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'We Are Entering A New Oil Normal"
From Jawad Mian of Outside the Box
Investment Observations
The precipitous decline in the price of oil is perhaps one of the most bearish macro developments this year. We believe we are entering a “new oil normal,” where oil prices stay lower for longer. While we highlighted the risk of a near-term decline in the oil price in our July newsletter, we failed to adjust our portfolio sufficiently to reflect such a scenario. This month we identify the major implications of our revised energy thesis.
The reason oil prices started sliding in June can be explained by record growth in US production, sputtering demand from Europe and China, and an unwind of the Middle East geopolitical risk premium. The world oil market, which consumes 92 million barrels a day, currently has one million barrels more than it needs. US pumped 8.97 million barrels a day by the end of October (the highest since 1985) thanks partly to increases in shale-oil output which accounts for 5 million barrels per day. Libya’s production has recovered from 200,000 barrels a day in April to 900,000 barrels a day, while war hasn’t stopped production in Iraq and output there has risen to an all-time high level of 3.3 million barrels per day. The IMF, meanwhile, has cut its projection for global growth in 2014 for the third time this year to 3.3%. Next year, it still expects growth to pick up again, but only slightly.
Everyone believes that the oil-price decline is temporary. It is assumed that once oil prices plummet, the process is much more likely to be self-stabilizing than destabilizing. As the theory goes, once demand drops, price follows, and leveraged high-cost producers shut production. Eventually, supply falls to match demand and price stabilizes. When demand recovers, so does price, and marginal production returns to meet rising demand. Prices then stabilize at a higher level as supply and demand become more balanced. It has been well-said that: “In theory, there is no difference between theory and practice. But, in practice, there is.” For the classic model to hold true in oil’s case, the market must correctly anticipate the equilibrating role of price in the presence of supply/demand imbalances.
By 2020, we see oil demand realistically rising to no more than 96 million barrels a day. North American oil consumption has been in a structural decline, whereas the European economy is expected to remain lacklustre. Risks to the Chinese economy are tilted to the downside and we find no reason to anticipate a positive growth surprise. This limits the potential for growth in oil demand and leads us to believe global oil prices will struggle to rebound to their previous levels. The International Energy Agency says we could soon hit “peak oil demand”, due to cheaper fuel alternatives, environmental concerns, and improving oil efficiency.
The oil market will remain well supplied, even at lower prices. We believe incremental oil demand through 2020 can be met with rising output in Libya, Iraq and Iran. We expect production in Libya to return to the level prior to the civil war, adding at least 600,000 barrels a day to world supply. Big investments in Iraq’s oil industry should pay-off too with production rising an extra 1.5-2 million barrels a day over the next five years. We also believe the American-Iranian détente is serious, and that sooner or later both parties will agree to terms and reach a definitive agreement. This will eventually lead to more oil supply coming to the market from Iran, further depressing prices in the “new oil normal”. Iranian oil production has fallen from 4 million barrels a day in 2008 to 2.8 million today, which we would expect to fully recover once international relations normalize. In sum, we see the potential for supply to increase by nearly 4 million barrels a day at the lowest marginal cost, which should be enough to offset output cuts from marginal players in a sluggish world economy.
Our analysis leads us to conclude that the price of oil is unlikely to average $100 again for the remaining decade. We will use an oil rebound to gradually adjust our portfolio to reflect this new reality.
From 1976 to 2000, oil consolidated in a wide price range between $12 and $40. We think the next five years will see a similar trading range develop in oil with prices oscillating between $55 and $85. If the US dollar embarks on a mega uptrend (not our central view), then we can even see oil sustain a drop below $60 eventually.

Source: Bloomberg
Normally, falling oil prices would be expected to boost global growth. Ed Morse of Citigroup estimates lower oil prices provide a stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities. Per-capita oil consumption in the US is among the highest in the world so the fall in energy prices raises purchasing power compared to most other major economies. The US consumer stands to benefit from cheaper heating oil and materially lower gasoline prices. It is estimated that the average household consumes 1,200 gallons of gasoline a year, which translates to annual savings of $120 for every 10-cent drop in the price of gasoline. According to Ethan Harris of Bank of America Merrill Lynch: “Consumers will likely respond quickly to the saving in energy costs. Many families live “hand to mouth”, spending whatever income is available. The Survey of Consumer Finances found that 47% of families had no savings in 2013, up from 44% in the more healthy 2004 economy. Over time, energy costs have become a much bigger part of budgets for low income families. In 2012, families with income below $50,000 spent an average of 21.4% of their income on energy. This is almost double the share in 2001, and it is almost triple the share for families with income above $50,000.” The “new oil normal” will see a wealth transfer from Middle East sovereigns (savers) to leveraged US consumers (spenders).
The consumer windfall from lower oil prices is more than offset by the loss to oil producers in our view. Even though the price of oil has plummeted, the cost of finding it has certainly not. The oil industry has moved into a higher-cost paradigm and continues to spend significantly more money every year without any meaningful growth in total production. Global crude-only output seems to have plateaud in the mid-70 million barrels a day range. The production capacity of 75% of the world’s oilfields is declining by around 6% per year, so the industry requires up to 4 million barrels per day of new capacity just to hold production steady. This has proven to be very difficult. Analysts at consulting firm EY estimate that out of the 163 upstream megaprojects currently being bankrolled (worth a combined $1.1 trillion), a majority are over budget and behind schedule.
