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Softpanorama Energy Bulletin, 2014

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One of the best finds of the year is

Energy key to our civilization By Lars Schall

This is an unedited part of an interview first published on the Lars Schall website. For the full interview see here.


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[Dec 30, 2014] The crux of today's civilization is energy by Lars Schall

Jul 23, 2013

This is an unedited part of an interview first published on the Lars Schall website. For the full interview see here.

Dr Karin Kneissl is an independent energy analyst, university teacher and writer. From 1990 to 1998 she served in the Austrian Ministry for Foreign Affairs and recently taught several seminars in Turkmenistan and Lebanon, where she works as guest-lecturer in Beirut. She teaches in Vienna (Diplomatic Academy, Military Academy) and at the European Business School (Frankfurt). Her publications range from books on the Middle East (The Cycle of Violence, 2007) to diplomacy. In 2008, a second and revised edition of her book The Energy Poker was launched in Munich, wherein the repercussions of the current financial market crisis on the price of oil and natural gas are tackled. Her articles on the energy market have been published in peer-reviewed journals, notably in India, Poland and France.

The following interview was conducted as her latest book is coming out, Die zersplitterte Welt: Was von der Globalisierung bleibt ("The Splintered World: The Remains of Globalization"), published by Braumuller in Vienna, Austria.

Lars Schall: Dr Kneissl, very recently you have been in Egypt and in Lebanon. What were your experiences there?

Karin Kneissl: I spent a while in Egypt in mid-May and the atmosphere was already very tense; one could really feel that the collapse of the state is imminent. And this is something that is fairly frightening for a country like Egypt, which - in my mind - given its long standing pre-Islamic history - is one of the few countries in the Arab world that is not the outcome of colonization chess board mapping; it has its genuine territorial history for 5.000 years. And that such a country with such a long-standing history of institutions is at the brink of collapse, that is, I think, the most frightening element of the current state of Egypt.

In Lebanon - I just came back from Lebanon two weeks ago - the atmosphere on the spot, continues to be - how should I say? - the traditional optimism of the Lebanese who have gone through terrible times but who have learnt to manage protracted conflicts. Most of my Lebanese interview partners I met are more or less optimistic about the option to avoid the outbreak of an overall conflict. However, most people expect the one or the other booby trap bomb to explode, as we have seen just a few days ago. So the violence in the streets will continue - whether it is in the north or the south of the country. But given the manifold interests at stake in the country, be it from Iran, be it from the Gulf countries, be it some Western vested interests, they might avoid the outbreak of another big conflict inside the country.

LS: Well, Lebanon gets sucked up into the conflict in Syria more and more, is this right?

KK: We have the same confessional pattern on both sides of the border and the old word of Lebanization - you might remember that in the 1970s some political scientists referred to the balkanization of Lebanon, meaning the breakdown of the country in small-sized cantons as we have seen at the beginning of the 20th century - balkanize a country, balkanize a centralized state - and when Yugoslavia started to fall apart in the early 1990s, some political scientists referred to the Lebanonization of Yugoslavia. And today we have some additional terms like the Iraqization, the Somalization and the many spillovers that we have seen from Iraq, from Afghanistan, but particularly from Iraq, into Syria and now from Syria back into Lebanon inter alia, this Shi'ite-Sunni conflict, this inter-Muslim conflict, this is something that very, very closely affects Lebanon as well.

LS: In your new book The Splintered World you have the thesis that World War I in this region is actually still going on. How do you come to this conclusion?

KK: Well, the borders that we see in the Middle East are the immediate outcome of the treaties after World War I, the treaties that were concluded in the suburbs of Paris, in that case in Sevres and later on in Lausanne. And these borders actually have their reference in pipeline agreements of 1920. So the whole region was mapped along the ceasefires, the armistices of ... as the situation in the field was after World War I and what happened to the remnants of the Ottoman Empire, namely the reshuffling of the map of the Middle East by the victorious powers Great Britain and France alongside resource interests, in that case the oil of Mesopotamia, this is the map of today's Middle East.

Now, since I mentioned Egypt just beforehand as one of the few countries, if not the only Arab country that really has a long-standing pre-Islamic, pre-20th century state history ... countries like Syria and Iraq on the other hand, even though their origins as cultures go back to pre-historic times but the nation, the territorial figure of the state is fairly recent and that has a lot to do with the outcome of World War I. And in my eyes that war is still going on because the conflict levels of those days, like, I would say, the fight for Damascus. In my eyes, this city has a much stronger role in Arab history than for instance Jerusalem. Jerusalem is often referred to by Muslims as the third important city and of fairly relevant importance to Arab history. But I would say that Damascus is even more important and we can see the way Turkey, Gulf countries like Qatar and Saudi Arabia and others, are participating in the war in Syria, it is as if World War I was still going on.

LS: Now, when you say that Damascus is so important, does the road to Tehran lead through Damascus?

KK: It is important for Tehran to have a foot in the eastern Mediterranean. However, this is something that not only the Islamic Republic of Iran had been fighting for but it is a very old constant also in Persian history. Iran, Persia, whatever you call it, is the country of the Gulf, of course. But they always wanted to keep a foothold also in the eastern Mediterranean. At various times in history the different Shah dynasties sent Shi'ite clerics to take care of Shi'ite communities in the eastern Mediterranean, such as in Lebanon. And these many constants are also still valid today because for Iran, which sees itself not only now as a power of the Gulf but which also strives for leadership in the Muslim world.

LS: There is also a possible road going from Tehran to Damascus via a pipeline, the Iran-Iraq-Syria pipeline. Do you consider this as an important feature of the conflict in Syria?

KK: I would say in the case of Syria the oil interests are secondary. They were primary in the case of the Iraq War. What might emerge as a larger legacy of the whole conflict is maybe not so much the physical access to certain resources or to pipeline tracing, I think it will be more, as I just mentioned, a fight for Damascus, which has its role in ancient Arab history and it is also about the changing of the maps, the creation maybe of a Kurdish state that is interlinked, I think, in the whole pattern. It has to do with the fight of regional power dominance, both by Turkey and by a number of Arab states and the pipeline tracing according to my assessment is secondary.

LS: The main war theater in the war on terror is Afghanistan and this has become the longest war in US history. How does the balance look like as far as you are concerned? I mean it is now going on for more than twelve years ...

KK: Well, the old coining of the phrase Afghanistan being the graveyard of Empires, or course it is once again very valid and in my book I also refer to a certain analogy. Of course one should never push analogies into the extreme but when the declining Soviet empire decided in 1988 to start withdrawing - and we have here some very interesting details from the Kremlin protocols that were published a few years ago, how Gorbachev and his cabinet desperately were looking for some sort of honorable exit. I think it would be worthwhile studying those protocols of the Kremlin once again because the analogies here are rising.

The kind of mission-accomplished-exit-scenario that the United States and her allies had been building up over the past two years is crumbling. And it will most probably - a lot of indications amount to a scenario where we will have less of an honorable exit but an accelerated exit in a hurry. As we see now certain deadlines are pushed closer; the most important outcome in perception from the Soviet withdrawal from Afghanistan was: look here, rest of the world, a number of shepherds form the Hindu Kush mountain were able to kick out the Red Army! And this kind of perception in my eyes applies also to the current state of affairs because we can see to which point this enormous technological superiority, all the material, financial and political investment that was taken under Obama in the so-called "resurge" a few years ago, all that has resulted in nothing.

On the contrary, what we see right now with the US Army's withdrawal is the biggest destruction of military hardware that has ever happened in history and that might also amount to a change in warfare in the sense that all that war material that was taken into Afghanistan actually has proven to be quite useless. And with that perception in the Islamic world by and large with the current disastrous economic state of affairs of most NATO countries, I would not exclude that ... well, certain analogies might apply also for the Western powers in Afghanistan as was the case for the Soviet withdrawal in January 1989. And as we know, the withdrawal in January 1989 was the beginning of the so-called annus mirabilis that led to the collapse of the Soviet empire.

LS: Isn't it interesting that the US and the regime of Hamid Karzai are now again negotiating with the Taliban about TAPI, the Turkmenistan-Afghanistan-Pakistan-India pipeline?

KK: Exactly.

LS: What is this? Is this a historical joke?

KK: It is. You can call a kind of Treppenwitz der Geschichte, there is no real English translation to that. [1] But I remember fairly well that the first duty trip outside by Karzai when he was elected in 2002 was exactly to Ashgabat, Turkmenistan, because of that pipeline. And some people claim that Mr Karzai, who worked in the oil business before, being brought into Afghanistan, was a man of the oil world. Now, I am not so familiar with the details of his CV ...

LS: I believe he was a consultant of Unocal (Union Oil Company of California) ...

KK: ... but I have always given a certain future to that pipeline because it is something that those countries, those receiving countries, especially Pakistan and India, have a vested interest in. And it is something that we can observe on an overall level: pipelines are turning east and are turning south but they are not turning west. And what enforces that picture is also the fairly successful detente between Pakistan and India that we have seen in the past three, four years despite all the other difficult circumstances but a detente between Pakistan and India is going on. And this, I think, was a major step, and if a number of warlords in Afghanistan can agree on the sharing of the profits then I think that pipeline has a certain chance.

LS: When you say that those pipelines go to the east and not to the west, it reminds me of one theme in your book and this is the rise of the East, in particular China. And that we might go into an Asian age. Can you elaborate on this one?

KK: Well, the Asian age, I think, has to be taken with a certain prudence. But a lot of indicators nevertheless would for the time being be in favor of let's say a multi-polar world where a number of countries in the south and in the east will have a stronger weight than the north-western hemisphere. And for me one of the main elements to argue for such an option is the way those powers organize their strategies in the resource field; the way people are ready to sacrifice something in order to obtain something; the much higher level of curiosity that we will find among younger generations than we have it in our societies. And here of course it would be difficult to put all the countries into one basket and I personally am not such a partisan of the BRICS acronym because these countries are simply so different. But it is nevertheless interesting. Also I would say against the backdrop of the Edward Snowden case, to see how countries like China and Russia behave in that case in contrast to the western countries.

LS: Now that you mentioned it, how do you evaluate the behavior of continental Europe related to these NSA & Co. revelations?

KK: It is shameful. It is really shameful because I mean the basic concepts - I would not even go into norms - but to me simply the concept of asylum and the concept of freedom of speech, the concept of privacy, secret of postal, telephone et cetera ... our rights ... is simply fundamentally violated. And there is no real rising up, there is a kind of funny duty trip by the German Minister of Interior but there is no real outbreak or revolt of anger by the governments in power.

LS: And they also say, well, there is no economic espionage going on. Do you buy this?

... ... ...

Economist's View Links for 12-29-14

Darryl FKA Ron :

HAVE FAITH! There MUST be a GOD.

We cannot possibly blame this much stupidity on Darwin :<)

[Dec 29, 2014] Emergency shutdown at Ukraine's largest nuclear power plant

Dec 29, 2014 | RT News

One of the reactors at the Zaporizhia Nuclear Power Plant was automatically shut down after a glitch. This was the second halt in operations in recent weeks at the plant in Ukraine's southeast, which covers at least one fifth of the country's power needs.

"Unit 6 at Zaporizhzhya NPP was disconnected from the network by the automatic system that prevents damage to the generator. The reactor is running at 40 percent of nominal power," the plant's official website says stressing that radiation at the facility is equal to the natural background, which is 8-12 microroentgen/hour.

This accident took place on Sunday morning at 05:59 am local time (03:59 GMT). Causes are still being investigated, while the Energy Ministry hopes to restart the unit in the coming days. The remaining five reactors continue to generate an estimated 4,530 MW.

Late on Sunday, the problem had been fixed and the power plant's sixth power block had been plugged back into the network, the plant said on its website.

"Unit №6 was plugged back in after an error was corrected...At this moment all six power blocks are working," the statement said.

The previous incident at Zaporizhia NPP happened on November 28, but the fact went public five days later, when Ukraine's Prime Minister Arseny Yatsenyuk revealed it during the first session of his new cabinet.

READ MORE: Accident at largest nuclear power plant in Europe revealed by Ukraine PM

At that time the shutdown was caused by a short circuit. As a result, Unit 3 was switched off and put into maintenance to resume operations on December 5.

[Dec 29, 2014] Crude price drop triggers major layoffs in US oil industry

Dec 29, 2014 | RT USA

Thousands of recently highly paid workers have been laid off after the oil price plummeted 50 percent in 2014. At least four American oil-producing states are already facing budget problems due to decreasing oil revenues.

The price plunge has affected petroleum production in all oil-extracting countries, including the US.

Currently cheap fuel is still believed to be providing an overall boost to the US economy, as consumers can spend less on gasoline and more on shopping and services. But for the American energy sector the future looks less bright. It's effecting places like Alaska, Louisiana, Oklahoma and Texas, the New York Times reports.

US oil experts recall the 1980s oil price downturn, accompanied by economic disasters around the globe and arguably becoming one of the causes of the fall of the Soviet Union. Some experts are positive and say America's oil-producing states won't suffer too much because they "diversified their economies."

This doesn't apply to the state of Alaska. According to the NYT, approximately 90 percent of state's budget is formed from oil revenues. Alaska's government is considering a 50 percent capital-spending cut for bridges and roads in the face of the oil price drop, with Moody's, the credit rating service, lowering Alaska's credit outlook from stable to negative.

The state of Louisiana's 2015-16 budget is going to be $1.4 billion short, with 162 state government positions already eliminated and more to be discontinued starting from January. Contracts and projects are being either reduced or frozen in state agencies. According to the state's chief economist Greg Albrecht, for every $1 fall in price of an annual average barrel of oil, Louisiana loses $12 million.

For Texas, which has a far larger and more diversified economy than Louisiana, the oil price downturn is no good either. In just October and November Texas lost 2,300 oil and gas jobs, the federal Bureau of Labor Statistics reported last week. Through the last half a year the state has been losing $83 million in potential revenue every day, the Greater Houston Partnership recently reported. They blamed this on crashing price of its West Texas Intermediate crude oil, which has depreciated to $54.73 per barrel this week, from more than $100 six months ago.

The situation in other oil-extracting states could be even worse. In a study published last year, the Council on Foreign Relations warned the largest job losses caused by sharp decline in oil prices are going to take place in North Dakota, Oklahoma and Wyoming, where the number of drilling rigs is decreasing.

The US oil industry has showed 50 percent employment growth since the recession officially ended in mid-2009, giving jobs to over 779,000 people as of October 2014, the Wall Street Journal reported. A total of 10 million jobs have been associated with the US oil and gas industry, Mark Mills, a senior fellow at the Manhattan Institute, estimated.

Now according to Tom Runiewicz, a US industry economist at IHS Global Insight, if oil stays around $56 a barrel till the middle of the next year, companies providing services to oil and gas industry could lose 40,000 jobs by the end of 2015, while oil and gas equipment manufacturers could slash up to 6,000 jobs.

These workers can earn more than $1,700 a week, much higher than the average $848 a week payment for other workers, the WSJ reported. When experienced workers lose their highly paid jobs, they stop paying their bills.

There are also fears of a house-price slump. Fitch Ratings has already warned that with the price of oil continuing to plummet, home prices in Texas "may be unsustainable."

Random news

Chevron suspends its program of oil drilling in the Arctic:

According to Goldman Sachs because of the collapse in oil prices oil investment can be reduced by a trillion dollars: READ MORE: Oil producers to lose $1tn if price below $60 – Goldman Sachs

In China, an increasing shortage of gas. In the heating season, the deficit will amount to 6.2 billion cubic meters:

Oil production is falling apart at high speed, while alternative energy sources such as gas - also in short supply. If OPEC will join the process at the right time, you can expect at least a steady growth of oil prices and as a maximum - a sharp rise in prices at a record high.

However, it should be understood that the oil market is quite inert. I don't be surprised if low oil prices will hold on inertia for several months. However, if nothing unexpected happens, then closer to the end of 2015 we can might expect a recovery in oil prices, may be even to about $ 100 per barrel.

[Dec 28, 2014] Moscow on the Brazos

NYTimes.com

The big losers will be in the Dakotas and Nebraska, but that whole region has a population not much bigger than that of Brooklyn. The big enchilada is Texas; so how big a deal will the oil slump be there?

Pretty big. If you look at the BEA regional data, you learn that mining output nationally is up a lot - 39 percent between 2007 and 2013 - but that this is still fairly small change on a national basis, 0.7 percent of 2007 GDP. However, more than half the mining growth took place in Texas, which was only 8 percent of the national economy. So in Texas mining directly contributed 4.7 percent to GDP; if we use a multiplier of 1.5, which is what the best research suggests, we conclude that the shale boom added 7 percent to Texas's growth - and what shale giveth, shale may now take away.

tanstaafl, Houston

"Should be interesting to watch."

The Dallas Fed predicts 125,000 jobs lost in Texas over the next 6 months; glad Krugman is entertained by this.

Jack, Illinois 11 minutes ago

I don't get it. We're supposed to be running out of oil, right? Or has that changed? $2 gas and we've gone past the Bell Curve of supply and use? And now we're all drunk on cheap gas. I'm happy to see new innovative efficient technology, new electric and hybrid cars but now they're selling boatloads of SUVs and pickup trucks. They are back in big style. They are better now, instead of 11 mpg they're 15 mpg.

Doesn't that figure into this discussion where oil is going? Has new technology changed any fundamentals? When does oil come back up in price? Does that mean a return of the oil producers, Saudi Arabia, Russia, Venezuela? I don't think you have but there are a lot of people all agog about low oil prices that seem to have forgotten that not too long ago they were telling us it was all going to run out one day.

[Dec 27, 2014] Low Oil Prices Could Hurt the American Economy in the Long Run

One Morgan Stanley analysis shows that, under current prices, 80 percent of U.S. shale projects would lose money. The real unknown is how much domestic oil and gas production has been driven by debt, which could change this from a local to a national problem.... One interesting theory argues that big banks needed to eliminate derivatives rules in the year-end budget bill to ensure bailout protection for their credit default swaps, and hedge their bets against an oil-related financial crash.
Dec 21, 2014 | The New Republic

But the schadenfreude over Russia's demise should be tempered by the knowledge that the U.S. has its own regional petro-states. As the White House never tires in pointing out, the U.S. leads the world in oil and gas production, and amid this collapse, those projects are under serious pressure. While the overall impact of falling oil prices may help our economy overall, it will hurt those areas dependent on fossil fuel production-and potentially, it could affect all of us.

Taking the big-picture view, you can see lots of benefits from lower energy costs. Falling oil prices pull down inflation, which could keep the Federal Reserve from raising interest rates prematurely. But more generally, there are obviously two interested parties in any energy transaction-producers and consumers. And while producers may reap fewer profits from cheap oil, consumers ought to love it.

AAA estimates that the average consumer is saving $100 a month on gasoline (Goldman Sachs puts the total savings at $75 billion over the past six months), and this has already led to surging retail sales. Lower-income households devote a greater proportion of their incomes to energy, and we can expect them to turn around and spend the extra cash. With consumer spending making up two-thirds of the economy, this results in a nice bump to gross domestic product. In fact, if you see this as a redistribution from oil producers to consumers, you can even tell a story about how it reduces inequality.

But a macroeconomic analysis obscures how the explosive growth in U.S. oil production-the biggest in 30 years-has been confined to a few select regions. In particular, areas with traditional oil or shale gas basins-including plains states like Wyoming and western North Dakota, as well as Oklahoma, Texas, and Alaska-have seen the biggest growth in production, as sophisticated drilling techniques become widespread.

These areas helped to increase employment in the oil and gas industry by 100,000 workers since 2010, with predictions of millions more in the coming years. But drilling for shale oil remains costlier than, for example, drilling for oil in the Middle East, and makes far more economic sense when prices are high. If prices pass the "breakeven" point, where the cost of production exceeds the revenue gained, those projects will grind to a halt, with idled rigs, reduced hours, and plenty of layoffs.

While it's difficult to pinpoint the breakeven, with estimates varying wildly, there are indications that we're getting close. One Morgan Stanley analysis shows that, under current prices, 80 percent of U.S. shale projects would lose money. This week, Goldman Sachs predicted a loss of $930 billion in future oil production, particularly in areas like south Texas and the Gulf of Mexico. Some reports show that production has already slowed in the lucrative Bakken oil field in North Dakota. Permits for new wells fell by 36 percent in both west Texas and North Dakota in November. Some Texas wildcatter veterans are already talking about going into "survival mode," while their rookie counterparts in North Dakota have blown off the fears.

In general, it's good news for the world to have less oil drilling activity. But it is bad news for boomtowns that got fat and happy on drilling, without diversifying their economies to prepare for the aftermath. That aftermath may not come right away-if the well has already been drilled, it may make sense to keep going-but it's bearing down fast.

What sets these regions apart from, say, Russia, is that they have no independent monetary policy they can employ for quick relief. And the key regions for shale drilling happen to be fairly conservative, so you can hardly expect aggressive fiscal actions at the state level. In fact, many of these areas factor oil revenue into their government budgets, and so the result of a crash could be drastic spending cuts, affecting the most vulnerable members of society. North Dakota appears to be at least thinking about the implications of over-reliance on one volatile industry, but they haven't fully prepared for the fallout yet.

The real unknown is how much domestic oil and gas production has been driven by debt, which could change this from a local to a national problem. Oil producers who financed their investments with borrowed money may not be able to pay back the loans, and default rates are expected to double over the next year. For this reason, investors have sought large interest rate premiums to hold energy-related bonds. Debt-laden producers have to keep pumping crude to pay off creditors, and that could create a fire sale where prices fall even further, putting more companies in rough spots as they reach their breakeven point.

Moreover, borrowed money used to finance energy products often made its way into junk bonds made up of packages of corporate debt, known as "leveraged loans." These loans have been enormously popular for investors seeking high returns. But the collapse of oil prices has sent investors running to withdraw from funds that purchase these securities. So far this appears to be limited to the energy sector, which is crashing. But nobody seems to know precisely how much energy debt was stuffed into these bonds. Investment managers are frantically scanning their portfolios to determine their exposure to energy-related debt. And if they cannot exit fast enough, it will result in significant financial stress.

One interesting theory argues that big banks needed to eliminate derivatives rules in the year-end budget bill to ensure bailout protection for their credit default swaps, and hedge their bets against an oil-related financial crash. This theory is bolstered by the fact that banks have had trouble getting energy-related junk debt off their balance sheets. Presumably we all remember what can happen when banks get saddled with toxic assets.

This is all separate from how instability in Russia and several emerging markets could impact the U.S. economy. American mega-banks are exposed to global debt and will almost certainly have to write off loans from abroad. And trade will suffer from a prolonged, energy-related slump that ripples across the world.

The United States is big enough that major financial shocks like the oil collapse could have separate impacts in different parts of the country. But the potential for financial crisis exists in a way that it hasn't since 2008. And the country is far less prepared for recession than it was then-we still have near-zero interest rates and a Congress opposed to fiscal stimulus. Maybe it will turn out for the best, but we should brace ourselves for the worst.

AlexeyStrelkov

I have to disagree with other commenters here - while cheap oil can be good for the economy, current oil prices will ruin it since they are unsustainable. Let me explain:

1) if oil price goes below 40$, ALL major American shale projects will be stopped http://www.bloomberg.com/news/2014-10-17/oil-is-cheap-but-not-so-cheap-that-americans-won-t-profit-from-it.html that will lead to a local deficit, which will increase prices, but by that time most oil&gas companies will go bust since they are cash negative http://www.wsj.com/articles/SB10001424052702304688104579467810326527526

2) this will destabilise the market http://www.bloomberg.com/news/2014-12-11/fed-bubble-bursts-in-550-billion-of-energy-debt-credit-markets.html

3) American manufacturers will be deprived of domestic energy, they will have to rely on foreign imported oil once again (which increases geopolitical risks, by the way).

Cheap oil is good for everyone (especially considering that oil prices were hugely inflated until 2014), but too cheap is good for no one.


beihai

@AlexeyStrelkov you contradict yourself, since they are unsustainable they will not ruin the economy, for the first time in years the American consumer is enjoying slightly lower gas prices and oil companies lower profits. If some go bust then they go bust, what makes them above the free market? And we won't be "deprived" of domestic energy, it will still be there for when prices go up again.

your argument is terrible. If we can buy something BELOW cost then we should. There is no geo political risk is impoverishing oil producing countries. If anything NOW is the time to hike gas taxes in America to pay for our infrastructure repairs. Whatever jobs would be lost in the oil fields will be made up in fixing our roads and bridges.

AlexeyStrelkov

@beihai @AlexeyStrelkov First of all, let's get it clear - I am not here because I am Russian, I am here because I am actually working in the oil&gas industry.

American consumers are enjoying slightly lower gas prices BECAUSE American shale exists. If it did not exist, you would be paying anything OPEC wants you to pay. And if the shale goes bust, who would be there keep those prices low? Saudi Arabia? Qatar? Venezuela?

And no, when the prices go up AFTER the industry is done for, it won't just magically reappear. American shale was made possible by three things - available hardware (America is the biggest producer of specialized equipment in the planet), available engineers (when it comes to drilling, America has a lot of them) and available money (thanks to QEs, the markets were swimming in cheap money). QEs are gone now, if shale becomes economically unfeasible, rigs and engineers will be gone too. It will take years to get them back and I am not sure QEs will ever be back.

And importing oil will ENRICH oil producing countries, not impoverish them. And drilling engineers will not be employed by the construction industry, their skills are simply not transferable.

P.S. In it's current state American shale resources are not profitable on their own (+thanks to bankers, the whole affairs reeks of another market bubble). But if they are used in CONJUNCTION with bringing the manufacturing back from Asia, then it makes sense! Manufacturers get guaranteed supply of energy and resources, become more competitive, sell more stuff, make bigger profits, pay more taxes to the government and the government uses said taxes to ensure that they get guaranteed supply of energy and resources.

I think that was Obama's plan initially, but looks like it wasn't really successful.

TracySchmidt

@beihai @Gadfly7 @AlexeyStrelkov

There is no such thing as "the law of supply and demand."

They are two separate laws.

This is basic economics.

aewren86

@Gadfly7 @beihai @AlexeyStrelkov Well it does have a great deal to do with OPEC policies, but those policies are designed to crush our shale projects here that are cutting into their market share. They also want to put the screws to the Iranians who desperately need $100+ a barrel oil just to cover their obligations.

We get cheap oil, the Iranians and Russians can't afford anymore adventures, I really can't see a downside other than for our Boomtowns, and well we all know what comes after a boom...

Gadfly7

@aewren86 @Gadfly7 @beihai @AlexeyStrelkov

That is how the game is played today. We will crush them and bend them to our will through energy a/o economic blackmail, sanctions or other mafia style games.

However, the Chinese are loving it and the USA is trying to figure out what to do with them next.

We assume nobody will fight back.

P.S. Take that SONY pictures. It's perfectly Ok to pretend an assassination of a countries leader if we don't like him. How naïve a Seth Rogen.

beihai

@aewren86 @Gadfly7 @beihai @AlexeyStrelkov Iran also has vast stores of natural gas and holds some of the world's largest deposits of natural gas with an estimated 33 trillion cubic meters of gas reserves, ranking fourth in the world for gas reserves, and the second-largest natural gas reserve storage facilities world-wide, according to the BP statistical review of world energy published in June 2014.

I don't know. If Saudi Arabia was really so desperate to put the screws to Iran they would have been selling very cheap oil for years and years, I think people are putting too much stock in conspiracy and not enough on basic economics, that is people priced oil last year on the expectation that things in Ukraine would be far worse causing oil to spike and that the EU and China's economies would be stronger. The US is one of the few countries outperforming expectations but we are also producing more oil than ever ourselves, as are the Canadians.

As to our boomtowns, they are small populations in North Dakota so I don't care. Texas will be interesting. They are America's Arabia, one industry dependent and backwards in most other respects. I hope oil prices stay low for a while.

beihai

@Gadfly7 @beihai @aewren86 @AlexeyStrelkov look, OPEC is essentially a criminal cartel whose main reason for existence is price fixing so i get your point that supply and demand sounds like a cliche but cliches have some validity. When prices spike people drive less, buy more fuel efficient cars and even migrate from gas entirely with CNG buses and the like.

ISIS has been selling oil as fast as it can otherwise they would have no money to buy food. This is the nature of humanity, to make a buck people would buy and sell with their worst enemy.

Saudi Arabia wants to maintain its market share, they don't want to be the country that has to cut production because of all of the new production elsewhere. Back in 2008 the US produced 5,000 ,barrels of oil per day, we are now up to 7,442 in 2013 bpd. in 2008 Canada was at 3,300 bpd, now it is up to over 4,000 (2013).

http://www.eia.gov/countries/country-data.cfm?fips=ca#pet

in comparison Saudi Arabia is at 11,600 bpd. The US and Canada have increased output from 8,300 bpd to 11,442 bpd.

And this was 2013. These are raw numbers, if the US and Canada is producing more oil than Canada produced entirely in 2008 that oil has to go somewhere.

TracySchmidt

@beihai @aewren86 @AlexeyStrelkov

LOL!

As of September of this year, the U.S. produced 8.864 MILLION barrels of oil per day.

In 2013, the U.S. produced between 7 million and 7.8 million barrels per day, not the absurdly low figure of 5,000 barrels per day.

So says the U.S. Energy Information Administration.

HughMagbie

No wonder your mag is going down the tubes. Ever since we passed the Commodities Modernization Act of 2000 Wall St has been able to manipulate the currency/commodity markets to artificially hype oil to over 100 dollars a barrel. Big oil and petro countries engaged in an orgy of spending and sometime saber rattling with their phony gdp. Big oil got out of refining and distillates and concentrated on oil exploration, demolishing the big lie of peak oil. Folks all over the world had to chose to heat or eat. Big oil.and Wall St demolished the middle class and.made the largest profits in history during a recession. Now they are getting demolished by the Saudis.

I.don't care how many oil jobs are destroyed, they were jobs created by predatory speculation that hurt far more.people than helped. They will be coming to us soon for a bail out. I don't want.to bail out big oil and Wall St,I.want Wall St oit of the currency/ commodity markets, and I think that of you want to save the doomed fracking industry from the Saudi price war, you'll have to.nationalize it in the name of national security.

US oil should be free from the speculators, they should be broken up.and their assets returned to those who.have had trillions stolen from them by this collosal scam.

[Dec 26, 2014] Saudi Arabia braces for $39bn deficit, to cut wages due to low oil prices

Dec 26, 2014 | RT Business

The Finance Ministry said the government will try to save some money by cutting salaries, wages, and allowances that represent around "50 percent of total budgeted expenditures." But the move could anger Saudi youth, who are already struggling to cover the costs of living in the country.

According to the International Monetary Fund (IMF), about two-thirds of the population works for the government.

The 2015 budget includes 860 billion riyals (US$229.3 billion) in spending and 715 billion riyals ($190.7 billion) in revenue. Saudi Arabia promised to cover the difference by digging into its reserves.

Jim Oksvold

Saudi Arabia wants a higher market share for their oil and can afford to fight for it.

Giordano Bruno

Sure, they can 'afford' to get rid of their national treasure at a faster rate, at lower prices.

Once it's gone, they are dirt poor again.
Or sand poor, in their case.

Evelyn Axiaq

Cutting wages? They should start from themselves. The most senior princes are billionaires and multi millionares. The other 3000 royal family members all have hefty allowances for nothing. All this thanks to Saudi oil wealth. Saudi's oil belongs only to the royal family dictatorship, and not to the ordinary citizens.

Serge Krieger

when you plot mischief for others, you're preparing trouble for yourself

Ivan Butko

Oil and gas shipments accounted for 68% of Russia's total $527bn of gross exports in 2013, when Brent crude - comparable to Russian Urals - traded at an average of $108 per barrel.

Should the current price of Brent, at around $60 per barrel, be sustained over the next 12 months, that would result in Russia's export income from crude dropping to $95bn, from $174bn in 2013. However, these losses will be amplified by the total loss of revenue accrued from lower prices for refined petroleum products and domestic sales of crude, which totalled $122bn in 2013.

As for Saudis, lower price is something they are willing to accept..

[Dec 26, 2014] Make No Mistake, The Oil Slump Is Going To Hurt The US Too

Dec 24, 2014 | zerohedge.com

If you only paid attention to the mainstream media, you'd be forgiven for thinking that the US is going to get away from the collapse in oil prices scot free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told.

In reality, though, many of the jobs the US energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on US-made goods rather than imports. And it assumes consumers won't save some of this windfall rather than spending it.

Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won't fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut-without a formal agreement between OPEC, Russia, and other producers to cut production-is if the price of oil falls below the "cash cost" of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn't sink below the cash cost of production, then we'll have more of what we're seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut-now running at 2-4 million barrels per day-by keeping their existing wells going full tilt.

True, oil would have to fall even further if it's going to rebalance the oil market by bankrupting the world's most marginal producers. But that's what's bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It's no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil-sector capital expenditure-in fields representing up to 7.5 million bbl/d of production-would be at risk, according to Goldman Sachs. And that doesn't even include the US shale sector!

Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil- and gas-related capital expenditure in the US is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.

We're not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out-and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma-based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that's made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don't make money below $55. And fully 50% are uneconomic at $50.

So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the too-big-to-fail banks slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill-advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It's hard to see why it should be different this time.

It's a crying shame. The US has come so close to becoming energy independent. But it's going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve's easy money policy.

* * *

To find out more, sign up for Marin Katusa's just-launched advisory, The Colder War Letter.

[Dec 26, 2014] We Live In A New World And The Saudis Are The First To Get It

Tyler Durden on 12/24/2014 - 20:32

We live in a new world, and the Saudis are either the only or the first ones to understand that. Because they are so early to notice, and adapt, I would expect them to come out relatively well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions, and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss of jobs (something it will have in common with North Sea oil, among others), but perhaps even more with profound mayhem for many investors in US energy. And then we're right back to your pension plans.

Kazakhstan Prepares For $40 Oil

The question is how low can the banks bring the oil prices without the oil derivatives exploding? With the current price many shale companies will be gone in two-tree years. What's next?
"People should not be worried," explained Kazakhstan President Nursultan Nazarbayev in a TV address over the weekend, "we have a plan in place if oil prices are $40 per barrel." Kazakhstan, the second largest ex-Soviet oil producer after Russia, explains "there are reserves which could support people, preventing living conditions from worsening."

However, if A. Gary Schilling's reality check of $20 oil being possible comes to fruition, as he explains, what matters are marginal costs - the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf... We wonder who has a plan for that?

The Kazakh President says "don't worry", as Reuters reports...

Kazakhstan, the second largest ex-Soviet oil producer after Russia, has plans in place should global oil prices fall as low as $40 per barrel, President Nursultan Nazarbayev told local TV channels.

"Kazakh people should not be worried. We have a plan if oil price are $70, $60, $50, $40 per barrel," he said, according to a transcript published on his website www.akorda.kz.

"There are reserves which could support people, preventing living conditions from worsening," he said, without providing any details.

Kazakhstan's National Fund, which collects oil revenues, stood at $76.8 billion at the end of November. Separately, the central bank's net gold and foreign exchange reserves stood at $27.9 billion.

Nazarbayev has also urged the Kazakh people not to worry about the slide in Russia's rouble currency, which has lost some 45 percent of its value versus the dollar this year.

But A Gary Schilling is less sure... (via Bloomberg View)

When the U.S. Federal Reserve ended its quantitative-easing program in October, it also ended the primary driver of U.S. stocks during the past six years. So long as the central bank kept flooding the markets with money, investors had little reason to worry about a broader economy limping along at 2 percent real growth.

Now investors face more volatile markets and securities that no longer move in lock-step. At the same time, investors must cope with slower growth in China, minuscule growth in the euro area and negative growth in Japan.

Such widespread sluggish demand -- along with ample supplies of oil and most everything else -- is the reason commodity prices are falling. They have been since early 2011, but many people failed to notice until recently, when crude oil prices nosedived.

Normally, less demand and a supply glut would lead the Organization of Petroleum Exporting Countries, beginning with Saudi Arabia, to cut production. As the de facto cartel leader, the Saudis would often reduce output to prevent supply increases from driving down prices.

Of course, this also cost the Saudis market share and encouraged cheating by OPEC members. Saudi leaders must grind their teeth over the last decade's unchanged demand for OPEC oil, while all the global growth has been among non-OPEC suppliers, principally in North America.

That may explain why, while Americans were enjoying their Thanksgiving turkeys, OPEC surprised the world. Pressed by the Saudis and other rich Persian Gulf producers, it refused to cut output despite a 38 percent drop in the price of Brent crude, the global benchmark, since June.

OPEC, in effect, is challenging other producers to a game of chicken. Sure, the wealthier producers need almost $100 a barrel to finance bloated budgets. But they also have huge cash reserves, which they figure will outlast the cheaters and the U.S. shale-oil producers when prices are low.

The Saudis also seized the opportunity to damage their opponents, especially Iran and what they see as Iran-dominated Iraq, in the Syria conflict. They also want to help allies Egypt and Pakistan reduce expensive energy subsidies as prices fall.

Then there's Russia, another Saudi opponent in Syria, with its dependence on oil exports to finance imports and 42 percent of government outlays. With the ruble collapsing, the Russian central bank let the currency float in November after blowing through $75 billion to support it. Then the central bank tried to stop the free fall by raising interest rates by 6.5 percentage points to 17 percent on Dec. 15.

Still, the Russian currency is floundering, along with the economy. Consumer prices in Russia rose 9.1 percent in November from a year earlier. The economy will be in recession next year, the website of the Russian economy ministry acknowledged for a few hours on Dec. 2, before the posting was deleted.

Venezuela is also suffering. The government needs $125-a-barrel oil to cover its spending, of which 65 percent depends on oil exports. Its crude production is down a third since 2000. With inflation raging, the bolivar officially sells for 6.29 a dollar, but for 180 on the black market.

In Nigeria, where oil and natural gas account for 80 percent of government revenue and almost all its exports, the naira has fallen 11 percent versus the greenback so far this year.

How low can oil prices go?

In the current price war, the global market price needed to support government budgets isn't really the main issue. Nor are the total costs for exploration, drilling and transportation.

What matters are marginal costs -- the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf, and about the same for U.S. shale-oil producers. The estimated $50 to $69 a barrel break-even point for most new U.S. shale-oil production is less relevant.

Developing countries that depend on commodity exports for hard currencies to service foreign debt will produce and export even at prices below their marginal cost. Until some major producer chickens out and cuts production, oil prices should remain low. They could decline a lot more than the 50 percent drop so far.

Arius

Tylers - the headline is misinterpretating what kazakh states. They already have plans for 40 ... what they are saying is Bring it On ... the ball is in your court ... You dig?

