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Calling 'BS' On Projections Of A Decade of $20 Oil
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The ability of oil exporters to trigger a short-term collapse in price does not automatically translate into an ability to control the financial conflagration such a crash ignites.
My BS detector went off when two stories with similar headlines touting $20/barrel oil were published on the same day. Color me skeptical, but it's almost as if mere $40/barrel oil is no longer enough to get the blood flowing, so both stories blared the more extreme $20/barrel price point.
Neither story depicted $20/barrel oil as a brief spike--rather, each presented a future of sub-$50/barrel oil that could last for years or even a decade or longer, matching the period of cheap oil that ran from the mid-1980s to the late 1990s.
I have no problem with the idea that geopolitics is driving supply excesses, the goal being to crash the oil revenues of enemies--that's part of my Oil Head-Fake scenario: The Oil-Drenched Black Swan, Part 4: The Head-Fake Disruption Ahead (December 4, 2014).
The Financialized-Oil Dominoes Are Toppling (December 12, 2014)
The idea that global demand is stagnating is also common sense, given that the global economy is stagnating.
What seems less well-supported is the notion that any single oil exporter can single-handedly pump enough crude to keep prices at $20 or even $30/barrel for years or even a decade. Remarkably, few analysts seem to question this; it's as if the extended period of low oil prices in the 1985-1999 time frame has generated an unquestioned faith in the Saudis' ability to push prices down at will for years on end.
The current era is significantly different from 1985-1999. Let's list a few of the critical differences.
1. Saudi oil exports make up less than 10% of global oil consumption. Saudi Arabia exported about 7.7 million barrels a day (MBD) in 2013, while total global production was 92.7 MBD and global consumption was 92.3 MBD. (Source: U.S. Energy Information Administration, EIA) Global Petroleum and Other Liquids2. The OPEC oil exporters' cartel provides about 40% of all oil produced.3. Total OPEC surplus production capacity is estimated at 2.5 MBD. This relatively modest capacity is the leverage that can supposedly keep prices down for years on end, regardless of what other non-OPEC producers and major consuming nations might choose to do.4. The Saudi population has doubled since the mid-80s:5. Saudi Arabia is the largest oil-consuming nation in the Middle East. "Saudi Arabia consumed 2.9 million barrels per day (bbl/d) of oil in 2013, almost double the consumption in 2000." (source: EIA) That's as much as Australia (1.1 MBD) and France (1.8 MBD) combined.6. These trends--rapid expansion of population, social welfare costs and oil/natural gas consumption--are continuing their upward trajectories. Many other exporting nations have similar profiles: rapidly expanding populations and domestic consumption, hefty fuel subsidies for residents, and expanding social welfare costs.Saudi Arabia has 16% of the world's proved oil reserves, is the largest exporter of total petroleum liquids in the world, and maintains the world's largest crude oil production capacity.(EIA)7. Saudi Arabia and other major oil exporters derive a significant percentage of their national incomes (public and private) from investments in the global financial system--the same financial system that is being destabilized by crashing oil prices.The collapse in collateral and income is not limited to oil exporters with marginally high costs--everyone with a stake in the interconnected global financial system will suffer losses as the financialized-oil trade unwinds violently and unpredictably.8. The oil exporters' ability to control a global financial meltdown triggered by crashing oil prices is nil.
All of which is to say that the ability of oil exporters to trigger a short-term collapse in price does not automatically translate into an ability to control the financial conflagration such a crash ignites, or an ability to effortlessly maintain oil at $20/barrel for years.
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If you like your BS, you can keep your BS.
High stakes poker.
What's bluff?
Wait and see.
Dow 500,000. There. I fixed it for you.
Oil can stay low for a couple of of years at worst. Even with lower demand, production and capex won't get cut until after a few quarters of losses. Companies are reluctant to lose trained personel and projects that are close to completion will be finished. It won't take more than a few years at worst to remove a good portion of production at current (or lower) prices.
Once higher cost production gets shut down, supply will fall dramatically below recesssion levels of demand.
Aren't low prices the answer to low prices?
Roadblock's picture
It'll be far cheaper, $10. We are entering the post-Jobs society where abundance is everywhere.
In the short run the removal of speculative manipulation will keep the price low.
Demand for gasoline in the USA has been cratering since 2005 (hybrid cars replace SUVs). With the dawning of the era of the electric car, that trend will only accelerate.
So in the long run, the golden era of oil is over. Consider the massive implications of that.