Large energy companies are sitting on a great deal of cash which cushions the blow from a weak pricing environment in the short-term. It is still important to keep in mind, however, that most big oil projects have been planned around the notion that oil would stay above $100, which no longer seems likely. The Economist reports that: “The industry is cutting back on some megaprojects, particularly those in the Arctic region, deepwater prospects and others that present technical challenges. Shell recently said it would again delay its Alaska exploration project, thanks to a combination of regulatory hurdles and technological challenges. The $10 billion Rosebank project in Britain’s North Sea, a joint venture between Chevron of the United States and OMV of Austria, is on hold and set to stay that way unless prices recover. And BP says it is “reviewing” its plans for Mad Dog Phase 2, a deepwater exploration project in the Gulf of Mexico. Statoil’s vast Johan Castberg project in the Barents Sea is in limbo as the Norwegian firm and its partners try to rein in spiralling costs; Statoil is expected to cut up to 1,500 jobs this year. And then there is Kazakhstan’s giant Kashagan project, which thanks to huge cost overruns, lengthy delays and weak oil prices may not be viable for years. Even before the latest fall in oil prices, Shell said its capital spending would be about 20% lower this year than last; Hess will spend about 15% less; and Exxon Mobil and Chevron are making cuts of 5-6%.”
About 1/3rd of the S&P500 capex is done by the energy sector. Based on analysis by Steven Kopits of Douglas-Westwood: “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs. Nearly half of the industry needs more than $120. The 4th quartile, where most US E&Ps cluster, needs $130 or more.”
As energy companies have gotten used to Brent averaging $110 for the last three years, we believe management teams will be very slow to adjust to the “new oil normal”. They will start by cutting capital spending (the quickest and easiest decision to take), then divesting non-core assets (as access to cheap financing becomes more difficult), and eventually, be forced to take write-downs on assets and projects that are no longer feasible. The whole adjustment process could take two years or longer, and will accelerate only once CEOs stop thinking the price of oil is going to go back up. A similar phenomenon happened in North America’s natural gas market a couple of years ago.
This has vast implications for America’s shale industry. The past five years have seen the budding energy renaissance attract billions of dollars in fixed investment and generate tens of thousands of high-paying jobs. The success of shale has been a major tailwind for the US economy, and its output has been a significant contributor to the improvement in the trade deficit. We believe a sustained drop in the price of oil will slow US shale investment and production growth rates. As much as 50% of shale oil is uneconomic at current prices, and the big unknown factor is the amount of debt that has been incurred by cashflow negative companies to develop resources which will soon become unprofitable at much lower prices (or once their hedges run out). Energy bonds make up nearly 16% of the $1.3 trillion junk bond market and the total debt of the US independent E&P sector is estimated at over $200 billion.
Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia "will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.
In the current cycle, though, prices will have to decline much further from current levels to curb new investment and discourage US production of shale oil. Most of the growth in shale is in lower-cost plays (Eagle Ford, Permian and the Bakken) and the breakeven point has been falling as productivity per well is improving and companies have refined their fracking techniques. The median North American shale development needs an oil price of $57 to breakeven today, compared to $70 last year according to research firm IHS

Source: WoodMackenzie, Barclays Research
While we don’t believe Saudi Arabia engineered the latest swoon in oil prices, it would be foolish not to expect them to take advantage of the new market reality. If we are entering a “new oil normal” where the oil price range may move structurally lower in the coming years, wouldn’t you want to maximise your profits today, when prices are still elevated? If, at the same time, you can drive out fringe production sources from the market, and tip the balance in MENA geopolitics (by hurting Russia and Iran), wouldn’t it be worth it? The Kingdom has a long history of using oil to meet political and economic ends.
We don’t see any signs of meaningful OPEC restraint at the group’s 166th meeting on November 27th in Vienna. The cartel has agreed to cut crude production only a handful of times in the past decade, with December 2008 being the most recent instance. Based on our assessment, the only members with enough flexibility to reduce oil output voluntarily are the United Arab Emirates, Kuwait and Saudi Arabia. OPEC countries have constructed their domestic policy based on the assumption that oil prices will remain perpetually high and most members are not in a strong enough financial position to take production offline. Once all the costs of subsidies and social programs are factored-in, most OPEC countries require oil above $100 to balance their budgets. This raises longer-run issues on the sustainability of the fiscal stance in a low-oil price environment. On the one hand, you have rising domestic oil consumption because there is no price discipline, which leaves less oil for the lucrative export market, and on the other hand, you require more money now than ever before to support generous budgetary spending.
How will this be resolved?
And with a much slower rate of petrodollar accumulation, what will be the implication for global financial markets, given the non-negligible retraction in liquidity?
The current oil decline has potentially cost OPEC $250 billion of its recent earnings of $1 trillion. Thus, it is not surprising to see OPEC production – relative to its 30 million barrels a day quota – rising from virtual compliance to one where the cartel is producing above its agreed production allocation. Output rose to 30.974 million barrels per day in October, a 14-month high led by gains in Iraq, Saudi Arabia and Libya. So, it can be grasped that the lower the price of oil falls, the greater the need to compensate for lower revenues with higher production, which paradoxically pushes oil prices even lower.
We believe the “new oil normal” will alter relative economic and political fortunes of most countries, with income redistributing from oil exporters (GCC, Russia) to oil importers (India, Turkey). We therefore exited our long position in the WisdomTree Middle East Dividend Fund (GULF) at a 14.4% gain.
Those nations with abundant oil tend to suffer from the “resource curse”. With no other ready sources of income, the non-oil economy atrophies due to the extraordinary wealth produced by the oil sector. OPEC countries are some of the least diversified economies in the world.