Arius

The question is how low can the banks bring the oil prices without the oil derivatives exploding?

the kazakh are saying at 50 or 40 we dont care ... now hold or fold? Game ON

Jumbotron

Ahem......peak oil is still here. The Saudi's are cutting with water more and more. Shale had not even got us back to domestic peak in 1970. The GOM is not producing any more big finds. Alaska is in terminal decline. North Sea is in terminal decline. Mexico is in terminal decline. Canada has to scrape the bottom of the toilet bowl (Tar Sands) to be an oil player.

And we are on the cusp of the Great Collapse of the Great Ponzi (2020-2025) so there will be no investment available for REALLY hard to get at places like the Artic.

KansasCrude

No we are spending a barrels worth of energy to get a barrels and a half worth of energy with shale. Try running our society with that kind of net energy. No freaking way the only reason we are not seeing well over $100 is because our economy sucks so bad we are using 4 million barrels a day less than 2008. Quit kidding yourself the cheap easy stuff is gone. If we are going to see the economies of the world continue to suck then we are going to see oil remain cheaper than $150 IF the dollar doesn't desinigrate. If we get the USD valued at reality then maybe that will look cheap.

The Bakken is peaking now.....Eagle Ford soon. Shale oil is a scam.

noben

Think outside the barrel, outside the Petrodollar: If the USD can be backed by a Real Asset like Petroleum, so can every other currency. Or be backed by PM.

At this rate... given that all currencies that are getting hammered by the USD will only be able to trade with EACH OTHER anyway, why not accept and front-run this thing?

IOW: Your citizens and businesses have in effect been forced to drop the USD anyway (can't afford to import goods from US, EU), so you might as well make it official: "The currency of our country will no longer by indexed to the USD, but to PMs, Petroleum or the CNY". That would kill the USD in weeks.

Kaboom, Dollar Kabal!

NoDebt

This is awesome. It's just like a depression but without the stock market crash. Someday in the far future we'll understand just what REALLY was going on these last few years. Cause we're sure as hell not getting the truth right now. (Secret E.O.'s anybody?)

Al Huxley

You know, the only thing bothering me is I must have missed the part in J-Bag's speech last week where she promised that the Fed would cover any bad debt resulting from the collapse of the shale industry. But no big deal, she must have mentioned it somewhere along the way.

sun tzu

You can check their balance sheet weekly. It's still growing.

http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Click on view as table.

Oct 1, 2014 = $4.450 trillion

Dec 17, 2014 = $4.502 trillion

An increase of over $50 billlion in 10 weeks. That's $5 billion per week of bonds they're still buying after QE3 "ended"

cowdogg

Gary Shilling is an idiot and always has been. The fact is there are no free lunches and nobody is going to produce something below cost for long. All in costs for oil production no matter where is above $80 and continually going up because what is produced has to be replaced at much higher prices or you are in the process of going out of business.

YHC-FTSE

I don't care how fucking sluggish the demand is, $20 is ridiculous. This isn't 1979 and the demand is multiples higher than it was 30+ years ago.

The thing with commodities, it's mostly dug out where the owners of the land are shit ignorant. First it was glass beads, next it was coins, and now we give them the alluring choice between shiny toilet paper or bullets and bombs. With the exception of the sheep fucking president of Kazhakstan, I seriously doubt anyone sane would be willing to sell their oil at $20. That's is so fucking stupid, it's almost Obamic.

Al Huxley

Saudis have magnanimously decided to supply the entire global demand at .80/barrel. Suspend your judgement and critical thinking, get long the S&P, DOW and NASDAQ and enjoy the party! You'll be able to pay for your $1/gallon gas with the daily profits on your market investments, and employment won't be a problem because you'll be making enough off the market to pay for everything, especially with the radically reduced cost of living that will come from more-or-less free commodities.

As NoDebt said, it's all the best parts of a depression, but without a crashing stock market, so just get into the market with all you've got and you'll be fine.

HowdyDoody

Courtesy of derivatives, the $ price can be anything those with power want it to be. The $ price of everything is fixed.

BouncingCat

What the shale oil boom has produced is a ceiling for the price of oil. If OPEC wants all the oil revenue, they just have to keep the price down below other producer's costs. So if shale has a marginal cost of 50-69, that becomes OPECs ceiling until demand increases.

techstrategy

The shape of the supply curve is changing rapidly over time. With 30-40% depletion rates, we lose 2 million barrels if domestic shale per year absent new drilling.

The full lifecycle cost becomes relevant far faster than people are projecting. Depletion rates in traditions fields are on the order of 5-7%, which means at least another 5 MM BPD absent global drilling. Coupled with elasticity of demand (increase in quantity demanded at lower prices) and we'll work through this "glut" much more rapidly than Shilling and shills appreciate.

The isn't the excess housing stock. We have to run hard to stay in place with petroleum production.

CitizenPete

Before you all go steppin on each other with too much gusto, perhaps you need to agree to the definition of the term "Peak Oil". Then you can chase each other in circles doing the russian squat dance. You could actually be in violent agreement at this point.

When someone says 'oil has already peaked' or 'peak isn't until 2020', what do they mean? Peak Oil can (and will) have many definitions. It would benefit policy debates and discussions if there were a universal, agreed-upon definition. The most common is the year in which global crude oil production reaches its maximum sustained level, followed by a permanent decline. Some (Ken Deffeyes) define Peak as the date when 50% of the world's oil has been used irrespective of the annual flow rate (presumably, we could have used 50%+ of our oil and still have rising production if technology is allowing us to borrow from what would have been a bell shaped curve.)

Other definitions differ in what is included as 'oil'. The most restrictive includes only oil graded as "Light Sweet". More common definitions include condensate and Natural Gas Plant Liquids (NGPL).

Still broader definitions include the heavy oils, the Orinoco oil sands, and the Alberta tar sands. And the broadest measure of 'what is oil' might include corn and sugarcane turned to ethanol, palm nuts turned to biodiesel, and coal turned to diesel fuel. This is referred to as "All liquids" and is what is commonly reported as total oil production in the media."

http://www.theoildrum.com/node/4020

hendrik1730

The "marginal cost" for shale oil production is not comparable to classical wells since they run virtually dry in 3 years. Their true average production cost per barrel MUST be at least 3 times higher than that for classical wells - if not more. Why does one think the shale oil producers are drilling additional wells like crazy ( now dropping steeply because of no longer viable economically )? Not for increasing production, just for keeping output more or less constant. Also bear in mind that virtually all the "sweet spots" in the Bakken have already been drilled empty, so oil extraction cost is on the rise and the hangover is on its way ....

Quinvarius

When the stupid predictions start coming out of Wall Street that means that a large move has already happened, the trend is probably coming to an end. No one is going to let 20 oil happen. And now that Wall Street says they want it, it will be resisted.

No matter what Saudi Arabia says, they are being destroyed. They cannot take these prices any more that anyone else without a bailout, probably less so.

[Dec 25, 2014] Seven Questions About The Recent Oil Price Slump By Rabah Arezki and Olivier Blanchard[

IMF is a tool of Washington, so such research should be taken with a grain of salt. Especially the role of financial speculation in the current slump of oil prices. It looks like they also underestimate damage to the US shell production, and especially employment in oil sector. Still some data are pretty interesting. Still I do not understand why they are ignoring the collapse of German export to Russia as a destabilizing factor.
December 22, 2014 | IMF

(Versions in 中文, Français, and Русский)

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.

In summary:

... ... ...

Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF's next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability.

... ... ...

Oil prices have fallen by nearly 50 percent since June, 40 percent since September (see Chart 1).[2] Metal prices, which typically react to global activity even more than oil prices, have also decreased but substantially less so than oil (see Chart 2). This casual observation suggests that factors specific to the oil market, especially supply ones, could have played an important role in explaining the drop in oil prices.

On the supply side, the evidence points to a number of factors, including surprise increases in oil production. This is in part due to faster than expected recovery of Libyan oil production in September and unaffected Iraq production, despite unrest.[3]

A major factor, however, is surely the publicly announced intention of Saudi Arabia - the biggest oil producer within OPEC - not to counter the steadily increasing supply of oil from both other OPEC and non-OPEC producers, and the subsequent November decision by OPEC to maintain their collective production ceiling of 30 million barrels a day in spite of a perceived glut.

The steady increase in global oil production could be seen as "the dog that didn't bark." In other words, oil prices had stayed relatively high in spite of the upward trajectory in global oil production due to the perception at the time of OPEC's induced floor price. The resulting shift by the swing producer however helped trigger a fundamental change in expectations about the future path of global oil supply, in turn explaining both the timing and magnitude of the fall in oil prices, bringing the latter closer to the level of a competitive market equilibrium. A similarly dramatic drop took place in 1986, when Saudi Arabia voluntarily stopped being the swing producer, causing oil prices to fall from $27 to $14 per barrel, only to recover fifteen years later, in 2000.

Beyond traditional demand and supply factors, some have pointed to "financialization"-oil and other commodities considered by financial investors as a distinct asset class-and "speculation" as contributors to the price decline.[4] We see little evidence that this is the case. According to the latest report from the International Energy Agency, oil inventories have reached their highest level in two years, suggesting expectations of price increases, not price declines.

How persistent is this supply shift likely to be?

This depends primarily on two factors:

The first is whether OPEC, and in particular Saudi Arabia, will be willing to cut production in the future. This in turn depends in part on the motives behind its change in strategy, and the relative importance of geopolitical and economic factors in that decision. One hypothesis is that Saudi Arabia has found it too costly, in the face of steady increases in non-OPEC supply, to be the swing producer and maintain a high price. If so, and unless the pain of lower revenues leads other OPEC producers and Russia to agree to share cuts more widely in the future, the shift in strategy is unlikely to change soon. Another hypothesis is that it may be an attempt by OPEC to reduce profits, investment, and eventually supply by non-OPEC suppliers, some of whom face much higher costs of extraction than the main OPEC producers (see Chart 4, which gives the world marginal cost curve, showing how much it costs to produce an additional barrel by type of oil extraction).

The second factor is how investment and in turn oil production will respond to low oil prices. There is some evidence that capital expenditure on oil production has started to fall. According to Rystad Energy, overall capital expenditure of major oil companies is 7 percent lower for the third quarter of 2014 compared to 2013.

Available projections from the same source indicate that capital expenditures will fall markedly throughout 2017. For unconventional oil, such as shale, (which now accounts for 4 million out of a world supply of 93 million barrels a day), the break-even prices-the oil price at which it becomes worthwhile to extract-of the main United States shale fields (Bakken, Eagle Ford and Permian) are typically below $60 per barrel (see Chart 5 which gives break-even prices for the United States shale fields).

At current prices (around $55 per barrel), Rystad Energy's projections suggest that the level of oil production could decline but only moderately by about less than 4 percent in 2015. Rates of return will be significantly lower, however, and some highly leveraged firms that did not hedge against lower prices are already under financial stress and have been cutting their capital expenditure and laying off significantly.

Thus, other things being equal, the dynamic effects of low prices on supply should lead to a decrease in supply relative to the initial shift and thus to a partial recovery of prices. This is what is suggested by futures markets, which show, in the left hand side panel of Chart 6, an expected recovery of prices to $73 a barrel by 2019.

The uncertainty associated with these forecasts comes not only from supply but also demand factors.

On the supply side, for example, possible changes in OPEC's strategy and geopolitical tensions in Libya, Iraq, Ukraine, and Russia should not be underestimated. On the demand side, uncertainty about global economic activity and thus the derived demand for oil remains high. This is shown, emphatically, by the size of the implied distribution of futures prices (based on options prices) in the right hand side panel of Chart 6: the 68% confidence band for the price in 2019 ranges from $48 to $85, the 95 percent band from $38 to $115; a very wide range indeed.

What are the effects likely to be on the global economy?

Overall, lower oil prices due to supply shifts are good news for the global economy, obviously with major distribution effects between oil importers and oil exporters. The crucial assumptions in quantifying the effects of those supply shifts are how large and persistent we expect them to be. These assumptions determine not only the path of adjustment, but also the initial reaction of consumers and firms.

Given the uncertainty about the relative importance of supply shifts, both now and expected in the future, we present the results of two simulations (these are ceteris paribus in nature-not projections about the global economy, and as such ignoring all other shocks likely to affect the global economy), which we see as representing a reasonable range of assumptions. The first assumes that the supply shift accounts for 60 percent of the price decline reflected in futures markets. The second also assumes that the supply shift accounts for 60 percent of the price decline at the start but that the shift is partly undone over time for the reasons described above, with its contribution to the price decline going gradually to zero in 2019.[5]

The results of the simulations shown below capture only the effects of the supply component of the oil price decline (the demand driven component of the oil price decline is a symptom of slowing global economic activity rather than a cause). The oil price projection used in the simulations is based on the IMF's price forecast, which is itself based on futures contracts.

... ... ...

What are likely to be the effects on oil exporters?

As Chart 8 shows, the effect is, not surprisingly, negative for oil exporters. Here again, however, there are substantial differences across countries.

In all countries, real income goes down, and so do profits in oil production; these are the mirror images of what happens in oil importers. But the degree to which they do, and the effect of the decline in the price of oil on GDP depends very much on their degree of dependence on oil exports, and on what proportion of revenues goes to the state.

Oil exports are much more concentrated across countries than oil imports. Put another way, oil exporters depend much more on oil than oil importers.

To take some examples,

In most countries, a mechanical effect of the oil price decline is likely to be a fiscal deficit. One way to illustrate the vulnerabilities of oil-exporting countries is to compute the so-called fiscal break-even prices-that is, the oil prices at which the governments of oil-exporting countries balance their budgets. The breakeven prices vary considerably across countries, but they are often very high.[9]

For Africa, those budgetary oil prices have been revised down in 2015 in light of the falling prices (See Chart 10). For Latin America, the budgetary oil prices are $79.7 for Ecuador and $60 for Venezuela.

Some countries are better equipped than in previous episodes to manage the adjustment. A few have put in place policy cushions such as fiscal rules and saving funds and have more credible monetary framework, which have helped decouple internal from external balances, such as Norway.

But, in many, the adjustment will imply fiscal tightening, lower output, and a depreciation (harder to achieve under the fixed exchange rate regimes that characterize many oil exporters). And where expectations of inflation are not well anchored, the depreciation may lead to higher inflation.

What are the financial implications?

Declines in oil prices have financial implications, directly through the effects of oil prices themselves, and indirectly through the induced adjustment of exchange rates.

Lower oil prices weaken the financial position of firms in the energy sector, especially those that have borrowed in dollars, and by implication weaken the position of banks and other institutions with substantial claims on the energy sector. The proportion of energy firms with an interest coverage ratio (the ratio of cash flows to interest payments) below 2 stands at 31 percent in emerging countries, indicating that some of these companies may indeed be at risk. CEMBI spreads, which reflect spreads on high yield emerging market corporates, have increased by 100 basis points since June.

Stress tests carried out in the context of our financial stability assessments over the past few years in a number of oil exporting countries had found only a few countries where some banks did not pass the tests, implying recapitalization needs of a few points of GDP at most. However, those stress tests results may not be very informative since the capital buffers at the time of the tests may have changed, as well as the profitability of banks. Russia is a good example of rapidly evolving conditions in both respects considering the effect of sanctions on its financial sector. Overall the impact of lower oil prices on banks in oil-exporting countries will depend critically on how persistent the fall in price is and its impact on economic activity and in turn on prevailing buffers.

Lower oil prices also typically lead to an appreciation of oil importers' currencies, in particular the dollar, and to a depreciation of oil exporters' currencies. The drop in oil price has contributed to an abrupt depreciation of currencies in a number of oil exporting countries including Russia and Nigeria. While the decrease in the price of oil is only one of the reasons behind the fall of the rouble, the Russian currency has depreciated by 40 percent so far this year, and 56 percent since September. While controlled depreciations can help oil exporters adjust, they also exacerbate financial problems for those firms and governments whose debt is denominated in dollars. And, in countries where expectations are not well anchored, uncontrolled depreciations can lead quickly to very high inflation.

If sustained, the oil price slump will thus have a concentrated and material impact on those bondholders and banks with high dollar and energy sector exposures. However, the global banking system's exposure is likely not to be large enough to cause more than a moderate increase in provisioning requirements and should be partially offset by improving credit quality in oil importing countries and sectors. Some oil importers may nevertheless have financial sector linkages to oil exporters, and may be exposed to economic and financial developments in the latter. For example, Austrian banks have significant exposure to Russia, and some have seen a very sharp decline in their equity price recently.

This relatively optimistic assessment must however come with a clear warning. One of the lessons from the Great Financial Crisis is that large changes in prices and exchange rates, and the implied increased uncertainty about the position of some firms and some countries can lead to increases in global risk aversion, with major implications for repricing of risk, and for shifts in capital flows. This is all the more true when combined with other developments such as what is happening in Russia. One cannot completely dismiss this tail risk.

20 Stunning Facts About Energy Jobs In The US

Zero Hedge
Latina Lover

Another example of the Bankster takedown of the economy. Drive the price of oil down via naked shorts, bankrupt the domestic independent oil industry, buy their assets on the cheap, and then raise the price of oil by covering naked shorts. Wash, rinse, repeat.

James_Cole

The Manhattan Institute does not disclose its corporate funding, but the Capital Research Center listed its contributors as Bristol-Myers Squibb, ExxonMobil, Chase Manhattan, Cigna, Sprint Nextel, Reliant Energy, Lincoln Financial Group Foundation, and Merrill Lynch. Throughout the 1990s the tobacco industry was a major funding source for the institute.

Fed starts the bailout in...3.....2.....

Bangin7GramRocks

The jobs are temporary. Raping of the land is permanent. Sorry Mr. Roughneck, I hope you didn't overextend yourself during the boom times.

Karaio

An incandescent lamp or sun emit more energy / light before go out.

This oil boom in the US is very similar.

The great aggravating shit is the contamination of the water table.

The President gave a shot in both feet.

The first in Ukraine, the second was the agreement to lower the price of oil in Saudi Arabia.

The sons of bitches in his government did not measure consequences, thought the short term, will now have to swallow a "mush pit" - can not find a translation of this expression.

Bird eating stones knows the ass you have.

hehe.

AGuy

"According to Boone Pickens, OPEC is no longer a cartel. And we'll have $100 oil inside 18 months. I'm buying"

FWIW: I have doubts that $100 bbl Oil is sustainable. I think the odds favor demand destruction over $100 (assuming adjusting for inflation). Prices are already falling because people can't afford even $90 bbl. I think the future will be a declining economy for at least the next 20 years. Oil prices will certainly remain volatile. I have a feeling that this correction will put a long term lid on Oil and Gas CapEx. Investors will fear getting burned and Oil companies are not likely to increase CapEx on expensive oil projects without investor backing. Maybe if the Fed starts buying Junk energy bonds the boom can continue, but that seems unlikely at the momement. Without Energy production expansion the economy can't grow. Loss of energy production will force the economic to decline.

darteaus

Reading closely, I don't see anyone talking about sustainable, AND I note that you are not saying they are.

I believe that Pickens is simply arguing that 18 months from now, oil will hit $100. Between now and 18 months or $100, "The market will flucuate" [JP Morgan].

DerdyBulls

I don't think it is sustainable either. Populations continue to increase. New discoveries are fewer. Bringing it to market cost more. The world economy is built on it. No prospects in sight for changing this. Do you believe in peak oil? The price goes way beyond $100.

Bell's 2 hearted

"the only bright spot for America's economy over the past 6 years"

nah, there has been another

US automotive industry has done well ... courtesy of ramping subprime auto loans back to pre-recession peak ... which, er, are starting to go belly up ...

papaswamp

The Q3 delinquency reports should have raised more eyebrows than it did. I suspect this will begin to rise quickly in Q4 and even faster in Q1 '15 if oil stays sub $60. All those roughnecks that bought $60k F250s are suddenly not going to be able to make payments with those capex cuts.

Kreditanstalt

The wages paid in this over-priced industry are all fake, and the markets will soon show that.

Half the economy of many smaller towns and suburbs everywhere is dependent on these big paychecks which will soon be gone.

The 'Southern Gas Corridor' stinks to high heavens

Kulobi, December 21, 2014 at 7:03 pm

One can tell that the 'Southern Gas Corridor' stinks to high heavens: it has started to attract gusanos of the first degree, e.g. the Right Hon Anthony Charles Lynton Blair http://bankwatch.org/bwmail/60/euro-caspian-mega-pipeline-another-blair-rich-project
Tony will fix it,in the same efficient way he brought peace to the Middle East and saved children globally.
Azerbaijan's lack of democratic credentials won't deter the EU or corporate types of course. In any event, Mark's narrow-minded impression of Aliyev Jr as a corrupt dictator ought to be carefully triangulated against the expert judgment of Paul Goble, who wholeheartedly endorsed and propagated Aliyev's conviction that "all freedoms, including the freedom of conscience and religious freedoms have been guaranteed in Azerbaijan."

http://www.azembassy.ca/ada/2009/ADA_Vol.%202,%20No.%2022,%20November%2015,%202009.pdf

... ... ...

TANAP's problems are quite prosaic, lack of funding being the most salient one. The current price tag is $14 bn. Azeri sovereign wealth fund, SOFAZ, is supposed to pick up the tab. SOFAZ gets its dough through Azeri oil exports; it was hit for six this year. Last April, SOFAZ allocations for TANAP were reduced 20-fold (well, there were geopolitical reasons for the drop, too). http://www.panorama.am/en/economy/2014/04/11/az-tanap/
Another issue is the ownership of the Shah Deniz field that is designated to feed TANAP. Lukoil has a 10% stake in it, and Lukoil is under US sanctions at the moment. Not a penny must reach Putin's cohorts!

Jen, December 21, 2014 at 7:14 pm

Paul Goble has also worked for the US State Dept, Carnegie Endowment for International Peace, Voice of America, Radio Free Europe / Radio Liberty and the CIA. He has received state awards from Estonia, Latvia and Lithuania. Goble sure knows whose side he wants to be on, it don't look like Putin's side.

http://en.wikipedia.org/wiki/Paul_A._Goble

Kulobi , December 21, 2014 at 8:33 pm
Jen, Paul Goble is one of Mark's favourite characters in the gallery of Russophobes whose high-brow cretinism never fails to amuse, cf.

http://marknesop.wordpress.com/2014/05/10/is-paul-goble-just-pretending-to-be-an-idiot/

I had a much needed moment of comic relief the other day reading his take on Kazakhstan

http://oilprice.com/Geopolitics/International/The-Russian-Empire-Is-Kazakhstan-Next.html

This is a classic example of bullshit 'analysis' practiced by Lucas, Fridman et al, but perfected by Goble: a/ regale the audience with a Russia-is-an-imperialist-predator meme early, preferably in the title; b/ illustrate this eternal truth with a reference to an obscure Russian source, intimating darkly that regardless of this person's obscurity, s/he "is echoing the official Kremlin narrative"; and c/ smudge it all over: Moscow will either invade Kazakhstan soon, or "Kazakhstan is already lost as part of the Russian world". Hopefully, a few freidmans later one of the predictions will come true or, much more likely, both will be forgotten.

Jen, December 21, 2014 at 9:01 pm
Kulobi: there are so many in the idiot parade who have been shot down here (and so many more to come), all of whom are so entirely forgettable that I hope you'll forgive me for forgetting that Paul Goble had been in Mark's target sights only seven months ago; and also for missing the humour in your comment about him praising Ilham Aliyev to the skies.

BTW another fan of Aliyev, so much so that each man's body language is an exact mirror of the other's.

Kulobi, December 21, 2014 at 9:19 pm
Hahahahaha! Thanks for that! The expression on the face of HRH the Duke is priceless – his eyes are practically oozing quiet wisdom and dignity. Reminds me of how my dog looks like when crapping accidentally on a neighbour's driveway.
yalensis, December 22, 2014 at 2:43 am
As one of the commenters noted, "Not in any way unusual to find cockroaches lurking together." So true…
Kulobi , December 21, 2014 at 9:11 pm
Putin stole Friedman's marbles!

http://www.nytimes.com/2014/12/21/opinion/sunday/thomas-l-friedman-whos-playing-marbles-now.html?_r=0

This is a gem.
Friedman ups the ante on Goble, corroborating his argument by references to himself only.
NB an abortive attempt at a simile: "Spheres of influence are not like some honorary degree you get from Moscow University and can keep forever." It ain't PG Wodehouse but he keeps on trying.

Moscow Exile, December 21, 2014 at 9:29 pm
Friedman:

"Let us not mince words: Vladimir Putin is a delusional thug."

Thank you!

Next patient!

yalensis, December 22, 2014 at 3:00 am
It is interesting to compare Friedman (20 December) side by side with Krugman (21 December) .

The pieces have slightly different slants (Krugman accuses Putin of "plunder", whereas Friedman accuses Putin of excessive machismo), but both sound like they were written by pretty much the same pen. Both men are obviously being roped into Obama's corral for something nefarious, that requires more propaganda umphh. Another go at Syria?
Or the unthinkable – NATO war of aggression against Russia?

Southern Cross , December 22, 2014 at 3:01 am
More likely Friedman and Krugman share so many ancestors that they're basically the same person.
yalensis , December 22, 2014 at 3:31 am
Yeah, I noticed in their little round locket-like photographs, it was hard to tell the difference between them. Except that one of them has a mangy little beard, I think.
marknesop, December 22, 2014 at 10:52 am
Friedman is an unabashed American triumphalist – as long as America is kicking somebody's ass, you can count on Friedman to pontificate about all the positive change that is being wrought, because in his imagination it is impossible for America to do anything venal or cruel owing to its essential goodness and munificence, and therefore any negative consequences which accrue are purely accidental and could have happened to anyone. It is just like him to pose the rhetorical question "WHo's Playing Marbles Now?" in an "I knew America had your number all along, motherfucker" sort of way.

Perhaps this is a good time to remind readers of what I consider Friedman's seminal work, although he would not because it was a one-off, an anguished moment of both self-doubt and doubt in the honest motives that George W. Bush actually planned to turn Iraq into a prosperous western-oriented market democracy rather than simply kicking it to pieces to thwart its ambitions. Friedman wrote "Dancing Alone", he did so out of anguish that America's project had come off the rails. What he did not see was that it was exactly on the rails that were intended for it, and that the United States government was as good at nation-building as it was at pinochle but was nonetheless completely satisfied if Iraq was ruined forever.

marknesop, December 22, 2014 at 10:15 am
I have often wondered, unkindly, what The Indispensable Paul Goble (for so La Russophobe reliably referred to him when she quoted his work; "Next up, from the indispensable Paul Goble…") did for the CIA. Perhaps he brought in a cheese tray; you know, with popular French cheeses like Camembert and Brie, wrapped fruit and biscuits, for the deskbound analysts to buy. My sister worked for years for the Royal Bank of Canada, and they used to have a guy like that, Manu, who sold the most mouthwatering cheeses. Anyway, I can't picture Goble ever having been an analyst, since so many of his conclusions rested on nothing but his own personal fervent hope that the change he described would take place. Alternatively, he could have been a top-ranked analyst, and his incompetence could explain much of what makes the CIA the Keystone-Kops outfit it is.

Since we have some new readers, perhaps it would be a good time to reintroduce Mark Adomanis's analysis of Paul Goble, which he provided in an "interview" with La Russophobe that I'm surprised she printed. I frequently disagree with Adomanis, especially over his moonie defense of Pussy Riot, but a couple of his pieces, such as his castigation of Saakashvili for simply throwing the word "democracy" into his conversation at odd moments, were right on the money. Such a moment also was this: "As for Paul Goble, I have no problem with my description of him. His job is to studiously dig through rags like Novaya Gazeta, find the most unhinged anti-Putin rants he can lay his hands on, translate them, and then print them as "authoritative" sources. His editorializing takes place through his choice of content, which is inevitably alarmist and hysterical in tone (and frequently revealed to be extremely inaccurate). I'm just amazed that after all these years he still has the patience to churn out amount of content he does so I can at least admire his persistence."

marknesop, December 22, 2014 at 10:09 am
It is a source of everlasting delight to me when a post brings to light gems like this that I did not find. Given the history of bickering and infighting over Nabucco, I am comfortable that the same sort of rice-bowl issues as well as the very real environmental concerns will stall the Southern Gas Corridor's legs repeatedly, and even if it is eventually completed it will not handle anything like the capacity South Stream would have. It is going to cost the EU a fortune to build because everyone will have his hand out (that was a concern for South Stream, too, of course, but not the EU's concern), and in the end it will not satisfy the demands placed upon it. Meanwhile, it must be with a sense of gathering horror that the EU regards the true unreliability of Ukraine as a transit country – perhaps that is the real reason for the foreigners in the cabinet; to provide a running commentary on who is causing problems in the government and needs to go. The entire Ukrainian pipeline network badly needs an upgrade, as well, and the EU has just put up its hand and shouted "pick me!!"

Thanks for this. You have made up at a stroke for all the timers you did not do homework when you were in school, because you certainly did your homework on this one.

Oddlots, December 22, 2014 at 2:04 pm

Yes this was great. Thanks. I will now have something to toss back at those who would have Dugin playing the role.

Illustrating my own Anglo prejudices and reference points, what strikes me is how Burkean Putin's instincts seem to be: gradualist in reform, keen to first do no harm and a somehow sense that society is a delicate thing, easily destroyed but hard to rebuild.

Contrast that with the evident reckless, superficial views of the likes of… Well, the entire team of politicians fielded by this generation in "the west" and the difference is striking. Blair comes to mind particularly. What could explain it? It's as if something has been left off the curriculum or something particularly pernicious has been added.

[Dec 23, 2014] Oil free market is bad news for US By Martin Hutchinson

Dec 08, 2014 | prudentbear.com

The OPEC meeting over Thanksgiving week failed to result in any oil production cuts, immediately sending prices down by US$5 per barrel. Its action made it clear that, for the first time since 1972, there is no cartel able to control the oil market.

The fall in the oil price is caused by a fundamental shift in the market. Price is now being driven by supply, whereas previously it was driven by demand. This has happened before: the oil price fell from $27 a barrel at the beginning of 1986 to $10 at the year's end, where it remained until around 2000, with only a short blip during the Gulf War. The transition from a market driven by demand to one driven by supply typically causes a large price shift because of the long lead time of oil investment and stickiness in the market. In 2011, when oil prices soared above $100 a barrel, there was considerable speculation that they would soon reach $200. Since then, the U.S. fracking revolution has both brought new supply on stream, making the U.S. a bigger producer than Saudi Arabia, and increased the potential resources for future production worldwide. At $100 a barrel, Canadian (and potentially Venezuelan) tar sands and shale deposits in Poland, Argentina and many other countries were potentially profitable. Investment would have poured into those sectors.

Just as in 1986, after several years of high prices, new sources of oil supply caused the price to collapse. In 2014, after several years of high prices, supply and potential supply caught up with demand, and the price dropped back to the level at which marginal supplies became unprofitable.

In the late 80s and the 90s, marginal supplies were profitable at $10 a barrel. Today that figure is more like $70. There is a certain amount of further efficiencies that can be gained from experience, so the initial estimates of $80 a barrel at which fracking and oil shale made sense were probably a little high. But it seems very unlikely that substantial new supplies will continue to be developed below $70. The oil price may spike downward for a while, but the $65-$70 level looks like a long-term floor.

Chevron's And Oil's Last Downward Gasp - Time To Buy

Eventually all good (and bad) things end. Oil's 40% drop and Chevron

CVX +3.58%'s 20+% decline show signs of exhaustion. Yes, the "news" and pundit-commentary is decidedly negative, but this is when contrary thinking and actions produce their best returns.

Not all commentary is negative. Some even contain indications of a reversal at hand. For example, this morning's (12/10) Bloomberg article, "OPEC Sees Weakest Demand for Its Crude in 12 Years in 2015." Note this sentence: "The impact of this year's 40 percent price collapse on supply and demand remains unclear, OPEC said."

"Unclear" = uncertainty, and that is what the market is dealing with. But uncertainty does not mean forever down. It only means down to a new level at which buyers feel confident to step in. And it looks like we are there.

Start with Chevron's picture described previously in "OPEC's Gamesmanship Could Benefit Exxon and Chevron" and "Chevron – How To Buy Into This Falling Stock." Now look at the following graphs, which show today's story best, explaining why now is a good time to buy CVX.

[Dec 21, 2014] Maybe Oil Goes to $70 on its Way to $40

Dec 21, 2014 | Zero Hedge
Submitted by Charles Hugh-Smith of OfTwoMinds blog,

A retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel.

... ... ...

3. Too many punters have bet on oil dropping straight to $40/barrel, and all those put options offer the big financial players an incentive to spark a short-covering rally that outruns stops and scoops all the money by options expiration on January 16, 2015.

The more puts there are at $70/barrel (and equivalent levels in energy etfs, oil services stocks, etc., the greater the incentive to push the short-covering rally higher than expected.

4. The parabolic drop in oil resulted more from the panicky unwinding of a crowded and overleveraged trade than supply-demand. As I explained in my series on the financialization of oil, the financial pyramiding of oil is much less visible than supply and demand, so the mainstream media focuses on what's easy, i.e. supply and demand issues.

Crowded trades (trades where almost everyone is on one side of the boat) unwind in precisely this sort of freefall. Once the trade has been unwound, however, the selling cascade exhausts itself and insiders who know better start buying. Buying begets buying, shorts start covering, and voila, a retrace that fills open gaps and kisses the 50-day moving average surprises everyone who was confident oil was heading straight down to $40/barrel.

[Dec 21, 2014] "Houston, You Have A Problem" - Texas Is Headed For A Recession Due To Oil Crash, JPM Warns

Dec 21, 2014 | zerohedge.com

Fast forward to today when we are about to learn that Newton's third law of Keynesian economics states that every boom, has an equal and opposite bust. Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the "recovery" has been flooded with. Here is JPM's Michael Feroli explaining why Houston suddenly has a very big problem.

Newsboy

Selling oil when prices drop will hurt all competitors with higher production costs, which is good for the House of Saud in the longer run, even if they relish hurting some more than others.

It's all good...

Freddie

...the nomadic and medieval House of Saud...

Yes they were Mi6 controlled "tribal" Iraqi related to the Red Shield and still are.

Conrad Black is a NeoCon.

Dr. Jim Willie months ago said the US would pivot to Iran. The only reason that I can thin

k is the USA intel and oil companies know that the Saudis old oil fields are dying rapidly.

The big oil left is in Iran, Iraq, Russia and the various stans near the Caspian Sea.

Jack Burton

I read it, I find little of real import in it. It sounds like a bit of a rant after too many drinks by someone connected to Necon Washington. Some of the political sound bites read like a deluded and unhappy zionist. Frankly, it is hardly even rational. I think he himself does not understand what he meant to convey by it. Irrational at best.

Someone clinging to the miracle of heavy oil. Not admitting that even at $50, $35 well-head, that fracking and tar mines are not viable.

NoDebt

What is truly amazing through all this shit is that the oil keeps flowing. From everywhere. Stable countries, unstable countries, countries embroiled in civil war.

Somebody's being played, that's for damned sure.

Jack Burton

I can't find a home for this, so post it here to be Off Topic, but topical given the possible collapse of the Minsk Agreement in Ukraine. This is just in from rebel intelligence inside occupied Donbass.

" According to information received from local residents, 83 km from Donetsk, in the village of Granitnoe, Telmanovo district, Donetsk People's Republic, English-speaking mercenaries were spotted.

According to a resident of Granitnoe Roman S., mercenaries often appear in the shops and markets, moving in small groups, they have new NATO uniforms, communicate with each other in English, bringing a translator along with them, not allowing to take photos of themselves under a threat of use of weapons."

There is a feeling that a large offensive is coming, but it may wait till May, once the West has supplied and armed the Kiev Junta. Foreign fighters are key to restoring some semblence of fighting ability to Kiev infantry and tank forces.

[Dec 21, 2014] Conrad Black: The Saudis Fear Western Alliance With Iran; Crashing Oil Is Their Retaliation

"The oil-price weapon, in the face of the terminal enfeeblement of the Obama administration, is the last recourse before the Saudis and Turks, whatever their autocues of racist rhetoric, invite Israel to smash the Iranian nuclear program from the air."

The US is behind the current drop in oil prices – Bolivia's president

RT News
America is acting like other large empires did for centuries as they "disseminated strife and hatred inside and outside, wishing to establish political control over other nations and to plunder them economically," Morales said, in an apparent reference to the Spanish conquistadors' invasions of Latin America.

The Bolivian president also slammed Europe for being "US accomplices" in implementing sanctions worldwide.

"We must think of a way to liberate Europe, and just think that they used to be invaders of our countries," he said.

Morales said that President Obama "should stop imposing sanctions" and pay more attention to America's internal problems, such as "abolishing capital punishment, or to think of new laws to combat racial discrimination."

He described the US president a "discriminated Afro-American" who himself is "discriminating against migrants."

"Of course, now that America can't overthrow a president by a violent military coup, it starts to view the option of economic sanctions. I am sure that the oil prices plunge was provoked by the US to undermine the Russian and Venezuelan economies. This is my opinion," Morales said.

Morales said that current oil prices, which have reached their lowest since 2009, are the result of "temporary difficulties."

"I am sure the US aggression related to oil price cuts will not last long. Is $60 per barrel a feasible price? Washington is not interested in this. All the US is interested in is an economic assault on some countries to overthrow their presidents. But they will not succeed in this task," he said.

The oil price has fallen from $100 per barrel in June to $60 per barrel in December, due to a drop in global demand and increased oil production in the US.

Many observers believe that low oil prices and Western sanctions imposed on Moscow over its union with Crimea and alleged involvement in the Ukrainian crisis have delivered a painful blow to Russia's economy.

A decline in confidence in the country's economy prompted investors to sell off Russian assets, which in turn saw the ruble plunging over 40 percent against the dollar since the start of the year.

[Dec 18, 2014] Is Russia Being Driven Into the Arms of China

Zero Hedge

Quentin Daniels

The current US policy of simultaneously antagonizing both China and Russia will likely go down as one of the 21st century's more significant strategic miscalculations. Assuming of course that it is a part of some strategy and not just bumbling incompetence.

dexter_morgan

Hey, just following orders apparently.

Israeli Prime Minister, Ariel Sharon, October 3, 2001-

"Every time we do something you tell me America will do this and will do that . . . I want to tell you something very clear: Don't worry about American pressure on Israel. We, the Jewish people, control America, and the Americans know it."

lasvegaspersona

Let's see

SOOOO. I guess they are buds, not sure 'driven into the arms of' describes what is happening but like almost every other country on the planet they are both trying to distance themselves from us policy and minimize the damage to themselves in the coming demise of the dollar.....oh..one more thing...they both value gold...but then most CBs besides the Fed do.

Monty Burns

"What is new is that the West has finally given up on trying to woo Russia closer and decided to exact a price for their treachory. "

Are you out of your f*cking mind? The 'West' has reneged on every post_soviet deal and been provoking Russia non-stop for the last 15 years at least.

