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The Return of the Bad Old Days of Oil Shocks

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And we thought the bad old days of oil shocks were over. Embargoes, price spikes, gasoline lines in America, a sweater-bedecked president ordering the end of hot water in many facilities, collapsing retail sales as high gasoline and energy prices hit stores as much as a big tax increase would, economic stagflation, or worse. Well, it just might be that we were wrong to believe that danger to our continued prosperity has been removed with the death of theories about “Peak oil.”

Certainly, the takeover of part of Iraq by ISIS forces, variously called “militants,” “terrorists,” “gangsters,” and in White House circles thought to be disaffected Sunnis aching to participate in the government of a democratic Iraq, has set nerves jangling among energy planners. True, most of Iraq’s oil production, at around 3 million barrels per day the second highest of OPEC’s 12 members after Saudi Arabia’s 10 million, is in the south of the country, still far from the reach of the anti-government forces. But that does not necessarily mean that we can assume recent developments in Iraq will have little to do with the price of crude oil. Oil majors operating in the country have begun evacuating some personnel. Exxon Mobil has removed staff from two large fields in the south of Iraq. That might not shut down those fields, but it will certainly make it imprudent to count on Iraq to increase production in coming years to meet predicted demand increases. Which would mean higher oil prices, never good news for struggling Western economies.

For some time now the International Energy Agency has been warning that continued recovery from the Great Recession is increasing demand for oil and putting pressure on world oil supplies. The IEA is counting on Iraq to supply about 60 percent of the growth in OPEC production in the next several years. That might still happen, but surely it is more risky today to depend on Iraq to increase production by as much as one million barrels per day than it was only a few days ago.

Meanwhile, Libya, which at one time could be counted on for close to 2 million barrels per day, cannot be counted on for much at all as militants have shown they can shut down the nation’s oil transport infrastructure. Russia, with its oil fields ageing and investment-starved, and its production falling off, can’t be counted on to make up any shortfalls. North Sea production is as likely to decline as rise, Venezuela is hardly in a position to meet new demands as its lack of investment and ongoing political turmoil prevent development of its vast reserves, and Mexico remains unpredictable until we see how proposed reforms allowing foreign investment in its inefficient oil industry play out. If we are to avoid the bad oil days, the US and Saudi Arabia will have to push lots of oil onto world markets.

America can do its part. The tale of fracking in the U.S. has been oft-told. As a result of this new technology—really, new applications of an old technology—U.S. daily production of crude oil and associated liquids now exceeds the daily average of some 11m barrels reached in the nation’s peak year, 1970, although production of crude alone, at 8.3m barrels, is short of the 1970s peak. Since 2005, America has accounted for almost all of the increase in worldwide production.


But export of U.S.-produced crude oil is banned by law. So increased domestic production, attainable if the Obama administration does not stifle the growth of fracking as part of the presidential drive to reduce carbon emissions, will be used to reduce imports further and free up those barrels for peddling on world markets.

In Saudi Arabia, the government will have to open the valves to maintain its role as the world’s swing producer and price-stabilizer. Before the new war in Iraq erupted, the Saudis agreed to ramp up production by 300,000 barrels per day to keep OPEC output steady at around 30 million barrels daily, meeting about one-third of world crude oil demand. No sweat, or not much of one. The kingdom will be called upon later this year to add another

400,000 barrels to meet rising demand. A bit of a sweat, but doable. Ironically, Iran is helping to meet world demand by cheating on its agreement, made during the nuclear talks, to put a one-million barrel per day ceiling on its exports pending further negotiations. In the event, the mullahs are exporting 650,000 barrels per day in excess of that ceiling. That nets them about $65,000,000 every day, a nice premium for cheating with no risk that America will walk away from the negotiating table.

All of this means that barring a complete shutdown of Iraq’s industry, there is a rough demand-supply balance, the maintenance of which is in the hands of the Saudis and U.S. drillers. But the risks of a shortfall in the near- medium-term have increased, and with it the risk of higher fuel and gasoline prices that might damage recoveries here and throw the even more fragile euro economies into recession. There are already signs of pressure here on gasoline prices as the driving season begins.