In an article titled “When The Petrodollars Run Out”, economist Daniel Altman wrote for the Foreign Policy magazine as follows: “Twenty countries depend on petroleum for at least half of their government revenue, and another 10 are between half and a quarter. These countries are clearly vulnerable to big changes in the price and quantity of oil and gas that they might sell…So what can these countries do to bolster themselves for the future? For one thing, they might try to use their petroleum revenues to diversify their economies. Yet there's little precedent for that actually happening. In the three decades from 1983 to 2012, no country that ever got 20 percent of its GDP from oil and gas – according to the World Bank's figures – substantially reduced those resources' share of its economy. The shares typically rose and fell with prices; there were no long-term reductions.”

Source: Foreign Policy
Saudi Arabia appears to be comfortable with much lower oil prices for an extended period of time. The House of Saud is equipped with sufficient government assets to easily withstand three years at the current oil price by dipping into their $750 billion of net foreign assets. Saudi Arabia bolstered output by 100,000 barrels a day recently to 9.75 million, and cut its prices for Asian delivery for November – the fourth month in a row that it has cut official selling prices to shore up its global market share. With American imports from OPEC almost cut by half and given weak European demand, most oil-producing countries are now engaged in a price war in Asia. The Kingdom generates over 80% of its total revenue from oil sales so it may not remain immune in the “new oil normal” for long. According to HSBC research, Saudi Arabia would face a budget shortfall approaching 10% of GDP at $70 oil and at $50, the deficit could exceed 15% of GDP.
Russia and Saudi Arabia have opposing agendas in the Middle East. We believe Russia would like to see Middle East burn. This would shore up the cost of oil and keep America from geopolitically deleveraging from the region, thus allowing more room for Putin to outmaneuver his opponents in Europe. It was reported last year that the Saudis offered Russia a deal to carve up global oil and gas markets, but only if Russia stopped support of Syria’s Assad regime. No agreement was reached. It now seems the Saudis are turning to the oil market to affect an outcome.
With global energy prices at multi-year lows, Russia is facing a persistent low growth environment and an endemic outflow of capital. The $30 drop in the Brent price translates into an annual loss in crude oil revenues of over $100 billion. According to Lubomir Mitov, Russia’s financing gap has reached 3% of GDP, and they have to repay $150 billion in principal to foreign creditors over the next 12 months. Even with $400 billion in foreign currency reserves and the Russian central bank raising its official interest rate by 150 basis points to 9.5% last month, the ruble is down 38% from its June high making foreign liabilities a lot more onerous. As per Faisal Islam, political editor of Sky News, “financial markets have punished Russia far quicker than Western governments.”
“It took two years for crumbling oil prices to bring the Soviet Union to its knees in the mid-1980s, and another two years of stagnation to break the Bolshevik empire altogether…” writes Ambrose Evans-Pritchard in The Daily Telegraph. “…Russian ex-premier Yegor Gaidar famously dated the moment to September 1985, when Saudi Arabia stopped trying to defend the crude market, cranking up output instead.” It is estimated the Soviet Union lost $20 billion per year, money without which the country simply could not survive.
Could we see a repeat of events?
In the past, higher resource prices increased the occasions for military conflicts as nations would scramble to secure necessary supplies. Going forward, however, we firmly believe lower oil prices pose a greater risk of escalating current geopolitical challenges.
Putin is a determined and ambitious leader who wants to expand Russia’s power and influence. Since he rose to dominance in 1999, he advocated development of Russia’s resource sector to resurrect Russian wealth. In his doctoral thesis, he equated economic strength with geopolitical influence. Today, Russia needs an oil price in excess of $100 a barrel to support the state and preserve its national security. Consequently, there is no question Putin will try to resist lower oil prices either through outright warfare or more covert economic sabotage.
Russia is the world’s 8th-largest economy, but its military spending trails only the US and China. Putin increased the military budget 31% from 2008 to 2013, overtaking UK and Saudi Arabia, as reported by the International Institute of Strategic Studies. Russia also has plans to become the world’s largest arms exporter by more than tripling military exports by 2020 to $50 billion annually. We are convinced Putin would like to see a bull-market in international tensions. This is the biggest threat to our “new oil normal” theme.

Source: Cagle Cartoons
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Putin is a determined and ambitious leader who wants to expand Russia’s power and influence
Yet it was the Nobel Prize Winner who spent $5 billion destabilizing Ukraine. Obama has bombed seven Muslim countries and almost lied his way to a major war with Syria with fairy tales about Assad's use of sarin gas.
Pulitzer Prize-winning investigative journalist Seymour Hersh has published an article demonstrating that the US government and President Barack Obama knowingly lied when they claimed that the Syrian government had carried out a sarin gas attack on insurgent-held areas last August.
http://www.wsws.org/en/articles/2013/12/10/pers-d10.html
Putin will try to resist lower oil prices either through outright warfare
Pure, puerile propaganda which ignores relentless bombing by the Nobel Prize Winner. To call this article worthlesss would be to compliment it.
What goes up, must come down. Oil is worth no more than $20 a barrel.
"The precipitous decline in the price of oil is perhaps one of the most bearish macro developments this year."
Yes. Cheap oil absolutely will kill the real economy.
2015 will be known as the year of the electric car as several Japanese and Korean car makers will be introducing fully electric models.
Add that to this article and the age of oil is over.
Right... because electric cars can substitute: jet fuel, diesel, ashphalt, fertilizer, heating oil, feedstock, plastics, polyurethanes and .... electric power generation to power those electric cars. Good plan.