AdvancingTime

What a nightmare! This stupid policy has to be put on Obama. He doesn't seem to remember history. Many Americans cringe when they think about the billions of dollars of consumer goods we import from China every month, but what makes it even more bizarre is that China is an American make product. Decades ago America started down a perilous path to build China into a world power.

Decades ago a pathological fear of Russia and the Kremlin's atheism caused America to seek a counter balance in the region. Central to the American effort was offering the prospect of economic incentives to China, we combined this with a hardline military response to communist aggression. Ironically, it was the China's communist longevity the Washington wise men should have feared more. The article below delves into how and why America made China into the economic giant it is today.

http://brucewilds.blogspot.com/2012/09/china-made-by-america.html

[Dec 18, 2014] It's A Huge Crisis" - The UK Oil Industry Is "Close To Collapse, People Are Being Laid Off

So it might take two or three years of low oil prices to destroy the US oil industry. Then what ?
zerohedge.com
It seems like only yesterday when back on October 11, we first explained - and previewed - the collapse of oil courtesy of the secret deal between the US and Saudi Arabia. However, it seems like only this morning when we subsequently wrote that "If The Oil Plunge Continues, "Now May Be A Time To Panic" For US Shale Companies." In retrospect, it was, and with the price of crude far below mid-October levels, the pain for both Russia and shale is now quite unbearable (even as Saudi Arabia explained earlier today that the reason for collapsing oil has nothing to do with supply and everything to do with plunging demand, and after seeing this chart we believe it).

All of this was perfectly obvious months ago to anyone who cared. To wit:

... while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the "deal" with Obama's White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the "costs" meant to punish Russia end up crippling the only truly viable industry under the current presidency.

So with great delight we present the latest blowback from Obama's "brilliant" strategy to cripple Putin: in addition to the default wave about to crush America's own shale industry, America's biggest foreign ally and military partner when it comes to "ideologically pure missions of liberation" - the UK, and specifically its North Sea oil industry which according to the BBC is in a "crisis" and according to Robin Allan, chairman of the independent explorers' association Brindex, the industry was "close to collapse".

The story is the same as in the shale patch, only in the far colder and stormier North Sea: "Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. 'Everyone is retreating'"

"It's almost impossible to make money at these oil prices", Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC. "It's a huge crisis. This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that's painful for our staff, painful for companies and painful for the country."

"It's close to collapse. In terms of new investments - there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone."

And to think it was just yesterday that the WSJ telling anyone who believes propaganda that "Christmas has come early for British consumers.

Tumbling oil prices, rising wages and declining borrowing costs are lifting households' spending power, sending a powerful signal that consumers are set to keep Britain's economy growing in the New Year.

BOE officials in December concluded the decline in the oil price in particular should act as a mini-stimulus for the U.K. and its major trading partners, even as Russia and other energy producers reel from crude's recent slide. The BOE estimates the oil price has fallen 35% in sterling terms since June.

Which once again shows that when it comes to being utterly clueless about the real world, central bankers truly have no peers. Well, side from their media cheerleaders of course.

But hold on: wasn't only Putin supposed to be getting crushed as a result of the oil collapse? Suddenly the "secret" Saudi agreement isn't looking all that hot.

As for the truly "best" news: the collapse in the oil field will remain hidden from official government data. Mr Allan said many of the job cuts across the industry would not have been publicly announced. Oil workers are often employed as contractors, which are easier for employers to cut.

His remarks echo comments made by the veteran oil man and government adviser Sir Ian Wood, who last week predicted a wave of job losses in the North Sea over the next 18 months.

BOE bullshit aside, this is what is really going to happen:

The US-based oil giant ConocoPhillips is cutting 230 out of 1,650 jobs in the UK. This month it announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices.

Other big oil firms are expected to make similar cuts to their drilling and exploration budgets. Research from the investment bank Goldman Sachs predicted that they would need to cut capital expenditure by 30% to restore their profitability at current prices.

Service providers to the industry have also been hit. Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.

On Wednesday Aberdeen-based Wood Group announced a pay freeze for staff, and cut rates for its contractors.

Apache, one of the North Sea's biggest producers, has followed suit and will impose a 10 percent reduction on its contractors' wages from January 1st.

So what happens to the UK oil and energy industry? "The industry was hoping to see continued high levels of investment, stemming the inevitable decline of production as North Sea's resources are used up. But falling oil prices have put that in doubt."

However, the Department of Energy and Climate Change said:

"The recent sharp reductions in oil prices are very challenging for companies active in the North Sea. We have seen very little evidence of new projects being cancelled or deferred in reaction to lower oil prices."

Which means the real pain is only just starting, first in the UK and soon everywhere else.

BringOnTheAsteroid

Not to worry, the Republicans will turn this ship around.Are there really so many people in the US who still think there is even a remote difference between these two parties?

That Obama is any worse than that dick head before him and will have been worse than the dick head after him.

[Dec 14, 2014] Head of OPEC thinks that oil prices are artificially lowered

Dec 14, 2014 | vzglyad.ru

According to the NESF, now 95% of transactions in the oil market are in oil futures, which typically never brought to fulfillment in real oil. As a result, oil prices are determined by the amount of money that is spinning on the oil futures market. Now there are a lot of money injected in this market, which coused the drop in "virtual oil" prices.

The most outspoken member of OPEC - Venezuela - clearly indicates that the United States and some of its allies have lowered the price of oil in order "to harm Russia, and along with Venezuela." This opinion was expressed earlier Thursday Venezuelan President Nicolas Maduro. The UAE has also accused the United States in excess of oil on the market (and falling prices).

"In the current price of oil is almost no economy, one policy. Collusion US and Saudis visible to the naked eye. The West has learned that the sanctions have little effect on Russia. And hit our weakest point - the price of oil and, as a consequence, gas, "- said in an interview with LOOK director of analytical department" Alpari "Alexander Razuvaev.

Russian President Vladimir Putin in the last month admitted that he suspects some countries in the conspiracy, the purpose of which is to reduce world oil prices. "Conspiracies are always possible," - he said.

Commenting on the decision of the OPEC oil Unabridged, Putin noted that the reaction of the oil price was expected, but after the winter prices are balanced. "I think that there are no surprises for either of us, nor for you does not occur. We took part in a meeting of a group of countries of OPEC. For us, from the very beginning it was clear that after the announcement of OPEC's Unabridged prices react, "- said the president of Russia.

On Wednesday, December 10, Iranian President Hassan Rouhani in a meeting with the Cabinet of Ministers said that the sharp drop in oil prices is the result of a conspiracy on the part of a number of states. "The fall in oil prices is (the result) of a conspiracy against the peoples of the region and the Muslims in general," - said Rouhani. The Iranian leader also said that "the people of our region will never forget such a conspiracy."

On Friday, the price of Brent crude oil fell below $ 63 a barrel amid the negative outlook for fuel demand in 2015, the International Energy Agency (IEA).

[Dec 14, 2014] OPEC's message to US shale: Drop dead By Matt Egan

"The shale boom is on par with the dot-com boom."
Nov. 28, 2014 | money.cnn.com

Dot-com bust all over again? The fear is that OPEC's hard line could cause a pull back in the U.S. shale industry, sparking job losses and causing panic in the financial markets.

That's what Russian oil tycoon Leonid Fedun is predicting, although Russia isn't part of OPEC.

"The shale boom is on par with the dot-com boom. The strong players will remain, the weak ones will vanish," he told Bloomberg News on Thursday.

The OPEC move has clearly spooked investors, who sent energy stocks like Halliburton (HAL), Helmerich & Payne (HP) and Schlumberger (SLB) plummeting on Friday. (U.S. markets were closed for Thanksgiving Day on Thursday).

... ... ...

Nysveen said the breakeven crude oil price for U.S. shale producers is around $50 or $55. Despite the recent plunge, oil is still well above that at the $70 range.

[Dec 14, 2014] Analysis – Oil price slump sorts the hedged from the unhedged

only 14.3 percent of 2015 shale production was hedged….

et Al, December 13, 2014 at 11:13 am

Neuters: Analysis – Oil price slump sorts the hedged from the unhedged

http://uk.reuters.com/article/2014/12/12/uk-oil-hedging-analysis-idUKKBN0JQ0D820141212

Oil's slide to the lowest price in more than five years is carving a divide between U.S. shale drillers who heavily hedged future production and those who didn't.

While financial hedges are commonly required by many oilfield lenders, the industry's mid-sized U.S.-focused shale field producers pursued varied strategies when it came to protecting future revenues, according to a Reuters review of filings and interviews with bankers and experts.

Those decisions are now coming back to haunt some drillers. Best-known is Continental Resources (CLR.N), which lifted its hedges in early November, when oil was trading at around $83 (£52.78) a barrel, leaving it unprotected as prices slipped another $20, the most dramatic drop since the 2008 crisis. Continental's share price has been more than halved since late June…

…Among major and mid-sized exploration and production companies, some 35 percent of all 2014 oil production was hedged at an average of $95.5 a barrel as of November, according to an analysis prepared by RBC. Yet only 14.3 percent of 2015 production was hedged….

…Now that the crude price has almost halved in the past six months, and predictions grow for a prolonged slump in prices, investors are scrutinizing filings to understand which corporations were clever enough to have locked in prices prior to the slump and therefore have enough cash on hand to pay increasingly expensive service contracts.

"The purpose of hedging is to secure cash flow regardless of price scenario," said Robert Campbell, head of oil products research at Energy Aspects in New York. "The whole thing with (shale drillers) is cash preservation."…"
###

What's the american phrase? 'Getting your thing caught in the zipper'?

U.S. Oil Producers May Drill Themselves Into Oblivion

Businessweek

We're now in the midst of a fourth, with oil prices down more than 20 percent since peaking in late June at around $115 a barrel. They're now hovering in the mid-$80 range and could certainly go lower. That's good news for U.S. consumers, who are finally starting to reap the rewards of the shale boom through low gasoline prices. But it could spell serious trouble for a lot of oil producers, many of whom are laden with debt and exaggerating their oil reserves.

,,,oil companies in the U.S. are perpetuating the crash by continuing to drill and push up U.S. oil production to its fastest pace ever. Rather than pulling back in hopes of slowing the amount of supply on the market to try and boost prices, drillers are instead operating at full tilt and pumping oil as fast as they can. Just look at the number of horizontal rigs in the field.

...Unlike conventional vertical wells, where more wells do not always equal more oil, the strategy in a shale field appears to be to drill as many as possible to unlock oil trapped in rock formations

... ... ...

So will U.S. oil producers frack their way into bankruptcy? That's a real possibility now. They've certainly gotten more efficient at drilling, and don't need the same price they did to remain profitable. But we're getting pretty close. Back in July, Goldman Sachs estimated that U.S. shale producers needed $85 a barrel to break even. That's about where we are right now. The futures market points to even lower prices next year, with contracts for oil next April trading at about $82 a barrel. Certainly, some producers need higher prices than others. Those at the bottom of the cost curve could benefit from a potential wave of bankruptcy that spreads across the oil patch; they could then scoop up some assets on the cheap.

Shale Oil's Relentless Production Is Breaking OPEC's Neck

Businessweek

...shale producers have lowered their costs so much that in key fields they can make profits at $50 to $70 a barrel.

... ... ...

Cheap oil from shale already shows signs of shaking out investment in costlier technologies. Rystad Energy, a Norwegian consulting firm, estimates that oil averaging $60 a barrel next year would lead to the delay or cancellation of one-third of all oil and gas projects slated for go-aheads in 2015, mainly higher-cost investments in the Alberta oil sands, the Arctic, Brazil, West Africa, and the North Sea. As night follows day, scuppering projects will lead to shortages and a price spike. Untamed oil is "in a continuous boom-bust cycle," says Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin.

... ... ...

China is already adding to its strategic reserve at today's low prices, putting a floor under the market-"wisely," says John Studzinski, a senior managing director at Blackstone Group (BX). The other calming force is the futures market, which guides investment by reflecting investors' collective judgments about the trajectory of prices.

Crude Carnage Contagion Biggest Stock Bloodbath In 3 Years, Credit Crashes

Zero Hedge

... the decoupling at epic levels... between bonds and stocks.. and between credit and stocks...

Crude is now down 25% from the initial OPEC leaks...back below $58!!

...energy credit is near 1000bps now... and is starting to spread to rest of the HY markets...

* * *

But it's all about the fundamentals!! Great Jobs Data, Great Retail Sales Data, and Great Consumer Confidence Data - unless that's all totally manipulated bullshit?


ebworthen

+10 for the "Jim Cramer" tag on the article.

Mr Pink

Not to worry muppets...the Santa Claus rally begins Monday morning!

Oil prices plunge below $60 on weak forecast by IEA

RT Business

The oil glut continues, says the latest International Energy Agency's (IEA) report which slashes demand growth forecasts for 2015. A weak economic outlook for China, Europe, and Russia will see demand rise one percent, not enough to offset oversupply.

Oil demand growth for 2015 was slashed by 230,000 barrels per day, and is set to only increase one percent, or by 900,000 barrels to 93.3 million barrels per day, compared to 92.4 million barrels per day in 2014.

"The global economy remains weak, there is no wage growth, there is little consumer spending and the main concern is deflation, all of which is feeding into each other," said Antoine Halff, author of Friday's report.

There will be weak demand from Russia and former Soviet Union states, as growth is set to grind to a halt. The report cited Western sanctions as a trigger for slowed growth in Russia.

The forecast is based on surging US crude oil exports, which is producing the most oil since the 1980s. Production reached 9.12 million barrels per day through December 5, according to the Energy Information Administration.

Both Brent and WTI crude blends fell to a 5-year low. Following a 20 percent decline OPEC decided not to stabilize prices by cutting production in November. Before the meeting, oil futures plunged 20 percent from the June peak of $116 a barrel.

The steep decline since June has "had a modest impact on near-term production growth, but steeper price declines could set back many producers," the report stated.

"Weak oil demand was itself a key factor behind falling prices," the report added.

On Friday Brent crude dropped to $63.13 a barrel, while WTI dipped below $60 a barrel to $59.19.

"Despite lower crude oil prices, we expect US production to continue to grow apace in 2015," expanding by 685,000 barrels a day," the energy watchdog said.

The US isn't the only non-OPEC country flooding the market; Canada, Norway, and Russia continue to export at high levels, despite a weakened demand for crude. OPEC produces about 40 percent of the world's oil, and continues to overproduce, in November the 12 nations pumped 30.56 million barrels a day, overstepping their target volumes for 6 months straight, Bloomberg News reports.

Saudi Arabia, the historical leader of the oil cartel, hopes the market will sort itself out, meaning that countries that have expensive extraction projects will cut production.

READ MORE: Saudi Arabia to keep politics out of OPEC, will let market stabilize price

In its December report, OPEC said that it will need to cut crude production down to 28.9 million barrels, or by 300,000 barrels per day. The IEA put forth the same estimate in Friday's report.

The next oil report from the IEA is due in February 2015.

[Dec 12, 2014] Why US Shale May Fizzle Rather Than Boom

The Shale Revolution may not really end up being a revolution after all. A new study in Nature finds that the estimates for shale gas production could be vastly overblown, and production could peak within the next decade. …

…For example, in its latest Annual Energy Outlook, the EIA predicts that shale gas production will continue to climb upwards over the next several decades. By 2040, the agency forecasts, the U.S. will be producing 56 percent more natural gas than in 2012, largely driven by a doubling of natural gas production from shale.

Writing in Nature on December 3, Mason Inman reports that such predictions could be wildly optimistic. Using data from a team of researchers from the University of Texas, which studied the topic for three years, Inman concludes that the shale story is not nearly as revolutionary as everyone thinks. Inman says that shale gas production from the big four shale plays – the Marcellus, Barnett, Fayetteville, and Haynesville – which account for two-thirds of the country's shale gas output, will peak in 2020, declining thereafter. If that is true, even the EIA's most downbeat scenario for shale gas production could be overly optimistic. …

…The repercussions for the U.S. would be enormous. Billions of dollars of investment are pouring into shale gas production, refineries, factories, petrochemical facilities, and natural gas export terminals – all based on the assumption that the shale gas revolution has decades of life left in it. But in reality, it could all peak within the next decade or so, after which, "there's going to be a rude awakening for the United States," Tad Patzek, a researcher with the UT team told Nature.

If that ends up being the case, shale gas may look more like a blip rather than a monumental revolution for the United States. When production declines in the 2020's, natural gas prices will rise. That could raise the prices of everything from electricity, to plastics and fertilizer. It could also make LNG export terminals uneconomical.

"The bottom line is, no matter what happens and how it unfolds," Patzek said, "it cannot be good for the US economy."

Full text: http://www.zerohedge.com/news/2014-12-10/why-us-shale-may-fizzle-rather-boom

[Dec 11, 2014] Plunging oil has 'definite effect' on Canada

Dec 11, 2014 | RT Op-Edge

RT: OPEC's decided not to do anything to boost the price of oil. How's this affecting Canada's energy sector and economy more generally?

Jennifer Winter: It has a definite effect on the Canadian economy in particular in Alberta. About 30 percent of the government's revenues are dependent on the oil and gas sector both from royalties from production. That has an impact on government budgets; it has an impact on what the government is able to spend money on. And it is also has an effect on what the investment firms are able to make and their revenues.

... ... ...

RT: Nearly all of Canada's oil comes from tar sands which apart from having a huge impact on the environment are also very expensive. Could falling oil prices mean this kind of oil extraction is no longer economically viable?

JW: No, the oil sands, tar sands are quite well suited to riding out low prices. One of the reasons that it is a lot more expensive is [that] there is a bigger capital cost invested in production. But as long as these existing projects are covering their variable cost of extraction, they can continue to produce.

What we are likely to see is a significant slowdown in new investment in the oil sands.

[Dec 11, 2014] Saudi oil and the Shi'ite crescent By M K Bhadrakumar

December 11, 2014 | Indian Punchline
The Iranian President Hassan Rouhani's dramatic description of the recent decline in oil price as due to 'Muslim treachery' calls attention to Saudi Arabia's motives. At a cabinet meeting in Tehran on Wednesday, he said, "The fall of crude prices is not merely an economic issue, rather it is the result of certain states' political plot and planning.

"The decrease in oil price is a plot against the regional people and Muslims which merely serves the interests of some other countries. Certainly, people will react to such schemes and the countries which have hatched this plot should know that they have just increased the Muslim world's hatred for themselves," Rouhani added.

The many interpretations and conspiracy theories in vogue currently on the issue of the drop in oil price in the world market broadly fall into three categories. One, the phenomenon of oil price is attributable to the demand-supply situation prevailing in the world market – that is, a glut in supply has resulted due to increased production and fall in demand (due to slowing demand in China, Japan and Europe), and the plunge in oil price ensued.

Two, this is an invidious political plot hatched by the US and Saudi Arabia to weaken the Russian and Iranian economies. Three, what is happening is partly political and partly economic.

The second thesis is the most alluring, of course. Who wouldn't like a conspiracy theory? However, the Russians and the Iranians themselves do not think that President Barack Obama has hatched a plot against them.

Moscow, despite its problems with Obama, sees through issues rationally and calmly and is disinclined to see his shadow behind every bush – that is, even despite Washington's determination to fight Russia on the beaches, in the air and in the hills.

The Russian news agency Sputnik, in fact, just featured an incisive analysis to explain that the US shale gas industry is actually skating on thin ice if the current decline in oil price persists and, in turn, this may eventually bring the roof down on the American economy if the current 'shale bubble' meets the fate of the dotcom bubble and real estate bubble.

The Russian commentary just stopped short of making the point that the US and Russia have shared interests here – although, it is improbable that anyone in Washington is in a mood to listen to the sage Russian expert advice.

Interestingly, Rouhani too kept Uncle Sam out of the matter. But, unlike the Russians who have been confabulating with the Saudis on the oil price issue to find common ground, he points the finger at Riyadh (without naming it explicitly) for deliberately hurting the Iranian economy.

There was a time when Iran would have most certainly brought in the 'Great Satan' somewhere into all this but then, times have changed. The US-Iranian engagement has gained traction. (On the crucial Afghan issue, Rouhani has been openly endorsing the US-backed national unity government in Kabul.) and it is entirely conceivable that while eating together or sipping tea in the corridor on the sidelines of their meetings, American and Iranian diplomats have exchanged notes on what is happening on the world oil market.

Besides, Tehran exudes cautious optimism that the 7-month extension of the nuclear negotiations could be leading to a resolution of the problem. In a report this week, the International Crisis Group broadly concurs with such an estimation, too – "Obstacles notwithstanding, there is a credible path to an agreement… Now that the fog has receded, the parties should move ahead quickly."

Rouhani couldn't have been propagandistic when he hit at a Saudi plot against Iran. The point is, he has been a long-time advocate of a Iran-Saudi rapproachment. Evidently, his patience is wearing thin that there are no signs of a change of thinking toward Iran in the Saudi calculus, which is still permeated by a strong antipathy bordering on hostility toward the prospect of Iran's imminent integration with the international community.

Indeed, the Saudi-Iranian tango over oil price is not a new development. Books, in fact, have been written on the subject. (The Oil Kings: How the US, Iran and Saudi Arabia Changed the Balance of Power in the Middle East By Andrew Scott Cooper.)

A pivotal moment came when the Saudis replaced Iran (following the Islamic Revolution in 1978) as the principal power broker in the OPEC. It still becomes a debatable point, though, as to how far the US-backed Saudi ascendancy in the OPEC in the post-1973 period might actually have been contributory factor in the overthrow of the Shah of Iran (who was critically dependent on oil revenue for the massive urbanization program to transform and 'modernize' Iran.)

Suffice it to say, it is an entrenched belief in Riyadh that the Iranian regime's popular legitimacy and social base is directly linked to its ability to provide a certain level of economic prosperity to the country.

In the prevailing regional milieu, there is the added factor that the Saudis are extremely worried about Iran's surge as regional power and Tehran's possible replacement of Riyadh as a key interlocutor for the US in the latter's regional strategies. The Saudis are also rooted in the belief that Tehran is providing covert support to the Shi'ite empowerment in the region in such crucial theatres as Bahrain and Yemen, which have direct bearing on Saudi Arabia's political economy.

Having said that, the big question is how much of a lethal blow the Saudis could be inflicting on the Iranian economy by keeping the oil prices low?

The fact of the matter is that Tehran anticipates a prolonged period when oil prices may remain low and is ably adjusting to the new reality. The Iranian budget which has been presented in the Majlis in Tehran last week suggests that the economy can absorb the body blow from the Saudis. Some indicators:

Put differently, Tehran knows that time is working in its favor and the sanctions regime is becoming increasingly irrelevant. Ironically, the Western sanctions may have helped Iran to emerge as the only petrodollar state in the region with a diverse industrial base and indigenous military capabilities to safeguard its national security.

All in all, Saudis are immensely experienced in oil politics and their calculus would have several templates and most of them are interlocking. There is no denying that the global oil production is changing and the diminishing importance of the traditional producers is a cause of genuine concern.

Nonetheless, the Saudis have been explicit about their hostility toward Iran. The Financial Times reported this week the vignette of a private conversation between the US secretary of state John Kerry and a "senior Saudi official" and where the latter remarked, "ISIS [Islamic State of Iraq and Syria] is our [Saudi] response to your [US] support for the Da'wa [Tehran-aligned ruling party of Iraq]." Read the FT commentary here.

[Dec 10, 2014] China or the U.S.: Which Will Be the Last Nation Standing?

Predictions, predictions, prediction. this time from 2010 ;-)
February 3, 2010 | Richard Heinberg's Museletter

By contrast, China is enjoying springtime on amphetamines. It now has the biggest car market in the world. And, according to Stuart Staniford in a recent fact-filled article, "if present trends continue, the Chinese expressway system will likely grow larger than the U.S. interstate highway system within the next couple of years, and Chinese car ownership will exceed U.S. car ownership by somewhere in the neighborhood of 2017." As of 2010 China is the leading producer of hydroelectric and solar power and by 2011 will be the top producer of wind power. China's smart grid investments dwarf those of the U.S. by 200 to one. The Chinese are also investing heavily in nuclear energy.

Staniford goes on:

"Oversimplifying greatly, it's as though the U.S. borrowed a pile of money from China in order to fight a war to free up oil supply in Iraq in order that China could become the greatest industrial power the world has ever seen."

... ... ...

...there is a school of thought that says China's apparently unstoppable economic miracle is a bubble waiting to burst. Beijing's housing market is overheated, like that of Las Vegas circa 2006. Last year, the Chinese economy enjoyed 9 percent GDP growth-on paper. But in order to achieve that goal, the government and banks had to loan out 30 percent of China's GDP (the rate of growth in loans accelerated during the latter part of the year; at year-end rates, banks were on track to loan out an amount equal to the nation's entire GDP in 2010). In any case, much of that growth probably occurred through speculation on real estate and questionable stocks.

Generally, China is at a Wild West stage of economic development: it is a collection of powerful local capitalist power bases unaccountable to anyone, all jockeying to create and inflate assets and credit. While the central government has recently exerted control over the banks, its ability to halt regional Ponzi schemes is still limited.

[Dec 10, 2014] Oil Market Reminds Me of 1986 Price Drop Sass

(video). Essentially his opinion is that oil is forecasting really bad time for the world economy ahead of us. It is unusual start of troubles not troubles might be coming.
finance.yahoo.com

Bottom of oil prices is not seen yet. Last time in 1986 oil fall $35 to $10. Most of the damage in oil price decline behind us. But not oil speculators were washed out.

Marginal producers will go out of business. They are highly leveled and they will have problems in refinancing their debt. There will some ripple affects on financial market. Increased volatility is probably coming in 2015. Fed intend to raise rate.

High yield bond market will be affected.

[Dec 10, 2014] OPEC Sees Weakest Demand for Its Crude in 12 Years in 2015

Dec 10, 2014 | finance.yahoo.com

OPEC cut the forecast for how much crude oil it will need to provide in 2015 to the lowest in 12 years amid surging U.S. shale supplies and reduced estimates for global consumption.

The Organization of Petroleum Exporting Countries lowered its projection for 2015 by about 300,000 barrels a day, to 28.9 million a day. That's about 1.15 million a day less than the group's 12 members pumped last month, and the 30-million barrel target they reaffirmed at a meeting in Vienna on Nov. 27. The impact of this year's 40 percent price collapse on supply and demand remains unclear, OPEC said.

"The fundamentals outlined in the report look quite bearish," Abhishek Deshpande, oil markets analyst at London-based Natixis SA, said by e-mail. "Fiscal balances are a huge problem for weaker OPEC members, so I won't be surprised if they call for an emergency meeting early next year."

Prices now are below what 10 out of OPEC's 12 members need for their annual budgets to break even, according to data compiled by Bloomberg. Kuwait and Qatar are the exceptions. Saudi Arabia, OPEC's biggest member, has $742.4 billion of reserve assets, data from the country's monetary agency show. OPEC's next meeting is due to take place on June 5.

Brent crude, the global benchmark, traded $1.11 a barrel lower at $65.70 a barrel as of 12:54 p.m. London time. It slumped as low as $65.29 a barrel yesterday, before rebounding. It hasn't been below $65 since September 2009.

November Dip

Demand for OPEC's crude will slump to 28.92 million barrels a day next year, according to the report. That's below the 28.93 million required in 2009, and the lowest since the 27.05 million a day level needed in 2003, the group's data show.

Output from the 12 members declined by 390,000 barrels a day in November to 30.05 million a day amid lower production in Libya, according to data from analysts and media organizations referred to in the report as "secondary sources."

Libyan output dropped last month by 248,300 barrels a day to 638,000 a day. Pumping at the Sharara oil field, the country's biggest-producing asset, and the neighboring El Feel site, was halted after Sharara was seized by gunmen, according to the International Energy Agency.

Production also slipped last month in Algeria , Angola, Kuwait, Qatar, the United Arab Emirates and in Saudi Arabia, where output declined 60,100 barrels a day to 9.59 million.

Demand Dimmed

The organization trimmed projections for global oil demand this year and next. World fuel consumption will increase by 1.12 million barrels a day, or 1.2 percent, in 2015 to 92.26 million a day. That's a reduction of 70,000 barrels a day from last month's report.

OPEC boosted forecasts for supplies outside the group in 2015 by 120,000 barrels a day. Non-OPEC supply, driven the U.S., Canada and Brazil, will expand next year by 1.36 million barrels a day to 57.31 million a day. Production from non-OPEC nations will increase this year by 1.72 million barrels a day, about 580,000 a day more than the organization's initial estimates.

Total oil inventories in the world's most advanced economies remained 15 million barrels higher than their five-year average in October, at 2.7 billion barrels, even as they declined by 5.1 million barrels, according to the report.

The reduction in demand estimates "reflects the upward adjustment of non-OPEC supply as well as the downward revision in global demand," the group's Vienna-based research department said in its monthly oil market report today.

Russia Government Debt to GDP 1999-2014 Data Chart Calendar

Actual Previous Highest Lowest Dates Unit Frequency
13.41 12.74 99.00 7.90 1999 - 2013 percent Yearly
Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields. This page provides - Russia Government Debt To GDP - actual values, historical data, forecast, chart, statistics, economic calendar and news. Content for - Russia Government Debt to GDP - was last refreshed on Wednesday, December 10, 2014.
Government Debt to GDP Reference Previous Highest Lowest Unit
Australia 20.48 Dec/13 27.16 31.70 9.70 percent [+]
Brazil 56.80 Dec/13 58.80 60.90 53.40 percent [+]
Canada 89.10 Dec/13 88.10 101.70 66.50 percent [+]
China 22.40 Dec/13 26.00 33.50 1.00 percent [+]
Euro Area 90.90 Dec/13 89.00 90.90 66.20 percent [+]
France 92.20 Dec/13 89.20 92.20 20.70 percent [+]
Germany 76.90 Dec/13 79.00 80.30 55.60 percent [+]
India 67.72 Dec/13 66.60 84.30 66.60 percent [+]
Indonesia 26.11 Dec/13 24.03 95.10 24.03 percent [+]
Italy 132.60 Dec/13 127.00 132.60 90.50 percent [+]
Japan 227.20 Dec/13 218.80 227.20 50.60 percent [+]
Mexico 36.90 Dec/13 33.10 37.20 17.10 percent [+]
Netherlands 73.50 Dec/13 71.30 76.10 45.30 percent [+]
Russia 13.41 Dec/13 12.74 99.00 7.90 percent [+]
South Korea 33.80 Dec/13 34.80 34.80 7.99 percent [+]
Spain 92.10 Dec/13 84.40 92.10 16.60 percent [+]
Switzerland 35.40 Dec/13 36.40 54.60 25.10 percent [+]
Turkey 35.85 Dec/13 36.18 77.90 35.85 percent [+]
United Kingdom 90.60 Dec/13 89.10 90.60 31.30 percent [+]
United States 101.53 Dec/13 100.10 121.70 31.70 percent [+]

Saxobank's 10 Outrageous Predictions For 2015 - A Reckoning's Coming Zero Hedge

Corrected for inflation, oil at $65/barrel today equals $20-40/b in the 1970s.

... ... ...

We saw it for one week of mayhem in October. If that's anything to go by, we are in for a rollercoaster ride in 2015. Tangible assets and production sit at all-time lows.

Paper money investment has crowded out productive capital while societies are dominated by hairdressers and bankers. We're losing the art of manufacturing.

[Dec 09, 2014] Is This The Mystery Crude Oil Liquidator The God Of Crude Oil Trading Is Out

Zero Hedge

Two months ago, when the first tremors in the crude market appeared, we wondered, jokingly, if one of the biggest crude bulls -the man known as the "god of oil trading - Phibro's (and formerly Citi's uber-well paid trader) Andy Hall was puking blood yet.


Any crude BWICs from Andy Hall yet?

- zerohedge (@zerohedge) October 2, 2014

But while we may have been joking, for Andy Hall things were only all too real. So real, in fact, he just lost his job according to Bloomberg.
•OIL TRADER ANDREW HALL SAID TO LEAVE PHIBRO BY YR-END: SOURCES

So is Hall's unwind the source of what some say is a relentless, rolling liquidation within the commodity space?

What is surprising, is that until September, Hall's Astenbeck wasn't doing too badly as the following letter shows

... ... ....

What is perhaps more ironic, is that Hall actually thought shale would be a dud, and that we are beyond the peak-shale era, which would send crude prices higher. Well, he may have been correct about the fate of shale oil, but not how it would get there, considering he himself would be one of the casualties in the process.

More ironic, the following blurb from Bloomberg: "Andrew John Hall -- known as the God of Crude Oil Trading to some of his peers -- has built his success on a simple creed: Everyone who disagrees with him is wrong.

For most of the past 30 years, that has been a killer strategy. Like a poker player on an endless hot streak, Hall has made billions for the companies for which he's traded by placing one aggressive bet after another. He was one of the few traders who anticipated both the run-up in and the eventual crash of oil prices in 2008.

Hall was so good that he bagged a $98 million payday in 2008, when he ran Citigroup Inc.'s Phibro LLC trading unit, and was up for about $100 million more in 2009.

In the end, Bloomberg Markets will report in its October 2014 issue, he couldn't collect the 2009 payout from Citi because an anti–Wall Street backlash against the bank -- which had just received a $45 billion U.S. government bailout -- led regulators to block it. No such bonuses have awaited Hall of late. He's racked up losses in two of the past three years.

His wager that oil prices would rise and rise has run headlong into an unanticipated energy revolution -- the frenetic push in the U.S. and elsewhere to wring crude out of shale. Shale drilling has boosted U.S. oil output to the highest level in 27 years; it helped the U.S. supply 84 percent of its energy demand last year. Oil prices, far from taking the upward trajectory Hall predicted, have been essentially unchanged since 2011.

For the 63-year-old Hall, who has used his wealth to build an extensive modern art collection, this has meant a sobering comedown. Assets under management at his Astenbeck Capital Management LLC hedge-fund firm fell to $3.4 billion in May, down from as much as $4.8 billion in January 2013. Astenbeck, based in Westport, Connecticut, fell 3.8 percent in 2011, posted a 3.4 percent gain in 2012 and slid another 8.3 percent in 2013, according to Astenbeck letters obtained by Bloomberg. This makes some wonder whether Hall has lost his touch.

"At one point, Phibro traders were the rulers of the world," says Carl Larry, a former trader who publishes a newsletter on oil markets. "The best always learn how to adapt. Maybe it's taking him longer to do that now. Or maybe his time has come."

The punchline: "Hall, based on comments in his letters to investors, is unfazed by the losses and secure in his view that the price of oil is destined to rise. In those letters, he regularly mocks those who are convinced that a shale boom will mean long-term cheap, abundant energy."

Oops.

As for the $64K question: has he liquidated his long positions yet, or is he yet to liquidate them? Considering the bankruptcy fate of Venezuela may well lie in the answer, we are confident we are not the only ones curious.

[Dec 09, 2014] High-Yield Credit Crash Accelerates

Submitted by Tyler Durden on 12/09/2014 - 09:47

High-yield energy bond spreads are crashing-er. Up 15bps to 880bps today, these are record wides and massively impact the economics of these firms - no matter how much investors want to ignore it. This is contagiously spreading across the broad high yield and even investment grade credit markets as high yield bond prices crash below the mid-October Bullard lows...

[Dec 07, 2014] How Russian goverment can respong to budget problems and how serious they will be ? by Vasily Koltashov

Slightly edited Google translation...
December 5, 2014 | vzglyad.ru

Much more interesting to create a miracle in the economy than to wait for its coming.

The flow of events in the economy and twists the monetary policy of Russia very strongly. Indicators deteriorate, global commodity prices are falling - we clearly entered a phase of turbulence which means the acceleration of the development of the new economic crisis.

Oil prices for some reason fell exactly at the moment when internal conditions of the new economic crisis in Russian economics became evident. And nobody is afraid of the words "economic crisis" anymore. This time the term came into our lives easier and simpler than in 2008. But this bout of economic crisis might be not as weak for Russia as in 2008.

"The monetary response to the" second crisis "in Russia yet drawn by itself - it is a game for the depreciation of the ruble, which are just a lot of power".

A lot of analysts focuses on the external causes of the troubles in the economy. And it would be better to note in 2012-2013 their beginning stage of this new crisis, not forgetting that the collapse of oil prices in 2009-2010 was not canceled, but merely postponed. Not everybody forgot about this waning: several people in recent years, sounded warnings that the price of black gold is able to drop to 60-70 dollars range. However, to give an accurate forecast of future oil prices would have been unthinkable.

Many political factors prevented more precise determination of when a new drop in oil prices can start. Meanwhile, as oil prices variation decline, the opinion that that range of 100-110 dollars per barrel is a new long term norm became dominant, and everything else - it's speculation.

For me, it was clear that the fall in prices was just postponed, and that oil prices just can't stay on this level for a considerable time without upswing in the world economy. So when the decline in activity in all economies of the BRICS started, and not only in them, the writing was on the wall.

The question of the level of drop of the current oil prices is not as difficult for analysts. It is evident that the US sanctioned and provided conditioned for them to fall. Suffice it to mention the removal of the blockade of Iran oil, the country which is very hungry in the oil sales, the return to the market of some fraction of Libyan oil, and additional supplies from Iraq.

... ... ...

[Dec 05, 2014] 150 Billion Reasons Why Low Oil Prices Are Not Good For The Global Economy

Dec 05, 2014 | Zero Hedge

While the clear narrative forced upon the investing (and consuming) public is that lower oil prices are great for the economy - which is utter crap (as we have explained here and here) - the fact of the matter both primary and secondary effects are extremely significant... and already occurring. As Reuters reports, global oil and gas exploration projects worth more than $150 billion are likely to be put on hold next year as plunging oil prices render them uneconomic as the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil.

As one analyst notes, "at $70 a barrel, half of the overall volumes are at risk."

knukles

Watch out for the fallout from the marginal producers... bank loans and high yield debt could be some problems.
Why?
Because the bankers assumed that $100 oil was in perpetuity.
Why?
I dunno.
No more than $60 oil gonna be in perpetuity.
Or lower.

Soon as Uncle cries Uncle, the Saudis will raise the price back and then after the carnage and the marginal producers gone...
Goooooly!

Another fabricated buncha poop is the reason prices falling like a rock is because we're energy independent, etc.
That's why the fell like a rock in one quarter.
We became energy independent so quick....
Goooooly!

... ... ...

Pareto

Pareto's picture

I agree. I think levered plays are geting shaken out for one, and for two, global demand simply isn't there as this site has eluded to time and time again. About 8 years ago, an NGL (or LNG for you international types) a guest analyst appearing on Bloomberg contended that among other things, "there is so much natural gas around you can swing a baseball bat and hit natural gas particles." Since then LNG hasn't left the land locked price of $3 - $5 range. He was spot on. While the duration of oil's apparent excess supply relative to demand may be different from LNG, it is in fact not the first time we have seen this: early 80's early 90's, 2000, 2002, 20008/09, and now the present.

