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Oil prices

Threegoofs

Threegoofs

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I posted this in the 'general politics' forum by mistake, because I thought this might be a better place for it since you guys tend to look at this stuff from a more academic point of view, versus the political spin in the general forums (or if you have spin, at least its reasoned). I predict the thread in the other forum will end up talking about Benghazi, immigration, terrorists and how Obama and Hillary Clinton destroyed the US oil industry very, very soon.

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Over the last year, seeing oil prices plummet, I assumed, like everyone, that it was primarly a ploy for SA to crush external competitors, especially the US and Canadian shale oil production, which it has clearly effectively done.

But I've read some things that might add to that explanation, and they are actually pretty compelling.

The Saudis have lots of the worlds oil, and its readily available to them compared to the rest of the world - its cheap to get and pump, and I've read estimates that the raw cost to get it out of the ground is somewhere around $6 per barrel, compared with at least five to tenfold that of more difficult production, such as shale.

But Saudi is in this for the long term, and they realize that oil demand will peak before the supply... the movement to electric cars is starting and will be widespread in a decade or two - estimates are that in 2030, oil use will be half what it is now. Natural Gas is incredibly abundant now, and can replace oil in all sorts of areas, like home heating and even ocean going ships When that day happens, the Saudis will be sitting on a whole lot of easy to obtain oil with not much demand. Given the realities of Global Warming, in a few decades it should be obvious to even the biggest neanderthals that pouring more CO2 into the atmosphere is not a good thing, so we can expect more carbon taxes, restrictions, etc, to be placed on emissions from oil.

In addition to all this, a competing regional power that the Saudis hate is now going to be freely exporting oil, and SA has a vested interest in minimizing Iran's prosperity, and has the ability to do so by keeping production up and prices low.

So where does that leave the Saudis?


Their strategy is to extend the oil boom as long as possible, because any oil that remains in the ground is lost revenue eventually, and in a few decades, they will be leaving a whole lot of oil in the ground. So their long term strategy is to drive prices down so SA becomes the nation with the largest market share. They may tighten the spigot every once in a while, but not too much, lest other producers start selling more oil and cutting into their goal of pumping themselves dry as fast as possible. Every barrel of oil that stays under SAs feet is missed revenue.

I havent heard this take on DP before - and it shocked me when I had read of it because of its simplicity and clarity.

Heres a nice news story on it, and there are more out there.

Saudi Arabia's Plan to Extend the Age of Oil - Bloomberg Business
 
there are so many uses for oil....

i dont see our use of plastics decreasing anytime soon

now different grades of oil are used for different things

but the saudi's are killing the market to kill production in other parts of the world....especially russia, and the shale boom in the usa which was eating into our need to import their oil

not sure about your production cost @ $ 6 a barrel, but i agree it is a whole lot cheaper than what russia can drill for, or what it costs us to get the oil out of shale

i just wonder about the endgame....what is their LONG range plans
 
gdgyva said:
there are so many uses for oil....

i dont see our use of plastics decreasing anytime soon

now different grades of oil are used for different things

but the saudi's are killing the market to kill production in other parts of the world....especially russia, and the shale boom in the usa which was eating into our need to import their oil

not sure about your production cost @ $ 6 a barrel, but i agree it is a whole lot cheaper than what russia can drill for, or what it costs us to get the oil out of shale

i just wonder about the endgame....what is their LONG range plans
Click to expand...

Once source for production costs is here.

FACTBOX-Oil production cost estimates by country | Reuters

The bottom line is that SA can produce for much less than others, and has the most oil.

And you know as well as I that dropping demand does not drop prices proportionately. Look at 2008. Gasoline/oil demand was down somewhere less than 10% and gas prices were down by at least 50%.

The concept of plastics or lubrication propping up oil prices is just not tenable. 75% of oil used is in gasoline products (gas, diesel jet fuel).
 
I think you may have a good point here. But another thing to consider is the question of whether the Saudi's can keep their people happy on cheap oil. Spending largess has been no problem in the past, with billions flowing in, but my understanding is that now they are burning through foreign reserves quite fast, in order to keep public spending at levels previously expected.
 
Ganesh said:
I think you may have a good point here. But another thing to consider is the question of whether the Saudi's can keep their people happy on cheap oil. Spending largess has been no problem in the past, with billions flowing in, but my understanding is that now they are burning through foreign reserves quite fast, in order to keep public spending at levels previously expected.
Click to expand...