LOL!! Take all ground transportation out of the equation and oil is finished. Heating oil? LOL!! Natty gas!!
Electricty is not a SOURCE of energy. You have to burn fossil fuels, use nuclear power or renewables to generate the electricty. Nuclear power and renewables need fossil fuels to build and maintain. Every step of conversion, you lose energy.
Matt, if you are going to quote from "Our Friend Electricity", you'll need to use quotation marks.
BTW my solar panels crank out electricity. The excess goes to the grid right now. Soon it will go straight into my car!!
Few drops of OIL is all I need to lubricate my bicycle chain.
"Our analysis leads us to conclude that the price of oil is unlikely to average $100 again for the remaining decade."
fail!
the problem with this assumption is that it prices the oil in dollars, and it assumes that the dollar will continue its grandiose valuation in a stable manner. not likely, especially as the federal reserve has specifically stated that it is working to maintain positive inflation rate (i.e., devaluaing the dollar / wealth transfer to the 0.001%). petrodollar hegemony is coming to an end quickly.
a more interesting speculation would be to talk about what oil is worth in real money (gold) - historically 1oz per 16 barrels.
Stupid article is stupid.
He lost me in a lot of places, but permanently when he cited "per well" productivity gains.
In fact the wells are about as productive as ever with practically no gains at all in recent years. Instead what we've got is "per rig" productivity gains mainly becasue of multi-well pad drilling.
These are entirely different concepts because the main cost of the well is in the well itself, by FAR, not in the rig movement and set-up costs.
Seems like an analyst should know these things.
The value of the dollar against comodities is a whole different discussion. The value of oil is going to drop because of slower economic activity and the development of new technologies to explore and extract oil. The value of the dollar, against all types of comodities, is going to drop because it is being hyper printed, digitally. That will be an offset.
Net net. US consumers are screwed.
The US Gov is all in to destroy the US energy industry. That can't be good long term since solar panels need taxes and digitally created revenues to make them sort of "economical" (but not really).
"BTW my solar panels crank out electricity. The excess goes to the grid right now. Soon it will go straight into my car!!"
How much energy is embedded in the panels? How much energy will they produce over their lifetimes, and what is the mean time between failure?
Are you on net metering or a subsidy payout program? It sure is great when other people's money pays for your stuff, right?
Personal ground transport accounts for only 45% of all oil used in the US. Best estimates put electric vehicles at 10% of total production by 2020 so that takes out 5% of oil consumption... a real revolution. Forget the Western world and look to China and India for the future of cars. They don't exactly have a decent electrical infrastructure for recharging. End of oil era is hyperbolic for at least another 20-30 years.
Add in commercial transportation.
I'm not forgetting China or India. Neither country has oil, so the impetus will be even greater there. I think we've seen what happens when the Chinese focus. When they want to have the best electric infrastructure they'll have it in short order. They didn't build the Three Gorges dam for chuckles.
It all happens on the margin. As soon as it becomes obvious that oil demand will only shrink, it's over. Most current investors thought oil was going to $120 by 12/31/14.
Paradigm shift!!
The fuel cost for an electric car is 1/3 of that for a gas-powered car. Throw in almost no maintainence cost and electric is a no brainer.
Oh, so the batteries last forever? Good to know.
Commercial transport won't be ready for electric motors for another 20 years, minimum. Too heavy, too big. You just don't dump a whole new way of doing things and POOF!. It takes many years to move things over. If you have ever been to India, you know there is little chance of EV taking off there in the foreseeable future. Oil will be with us for a while yet.
Commercial transport can run quite well on natural gas or propane. And trains could still (hypothetically) run on coal.
Does cheap oil mean our Generals can resume killing brown people with tanks again?
Because that electricity just spontaneously creates itself of course.
Coal being phased out in power generation, so are they going to use, firewood ?
Electric vehicles will work when the commute is short, avoiding deep discharge cycling,
but here in the US ?
The only reason Tesla is still here is because their cars are showboats, not really used like real
cars.I still have good sources in the battery industry who assure that there has not been any real
leap foward in technology, just incremental steps.The same problems that have plagued batteries
for 120 years have not been solved,nor has insight been made into the causes.
So electricity is going away? Good one!!
The Nissan Leaf is already out there. Yeah, even Americans are buying it. It's affordable and reliable. I've seen ads for KIA and Volkswagen models as well. Just because Ford, GM and Dodge cannot build it doesn't mean squat.
If you want to whistle past the graveyard, be sure to whistle a happy tune!! And sell any TX RE!!!!
Electric cars! No gasoline!! Little maintenance!! Few replacement parts!! Game Over!!
If the electric car market had to compete without subsidies it would not exist at all. They are not economical without first taxing everyone and sending that tax money to the manufacturers. That is criminal.
When the technology is mature and can directly compete with conventional power sources, without help from the tax code. I'm all for it.
The subsidies are necessary to get production up to critical mass, then the electric car will compete and win easily.
We subsidize so much garbage like sugar and tobacco. I WANT subsidies for electric cars.
Is it criminal? Call the cops!!
Did Henry Ford need his neighbor's and children's money to reach "critical mass"? How about Steve Jobs? Did Apple need to take money from uncle sugar to reach "critical mass" for the IPhone or IPad? Certainly not. Those products were economically viable when they reached the market.
If you want an electric car go buy one. Don't send all of US a bill for your car though.
What do you think about Aluminum batteries as backup? Supposedly 3000 kilometers range, so you use your 50 Km battery to commute, then dip into the aluminum battery for extended driving. Once it is used up, you send it back to the smelter to be refined again. Alcan and and Israeli company are partnering for North American trials. Of course, there is not a lot of potential left for adding more hydro power for aluminum smelting.