Peak oil is a relative expression in my opinion - and we've been hearing that for well over 20 years. That thesis really hasn't worked in my opinion and I think the FED's monetary policy of ZIRP has had more to do with the rise in supply than anything else. I have seen a return to $30 oil at least 5 times in my life - there is no reason we won't see it again, or should I say potentially see it again.

Like all those years I identified - lower prices were indeed good for the economy, if by economy, you mean consumers and households. It was shitty for the stock market, for it seems that where commodities go, the stock market ultimately follows if only because the demand for raw materials and inputs seems to correlate well with the demand for everything else. The price of oil, while in part detemined by supply and availability, it is also determined by the end user. and its not just automobiles. Manufacturing consumes the lions share of oil demand, so, in my opinion a declining price of oil - all else equal - reflects a declining economy, but, this does not imply that it is bad for the economy. Big difference!

Always, declining prices, while they may be signaling diminishing demand, or recession and so on, is not a bad thing for the economy. For falling prices have always been the silver lining to a recession. Falling input costs such as fuel is a benefit and will provide reduced costs to many parts of the economy, not just drivers of autos and highway tractors. What I'd like to see, and what I hope to see is some return to affordability for all assets as a result - where specualtion - just for a while - takes a back seat to real durable demand - such as in housing.

I say for a while because the CB insanity will not end - and it will make every effort to correct this price decline. And so like a recurring bad dream Central banks will continue with aggressive yield (and interest rate) suppression, thus again distorting capital allocation whilst ensuring I stay a poor man by continuing to fuck over my savings account with negative rates. After 5 periods that I have personally lived through (and I am still young I think), this is what I know now - and not to expect anything different.

WhyWait

No extrapolation past 2016 is worth the paper it's written on - except as part of the conversation that's driving the investors toward panic.

Falling oil price shatters Asia's assumptions

FT.com

Realist

1. This piece is indeed helpful in understanding some aspects of the effects of the oil price slump on the world economy, but we do need much more information and analysis and less by way of sensational headlines.


2. Saudi Arabia is the swing producer, and also one the countries most reliant on oil revenues. We have been here before in 1986. The Saudis had then brought the American oil industry down on its knees over a period of four months or so, and it was only now with shale oil that the industry was beginning to recover- and then the Saudis give it another jolt now.

3. Countries such as Russia and Malaysia are neither the most dependent on oil, nor are these countries as bereft of other options as some of the more dependent ones.

4. For the world as a whole to shift back to hydrocarbon-intensive production technology, now that effort to shift away from it is beginning to pay off, is huge risk. Sunk costs cannot be recovered, and the consequences of that fact need to be explored and understood.

[Dec 05, 2014] Two cheers for the sharp falls in oil prices By Martin Wolf

Another point of view supporting hypothesis about inherent instability of oil prices inthe current environment. From comments: "The successful companies are leveraged to the hilt on a tsunami of cheap money and totally dependent on high realised oil price cash flow"

FT.com

Will these low prices last, or might they go even lower? I am not foolhardy enough to forecast oil prices: the price elasticities are so low and the margins between supply and demand so fine that it is all too easy to forecast wrongly. The case that the decline will prove temporary is that Saudi Arabia's desire to cripple production of unconventional oil, which demands a high level of capital expenditure, will swiftly succeed. Moreover, the lower oil prices, a hoped-for economic recovery and continuing rapid growth in emerging economies could boost demand for oil. In addition, argues HSBC, "global spare capacity is still very tight by historical standards and largely concentrated in Saudi Arabia". Having made their point, the Saudis might yet cut production.

... ... ...

First, a $40 fall in the price of oil represents a shift of roughly $1.3tn (close to 2 per cent of world gross output) from producers to consumers annually. This is significant.

... ... ...

It could create significant bankruptcy risks in the energy sector, particularly among the more highly leveraged oil producers. How far that would also damage lenders is unclear.

... ... ...

Fifth, the fall in energy prices will create shifts in asset prices. The exchange rates of energy-producing countries will be under downward pressure, already to be seen in the sharp fall in the Russian rouble. Shares in companies that benefit from lower oil prices, directly or indirectly, will rise. This might create new stock market bubbles.

Finally, falling oil prices threaten to make economies more carbon intensive and less energy efficient.

... ... ...

Much uncertainty remains over how low prices will go, and for how long. But to the extent that they reflect strong supply rather than reduced demand, they offer a welcome boost to the world economy.

fiatsceptic

MWolf's interest in the consequences of an assumed "structural downshift in prices" – descriptive/predictive economics -- is lukewarm. He wraps the analysis in a normative policy push – his withheld third cheer awaiting higher carbon taxes – of substantially greater interest to him.

Yet at least the FT's designated chief economic commentator suffers, here, the indignity of throwing more than a bone at basic descriptive economics before plunging into steep-sided political advocacy, in a welcome shift of approach toward that of the FT's real economic commentary leaders, Smithers and Davies. His doing so may, unfortunately, be merely a reactive dance around the policy elephant in the anti-fossil-fuel room, as reflected in *RiskManager*'s apt question: "what effect has the belief in Peak Oil and ever rising oil prices had on politics around the world and peoples "understanding" of how the world works?"

We need to see this big picture political/policy/perception question addressed in some depth, FT. Because doing so will grate heavily on FT received wisdom, it probably needs to be a commissioned piece.

RiskAdjustedReturn

@Novice

"Can someone please explain to me what the paragraph below means in layman's terms? I don't really understand inflation.. thanks"

I'd say that it reflects the fact that most of today's Keynesian economists fear deflation the way Catholics fear Hell.

Even something so unequivocally good as more energy sources (lower energy prices), which improve the living standards for most of the world's population, are a source of terror.

The Invisible Handcuffs

Oil is cost driver. The lower the price of oil the cheaper all production and ostensibly, lower prices for all produced goods. Lower prices across the board would be reflected in a decrease in the CPI which many look to as the bell weather for inflation (and when it decreases, deflation).

That would be my interpretation. I don't agree but I think that's probably what the intended menacing was.

So what

Futile to comment on oil price. When economies around the world were in trouble after 2008, price rose. Now that recovery is on way, price drops. I would have thought the other way around. But such is the nature of cartels. There are other issues at play here that are not market forces..

RiskManager

... ... ...

On financing shale, I expect but do not know, that financing of wells is done on short 2 year paybacks against prices that are hedged ahead when the financing is done. I think a 2 year payback is not as sensitive to higher interest rates as most people think as they are thinking in terms of 10+ year conventional well financing against unhedged future prices.

Highland Chief

@risk manaher (and others)

I am continually underwhelmed by the knowledge of the oil business from both a technical / commercial and political point of view presented by contributors here and in many other forums. (It was displayed in its most depressing form during the commentaries presented by both sides of the debate in the run up to the independence referendum in Scotland)

The word "reserves" is banded around with no understanding of what it means. The stuff in the sub surface remains "resource" until it can be technically and commercially demonstrated to be recoverable.

Using an expression "geological reserves" is meaningless / misleading. Without doubt the unlocking of shale oil (and gas) resources by applying the technologies of horizontal wells and hydraulic fracturing has been a success. However, the business is an intensive user of capital, physical resources (drilling rigs and associated equipment) and water. The successful companies are leveraged to the hilt on a tsunami of cheap money and totally dependent on high realised oil price cash flow - we have the seen the impact already and it will become worse. The pressure on managing water use will only increase. The net result of the foregoing will be much of the so -called reserves remaining just what they are: "contingent resource".

Does anyone believe that this has all not been thought through and through by the strategic planners in Saudi Aramco and the relevant Saudi Arabia government departments?

By the way, the international oil business is like no other - just watch the film Syriana (2005) - it is closer to the truth than many oil companies executives and governments are prepared to admit.

RiskManager

@Highland Chief I stand corrected on the use of the word reserves but would take issue with your point on the scalability of shale production. I think this is precisely what Saudi planners have belatedly realised, that if shale is allowed to take off outside the USA their oil price is capped. Hence they are moving now, or rather not responding, so that shale economics can be destroyed and the existential threat removed. I think however they will fail. Yes shale is capital intensive, and so is most oil exploration.

... ... ...

Back to reserves though, US shale now produces about 2.5 mb/d, all of which was just 5 years ago "contingent resource" and today is "reserve". The idea that only US shale resources can become reserves is ridiculous I propose.

MikeWild

If the 'The tight oil supply by country chart' from BP is a reasonable estimate, then shale oil will play a relatively small role in replacing naturally depleting conventional oil fields.

It's worth bearing in mind that the oil majors have been investing record sums over the past 10 years only to stand still in terms of production volumes.

A conservative estimate is that 3mb/day of new production needs to be added each year to offset depletion of existing fields. So the IEA is probably right in that the middle east (Iraq especially) will provide the bulk of future increases in oil production.


PGL

Is the oil price collapse a conspiracy to starve Iran of funds and thus for Hisbollah et al.?

As once advocated by Shimon Perez in a talk show?

Or is this just a fortunate side-effect?

Johnny Julius Johnson

@PGL

The timing of the collapse is too timely. It occurs just in time to give Putin pause before further testing the material composing NATO.

Brad

Thank you for preparing a well researched, supported and written article. The timing of price and demand feedback loops are important to consider when looking at impacts. Interesting to see fairly high elasticity of low mileage vehicle demand to oil price - as oil prices go down, low mileage vehicle sales go up fairly quickly. Lower prices will also lessen economic signals around energy efficiency, subtly encouraging less efficient investments and activities. Simultaneously, as accurately identified in the article, consumers and their economies will benefit significantly from an additional $1.3 trillion in their pockets.

Simultaneously, we will also see a pull back in capital allocations from the more costly oil exploration and production investment opportunities. Countries which export oil will suffer a reduction in revenues, and pass the buck on who will cut production first. We also are seeing a strengthening dollar, which will encourage an increase in international purchasing power on the part of US consumers and businesses. In classic terms, demand will marginally increase, economic activity will increase, and production will pull back. The feedback cycle may take as long as 18 months for the effects to be fully realized.

From a broader perspective, as recognized years ago by the NYT, oil prices are in a long term ascendancy, punching through a series of price thresholds. Although we are now experiencing close to a 40% reduction in oil prices in the past six months, it is not permanent, and will be reversed. The continued upward pressure on oil prices is removing an extremely valuable resource from the global economy, constraining global economic growth to productivity increases.

Economic growth is constrained when oil prices are high, to wit, several European countries may be sliding back into recessions, as well as a modest pull back in China.

It has been estimated that oil prices above $110/bbl constrains economic activity. As we draw down lower cost energy resources, our economies will simultaneously experience lower and lower levels of economic activity.

Stretch

oil prices have been engineered power by the USA using help from the Saudis in order to weaken Russia and Iran in order to make them bend to the USA's rules and therefore enable the US to strengthen its 'pivot to the east' - an example would be weakening Russua in order that it accepts NATO forces on its doorstep: Ukraine.


Novice

good article!

Can someone please explain to me what the paragraph below means in layman's terms? I don't really understand inflation.. thanks

'Second, the fall in energy prices will lower already-low headline inflation. This creates two offsetting risks. One is that it might entrench expectations of ultra-low inflation. An opposite risk is that it might encourage central banks to ignore threats of rising underlying inflation. On balance, the former is at present a greater threat than the latter.'

Skywatcher888

@Novice If one novice might answer another, in a recovering global economy, some sort of inflation is to be expected because once people are willing to pay more for a commodity, that increase tends to spread around like a drop of oil on a bucket of water. Inflation is bad, particularly for financial institutions, because cheaper (more worthless) currency are used to pay back loans previously made with more expensive (valuable) currency.


The drop in oil prices is likely to mask that impending inflation because on the whole both the cost of energy intensive goods and transportation are lower. Once that gets into people's heads that inflation is not a problem, it's hard to get them out of that mindset. The second consideration might be that central banking authorities that are monitoring stimulus spending and other economic meta might also become somnolent that inflation is not a risk, but as the author says, this is less likely a possibility since they are the ones who's bottom lines are affected by inflation the most.

[Dec 05, 2014] A Note on Oil Prices and the Economy by Paul Krugman

If faling oil prices signify instability of the current energy sector (and by extension over-financialized US economy as a whole) , then current crash of oil prices is at best a mixed blessing. Krugman thinks "But fracking ... means that some of the producers ... engaged in a lot of investment spending. So you could make the case that falling oil is less expansionary than it used to be, and even, possibly, that it's contractionary."
December 4, 2014 | NYTimes.com

... ... ...

You might think that this surge in production, by reducing imports, has left the US relatively insulated from oil shocks. But we do need to remember that on the eve of the latest plunge real oil prices were very high by historical standards, so that oil imports as a share of GDP remained quite high - in fact, early OPEC high:

... ... ..

Because we once again have a significant sized domestic oil industry, falling prices now create losers as well as winners within the US. The gains from falling prices exceed the losses, and if the marginal propensity to spend is similar that should tell the tale for aggregate demand. In fact, in the old days when domestic oil largely meant Texas billionaires and all that, it was reasonable to argue that the internal redistribution further increased demand when oil fell.

But fracking ... producers are very different; and among other things, they're engaged in a lot of investment spending. So you could make the case that falling oil is less expansionary than it used to be, and even, possibly, that it's contractionary.

Selected Skeptical Comments

Chris, Sydney, Australia

Paul this is my take on the situation since most of this increase has been driven by bringing online shale oil production we could be in for a period of unstable prices. Shale is not cheap oil to extract much like tar sands, Saudi Arabia and a few others have production costs probably 25% of shale so if they stand firm on production and drive prices low enough shale and tar sands become unprofitable to extract and they stay in the ground.

Then as demand rises due to cheap prices, supply again falls below demand or close to it, prices rise and the process starts all over again.

For much of the history of oil supply has always exceeded demand. For many years the Texas railroad commission regulated production to avert a boom bust cycle. It is much more complicated now as we have integrated world markets but there are only 2 or 3 individual producers who can truly have an effect on prices. Interesting times ahead I think.

Juan Carlos Zuleta, Bolivia

If falling oil is contractionary, does this mean that there's space for government intervention to:

  1. Help shale oil producers stay competitive for the health of the US economy; and
  2. Keep the oil prices under control for energy security reasons?

pz, colorado

Fracking has been on a steady climb since 2008, China demand for oil continues to climb rapidly, the U.S. economy is rebounding and demand for oil is climbing, and yet oil prices drop 35% in a few months?! Fracking is producing just over 2M bl/day in a world market of 90M bl/day.

This drop makes no sense whatsoever. I suspect the political forces are having a far bigger impact on price than the supply/demand forces.

JH, San Francisco 5 hours ago

Here's Martin Wolfs shockingly good article on oil.

http://www.ft.com/intl/cms/s/0/18a2df62-7949-11e4-9567-00144feabdc0.html

[Dec 05, 2014] FirstFT (the new Lunch Wrap) by Fiona Symon

Crash of oil prices now creates losers as well as winners within the US.
Dec 04, 2014 | ftalphaville.ft.com
The oil market rout will shrink the cartel producers' annual revenues by $316bnand shift investment patterns, analysts estimate. It has made some investors so bearish they are buying contracts that pay out if prices drop below $40 a barrel – a level last traded during the bleakest chapters of the financial crisis.

Qatar has replaced the head of its $300bn sovereign investment fund following a change of leadership in the Gulf country.

Asset managers are cutting energy company exposure. (FT, WSJ $)

[Dec 05, 2014] Short-Term Energy Outlook

So the idea of blending gasoline with ethyl alcohol is dead...
U.S. Energy Information Administration (EIA)

Global Crude Oil Prices

North Sea Brent crude oil spot prices averaged $87/bbl in October, a decrease of $10/bbl from September and the first month Brent crude oil prices have averaged below $90/bbl since November 2010. The combination of robust world crude oil supply and weak global demand contributed to rising global inventories and lower crude oil prices. The forecast Brent crude oil price averages $83/bbl in 2015, $18/bbl lower than projected in last month's STEO.

The monthly average WTI crude oil spot price fell from an average of $93/bbl in September to $84/bbl in October. High refinery runs contributed to the discount of WTI crude oil to Brent crude oil narrowing from an average of $8/bbl during the first half of this year to an average of $3/bbl in July. More recently, lower-than-expected demand in Europe and Asia combined with continued growth in global liquids supply depressed global crude oil benchmarks like Brent, contributed to the WTI discount to Brent again falling to $3/bbl in October. EIA now expects WTI crude oil prices to average $80/bbl in the fourth quarter of 2014 and $78/bbl in 2015, $11/bbl and $17/bbl lower than projected in last month's STEO, respectively. The discount of WTI to Brent crude oil is forecast to widen slightly from current levels, averaging $6/bbl in 2015.

Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the forecast levels (Market Prices and Uncertainty Report). WTI futures contracts for February 2015 delivery, traded during the five-day period ending November 6, averaged $79/bbl. Implied volatility averaged 28%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in February 2015 at $63/bbl and $99/bbl, respectively. Last year at this time, WTI for February 2014 delivery averaged $95/bbl and implied volatility averaged 20%. The corresponding lower and upper limits of the 95% confidence interval were $80/bbl and $112/bbl.

[Dec 3 2014] Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives by Michael Snyder

Posted by wa8dzp

[Note: This item comes from friend David Rosenthal. David's comment:'And why the Citi provision is so urgent'. DLH]

Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives

Dec 3 2014
<http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives>

Could rapidly falling oil prices trigger a nightmare scenario for the commodity derivatives market? The big Wall Street banks did not expect plunging home prices to cause a mortgage-backed securities implosion back in 2008, and their models did not anticipate a decline in the price of oil by more than 40 dollars in less than six months this time either. If the price of oil stays at this level or goes down even more, someone out there is going to have to absorb some absolutely massive losses. In some cases, the losses will be absorbed by oil producers, but many of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts. The companies enter into these derivatives contracts for a couple of reasons. Number one, many lenders do not want to give them any money unless they can show that they have locked in a price for their oil that is higher than the cost of production. Secondly, derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace. These dramatic swings rarely happen, but when they do they can be absolutely crippling. So the oil companies that have locked in high prices for their oil in 2015 and 2016 are feeling pretty good right about now. But who is on the other end of those contracts? In many cases, it is the big Wall Street banks, and if the price of oil does not rebound substantially they could be facing absolutely colossal losses.

It has been estimated that the six largest "too big to fail" banks control $3.9 trillion in commodity derivatives contracts. And a very large chunk of that amount is made up of oil derivatives.

By the middle of next year, we could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but the price has fallen to about 50 dollars a barrel.

In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical.

At this point, some of the biggest players in the shale oil industry have already locked in high prices for most of their oil for the coming year. The following is an excerpt from a recent article by Ambrose Evans-Pritchard…

US producers have locked in higher prices through derivatives contracts.

So they are protected to a very large degree. It is those that are on the losing end of those contracts that are going to get burned.

Of course not all shale oil producers protected themselves. Those that didn't are in danger of going under.

For example, Continental Resources cashed out approximately 4 billion dollars in hedges about a month ago in a gamble that oil prices would go back up. Instead, they just kept falling, so now this company is likely headed for some rough financial times…

[Dec 03, 2014] There Are 300,000 Iraqi Barrels Signaling Oil Glut Will Deepen

Demand for oil continues to fall far faster than production, and worldwide oil stocks remain at high levels
Dec 03, 2014 | Bloomberg
OPEC's 12 members pumped 30.56 million barrels a day in November, 424,000 barrels a day less than in October, according to a Bloomberg survey of oil companies, producers and analysts. That exceeded its ceiling of 30 million barrels a day for a sixth consecutive month.
"Incremental volumes of oil out of Iraq will only entrench the supply surplus," Harry Tchilinguirian, head of commodity markets at BNP Paribas in London, said by phone Dec. 2. "Following an OPEC decision not to adjust its supply downwards, we now have a possibility that OPEC supplies will increase."

[Dec 03, 2014] The Shale Retrenchment Begins

Dec 03, 2014 | the-american-interest.com

New well permits fell almost 40 percent from October to November as shale producers adjusted course to account for plunging oil prices.

[Dec 03, 2014] Sub-$50 Oil Surfaces in North Dakota Amid Regional Discounts

Low prices will affect not only shale oil in areas without pipelines, they will affect corn alcohol production (it is a goner) as well as wind and solar energy production (which became loss leaders)
Dec 03, 2014 | finance.yahoo.com

Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.

That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.

It's more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.

Reallocating Capital

"To a producer in Wyoming, if Brent's $70 then I'm at $50, then I have to start asking does it economically make sense to keep drilling," Auers said. "They might start reallocating capital, you might see projects slowed or shut down."

... ... ...

One possible effect of lower prices is that companies may focus their spending on places where the infrastructure already exists or is on the way, said Carl Larry, a Houston-based director of oil and gas at Frost & Sullivan.

[Dec 03, 2014] Canada's Oil Dividends Threatened as $70 Crude Hurts Cash

Bloomberg

...Canadian Oil Sands Ltd. (COS) will cut its quarterly dividend 42 percent to 20 cents a share in late January, the Calgary-based company said in a 2015 budget forecast statement today after the close of North American markets.

... ... ...

"The true sustainability of the dividend model at current oil prices in Canada is highly challenged," said Nuttall, who oversees C$120 million ($106 million) at Sprott in Toronto. He predicted capital spending will fall 15 percent next year and dividend reductions may follow if prices stay low. "The current oil price does not work for the industry."

Canadian energy companies, such as Baytex Energy Corp. (BTE) with average dividend levels higher than their U.S. peers, are grappling with tough choices after oil fell as much as 40 percent from its high in June. The plunge accelerated last week after OPEC committed to maintaining its current output target amid a supply glut and a global battle for market share.

[Dec 02, 2014] In Diplomatic Defeat, Putin Diverts Pipeline to Turkey

This is an important diplomatic victory for the US, but this is a diplomatic defeat for Europe. They lost their gamble to transport Azerbaijan gas using Gazprom pipes. From comments: "Drop in oil won't help us anymore than Europe: Slow growth, high unemployment, and social fiscal policies in the EU will not be affected. And in the US, this must be sustained for at least two-three years--ain't gonna happen. Good Christmas headlines but the problems go so much deeper. "
Dec 02, 2014 | NYTimes.com
norman pollack
is a trusted commenter east lansing mi Direct link

What "Diplomatic Defeat"? How Putin's decision can be construed as a defeat at the hands of the US/EU reveals an NYT deep bias against both Putin and Russia (Roth's aside, "rhetorical twist of the knife," should have been flagged as rancid hate-mongering, not the first for that reporter.) Try for once an objective appraisal. This route-shift will directly hurt Western Europe, encourage closer Sino-Russian relations, and increase Turkey's role in the Middle East (to the obvious consternation of Israel--after the aid-altercation to Gaza).

If anything, Putin took the principled stand, as evident by the original route which, given the opposition, he was forced to change. I may sound bitter, but I think the US is steering toward a renewed Cold War under Obama, taking on Russia and China as putative interrelated THREATS. Ultimately, this will backfire, as the global geopolitical framework experiences a decentralization from US unilateral hegemony.

Europe will shiver. But The Times will gloat at what it takes as the West's having given Putin a black eye. Meanwhile, both Russia and China are dramatically strengthening, not only because of their respective internal development, but also US go-for-broke diplomatic/military shortsightedness.

By all means, Keystone uber alles, fracking and all.

DanGood, Luxemburg

Who is the "loser" here: Bulgaria, EU or Russia? This article grabs at straws to make the obstacles presented by EU into a "defeat" for Russia. But who needs the gas?

It borders on pathetic to see the bastion of capitalism using the capitalist system as a weapon. Not only does this go counter to the idea of free enterprise but it shows the west for being what it has become: the world's new bully and poodle to USA.

Russia can sit on its gas for a long time. Meantime EU is weakened by its need to import ever more expensive energy. And can any one blame Russia for wanting to bi-pass Ukraine?

Thomas, Singapore

A defeat for Putin?

That must be a different planet, the NYC writes about.
In fact, the only losers are the Europeans who now ill have to purchase more expensive oil and gas from their own sources in the North Sea and from the Middle East.

The winners are Turkey and, on the other side of Russia, China, who will now get cheaper oil and gas from Russia.

Putin has just done what every business would do, find other buyers when one or more buyers are gone.

So energy costs in Europe will rise.
And that is a victory?

T. Anand Raj, Madras, India

I think, we need a strong person like President Putin, to take on the U.S. and Europe. Let not the fate of this world be decided by the U.S. and its allies. Whatever the U.S. says is not gospel truth, to be strictly adhered to by the rest of the world. Mr.Putin was forced to defend his country because of NATO's decision to encircle Russia. This is a direct threat to Russia. Any President, with a strong will power, would have taken such steps to safeguard his nation.

Whatever maybe America and Europe's definition for Russia's intervention in Crimea and Ukraine, the fact remains that Russia was forced to take certain steps for its defence. If the U.S. could justify its intervention in Iraq, so can Russia. Just because a pipeline is re-directed it does not mean that Russia has been defeated, at least diplomatically. This may be a set back. But Mr.Putin is not out.

Mikhail, city of Sudak, Crimea

Who will pay bigger price for Gas in Europe shipped by gas tankers?
Who will be in charge after Ukraine will steal gas from Europe pipeline ( as it already did 3 years ago) .

Why Europe buy Russian gas through Nord stream and do not like do the same with the South stream , who are interested in that? German companies who trade it to South countries?

Why Europe buy anything in Russia ? It should buy in and pay everything to US, why to trade with other countries?

I m tired of politicals and well paid journalists who hurt business. Let's see results of future elections in Germany, lots of EU businesses lost money thanks to this new policy. People should understand that Russia (as any other independent country) had its own interests. Ok , you like to make coups in Kiev and invite it to NATO, you like bomb Serbia, Liviya, invade Siria, Iraq, Afganistan? - ok , please pay for it. Common people must understand that this is not devil-putin, as media color him, it will be another putins, because russians have own interests and vote for this. Please mention75-85% of Russian population support mr Putin efforts . Probably we need to seat and agree?

Todd S., Ankara

> "Russia is the most important international ally of President Bashar al-Assad of Syria, while Turkish-Syrian relations are tense."

Turkish-Syrian relations tense? That is an understatement - Turkey is actively hostile against Syria!

Iggy, Natich

I don't see EU winning much here. They don't get what they wanted - direct access to central asian gas through Russian pipeline. Money from gas transit won't save Ukraine economy anyway (if EU cares, but they don't) and Russians can still close the valve if they feel threatened enough. Loose-loose situation if you ask me.

You'll be surprised to know that many Russians actually welcome falling oil prices and ruble. They hope it will force government to improve as focus on strong energy sector wasn't healthy for the rest of economy. This is who they are - willing to survive hardships if they see greater purpose in it, just like in the soviet era. I don't think regime change hopes the West has have much ground, it could take decades to weaken this resolve.

abo, is a trusted commenter Paris

This is a victory for the US, not for Europe. Europe will pay more for its energy and lose out on jobs. It will also have to depend more on the US - surely the least reliable trade partner in the world. Too bad European leaders are so spineless they can't or won't stand up to America.

AmateurHistorian, NYC 6

So it is a diplomatic victory for EU by preventing its member from buying gas at a discount? I can understand US and EU big-oil/gas having a victory parade as they can now sell fracking gas from the US at a premium but how is this a victory for people in Southern Europe? Looks like Brussels only cares about core Europe again.

TR2, San Diego

Same-same here in the US. Politics is the same Putin's world or Obama's, just different metaphors for the same ills.

Ukraine is bankrupt getting IMF money, i.e., US tax dollars by other means, covering much debt bought by Americans who are working on backdoor payments from the EU and the US.

Drop in oil won't help us anymore than Europe: Slow growth, high unemployment, and social fiscal policies in the EU will not be affected. And in the US, this must be sustained for at least two-three years--ain't gonna happen. Good Christmas headlines but the problems go so much deeper.

What happens, for example, when all that debt acquired over the last five or six years must be serviced at higher interest rates? Oil at $21 a barrel forever, which is what Saddam promised if we'd let him have Saudi Arabia, will not help.

Until the middle class comes back with strong manufacturing growth, a strong dollar, and Fed not buying everything but the shoes off your feet, there is no light in that tunnel.

[Nov 30, 2014] How Low Can Oil Go by Jesse Colombo

Nov 30, 2014 | forbes.com

As I wrote in my original crude oil bubble report, I believe that the popping of the oil bubble will also lead to the popping of a bubble that developed in the U.S. shale energy industry. To summarize, the shale boom was driven by a combination of artificially high oil prices after 2009 and cheap credit in the form of junk bonds that were used to finance the shale producers' drilling activities.

Many shale oil companies have production costs in the $70s, so a sustained drop below this level will cause many of these companies to shut down and lay off workers. The energy industry is notorious for its violent booms and busts, so another bust would certainly not be unprecedented.

The early-1980s oil bust severely harmed the oil-dependent economies of Texas and Oklahoma.

[Nov 29, 2014] Fracking Fail 'US shale oil production to decline in 2015' Crystal Jefferson

Increased supply and revaluation of dollar are two factors that work together.
Nov 27, 2014 | YouTube

On the issue of fracking, Ed Hirs, who runs the independent oil and gas company Hillhouse Resources, says many American fracking companies can't turn a profit at prices below $70 dollars per barrel.

[Nov 29, 2014] Putin expects the oil market rebalance at the end of the first quarter or the middle of the next year

Nov 28, 2014 | svpressa.ru

Russian President Vladimir Putin said that Russia was not surprised by the decision of OPEC oil production Unabridged.

"We are satisfied with it as a whole, and we are not seeing anything special. We have a winter ahead of us and I am sure that in the first quarter or the middle of the next year, the market will rebalance "- said Putin on November 28 at a meeting with the leadership of the French Total.

The Organization of Petroleum Exporting Countries at a meeting on November 27 in Vienna unanimously decided to maintain the current oil production quota at 30 million barrels a day. Against the background of this decision, Brent crude fell to $ 71.12 a barrel. In the wake of this came the fall of the Russian currency - the dollar rose to 49.32 rubles, euro - up to 61.41 rubles.

[Nov 29, 2014] The crash of the policy of " oil pipeline to the West"

svpressa.ru

The head of Russian ministry of Economic Development Alexei Ulyukayev said that the Russian economy will withstand lower oil prices.

"We will not crash in the coming years" - with somewhat ambiguous optimism he answered to reporters when asked about the future of the Russian economy.

What is behind the minister optimism minister he did not elaborate. In this recently published his ministry data showing that falling oil prices will inflict 2.5 times more damage on the Russian economy then sanctions. Due to sanctions Russia is expected to lose about $40 billion a year, while the loss from the fall in oil prices is estimated in a range 90-100 billion a year.

That is, the total annular loss of the Russian budget might well be around $140 billion. Which is approximately seven percent of the Russian budget ( all health spending in russian budget in 2014 were exactly half of this figure).

How the country will be plugging financial holes? Should we expect that Russian economic policy will became more nationally oriented just as the Russian foreign policy recently became. Will Russia be able to fill the hole in the state budget by the development of the domestic industry making it a new sources of revenue ?

- Ulyukayev should know that the general health of the sovereign nation economy should not depend on any single industry, - says Oleg Bogomolov academician. - Falling oil prices would not be so scary if we have the balanced economy. But we at the same time have huge problems in agriculture, manufacturing. The human resources potential is also not very encouraging. Especially in areas which require highly skilled workers. Even such a thing as the general cultural level of the population affects the economy.

That mean that in case negative trends persists the economic collapse is quite possible. It is here that we must take action to correct the effects of neoliberal reforms that during a quarter of a century of thier dominance destroyed many areas of our economic life.

"SP": - Among experts now poplar is the view that we made a sharp turn in our foreign policy. It became the policy in our national interests. Are there any signs that a reversal might occur in the economic policy?

- There is a strong resistance on the part of the neo-liberal elite (primarily representatives of big comprador business oligarchs). This group does not want to notice that even in the West goes rethinking of liberal economic doctrine. Looks like Vladimir Putin envisioned some correct system approaches, but they are by-and-large paralyzed.

"SP": - Can we expect that the current situation will really push the process of import substitution and the development of own production?

- I do not see the part of the Russian leadership a serious look at this problem. In economic theory has long been known that large countries with a large population and large areas should focus on the development of the internal market. And if we look at China, the US, we see that they do exactly this. Russia during the last 2 decades has reoriented its development into exports-import economy. a part of neoliberal world. We pushed the export of hydrocarbons in order to cover our needs for most other goods. As a result, a number of industries operating in the domestic market, deteriorated to the critical condition. There is still no clearly expressed set of measures of how to correct this situation, As for import, it is rather a local measure, which is only slightly correct the situation on the domestic market. Well, we will no longer raise pigs and chickens ...

Sanctions imposed against Russia and authorities are counted that we will fall into half-starved existence. And we have a year 40 million hectares of arable land abandoned and overgrown forest. But I have not heard that one of the senior officials simply set the task to restore the area of cultivated farmland at least to the 1991 level. We need a radical turn. It is necessary to rebuild the economy as a whole so as not to be in such an extent dependent on the vagaries of the global market forces. We must decide whether we want, as before, depend on world oil prices, or will achieve a reasonable combination of work on domestic and international markets.

"SP": - That is a statement Ulyukayev that the economy will not collapse, just a populist gesture?

- It's a propaganda statement from which it does not follow that Ulyukayev understands the complete situation in the economy and honestly can tell us about it.

- A lot depends on what you mean by the word "collapse", - says Director of Public Relations of the financial group "Kalita-Finance" Alex Vyazovsky. - I, for example, today journalists overload my phone like as we have Black Friday in the foreign exchange market. The ruble fell against the dollar by more than five percent. Everyone is asking: what to do with money. That is, there is a real flight from the national currency. I say that there are multiple good investments for speare ruble funds - luxury car models, gold, dollars and euros. Perhaps this is not necessary the beginning of the collapse of the Russian economy. But the panic in the currency market is strong. If the panic spread to the stock market, the housing market, that's when you can say that the collapse began. But his first signs we are already seeing. They can still be cut short. Our central bank has large foreign exchange reserves, and all can not wait when it comes to normal financial interventions, will shorten the speculators capabilities of 'attacking' the national currency. If this does not happen, sooner or later, the crisis will move to manifafturing and to the services sectors.

"SP": - Are there any signs that economic policies have become more nationally oriented?

No, we still see the course on strengthening the oil and gas dependence of Russia from the West. We see no progress towards the new industrialization. That elite that is in power - they are the brains of the the policy of "oil pipe". They know how to manage oil and gas revenues, understand how to tax them. they do not know how to develop domestic production, and do not want to know yet. There is a slim chance that the sanctions and other unpleasant consequences of confrontation with the West will force them to think seriously about the development of domestic production.

- I think that in the coming years there is really not a chance for any tragedy for our economy - says financial analyst company "Alpari" Alexander Razuvaev. - There will be a process of import substitution and export growth. We have in recent months growth of manifacturing by 3 percent.

"SP": - $ 140 billion of losses we can somehow compensate?

- We can not. It is about 7 percent of GDP. In my opinion, it's not much but it will be bad if we will seriously decrease oil production. And it will start to decline, if we can not drilled in the Arctic. But even in this case, a noticeable drop in the volume of oil production will not begin in the next few years.

[Nov 29, 2014] Oil Tanks After OPEC Fails to Cut Production; US Shale Gas Targeted

The key question is: How much damage could a run on high yield debt do to the broader market?
naked capitalism
The ripple effects hit currency markets and, of course, energy stocks. The Wall Street Journal emphasized the potential upside for the US economy, with lower energy prices giving consumers more money to spend elsewhere. Energy importing countries will also benefit. In keeping with our reaction to Saudi's earlier decision to let oil prices slide, more and more commentators are seeing the OPEC refusal to support the market as at least in part designed to target the US shale gas industry. despite official denials. From the From the Financial Times:

"I wouldn't call it a price war, but it's a very aggressive test for US shale," said Jamie Webster, oil analyst at IHS Energy, a consultancy. "It's a new gambit for Opec to try."…

Amrita Sen, oil analyst at Energy Aspects said: "This is becoming a battle of [who has] the deep pockets and survival of the fittest."…

Although some analysts had thought the cartel may surprise observers with an output cut, others argued that driving prices higher would only encourage US shale drillers and other high-cost producers. All the while, Opec would only continue to lose market share, they said.

"Those producers that have been hardest hit by the oil price drop have been persuaded [ . . .] that the only way to counter the surge in US shale oil production is to allow lower prices to pare back supply over time," said Bill Farren-Price, head of Petroleum Policy Intelligence.

But it isn't clear how many North American producers will blink first in this game of chicken. From the Journal:

While some, including ConocoPhillips Co., have already announced plans to spend less in 2015, many more won't unveil next year's budget for several more weeks.

In Canada, industry officials said the slide in prices wouldn't likely lead to immediate production costs. Suncor Energy Inc., Canada's largest oil sands producer, still expects crude to recover to "the $90 to $100 range," chief executive Steve Williams said.

In a separate story, the pink paper points out that this de facto price cut is shellacking prices of bonds issued by energy companies:

Since the start of the year, the average yield for junk-rated energy debt has risen from 5.67 per cent to 7.31 per cent, while total returns for the year hover at 0.13 per cent. In contrast, the overall junk bond market has a total return for 2014 at 4.17 per cent, after a price loss of some 2 per cent.

Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors, said the drop in energy debt prices this year has effectively wiped out the 6 per cent coupon paid by the paper and adds "energy is heavily over-represented in the distressed segment" of the junk market.

Currently, 180 junk debt issues in Bank of America Merrill Lynch high-yield index are trading at very low prices, representing 7.9 per cent of the overall market, said Mr Fridson. Within the current distressed sector of the market, energy accounts for 52 issues, a share of 28.89 per cent.

The pressure on the junk market has come as the broad US equity market has continued rallying into record territory. During the near six-year bull market for risk assets, prices for both low-rated debt and equities have risen largely together, with the current divergence becoming a major talking point among investors.

While the US default rate remains low, such a measure is backward looking and was also moribund in 2007 ahead of the financial crisis. Deutsche Bank credit analysts recently said that if oil drops to $60 a barrel it could be the catalyst that pushes some energy companies into trouble and sparks a rise in the US corporate default rate.

An open question is how many banks have high exposures to energy companies. Keep in mind, as many banks learned to their woe in the early 1980s oil rout, that it isn't just the direct exposures that wind up counting. Being a lender to real estate developments in oil boom towns also puts one at risk.