$20/barrel? More likely than $100/barrel
I believe that the elite much less any 1st world nations do not have a ready answer to a post jobs society...even the best socialist models factor in productive citizens for a significant period of worker lifetime....seems all the best mentions were in the early twentieth century...george orwell, etc
I'm thinkin we'll reach that by Jan 15, 15
Appeal to consequences logic fallacy argument. $20 oil would cause a financial meltdown. No on wants or can control a financial meltdown. Therefore $20 oil is bullshit.
Does not compute. Does not compute. Does not compute.
A financial meltdown (and accompanying severe depression) will lead to $20 oil, not vice versa.
Yep, by the time we hit $20 things will be falling apart and with things like the race wars they are trying to start interesting times will be upon us...hedge accordingly....
That's not the argument at all as I understand it. Here is the principal claim:
Here would be my interpretation: $20 oil will cause a financial meltdown.The financial meltdown will behave according to a logic of its own that the actors who conspired to produce $20 oil could neither predict nor contain. Production will necessarily crash, wells will stand idle, aggregated financial and technical capital will be dispersed through bankruptcies or reallocated, people with skills and expertise will disperse as well. Prices will rise to compensate for the new scarcity in the context of an economy reorganized consistent with the supply shock itself.
Supporting claim (paraphrase):
This claim is true on its face, yo. Rockefeller's Standard Oil priced out competetors once. But that was long ago, and supported by a cronyism and coruption that we suppressed through democratic reforms long ago HEY I AM ALMOST GOT STRUCK BY LIGHTNING!--Ok, so, yes, but the cronyism and corruption of our era is at least qualitatively different, right?--they didn't have cellular phones or internet porn. Wait. What was my point again? Oh, yes. I call BS on your tediously simplistic fallacy non-argument. There. Happy? Please post your comments to a different blog.
20$ paper oil.
The paper is a promise, "we lied a bit" will be the answer.
Hold on to your oil longs. It's not a loss if you don't sell.
Since when do fundamentals mater in this market?
When ignoring them clashes with physics. We haven't really had that happen yet, but when finance meets physics, my money is on physics.
The physics is likely to be the kinetic energy transfer of high velocity bullets....
This is why I say they are pissing up a rope. However, EIA report showed that inventory increased 7.3m bbl this week. Looks like inventory tax is lower this year due to lower value of oil in inventory and thus, the free oil being given away by the Saudi's is getting stored in anticipation of higher prices going forward.
i read that $25 11 month oil contango article ... comparing to january 2009
not so sure it will be "free" money like last time
january 2009 was the bottom of the recession ... while december 2009 was in the "recovery"
we're not even in (acknowledged) recession yet ... if my US recession start no later than Q1 2015call turns out right ... those loading up on oil now will be choking on it
there will be stockpiling... nah, doesn't have the same ring to it, does it?
Will laugh when the billions in discount oil Saudi Arabia has given away for their masters reward instead turns to shit when the US double crosses them as they have everybody else...and games some other ploy.
Saudi's are fucking stupid and are quietly buring down their own home on a bet that the US will come out ahead in its war on itself and FUBAR currency and economy.
Here's my theory on why oil is going to well maybe not 20 but probably 35. You can't get blood from a turnip.
agree ... global economy 2015 will be slower than global economy 2014
Completely correct. There is very modest excess flow capacity in the system. Depletion will more than take care of it in 18-24 months, even under the most conservative (non societal collapse) scenario. It's all BS to enable financial players to squeeze / short oil companies and create distress to panic everyone out while buying on the cheap. Oil will always be priced at demand destruction levels henceforth.
Charles must be running out of ideas ... article just common sense
It's not a crash if oil ubiquity is exposed. It's a magical reset to the Jenga Ponzi of which we've all been a part.
All financial, geo-political machinations aside, Neptune in Pisces (first time since late 1840s, when Samuel Kier first drilled & dicovered "rock oil") says---oil will be found nearly everywhere, by nearly everybody.
Why does Neptune having its cock in Pisces mean oil will be found everywhere?
It has already all been said, long time ago. Younger people don't seem to be in the know, but I remember it very clearly. https://en.wikipedia.org/wiki/The_Limits_to_Growth
;)
If these low prices for oil were a big enough problem - for either the U.S. - or perhaps even the Russians if it got bad enough, and the House of Sod were the main culprit, is it really a stretch to suggest that a 'phone call' from either affected party would fairly well straighten out the 'misunderstanding' in short order...?
A tribe of nigger-rich beduins holding the U.S. - or even Russian markets 'hostage' for any length of time...? Unless there's a 3rd party with its hand in nearly everything, 'brokering' this instability, that is...
A DECADE! Absolutely noit.
