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Page added on October 26, 2014

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Do we have an oil chicken race ahead?

Do we have an oil chicken race ahead? thumbnail

A week ago I wrote my story “The falling oil price may presage a future recession”. Along the same lines Gaurav Sharma has contributed a story on Forbes with the title “Saudis Vs Oil Markets: Who’s Playing Whom?” I like to high light these part of his story:

“While the world was focused on Brent and WTI price dips, the OPEC Reference Basket of twelve crude oils from its member countries slipped from $89.37 on 7 October (just days after the Saudi move) to $81.67 per barrel on 23 October. Popular discourse about Saudi motives seems to be that oil minister Ali Al-Naimi does not want to see a repeat of the 1980s when cuts in production saw his country lose global market share.”

“Within OPEC, only Kuwait (needing a breakeven price of $75), Qatar ($71) and United Arab Emirates ($80) can withstand the current oil price decline along with the Saudis. However, others would be left sweating. For instance, Venezuela needs the price to be an unrealistic $162. Iran needs $134, Nigeria $126 and non-OPEC producer Russia around $100. Of the four, Russia can withstand the price decline for now, but persistently low prices will start biting.”

It looks as we might have an oil price chicken race ahead.

 Aleklett’s Energy Mix



22 Comments on "Do we have an oil chicken race ahead?"

  1. Nony on Sun, 26th Oct 2014 9:46 am 

    oil is a factor of production. The overall economy is much better off with cheap oil than with expensive. Producers are worse off, but all the things that use the product are better off. And that factor outweights the impact on producers.

  2. JuanP on Sun, 26th Oct 2014 10:07 am 

    The article linked above is worth the time. I found it accurate and thorough.
    http://www.forbes.com/sites/gauravsharma/2014/10/24/saudis-vs-oil-markets-whos-playing-whom/

  3. JuanP on Sun, 26th Oct 2014 10:14 am 

    Venezuela is likely to collapse first, it is a total mess of a country. Most Venezuelans I’ve met are extremely delusional and living in denial about their country’s prospects.
    Nigeria will definitely collapse. It is too big, hot, and crowded to be managed in a post peak world.
    Iran and Russia could last significantly longer. They have ancient cultural empires and have been around much longer than most countries in the world.

  4. Perk Earl on Sun, 26th Oct 2014 10:48 am 

    “For instance, Venezuela needs the price to be an unrealistic $162. Iran needs $134, Nigeria $126 and non-OPEC producer Russia around $100.”

    That reads like a wish-list, not realistic expectations. These countries need to find other sources of revenue to make up the difference because they are above the level of oil affordability, except for possibly Russia’s $100 if oil price rebounds.

  5. Plantagenet on Sun, 26th Oct 2014 11:16 am 

    Much of the so-called US “recovery” is based on the excellent economic numbers from Texas, North Dakota, and the US oil patch. Crushing the strongest parts of the US economy can’t be good for the US economy.

  6. Bob Owens on Sun, 26th Oct 2014 11:59 am 

    Most moves by OPEC over the past decades have, in retrospect, just been reactions to price/demand forces. This OPEC move is a reaction to $100/bbl oil. The disturbing reality is that the world is not able to afford oil at $100/bbl and world price is starting to reflect that. OPEC denies that reality by machinations about market share. Reality is they need $100/bbl and the world can’t provide that price and continue to function. The oil vice is getting tighter for both the oil exporters and users.

  7. rockman on Sun, 26th Oct 2014 12:21 pm 

    “…Basket…slipped from $89.37…to $81.67 per barrel on 23 October”.

    So here’s the two theoretical conversation between a refiner and an OPEC oil seller:

    A) Buyer: OK, I need 1 million bbls/day of oil next month and will pay you $89.37/bbl.

    Seller: OK, I can deliver the 5 million bbls/day but I refuse to accept more then $81.67/bbl. So you total bill comes to $231,000,000 less then what you’re willing to pay.

    [FYI that would for all of OPEC collectively be a $6.9 BILLION reduction of revenue just for that one month. “Force” refiners to pay that lower price for a year and OPEC VOLUNTARIALLY gives up $83 BILLION in revenue.}

    B) Refiner: I need 1 million bbls of oil per day for the next month.