In the 1970s, the Saudis inflicted pain on the global economy via price hikes that kicked rising inflation into a higher gear. Riyadh is again amplifying a broad international trend, this time towards deflation. But in the first use of the oil weapon, central bankers were eventually able to strangle inflation by engineering a deep recession.

By contrast, monetary authorities's creative efforts to beat incipient and actual deflation has looked like the cliched pushing on a string. This OPEC-induced energy rout is unlikely to be as damaging near-term as the 1970s oil shock, but the impact it does have may prove to be harder to remedy.

Aaron Layman, November 28, 2014 at 7:59 am

It seems Houston area economists have been surprised by oil's sharp decline. So far construction is still going strong, but multi-family and higher end of outer burbs is looking pretty saturated…

http://aaronlayman.com/2014/11/katys-high-end-housing-market-take-hit-collapse-oil-prices/

Code Name D November 28, 2014 at 1:23 pm

Rule one: Never pretend to posse the power of telepathy. So unless you can show me in writing or a speech where OPEC says this, I remain skeptical as to their motivations. And even then, OPEC is not a monolithic organization that is driven by one opinion. There is likely an array of rational to convoluted thinking that leads to its actions.

That said, I am still skeptical of any alleged attempt to suppress alternative sources. One, OPEC isn't actually doing any thing – they are standing pat on its quotas. Passive action such as "not making any changes" doesn't strike me as a convicting nefarious master plan.

Two, US unconventional oil is already top heavy as it is. Its damage and instability is entirely self-inflected. It's not a viable threat to OPEC. Why bother to assassinate a dying man?

Three, investments into renewable energy systems are not likely to be influenced or deterred by short term market fulgurations. Lower prices will sour their prospects only in the free market nations where pro-oil propaganda is already decimated without challenge.

Far more likely, this is just an ideological doge to place blame on the collapsing OPEC market, rather than confronting yet another epic free market failure.

peteybee, November 28, 2014 at 11:17 am

I think China is still adding tens of millions of motor vehicles / year to its fleet, while the US fleet has reached equilibrium.

Quick google search shows US vehicle-miles have been flat for a few years, and declining per-capita (this is a good thing, IMO). China still rising, expected continue. PS – thought this article was interesting, more coherently describes some themes from before…

https://rbnenergy.com/stop-in-the-name-of-opec-why-u.s.-shale-crude-production-won-t-halt-overnight

hunkerdown November 28, 2014 at 1:55 pm

Do all Americans believe that every long game is a conspiracy and therefore cannot and does not exist?

different clue November 28, 2014 at 3:50 pm

Not all do. Some don't. I don't.

The theory that KSA is taking easy non-action to keep oil price low enough long enough to exterminate high-cost rivals now, so that KSA can raise prices later without any in-the-meantime-exterminated rivals to worry about . . . makes sense to me.

jgordon November 29, 2014 at 2:57 am

This is an illustration of a peculiar form of propaganda in America, wherein wherever the fact that various elites are conspiring together to screw other elites or people in general various words such as "tinfoil" and "conspiracy" are thrown around to "discredit" whomever had the gall to point out that elites are constantly conspiring with each other to screw people over in ever newer and more inventive ways. Obviously this is a strategy used by elites, and one that really only works on a populace as gullibly ignorant and stupid as Americans normally are.

Jim Haygood, November 28, 2014 at 9:13 am

Monetary authorities' creative efforts to beat incipient and actual deflation has looked like the cliched pushing on a string.

'Inchoate' might be a better adjective than 'creative.' Hurling spaghetti at the wall to see if anything sticks doesn't take any creativity; just desperation.

While the late-2008 oil price slide briefly pushed the US into deflation, that was in conjunction with a financial crisis and deep recession. So far, deflation is not very likely this time round. The main risk is that central bankers again try to 'do something' even more destructive.

Rene, November 28, 2014 at 9:46 am

Since you're bringing up deflation and central bankers: how can there ever be the risk of deflation if you're a sovereign who can always print more money and pass it on to all citizens?

More money chasing the same assets always works if the right agents receive enough money, right?

Dino Reno, November 28, 2014 at 9:19 am

As much as I like a good conspiracy theory, this price decline is not the result of one. Too many competing interests make this all but impossible. The problem is demand is flat lining and headed down from here. The market is currently in the denial phase of the death of Big Oil. The echoing refrain, "The bottom is in, it's a geopolitical ploy, no way can this last," are the last desperate attempts to deny the Oil Bubble has popped. The great thing about bubbles is that no matter how big they get, they remain virtually invisible until the bankruptcies and bailouts begin. We still have a few months to go before the truth sets in.

Just like the Fed created banks on steroids that led to the financial crisis, the government also paved the way for the oil boom with tax breaks, lacks safety and environmental rules and nearly free land to drill. The cost of this energy independence will be the bankruptcy of a good size chunk of the our "booming" economy. The Chinese have nothing on us when it comes to subsidies to encourage malinvestment.

Yves Smith, November 28, 2014 at 11:50 am

The reason to think that there might be more to this is that this is not how OPEC normally responds to a price decline, particularly since the price of oil is below the Saudi's fiscal breakeven (which is different from their production breakeven).

The kingdom won't get enough in oil revenues to support its annual budget with oil at below $90 a barrel (or at least that's a level I've seen reported; sources no doubt vary in their estimates). So the Saudis have strong incentives to go for a higher prices and are incurring real costs to allow oil prices to continue to fall.

And I suggest you go review the history. Oil fell below $90 directly as a result of the Saudis saying they would not support it at this level, and took another big leg down as a result of the OPEC inaction.

Moreover, this washout does not change the long-term outlook for higher oil prices. While there are substitutes for oil for many uses (building heating being a biggie), there really isn't one yet for the internal combustion engine. And if OPEC can delay substitution for other uses by whipsawing prices and killing some producers (price uncertainty is just as deadly for investment as low prices), they preserve demand for oil v. oil substitutes and maximize the return on a limited resource. This is all entirely rational predatory pricing.

plantman, November 28, 2014 at 10:42 am

How much damage could a run on high yield debt do to the broader market?

Are the risks insignificant or could we be looking at the first of many dominoes?

Yves Smith, November 28, 2014 at 11:52 am

HIgh yield is really a very separate market. High yield bonds are "story" paper. They trade very much on a name-by-name basis since default risk is real, so you have to understand the company.

Investment grade corporate bonds trade on attributes: duration, maturity, coupon, rating, etc.

Having said that, the high yield market is often the canary in the coal mine for the rest of the economy, but it also gives a lot of false positives.

Peter Pan, November 28, 2014 at 1:09 pm
What idiot entity is selling CDS on high yield bonds? Surely they must be European banks, right?

Investors overpaying for yield after years of low rates (Reuters) –

http://uk.reuters.com/article/2014/11/20/us-investment-yearend-yield-idUKKCN0J421C20141120

"The high-yield market is sort of in a bubble and sooner or later there will be a price paid for that," said Carl Icahn, the billionaire investor who said he owns credit default swaps on high yield debt against the 5-year U.S. Treasury note.

That means he's essentially shorting high yield debt while going long on the U.S. five-year note.

"We think the risk-reward is great in that CDS," he said.

MikeNY, November 28, 2014 at 8:09 pm
Almost any first- or second-tier bank will write CDS on high yield bonds, or loans. All they really require is a liquid enough market to get an accurate spread over the relevant index (Treasuries or Libor). It's a big market now.
plantman November 28, 2014 at 11:35 am

…the drive to wipe out higher-cost US shale producers could have far-reaching consequences for global financial markets. Energy projects in the United States have been heavily financed through the issuing of high-risk or junk bonds. In 2010, energy and materials companies made up 18 percent of the US high-index yield, a measure of so-called sub-investment grade borrowers. Today they account for 29 percent, as a result of massive borrowing by drilling companies.

Research carried out by Deutsche Bank showed that should the price fall to $60 per barrel, which is eminently possible, there could be a default rate as high as 30 percent among some US borrowers.

A report published earlier this month in the British Telegraph warned that the

"rush to pump more oil in the US has created a dangerous debt bubble in a notoriously volatile segment of corporate credit markets, which could pose a wider systemic risk in the world's biggest economy"

Rosario November 28, 2014 at 9:30 pm

Not keen on the theory or the lingo, but the more gunpowder (debt) the bigger the explosion (default). Following the analogy, the harder the rock the more gunpowder needed to break it apart (vis-a-vis "kinda" Fracking).

Fracking is an effective, profitable industry despite its risk because our debt building financial industries love this.

Think of the history, even if it blows up they expect a bail-out or they dump the toxicity on other institutions. The industry is so leveraged because it is so risky. It only became profitable in the last 10 years (from rising oil prices) and that has been on a razors edge.

My layman's opinion of the outcome, bad, very bad.

Chauncey Gardiner November 28, 2014 at 2:10 pm

Although realities might not match the hyperbole, I h/b wondering about both the direct and indirect speculative exposures of the mega-banks in energy, metals and other sectors, including their respective exposures in both junk bonds and equities (as well as who is on the other side of those futures and derivatives trades)?

The recent illiquidity that culminated on October 15th is a harbinger of the road ahead IMO, and as in that instance could include unanticipated losses in currency futures and swaps.

… Shaping up to be a shoot-out at the OK corral among competing interests within the global elite? I fervently hope so and that the road kill includes some specific intermediaries, but also hope that our retirement pension funds and 401(k) funds are not caught in the crossfire.

Salient related link:

http://www.washingtonsblog.com/2014/11/big-banks-take-huge-stakes-aluminum-petroleum-physical-markets-manipulate-prices.html

An arb is a beautiful thing November 28, 2014 at 3:18 pm

Peteybee is posting very good thoughts on natural gas and oil in comments and attention should be paid.

It's sad to see the conspiracy mongering going on here backed by precious little of data. Conventional wisdom is treated as fact when it is not, and CW is then used to attribute all manner of nefarious intentions to energy market actors.

As a simple exercise, compare Saudi oil production levels from 1980 to current, against US production and WTI price of the same interval. It will enlighten you all as to what Saudi oil cuts can accomplish against a bursting oil price bubble. All the data is available on EIA/Wikipedia or the BP oil review. Hopefully it will enlighten this crowd about how OPEC "should" be acting.

And please please please stop moving from oil markets to shale gas in your blog posts. They are quite different. Why? Because a decline in oil directed drilling in the US is bullish for natural gas pricing in the future (2016 and beyond).

Last please, don't refer to Bentek as anything other than farce, they are no better than the FT or NYtimes for "analysis."

I'm sorry Peteybee, my tone will probably deprive you of the audience your posts deserve.

peteybee, November 28, 2014 at 11:10 pm

wow, thanks :-)

BTW I don't regard any of this as conspiracy theory mongering. I really like this website. Yves and Lambert are doing a great job. I mostly don't have an axe to grind on this subject either, I'm more interested in democracy reform and US foreign policy now.

I think the environmental criticisms of fracking (i.e., wastewater) are valid. I think the call for sustainable use of our natural resources on a global and national level is absolutely essential if we want the next generation to have a decent life on earth.

But I just think the peak oil concept, which made sense a couple of years ago, has turned out to be premature, and it seems like there's a hesitation to dig into data that contradicts it (not necessarily on this site, but lets say among the community of people who "care").

Minor Heretic, November 28, 2014 at 7:14 pm

The Saudis don't have to kill the entire array of shale oil drillers in the U.S. If they can force the weakest into bankruptcy then, as noted above, the junk bond market will go pear shaped. That will deny funding (or at least make it prohibitively expensive) to all shale drillers. All that leverage gives the Saudis leverage. Just as there is inertia in present operations keeping them going as they lose money, there will be mobilization delays in the ramp up of production in a future higher-price scenario. There certainly would be more cost and delay on the financial end.

The Saudis are willing to spend some of their sovereign wealth now and make it back later.

Lambert Strether, November 28, 2014 at 8:39 pm

Mosler on Saudi motivations.

Rosario, November 28, 2014 at 9:13 pm

So, what does this mean for renewable energy development in the USA in the near/long term? I'm afraid very little.

Realism tells me that major refiners have diversified portfolios of producing wells (including: tight rock, tar sands, deep water, the few-and-far-between shallow fields). Dipping oil price will only hurt the lower people on the industry hierarchy (small to mid-scale contractors/drillers, independent logistical operations, etc). This is not "hurting" Exxon, BP, Shell, and all of the big players since all the essential infrastructural components that require their refining are still in existence.

We still use petroleum for nearly all transit, agriculture, resource extraction, and heavy/consumer product industry. They have a guaranteed market and nearly all of their risk is sidelined by sub-contracting and subsidy. The oil industry is a Capitalists ideal model of a low profit risk ratio. I saw a comment above mentioning our witnessing the death of "Big Oil". I strongly disagree.

There is zero indication, either socially or politically, that we are making any move to divorce from our oil partnership. OPEC is playing games (or not, it doesn't matter) and major refiners are turning some accounting knobs and pushing some payroll buttons and everything will be that same as it was before. The only thing stopping their Juggernaut is complete depletion of feasibly extracted oil.

Though there is no, "conspiracy", to rig or manipulate oil on the markets one could argue that the conspiracy is writ on the entire order of modern society. There is a social and political reliance on petroleum, and in turn, petroleum is supported politically and socially, and so on.

I would argue the petroleum industry controls nearly every aspect of modern existence and the onus is on the realm of the social and political to break it. We may consider that the oil industry operates in a similar manner to a manifold of trusts that motivate and restrict society as they wish. Why not prosecute these industries as trusts? This would certainly create tumult, but it would open the door for real alternative investment and oil divestment without the petroleum industry handicap.

The pragmatic approach is dangerous for our future, maybe it is time to become a bit "crazy".

peteybee, November 28, 2014 at 11:13 pm

Looks like renewables are going to get hit really hard, as will attempts to bring NG vehicles to the US :-(

John Ennis, November 28, 2014 at 9:36 pm

Just a question about the physical mechanics of a fracked well. I have been told by an not completely unreliable source that fracked wells can't really be "turned off". My source was fairly adamant that a lot of the production in fracked wells is of a use-it-or-lose-it nature.

If this is true, and if someone here with certain knowledge about this would chime in about its veracity, how would this ground-truth effect the equation in a "lower than production cost" set of wells?

The 2014 Oil Price Crash Explained Energy Matters

The second time period from January 2009 to the present shows some different forces at work. Starting in 2009 some new production capacity was built. This was not in OPEC and is concentrated in N America where the light tight oil (LTO) boom took off supplemented by steady expansion of tar sands production. Prior to 2009, the production peaks were of the order 74 Mbpd. Post 2009 peaks of the order 77 Mbpd were achieved. About 3 Mbpd new capacity has been added.

In May 2011 there is a significant and curious excursion to lower production not accompanied by a fall in price. This coincides with Libya coming off line for the first time and the loss of 1.6 Mbpd production. It seems possible that this coincided with weak demand and the fortuitous loss of production cancelling weak demand leaving price unchanged.

The EIA are always running a few months behind with their statistics these days, not ideal in a rapidly changing world. Thus we do not yet have the data to see the recent crash in the oil price. But we know the price has fallen below $80 and production is unlikely to be significantly changed. So, how do we explain production of roughly 77 Mbpd and a price below $80?

The Recent Past and the Future

Old hands will know that it is virtually impossible to forecast the oil price. The anomalous recent price stability of $110±10 I believe reflects great skill on the part of Saudi Arabia balancing the market at a price high enough to keep Saudi Arabia solvent and low enough to keep the world economy afloat. The reason Saudi Arabia has not cut production now, when faced with weak global demand for oil, probably comes down to their desire to maintain market share which means hobbling the N American LTO bonanza. Alternatively, they could be conspiring with the USA to wreck the Russian economy? But Saudi Arabia is not the only member of OPEC and the economies of many of the member countries will be suffering badly at these prices and that ultimately leads to elevated risk of civil unrest. It is not possible to predict the actions of the main players but it is easier to predict what the outcome may be of certain actions.

  1. If demand for oil weakens by about a further 1 Mbpd this may send the price down below $60 / bbl.
  2. If OPEC cuts supply by about 1 Mbpd at constant demand this may send the price back up towards $100 / bbl.
  3. Prolonged low price may see LTO production fall in N America and other non-OPEC projects shelved resulting in attrition of non-OPEC capacity. This may take one to two years to work through but with constant demand, this will inevitably send prices higher again.
  4. Prolonged low price may see many specialist LTO producers default on loans, risking a new credit crunch and reduced LTO production. This would likely lead to a major consolidation of operators in the LTO patch where the larger companies (the IOCs) pick up the best assets at knock down prices. That is the way it has always been.
  5. Black Swans and elephants in the room – with conflict escalation in Ukraine and / or Syria-Iraq and a new credit crunch, all bets will be off.

Hugh Sharman, November 24, 2014 at 6:41 am

Practically speaking, of course, high cost oil extraction can and will close down soon, especially tight shale oil, possibly along with some pretty horrific debt defaults.

Here is the link

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11231383/Oil-price-slump-to-trigger-new-US-debt-default-crisis-as-Opec-waits.html


Roger Andrews, November 24, 2014 at 2:26 pm

Maybe we're in another recession?

Naimals , November 25, 2014 at 1:10 am

Didn't catch that the production volume for the last few months are not yet confirmed but that will make a difference in the analysis:

If it was a recession like 2008, then we would expect a reduction in the volume as the drop in price would be induced by a reduction in demand (fear, less consumption, etc.) corresponding to a shift of the demand curve to the left.

If the temporary data for the last few months of 2014 are indeed correct, it is indicative of an expansion of supply (not in the physical sense, but in the economic sense, which only requires a few major suppliers lowering the price they sell to the market), supply curve shifting to the right, volume increases and price drop.

This, in other goods market, will be equivalent to one key vendor lowering the marked price on the price list every month. More of the goods get sold and other suppliers has to follow since they are price-takers. (However, I don't know enough of the crude market to tell whether its behaviour is indeed similar)

Sam Taylor, November 24, 2014 at 8:59 am

Euan,

For all the focus on LTO, I think that older conventional production has got plenty of potential downside in the short term. I was at Petex last week, and went to a presentation by Apache on how they've managed to arrest the Forties field's decline through an absolutely massive drilling effort, as they attempt to sweep the field clean. Generally only chasing targets of maybe 1 million barrels or so. I expect that we'll see lots of smaller projects like this stop on lower prices, and older field production probably returning back to its decline trend fairly rapidly. And despite Oonagh Werngrehns exhortations, few people seemed that excited at the prospect of trying to wring out every last drop from the north sea.

However I agree that shale debt is a real worry. Energy companies make up something like 15% of the US high yield bond market, up from 5% in 2005. What scares me is the potential of falling oil prices having the effect of both stimulating the US economy and leading to higher interest rates, while at the same time hitting the shale drillers pocketbook. It'll be a test of whether or not the banks have really shored up their capital holdings or not. Frankly the new COCOs securities that they created in the wake of 2009 to accomplish this just look like a time bomb to me.

Euan Mearns, November 24, 2014 at 11:15 am

From what I recall The Industry did not react significantly to the price rout of 2008, but uncharacteristically carried on, leading to the false boom Aberdeen has enjoyed for the last 5 years.

This time the knives are out with rates being cut and redundancies everywhere. Has to have a negative impact on production. What are the chances of Osborne reversing tax hikes?

https://www.gov.uk/government/news/autumn-statement-2014-date-announced-by-chancellor

Sam Taylor, November 24, 2014 at 11:26 am

The price in 2008 went down and then back up in the space of 12 months, perhaps the somewhat rapid return to $100 helped mitigate things somewhat? Economics within the industry seem to have changed since then, though. Capex is up and production is down, and I think a large amount of the cash pile that companies were sat on has evaporated.

The industry would seem to need tax breaks to sustain its health going forward, but one has to wonder how that would play with the electorate, or indeed a government which seems intent of deficit slashing no matter the cost.

David, November 24, 2014 at 9:01 am

I skimmed an article in the Telegraph last week that said a lot of the US shale oil production was hedged well into 2015 and even beyond. Who is hedged and for how long will impact the change in supply with weaker prices.

Euan Mearns, November 24, 2014 at 10:56 am

I guess it is important to know what "a lot" means. Any company that hedged at $100 will appear to be sitting pretty right now. Of course there are those on the other side of those bets sitting on gigantic losses that will appear somewhere in the system someday.

The LTO / shale industry has momentum and it will take many months / years for the drilling action to be wound down – pouring gasoline on the fire as they say.

A C Osborn, November 24, 2014 at 11:43 am

With 6 million new cars a year being sold in just China alone requiring Fuel I can see those surpluses being eaten in to quite quickly.

I don't have a figure for India, but that also has to be pretty high as well.

Euan Mearns, November 24, 2014 at 12:08 pm

The world has over 1 billion cars. And so, while 6 million new per year sounds a lot, it is 0.6% of total. And it depends how much they are driven. And then there are all the cars in Portugal, Spain, Italy and Greece that folks have got rid of.

Energy contraction in Europe is a powerful force at present.

gass, November 24, 2014 at 8:32 pm

Not 6 Million cars but 16 Million per year. In 2010 there was a record of 18.2 Million cars
http://www.drive.com.au/motor-news/china-half-of-worlds-newcar-sales-by-2020-20110503-1e5ry.html

By 2020 it is estimated that China will buy 40 Million

Teo, November 24, 2014 at 9:40 pm

Raw numbers can be found at OICA.net

Current numbers , Chinese market being 1/4 of global market are obviously disproportionately small. But 1/2 of the world market is too much, even for China.

derek louden, November 24, 2014 at 11:48 am

There are a number of other issues worth considering. For George Osborne the possibility of reduced borrowing has vanished. He faces a number of problems, a decline in petroleum taxes, corporation taxes, excise duty, VAT and license fees from the fall in oil prices. He also faces a nightmare scenario in terms of infrastructure with the decline in prices accelerating the de-commissioning of old fields which are no longer profitable. The infrastructure losses place satellite developments at risk as there'll be nothing left to tie back to. He's faced with a much faster pace of de-commissioning than he'd thought likely when agreeing to part-fund these costs and finally he's being lobbied forcefully to provide tax breaks at a time when a collapse in tax receipts leaves him no lee-way to provide them.

As an aside, he's allowed Mark Carney to assume liability for "market maker" shadow banks when they are unable to meet their liabilities on forex, interest rate or commodity exchange contracts.

Taxpayers will, as a last resort, bail out banks if they're unable to honour purchases of oil at $110 a barrel in June 2015. Exactly how this will be paid for is difficult to ascertain at this stage. Ideas anyone?

Willem Post, November 24, 2014 at 2:54 pm

Euan,
"76 Mbpd and $120 / bbl"

74+ Mbpd appears more correct.

Alister Hamilton
November 24, 2014 at 5:21 pm

There's another explanation for the recent oil price decline proposed in this report:

http://www.thehillsgroup.org/index.html

in particular on this commentary page (you have to pay for the full report)

http://www.thehillsgroup.org/depletion2_022.htm

One of the report's authors is taking questions over at peakoil.com

http://peakoil.com/forums/viewtopic.php?f=47&t=70563

Very interesting!

[Nov 29, 2014] OPEC Presents: QE4 And Deflation

Nice but wrong redefinition of deflation: Deflation is not about lower prices, it's about lower spending.
Nov 29, 2014 | zerohedge.com

You can't force people to spend, not if you're a government, not if you're a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That's the perfect picture of Japan right there. There's no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can't force people to spend, you can't create growth either, so that myth is thrown out with the same bathwater in one fell swoop. Some may say and think deflation is a good thing, but I say deflation kills economies and societies.

Deflation is not about lower prices, it's about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it's just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.

[Nov 29, 2014] Traders Pass on Bearish Oil ETFs as Sector Tumbles

The spasm of volatility last month was probably a preview of jumpier times ahead.

Once this year's top-performing sector in the S&P 500, energy continued cementing its status as the lone group in the benchmark U.S. index to reside in the red for the year when energy stocks and equity-based exchange traded funds plunged during Friday's holiday-shortened U.S. session.

Already imperiled, oil stocks and the ETFs that hold those companies tumbled Friday after the Organization of Petroleum Exporting Countries (OPEC) opted to keep its daily output unchanged at 30 million barrels. The 12-member cartel made the decision at its Vienna meeting Thursday and the headlines sent oil futures tumbling. West Texas Intermediate futures slid to the lowest levels in five years. [Expect a Bad Day for Oil ETFs]

OPEC's decision to not cut production and the ensuing decline for oil futures predictably plagued an array of equity-based energy ETFs on Friday. Of the day's eight worst-performing non-leveraged ETFs, seven were energy sector funds. Led by an almost 14% drop for the First Trust ISE-Revere Natural Gas Index Fund (FCG) the average Friday decline for those seven energy sector ETFs was 11.5%.

Yet despite the fact that the Energy Select Sector SPDR (XLE) and the Vanguard Energy ETF (VDE) are each down more than 7% over the past month and that the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has plunged 35.4% over the past 90 days, traders have not been rushing to inverse, leveraged energy sector ETFs.

Since the start of November, the UltraShort Oil & Gas ProShares (DUG) has surged nearly 15%. DUG, the double-leveraged bearish answer to the iShares U.S. Energy ETF (IYE) , has done a nearly perfect job of delivering twice the inverse performance of IYE. To be precise, DUG is up 14.76% this month while IYE is down 7.6%. [Bearish ETFs for Falling Oil]

The Direxion Daily Energy Bear 3X Shares (ERY) , the triple-leveraged answer to XLE, is up 20.6% this month. However, those stout performances by DUG and ERY have not been attracting investors, a similar phenomenon to what has been seen with inverse futures-based oil ETFs. [Bottom Fishing With Oil ETFs]

As of Nov. 27, DUG had lost more than $6 million in assets this month while ERY had seen only modest inflows. Again, there are parallels between equity-based oil ETFs and their futures-based counterparts.

Money has been pouring into the United States Oil Fund (USO) , but much of the cash that has taken USO north of $1 billion in assets under management is believed to be from traders shorting the ETF.

Interestingly, XLE, the largest energy sector ETF, has added $1.1 billion in new assets this month, which could be a sign that some traders are shorting that fund rather than establishing long positions in inverse equivalents. XOP, often one of the most heavily shorted ETFs of any type, has added $41 million in new assets this month.

[Nov 29, 2014] OPEC has ushered in QE4, and how investors should play oil now

Nov 29, 2014 | MarketWatch
Welcome to the new era of QE4.

As if on cue, OPEC stepped in just as monetary policy (at least the Fed's) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices.

Protest away about the 1% getting richer and how prior QE hasn't trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.

It's hard to imagine a "more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally," says Alpari U.K.'s Joshua Mahoney. "For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits."

The impact of that could be "bigger than anything that has come before," says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas.

Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it's a "fundamental positive for anybody who uses oil, who uses energy." Just not great if you're from Canada, Russia or Australia, he says. Or if you're the ECB, fretting about price deflation. Or until it starts crushing shale producers.

[Nov 27, 2014] OPEC Leaves Oil Production Quotas Unchanged, and Prices Fall Further By STANLEY REED

Nov 27, 2014 | NYTimes.com

The price decline "does not mean we should really rush and do something," OPEC's secretary general, Abdalla El-Badri, told reporters after the meeting here on Thursday. "We don't want to panic," he said. ''We want to see how the market behaves."

Even though lower prices will hurt oil producers in the United States, the American economy will probably benefit as consumers have more money to spend and companies' energy bills decline. Europe and Japan, both large oil importers, are also likely to get a boost from lower prices, although in Europe high taxes on energy limit gains for consumers.

Lower prices, on the other hand, could be very painful for OPEC producers, who depend heavily on oil revenue.

... ... ...

While exports of crude oil from the United States are still restricted, the surge in output is being felt on global markets as a result of the increased export of refined petroleum products like gasoline.

American imports from OPEC and elsewhere have also been sharply reduced, forcing OPEC producers to compete for the remaining markets in Asia and Europe. Iran, for instance, is storing as much as 100,000 barrels a day on tankers because it is unable to find markets.

... ... ...

Igor Sechin, the chief of Russia's state-controlled Rosneft, met with Mr. Naimi to discuss cutting production, but no agreement was reached. OPEC officials had high hopes that Russia might join the organization in cutting production

[Nov 25, 2014] Who Will Wind Up Holding the Bag in the Shale Gas Bubble?

Quote from comments: "All these industries, in terms of energy, are robbing Peter to pay Paul, and they are creating a high reliance on very, very low EROEI energy sources. Pair this with mammoth federal subsidies to explore and produce and you have a society stuck in a tight space. What was left in me that trusted the system in 2012 voted Green Party for this very reason. Getting out of this situation will require an immense political undertaking with the oh so feared government planning."

We've been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas.

Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order.

But the same thing is happening further down the food chain, among players that don't begin to have the deep pockets of the industry behemoths: many of them are still in "drill baby, drill" mode.


Pepsi, November 25, 2014

It's emblematic of the neoliberal dogma, no questions allowed, no imagination permitted, there is no alternative. We will keep doing this until it explodes, and we'll probably continue after that.

NOTaREALmerican, November 25, 2014 at 2:01 pm

Before neo-liberals, humans questioned authority and came up with imaginative solutions?

Pepsi, November 25, 2014 at 3:22 pm

What are you trying to say, that we live in the flower of an age of creativity and critical thinking? I would argue that, economically, we do not.

NOTaREALmerican, November 25, 2014

No, i'm saying it's no better or worse than it ever was.

Neo-liberals entered the picture at which date in history? Prior to this date there was questions and imagination. Just wondering what the date of neo-liberalism was.

peteybee, November 25, 2014

The $6 breakeven figure is some kind of national average, which is the wrong way of analyzing it. All the action flocks to the cheapest play, I.e. Marcellus, for dry gas. It's somewhere in the $3 range there, last I checked.

Yves Smith, November 25, 2014

What about average don't you understand?

Those pricier production wells are still getting financing. Someone will wind up eating losses on that debt, particularly if it keeps going on. And some of the Marcellus shale won't be exploited. New York has a fracking ban in place via the courts, and it does not poll well, so the legislature might not interfere.

peteybee, November 25, 2014

Yes, the existing dry gas plays outside Marcellus are losers, I dont disagree there. But that won't prevent future investment from being routed to the one spot which put all the others out of business due to its lower cost. As you know, wall st. has infinite financing.

peteybee

November 25, 2014 at 6:24 pm


see here:
http://www.eia.gov/naturalgas/weekly/img/201410-October-monthly.png

Bartnett, Fayetteville, Haynesville, and Woodford have stopped growing. Eagle Ford is still growing (for dry gas, it's also a rich liquids play), but Marcellus is taking over.

Jim Haygood

November 25, 2014 at 10:55 am


Who will wind up holding the bag … is this a rhetorical question?

To quote that great American, Jonathan Gruber:

'Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really, really critical for the thing to pass …'

Shale bailouts … for the children!

John Massie, November 25, 2014 at 11:03 am

Simple, privatize the profits, socialize the costs. Isn't that the neoliberal way?

Code Name D, November 25, 2014

There is ideology at work here. "Developing" these fraking and shale resources has been a Libertarian ideological staple for years now, and is connected to conspiracy theories that tell of how "evil government" shut down domestic production in order to favor its communist allies such as the Saudis. (What, you didn't know they were communists?)

Global warming and poor production figures are just mechanics of the conspiracy.

Yves explains something else that I noticed, the lack of "disaster coverage" such as what we saw in 2008. That bad news might slow the "bottom feeders".

It proves my 2nd law of economics – the economy is always in recovery. They seem to think that if we don't cover bubble collapses, then it's not a bubble and it didn't collapse.

This happened in 2008 as I recall too, where the news media refused to even discuses the housing crises as it unfolded. How many people bought homes never knowing the markets were collapsing until after they signed the mortgage?

James, November 25, 2014

Trouble is, the ideology seems to be working. I'm beginning to think it's us naive, non-corrupt fools who are the stupid ones.

jib, November 25, 2014

I think you are confusing oil and gas. Two very different markets (at least in the last 10 years or so), the price of gas has been down for years, well head prices crashed in 2008. It is oil that has gone down recently.

While some E&P's use junk bonds, many finance CAPEX by selling next years production this year. No debt but they (usually) sell at a lower price than the current market. They have already sold next years production and locked in the money (at a higher price than current spot) so they are not going to lose money on this years wells and drilling the wells means more production next year which means more income. No reason to stop drilling yet.

But next year if oil is still at low price then CAPEX will be reduced and fewer wells will be drilled. Of course as fewer wells are drilled, the cost of renting rigs and services goes down so the price point at which the new wells can be profitable is lower. And different fields have different price points. And follow on wells on existing sections are cheaper and more reliable to drill than initial exploratory wells, etc, etc.

Basically the shake out is coming but it takes longer to hit and it wont be a complete collapse unless oil goes down below $50 and stays there.

Jonathan Nguyen, November 25, 2014

That time lag between market movements and their consequences for shale oil balance sheets echoes some of what I heard from Art Berman on the Kunstler podcast a few weeks back. He also mentioned in passing that oil from the Eagle Ford (Texas shale) is of enough lower energy density to cause significant problems for domestic refining. Unfortunately, I wasn't able to find any obvious support for this claim after some Googling (admittedly very brief). Can anyone with more knowledge comment?

Shale gas does appear (to this total novice) to be on more solid footing compared to the crude side, but I think the big worry is what Yves hinted at when talking about the longer term production peak. What are the implications of significant infrastructure and financial investment in a gas industry with such little longevity?

For all hyperbole about the gas revolution, a quick check with EIA gives us roughly 12 years of proven natural gas reserves at current consumption levels (2013 data in billion cubic feet, US reserves of 308,436 and annual consumption of 26,037). Yes, incremental gains in extraction efficiencies and rising prices will grow reserves some as pricier parts of known resources come online, but it seems hard to justify adopting natural gas for new uses across the economy like LNG autos or the like when the timeline for domestic gas is so short. Both production and financial interests are also at the mercy of the disconnected feedback loop between profitability and valuations.

Again coming from Berman, it sounds like many independent shale players are relying on stable/growing Wall Street valuations that are maintained by tracking production growth as an indicator. According to his view, most companies will be unable to meet debt obligations that are triggered when growth slows and asset prices dip. So the bloodbath would bring a severe cutback in production, rising prices and a period of consolidation and inflows of PE money. The companies that are the least levered and/or with the most profitable portfolios would come out on top and then enjoy a 5-10 year run As a very untrained reader here, I'm curious how accurate this representation is? And if so, how is it even possible to tell? Seems to me that neither Berman or Dizard point to any company specific examples that this is the case.

Rosario, November 25, 2014 at 12:55 pm

"It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it."

More just the latter and high oil prices. The engineering behind fracking is not new ( http://en.wikipedia.org/wiki/Hydraulic_fracturing ). It has been around for decades. Look at a chart of oil prices over the past 10 years and fracking production correlates very closely. Producers could not justify fracking at 1990s or 1980s oil prices otherwise they would have been doing it years ago since USA production peaked in the 70s.

Similar story for tar sands. The natural gas and water rights to extract the oil is cheap the end product is not (at least it used to be). All these industries, in terms of energy, are robbing Peter to pay Paul, and they are creating a high reliance on very, very low EROEI energy sources. Pair this with mammoth federal subsidies to explore and produce and you have a society stuck in a tight space. What was left in me that trusted the system in 2012 voted Green Party for this very reason. Getting out of this situation will require an immense political undertaking with the oh so feared government planning.

[Nov 25, 2014] Russia Reported to Consider Joining OPEC Oil Output Cuts in 2015 By James Herron, Rupert Rowling and Stephen Bierman

Nov 24, 2014 | Bloomberg/Yahoo

Russia's government is considering joining OPEC production cuts next year to boost oil prices, Kommersant reported. There isn't consensus to proceed with the measure, it said.

The world's biggest crude oil producer may agree to reduce output by 15 million tons, or about 300,000 barrels a day, in return for 70 million tons of OPEC reductions, the Moscow-based newspaper reported, citing people close to the government that it didn't identify. Russia's 2015 output estimates will be available later this year, Olga Golant, a spokeswoman for the Energy Ministry, said in response to questions from Bloomberg News. She declined to comment on the possibility of cuts.

Russian government officials held talks with Saudi Arabia, OPEC's largest member, and Venezuela last week to discuss oil prices that have plunged into a bear market amid the highest U.S. production in three decades. Saudi Arabia agreed on Nov. 21 to cooperate with the government in Moscow over oil markets, without making a public commitment to limit output.

"Russia might agree to cut output if OPEC reduces production by 1.5 million barrels a day," Olivier Jakob, managing director of Zug, Switzerland-based consultant Petromatrix GmbH, said by e-mail today. The government may struggle to get companies producing oil in Russia to participate in reductions, he said.

OPEC Meeting

OPEC members meet in Vienna on Nov. 27 to discuss output levels following a 30 percent drop in the price of Brent crude, the international benchmark, since June. The grade for January settlement fell to $76.76 a barrel on Nov. 14, the lowest in four years, and traded at $80.56 a barrel on the ICE Futures Europe Exchange in London at 9:48 a.m.

A production cut of about 1 million barrels a day is needed to put oil supply and demand back in balance and lift Brent back to an average of about $90 a barrel next year, Societe Generale said today in an e-mailed report. Without a supply reduction, Brent could fall to $70 a barrel and West Texas Intermediate, the U.S. benchmark, as low as $60, it said.

Saudi Arabia and Russia, which together produce 25 percent of global oil, agreed on Nov. 21 that the market "must be free of attempts to influence it for political and geopolitical reasons," Russian Foreign Minister Sergei Lavrov said after talks in Moscow. Where supply and demand are "artificially distorted," oil exporters "have a right to take measures to correct these non-objective factors."

Venezuela Talks

Lavrov and Saudi Arabian Foreign Minister Prince Saud Al-Faisal said in a joint statement that they'll coordinate on "issues" affecting the energy and oil markets, without giving more detail.

Russia and Venezuela discussed efforts to stop the slide in oil prices on Nov. 17, Russian Energy Minister Alexander Novak told reporters the following day. The countries will meet again in Vienna on Nov. 25, he said. Venezuela is willing to cut its production as part of broader international agreement, the country's Foreign Minister Rafael Ramirez told reporters in Caracas on Nov. 20.

"At various points between 1998 and 2002, a number of non-OPEC countries pledged production cuts as part of a package of reductions," Morgan Stanley said in an e-mailed report. "If the situation in oil markets were to become dire, such an agreement is possible, and would be in the interest of oil-exporting nations."

[Nov 24, 2014] At the Wellhead A drop in the price of oil is not all good news for China

November 17, 2014 | The Barrel Blog

Low oil prices are bullish for a large energy consumer like China - end-users at the pump are enjoying fuel prices that are at four-year lows - but Chinese state oil companies that have sizable upstream and downstream operations are not entirely happy.

... ... ...