Down arrows or no, the age of the afforable, practical electric car is upon us. USA gas demand has been shrinking since 2005 and will continue to shrink over the long term.
Toyota also will introduce a hydrogen powered model. 'W' said it couldn't be done. Can you believe it? 'W' was wrong.
Look for a mid-80s replay in the oil patch, except there will not be any rebound.
MalteseFalcon
You, more than anyone here, will appreciate the links below.
And I like this business; not that I share your enthusiasm…. Yet.
http://sf.france-science.org/2011/03/11/the-lithium-in-electric-cars-is-not-a-renewable-resource-part-1-2/
http://sf.france-science.org/2011/03/25/the-lithium-used-in-electric-cars-is-not-a-renewable-resource-part-2-2/
LOL!! Peak Lithium!! You guys never give up!!
By the time the lithium runs out (LOL) the oil patch will just be another desert.
10 years. Two car ownership cycles. 2025 and then it's over.
It’s obvious that you didn’t read one of the best articles about car batteries.
And, that is a shame, because you were the one that brought this issue up.
By the way: The article never said anything about Peak Lithium. However, it did addressed the recyclability of the lithium of existing batteries; and that, as the article said: “….a start-up called Onto Technology (in the US) has developed an interesting method that recovers the materials of cathode and anode for reuse directly in batteries.
This article assists your position about batteries. And that I find an interesting business concept; not that matters.
I find it "interesting" that none of the batteries considered for auto/home/business today don't consider the Edison battery, effectively used over 100 years ago.
These were of iron/nickel construction and used Potassium Hydroxide as the electrolyte. They were made in the US until the 1970's when Exide bought the factory and all developed technologies and promptly buried it.
These batteries were virtually maintenance-free, could be repeatedly discharged down to 5% of max rating, and were unaffected by overcharge at higher voltages. It's no wonder that this tech was buried by Exide!
I don't believe that anyone is making these for automotive use today, but they are being manufactured as backup batteries for solar & wind systems.
re:
http://ironedison.com/technical-info
Bolivia has 50-70% of the world's lithium reserves, and very little of it has been exploited yet:
https://en.wikipedia.org/wiki/Bolivia#Economy
You are mistaken. Cheap oil is not a cause, but an effect, of a deflating global economy.
What else can demand do but go down when people all over are tightening their budgets? How can it not decrease when most people's incomes are going down, and stifling demand for all those goods produced by those oil-consuming industries?
Cheap oil may indeed exacerbate the decline, but it was already happening before the 'cheapness' did.
Focusing on the PRICE alone of a commodity causes you to misinterpret the reasons for fluctuations. Those reasons are of far greater importance than the numerical prices on any given day.
What the fuck did these idiots expect would happen to oil prices with all the shale oil here along with a global depression!?
And even pickup trucks are getting over 20 MPG now!
Oil is way way overpriced now just as the housing market is.
Next shoe to drop is health care costs cause nobody can afford it now!
Everything rests on global demand.
Not really.
Anyway, low prices demand should pick up, right?
US QE ending wipes out all the leveraged investments going forward.
Any previous cheap Oil development/drilling loans will be unserviceable.
Expect the Trillions in QE sponsored leverage to now pay for years of M&A as the future Oil source/well (deep, difficult, shale, etc.) close down and investors bankrupt.
This is all about control of Oil which 'backs' fiat and TBTF. MasterBlaster survives by controlling the Oil/Energy flow.
Headbanger
US needs constant inflation (growth, even if there’s none) not to have a financial meltdown thus depression.
So, if the US cannot inflate housing, healthcare, student loans, and so on….
War is the only thing we have left.
By the way: Where did the writer Jawad Mian got 5 million barrels of shale-oil a day?
These fools couldn't even forecast the fall 3 months away and they want me to believe they can forecast to 2020?
Top it off with quoting IMF numbers and I laugh
“I was in Washington for 18 years and never saw any projection of any of economist ever come true in 18 years. Their theories couldn’t even see the 2008 mess.” – Senator Alan Simpson
and the dollar is now worth only 5 cents.
The energy contained in barrel of oil is equal to no less than 2 years of human labour. $100 is a bargain.
Human labour is priceless.
Of course, "its different this time"
...and...
Putin is such a warmonger we must bomb him and anyone who tries to join him.
No, REALLY this time. We're entering a new age where global growth (as ~2.5 billion Indians and Chinese gradually start to improve their income levels and lifestyle) drives a radical reduction in the use of energy, while supply enters a new age of abundance unseen since the Texas oilfields were first opened up. Forget all that shit we said 10 years ago about declining conventional reserves, and forget all that shit about shale being expensive with a sharply declining production curve - we thought we knew what we were talking about but turns out that back THEN we didn't but NOW we REALLY DO.
And forget all that shit about OPEC production boosts being geopolitically motivated to pressure the Russians, that's obviously just bullshit conspiracy theory, up there with LIBOR manipulation, FX rate manipulation and gold rehypothecation. Turns out you can make everybody (or everybody that counts) rich, just by printing money - no industry necessary, just pretending you have it is exactly the same! Oh, and BUY (non energy and resource related) STOCKS!
Yes, its funny how a sharp price drop creates instant bearish consensus. And, who knows, they could even be right. But so much consensus about "new normal of cheap oil" is really consistent with 250 dollars oil in a couple of years, just for fun when we read our comments in this article. Well, we will see anyway...