    Seller: OK, that will cost you $89.37 per bbl.

    Refiner: Based on my projection of what buyers of my products will pay I can’t pay more the $81.67/bbl and still make an acceptable margin. If I pay your asking price I would actually lose money. So sell to me at my asking price or I won’t buy more oil. I’ll just refine what I have in inventory.

    Seller: OK, it’s a deal. I need revenue to keep my income at some level. Otherwise I would shut my wells in until the market price increases.

    So there you go. Since none of us here was a fly on the wall listening to the conversation we can only guess whether A or B captures the essence of the negotiations.

    So guess already. LOL.

  8. Joe on Sun, 26th Oct 2014 1:08 pm 

    A question for you,

    How did we afford(or pay for it) 100.00/bbl oil all this time if we cannot afford it now? What changed?

    Joe

  9. Nony on Sun, 26th Oct 2014 1:43 pm 

    I agree with Rock. If OPEC was trying to lower price, the one thing they could do would be substantially increase production, but this has not happened. Instead they are maintaining production at approx. same level and just taking market price.

    Demand is slowing (or not growing fast) and U.S. shale has started to become enough to move the needle. Libya coming online had an effect also. It’s just supply and demand.

  10. shortonoil on Sun, 26th Oct 2014 1:43 pm 

    There was a day when the value of five barrels of oil would buy a Jaguar, then it became a Buick, a VW Bug, and today a nice dirt bike. The value of oil is not a constant, it is declining with time. This is a result of entropy production; it is why a bolt will eventually rust away into nothing but red powder, and why a rock on a mountain side will eventually roll down hill. It is one of our most basic laws of nature. We have now reached the point where a barrel of oil is no longer worth diner for two at a high end restaurant, or $100. It is called depletion, and it is an ongoing phenomena. We are approaching the end of the oil age, and no one can alter its course.

    http://www.thehillsgroup.org/

  11. Plantagenet on Sun, 26th Oct 2014 1:45 pm 

    @Bob Owens

    What “OPEC move” are you talking about? OPEC hasn’t done anything…..the oil production from OPEC has stayed roughly the same. The excess oil that is causing the oil price collapse is all tight oil coming from US shale fracking.

  12. shortonoil on Sun, 26th Oct 2014 5:33 pm 

    “How did we afford(or pay for it) 100.00/bbl oil all this time if we cannot afford it now? What changed?”

    In actuality we have not been able to afford $100 oil for quit some time. The world has been buying it through issuance of huge amounts of debt. The world has added 40% to its total debt load in the last six years. What happened is that the Etp of petroleum, Total Production Energy (see our site for a detailed explanation of Etp) has been increasing. Consequently, the energy available per unit to the end consumer has been going down. This has been going on since the first barrel of oil was extracted. A couple of years ago, however, the energy delivered to the end consumer became insufficient in $ terms (energy is worth money) to continue purchasing the oil at its then present price. Another way of saying this is, “the price of a unit of oil can not exceed the value it contributes to the end consumer”.

    Hopefully, we’ll have a page up at the site on this subject this week. It will be in the Commentaries section under “The Price of Oil” Your comments would be appreciated.

    http://www.thehillsgroup.org/

  13. Kenz300 on Sun, 26th Oct 2014 7:06 pm 

    Lower oil prices will provide a boost to the world economy.

    This boost in the world economy will increase demand for oil and drive oil prices higher.

  14. rockman on Mon, 27th Oct 2014 10:56 am 

    “How did we afford…100.00/bbl oil all this time if we cannot afford it now? What changed?”

    A simple answer but still valid to some degree IMHO: we couldn’t really afford $100/bbl oil. At least not enough of the consumers could. Remember the world has many economies that have difficulty buying much oil at $60/bbl.

    Economies adjust very slowly even to major changes in the dynamics. Oil or NG prices increase and drilling activity increases…but not next month. It can take several years to kick in significantly. Same thing with stress on economies: they react negatively to higher energy costs but it can take years to be fully felt. And then add the buffering effect of govt efforts to slow the response as we’ve seen with QE.

    Taken all together one could surmise that the current oil price slide is right on schedule.