Yes, but when you know the hammer is going to fall sooner or later, it makes more sense to soften the blow and get every drop of oil pumped before demand collapses.
 
Threegoofs said:
Yes, but when you know the hammer is going to fall sooner or later, it makes more sense to soften the blow and get every drop of oil pumped before demand collapses.
Click to expand...

I can see that strategy, but on the other hand, it also depends on how seriously the world takes global warming. Right now, China is building coal plants, the US is building 8 lane freeways, and Putin has said he can't wait for global warming, as it will be good for Russia. All this while making politically correct noises about planning for the future. The world's population is also growing, along with a new middle class in previously poor countries. Will they desire a roof top vegetable garden, or an SUV?
 
Threegoofs said:
I posted this in the 'general politics' forum by mistake, because I thought this might be a better place for it since you guys tend to look at this stuff from a more academic point of view, versus the political spin in the general forums (or if you have spin, at least its reasoned). I predict the thread in the other forum will end up talking about Benghazi, immigration, terrorists and how Obama and Hillary Clinton destroyed the US oil industry very, very soon.

---------------------------------------------------------------------

Over the last year, seeing oil prices plummet, I assumed, like everyone, that it was primarly a ploy for SA to crush external competitors, especially the US and Canadian shale oil production, which it has clearly effectively done.

But I've read some things that might add to that explanation, and they are actually pretty compelling.

The Saudis have lots of the worlds oil, and its readily available to them compared to the rest of the world - its cheap to get and pump, and I've read estimates that the raw cost to get it out of the ground is somewhere around $6 per barrel, compared with at least five to tenfold that of more difficult production, such as shale.

But Saudi is in this for the long term, and they realize that oil demand will peak before the supply... the movement to electric cars is starting and will be widespread in a decade or two - estimates are that in 2030, oil use will be half what it is now. Natural Gas is incredibly abundant now, and can replace oil in all sorts of areas, like home heating and even ocean going ships When that day happens, the Saudis will be sitting on a whole lot of easy to obtain oil with not much demand. Given the realities of Global Warming, in a few decades it should be obvious to even the biggest neanderthals that pouring more CO2 into the atmosphere is not a good thing, so we can expect more carbon taxes, restrictions, etc, to be placed on emissions from oil.

In addition to all this, a competing regional power that the Saudis hate is now going to be freely exporting oil, and SA has a vested interest in minimizing Iran's prosperity, and has the ability to do so by keeping production up and prices low.

So where does that leave the Saudis?


Their strategy is to extend the oil boom as long as possible, because any oil that remains in the ground is lost revenue eventually, and in a few decades, they will be leaving a whole lot of oil in the ground. So their long term strategy is to drive prices down so SA becomes the nation with the largest market share. They may tighten the spigot every once in a while, but not too much, lest other producers start selling more oil and cutting into their goal of pumping themselves dry as fast as possible. Every barrel of oil that stays under SAs feet is missed revenue.

I havent heard this take on DP before - and it shocked me when I had read of it because of its simplicity and clarity.

Heres a nice news story on it, and there are more out there.

Saudi Arabia's Plan to Extend the Age of Oil - Bloomberg Business
Click to expand...

The USA initiated an economic war on Russia, the world's second largest producer of OIL. The USA went along with SA cutting oil prices in the hopes they could bankrupt Russia, the gas station (McCain). The USA was a little shortsighted as regards the shale producers and it has bitten them. SA has effectively shut down shale oil speculations. Now it wants to get sanctions re-instated against Iran to shut them down. If they can get ISIS in control of Iraqi oil, they will corner that market. OIL is CORPORATE ergo any projections about its' future are always about beancounters and profit, not Nationalism and social welfare.
 
The US tight oil companies are responsible for driving down oil prices. Saudi Arabia and OPEC have lost whatever control they had on oil prices due to the fact that some independent US producer will fill the void if they stop pumping. Demand for oil is hardly collapsing, we have never used so much.
 
drz-400 said:
The US tight oil companies are responsible for driving down oil prices. Saudi Arabia and OPEC have lost whatever control they had on oil prices due to the fact that some independent US producer will fill the void if they stop pumping. Demand for oil is hardly collapsing, we have never used so much.
Click to expand...