We lied to some folks
When people do not understand the concept of money, analysis like this occurs
Looks like happy times for the MIC - no need to whack the bankers now, they'll get everything they need for free soon.
Whacking in terms of physical elimination got really close in my view.
And MIC would not do that direct. Saudis would do it for them, in my view
I was all for surrender and no assassinations, 2008 style.
A lot of people would prefer physical eliminations. Not me.
ekm1; I was playing around with this idea that TBTF & Prime Dealers think of themselves as Mission Essential to USA & All Government & Commerce... and they pay it on convincing us that they are mission essential.
So looked back at England's "estates of the realm" idea
the clergy, the nobility, and commoners, Free Press, Corporations(?), TBTF Banks(?)
Anyway the Estates idea doesn't really fit what we see as Empires... Except the Catholic Church was an Empire. Charters were set up as the First Corporations in Europe. Marques or Charters were essential in War to leverage Private Ships.
What are the "Estates" in the USA?
- Federal .gov, President, Congress
- Lobbyist, Lawyers, PACs, 501(c)s, Global Elite
- TBTF Big Banks, Federal Reserve, Shadow Banking
- MIC, Intelligence, Communications, Computers, Security, Spying, Contractors, Manufacturers, Private Armies
- MSM, Corporate or Privately controlled by agreement with Government
- Transnational Conglomerates, Big Oil, Mining & Engineering, Big Ag & Big Chemical, Big Pharma, etc.
The goal of every billionaire is to be deemed as essential for the state.
They call it 'monopoly'.
Buffett is one of them.
Issue is that there are not enough assets for all oligarchs to own, hence they backstab each other periodically
It is Ironic that Wealthy can't kill each other and then take the Assets they covet. The corporation holds the assets, so they have to buy equity or hold the debt of the corporation in order to take over.
I think even our Schools (K-12) are corporations.
Beyond simply business, corporations are the combination of two concepts:
1. fractional, transferable ownership
2. Limited Liability.
Nearly every entity outside of an actual human being is a corporation now; I mean, who wouldn't want to avoid being 100% liable for their actions?
Corporations originated in the Industrial Revolution when workers started dying in the new factories. Under common law, the factory owner was responsible for the deaths. The factory owners didn't like that, so they petitioned the government to create a new entity with legal immunity so they could not be sued. The workers kept on dying, but now the factory owners were off the hook.
Nobody should be able to avoid responsibility for his actions, and corporations should never have existed. Unfortunately, now corporations are not only considered legally people, they are allowed to influence elections and taxed at a lower rate than flesh-and-blood people.
It's a complete moral inversion.
Limited Liability vehicles go back much further than that; monestaries and other orders in the middle ages already had limited liability, well before industrial era factories.
This guy got a rim job from the Nudelcon...
The Zionist Rothschild cabal needs constant war and chaos. Will they be psychotic enough to start WWIII with Putin, using their bought-and-paid-for neocons in Congress? Or will China, Russia's new BFF, be the wild card that stymies the US.
Who'dathunkit?
usa=losing. the empire is getting desperate. they are now projecting the usa propensity for violence upon russia when there is not a person in the world outside the usa who doesn't know the usa is a thrashing empire in its death throes willing to take anyone down with it if it can preserve the empire for a day longer. what they don't say is russia pegged their economy to a much lower price($50 bucks?).
We are thrashing right up until the point where we are done with the political correctness self loathing crap.
Right now, too many of us are comfy driving our Lexus/BMW/Merc/Tesla to care. Once that changes, look out.
what a bunch of inane malarkey.
I wonder how banks will react to their repledged oil up to 100 times and huge investments in shale projects. The best projects developed in the start and oil output from them started coming to an end.
Peak Hopium....
My sentiments precisely.
NTHE will not be delayed one day by the wildly fluctuating prices of WTI. The transferance of the ground-sequestered hydrocarbons into the atmosphere will continue unabated. The inevitable, looming outcome is unrelated to political or economic side-shows such as price swings.
This article is so wrong I don't even care to count the ways.
A permanently low plateau!
Eternally! Watch out for gas stations chasing your car.
One major factor in the decline of oil prices, which is itself modulated by geopolitical issues, is the commodity cycle of the energy complex. The shale boom blossomed with the increase in prices, a lag time for explortion/extraction followed, oil/gas flowed, and the process has resulted in a glut of energy. However, what goes down must also eventually come up as drillers mothball rigs and new exploration declines - setting the stage for decreased supplies and a price increase. The timing for the change can be reasonably predicted based on past cycles, as shown here. Rinse, lather, repeat.
This article is misleading with several off-base assumptions. The key mistake though is examining supply and demand, measuring the result in dollars, yet failing to address the ever slipping value of the dollar.
The dollar requires international support via the oil market, this is finally becoming more widely known. But it also requires a high oil price too boot. The point is that supply and demand only begins to address the price of oil, as measured in dollars.
Economies in decline will lead to cheaper oil as long as available capacity is there.
There are an enormous number of internal inconsistencies with respect to production cost (not the least of which is the claim that shake breakeven has dropped to $57 from $70 where the chart shows higher for HALF CYCLE costs). Shale depleted rapidly, so the 5MM BPD production will drop to ~2.5MM or so within 2 years absent new drilling. But, ALL oil fields ate declining about 5% per year. So, absent new drilling, we are likely to see 10MM BPD reduction in supply over a 2-3 year period. This is the problem when traders are masquerading as investors everywhere.
