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Page added on September 6, 2015
Saudi Arabia Loses the Oil War
The oil war has finally reached its tipping point after 13 long months. This struggle between Saudi Arabia, and its much smaller North American adversaries has recently shifted as the application of innovative extraction technologies is now gaining the upper hand.
The fiscal damage to national budgets is reaching a breaking point as surpluses have become deficits. Once stable nations face the possibility of having to drastically slash spending as this war has raged risking social instability.
Saudi Arabia has figuratively blinked after going eye to eye with the smaller and more nimble players. The question now is how much longer will this war drag on until energy markets once again stabilize, allowing oil-producing nations to balance their budgets.
It would be shortsighted to conclude that record low oil prices would not eventually limit future supply, and impair Petrostate economies. Each future barrel of oil has a production cost that needs to be met in order for supply to keep up with annual demand growth, as well as compensate for annual well depletion. This translates into producers having to find and replace between 4 percent and 6 percent annually in a market that is currently oversupplied between 1-to-2 percent.
Crude production is a capital-intensive undertaking, as well as being highly dependent upon massive amounts of debt-sourced financing. No private company can continue producing oil at a loss for an extended period of time, and no sovereign nation can operate at a loss without eventually destroying its currency and economy—case in point: Venezuela. Last week the market’s dynamics significantly flipped for the first time in over a year.
The public mistakenly believes that worldwide oil consumption has stopped growing through this pricing rout—it has not. Annual growth runs around one million barrels per year. It has been the overall increase in supply, not a demand decrease, which has been primarily responsible for driving prices down over 60 percent during these last twelve months.
OPEC has officially said it would produce at an upper limit of 30 million barrels per day, but is in reality producing 32.1 million bbl per day. This number is just shy of its record high 32.8 million bbl/day set back in the July of 2008. This figure additionally appears to be the group’s production limit without unsanctioned Iran. Every nation is essentially pushing as much oil onto the market a possible in an effort to make up for the lower prices.
Saudi Arabia is the largest member of OPEC and the only producer that can truly curtail production (the other members ALWAYS cheat). It is currently hemorrhaging some $14 billion a month, and has just resorted to borrowing money for the first time in eight years—fighting a price war it cannot win. Their foolish gambit may have slowed, but cannot stop, North American producers.
When 90 percent of your government’s financing is contingent upon prices remaining above $100 to function, it is a huge mistake to go up against American ingenuity, which keeps finding ways to produce at lower and lower prices.
Here are the price levels needed to prevent these Petrostates from running fiscal deficits, given current budgetary constraints, according to the WSJ:
Libya $215.00
Algeria $111.10
Saudi Arabia $103.00
Iran $92.50
Venezuela $89.00
Nigeria $87.90
Russia $78.00
U.A.E. $73.10
Iraq $70.90
Qatar $59.10
Kuwait $47.10
North American producers have responded to the drop in prices by cutting higher-cost production, and preserving capital by slashing future investments. These cutbacks are working, but they are temporarily taking with them many high-paying jobs. This running lean response has been coupled with massive experimentation into production methods that lower overall cost of producing oil at profitable prices. Higher (non-profitable) sources are being mothballed, while technological solutions keep driving the overall cost curve lower allowing firms to survive.
The latest U.S. Energy Information Administration data shows that U.S. production has fallen from a 40-year high of 9.6 million barrels per day back in April, to the 9.27 million barrels per day in June. This declining trend should continue as commercial hedges put in place, back when prices were higher, expire. The current surplus that had been rapidly growing for months is now slowly reversing.
Frackers are innovating their way to lower break-even pricing using disruptive technologies. Some estimates say the fracking cost for some firms has dropped by more than $10 a barrel from a year ago, and will continue to drop even further. These innovations were something the Saudi’s never counted on when they made their decision to not restrict production last November.
The variable in question now is the timeframe in which to once again reach a true equilibrium price where supply and demand are balanced without manipulation. The Saudi’s strategy of not reducing production is finally starting to fail, helped along by the Yemen War, which has now entered the costly boots on the ground stage.
The Saudi’s recent move to borrow money is the canary in the coal mine, signaling their inevitable surrender. They will soon have to cut production on their end to stabilize prices—either by themselves or with the assistance of other OPEC members. Many countries are so heavily dependent on oil revenue that societal collapse is possible for those that can no longer pay their bills. If the current sub-$50 prices prevail, Saudi Arabia will burn through all of their foreign currency reserves in less than four years.
“Drill, baby, drill” has worked, but at the expense of many smaller U.S. firms that have higher costs and larger debts. A painful retracement should now begin as budgeting for the maintenance and upkeep of existing wells has been slashed, and as exploration for new sources of crude has ground to a virtual standstill across the globe.