Meanwhile, the markets for the products of crude oil are in turmoil. Although law here prohibits exports of domestic crude, it allows exports of refined products. American refiners have had two recent blessings. First, there is a glut of fracked oil not easily useable in U.S. refineries, and therefor available to refiners at favorable prices. Second, our refineries run on relatively cheap natural gas (another result of fracking). So the oil products they turn out have a price advantage in world markets. Which enables them to send what the trade press calls “a tidal wave” of gasoline, diesel and other refined products to Europe and elsewhere. Which is one reason BP has signed a deal with Kinder Morgan for 80 percent of the capacity of a new Texas refinery that will process U.S. crude just enough to call the output “products,” legally available for export.

As always, sudden change in oil markets has geopolitical as well as economic effects.

·     The administration believes it is in our interests to allow Iran to increase crude sales so as to hold oil prices down and prevent a further slowing of our economic recovery, and to encourage the mullahs to provide military aid to Iraq, and so is accelerating the exploration of common interests with our long-time foe.

9 Comments on "The Return of the Bad Old Days of Oil Shocks"

  1. Davy, Hermann, MO on Sat, 21st Jun 2014 7:27 am 

    The global financial system will not survive an economic tax from an oil price spike. The tools of massive debt creation has already reach diminishing returns. Those tools were like a short term help drug that has turn into a dangerous long term maintenance drug by mistake. These short term drugs increase tolerance and eventually reach toxic levels. Google Xanex addiction and overdose as a perfect analogy. We are no longer at a point in the systematic nature of the global system that we can take large shocks and absorb them and continue to grow even the current pseudo growth. 2008 was the end of that situation. We are in a new normal of financial repression, asset/debt bubbles, wealth transfer, and rapidly deteriorating vitals like food/energy/water. Of course this articles spins an optimistic outcome “if only” actions are taken. Of course these actions will benefit these folk’s patrons. More “lobby of plenty” spin. BTFD stupid!

  2. paulo1 on Sat, 21st Jun 2014 9:05 am 

    And if KSA starts to unravel? It is only a matter of time. Emboldened by what is going on elsewhere, (Libya, Nigeria, Somalia, Syria, Iraq, Thailand, Sudan….who did I miss?), those anti-civilization anti-western fundamentalists in the ME will go for it all.

    Ah, that wonderful life of cooking on an open fire, the little woman at home….covered from head to foot in dark heavy cotton with only eye slits to convey her presence, children un-schooled…running through the village on feet filled with round worm eggs, the men sitting in groups drinking mint tea, AK47s propped against the concrete bricked wall…. wondering if lunch is ready? Wait a minute, the call is coming…run to the mosque and prostrate yourselves 5X and kiss the ground while pointed at Mecca and give thanks. Give thanks for this wonderful life we have created to honour the Great One. Now, off to home. Hopefully, the women will be quiet…they are all noisy today planning little Fatima’s circumcision. Ah life is good, if only we could totally kill the Great Satan, if only we had that wonderful weapon of justice to bring the very wrath of the Almighty down upon the unbelievers!

    Does anyone remember those evil days of watching Andy Griffith? What about being in school and playing pick-up baseball at recess? How about the 5 cent little milk cartons they sold in school cafeterias at lunch? The hot lunch program so kids could learn at school and at least get one good meal during the day? Yeah, despite our flaws and shitty politicians I don’t think we did so bad.

    Glad I live on an Island on the other side of the world.


  3. Davey on Sat, 21st Jun 2014 10:54 am 

    Great point Paulo although let us not forget “Andy Griffith” was made possible by cheap oil so cooking meals around the fire might be in our future too.

  4. rockman on Sat, 21st Jun 2014 11:01 am 

    Well, they almost got it completely right: “The tale of fracking…As a result of this new technology—really, new applications of an old technology”. Frac’ng isn’t being used in a “new application”. About 35 years ago I did a 500,000 frac in a reservoir similar to the Eagle Ford Shale. And 25 years ago I frac’d my first EFS well. And 20 years ago the oil patch in Texas was horizontally drilling thousands of wells in a fractured reservoir similar to the EFS.