China National Offshore Oil Corp., the country's monopoly offshore producer, would likely see a 45% fall in profit while Sinopec's income would decline by 37% under the same conditions.

Although China's appetite for imported crude has long dominated headlines, the country also has sizable domestic production-currently stable at just a little over 4 million b/d-making it the world's fourth largest oil producer behind Russia, Saudi Arabia, and the US.

Bernstein estimates China's domestic crude output would fall by 1.5% at a 2015 Brent price of $80/b because state-owned companies' cash flows from their upstream operations would be insufficient to cover the cost of developing and replacing reserves.

PetroChina expects its output to grow 1.3% next year, but persistent oil price weakness could pose significant challenges in hitting that target, Nomura Research noted last week, after an update from the company at an investor briefing.

A sustained drop in oil prices would risk current production, as many of China's oilfields are aging and require more investment for enhanced recovery, while others are geologically complex, such as tight oil basins, and are relatively more costly to develop.

[Nov 24, 2014] Oil Prices Here's Why They May Have Bottomed Out Video

Nov 24, 2014 | Bloomberg

IG's Chris Weston explains why he thinks oil prices have bottomed out. He speaks with Bloomberg's Rishaad Salamat on "On The Move Asia." (Source: Bloomberg)

[Nov 24, 2014] OPEC Will Make a Production Cut UBS Wealth's Gordon Video

Nov 24, 2014 | Bloomberg

Wayne Gordon, a commodity analyst at UBS Wealth Management, discusses the outlook for OPEC oil production with Bloomberg's Rishaad Salamat on "On The Move Asia." (Source: Bloomberg)

[Nov 24, 2014] Lower oil prices and the U.S. economy

Econbrowser

PeakTrader

Perhaps, slowing global growth, including recession in Japan, and slowing growth in the E.U., Russia, and China, had some influence lowering oil prices.

Lord

Or as Dean Baker points out this is roughly 2/3rds due to reduction in demand.

Tom

No, his argument is that the price movement mainly reflects demand growth having fallen short of a projection made in 2007. But it's an ultra-flimsy argument, because:

– demand merely equals supply plus or minus inventory change, so by the exact same token, supply has fallen short of projections by practically the same amount.
– any demand/supply projection inherently incorporates a projection of the price the market will bear, andif you really want to analyze how that 2007 projection missed, you need to look at both the demand/supply trend miss and the price trend miss
– there are lots of projections about and it would be hard to argue that the oil industry was especially committed to that particular one
– the divergence from the 2007 projected demand/supply trend materialized mainly in 2008-2010, yet the price bounced back in 2011 and remained high through 1h14.
– the 2h14 price drop very clearly followed a surge in supply from Libya

Jeffrey J. Brown

And the US is dependent on net crude oil imports, based on most recent four week running average data, for 43% of the crude oil processed daily in US refineries:

http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_4.htm

Regarding Saudi Arabia, I suspect that they have been waiting for a downturn in global demand that would allow them to maintain their production and net exports (especially during their low domestic demand winter season), as a way to drive down oil prices, which would hurt the high cost tight/shale producers.

But an important point to remember is that the Saudis have so far been unable, or unwilling (take your pick), to exceed their 2005 annual net export rate of 9.1 mbpd (total petroleum liquids + other liquids, EIA). This post-2005 decline in net exports is in marked contrast to the large increase that they showed from 2002 to 2005, as their net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, as annual Brent crude oil prices rose from $25 in 2002 to $55 in 2005. Based on EIA data, their 2013 net exports were 8.7 mbpd (total petroleum liquids + other liquids).

As annual Brent crude oil prices rose from $55 in 2005 to the $110 range for 2010 to 2013 inclusive, Saudi net oil exports have been below their 2005 annual rate for eight straight years.

A second, and almost totally ignored, point is that CNE (Cumulative Net Exports) depletion marches on. By definition, it's not whether Saudi Arabia has depleted their remaining volume of post-2005 CNE. It's a question of by how much. The following chart shows normalized values for Saudi production, net exports, ECI Ratio (ratio of production to consumption) and remaining estimated post-2005 CNE by year (with 2005 values = 100%). The estimate for post-2005 CNE is based on the rate of decline in the Saudi ECI Ratio (at an ECI Ratio of 1.0, net exports = zero). I estimate that in only seven years, through 2012, Saudi Arabia shipped roughly one-third of their post-2005 CNE.

http://i1095.photobucket.com/albums/i475/westexas/Slide21_zps74c9ebac.jpg

Incidentally, we know what happened from 1995 to 1999 for the Six Country Case History*, as their production rose slightly and as their ECI Ratio fell, they shipped more than half of post-1995 CNE from just 1996 to 1999 inclusive:

http://i1095.photobucket.com/albums/i475/westexas/Slide2_zps55d9efa7.jpg

One other little interesting point is that the Six Country Case History showed an accelerating, year by year, rate of depletion in their post-1995 CNE, and I estimate that Saudi Arabia (and the 2005 Top 33 net exporters in genera) are showing similar accelerating rates of depletion in post-2005 CNE.

The Six Country Case History, from 1995 to 1999, illustrates the profound difference between production and CNE depletion.

*The major net oil exporters, excluding China, that hit or approached zero net oil exports from 1980 to 2010

HomeGnome

The Saudis are forcing US shale production to be mothballed… or, perhaps more accurately, targeting the debt pushers of US shale production

Jeffrey J. Brown

Solar and Wind Energy Start to Win on Price vs. Conventional Fuels

http://www.nytimes.com/2014/11/24/business/energy-environment/solar-and-wind-energy-start-to-win-on-price-vs-conventional-fuels.html?hpw&rref=business&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

Sam Taylor

One of the reasons that gas commands a premium price is that it is dispatchable. Power sources which can ramp up just when you need it, or deliver constant output when required, is inherently more valuable than power sources which are only available when the sun shines or wind blows. Until buffered solar/wind can compete on price with coal or gas then they act merely as cheap supplements as opposed to replacements. At the moment the cost of making up for wind/solar intermittency is borne by other producers, and in places like the UK that may show up in worsening grid stability.

Bruce Hall

Interesting that the U.S. now imports more oil/petroleum products from Canada than all of OPEC combined.

http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm That might increase if Keystone were built.

Meanwhile, shale production in the U.S. continues to move forward.

http://www.aei.org/publication/822253/
http://www.aei.org/publication/oil-price-slump-sets-stage-americas-shale-boom-2-0%E2%80%B2/

Apparently, the sky is not falling except maybe for OPEC.
http://www.aei.org/publication/energy-policy-blessing-shale-boom/


Stephen McCourt

I'm fearful too many highly leveraged business models are supported only by $80+ oil. Banks, private equity investors, and private lenders will experience big losses if low oil prices continue. Sometimes, declining commodity prices can create weakness that has systemic consequences.

Jeffrey J. Brown


November 24, 2014 at 3:15 am


The Telegraph has an article, linked below, quoting Daniel Yergin as saying that "We will have lower prices for some time to come." Following are some links to some similar articles, from 15 years ago and 10 years ago respectively.

Yergin's prediction, 10 years ago, that we were destined to see a long term oil price of about $38 per barrel caused me to suggest that we price oil in "Yergins," with One Yergin = $38. Brent is currently trading at a little over two Yergins.

The next shock?
March, 1999

http://www.economist.com/node/188181

Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future.

Policymakers who remember the pain of responding to oil shocks in 1973 and in 1979-80 will also be pleased. But the oilmen's musings will not be popular with their fellows. For if oil prices remain around $10, every oil firm will have to slash its exploration budget. Few investments outside the Middle East will any longer make sense.

Cheap oil will also mean that most oil-producing countries, many of them run by benighted governments that are already flirting with financial collapse, are likely to see their economies deteriorate further. And it might also encourage more emissions of carbon dioxide at just the moment when the world is trying to do something about global warming.

Yet here is a thought: $10 might actually be too optimistic. We may be heading for $5. To see why, consider chart 1.Thanks to new technology and productivity gains, you might expect the price of oil, like that of most other commodities, to fall slowly over the years. Judging by the oil market in the pre-OPEC era, a "normal" market price might now be in the $5-10 range. Factor in the current slow growth of the world economy and the normal price drops to the bottom of that range.

Capitalism's Amazing Resilience
November, 2004

http://www.forbes.com/forbes/2004/1101/041.html

Excerpt:


Energy is one of the two leading risks in the global economy. (Terrorism, of course, is the other.) Just take a look at one industry already suffering from oil shock–U.S.-based airlines will lose $5 billion this year. That loss matches the bump in fuel prices. Ouch. Then there's China, which has climbed to the world's number two spot in oil consumption. China uses most of its oil wildly inefficiently to generate electricity. Oil consumption by cars barely registers–now. But during the next four years, China's oil imports will double as the Chinese give up their bicycles. Biting your nails yet? Here's one more sobering oil fact: The world has only a 1% short-term cushion. This makes for a very volatile market.

Given these facts, where will oil prices be a year from now–$75 a barrel? $100? Wrong numbers, says Daniel Yergin. Wrong direction, too. Try $38. Yergin knows oil. He is a founder and the chairman of Cambridge Energy Research Associates, a consultancy that has 230 employees, with offices worldwide. He is also a recipient of the United States Energy Award and a member of the Secretary of Energy's Advisory Board. A former Harvard professor, Yergin is best known for his Pulitzer Prize-winning book on oil, The Prize: The Epic Quest for Oil, Money and Power.

Yergin's prediction of cheaper oil prices is noteworthy because he doesn't dispute any of the alarming facts cited in my opening paragraph. Not that he would. The facts came straight from Yergin's own mouth at the recent Forbes Global CEO Conference in Hong Kong. I jotted down Yergin's comments while listening to him speak at a dinner. Then he gave a formal speech the next morning and, fueled this time by highly caffeinated tea, I again took notes, just to be sure. Yergin is pretty clear about his predictions. He says oil demand will rise, yet prices will drop. How can this be?

Answer: capitalism's amazing resiliency. Oil prices rise–oilmen become innovative. They work, they invest, they put their heads to the task, they apply technology, and pretty soon they'll discover how to extract oil profitably from oil sand. Or open wells in deeper water. Or scour the planet for new sources using scanners thousands of miles in space. As Yergin reminds us, oil output is 60% higher today than it was in the 1970s. Not many sages from the 1970s would have bet their reputations on this development. The opposite sentiment prevailed back then; experts said the planet was running out of oil. Wrong.

Yergin says he's always asked when oil will run out for good. He shrugs. He's willing to say the world will need 40% more oil in 2025. Hard work and technology probably will find a way to meet the demand.

Sun sets on Opec dominance in new era of lower oil prices
November, 2014

http://www.telegraph.co.uk/finance/newsbysector/energy/11245367/Sun-sets-on-Opec-dominance-in-new-era-of-lower-oil-prices.html


"We are now entering a new era in world oil and we will have lower prices for some time to come,"says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. "Oil was really the last commodity in the super-cycle to remain standing."

. . . . Whatever action Opec takes on November 27, it is clear that its once staggering power over the global economy has been considerably weakened as a new era of lower oil prices beckons.

My comments:

In reality, it's very likely that actual global crude oil production, generally defined as 45 or lower API gravity crude oil, virtually stopped increasing in 2005.

Global liquids production, consisting of crude oil + condensate + natural gas liquids (NGL) + biofuels, has so far continued to increase. Condensate (basically natural gasoline) and NGL are byproducts of natural gas production. Actual global crude oil production probably effectively peaked in 2005, but global natural gas production and associated liquids–condensate and NGL–have so far continued to increase.

Note that when we ask for the price of oil, we get the price of 45 or lower API gravity crude oil, but when we ask for the volume of oil, we get some combination of crude oil + condensate + NGL + biofuels. Shouldn't the price of an item directly relate to the volume of that item, not to the volume of the item plus partial substitutes?

For more info, you can search for: Did global crude oil production actually peak in 2005?

What about net exports?

When we calculate Global Net Exports of oil (GNE), we have to deal with total petroleum liquids + other liquids (EIA data base). I define GNE as the combined net exports from the top 33 net oil exporters in 2005. The EIA shows that GNE have been below the 2005 rate of 46 mbpd (million barrels per day) for 8 straight years, with GNE in 2013 falling to 43 mbpd.

While falling US liquids consumption (relative to 2005, but currently rebounding) and rising US oil production have lessened the demand for GNE (and had an effect on global crude oil prices), by definition, this had no (direct) impact on the supply of GNE, and the most recent EIA data show that the US is reliant on net crude oil imports for 43% of the crude oil processed daily in US refineries.

And while we have recently seen some signs of softening demand in China, the volume of Global Net Exports of oil available to importers other than China & India fell from 41 mbpd in 2005 to 34 mbpd in 2013.

For more info, you can search for: Export Capacity Index (ECI).

S@ndy

Time to revisit My conclusion is that hundred-dollar oil is here to stay, Professor.

Steven Kopits

A number of the forecasting agencies see supply running as much as 1.5 mbpd ahead of demand currently. If OPEC doesn't cut production, then we could see significantly lower oil prices for the next several months.

You are once again free to move around the country. For a while, at least.

Steven Kopits

My personal view is that we'll see a bigger response in conventional production than shale oil.

Steven Kopits

Which I detail here: http://www.prienga.com/blog/2014/10/26/what-do-low-oil-prices-mean-for-conventional-production

Also, my Saudi post has gotten pretty good reviews; it's worth reading for those interested in the topic: http://www.prienga.com/blog/2014/11/11/understanding-saudi-oil-policy-the-lessons-of-79

How much does it cost to produce crude oil and natural gas - FAQ

U.S. Energy Information Administration (EIA)
A measure of the total cost to produce crude oil and natural gas is the upstream costs. The upstream cost includes lifting and finding costs. Lifting costs are the costs to operate and maintain oil and gas wells and related equipment and facilities to bring oil and gas to the surface. Finding costs are the costs of exploring for and developing reserves of oil and gas and the costs to purchase properties or acquire leases that might contain oil and gas reserves.

EIA collects data related to these costs from the largest (major), U.S. oil and gas producers in its Financial Reporting System (FRS). The data are generally representative of the average cost for the FRS companies to find and produce their own particular mix of crude oil and natural gas in their production locations in the U.S. and in other countries and regions of the world. The table below is adapted from the most recent report of the Performance Profiles of Major Energy Producers, 2009.

Costs for Producing Crude Oil and Natural Gas, 20072009
2009 Dollars per Barrel of Oil Equivalent1

Lifting Costs Finding Costs Total Upstream Costs
United States Average $12.18 $21.58 $33.76
On-shore $12.73 $18.65 $31.38
Off-shore $10.09 $41.51 $51.60
All Other Countries Average $9.95 $15.13 $25.08
Canada $12.69 $12.07 $24.76
Africa $10.31 $35.01 $45.32
Middle East $9.89 $6.99 $16.88
Central & South America $6.21 $20.43 $26.64

15,618 cubic feet of natural gas equivalent to one barrel.

Source: Tables 10, 11 and 12, Performance Profiles of Major Energy Producers, 2009.

Last reviewed: January 15, 2014

[Nov 24, 2014] Oil Price Slide – No Good Way Out

Capital Resources, the largest operator in the Bakken, shows rapidly growing outstanding debt through 6/30/2014, without seeming to take on significant new acreage (Figure 10).
Nov 5, 2014 | ourfiniteworld.com

We notice that some companies are already in very cash flow negative situations–in other words, in situations where they need to keep adding more debt. For example, Capital Resources, the largest operator in the Bakken, shows rapidly growing outstanding debt through 6/30/2014, without seeming to take on significant new acreage (Figure 10).

Figure 10. Selected figures from SEC filings by Continental Resources.

Figure 10. Selected figures from SEC filings by Continental Resources.

The Peak Oil Crisis: The Monterey Shale Debacle

November 6, 2014 at 6:59 pm comment Our Finite World "From what I can tell, the Monterey shale formation has turned out to be a California-based scheme to bilk investors. Producing less oil than Bakken shale, Eagle Ford, Green River, or other prospects, it has been called out by the media"
May 28, 2014 | postcarbon.org

Last week the LA Times ran a story saying that the U.S. Energy Information Administration (EIA) is about to reduce "its" estimate of the amount of shale oil that can be recovered from the Monterey Shale under California by 96 percent. This reduction cuts the estimate of producible shale oil in the U.S. by 60 percent.

[Nov 24, 2014] The Link Between Oil and the US Dollar by Greg Canavan

October 6, 2014 | dailyreckoning.com.au

What does the faltering oil price tell us about the strength of the global economy? The price of the international benchmark, Brent crude, has gone from US$115 a barrel in June to US$92 now. That's a 20% decline in just over three months!

Does this tell you that the global economy has slowed sharply in recent months? Or is it more a US dollar strength story? That's what I'm going to try and figure out in today's Daily Reckoning.

... ... ...

. You can put a large part of its decline down to the strength of the US dollar. Regardless of demand and supply dynamics, when the US dollar strengthens, anything priced in US dollars, like gold or oil or any other commodity, will fall.

What should worry the oil bulls though is that considerable geopolitical instability isn't helping the price out. You have heightened tensions between Russia and the West…and Russia is one of the largest energy suppliers in the world. And you also have yet another war going on in the Middle East, the product of past wars in the Middle East designed to stop future wars in the Middle East.

That these geopolitical risk premiums are not providing any price support suggests the demand outlook for oil is weak and getting weaker.

You can put that down to China. There is little doubt that China's economy is slowing. And as you've seen over the past few months, China's rulers are no longer interested in resorting to large scale stimulus measures whenever growth disappoints. They did that in 2012 and 2013 and it only blew China's credit bubble bigger.

Making matters worse for China, a strong US dollar is painful for their economy. They loosely peg their currency, the yuan, to the dollar. So a strengthening dollar hurts export competitiveness.

You're not seeing any visible signs of this discomfort yet, but if US dollar strength persists, it could become a problem. It could also become a problem for other emerging market nations, especially those who have borrowed in US dollars but must repay interest and principle in their local currency. Borrowing in a strong currency and repaying in a weak one is rarely a good combination.

U.S. Energy Information Administration (EIA)

Liquid Fuels Consumption

Total U.S. liquid fuels consumption rose by 470,000 bbl/d (2.5%) in 2013, the largest increase since 2004. Consumption of hydrocarbon gas liquids (HGL) registered the largest gain, increasing by 190,000 bbl/d (8.5%). In 2014, total liquid fuels consumption is expected to fall by 60,000 bbl/d (0.3%), with declines in the consumption of HGL, residual fuel oil, and other oils offsetting increases in distillate fuel, jet fuel, and unfinished oils consumption. Total consumption grows by 160,000 bbl/d in 2015, with distillate consumption accounting for 100,000 bbl/d of the growth.

Motor gasoline consumption grew by 160,000 bbl/d (1.9%) in 2013, the largest increase since 2004. EIA expects gasoline consumption to remain mostly unchanged in 2014 and then decline by 20,000 bbl/d in 2015, as improving fuel economy in new vehicles continues to offset highway travel growth. Distillate fuel consumption increases by 110,000 bbl/d (3.0%) in 2014, reflecting colder-than-average first-quarter weather and economic growth. Consumption of that fuel rises by a further 100,000 bbl/d (2.5%) in 2015. Some of the growth in distillate fuel consumption in 2015 comes from Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL Annex VI), which is an international agreement that generally requires the use of fuels below 1,000 parts per million sulfur by marine vessels in most U.S. waters, unless alternative devices, procedures, or compliance methods are used to achieve equivalent emissions reductions. However, EIA also expects low-sulfur distillate fuels will continue to be blended into residual fuel to meet the new sulfur limit and reported as residual fuel production and consumption.

http://www.eia.gov/petroleum/gasdiesel/

U.S. Regular Gasoline Prices* (dollars per gallon) full history
Change from
11/03/14 11/10/14 11/17/14 week ago year ago
U.S. 2.993 2.941 2.894 values are down -0.047 values are down -0.325
East Coast (PADD1) 2.991 2.947 2.908 values are down -0.039 values are down -0.374
New England (PADD1A) 3.117 3.061 3.014 values are down -0.047 values are down -0.382
Central Atlantic (PADD1B) 3.079 3.023 2.990 values are down -0.033 values are down -0.351
Lower Atlantic (PADD1C) 2.887 2.856 2.815 values are down -0.041 values are down -0.388
Midwest (PADD2) 2.959 2.906 2.856 values are down -0.050 values are down -0.270
Gulf Coast (PADD3) 2.769 2.723 2.673 values are down -0.050 values are down -0.331
Rocky Mountain (PADD4) 3.140 3.076 3.011 values are down -0.065 values are down -0.172
West Coast (PADD5) 3.237 3.168 3.114 values are down -0.054 values are down -0.353
West Coast less California 3.128 3.084 3.050 values are down -0.034 values are down -0.256

[Nov 24, 2014] 'Lower Oil Prices and the U.S. Economy'

Nov 24, 2014 | Economist's View

Jim Hamilton:

Lower oil prices and the U.S. economy: ... The current price of gasoline is 80 cents/gallon below what it has averaged over the last 3 years. Last year Americans consumed 135 billion gallons of gasoline. That means that if prices stay where they are, consumers will have an extra $108 billion each year to spend on other things. And if the historical pattern holds, spend it they will. ...
But another thing that's changed is that much more of the oil we consume is now being produced right here at home. While lower prices are a boon for consumers, they pose a potential threat to producers, especially the higher-cost operators. ...
If there are employment cuts in places like Texas, Louisiana, and North Dakota, that would obviously offset some of the gains to consumers noted above, and ultimately undercut the major force keeping the price of crude low for the time being, that being the success of small U.S. oil producers.
Nevertheless, there should be no question that at this point this is a favorable development on-balance for the U.S. economy. We're still importing 5 million more barrels each day of petroleum and products than we are exporting. Importing fewer barrels, and paying less for the barrels we do import, is a good thing.


JohnH

$100 billion of stimulus sounds like a lot. But in fact it's probably a trifle, particularly when consumers end up spending it mostly on Chinese imports...

pgl:

Toys - made in China.

Apparel - made in China.

Shoes - made in China.

iPads and iPhones - assembled in China.

Xbox - assembled in China.

What's on your Christmas list?

anne said in reply to JohnH...

Why is it that no other country in the world makes so much stuff that we want to buy why we are able to other than China? Why not Indonesia or Nigeria or Brazil or Poland? What is so different about the Philippines that we either do not buy much from the country or do not fret about what we buy from the country? I think the question is important for development specialists to try to answer fairly.

mulp said in reply to anne...

The Chinese government is run by capitalists while the US government has been dominated for the past three decades by free lunch pillage and plunder asset price inflation churning rent seeker economists who hate the sacrificed consumption of capitalism and suffering the personal loss of wealth when you screw up that is inherent in capitalism.

Since 1981, the government promoting investment in capital assets has been rare because doing so requires paying workers dollar for dollar for every dollar in capital created IF WISELY INVESTED, with the rewards for investment trickling in over the long life of the capital assets that require constant labor investment to maintain. Such policies kills all opportunity for profit, as economists in the 60s taught in defense of capitalism as the best way to create wealth by spreading the opportunity around to create wealth by sacrificed consumption in exchange for laboring.

Before 1981, the dominant economic theory was dismal because you have to work to create wealth - TANSTAAFL is dismal economics.

After 1981, we have been told that wealth is created without labor, that the reason America is Exceptional is this is the land of free lunches, the land of money for nothing, the land where a decaying house increases in value.

When economists stop saying "cost equals income", "spending is wages and wages are spending" then economists get the free lunch of saying you can cut wages and jobs to boost profits and the consumer spending will increased thanks to the high profit wealth effect. Essentially consumers have an infinite pool of money they spend based on how much richer the elites become.

In 1981, FDR's influence on economic theory was erased, progressives rejected Monahan paraphrasing FDR in 1935:

"A large proportion of these unemployed and their dependents have been forced on the relief rolls. The burden on the Federal Government has grown with great rapidity. We have here a human as well as an economic problem. When humane considerations are concerned, Americans give them precedence. The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America. Work must be found for able-bodied but destitute workers.

"The Federal Government must and shall quit this business of relief.

"I am not willing that the vitality of our people be further sapped by the giving of cash, of market baskets, of a few hours of weekly work cutting grass, raking leaves or picking up .papers in the public parks. We must preserve not only the bodies of the unemployed from destitution but also their self-respect, their self-reliance and courage and determination. This decision brings me to the problem of what the Government should do with approximately five million unemployed now on the relief rolls."

And conservatives redoubled their fight after Reagan did an FDR in Jan 1983 to tax and spend to create jobs because when the private sector won't, government must. FDR in 1935:

"There are, however, an additional three and one half million employable people who are on relief. With them the problem is different and the responsibility is different. This group was the victim of a nation-wide depression caused by conditions which were not local but national. The Federal Government is the only governmental agency with sufficient power and credit to meet this situation. We have assumed this task and we shall not shrink from it in the future. It is a duty dictated by every intelligent consideration of national policy to ask you to make it possible for the United States to give employment to all of these three and one half million employable people now on relief, pending their absorption in a rising tide of private employment."

and

"This new program of emergency public employment should be governed by a number of practical principles.

"(1) All work undertaken should be useful- not just for a day, or a year, but useful in the sense that it affords permanent improvement in living conditions or that it creates future new wealth for the Nation.

"(2) Compensation on emergency public projects should be in the form of security payments which should be larger than the amount now received as a relief dole, but at the same time not so large as to encourage the rejection of opportunities for private employment or the leaving of private employment to engage in Government work.

"(3) Projects should be undertaken on which a large percentage of direct labor can be used.

"(4) Preference should be given to those projects which will be self-liquidating in the sense that there is a reasonable expectation that the Government will get its money back at some future time.

"(5) The projects undertaken should be selected and planned so as to compete as little as possible with private enterprises. This suggests that if it were not for the necessity of giving useful work to the unemployed now on relief, these projects in most instances would not now be undertaken.

"(6) The planning of projects would seek to assure work during the coming fiscal year to the individuals now on relief, or until such time as private employment is available. In order to make adjustment to increasing private employment, work should be planned with a view to tapering it off in proportion to the speed with which the emergency workers are offered positions with private employers."

Compare with Reagan in 1983 in a rare bipartisan exercise of rational economic theory:

"Today, as this bill becomes law, America ends a period of decline in her vast and world-famous transportation system. Because of the prompt and bipartisan action of Congress, we can now ensure for our children a special part of their heritage -- a network of highways and mass transit that has enabled our commerce to thrive, our country to grow, and our people to roam freely and easily to every corner of our land.

This bill was possible because of the contributions of so many Senators and Congressmen, many of whom are standing here today. Without their leadership, cooperation, and determination, this bill would never have become law.

"Anyone who's driven the family car lately knows what it's like to hit a pothole -- a frustration, expense, a danger caused by poor road maintenance. Woeful tales of highway disrepair have become part of the trucking lore. Bridges are crumbling from under us in many of our older cities while growth is being stifled in our newer ones, because the transportation system can't cope with the expanding population.

"Overall, we have 4,000 miles of Interstate Highway that needs resurfacing and 23,000 bridges that need replacement or repair. Our cities need new buses, new or rebuilt railcars, and track improvements that will cost $50 billion during the next 10 years. Common sense tells us that it will cost a lot less to keep the system we have in good repair than to let it disintegrate and have to start over from scratch. Clearly this program is an investment in tomorrow that we must make today. It will allow us to complete the interstate system, make most -- the interstate repairs and strengthen and improve our bridges, make all of us safer, and help our cities meet their public transit needs.

"When we first built our highways, we paid for them with a gas tax, a highway user fee that charged those of us who benefited most from the system. It was a fair concept then, and it is today. But that levy has not been increased in more than 23 years. And it no longer covers expenses. The money for today's improvements will come from increasing the gas tax, or the highway user fee, by the equivalent of a nickel a gallon -- about $30 a year for most motorists.

"The repairs and construction are expected to stimulate about 170,000 jobs, with an additional 150,000 jobs created in related industries. Another provision in this bill adds up to 6 weeks of unemployment benefits for people who have used up all their unemployment insurance. Such badly needed assistance will put more than half a billion dollars into the pockets of family budgets of our long-term unemployed.

"While the action we take today will bring some relief to those of us who so want to work and yet cannot find jobs, its principal benefit will be to ensure that our roads and transit systems are safe, efficient, and in good repair. The state of our transportation system affects our commerce, our economy, and our future.

"That's why I'm pleased today to sign House resolution 6211, the Surface Transportation Assistance Act for 1982. It will help America enter a brighter and a more prosperous decade ahead. And so saying, and before the bridges fall down, I'll get this bill signed. [Laughter]"

Both Reagan and FDR argued government should create jobs for the unemployed, and both called for the spending to be paid for by the users of the capital assets both called for building with the labor of the workers employed.

We can not import the capital assets the nation needs. The steel industry died in the US because the US slashed its capital asset building and thus killed demand for all the steel production in all its forms. The US stopped making the huge castings like those for nuclear reactors and big ships and big lock dams because the US killed those industries in the US. While in the 50s, Congress would have deemed the steel industry critical to national defense and done all sorts of things to prop it up, Reagan took the view of conservative economists that the human capital to build steel foundries was found in Wall Street, not Pittsburg or the Chicago in Indiana.

Saying you can create the human capital needed in the classroom or now in the online education system is free lunch economics because the only way you have the human capital to build a steel industry is by people working all their lives in a real steel industry.

China is America in 1780-1830 desperately focused on building its own industrial economy so it could build an industrial economy to compete globally. China is proposing to do what Lincoln did as a capstone to his private practice - build railroads everywhere to develop the economy.

Economists dismiss railroads as critical for economic development, thinking they are old expensive technology better handled by cars, trucks, planes, and wireless digital. Railroads require too much sacrifice and too much labor and too much government, so economists reject them. But TANSTAAFL.

China sacrifices and US economists attack China for all the sacrifice forced on the Chinese people, saying sacrifice is harmful, that they have too much capitalism in China because China's government is providing too much support for private Chinese corporations using the savings of the Chinese to hire Chinese labor to build Chinese capital assets.

Economists claim China is doing what the US did when savings were used to churn assets and inflate asset prices without hiring labor to build more assets. China spends trillions to hire labor to build capital assets. The US uses savings to pump up asset prices and fights hiring labor to build new capital assets.

JohnH said in reply to anne...

IMO China is shorthand for "imports from cheap labor countries." As Chinese labor costs rise, cheap labor production is moving to places like Bangladesh and Vietnam, where wages are lower still. Nonetheless, with a billion people to employ, China will continue to supply a major portion of the world's manufactured goods, even as places like the Philippines and Indonesia grab small shares.

This trend has been exacerbated by US policy--reserve currency, overvalued dollar, and a single minded obsession to avoid US labor and environmental regulations. So today what the US produces best is junk securities...

New Deal democrat said...

Here are a few statistics to help understand how much the US consumer is saving on gas.

The average vehicle in the US is driven 11,318 miles/year:

http://www.epa.gov/cleanenergy/energy-resources/refs.html

The average gas mileage in the US fleet is about 24 miles per gallon:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/13/cars-in-the-u-s-are-more-fuel-efficient-than-ever-heres-how-it-happened/

There are about 250 million vehicles in the US:

http://www.latimes.com/business/autos/la-fi-hy-ihs-automotive-average-age-car-20140609-story.html

That's about 9 billion gallons of gas per month total in the US.

Every 10 cent decline put $900 million dollars a month in consumers' pockets.

Gas now is about 35 cents a gallon cheaper than it was last November. That means about $3 billion dollars this month that can be saved or spent elsewhere.

pgl said in reply to New Deal democrat...

With this drop in gasoline prices - New Jersey could afford a real tax on gasoline so it can fix its own roads and bridges and cease ripping off the Port Authority.

New Deal democrat said in reply to pgl...

Not a bad idea at all.

Btw, I have taken to renaming morning and evening traffic reports, "the daily infrastructure failure report," because that is usually what they are.

I vacationed in Central Europe last month. I would practically kill for the trains, subways, and trolley systems they have there.

mulp said...

60 Minutes has a segment on the transportation systems declining state.

In the free lunch economics that all economists have adopted since 1980:

  1. the value of the Interstate highway system has increased dramatically because of its economic value - those who claim the Interstates are declining in value are out of touch engineers who do not understand how the economy works - economies are unconstrained by natural laws and entropy
  2. hiking taxes on gasoline would kill jobs and cause a recession. The best way to create jobs is a gas tax holiday and cutting wasteful government spending bridges and stuff - after all, road construction interferes with the economy
  3. building railroads would be wasteful spending that would destroy the value of the Interstates. If a high speed rail system could carry container freight to regional centers, the value of the Interstate highways bypassed would decline because they are not carrying traffic. But the rail system investment would need to be paid for to cover the capital value destroying spending, and that would mean the shippers would be paying for the railroad capital instead of paying for oil which would result in lower demand driving down prices which would kill profits which in turn would destroy wealth, and that would means the wealth effect would slash consumption and cause a recession.

What no one says on 60 Minutes is that nothing should be spent on highway infrastructure. If a bridge fails, then the alternative routes will increase their monopoly, carry more traffic, and thus they will increase in value.

4) privatizing the Interstates so wealth can be released by doing IPOs. Those who get to own the Interstates can cash out, and those who buy shares in the right highway routes will really get rich quick when a competing highway is closed due to a bridge collapse. The monopoly power of that lone Interstate will instantly make it twice as valuable and Wall Street will turn it into wealth by higher share prices reflecting the monopoly.

The Effect of Oil Price Declines on Consumer Prices

The Big Picture

Oil prices have declined significantly in recent weeks, reaching levels not seen in several years. At the same time, the year-over-year percent change in the most widely known measure of inflation, the Consumer Price Index (CPI), came in at 1.7 percent for September, which is below policymakers' targeted levels. Given these circumstances, there is some concern that low oil prices, which have continued to remain below $90 a barrel through October, will keep inflation persistently below or even push it further from targeted levels. A look at historical relationships between oil prices and various price measures can help gauge the potential pass-through of the recent oil-price declines to other domestic prices.

Historically, international and domestic oil prices have moved closely together-until recently there had been 25 years of nearly identical price movement. (Brent crude is the measure of international oil prices, while West Texas intermediate is the measure of domestic oil prices.) However, at the start of 2011 they began to deviate slightly from one another. In October, oil prices fell significantly, resulting in some of the lowest international barrel prices since 2010, and the two crude benchmarks began to converge to the same price path.

The most direct impact that low oil prices, both domestic and international, have on other domestic prices is through a decline in retail gasoline prices. While oil prices and gasoline prices follow the same trend, gasoline prices react with a delay to changes in oil prices. Gasoline prices have been trending around $3.50 a gallon for a few years, a level much higher than before the recession, but by the end of October, they had declined to $3.14 a gallon.

In broader terms, one way in which we might expect oil prices to influence aggregate domestic prices is by lowering firms' costs of production. An indicator in which this effect would show up is the Producer Price Index (PPI), which measures the change in the selling prices received by domestic producers for their output. As production costs go down, firms can lower the prices they charge for their produced goods. The year-over-year percent change in the PPI for finished goods has been loosely related to international oil prices for the past 20 years. But when oil reached $60 a barrel in 2007, the two price series began to move more in sync. The year-over-year percent change in the PPI was lower in the most recent data release, but it is still too early to tell whether low oil prices are going to feed through to the PPI going forward.

[Nov 21, 2014] Richard Heinberg on Snake Oil How Fracking's False Promise of Plenty Imperils Our Future

"Limits to growth" was published 1972. See also limits to growth a report to the club of rome and Suffer the Intellectuals - The American Interest
Feb 26, 2014 | YouTube

Recorded February 25th, 2014 in Vancouver, BC

Richard Heinberg speaks on his newest book, covering the short-term nature of the recent North American oil boom and the financial bubble that supports it.

Heinberg covers the implications of the 2016-2017 peak in unconventional output by providing essential information for any community facing the false promises of companies planning to extract reality

Event Partners Include: Village Vancouver, Post Carbon Institute and the UBC Sustainability Initiative

baobab 2050

Keep in mind that shale gas EROEI at the wellhead, though impaired by the nonstop drilling and rapid declines, can still be quite high. But the EROEI of all gas production plummets once we factor in the energy costs of compressing and distributing gas to end users.

By Charles Hall and David Murphy. An estimate of natural gas EROI, at the well head and at the point of use. Prof. Hall made the observation that the EROIs are declining so much, and the difference between the EROI at the point of calculation and where the energy is delivered is so large, that coal may be what is running the US economy.

The bottom line is that serious homework needs to be done on the EROEI of shale gas before one buys into the hype concerning its economic viability. The Oil Drum article linked above is doing exactly that, and reveals yet another web of carefully disguised fraud or stupidity. Arthur Berman's serious homework stands in stark contrast to the apparent "logic" of the shale gas players. The latter was laid bare by Rigzone in September 2008, when they published the following list of 25 reasons why the lemmings were rushing off the shale gas cliffs:

Are Marcellus gas producers all lemmings looking for a cliff? A number of people are beginning to seriously question the gas shale phenomenon given the continuing, and projected to continue, low gas price outlook. These critics recognize that many producers, especially the publicly-traded companies, are being pressured to engage in group-think by institutional investors. In fact, several friends have compiled a list of reasons why this group-think exists and we list them below. The authors of the list suggest it does not include all rationales and welcome any additions.

1. Bravely defend the leases
2. Add reserves
3. Grow production and be a good employee
4. Grow production to prolong the illusion that this is profitable
5. Grow your bonus and the value of your stock options
6. They made me do it (the investment bankers)
7. An investment in the future when gas prices are higher
8. Technology will save the day
9. Optionality
10. The land is the play
11. Greater fool theory: live another day to flip the company
12. Cash flow to pay debt service
13. Playing God: I think I'm flying
14. I can't admit that I was wrong
15. No better ideas
16. Charles Prince at the Dance
17. Market share
18. Relatively low rate of dry holes
19. Fear of litigation when the whole game ends
20. Continued access to capital
21. Peer pressure
22. Vast number of enablers (bankers, analysts, service companies)
23. Still more shales to declare "great"
24. Government allowance seen as source of tax revenue, jobs
25. "I am an E&P company"; what else would you expect?"

daryanenergyblog

However, in the last few weeks a number of revelations (on the back of a number of leaked documents released via the NY Times last year) from within the shale gas industry have seemed to confirm the skeptic's suspicions, that all was not rosy in the Shale gas garden (nice summary article from Forbes on this here). These documents paint an image of an "…ENRON like" (to quote one executive) industry, with numerous technical and environmental problems casually swept under the rug. Of an industry more interested in good public relations and attracting investors ("…con Wall street" to quote another executive) than pumping out gas. According to some of the sources, a number of shale gas operations are essentially "…uneconomic", while some are unlikely to yield any sort of return at all. In one leaked e-mail an executive describes how many "plays" (that is drilling operations) are "…just giant Ponzi schemes".