Hah ha ha ha ha ha ha
Beings one of the old pharts who lived through the oil embargoes, conscious flooding of markets and production cycles of the 70's etc., one can only surmise this diatribe to be devoid of reality when in fact, the apparent glut hinges upon OPEC and inside OPEC, the Saudi's production levels.
They want the price back up, they cut production and viola, it skyrockets once again.
And instead of being hailed as the saviors of economic activity by the West, no the West claims it's own innovative designs and once production is cut, it will again be the evil Arabs fault.
Not to mention the dynamics of the West, gas pipelines to Europe from the gulf, the interplay with Russia's gas supplies to Europe, Iran and the Arab world's long term hostilities ISIS, etc.
Fuck yeah.. It's because of the electric cars.
Anybody but me see a decades old pattern here?
Dude, this is so like 1978 its not even funny. Im just waiting for some embassy to be overrun, but instead of sitting on the hostages, we get a new orange jumpsuit video every week.
You are exactly right, Saudis will cut production when they feel like it (aka Putin has learned his lesson about messing around with Syria and Iran)
Might this also be the Saudis once again punishing other OPEC members to beat them back into line with compliance? They had a problem like this before, and they lowered prices to get everyone back in line. 1 Million barrels per day in extra oil due to OPEC members cheating on their quotas.
While the Saudis would rather oil prices were higher, considering the economics on the ground, this approach works for them in every other way. They get to screw with Iran and Russia, while also not having to cut production for the sake of their OPEC neighbors who are notorious cheaters anyway.
Pretty good article on Oil as a harbinger for the Economy.
With 50% youth unemployment world-wide and many on foodstamps, it won't be long before recession and depression occurs.
Going forward there may be multi-decade recession/depressions...so it is a 'new normal'.
The depressionary 'new normal' will cause new innovations and breakout technologies to occur or things will get even worse.
For example, I would expect next gen nuclear power plants to become popular as energy sources in the G20 countries.
Totally braindead article.
Production from existing fields is falling, only new incremental production (at higher cost) is keeping oil production stagnant.
With falling prices, supply will fall. If the oil price does not rise that will be due to collapsing demand which may happen. But supply will never reach 95mbd as stated.
A discrepancy of 1 to 2 million BPD of oil in demand vs supply can create a 30-40% drop in price...
What does this tell you?
It tells me that :
1° Its a market in which the price is rigged all the time. Even the spot price, which has been touted as a sign that oil is a market commodity followng supply and demand. An oligarchy market with an immensely high BETA on political issues is not a "market commodity", never was and never will be.
Since 1973 it is incestuous with the world monetary supply of Reserve. That was a total political construct with ONE purpose : make $ SOLE world currency of trade after it had been taken off the gold exchange peg !
Swing Producer Saud, then as now, got a military guaranty for that handshake with Pax Americana. And Pax Americana had to recycle that Arab wealth to the asset markets of West thus ensuring $ denominated asset market ramp up to heights unimagined (Jack's derivative pumped magical beanstalk).
2° What has changed in 2014 is that US foreign policy and globalisation economic policy have made Iran now looking like a viable Alternate regional partner to USA. As well a major supplier to hungry new tiger Chindia; (after having tried to physically eliminate its revolutionary and religious "heretic" regime since 30 + years via a joint Saud/US/Saddam-Iraq military effort).
This about turn of US foreign policy vis a vis Saud's historical Shia enemy (Shia/Sunni Muslim divide); all the while giving to the Sauds a viable alternative market of huge size other than USA/EU, aka Chindia; has changed Saud's strategic focus and mindset.
It now shows on the Price front in a brutal fashion that has nothing to do with normal supply and demand but with a desire for PUNITIVE actions against US Oligarchy Hubris.
As the fear of Saud flooding the market has made all those who were speculating on a long term Oil price rise, now being caught with their pants down, including the US tight oil strategic plays.
And like Draghi, Saud "will do what it takes" to ensure that this price of bleeding the economies of its new "friendemies" will be its Shylockian way of settling its problems with traitorous partners.
As collateral damage the financial world trembles, as the speculative plays in US markets could make the WS asset ramp up, as the bond market mini interest rates prevalent feeding carry trades-- and consequent $ domination of world monetary thread-- go belly up in uncontrollable spiral.
This would indeed be an unforseen consequence of this current, manifest Saudi rage against its ancient ally, now seen as going renegade on the idealogical front which is paramount for the Monarchy's control of the world Sunni population as beacon of Islam; its only true claim to world forum princehood and co-leadership of the Oil world.
USA's "reap the whirlwind" mantra is looking ominous for all its allies and friends as the financial Titanic now starts to increasingly shudder in troubled waters.
King commodity could blow up the financial powder keg.
Even before it makes the hope of economic growth take route in stagnant first world.
Thats the size of the tsunami a butterfly fluttering of a 1 million BPD swing could herald.
Ali Baba of Saud has now poured oil onto the 40 thieves hiding in those jars in his cave!
We are truly in the tales of a Thousand and one Nights!
Good post. I think the Oil market is rigged also.
October 2005 gas prices neared $4, Production & Supplies have been high since 2008... demand has been low for quiet a while... and only lately after 8 years have we seen prices go down.
Yeah, who is getting hurt? This could be a Black Swan for the TBTF.
Real Estate collapsed 7 years ago.
Maybe Oil will collapse now, given there was a lot of leveraged investment using QE cheap money for last 6 years.
No QE, no Oil bubble.
Next Crash ? (now)
Major M&A going forward to buy up all the bankrupt cheap money "investments".
Leveraging up drilling wells hardly increases the price of oil. Gruber told me about people like you.