Surviving the next quarter is the focus for many firms as bankers come knocking, looking for reassurances that they will be paid back on over $550 billion of already highly questionable loans. North American firms, although wounded, are in the better position than Saudi Arabia to ride out the price war.
The additional supply that many were counting on (aside from the lifting of Iranian sanctions) now appears unlikely, as these large debt obligations overwhelm profit margins across the globe. Bankers don’t lend money to businesses that don’t make a profit—and at these price levels, lending is drying up. This should painfully unfold over the next six-to-twelve months.
This breakdown in prices has been painful for the entire sector; it has destabilized many regions around the globe. The lasting legacy of this pricing war will be that in order to make deals that will provide needed new supply, future lenders are going to demand much more stringent and costly terms. This added risk premium will be built into pricing models, and, unfortunately, passed on to consumers in the form of higher prices at the pumps. The days of cheaper trips to the pump will likely be over by next summer, and those who bet against the return to higher prices will soon regret those SUV purchases.
68 Comments on "Saudi Arabia Loses the Oil War"
Walt T on Mon, 7th Sep 2015 4:15 pm
The Saudis and all mulsim countries ARE NOT INNOVATORS – THEY HAVE CREATED NOTHING SINCE THEIR SCUMBAG PROPHET MUHAMMED EMERGED 1500 YEARS AGO – NOTHING EXCEPT FOR TERROR. THEY GOT RICH BECAUSE MOTHER NATURE GAVE THEM HUGE ANMOUNTS OF EASILY RECOVERABLE OIL. Americans innovated and created offshore drilling , fracking, and whatever it took to get oil that was not easily recoverable. BUT THE MUSLIMS HAVE ZERO ABILITY TO INNOVATE – HELL ANMERICAN COMPANIES CAME IN AND SHOWED THM HOW TO GET THE OIL OUT OF THE GROUND IN THE FIRST PLACE – THEN THE SAUDIS TOOK IT OVER. THE MUSLIMS USE THE INTERNET TO SPREAD THEIR DEADLY ISLAMIC CRAP – THE WORD OF SATAN. BUT DID THE MUSLIMS DEVELOP ANY OF THIS TECHNOLOGY. NO THEY JUST TOOK WHAT AMERICANS DEVELOPED. IN 1500 YEARS THESE BASTARDS HAVE INNOVATED NOTHING – WITHOUT THE WESTERN WAY OF LIFE WHICH THEY SO DETEST, THESE CAMEL HUMPERS WOULD STILL BE LIVING IN CAVES. SCREW SAUDI ARABIA AND EVERY OTHER MUSLIM NATION – THEY ARE SATAN’S KILLERS AND HAVE NO ABILITY TO INNOVATE ONCE THE EASY OIL IS GONE!
GregT on Mon, 7th Sep 2015 4:45 pm
“Americans innovated and created offshore drilling , fracking, and whatever it took to get oil that was not easily recoverable.”
That wouldn’t be the same oil that is destroying the only planet that us humans will ever have to live on, would it?
Boat on Mon, 7th Sep 2015 5:57 pm
GregT,
Once again you use the same o’l tactic. Jump from oil depletion to climate change. They are two different subjects.
They will both happen but to what extent and when are the questions. Doomers have a very poor track record. I repeat, I take a pretty safe position. I look out 5 years and don’t see enough disruption for any immediate crash. For this simple opinion you doomers go nuts. Lol I never have got it and suppose I never will. Yet a decade has gone by with these dire warnings and for a decade I have been right. You guys are as wrong as the climate change and eventual oil depletion. Tough job to be stuck in the middle but someone has to do it.
GregT on Mon, 7th Sep 2015 6:22 pm
Boat,
“Jump from oil depletion to climate change. They are two different subjects.”
They are two sides of the same coin Boat. We either stop burning fossil fuels voluntarily, and hope that we haven’t already set in motion a runaway greenhouse event, or we keep burning them, and kill of most of all life on the planet. Climate change is already occurring Boat, as is oil depletion.
The dire warnings have been ongoing for far longer than a decade. Climate change from burning fossil fuels was understood more than a century ago, and oil depletion is simple common sense. Something that you are seriously lacking.
You are correct Boat. You don’t get it, and I doubt that you ever will. You just don’t have the capacity.
shortonoil on Mon, 7th Sep 2015 6:25 pm
“After reading a majority of the comments here I have concluded that cognitive disconnect is one of the major problems that causing hurdles to maintaining any type of civilization in the future.”