  15. Nony on Mon, 27th Oct 2014 12:42 pm 

    The thing that people miss is the idea of a demand curve. Some people CAN’T afford $100/bbl and some CAN. If there is not enough supply to go around, then price rises and the “CAN” people get the barrels and the “CAN’T” people don’t. Similarly, if supplies are in excess than price drops and the “CAN” people just pay less than what they could pay.

    This is an extremely basic concept and applies to eggs, corn, butter, steel, and basically everything. Stop talking about the customers as one entity. The market is comprised with multiple customers, with different ability/desire to pay.

  16. Davy on Mon, 27th Oct 2014 1:56 pm 

    Geeze, NOo, get a friggen grip that there is more to the economy than High school Econ 101. NOo, what about the laws of thermodynamics? What about deflating economic activity from your “cannots”? You need to open your mind up NOo to limits of growth and diminishing returns. I am willing to back off of some of my doom if you show some acknowledgment of a finite world.

  17. Northwest Resident on Mon, 27th Oct 2014 2:19 pm 

    Nony — So, the oil companies can make up with price what they lose in volume? Is that what you’re saying? I admit, with all the wealth transfer and super-inflated investment values today, there are a lot more well-to-do individuals capable of handling that $150 or so price per barrel you’re predicting. But the other 99% will be priced right out of the ability to buy the more expensive oil products. But sure, why stop at $150 per barrel. Raise the price to $1000 per barrel and they’re still be plenty of multi-millionaires who can handle that price. Problem is, nobody else can, and businesses that use oil to sell products to those 99% will go straight to bankruptcy. I like your unbridled optimism, Nony, but sometimes reality gets in the way, or should.

  18. Nony on Mon, 27th Oct 2014 2:21 pm 

    Davy:

    I probably acknowledge more than you think I do. Adelman (very famous economist) said about oil ‘depletion moves the supply curve to the left [less cheap oil available] and knowledge moves it to the right [more cheap oil available].’

    It is perfectly possible to have a normal econ 101 view of things and to square that with a depleting resource. This is what Hotelling (should have) won the Nobel prize in Econ for:

    http://en.wikipedia.org/wiki/Hotelling%27s_rule

    IOW, if you use stuff up and you can’t recreate it, you have less left and the price goes UP! This is an ACKNOWLEDGEMENT of the role of depletion, not fighting it!

    P.s. You have a tendency to throw out terms like thermodynamics or chaos theory. I get the impression you understand neither the math of the differential equations involved OR the conceptual issues (e.g. Le Chatelier’s rule). You just make word salad. Not analysis. Slow down and try to break things down into logical arguments. Not word salad.

  19. Northwest Resident on Mon, 27th Oct 2014 2:21 pm 

    “I am willing to back off of some of my doom …”

    Noooo! Never give in!! Don’t make compromises with the devil (figuratively speaking in your case Nony).

  20. Northwest Resident on Mon, 27th Oct 2014 2:27 pm 

    Nony — The central point that you’re not getting is that unlike sushi, fine wine, designer jeans and a hundred million other products, OIL and gas/NG are NOT optional purchases. True, a lot of the recreational driving can (and will) be eliminated with the higher oil prices, but there is a point where the price of oil goes so high that businesses must pass that excess price on to their customers, who won’t have enough money to buy those products because they’re using every dime to stay warm or to get back and forth to that part time job at McD’s. ECON 101 does not explain the very complex relationship of oil to the economy, not even close.

  21. Davy on Mon, 27th Oct 2014 2:30 pm 

    NOo, who said I understood anything. I am just sitting on my limb singing my sweet bird song of doom and you responded so that means there must be something to it. NOo, your thinking is clearly dated and failing. From here on out your pseudo science called economics is going to disappoint you endlessly. Your world is built on sand and the tide is going to wash you down. I like you anyway NOo. You are definitely a challenge and a nice guy. Oh, ps, some people get lost in the numbers and fail to appreciate the concepts.

  22. Davy on Mon, 27th Oct 2014 2:36 pm 

    Thank you NR, maybe NOo will understand you. He doesn’t like salad so maybe your stiff shot of bourbon will appeal to him.

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