Agreed. I also don't think shale is going anywhere either, it will take a five year hit at the most. I actually lived in Bismarck for a time and work in the oil industry myself, the infrastructure invested into shale is too much to just give up on. The mom and pops will go bankrupt and be bought out cheap by the big boys like BP, Chevron, etc. These companies have the resources to invest into more efficient fracking technology such as recycled hydrocarbons for fracking rather than water/sand mix, more efficient horizontal drilling, etc.

Price of oil will stay low for 2-3 years then stabilize at $70-90 for a ten year period I think. The combination of fracking, traditional drilling, and the rise in alternative energy sources and their efficiency will ensure the price of oil stays low (but not THIS low) for decades to come. And eventually, we'll tap out all our resources in a few decades (4-6?) but technology on the alternative energy side and the infrastructure needed to support it at a level that is cost efficient for the average consumer will have grown leaps and bounds, allowing planet Earth to safely make that transition. Make no mistake, oil will not last forever but it isn't going anywhere anytime soon.
 
akrunner88 said:
Agreed. I also don't think shale is going anywhere either, it will take a five year hit at the most. I actually lived in Bismarck for a time and work in the oil industry myself, the infrastructure invested into shale is too much to just give up on. The mom and pops will go bankrupt and be bought out cheap by the big boys like BP, Chevron, etc. These companies have the resources to invest into more efficient fracking technology such as recycled hydrocarbons for fracking rather than water/sand mix, more efficient horizontal drilling, etc.

Price of oil will stay low for 2-3 years then stabilize at $70-90 for a ten year period I think. The combination of fracking, traditional drilling, and the rise in alternative energy sources and their efficiency will ensure the price of oil stays low (but not THIS low) for decades to come. And eventually, we'll tap out all our resources in a few decades (4-6?) but technology on the alternative energy side and the infrastructure needed to support it at a level that is cost efficient for the average consumer will have grown leaps and bounds, allowing planet Earth to safely make that transition. Make no mistake, oil will not last forever but it isn't going anywhere anytime soon.
Click to expand...

Sounds like hope to me.

The Saudis seem to be able to pump $10/bbl oil for a few decades. Shale will never be more efficient than that.
 
Might it be a way to keep ISIL somewhat in check for the time-being, seeing as they found a way to use oil to finance their caliphate? It's a bit ironic that ISIL's rise and harnessing of oil coincided with the most dramatic oil price drop in our lifetimes...
 
It's all economics. Oil prices go up, then they fall, then they go up, then they flatline. I'm to the point I don't even care about gas prices anymore. Iv'e come to terms that there will never be gas below one dollar ever again, and quite honestly, I don't care if i'm paying 3 cents more than to station down the road. The media attempts to scare people by constantly posting "yellow journalism" of the 21st century. You hear, "Saudi Arabia jumps oil prices, American's to pay 50 cents more." It's a simple media tactic. Gasoline, though still plentiful, is running short, but it will be a LONG time till any drastic effects start to happen. Although, on that note, that begins another debate on clean energy. In short, if more people invested in clean energy, we would be less reliant on oil.
 
Neomalthusian said:
Might it be a way to keep ISIL somewhat in check for the time-being, seeing as they found a way to use oil to finance their caliphate? It's a bit ironic that ISIL's rise and harnessing of oil coincided with the most dramatic oil price drop in our lifetimes...
Click to expand...

Not necessarily ironic at all. The Saudis control the price.

The Saudis are more concerned with Iran than ISIS anyway.
 
Threegoofs said:
Sounds like hope to me.

The Saudis seem to be able to pump $10/bbl oil for a few decades. Shale will never be more efficient than that.
Click to expand...

They're economic forecasts are based on oil in the $100-110 range. They won't be able to sustain this price range long term.

How long can the Middle East survive cheap oil? - Oct. 25, 2015

And that is why I say the price will level out to a range around $70-90. The Saudi's are already being forced to make cuts in certain services to cope with the current oil prices.
 
Threegoofs said:
Sounds like hope to me.

The Saudis seem to be able to pump $10/bbl oil for a few decades. Shale will never be more efficient than that.
Click to expand...