Kind of pathetic isn’t it? Not one of these posters realize that at $44/ barrel there is not a single producer in the world that can afford to replace their reserves. When the present fields are depleted out, that is it for world oil production. For most fields that is 7 or 8 years down the road. They just can’t get their head wrapped around the concept that the economy can no longer pay enough for oil to allow producers to make a profit at producing it. They think that the petroleum of the future that will run our world is going to come from magical “oil trees”. They probably picked that idea up from the FED’s magical “money tree”!
They believe anything is possible because they want it to be so? Let’s just hope they expire somewhere that isn’t going to stink up the place.
Boat on Mon, 7th Sep 2015 6:32 pm
Humans will never stop burning fossil fuels. Period. During and after climate change. I thought everybody knew this. Unless you and 5 billion decide to off themselves we will let climate change do it for us. SS to tell you, just the way it is. Meanwhile there is plenty of oil and no crash in the foreseeable future.
GregT on Mon, 7th Sep 2015 6:50 pm
“Humans will never stop burning fossil fuels. Period.”
That’s right Boat, there is an infinite amount of oil to burn that extends far beyond the Earth, the Solar System, and the Milky Way galaxy. Us human’s will continue to burn it, forever. Even after we have become extinct. Us humans are smart like that. Everybody knows that, ‘cept for the people on PO.com. They’re dumb, and they think that oil is finite in nature, and will cause a crash in the foreseeable future. No need to apologize, you have told everyone the way that it is. We all feel much better now. Thanks Boat!
Boat on Mon, 7th Sep 2015 7:05 pm
No No there GregT
Lets not distort/a doomer specialty. Oil may deplete to the point it is a huge problem but it might also last long enough for the world to go electric. You doomers are so ideology driven ya’ll do a group cheer on any kind of bad news. It’s actually entertaining. Consumers will always buy their way to the most efficient/cheapest energy solution. It is very possible this could go on for hundreds of years.
GregT on Mon, 7th Sep 2015 7:28 pm
Electricity is an extension of fossil fuels Boat. No fossil fuels, no electricity.
Nobody here (that I am aware of) is looking forward to the end of the age of oil. Quite the opposite, the end of oil will bring in an era of suffering never seen before in the history of mankind. You may be entertained, but the rest of us here are most assuredly not.
“Consumers will always buy their way to the most efficient/cheapest energy solution.”
You have proven beyond any reasonable doubt that you do not understand how money works Boat, or how it is created. You are one of the brainwashed masses that is incapable of rational, and considerate thought. Money does not buy energy Boat. Money is a claim on future energy, that must be paid back, plus interest.
We are currently ‘consuming’ renewable resources at a rate of ~1.6 times faster than they can be replenished. Non-renewable resources deplete the moment that you begin to exploit them. They are call non-renewable resources because they are non-renewable. Duh.
There isn’t a hope in hell that this can go on for hundreds of years. There are only enough known oil reserves to last for ~forty years, and most of those known reserves are unaffordable to our economies. A few decades maybe, but in all likelihood less than two.
apneaman on Mon, 7th Sep 2015 8:33 pm
Boat what ideology is doomerisim? It does not make sense to say that a view that advocates nothing is an ideology. You sound like religious folks who say my lack of belief in any deity is just another religion. No it’s not and neither is my non belief in Santa or fairies or ET. Dooming is taking the positioning industrial civilization is going to end soon and there is going to be a huge die back and maybe ape extinction. It’s not advocating the end, it’s predicting it. This is based on ape history, ape psychology and the laws of physics, chemistry and biology. I’m a doomer because I think it is too late. I’m not looking for votes or advocating for change because I do not think it is possible to change ape behaviour or the trajectory we are on. I’m just another chatter monkey yaking about that which interests me the most – documenting and discussing where and how we went wrong. Oh and of course correcting the misguided like you boater. Think of it as a public service.
Gene Sidore on Mon, 7th Sep 2015 9:16 pm
The article doesn’t make any mention of U.S. demand declining because of improved vehicle fuel efficiency. The improvements will continue to come because the average passenger-use vehicle is about 12 years old, and the replacement cycles will bring newer, much more efficient vehicles into the fleet. New fuel efficiency regulations affecting big trucks are going into effect, and those will have a significant impact on demand.
As more electric, fuel-cell, CNG and hydrogen-fueled vehicles come into use, especially in police, postal and local-delivery vehicles, even more reductions in demand for gasoline and diesel fuel will occur.
dissident on Mon, 7th Sep 2015 9:33 pm
If only these efficient vehicles were available on the market. The car manufacturers have taken their sweet time to even offer a half decent choice in hybrid vehicles. BTW, hydrogen is an energy carrier and not an energy source. Where is the infrastructure to produce vast quantities of this barely storable “fuel”? It leaks way too much. And plug-in hybrids draw energy from the grid which depends on coal, gas or nuclear.
