australia, all so an unalected brutal cartel can continue to profit from the primacy of oil production, all to spite renewables and energy independence.

YOu are genuinally sick

Where did he say that?

 

[Freo2012]

I have just written a little OP thread "global derivatives market" - might want to have a quick read and understand the effect of the unprojected massive fall in oil prices - war is inevitable (with some oil producing countries) to cut production if OPEC do not cut production (USA will not force their on-shore oil companies to decrease production and many are derivative hedged to a large extent during recent higher oil price environment) to ensure global banks still continue to exist - extreme power play over global base commodity is starting to happen.

 

[Todman]

So you are excited about financial devestation, sliding standards of living, economic issues for Australia, all so an unalected brutal cartel can continue to profit from the primacy of oil production, all to spite renewables and energy independence.

YOu are genuinally sick

After looking at the graph I've posted then the chance of $20 per barrel is possible and probable.

 

[telsor]

One of the best things about alternative energy sources is reducing our reliance on anti-market cartels.

I'd rather rely on the sun and wind than the Saudi royal family.

Actually a lot of the renewables technologies rely on rare earth minerals, which largely come from China, so you're just swapping who you rely on.

 

[smokingjacket]

Actually a lot of the renewables technologies rely on rare earth minerals, which largely come from China, so you're just swapping who you rely on.

Why is trading with China a bad thing? Do you object to our iron ore and coal exports to that country?

Secondly Australia has one third of the worlds known rare earth deposits. That argument fails to stack up. We can have an industry that's self sufficient from all the way through the production chain. With the political will of course

 

[telsor]

Why is trading with China a bad thing? Do you object to our iron ore and coal exports to that country?

Secondly Australia has one third of the worlds known rare earth deposits. That argument fails to stack up. We can have an industry that's self sufficient from all the way through the production chain. With the political will of course

Why is trading with the Saudi's a bad thing?

 

[smokingjacket]

Why is trading with the Saudi's a bad thing?

Our oil trade with them finances the global Wahabist movement responsible for most of the problems of the last decade and a bit?

 

[Todman]

So you are excited about financial devestation, sliding standards of living, economic issues for Australia, all so an unalected brutal cartel can continue to profit from the primacy of oil production, all to spite renewables and energy independence.

YOu are genuinally sick

A lower cost for oil should have a stimulus for the economy, not to mention the benefits for the dear old pensioners, with lower energy costs they will now have more left over for other things.

 

[Sydney Bloods]

Does anyone know what is cost a month ago by the barrel? It's only dropped from 1.50 to 1.29p/l yet barrel prices are now below US$80 :S

Servo's possibly keeping prices illegally inflated and stealing from the consumer?

don't forget fuel taxes, ******* government. I drive 92K's day FFS!

 

[Todman]

http://www.theage.com.au/business/m...us43-morgan-stanley-says-20141208-122oje.html

Seems I'm not the only one who thinks the price will continue to fall

 

[Chief]

Just going off a part of an interview I listened to around the time of the G20.

The Russian economy is very inefficient, requiring decent oil prices to fund.

As a shallow reading of it, this could be the best thing for Russia's future. Force them to reform.

But likely it will just force them back into line so the US can dominate, and the price will go up again.

 

[Chief]

Does anyone know what is cost a month ago by the barrel? It's only dropped from 1.50 to 1.29p/l yet barrel prices are now below US$80 :S

Servo's possibly keeping prices illegally inflated and stealing from the consumer?

When oil goes up, it hits the pump immediately. When it drops it drops slowly.

 

[Todman]

Just going off a part of an interview I listened to around the time of the G20.
The Russian economy is very inefficient, requiring decent oil prices to fund.
As a shallow reading of it, this could be the best thing for Russia's future. Force them to reform.
But likely it will just force them back into line so the US can dominate, and the price will go up again.

you would need a lot of clout and very deep pockets if you suggest price fixing.

 

[Chief]

you would need a lot of clout and very deep pockets if you suggest price fixing.

The gist was that Russia wants to win back its cred as a threat to suppliers, and show that the US/the west will not come to their aid as in Ukraine. Russia wants to keep prices high with bi-lateral agreements to maintain its inefficient economy.

I was driving while listening so I don't recall it all, but it sounded like a plausible story.

 

[mottrain]

The gist was that Russia wants to win back its cred as a threat to suppliers, and show that the US/the west will not come to their aid as in Ukraine. Russia wants to keep prices high with bi-lateral agreements to maintain its inefficient economy.

I was driving while listening so I don't recall it all, but it sounded like a plausible story.

Yeah you'd be bang on on that and I wouldn't disagree with you on it. They've found themselves in a hole over it in terms of finances as all the other sanctions effects are starting to show. Their currency is struggling as well.