[Nov 21, 2014] Energy Returned on Energy Invested (EROEI) for Shale Oil and Shale Gas

Geothunder Energy

Some Data for the numbers people:

It is important to realize that these ratios change dramatically year to year based on technological changes. For instance, I know that the ratio for the tar sands is off, but that is not what this post is about, and I do not feel like trying to find data that may not exist yet.

Natural gas: 10:1
Coal: 50:1
Oil (Ghawar supergiant field): 100:1
Oil (global average): 19:1
Tar sands: 5.2:1 to 5.8:1
Oil shale: 1.5:1 to 4:1

Wind: 18:1
Hydro: 11:1 to 267:1
Waves: 15:1
Tides: ~ 6:1
Geothermal power: 2:1 to 13:1
Solar photovoltaic power: 3.75:1 to 10:1
Solar thermal: 1.6:1

Nuclear power: 1.1:1 to 15:1

Biodiesel: 1.9:1 to 9:1
Ethanol: 0.5:1 to 8:1

This list comes from:

• Richard Heinberg, Searching for a Miracle: 'Net Energy' Limits & the Fate of Industrial Society.

[Nov 21, 2014] Oil at $75 Means Patches of Texas Shale Turn Unprofitable

Bloomberg

With crude at $75 a barrel, the price Goldman Sachs Group Inc. says will be the average in the first three months of next year, 19 U.S. shale regions are no longer profitable, according to data compiled by Bloomberg New Energy Finance.

Those areas, which include parts of the Eaglebine and Eagle Ford in East and South Texas, pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo Inc. and company presentations. That compares with the 1.03 million-barrel gain in daily national output over the past year, government figures show.

... ... ...

"Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke," said Daniel Dicker, president of MercBloc Wealth Management Solutions with 25 years' experience trading crude on the New York Mercantile Exchange. "The shale revolution doesn't work at $80, period."

... ... ...

Estimates of the price that drillers need to break even have varied. The Paris-based International Energy Agency said about 96 percent of U.S. shale production remains profitable at $80 a barrel. Analysts at Sanford C. Bernstein LLC said one-third of the output added in the first three months of 2014 is uneconomic with WTI at $80.

About 80 percent of potential growth from U.S. shale oil in 2015 would remain economic at $70 a barrel, IHS Inc. said in a report today. At an average annual price of $77 a barrel, output will rise by 700,000 barrels a day in 2015, compared with more than 1 million barrels a day this year, the Englewood, Colorado-based data provider said.

... ... ...

By contrast, the biggest-producing fields -- North Dakota's Bakken and the Permian and Eagle Ford in Texas -- pump a combined 4.7 million barrels a day, according to the Energy Information Administration. Those regions remain economic at $55 to $65 a barrel, according to Manuj Nikhanj, head of energy research at New York-based Investment Technology Group Inc. What matters more than break-even levels is that lower prices reduce the cash flows companies can use to reinvest in new production, he said.

... ... ...

Some break-even analyses have been wrong because they use improper assumptions, Robert C. Turnham Jr., Goodrich's president, said on a Nov. 4 conference call. A well that costs $13 million and eventually yields the equivalent of 600,000 barrels of oil returns 13 percent at $70 a barrel, the company said in a Nov. 11 slideshow.

"The first question on every earnings call is, "What can you do going into the next year if we really are in a $75 oil price environment?'" said Chad Mabry, an analyst at MLV & Co., an investment bank in Houston. "We're already starting to see some cracks."

Damian Shchur

This "Region's break-evens range from $79.28 to $186.73 a barrel." There is no way this is true. Oil prices peaked in 2008 around $140 a barrel. Nobody would invest in a well with a negative profit margin.

I think the wide range of estimates for break even cost is based on wide range of assumptions made when calculating them. You need to look at the time period of the investment and the amortization period used. I think this article might be assuming a 1 year return.

As DataAnalyzerVA pointed out, the first year is the most expensive, and then costs drop off. Nobody is going to close the spigots, though we may see a decrease in investments for new oil fields for the next 2 years. Regardless, US production will be higher in 2015 than in 2014. I think OPEC reduces output before the US does.

oil_rick10

This article is so far off on average breakeven oil prices in most of these plays it's laughable. If supply is the answer, needs to come from most marginal shale plays and abroad. OPEC governments rely heavily on oil and gas for social programs so can't analyze them like American energy companies - need to look at breakevens on their budgets, not the individual wells.

Saudi's breakeven oil price to balance their budget is ~$100/Bbl and most of OPEC is worse than that. All a waiting game to see who can rely on their surpluses and gain the most market share until none can take the pain anymore. 6-9 months max

Grey Fox

Great PR dribble, I wonder which firm came up with this Bull-scat.

I don't believe a word of it! This level of pricing might be a reality for producing a well but once the well has pumped enough to pay for the well the cost of a nodding donkey pump each day.

But to say that a well any well is only breaking even at $150 would mean to me that insanity has become the norm and those well should be to shut it down today. What are they doing to get the oil, supping it up off the ground with paper towels.

David L. > Grey Fox

Don't forget the maintenance charges for replacing sucker rod strings, pumps, heater treaters, pumping unit parts, and a myriad of other items that are required to keep the crude flowing.

Most people forget the small things that add up. After 45 years in the oil business I've heard just about everything that you can throw out there.

I once asked a friend of mine from back east if he knew how they got oil out of the ground and he said "You just go out and poke a hole in the ground and then suck it up with a pump".

DataAnalyzerVA > Grey Fox

It all comes down to how the upfront drilling costs are allocated over the production life of the well. Marginal costs are very low once the well is in production and will be for years if not decades. No one shuts down a well that's producing.

Dcoronata > DataAnalyzerVA

Shale isn't a well in the traditional sense -- you have to frack the substrate, pump in high pressure CO2 or/and steam, and you've got to gather up what oozes out. And as time goes by it gets worse -- more steam, more negative pressure, more heat to break down what remains.

Then all you get is natural gas.

Cornelius Carroll > David L.

The phases of recovery and their typically associated timelines refer to conventional oil fields. Shale fields have very high decline rates and are often re-fracked after ~18-24months.

Dcoronata > DataAnalyzerVA

But not for shale and way worse for tar sands.

This is about EROI and the cost of infrastructure and refining. The EROI for shale is about 80% -- One energy-equivalent bbl of crude needs 1.25 bbl of shale because you're putting the rest back into the ground in the form of steam and pumped high-pressure CO2.

Then you've got to truck it, and you've got millions of barrels of contaminated water to deal with. One bbl of oil takes 3 of water, and you've got to get that from somewhere. And it needs to be clean, or else you damage your high pressure boilers and pumping equipment.

[Nov 21, 2014] Russia Can Survive An Oil Price War naked capitalism

By Colin Chilcoat, a writer at OilPrice. Originally published at OilPrice

Still, the lower prices – Brent crude has averaged $81 per barrel thus far in November – are in no party's best interest and OPEC will do their best to keep prices high while defending their market share. The cartel's upcoming meeting in Vienna on the 27th will go a long way in determining the future trajectory of oil prices. The global supply glut will be the focus, but theories surrounding both US and Saudi collusion and conflict give doubt to any plan for unified production cuts.

Business as usual in Vienna would be a welcome sight for Russia, who would see a decline in the United States' ability to define geopolitical events in the Eastern Hemisphere. The truth is, the US can't win any volume or price-based game of brinkmanship with the traditional producing states, Russia included. Shale plays in both Russia and the US will soon be priced out with continued slippage. Unlike the States however, a majority of Russia's production comes from cheaper, though declining, fields in West Siberia. The International Energy Agency already predicts a 10 percent decline in US shale investment in 2015.

Whether or not that's enough to stunt global supply remains to be seen. Shaky situations in Iraq and Libya could just as easily remedy pricing woes overnight. What doesn't kill you doesn't always make you stronger, but Russia can survive a price war.

rkka, November 21, 2014

"The question isn't whether Russia can survive an oil price war, but whether Putin can survive one."

Easily.

1) The Russian gvt's foreign-currency-denominated debt is trivial, and all her bills are in Rubles. So the floating Ruble counterbalances the oil price decline nicely. Fewer $/barrel, but more Rubles/Dollar.

2) The declining Ruble makes an import substitution strategy more effective.

3) Russians remember the last time Western-oriented 'FreeMarketDemocraticReformers' were in charge. 'FreeMarketDemocraticReforms' had put ~60% of Russia's GNP in the hands of seven bankers, who considered paying taxes & wages a decidedly lower priority than stripping assets from the businesses they had acquired by payoffs to the Yeltsin 'Family', and offshoring the proceeds. The Russian government was bankrupt. Debt payments to Western banks & intl. institutions was about 50% or the Russian government's total revenue. There were cases of death by starvation in remote Russian army posts. Overall, deaths in Russia were exceeding births by a million/year.

And all the Anglosphere Foreign Policy Elite & Punditocracy (AFPE&P) would say about the situation was

"Moar Reforms!!! Faster!!!"

By contrast, in 2013, births exceeded deaths in the Russian Federation for the first time since 1991.

And the AFPE&P are permanently outraged at Putin, and have been ever since Putin took down their Golden Boy Khodorkovsky in 2003. The AFPE&P care not how, or even whether, Russians live, only that the Russian government submit, which Yeltsin did, and Putin does not.

And Russians know this.
So, yes. Putin will survive this easily.

Zver Muzhik, November 20, 2014 at 10:38 pm

Don't know about Schlumberger, but Halliburton absolutely does not get '5 percent' of its global revenues from the Russian market. more like 2.5 percent. and the profit margins are much lower than in other markets because of higher costs of doing business. moreover, since the sanctions virtually all of their client base is off limits.

Halliburton will probably leave Russia altogether, as was alluded in a recent moscow times piece – http://www.themoscowtimes.com/business/article/sanctions-squeeze-western-oil-service-companies-out-of-russia/507136.html

if the halliburton-baker hughes merger goes through, that means that 2 of the 3 major players will be gone, and i wouldn't be surprised to see schlumberger follow suit.

without modern drilling technology available, russia will be hard-pressed to fully exploit its energy reserves.

bobby, November 21, 2014 at 12:09 am

This is what I don't understand. US, canada, australia oil industry will die first long before Russia. US:expensive shale oil, Canada expensive sand oil, Australia expensive deep water gas. None of them can survive $60-70/barrel oil. Russia can. Painful, but not lethal.

If Oil touches $60/barrel, the entire US shale oil industry, including the mos competitive texas one will fold. The next question: what will happen to trade deficit? Borrow money from china to buy middle east oil?

This on top of ever unstable middle east situation.

so, you tell me who will survive the oil war.

Coldtype, November 21, 2014 at 5:59 am

The US doesn't "borrow" money from China or anyone for that matter as it is the sovereign issuer of its own currency via keystrokes.

The US offers those in possession of dollar assets, which earn no interest, the option of exchanging them for US Treasury Securities that do pay interest, also in dollars, via the same keystrokes.

Optimader, November 21, 2014

https://ir.citi.com/rBWYa6YM4Scr4LsmpuQB8DZubx61JU8NqGw5jsCxMMfxMRxBp4u4gwbWrQgfNlfhzMSpx1Jv3qA%3D
Energy2020 out of america

Of course Russia will survive, so will us shale oil production. The graph is overly pessemistic on breakeven for developed production. More like $40/bbl. Saudi Arabia will run out of bullets first

Yves Smith, November 21, 2014 at 3:04 am

There are two arguments that get conflated, and IMHO this article might have focused on the wrong one. There is the production break-even, and the fiscal break-even, which is the price of oil a state needs to maintain its government finances. The Saudi fiscal break even has been pegged at $90 a barrel.

However, the Saudis have plenty of borrowing capacity, so they can play the predatory pricing game for some time.

The Saudis have the best petroleum engineers in the world. They are also widely cited as having the lowest production costs. No matter how glossy the presentation (and I note a lot of undue bullishness re shale oil here), I'm skeptical of a single analyst's report so out of line with what is reported virtually everywhere else.

Optimader, November 21, 2014

It will remain to be seen if the saudi arabian reserve capacity over time is sufficient to replace shale oil production below all of it's players breakeven.

Im guessing no.

As for russia, their state controlled production will soldier on, gasprom will begrudginly assist rosneft. It will be interesting to see what SA idle reserve production capacity turns out to be recalclated as

Generalfeldmarschall von Hindenburg, November 21, 2014

The only thing not being addressed that's crucial to all this is the peak oil question. I guess oil must abiotic ally replenish somehow if the Saudis can just endlessly kick out the jams whenever they feel like crushing the competition? They've been doing this since the early 70s

optimader, November 21, 2014 at 11:34 am

I hear what your saying..

All mere speculation, but the US shale oil industry is not an amorphous interest so although it may in aggregate have an average breakeven price of $**/bbl, it is composed on discrete players. Presumably the expensive ones may go upside down and idle, but there are lower breakeven plays that will muddle on.

Personally I don't think Saudi Arabia has the idle capacity to pull the stops out on that will supplant the lower breakeven shale oil. SA has traditionally been VERY opaque on real reserves and idle capacity. the latter would have to be bigger than I think it is. In any case, it's not a long term play that I think will work to kill the shale oil industry, bloody its nose, of course.
As far as Stadia Arabia having the best petroleum engineers (and petroleum geologists?), that may or may not be the case, never thought about it. If they do I'm guessing most are American and European contractors, not Saudis.

It's a good question, I'll probably be having beers w/ a couple frmly w/ UOP & Amoco this weekend that would be at the top of the list in those professions, I'll ask them that. Surely I'll solicit an unbiased opinion HAHAHA

kievite, November 21, 2014 at 3:54 pm

Presumably the expensive ones may go upside down and idle, but there are lower breakeven plays that will muddle on

I am not sure that to idle is possible as shale oil companies are major issues on debt on junk market. They need to service those loans. And with typical life of the a shale well of less then three years, they need to drill and drill to stay solvent. Now they can't get new financing. So my take on this that they might go bankrupt.

You are right that Russia will be severely hit by sanctions. They are already suffering. But
one interesting issue is the ability of Russian to compensate for Western technology from Chinese or other sources. They have huge experience in this particular area as during Soviet times they were under sanctions all the postwar period.

I think they also might realize that they actually do not need to rush as their foreign debt is not that large. They can use accumulated foreign currency reserves for some time leaving some oil in the ground for now as oil is now the most powerful convertible currency. So they can join OPEC and cut output as the matter of common policy. That will be huge surprise for the US policy makers.

I feel that outside few "indispensable" companies those major Western companies that left Russian market has little chances to return. Some are intentionally pushed out (Coca-Cola). In any case for US food producers the market share will shrink. Also looks what is happening with German auto and industrial exports right now. German suppliers are now treated like "also run" and simply avoided in new contracts, if such a possibility exists. That policy also effect "easy money": all US major accounting/auditing companies might now be shown the door.

Does not not diminish the damage for Russia. I just want to say that sanctions are two way street and Russians might have a few tricks in their sleeves as the US elite is stretched between containing Russia and containing China.

There is problem here - shorttermism of the US foreign policy. I am slightly skeptical about the abilities of the current ruling oligarchy in the USA to calculate the position three or four moves ahead in this chess party.

Many important technologies are in some form are now available elsewhere, so the key question is whether the US can persuade other countries to join the sanctions game. So far they managed to coerce/persuade Europe (not without Merkel help, NSA probably has something on her ;-).

And if Hillary can become the next President, then all bets are off. She has a unique ability to spoil everything, in foreign policy. Probably only Senator McCain can compete with her in this particular ability. Such chickenhawks as her might be a huge liability for the USA as a country.

jay moses, November 21, 2014

Russia survived world war 2 despite the loss of 20million lives she survived the 1950′s-1989 despite the shortages of everything that resulted from the command economy. Russia survived the collapse of the USSR despite the collapse of the economy it had left after 72 years on the communist road to nowhere.

anyone who thinks that these absurd sanctions are going to accomplish what the nazis, economic collapse and the loss of empire did not accomplish is brain dead.

if the russian people know how to do anything, it is how to survive anything.

Vatch, November 21, 2014

I just had a thought: maybe they're tired of surviving hard times.

James, November 21, 2014

So did I: And so they should become a subsidiary of USA Inc?

susan the other, November 21, 2014 at 2:57 pm

The bit about (in comments) the elasticity of oil producer states and their currency was interesting. Makes more sense of the 'petrodollar' than before. Demand rules.

I'm still puzzling over a reported comment by Merkel that Putin is "delusional" in his foreign policy. Does his delusion run toward the US or against us?

different clue, November 21, 2014

More oil . . . more carbon skydumping, more ocean acidation, more climate dechaos decay.

Well! isn't that special.

IEA predicts 'new chapter' for oil markets, sees price declines into 2015 as likely

The Barrel Blog

"While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80-$90/b range, supply/demand balances suggest that the price rout has yet to run its course," it said.

Market players have estimated that some US light, tight oil production could become uneconomic at current price levels, including OPEC Secretary General Abdalla el-Badri, who last month said 50% of US light, tight oil production could come off the market as a result of the low price.

[Nov 18, 2014] Approximately 16% of US oil production has break-even price between $80 and $60 and can be affected by drop in oil prices

...some shale oil is fairly costly to extract and some wells were only drilled because WTI at over $100 made them seem like a reasonable proposition, but the vast majority of producers and plays can survive with oil at these levels. According to IEA Executive Director Maria van der Hoeven in an interview with Reuters recently

"…some 98 percent of crude oil…from the U.S. has a breakeven price of below $80 and 82 percent have a breakeven price of $60 or lower."

[Nov 17, 2014] US shale industry is weakening. Will there be a shakeout? By Nick Cunningham

May 29, 2014 | csmonitor.com

Shale oil and gas companies' debt has almost doubled in the last four years. What are the consequences if the US shale industry experiences a shakeout?

The US shale industry may be a lot less healthy than many people think. A new analysis from Bloomberg News found a startlingly high level of debt in the shale industry, with companies borrowing more and more money as revenues disappoint.

According to the report, debt among shale oil and gas companies has nearly doubled over the last four years. While drillers often need to borrow in order to expand, revenues have not kept pace, growing at a mere 5.6 percent over the same time period.

The problem is that many shale oil and gas wells offer an initial burst of production over the first year or two. After that, output drops precipitously, and if companies have not paid down debt, they may have much more difficulty in later years than they may have anticipated. They fall into a downward spiral in which a greater share of their revenue must go to paying down debt.

Bloomberg concluded that out of the 61 companies surveyed, around a dozen are spending more than 10 percent of their revenues on debt interest.

What's the significance of so many shale drillers struggling to turn a profit? It means that the zeal with which investors poured money into so many shale companies may be at an end. The industry is due for a shakeout. (Related Article: U.S. Shale: Dazzling Numbers, But Also Divisions)

The companies in the worst shape – those that are highly leveraged without a growing production portfolio – could be heading towards bankruptcy. As the weakest links drop out, the industry will consolidate and leave only the strongest and healthiest producers.

A shakeout is normal in any industry when the hyper-growth phase begins to slow. But unlike in the tech industry, for example, the shale industry's economic fortunes have ramifications far beyond individual companies, their employees and investors.

If drillers begin to go belly up, oil and natural gas production growth could slow or come to a halt. The Energy Information Administration projects in its latest Annual Energy Outlook that US natural gas production will grow at a steady rate of 1.6 percent per year through 2040. That would mean that over the next 25 to 30 years, natural gas production would expand by an astonishing 55 percent.

But that may be wildly optimistic given the fact that so many companies are struggling to be profitable right now in the shale patch. Or put another way, production may not be sustainable at current price levels, and would have to rise in order for growth to continue.

Either way, a lower growth trajectory or higher prices would seriously alter the expectations about the U.S. energy picture. For example, if natural gas prices need to significantly rise in order to maintain growth, the opportunity to export significant volumes of liquefied natural gas (LNG) overseas may be smaller as well. That's because US companies would not be able to arbitrage American gas as easily by liquefying it and selling it at a higher price to hungry consumers in East Asia. (Related Article: Is This Shale's Power-to-the-People Moment?)

As a result, the companies investing money into building LNG export terminals that costs billions could begin to look a bit inflated.

A shale shakeout would also reverberate through the electric power sector since plateauing shale gas production would be a boon for renewable energy. Natural gas was expected to gobble up an ever-increasing share of electricity generation because prices were expected to remain stable even as production rose. But if those expectations turn out to be wrong, that leaves a lot of space for other forms of generation. And with coal and nuclear power becoming increasingly uncompetitive in 21st century America, that leaves an enormous opportunity for renewable energy.

As for oil, lower production from shale would also mean that the US would continue to rely on imported oil instead of domestic production. While that does not mean much on its own, the fact that the oil industry can no longer offer trite promises of "energy independence" means that Congress may have to face up to the fact that the US needs to find alternatives to oil for the long-term.

The shale revolution has been an opiate for many of the US's energy problems for several years now, but that could begin to change if the industry begins to falter.

Source: http://oilprice.com/Energy/Energy-General/Is-The-Shale-Industry-About-To-Experience-A-Shakeout.html

[Nov 17, 2014] Will Oil Drop Below $70?

Nov 05, 2014 | 24-7 Wall St.

However, there is a school of thought that rising shale production could put a floor on prices. Dave Lesar, co-chief executive officer at Halliburton, told Bloomberg:

Unlike with conventional oil, shale wells peter out quickly and companies depend on constant new drilling to maintain production levels. This also makes shale more responsive to price movements. Lower prices will discourage new drilling, quickly removing the glut in crude supplies.

For the time being, Lesar's comment puts him in the minority.

[Nov 17, 2014] All Aboard The Instability Express

Nov 17, 2014 | Zero Hedge

Across the board, shale oil production has not been a profitable venture since it was ramped up around 2006. Below $80 a barrel, chasing profit only becomes more difficult for those who couldn't make a profit at $100. A lot of those junk bond "investments" are about to become worthless, and the "investment community" will lose its appetite for any more of it. That will leave the US government as the investor of last resort. Expect that to be the object of the next round of Quantitative Easing. The ultimate destination of these shenanigans will be the sovereign debt crisis of 2015.

[Nov 17, 2014] Why $3 a gallon gas is a bad sign for the global economy By Max Ehrenfreund

Nov 17, 2014 | The Washington Post

There are already signs that gasoline prices, which have fallen to their lowest level in the past six years, are making it easier for Americans to get by. The sudden, 20 percent decline in gas prices has saved the average person $520 since June, and people are putting that extra money to use. Wal-Mart said last week that its quarterly sales had i

... ... ...

The unfortunate truth is that low prices for gasoline are a symptom of a sickly global economy. It isn't just gas prices that are falling as consumers make do with less and businesses put off new investments in Europe, China and Japan. Metals such as copper, silver and platinum are cheap, too, and so are crops like corn, soybeans and wheat.

If prices continue to fall, the economy could be in real danger, because there won't be much central banks can do to encourage spending with interest rates already at or near zero in most of the world. Lower prices might be good in themselves, but it's what they reveal about the way things are headed that's cause for concern.

[Nov 17, 2014] Analysis: winners, losers and political uncertainty

Fracking industry will be the first victim. Below $80 marginal players will be bankrupt. US bond market might be next, as fracking is about the issuance of bonds parallel to drilling, not just drilling ;-). And fracking is only viable due to current high prices.
Nov 15, 2014 | theguardian.com

There have been four major recessions in the West since the mid-1970s and each has followed a spike in the oil price. All downturns have their own peculiarities, but one common thread links the stagflation of the seventies to the mega-crash of 2009: dearer crude. The opposite also applies. A low oil price was a vital ingredient in the post-war Golden Age, and a falling oil price lubricated the strong and sustained growth of the 1990s. Logically, therefore, the 25% decline in the cost of crude since June should mean higher levels of activity.

For that to happen, however, the oil price will have to fall a lot further, to somewhere around $50 a barrel. At $115 a barrel the price was consistent with rip-roaring levels of demand.

In the meantime there will be winners and losers. The winners are the large net importers of oil and those that have high inflation rates, such as Turkey and India. Business costs will fall and consumers' incomes will stretch further.

The losers are oil producers, which will see growth fall and budget deficits swell. Iran, subject to a crippling western embargo, needs an oil price of more than $140 a barrel to make its budget break even. Anything below $120 a barrel spells trouble for Venezuela and Nigeria. About $105 a barrel is Russia's cutoff point. At today's price even Saudi Arabia, the world's biggest producer, is starting to feel the pinch as it has used a high oil price to fund generous public spending. It needs $93 a barrel to balance the books.

The problems are magnified for many of these countries because high oil prices have stunted the development of other sectors of the economy. In Russia, oil and gas accounts for 70% of exports. The country's struggling manufacturing sector relies heavily on orders from energy companies.

Falling oil prices are the result of a glut of supply and an easing of demand from a slowing global economy. Saudi Arabia could try to arrest the decline by cutting production, although a similar ploy was notably unsuccessful in the mid-1980s. Despite having youth unemployment of above 30%, Riyadh would probably live with $80 barrel oil prices if it thought it would discourage Vladimir Putin from turning off the taps to the west.

This is where the economics of oil mesh with geopolitics. One theory is that lower oil prices will force Russia to adopt a softer line over Ukraine, and Iran to come to terms over its nuclear programme. But a sharp dose of economic pain in countries that are highly volatile could have the opposite effect.

mosquitohippy 17 Oct 2014 13:59

That's why Saudi are doing this, to take out others forms of oil production, fracking is only viable due to current high prices.

SalmanShaheen 17 Oct 2014 09:49

Lower oil prices are clearly going to cause domestic upheavals around the world, but the really interesting point is that by 2035 the IEA expects America to be energy independent thanks to its fracking boom. Given the importance of oil to US foreign policy, this is going to have a number of geopolitical implications for Russia, Venezuela and the Middle East http://theworldweekly.com/#!/reader/i/2482

RUTHLESSSNIPER LossinLips 17 Oct 2014 08:05

I've been hearing since 1970 that we would run out of oil in 15 years. That 15 years has come and gone almost 3 times now, yet more continues to be found and the technology to get it is developed.

RUTHLESSSNIPER Spike501 17 Oct 2014 08:01

$2.73 Yesterday in South Carolina.

[Nov 16, 2014] The cost of new oil supply

Apr 17, 2012 | SmartPlanet

Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 - $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 - $90 a barrel for the Canadian tar sands and heavy oil from Venezuela's Orinoco belt; and $70 - $80 a barrel for deepwater oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.

Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 - $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.

Globally, Skrebowki estimates that it costs $80 - $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.

My own research suggests that $85 is really the comfortable global minimum. That's the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

[Nov 16, 2014] Shale Oil: Expensive, Over-Hyped, & Short-Lived

zerohedge.com

Submitted by Adam Taggart via Peak Prosperity blog,

If you've watch the previous video chapter on Peak Cheap Oil, you may be wondering how any of that could be still be true given all the positive recent stories about shale oil and shale gas , many of which have proclaimed that "Peak Oil is dead".

The mainstream press has faithfully repeated every press and PR statement made by the shale producers. And if you simply followed the headlines, you might even believe this about the US:

The only problem with this story is that it is misleading in some very important ways. And entirely false in others.

Here are there are five main things to know about the shale plays.

  1. They deplete very quickly. The typical shale, or tight rock, well production declines by 80% to 90% within three years.
  2. They are expensive. All oil and gas coming form them is several times more expensive than what we got from conventional oil plays.
  3. They are environmentally damaging because the fracking fluid is highly toxic and much of it escapes during the blowback process and sometimes water wells are contaminated.
  4. Because each well has low flow and depletes quickly, massive numbers of wells must be drilled creating significant infrastructure damage to roads and bridges. Currently no state or municipal authorities are capturing anything close to the total cost of the infrastructure damage from the shale operators which means taxpayers are gong to be left paying those bills.
  5. Not all shale plays are created equal – some are vastly superior to others. And even within a given play there are sweet spots and dry holes which can only be determined by punching a well in and seeing what comes out. Some call this the 'mapping by braille' approach.

When we put all of these together it adds up to a very expensive set of plays that will only last for a very short while.

To the extent that mainstream press has been conveying the message that peak oil is dead and that our energy concerns have been laid to rest is the extent to which they have been misleading us.

In many ways, the increased crude output from shale plays has bought us some time. We can either use the temporary boost in energy supplies, expensive though they are, to build towards a future when these too eventually run out, or we can use them as an excuse to carry on with business as usual.

If we do choose business as usual as our operating strategy - I use that word very loosely – then we will just march straight into the shale oil peak around the year 2020 and be very disappointed with ourselves and our utterly inappropriate transportation infrastructure.

Escrava Isaura

But, but, but,.......Obummer said my lifestyle would't change. My answer: It will... and very soon. The word (conventional crude) oil production, minus US:

So, the world oil (standard) rate of decline of 5% was delayed. Now, what will happen when 3.5 MBpD (5%) of oil starts to decline, annually?

Where will you find 3.5 MBpD? Just to keep even.

http://peakoilbarrel.com/wp-content/uploads/2014/11/World-Less-US-N-O-Less-US.png

Latina Lover

Shale oil is a stop gap, a reflection that most of the cheap oil has already been produced or found.

SafelyGraze

oh, fine

this article is clearly just another propaganda piece for liquid salt thorium reactors

can't we all just agree that natural gas, coal, oil, and uranium are what we want?

not to neglect wind hugs, the photovoltaic society of the orient

JustObserving

Sooner than you think in California:

State officials allowed oil and gas companies to pump nearly three billion gallons of waste water into underground aquifers that could have been used for drinking water or irrigation.

Those aquifers are supposed to be off-limits to that kind of activity, protected by the EPA.

"It's inexcusable," said Hollin Kretzmann, at the Center for Biological Diversity in San Francisco. "At (a) time when California is experiencing one of the worst droughts in history, we're allowing oil companies to contaminate what could otherwise be very useful ground water resources for irrigation and for drinking. It's possible these aquifers are now contaminated irreparably."

http://www.nbcbayarea.com/investigations/Waste-Water-from-Oil-Fracking-I...

falak pema

Shale or tight oil contributes nearly 3 million B/D to current US production and is projected to contribute 5 million BPD by 2016 then stabilising at this level around 2020 in the base scenario and going to 12 million BPD in 2030 making US autosufficient at 18 million BPD total production, in the optimistic case.

Along with NGL and eventuel biofuel it should then hit 20 million BPD of liquid production making it even export oriented. Thats the rosy story of the Oil lobby.

Now, given the fleet of drilling wells this will require-- as the depletion rates of these wells means at best individual well depletion time is 5 years-- we should have more rigs drilling wells than cars driving in American gruyere land. Anybody want to live in permanent earthquake land sitting on the dock of the bay where the oils wells belch their fracked oil like squirrels popping their heads out on a golf course?

American exceptionalism at its best. (I didn't bother to see the video).

Serfs Up

And whose 'reference scenario' is that? Yours?

Because it sure ain't the EIA's. http://www.eia.gov/forecasts/aeo/section_issues.cfm#tight_oil

The reference scenario they have shows oil production peaking in ~2020 and then dribbling down thereafter.

This is probably still optimistic (given the recent oil price collapse) but let's give us all the benefot of that doubt, shall we?

This still means the shale miracle tops out in 2020 and then we're right back where we started...competing with the world for what can be exported....this is why the APEC conference was such a major geopolitical realignment.

And Brisbane just confirmed it. It's "us" against "them."

But seriously, what's the plan, US? Is it pretend we're number one until 2020 and then we get cranky-serious about everything? Okay. But that's not a strategy and it's not even a plan, unless ostriches have plans when they stick their heads in the ground.


[Nov 16, 2014] Putin blames politics for falling energy prices

Nov 06, 2014 | finance.yahoo.com

In an interview with Chinese media published on Thursday, Putin did not blame any particular country for the price drop, but some Russian political commentators have depicted it as a Saudi-U.S. plot against Moscow.

"Of course, the obvious reason for the decline in global oil prices is the slowdown in the rate of (global) economic growth which means energy consumption being reduced in a whole range of countries," Putin said, according to a text released by the Kremlin.

"In addition, a political component is always present in oil prices. Furthermore, at some moments of crisis it starts to feel like it is the politics that prevails in the pricing of energy resources."

The price of Russia's flagship Urals (URL-E) crude oil blend has fallen by about a quarter since the end of June, following the trend in global oil prices.

Trading at over $80 per barrel, it is well below the $114 required to balance the Russian budget. That will further weaken an economy already hurting from Western sanctions over the crisis in Ukraine.

[Nov 16, 2014] Has Washington Just Shot Itself in the Oily Foot by F. William Engdahl

The collapse in US oil prices since September may very soon collapse the US shale oil bubble and tear away the illusion that the United States will surpass Saudi Arabia and Russia as the world's largest oil producer.
Nov 06, 2014 | voltairenet.org

By organizing in Iraq and Syria the first war leading to a decline in oil prices, the Obama administration's intention was probably to cripple its adversaries' economies: Russia, Iran and Venezuela. But this policy can have severe unintended consequences in other areas: acceleration of China's development, threats to the dollar's value and a challenge to the economic model predicated on an illusory shale oil bonanza. For William Engdhal, this last manipulation is perhaps the straw that will break the camel's back.

The collapse in US oil prices since September may very soon collapse the US shale oil bubble and tear away the illusion that the United States will surpass Saudi Arabia and Russia as the world's largest oil producer. That illusion, fostered by faked resource estimates issued by the US Department of Energy, has been a lynchpin of Obama geopolitical strategy.

Now the financial Ponzi scheme behind the increase of US domestic oil output the past several years is about to evaporate in a cloud of fictitious smoke. The basic economics of shale oil production are being ravaged by the 23% oil price drop since John Kerry and Saudi King Abdullah had their secret meeting near the Red Sea in early September to agree on the Saudi oil price war against Russia.

Wall Street bank analysts at Goldman Sachs just issued a 2015 forecast that US oil prices, measured by a benchmark called WTI (West Texas Intermediate) will fall to $70 a barrel. In September 2013, WTI was more than $106 a barrel. That translates into a sharp 34% price collapse in just a few months. Why is that critical to the US shale production? Because, unlike conventional crude oil deposits, shale oil or tight oil as industry calls it, depleted dramatically faster.

A comprehensive new analysis just issued by David Hughes, a Canadian oil geo-scientist with thirty years' experience with the Geological Survey of Canada, using data from existing US shale oil production that has now become public for the first time (the shale oil story is very recent), shows dramatic rates of oil volume decline from US shale oil wells:

"The three year average well decline rates for the seven shale oil basins measured for the report range from an astounding 60-percent to 91-percent. That means over those three years, the amount of oil coming out of the wells decreases by that percentage. This translates to 43-percent to 64-percent of their estimated ultimate recovery dug out during the first three years of the well's existence. Four of the seven shale gas basins are already in terminal decline in terms of their well productivity: the Haynesville Shale, Fayetteville Shale, Woodford Shale and Barnett Shale."

A decrease in oil daily of between 60% and 91% for these best possible shale oil regions means the oil companies must drill deeper to even stay still with oil production, let alone increase total oil volume. That means the drillers must spend more money to drill deeper, a lot more. According to Hughes, the Obama administration Department of Energy has uncritically taken rosy forecast numbers given them by the companies that boost the US shale oil myth. His calculations show future US shale oil output only 10% that estimated for 2040 by the Energy Department.

Hughes describes the current deadly dilemma of the shale oil companies as a "drilling treadmill." They must drill more and more wells just to keep production levels flat. The oil companies have already gone after the most promising shale oil areas, so-called "sweet spots," to maximize their production. Now as production begins to decline terminally, they must start drilling in spaces with less rich oil and gas returns. He adds, "if the future of U.S. oil and natural gas production depends on resources in the country's deep shale deposits…we are in for a big disappointment."

[Nov 15, 2014] Obama's Secret Deals With Saudi Arabia & Qatar By Eric Zuesse

"I find that both bombings are different parts of the same Obama-initiated business-operation, in which the American aristocracy, Saudi aristocracy, and Qatari aristocracy, work together, to grab dominance over supplying energy to the world's biggest energy-market, Europe, away from Russia, which currently is by far Europe's largest energy-supplier."
Nov 15, 2014 | informationclearinghouse.info

... ... ...

November 07, 2014 "ICH" - Why is the Ukrainian Government, which the U.S. supports, bombing the pro-Russian residents who live in Ukraine's own southeast?

Why is the American Government, which aims to oust Syria's leader Bashar al-Assad, bombing his main enemy, ISIS?

I find that both bombings are different parts of the same Obama-initiated business-operation, in which the American aristocracy, Saudi aristocracy, and Qatari aristocracy, work together, to grab dominance over supplying energy to the world's biggest energy-market, Europe, away from Russia, which currently is by far Europe's largest energy-supplier.

Here are the actual percentage-figures on that: Russia supplies 38%, #2 Norway (the only European nation among the top 15) supplies 18%, and all other countries collectively supply a grand total of 44%. That's it; that's all -- in the world's largest energy-market. Russia is the lone giant. But U.S. President Obama's team want to change that. (Unfortunately, the residents in southeastern Ukraine are being bombed and driven out to become refugees in Russia , as an essential part of this operation to choke off Russia's gas-supply to Europe.)

Obama has initiated, and is leading, this international aristocratic team, consisting of the U.S. aristocracy and Sunni Moslem aristocracies -- the Saudi and the Qatari royal families -- to choke off Russia's economic lifeblood from those European energy sales, and to transfer lots of this business, via new oil and gas pipeline contracts and new international trade-deals, over to the royal families of Saudi Arabia and Qatar. Those royals, in turn, are assisting Obama in the overthrow of the key Russia-allied leader of Syria, Bashar al-Assad, who has performed an indispensable role in blocking any such massive expansion of Saudi and Qatari energy-traffic into Europe, and who has thus been a vital protector of Russia's dominance in the European energy-market.

America's aristocracy would be benefited in many ways from this changeover to Europe's increasing dependence upon those Sunni Moslem nations, which have long been allied with U.S. oil companies, and away from the Shiite Moslem nation of Iran, and from its key backer, Russia.

The most important way that America's aristocrats would benefit would be the continuance, for the indefinite future, of the U.S. dollar's role as the international reserve currency, in which energy and energy-futures are traded. The Sunni nations are committed to continued dominance of the dollar, and Wall Street depends on that continuance. It's also one of the reasons the U.S. Treasury's sales of U.S. Federal debt around the world have been as successful as they are. This also provides essential support to the U.S. Federal Reserve.

Furthermore, Obama's effort to force the European Union to weaken their anti-global-warming standards so as to allow European imports of oil from the exceptionally carbon-gas-generating Athabasca Canada tar sands -- which are approximately 40% owned by America's Koch brothers, the rest owned by other U.S. and allied oil companies -- would likewise reduce Europe's current dependency upon Russian energy sources, at the same time as it would directly benefit U.S. energy-producers. Obama has been working hard for those oil companies to become enabled to sell such oil into Europe .