Jidon on Mon, 7th Sep 2015 11:01 pm
GregT
Electric is not an extension of fossil fuels. Nuclear can also create electricity. Lots of it, in fact.
Given all the bankrupt AltE companies our federal govt has given “preferred” loans to, like Ener1, Solyndra, etc., the stats don’t lie. (Remember how Ener1 announced its BK right as the president was hailing it during his SOTU speech?)
AltE, WHILE NOT WITHOUT VALUE AND VIRTUE, has not advanced to the point where it is remotely cost-competitive or as viable as the current fossil or nuclear alternatives.
We have hydrogen fuel cell cars not far off…Toyota is marketing one next year, I believe, and has made their patents freely open for others to use. I do think AltE will have a larger and larger place at the table, but it’s just not there yet, and it wont be for a while. You can be chicken little and tell me the sky is falling every year, like Al Gore did when he said the Arctic ice will be gone by 2013 (it isn’t), but the fact is oil is the best game in town, it will continue to be for a while, legions upon legions of people in nations around the world will line up at filling stations to fill their tanks with gallons upon gallons (or liters upon liters) of that decadently combustible, richly profitable, and emotion-setting substance: Fossil fuel.
Drill…baby….drill.
George Rigney on Mon, 7th Sep 2015 11:17 pm
The new concentrating solar power plants make every othe method except hydro antique
We need a civilization without cars!
I just drove my 1988 turbo Volvo to Starbuds to wi-fi, and it is a lot of machinery to fire up for a such a simple task. Still a lot of big trucks, people driving everywhere, huge holiday traffic jams, and LA is like a bunch of ants, every freeway packed all day long….
GregT on Tue, 8th Sep 2015 12:05 am
Jidon,
“Nuclear can also create electricity. Lots of it, in fact.”
Nuclear is also an extension of fossil fuels, as is hydro. To say otherwise is to be disingenuous, or in a complete state of denial. Hydrogen fuel cells are not an energy source, but rather an energy carrier.
The rest of what you say is nothing more than feel good propaganda for the fossil fuels industry. There is no debate anymore, at least not amongst scientists. Climate change is real. It is here and now, and it is going to continue to intensify for at least the next several decades, IF we stop burning them now. If we do not, we are sealing the fate of all future generations, and in all likelihood ourselves.
You should be ashamed of yourself.
Davy on Tue, 8th Sep 2015 6:21 am
Jidon & George, all energy producing technologies are fossil fuel supported from construction, to fueling, to servicing, and finally mothballing. The society they inhabit is a complex interconnected global system fossil fuel driven. All participants in the industry in question eat, drink, sleep, move, and buy with the foundational support of fossil fuels.
AltE and Nuk are a fossil fuel carrier and extender when one consider this. AltE has some sweet spots and niche applications that make it vitally important. Unfortunately it is not being applied properly as a localized decentralized application to protect a community or individual from grid insecurity. NUK and AltE will be stranded assets when the grid destabilizes from economic collapse. Fossil fuels drives modern society and the end of fossil fuels is the end of modern society.
I am here every friggen day and not once in 2 years have the greencopians or NUksters proved this wrong. I would love for AltE to break out of its fossil fuel chains and self-replicate and drive a carbonless reduced but still complex society. AltE is not really carbon green or pollution free since fossil fuels are a component and AltE has a high tech waste stream. The so called EV world-a-coming is a sham. Batteries are dirty and in most cases battery charging is fossil fuel driven. AltE will likely never reach the point of being the primary EV energy support.
You guys are preaching a fantasy and it is dangerous because it allows the sheeples to think we have a future. When I was growing up I was told that by now we would have outposts on Mars. What does that tell you? You guys are just chirping that same siren song as we near the rocks.
shortonoil on Tue, 8th Sep 2015 10:57 am
“All participants in the industry in question eat, drink, sleep, move, and buy with the foundational support of fossil fuels.”
Most people fall to realize the incredible energy density of petroleum. A home that uses 300 Kwhrs per month of electricity is using the energy equivalent of about one cubic foot of petroleum. It has been that phenomenally high energy packaging that has allowed the construction of our modern civilization. It has also allowed for the maintenance of it. There is nothing else that even comes close, including coal, NG, and nuclear. The quantity of energy available to do work must also be accompanied by a high enough delivery rate of that energy for it to be of use. Other energy forms take huge infrastructure projects to make high energy rate delivery possible. Petroleum shows up in a five gallon can.
Kenz300 on Tue, 8th Sep 2015 3:04 pm
The planet is losing the war with fossil fuels…….
We need to reduce our use of fossil fuels and increase our use of wind and solar…..
The Year Humans Got Serious About Climate Change — NYMag
http://nymag.com/daily/intelligencer/2015/09/sunniest-climate-change-story-ever-read.html