The Saudi's can pump 11MM BOEPD @ $10/BBL (which I don't really know if that's the true cost but i'll roll with it). Lets ask a more interesting question... can they pump an additional 5-6MM BOEPD at that cost? Probobly not. Exploration, drilling, the ongoing maturation of oil fields in decline that make it even harder to grow production would make this a very difficult feat. The Saudi's have produced roughly the same amount of oil for years now. Its been flat. The US has nearly double production in the past 5 years or so. The US was able to essentially increase production by that amount in about 5 years... pretty impressive if you ask me. The Saudi's are running around right now with their head in the sand. The US tight oil producer is the marginal producer of oil now, not Saudi... they are at the mercy of the market.

Now with that said its pretty clear that a lot of US independents can't make money right now. And counter-intuitively they are not slowing production because doing so would cause many of them to breach contractual obligations. They still need cash flow. These zombie companies are eventually going to have to face the music... some form of bankruptcy or restructuring. I doubt we see oil prices rise significantly until this happens to fairly large public companies like Whiting, Continental Resources, etc, at which point I expect to see some sort of consolidation with larger companies swooping in and grabbing assets at fire sale prices. Hopefully the banks did a better job this time with risk management and there is no financial crisis from this debt bubble. However, with that being said there are some phenomenal tight oil companies out there that will surely survive and can in fact compete at these levels... EOG Resources is a great example and is already one of the largest producers of oil in the US.
 
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drz-400 said:
The Saudi's can pump 11MM BOEPD @ $10/BBL (which I don't really know if that's the true cost but i'll roll with it). Lets ask a more interesting question... can they pump an additional 5-6MM BOEPD at that cost? Probobly not. Exploration, drilling, the ongoing maturation of oil fields in decline that make it even harder to grow production would make this a very difficult feat. The Saudi's have produced roughly the same amount of oil for years now. Its been flat. The US has nearly double production in the past 5 years or so. The US was able to essentially increase production by that amount in about 5 years... pretty impressive if you ask me. The Saudi's are running around right now with their head in the sand. The US tight oil producer is the marginal producer of oil now, not Saudi... they are at the mercy of the market.

Now with that said its pretty clear that a lot of US independents can't make money right now. And counter-intuitively they are not slowing production because doing so would cause many of them to breach contractual obligations. They still need cash flow. These zombie companies are eventually going to have to face the music... some form of bankruptcy or restructuring. I doubt we see oil prices rise significantly until this happens to fairly large public companies like Whiting, Continental Resources, etc, at which point I expect to see some sort of consolidation with larger companies swooping in and grabbing assets at fire sale prices. Hopefully the banks did a better job this time with risk management and there is no financial crisis from this debt bubble. However, with that being said there are some phenomenal tight oil companies out there that will surely survive this crisis and can in fact compete at these levels... EOG Resources is a great example and is already one of the largest producers of oil in the US.
Click to expand...

I wouldn't consider any of the aforementioned companies to be anywhere near small, and think Whiting and Continental Resources will whether the storm. A lot of my old clients, guys like Bridger, Chesapeake will probably have to sell off their assets. If you're in the mid-stream business, you're likely locked into 5-10 year contracts and shouldn't take a hit.

I believe the Saudi's will pull back oil production within the next two-three years because their economy is not diversified enough to sustain the impact of these prices. Kuwait, UAE, and a few others have diversified economies routed in finance and other sectors that will cushion the blow of low oil prices, this is not the case in Saudi Arabia.

And God forbid they encounter the social turmoil the Arab spring has wreaked across the rest of the Middle East. So many factors at play here, but ultimately shale will continue on once acquisitions are made and the larger players like BP, Chevron, Shell etc swoop in. They have the resources to design the technology able to extract shale at a much more cost effective price.
 
akrunner88 said:
They're economic forecasts are based on oil in the $100-110 range. They won't be able to sustain this price range long term.

How long can the Middle East survive cheap oil? - Oct. 25, 2015

And that is why I say the price will level out to a range around $70-90. The Saudi's are already being forced to make cuts in certain services to cope with the current oil prices.
Click to expand...

You don't understand...the Saudis know that it's unsustainable. They are cutting back and reducing their budget now. As the article says, Kuwait, UAE and Bahrain can do this for decades. The Saudis can too, if they reduce their spending.

Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget - Bloomberg Business

I think they are in this for the long haul.
 
T Boone Pickens predicted $75/brl. this year that does not rhyme with most predictions it may hit $20/brl before it rises. Most thinking say it will remain low all this year, the bad part of that is the DJ Ave will most likely linger until oil rises.
 
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