Could we see a WTI in the 20s 30 in the Januray - Feb time frime yes.
Long-term probably going maybe 50 to 60
KKR and whoever else can load up tankers all they want. This is a geopolitical economic WAR
There's more crude in the ground than you have money in your LLC
Global malaise aside 20 years ago China and India were not consuming the amount of oil they are now. How many companies/nations can produce oil at $20 a barrel?
Saudis doth protest too much, but don't worry if they can't get it below $50 some media pinhead will start talking about $10 based on what someone said.
Anything over $10 a barrel and the Saudis make money. It's the other oil producers that take the screwing. Some a little some a lot.
Agree, but their citizens are accustomed to a large and growing array of subsidies and social programs. While in theory these programs could be reduced or eliminated in the event of economic hardship, the reality is such a change would bring instability. Thus, the fully-loaded cost of the current Saudi regime producing oil is north of $50 per barrel.
qoohh yeah...... subsidies and the Saudi citizen....cut the subsidies significantly and those radical saudis (sunnis) and daesh( the IS kool aid man) will come busting out of the wall screaming...... ooooh yeah/allahu akbar ......and run the show instead of our royal cronies...
I already called bullshit on 3+ years of sub-$60 oil.
The writer of the article has not considered the changing value of the US dollar. If the US dollar goes up in value then the cost of oil will appear to drop.
With deflation just getting started it might get very interesting very soon. If the giant gorrilla in the corner, the derivatives market, collapses we could very well see a serious deflation, making the 1930s look like a cake-walk.
That should separate the men from the boys.
"has generated an unquestioned faith in the Saudis' ability to push prices down at will for years on end."
Well, I don't know. I kinda question whether this really WAS something the Saudis DID. The global economy has slowed significantly, and demand is just not there.
It seems more likely to me that the Saudis are reacting to the lowered price by 'making it up in volume". Because they really NEED a steady, and large income stream to support a nation only kept appeased by the constant flow of 'bennies' from rich oil sheiks.
I'm also certain that our own US leaders have expressed an interest in keeping things mellow in the Kingdom, and encouraged their friends in Riyadh to keep it flowing, regardless of price. The last thing any of them want is political unrest in the land of Mecca and Medina. Because even the most intellectually challenged neocon can see the problems THAT would cause. Not so easy to send troops in there to quell disturbances should the House of Saud lose control. This ain't Iraq. You'd have about a billion Muslims worldwide piling on you from all directions the second you set foot on their 'holy lands', and they'd be deadly serious.
This makes more sense to me than the narrative that the Saudis are helping us crush Russia with cheap oil. Russia they can deal with, what they CAN'T handle is a Muslim world aflame with rage and united against us. It is far more important to keep the House of Saud IN than to take Putin OUT.
agreesome. But this is ZH and conspiracy abounds.
Is there really a problem for KSA to sell oil cheaply for a long period of time?
There may be another angle - the Non-US/Anglo Bank Big4Acctg/EPS_Haggling World View for a better clue as to KSA's relative aloofness with their Px Cut Campaign.
Their Capital Costs of Infrastructure "At Large" has probably been Paid Off, so there maybe Maintenance, parts, labor, any taxes/contributions to Royal House/Sovereign_WealthFund/Govt_Treasury, and (literal) Plant/Pipeline Operating Costs - recouped quickly or "written off the books" if needed.
Pardon the Naiveté; but even when figuring in the (existing, not brand_new/under_construction) Refinery Ops and Retail G&A Expenses/Costs, any Oil sold after clearing them is "Gravy" for them, isn't it?
Their Royalty and Oligarchs already own "Reservoirs" of Black Gold, Real Gold(already in the Consumer System), USD, and a(n ever-expanding)Sovereign_Fund. Raking in Serial-QE'd (and an ever depreciating) stash of Fiat Cash and Bonds may not be that attractive - buying up Oil Producing (and other Income Producing) Assets which have gone Bankrupt Worldwide seems like a better play going forward. I'm surprised that KSA hasn't Ventured out to running its OWN SET OF MAJOR INVESTMENT BANKS - rather than relying on the Anglo-American IB Cartel.
Depressed Stock Prices and Bankruptcies of Competitors allow of KSA to buy them up - and still sell Oil from them at a low Px to "take it all". Of course, TEAM_RUS will be one of the few Independent Producer-States surviving this Hoarding.
To use a LOTR Reference - they've One "Refinery Ring" to Rule them All; and Dubya, who has been depicted in the past as "His Excellency Prince Bandar's 'Bitch'", is a perfect example of a "Pwned" Country's Head of State.
Thanks in Advance for the Feedback.