New normal just means old normal all over again
http://newworldorderg20.wordpress.com/2014/11/29/russias-rosneft-buys-french-oil-refinery-from-total/
http://newworldorderg20.wordpress.com/2014/11/21/u-s-chevron-enter-joint-project-with-russias-lukoil-in-nigeria/
http://newworldorderg20.wordpress.com/2014/11/20/russias-gazprom-already-part-owner-of-so-called-alternative-energy-sources-for-e-u-energy/
http://newworldorderg20.wordpress.com/2014/11/11/reprint-article-article-being-deleted-on-net-gazprom-buys-europes-biggest-underground-gas-storage-facility/
http://newworldorderg20.wordpress.com/2014/11/26/russia-has-signed-nuclear-agreements-with-ukraine-turkey-existing-finland-south-africa-india-algeria-argentina-vietnam-bulgaria-existing-belarus-existing-iran-and-u-s/
Whiplash. BTFD.
I would like to thank all those "electric" car owners for lowering the cost of fueling my 3/4 ton truck.
Let us play with physics and electro-chemistry:
1 kWh = 3412 BTUs
1 gallon of gas: 114,000 BTUs
1 gallon of diesel: 129,500 BTUs
gas @ $3.00 per gallon
PG&E uses a teired rate system so electric cars will put you in the top tier.
electricity at $0.160/KwH (propaganda price, aka paid by households overall)
electricity at $0.325/KwH (real price using top residential tier)
114,000 / 3412 * 0.160 = $5.34 (per gallon equiv) (using propaganda rate)
114,000 / 3412 * 0.320 = $10.86 (per gallon equiv) (using real rate)
Now lets talk about charging efficiency and "useful work".
To get the power in (charge) and out (discharge) you are looking at 60 to 80% efficiency
for lead acid batteries.
Now we add in the energy loss of the battery charger itself (converting
240VAC to DC) and we get something around 45 to 68%
And lastly we add the efficiency of the electric motor turning the wheels. Assuming
and efficiency of 85% we end up at 38 to 58% overall effiency. Let us call it 50%.
Now gas car engines are about 40% efficient, and diesels are about 55% efficient.
Let us redo the chart:
(this is effect what you are paying in equivalent "work" (moving you car))
elec 114,000 / 3412 * 0.160 / 0.50 = $10.68 (per gallon equiv) (using propaganda rate)
elec 114,000 / 3412 * 0.320 / 0.50 = $21.36 (per gallon equiv) (using real rate)
gas 3.000 / 0.40 = $ 7.50
diesel 3.000 / 0.55 = $ 5.45
Why are the government numbers so different? We all know why.
SNBLITZ, excellent cost breakdown.
Since it is 4x more expensive to run electric vehicles, and the added 25% purchase price, they will be in the future only...so far.
I only give room if next gen nuclear power plants come on-line, liquid salt based, or other improved methods.
If cheap nuclear power comes on-line, perhaps then electric cars may be cost effective.
It will take trillions investments in next gen nuclear...will it happen by governments ? maybe. India and China appear interested.
Cheap oil will remove the incentive to invest in 'cheaper' electric power sources.
Without US QE there will be less cheap money to invest in future energy sources.
The government has a way of reworking those numbers. Since you bring up PG&E, you will be among the first to experience it first hand. California will be steadily adding more carbon tax to the price of every gallon of gas by taxing the refiners. I figure it will start as low as $.15 a gallon in January, then they'll increase the tax steadily as they see the opportunity with lower world oil prices. Before you know it, that $.50 per gallon difference in the price of California gasoline versus other states will increase to $1.00 or more.
It would serve Russia's own needs to back off supplying Syria with arms while the Americans are dumping their own treasure into the fight with ISIS. First, they would save on the aid but more importantly it would aid ISIS in their fight against Iraq. If ISIS was to take out some of Iraq's production assets, it would help world oil prices, and the Russians.
"With global energy prices at multi-year lows, Russia is facing a persistent low growth environment and an endemic outflow of capital."
Usage Nazi alert: nobody seems to know what the word "endemic" means any more. The word means "native to an area," or "prevalent in an area," not "large." The closest word people seem to mean is "epidemic."
How these lower prices effect a particular nation will vary and will effect both their currency and how competitive they will be going forward. The decision by OPEC members Thursday to keep their production ceiling unchanged has sent crude prices into a tailspin.
Dropping oil prices add a new surprising new dimension to the stability of the world financial system. While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales. The shale boom has been one of the bright spots in the economy in recent years and acted as a tailwind that accounted for much of America's growth. Expect this to come to an abrupt halt and with it thousands of jobs. The article below delves deeper into the dark side of falling oil prices.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
The West spins lower oil prices as economic warfare against Russia to bring them in line and setup the predictive program that Russia will be the aggressor here when sabotage or war breaks-out. Now they have a clearly defined agenda to sell in the West. No doubt when war breaks out, Russia will be pinned even when the West precipitates the cause. Like the US blockade of Japanese Oil exports from Indonesia that precipitated Pearl Harbor. 99% of "educated" Westerners have no clue about the true causes of war. Casus belli in hoc signo vinces Veritas vos liberabit.
"In order to keep us obedient, meek and weak, the predators engaged themselves in a stupendous maneuver- stupendous, of course, from the point of view of a fighting strategist; a horrendous maneuver from the point of view of those who suffer it. They gave us their mind! Do you hear me? The predators give us their mind which becomes our mind. The predators’ mind is baroque, contradictory, morose, and filled with the fear of being discovered any minute now." Carlos Castaneda