    “…the growth of fracking…will be used to reduce imports further and free up those barrels for peddling on world markets.” So freaking wrong. LOL. We currently import about 2 to 3 bbls of oil per day more then domestic demand requires. We refine those excess imports and export the products. The more domestic production increases the less we need for our consumption. But as long as our refineries can make their profits they’ll continue to compete for oil with the other importers. The Texas Motiva refinery expansion (the most expensive in history) was paid for by the Dutch and Saudis so they could profit from cracking imported oil…not domestic production. And it looks like they have their eye on Canadian oil sands production.

    And again not too accurate: “…there is a glut of fracked oil not easily useable in U.S. refineries, and therefor available to refiners at favorable prices.” While it’s true that EFS production doesn’t produce the same profit margins for Gulf Coast refineries as the heavier oil, it’s given incentive to export those bbls. Which is why more than 25 million bbls of EFS production per year is being shipped half way around the country to Canadian refineries. And there’s no problem doing this with the “oil export ban”: cheap upgrader units have sprung up in the trend converting EFS oil to a product status. And Bakken oil exports to Canada? No problamo: the US gov’t has been handing out exemptions to the ban whenever requested.

    IMHO all in all this author doesn’t seem to have a clue about the actual dynamics of the situation.

  5. Juan Pueblo on Sat, 21st Jun 2014 11:02 am 

    The administration’s capacity to put the screws on Iran is being lost as oil production peaks. If we don’t break them in the next couple of years, which seems unlikely right now, they will become much stronger. Their oil and gas becomes increasingly important to almost the whole world as time passes.

  6. Juan Pueblo on Sat, 21st Jun 2014 11:21 am 

    Rock, thanks for the analysis. I value your input in general, your personal knowledge and experience of the subject is priceless.

  7. Juan Pueblo on Sat, 21st Jun 2014 11:27 am 

    Paulo, the KSA point is on target. They have a significant Shia population in some oil areas. Since you asked, I would say you missed Yemen, KSA’s neighbor and one of the less developed places on the planet.

  8. rockman on Sat, 21st Jun 2014 1:41 pm 

    Juan – I had forgotten about Yemen so just dig this up. A very interesting take IMHO. Here’s just a taste from the Yemen Times:

    Syria has fallen apart. Major cities in Iraq have fallen to Al-Qaeda. Egypt may have stabilized slightly after a counter-coup. But Lebanon is starting once again to fragment. Beneath all these facts— beneath all the explosions, exhortations and blood—certain themes are emerging.

    Some years ago, before the Arab “Spring” ever sprung, I remember asking one top security official about the region. What, I wondered, was their single biggest fear? The answer was striking and precise: “That the region will clarify.” That is a fear which now appears to be coming true.

    The Middle East is not simply falling apart. It is taking a different shape, along very clear lines—far older ones than those the Western powers rudely imposed on the region nearly a century ago. Across the whole continent those borders are in the process of cracking and breaking. But while that happens the region’s two most ambitious centers of power—the house of Saud and the Ayatollahs in Iran—find themselves fighting each other not just for influence but even, perhaps, for survival.

    The way in which what is going on in the Middle East has become a religious war has long been obvious. Just take this radio exchange, caught at the ground level earlier this month, between two foreign fighters in Syria, the first from Al-Qaeda’s Islamic State in Iraq and Syria (ISIS), the second from the Free Syrian army (FSA). “You apostate infidels,” says the first. “We’ve declared you to be ‘apostates,’ you heretics. You don’t know Allah or his prophet, you creature. What kind of Islam do you follow?” To which the FSA fighter responds, “Why did you come here? Go fight Israel, brother.” Only to be told, “Fighting apostates like you people takes precedence over fighting the Jews and the Christians. All imams concur on that.”

    Long article worth reading IMHO.

  9. Makati1 on Sat, 21st Jun 2014 10:30 pm 

    “And we thought the bad old days of oil shocks were over.”

    At that point, I knew this is just another piece from the Ministry of Propaganda. BS in the form of information. We caused a lull in the religious war of 1,200+ years, with the WW2 interruption, which religious war has now resumed.

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