And, finally, the extension of U.S. fracking technology into Ukraine, and perhaps ultimately even into some EU nations, where it has been strongly resisted, might likewise reduce the enormous flow of European cash into Russian Government coffers to pay for Russian gas (which doesn't even require fracking).

In other words, the wars in both Syria and Ukraine are being fought basically in order to grab the European energy market, away from Russia, somewhat in the same way (though far more violently) as Iran's share of that market was previously grabbed away by means of the U.S.-led sanctions against that country. The current bombing campaigns in both Syria and Ukraine are directed specifically against Iran's chief ally, Russia.

mike

What a fantastic article. The part I don't get is the following. Surely Iran and Russia and Syria could actively destabilize the Qatari aristocracy and their religious allies and likewise the Saudi aristocracy. These people number a few thousand and the discontent among the Nationals would be easily activated if a serious effort was made.

Arindam

The Mexican drug cartels have a saying - plomo y plobo - 'silver or lead': either accept our bribes or accept our bullets.

The Saudis, Qataris, etc... run their countries on a similar basis. The nationals are either bought off (through easy, well-paid public sector jobs, housing allowances, free water and electricity, etc..) - or imprisoned (as happened to one poet who dared to declare: 'We are all Tunisia in the face of the repressive élite'). Thus, launching a revolution in these places is not as easy as it might seem at first glance - since the discontented have usually been corrupted or incarcerated already.

Furthermore, much of the workforce of the Gulf countries is comprised of expatriates who are neither involved nor interested in internal politics and are happy to support the status quo so long as it enables them to keep working and earning. Thus, they can be counted on to keep things going, even when there are major public protests - as for example, took place in Bahrain in the early months of the Arab Spring.

Diogenes

Money seems to destroy humanity by having the appearance of representing productivity, but actually represents scams and corruption. It's a good representation of a variation of Gresham's rule - when scams and corruption are competing against honesty and hard work, scams and corruption will win.

Vicjoe
Tom forgot again to attribute the original source for this 'deep state' article as per Creative Commons precepts; the original can be found at: http://www.smirkingchimp.com/thread/eric-zuesse/5...

Diogenes

This article is an excellent presentation of one way of viewing what is happening in the world. It's an important contribution to the effort to understand the world. As with any article or opinion, all or part of it may or may not be accurate.

International events are caused by the theory of swarming - with large groups supporting one effort or another - where their motives and objectives lag behind what actually is possible or what actually exists.

One obstacle to world stability is a continuing sense that the US has a higher quality of life than other countries, which is increasingly untrue. Europeans are learning that the US govt. and their own governments are pawns of transnational investors. The source of evil in the world is not a country or an ethnic group, but those who are cursed with greed, a need to dominate others, and a reckless disregard for the future of humanity.

Washington76
Petrodollar Panic? China Signs Currency Swap Deal With Qatar Canada 11/10/2014

The march of global de-dollarization continues. In the last few days, China has signed direct currency agreements with Canada becoming North America's first offshore RMB hub, which CBC reports analysts suggest "could double maybe even triple the level of Canadian trade between Canada and China," impacting the need for Dollars.

http://www.zerohedge.com/news/2014-11-10/petrodol...

[Nov 14, 2014] Can Oil Prices Bounce Back?

Those 4000 pounds SUVs transporting a single 200 pound body is what the US economy is about ;-). Unless low prices of oil point out at some scheme to punish Russia (and simultaneously drive shell oil producers and tar sand oil extraction out of business), this is more of an evidence of the collapse then something else. Quote " We have been hearing for so long that the problem of "peak oil" will be inadequate supply and high prices that we cannot adjust our thinking to the real situation. In fact, the two major problems of oil limits are likely to be shrinking debt and shrinking wages. The reason that oil supply will drop is likely to be because customers cannot afford to pay for it; they don't have jobs that pay well and they can't get loans.
In some ways, the oil prices situation reminds me of driving down a road where we have been warned to look carefully toward the left for potential problems. In fact, the potential problem is in precisely in the opposite direction–to the right. The problem gets overlooked for a very long time, because most of us have been looking out the wrong window."

Our Finite World

Can Oil Prices Bounce Back?

If we could somehow fix the world's debt problems, a rise in the price of oil would seem to be much more likely than it looks right now. As long as the drop in demand is related to declining debt, and the potential feedbacks seem to be in the direction of deflation and the possibility of making defaults ever more likely, we have a problem. The only direction for oil prices to go would seem to be downward.

I know that we have very creative central banks. But the issue at hand is really diminishing returns. Prior to diminishing returns becoming a problem, it was possible to extract and refine oil cheaply. With cheap oil, it was possible to create an economy with low-priced oil, inexpensive infrastructure built with that low-priced oil, and factories built with low-priced oil. Workers seemed to be very productive in such a setting, in part because low-priced oil allowed increased mechanization of production and allowed cheap transport of goods.

Once diminishing returns set in, oil became increasingly expensive to extract, because we needed to use more resources to obtain oil that was very deep, or in shale formations, or that required desalination plants to support the population. Once we needed to allocate resources for these endeavors, fewer resources were available for more general uses. With fewer resources for general activities, economic growth has become inhibited. This has tended to lead to fewer jobs, especially good-paying jobs. It also makes debt harder to repay. History shows that many economies have collapsed because of diminishing returns.

Most people assume that of course, oil prices will rise. That is what they learned from supply and demand discussions in Economics 101. I think that what we learned in Econ 101 is wrong because the supply and demand model most economists use ignores important feedback loops. (See my post Why Standard Economic Models Don't Work–Our Economy is a Network.)

We often hear that if there is not enough oil at a given price, the situation will lead to substitution or to demand destruction. Because of the networked nature of the economy, this demand destruction comes about in a different way than most economists expect–it comes from fewer people having jobs with good wages. With lower wages, it also comes from less debt being available. We end up with a disparity between what consumers can afford to pay for oil, and the amount that it costs to extract the oil. This is the problem we are facing today, and it is a very difficult issue.

We have been hearing for so long that the problem of "peak oil" will be inadequate supply and high prices that we cannot adjust our thinking to the real situation. In fact, the two major problems of oil limits are likely to be shrinking debt and shrinking wages. The reason that oil supply will drop is likely to be because customers cannot afford to pay for it; they don't have jobs that pay well and they can't get loans.

In some ways, the oil prices situation reminds me of driving down a road where we have been warned to look carefully toward the left for potential problems. In fact, the potential problem is in precisely in the opposite direction–to the right. The problem gets overlooked for a very long time, because most of us have been looking out the wrong window.

For more on this subject, read my last two posts:

WSJ Gets it Wrong on "Why Peak Oil Predictions Haven't Come True"

Eight Pieces of Our Oil Price Predicament

VPK says:

November 5, 2014 at 11:34 am


Thanks Gail for all your hard work putting it all together.

I bet Jim Cramer reads your blog!

http://www.cnbc.com/id/102152194#.

Cramer added that there is a perfect storm of issues happening. First, there is the weakening global economy. The world outside of the U.S. is weakening, which means oil is getting cheaper as well. Additionally, the U.S. is still importing oil. In the long term, the Saudis can flood the market to reduce reduce drilling, but they wouldn't be able to dump as much oil into the U.S. if global economies were stronger and able to use more oil.

To top it off, oil is priced in U.S. dollars. That makes oil more expensive for the world as our currency gains strength. Europe isn't exactly getting a deal on oil if the Euro is weakening.

The second issue stems from overproduction of oil in the U.S. There has been a 71 percent increase in oil production since 2005, along with increased popularity of fuel-efficient cars and trucks.

"We do not have the storage space nor the pipelines to get this oil to market, and the price discounts that are available in our country are, in the most landlocked places, well below whatever the Saudis are charging," said Cramer

Kimberly Davis says:

November 5, 2014 at 12:01 pm


A mega-trend I rarely hear mentioned – Both transportation and electrcity energy planning are insufficiently recognizing the dramatic plateauing of *demand*, as technology changes everything about our lives.

It's not just telecommuting, telework, teleconference – we now use computers and smartphones for – tele-shopping, tele-renting movies, tele-paying bills, tele-paying your taxes and renewing your licenses, tele-chat with friends, tele-recheck your book at the library, tele-send your husband a picture of the broken board when he's at Home Depot…….

Vehicle miles traveled per capita have been falling since 2002 in the US.

At first, they thought it might be the post-9/11 recession, but the trend has become de-coupled from both population and GDP.

Land use patterns are shifting to "livable communities", where people can live/work/shop/play without owning a car – local governments made an intentional shift in this direction, and it's worked. Car ownership among young people has plummeted – they see car ownership as an expensive, polluting risk. With options like zip-car, they opt out of ownership, meaning they walk or take transit or, make other plans that don't require cars….

Similar shifts in tele-commerce effect trucking and other freight transport.

And tele-commerce is reducing the need for the developing world to become automobile-dependent, as well.

[Nov 14, 2014] If WTI Drops To $60, It Will Trigger A Broader HY Market Default Cycle, Says Deutsche

Zero Hedge

A month ago we wrote that with oil plunging, the flipside of the widely documented "secret" deal by Obama/Kerry with the Saudis to crush Russia with low, low oil prices, is that none other than America's own shale industry would be placed under the microscope soon, as its viability at a price well below the shale industry's cost curve is suddenly put in doubt.

We concluded that "while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the "deal" with Obama's White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the "costs" meant to punish Russia end up crippling the only truly viable industry under the current presidency. As a reminder, the last time Obama threatened Russia with "costs", he sent Europe into a triple-dip recession. It would truly be the crowning achievement of Obama's career if, amazingly, he manages to bankrupt the US shale "miracle" next."

Since then crude has continued to slide, and both Brent and WTI are now trading at a price where just a year ago would seem ludicrous: in the mid-$70s. And the future of America's "shale miracle" has only gotten ever murkier since a month ago.

But suddenly it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrel. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized. "

Here are the details:

So how big of an impact on fundamentals should we expect from the move in oil price so far and where is the true tipping point for the sector? Let's start with some basic datapoint describing the energy sector – it is the largest single industry component of the USD DM HY index, however, given this market's relatively good sector diversification, it only represents 16% of its market value (figure 2). Energy is noticeably tilted towards higher quality, with BB/B/CCC proportions at 53/35/12, compared to overall market at 47/37/17. We find further confirmation to this higher-quality tilt by looking at Figure 3 below, which shows its leverage being around 3.4x compared to 4.0x for overall market. Similarly, their interest coverage stands at noticeably higher levels, even having declined substantially in recent years (Figure 4).

Energy issuer leverage has increased faster than that of the rest of the market in recent years, but this trend has largely exhausted itself in recent quarters. As Figure 5 demonstrates, growth rates in total debt outstanding among US HY energy names have been only slightly higher relative to the rest of HY market. It is almost certain in our mind that with the current shakeout in this space further incremental leverage will be a lot harder to come by going forward.

Perhaps the most unsustainable trend that existed in energy going into this episode shown in Figure 6, which plots the sector's overall capex expenditure, as a pct of EBITDAs. The graph averaged 150% level over the past four years, clearly the kind of development that could not sustain itself over a longer-term horizon. Our 45%-full sample of issuers reporting Q3 numbers has shown this figure coming down to 110%, a move in the right direction, and yet a level that suggests further capacity for decline. This chart also shows, perhaps better than any other we have seen, the extent to which current economic recovery in the US has in fact been driven by the energy development story alone.

The next question we would like to address here is to what extent the move in oil so far could translate into actual credit losses across the energy sector. To help us approach this question we are borrowing from the material we are going to discuss in-depth in next week's report on our views on timing/extent of the upcoming default cycle. For the purposes of the current exercise we will limit ourselves to saying that we have identified total debt/enterprise value (D/EV) as an important factor helping us narrow down the list of potential defaulters. Specifically, our historical analysis shows that names that go into restructuring, on average, have their D/EV ratio at 65% two years prior to default, and, expectedly, this ratio rises all the way to 100% at the time of restructuring. From experiences in 2008-09 credit cycle we have also determined that there was a 1:3 relationship between the number of defaulting issuers and the number of issuers trading at 65%+ D/EV prior to the cycle. Again, we are going to present detailed evidence behind these assumptions in the next week's report.

For the time being, we will limit ourselves to applying these metrics to current valuations in the US HY energy sector, and specifically, its single-B/CCC segment. At the moment, average D/EV metric here is 55%, up from 43% in late June, before the 26% move lower in oil. About 28 pct of energy B/CCC names are trading at 65%+ D/EV, implying an 8.5% default rate among them, assuming historical 1/3rd default probability holds. This would translate into a 4.3% default rate for the overall US HY energy sector (including BBs), and 0.7% across the US HY bond market.

Looking at the bond side of valuation picture, we find that energy Bs/CCCs are trading at a 270bp premium over non-Energy Bs/CCCs today (Figure 7). This premium implies incremental default rate of 4.5% (= spread * (1 – recovery) = 270 * (1-0.4) = 4.5%). Actual default rate among US HY Bs/CCCs is currently running at 3%, a level that we expect to increase to 5% next year (not to be confused with overall US HY default rate, currently running at 1.7% and expected to increase to 3.0% next year).

The bottom line is hardly as pretty as all those preaching that the lower the oil the better for the economy:

In the next step we are attempting to perform a stress-test on oil, defined this way: what would it take for overall US energy Bs/CCCs segment to start trading at 65%+ total debt/enterprise value? Our logic in modeling this scenario goes along the following lines: if a 25% drop in WTI since June 30th was sufficient to push their average D/EV from 43 to 55, then it would take a further 0.8x similar move in oil to get the whole sector to average 65 = (65-55)/(55-43) = 0.8x, which translates into another 20% decline in WTI from its recent low of $77 to roughly $60/bbl. If this scenario were to materialize, based on historical default incidence, we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.

How should one trade an ongoing collapse in oil prices? Simple: sell B/CCC-rated energy bonds and wait to pick up 10%.

If this scenario were to materialize, the US energy Bs/CCCs would have to trade at spreads north of 1,800bp, or about a 1,000bps away from its current levels. Such a spread widening translates into a 40pt drop in average dollar price from its current level of 92pts for energy Bs/CCCs.

It gets worse, because energy CapEx is about to tumble, which means far less exploration (and US fixed investment thus GDP), far less supply, and ultimately a higher oil price.

As the market adjusts to realities of sharply lower oil prices, it is important for to remember that the US HY energy sector is a higher quality part of the market. Higher credit quality will help many of them absorb an oil price shock without jeopardizing production plans or ability to service debt. Their capex rates, expressed as a pct of EBITDAs, have already declined from an average of 150% over the past four years to roughly 110% today. We still consider this level to be high and thus subject to further pressures. This in turn should work towards slower rates of supply growth, and thus ultimately towards supporting a new floor for oil prices. A 25% in oil price so far has pushed debt/enterprise valuations among US energy B/CCC names to a point suggesting 8.5% future default probability, while their bonds are pricing in a 9.5% default probability.

And the scariest conclusion of all:

Finally, our stress-test shows that a further 20% drop in WTI to $60/bbl is likely to push the whole sector into distress, a scenario where average B/CCC energy name will start trading at 65% D/EV, implying a 30% default rate for the whole segment. A shock of that magnitude could be sufficient to trigger a broader HY market default cycle, if materialized.

And now back to the old "plunging oil prices are good for the economy" spin cycle.

Oil Price Slide – No Good Way Out by Gail Tverberg

November 5, 2014 | ourfiniteworld.com

The world is in a dangerous place now. A large share of oil sellers need the revenue from oil sales. They have to continue producing, regardless of how low oil prices go unless they are stopped by bankruptcy, revolution, or something else that gives them a very clear signal to stop. Producers of oil from US shale are in this category, as are most oil exporters, including many of the OPEC countries and Russia.

Some large oil companies, such as Shell and ExxonMobil, decided even before the recent drop in prices that they couldn't make money by developing available producible resources at then-available prices, likely around $100 barrel. See my post, Beginning of the End? Oil Companies Cut Back on Spending. These large companies are in the process of trying to sell off acreage, if they can find someone to buy it. Their actions will eventually lead to a drop in oil production, but not very quickly–maybe in a couple of years.

So there is a definite time lag in slowing production–even with very low prices. In fact, if US shale production keeps rising, and Libya and Iraq keep work at getting oil production on line, we may even see an increase in world oil production, at a time when world oil production needs to decline.

A Decrease in Oil Prices May Not Fix Oil Demand

At the same time, demand doesn't pick up quickly as prices drop. We are dealing with a world that has a huge amount of debt. China in particular has been on a debt binge that cannot continue at the same pace. A reduction in China's debt, or even slower growth in its debt, reduces growth in the demand for oil, and thus its price. The same situation holds for other countries that are now saturated with debt, and trying to come closer to balancing their budgets.

Furthermore, the Federal Reserve's discontinuation of quantitative easing has cut off a major flow of funds to emerging markets. Because of this change, emerging market demand for oil has dropped. This has happened partly because of the lower investment funds available, and partly because the value of emerging market currencies relative to the dollar has fallen. Again, a decrease in oil price is not likely to fix this problem to a significant extent.

Europe and Japan are having difficulty being competitive in today's world. A drop in oil prices will help a bit, but their problems will mostly remain because to a significant extent they relate to high wages, taxes, and electricity prices compared to other producers. The reduction in oil prices will not fix these issues, unless it leads to lower wages (ouch). The reduction in oil prices is instead likely to lead to a different problem–deflation–that is hard to deal with. Deflation may indirectly lead to debt defaults and a further drop in oil demand and oil prices.

Thus, oil prices are likely to continue their slide for some time, until real damage is done, perhaps to several economies simultaneously.

The United States' Role in the Oil Over-Production / Under-Demand Clash

The United States is the country with the single largest increase in oil production in the past year. This growth in oil production seems not to have stopped, in recent weeks.

Figure 1. US Weekly Crude Oil Production through Oct 24. Chart by EIA.
Figure 1. US Weekly Crude Oil Production through Oct 24. Chart by EIA.

At the same time, the US' own consumption of oil has not increased (Figure 2).

Figure 2. US oil consumption (called "Product Supplied"). Chart by EIA.
Figure 2. US oil consumption (called "Product Supplied"). Chart by EIA.

The result is a drop in needed imports. A number of oil exporters have been hit by the US drop in imports. Nigeria extracts a very light oil that competes for refinery space with oil from shale formations. Our imports of Nigerian oil have been reduced to zero (Figure 3). (The amounts I am showing on this and several other charts are "net imports." These reflect transactions in both directions. Often the US imports crude oil and exports oil products, sometimes to the same country. In such a case, we are selling refinery services.)

[Nov 11, 2014] Ed Harrison: Zero Rates, Resource Misallocation, and Shale Oil

This article is a more systematic work-up of something that we've discussed short form and Wolf Richter has also written up: that of the dependence of the shale oil boom on reasonably high oil prices as well as cheap financing. And as predicted, shale oil producers have shut marginal wells, and even majors are cutting back on oil production.

Ishmael November 11, 2014 at 12:49 pm

In the early 1980′s I met with many a wildcater to discuss that it was costing them $50 a barrel to find oil (just including the price of successful wells and not the cost of dry holes) and selling it for $35 just did not make sense. In the late 70′s and early 80′s I was very involved with the oil and gas industry on several continents including Canadian oil sands and outside of North Africa I saw few oilfields being found where oil was being found for less than $50 a barrel and that was 35 years ago. Most fields are experiencing secondary and tertiary recovery now. I can assure you that $60 cost on current reserves is ridiculous.

With that said there remains a large amount of reserves to be produced. The problem is the cohesiveness of the sands and getting the liquids to loss that cohesiveness to the sands is a challenge. I talked to a chemical engineer (heading up this department for a major oil company) at an oil symposium and had a new start up which had a product which could reduce the cohesiveness. This could result in significant future production since most of the oil is still locked into these reservoirs. Of course talk is cheap.

Most independent oil and gas companies will have a tough time cutting back production. These companies are loaded up with debt which needs to be serviced. Also shutting in wells usually damages them and will damage future production.

Oil looks like it could go to $40 a barrel. That will do a lot of damage to the oil industry. I expect a repeat of the 80′s and 90′s for a while where the industry just languished.

frances November 11, 2014 at 6:45 am

Apart from the investment risk discussion, will default see the companies walk away from the environmental assault they have wrought? Rhetorical question. Irreversible damage, no matter how much money could be thrown at 'clean-up.'

James November 11, 2014 at 7:41 am

Good point, and one that will no doubt get lost in the ensuing meltdown. Looks like another round of socialized losses headed our way, regardless of the economic fallout.

Yata November 11, 2014 at 12:39 pm

Investors losing their fortunes in the oil field isn't a relatively new phenomena. There comes a point when you get numb to the idea of the dumb money being fleeced (less the victims of institutional investors who have relatively little choice) in the market. If you're stupid enough to hand someone your money on some vague promise, you get what you deserve. Think of it as a form of socio-economic Darwinism.

But as things go it will be the little guy taking the loss. Here I can only speculate that the smart money and profits have been off-shored in any soon-to-be-bankrupt shale oil ventures. There will be just enough money left behind for a rear guard action of legal defense and campaign contributions.

Reuters has a special report in today's headlines: Special Report: For these oil and gas bets, the odds favor the house which argues for the current trend in investing.

If I were dense enough to hand them my money, my bet would be with the O&G firms who have retained the best O&G contract lawyers, and or, securities lawyers.

chey November 11, 2014 at 12:50 pm

Yves. The final barb in your response to Greenbacker could easily be leveled against Harrison. Some fact-checking, or just logic, is in order

  1. Shale production is not riskier than regular E&P, at least not from a dry hole standpoint. The degree of confidence about the resource in the ground is very high. When was the last time you heard of a U.S. independent drilling a duster?
  2. The payback period on wells is NOT long. Shale wells have extremely high initial production rates, and most of the overall resource is produced within a handful of quarters. Of course that ratio fluctuates with the cmdty price, but as a general rule his statement betrays a lack of basic understanding
  3. These companies are not cash flow negative b/c of payback periods. They could easily tailor their drilling plans to live within cash flow. The reason they are cash flow negative is grounded in the economic decision to maximize NPV. If your wells are 30+% IRR, what makes more sense economically? To drill 50 wells in Year 1 or over the course of 10 years? Again, this is very basic stuff that Harrison seems to miss.
  4. Listen to 3Q earnings calls and see if you can keep count of OFS co's complaining about their deteriorating pricing, and E&P's discussing their increasing efficiencies and their pushback on costs, so I guess that plays well to the "sweet spot" that Harrison mentions
  5. Apparently Harrison is not aware that there are virtually zero high yield maturity dates for E&P that take place in the next 4 years, while revolvers contain high amounts of availability
  6. Are reserve based lenders managing those secured revolvers going to abandon optimistic thinking and begin running backwardation price decks, thus shrinking their loans? Please…

So bravo to Harrison for pointing out that producers will suffer in a lower commodity price environment. Thanks for that epiphany, but can we please take pause before predicting a "crisis of epic proportions"?

[Nov 01, 2014] Bill Christison Oil and the Middle East

April 5, 2002 | www.counterpunch.org

Why U.S. Foreign Policy Has To Change

By Bill Christison

Back in March CounterPunch published Christison's devastating critique of the strategies and conduct of the US war of terrorism. (See our archive by scrolling down to "Search CounterPunch.)) These new remarks, which he has made available to CounterPunch were delivered to various peace groups in Santa Fe, New Mexico on early April.Bill Christison joined the CIA in 1950, and served on the analysis side of the Agency for 28 years. From the early 1970s he served as National Intelligence Officer (principal adviser to the Director of Central Intelligence on certain areas) for, at various times, Southeast Asia, South Asia and Africa. Before he retired in 1979 he was Director of the CIA's Office of Regional and Political Analysis, a 250-person unit His wife Kathy also worked in the CIA, retiring in 1979.Since then she has been mainly preoccupied by the issue of Palestine.

I've been asked to talk today about the topic, "U.S. Oil Policy as a Juggernaut in U.S. Foreign Policy." That's a great title. When you hear the word "juggernaut," what you think of--at least what I think of--is a monster machine of some sort, maybe the heaviest heavy tank you can imagine, rumbling down a city street, unstoppable, crushing everything in its way, and even destroying the paving of the street as it goes. Well, that comes pretty close to describing what I believe about the long-term effects of our oil, and other, foreign policies in the Middle East. But if we look ahead, rather than at the past or the present, my hope is that, by changing some of our own foreign policies, U.S. oil policy will in the future no longer be a destructive juggernaut.

It's worth spending a minute to talk about why oil is so important to the United States. The world's total use of energy from all sources--from petroleum, natural gas, coal, wood, hydropower, nuclear, geothermal, solar, and wind power--has increased in recent years roughly as the global population has also increased. Petroleum contributes the greatest single amount--about two-fifths of the world's total energy output, and natural gas (which is in some ways related to oil) more than another one-fifth. The United States alone uses about one-quarter of the world's total energy output, but has less than five percent of the world's population. The U.S. itself does not produce anywhere near the amount of energy that it consumes. According to statistics of the U.S. Department of Energy, the United States used in the year 2000 almost 100 quadrillion Btu's--or British Thermal Units--of energy. But of those 100 quadrillion Btu's, the U.S. had to import close to 30 percent. The United States is, hands down, the most profligate user of energy, by far, on this whole globe.

With respect to oil alone, the U.S. imported in the year 2000 almost two-thirds of the oil that it used. The importance of Saudi Arabia as a supplier of the U.S., needs to be emphasized, but not just because the Saudis hold the largest known but still untapped oil reserves in the world. What is even more important to the U.S. at the moment is that Saudi Arabia has the largest installed but unused rapid production capacity--that is, oil wells, pumping equipment and so forth already there but not used to meet current, or "normal," production needs. In any emergency that cut off oil supplies from anywhere else in the world, Saudi Arabia would one of very few, and maybe the only, nation that could easily and quickly increase its oil production without a waiting period measured in months rather than a few days. This obviously adds to what any general or admiral would call the strategic value of Saudi Arabia to the United States.

There is another characteristic of the global oil industry that we should all understand. It is an industry dominated by a half-dozen extremely large, global corporations--including ExxonMobil (these two firms merged in 1999), British Petroleum, Shell, Texaco, Gulf and Socal. Fifty to 75 years ago these companies might have been swashbuckling, unregulated corporations seeking to maximize profits and avoid the controls of any governments by all means fair or foul. Today, however, these companies by no means have the same personalities that they had years ago. In the Middle East, at least, the governments of the area have nationalized practically all oil production, and the companies or their subsidiaries have gradually worked out mutually supportive relationships with the local governments, under which the companies continue to manage most of the oil production and global oil trade, while the governments, and OPEC, make the basic decisions on how much oil to produce. The companies continue to make large profits, which keep them happy enough.

In their relations with the U.S. and other advanced nations, the companies no longer shun government regulation, because most of the regulations imposed on them are supportive of, and increase the profits of, the companies themselves. The regulations fall more into the area of corporate welfare than into the area of inducing the corporations to become better citizens. In the U.S., the ties of the oil companies with both of the major political parties are close and mutually profitable. Up to a few months ago, these same comments would have applied to Enron, which was clearly one of the world's largest energy companies, even though it was not one of the largest global oil companies.

I started out by comparing the long-term effects of U.S. oil policies to a juggernaut. To show you why, I want to go back almost 60 years, to February 1945. In that month, President Franklin D. Roosevelt, while returning from the Yalta Conference, met with King Ibn Saud of Saudi Arabia on a U.S. warship in the middle of the Suez Canal. Two months later, Roosevelt was dead, but this meeting was probably one of his most important acts as a world leader The actual records of the conversations between these two men have never been released by either of their governments, but it is quite clear that an agreement was reached under which the United States guaranteed for the indefinite future the security and stability of the Saudi monarchy. In return, the Saudi King guaranteed U.S. access to, and joint development of, the massive Saudi oil reserves, also for the indefinite future. These mutual guarantees were later, implicitly at least, extended to apply to the other, and smaller, Gulf state monarchies, from the Arab Emirates to Bahrain and Kuwait. All of these guarantees were reinforced by the U.S. war against Iraq in 1990-1991, and these guarantees still today form the basis of U.S. oil policies in the Middle East.

So for close to 60 years now, the U.S. has continued to prop up and support these authoritarian governments. I'd like to give you an example of how this has worked in the case of Saudi Arabia. This is from an article that appeared in The Nation magazine last November, written by a British expert on world security affairs. Here are a few lines from this article. "To protect the Saudi regime against its external enemies, the United States has steadily expanded its military presence in the region. [T]o protect the royal family against its internal enemies, US personnel have become deeply involved in the regime's internal security apparatus. At the same time, the vast and highly conspicuous accumulation of wealth by the royal family has alienated it from the larger Saudi population and led to charges of systemic corruption. In response, the regime has outlawed all forms of political debate in the kingdom (there is no parliament, no free speech, no political party, no right of assembly) and used its US-trained security forces to quash overt expressions of dissent. All these effects have generated covert opposition to the regime and occasional acts of violence"

The United States pursued policies like these not only in Saudi Arabia and the smaller Gulf States, but elsewhere in the Middle East as well. When the U.S. overthrew Mossadegh in Iran in 1953, and reinstalled the Shah in power, Washington began carrying out precisely the same policies in Iran as it employed in Saudi Arabia. The Shah's secret police, known as SAVAK, and the Iranian military forces both grew markedly stronger. For 26 years the Shah's repressive regime succeeded in smothering internal dissent. In 1979, however, major internal dissent did erupt, supported by radical Islamic clerics who wanted all U.S. influence out of their land. The Shah was quickly overthrown. U.S. experiences in Iran since that date should have suggested to people in Washington that just perhaps the strong U.S. support for repressive regimes in the Middle East was not the ideal long-term policy for us to pursue. No reexamination of U.S. foreign policy ever got started, however, because the United States was immediately consumed by the horrible insult Iranians imposed on us when they held over 50 Americans from the U.S. Embassy hostage for more than a year.

Then, in the 1980s, the U.S. spent the decade quietly cozying up to Saddam Hussein, the dictatorial ruler of Iraq, which was and is another big oil producer of the Middle East. Since Iran was now a U.S. enemy, the U.S. supported Iraq in its war against Iran. The U.S. did not criticize Saddam Hussein even when he employed chemical warfare to gas sizable numbers of Kurdish people in his own country. The United States only abandoned him in 1990, when he crossed the U.S. over Kuwait. Even here, the diplomatic signals Saddam received from the U.S. until shortly before he invaded Kuwait were very unclear. Once again, when the break finally came, the U.S. administration gave no thought to reappraising its own policies throughout the region. A decision was made in favor of going to war to end this threat to U.S. hegemony and U.S. access to oil, and that was that.

Now, in the year 2002, this almost-60-year-old Middle East oil policy of the United States is showing signs of even more fraying at the edges. Beyond any question in my opinion, one of the root causes behind the terrorism of September 11 was this very U.S. policy of supporting for the past half-century and more these authoritarian and often corrupt Arab and Muslim governments. There exists a high degree of anger among many Muslims with their own governments, which have for so long been supported by the U.S.

Osama bin Laden is a good example of this particular root cause behind the September 11 terrorism. His wrath was directed as much against the Saudi government, for example, as it was against the United States. His opposition to what used to be his own government was probably the main reason why he had the support of a majority of the young men under 25 in Saudi Arabia. He received similar support from many young men in other Arab and Muslim states as well. Right now these groups of angry young men obviously no longer have a viable leader in Osama bin Laden, but other extremist leaders are almost sure to arise. In addition, the next generation of leaders in at least some of these states may well emerge from among these young men. If any of them do come into power, their future governments will likely be more anti-American than the present governments, which Washington likes to call "moderate," but which are really nothing of the sort. If we have not reduced our energy dependence on oil in the meantime, we may face serious trouble.

The U.S. should therefore adopt quite draconian measures immediately to reduce its overall energy usage, including its dependence on Mideast oil. It is unlikely, for the near future at least, that the U.S. will solve a future energy crunch through alternative power sources or by "clean" coal, nuclear power, or Alaskan oil usage. The U.S. also should not count on oil supplies from Central Asia as a way to ignore the need for conservation.

The U.S. should also, over time and gradually, reduce its ties with the present governments in many Muslim states, and try to develop improved relations with opposition elements there, actively seeking out democratically inclined groups. Such steps will be necessary if there is to be any hope of reducing support for future Osama bin Ladens that arises from the anger of Arabs and Muslims with their own governments.

I want to turn now to another foreign policy problem that the U.S. faces in the Middle East, one that has become more tightly intertwined with U.S. oil policies since September 11. Ever since shortly after World War II, the U.S. has had not one but two fundamental foreign policies in the Middle East. The first policy, which I've already talked about, has been to support authoritarian and undemocratic governments in the oil nations in an effort to guarantee the long-term easy access to Middle East oil at "reasonable" prices. The other policy, equally important, has been to provide strong support to Israel and to guarantee the security of Israel as a Jewish state, also for the long term.

Over the last fifty-plus years, there has been a fair amount of tension and conflict between these two policies. The United States under President Harry Truman was, as I'm sure you all know, instrumental in helping to establish the state of Israel in 1948. But even then, one of the reasons for the opposition to Truman's desires by many other U.S. officials, including the Secretary of State, General George Marshall, was that it might endanger the west's access to oil from the Arab nations.

As it has turned out, for most of the period since World War II, the U.S. has managed to keep its two basic policies in the Middle East pretty much apart from each other--in separate boxes so to speak--and to keep the tensions between them in check. The very existence of the Cold War, which provided the bogey-man of a common enemy, helped in this regard. The one obvious time when the U.S. proved unable to keep the tensions between its two policies under control was the OPEC oil embargo against the west in late 1973 and early 1974. The Arab-Israeli war of 1973, and specifically the U.S. response of resupplying Israel with large amounts of new military equipment, precipitated the embargo, and many of us here can remember the gas lines that resulted in this country. But the gas lines only lasted a few months, and then we all went back to normal. But we should remember those months as a perfect example of the fact that there are indeed real conflicting interests involved in the two basic U.S. foreign policies in the Middle East.

Overall, though, because the United States has been able to hold these conflicting interests in check for most of the past half century, I think that Washington has allowed the tensions to grow, more or less ignored by U.S. policymakers, to a point where they are going to be exceedingly difficult to deal with in the future. Since September 11, a number of things have happened that make it more impossible than ever to separate the effects of the Israel-Palestine problem from the effects of the continuing U.S. support for most authoritarian governments of the oil nations in the area.

In Saudi Arabia and most of the small Gulf States, the position of the monarchies has become more precarious, as these monarchies have been subjected to more criticism since September 11 from public opinion in the United States than has been the case for years. In normal circumstances, when these monarchies are confident that the U.S. guarantee of their security is strong and unbreakable, most of them will not worry too much about other issues that might further weaken their domestic position. The George W. Bush administration is undoubtedly reassuring them that the U.S. security guarantee is still in effect, but they cannot help but be worried about its permanence when they see public opinion in this country changing. This puts pressure on the monarchies to pay more attention to the opinion of their own Arab "street." And the opinion of this Arab "street" is today more intensely critical than ever of Israel's policies on Palestine and the continued occupation of the West Bank and Gaza.

The U.S. government, from September 11 right up to the present, has made it clearer than ever to the world at large that it will unilaterally decide what actions around the world constitute "terrorism," and what actions do not. Specifically, in the minds of Arabs and Muslims everywhere, the U.S. seems to have accepted all actions by Palestinians against Israelis, including acts against Israeli soldiers as well as those against innocent civilians, as being terrorism. At the same time, however, the U.S. appears to believe that no acts by Israelis against Palestinians constitute terrorism. Arabs see this as a double standard. When, also at the same time, Arabs see their own rulers expressing support for the "war on terrorism" as it is defined by the U.S., their antagonism toward their own rulers intensifies. And the rulers themselves, recognizing this antagonism, feel greater concern for their own positions.

I'd like to express a note of caution here. I certainly do not know for sure whether any, or some, or all of the governments in Arab oil nations--the dictatorial governments whose stability and security the U.S. has guaranteed for almost 60 years--will collapse in the near future. Of course change can happen rapidly and without warning. The best minds in the U.S. government had no inkling that the Shah of Iran was going to be ousted a week before it happened in 1979. But even governments that seem to be falling apart can sometimes last for years, until some totally unforeseen shove comes along that pushes them over the edge.

What I am more sure of is that these Arab oil governments are now under greater pressure to change than they have been for years, because of developments since September 11. Therefore the U.S. should be actively encouraging--though never using military force to do so--a gradual movement toward greater political democracy in these nations. And in order to reduce the importance of one major factor leading to greater instability in the region, the U.S. should immediately begin to play a far more active role than it has recently in pressing for a solution to the Israel-Palestine problem based on two truly sovereign nations, with strong treaty guarantees from the United States of the future security of both of these nations.

[Oct 30, 2014] EROI of different fuels and the implications for society by Charles A.S.Hall, Jessica G. Lambert, and Stephen B. Balogh,

Oct 31, 2013 | mahb.stanford.edu

Article provided by Elsevier in its journal Energy Policy.

All forms of economic production and exchange involve the use of energy directly and in the transformation of materials. Until recently, cheap and seemingly limitless fossil energy has allowed most of society to ignore the importance of contributions to the economic process from the biophysical world as well as the potential limits to growth.

This paper centers on assessing the energy costs of modern day society and its relation to GDP. Our most important focus is the characteristics of our major energy sources including each fuel's energy return on investment (EROI).

The EROI of our most important fuels is declining and most renewable and non-conventional energy alternatives have substantially lower EROI values than traditional conventional fossil fuels. At the societal level, declining EROI means that an increasing proportion of energy output and economic activity must be diverted to attaining the energy needed to run an economy, leaving less discretionary funds available for "non-essential" purchases which often drive growth.

The declining EROI of traditional fossil fuel energy sources and the effect of that on the world economy are likely to result in a myriad of consequences, most of which will not be perceived as good.

How will Saudi Arabia respond to lower oil prices

  • Econbrowser
  • Oil prices (along with prices of many other commodities) have fallen dramatically since last summer. Some observers are waiting to see if Saudi Arabia responds with significant cutbacks in production. I say, don't hold your breath.

    ...I think a better interpretation is that the market moves after 2005 became too big for the Saudis to control, and they gave up trying. I remain skeptical of the claim that Saudi Arabia is ever going to produce much in excess of 10 mb/d, regardless of what's going on in the market.

    Last week I discussed the three main factors in the recent fall in oil prices: (1) signs of a return of Libyan production to historical levels, (2) surging production from the U.S., and (3) growing indications of weakness in the world economy.

    As far as Libya is concerned, the politics on the ground remain quite unsettled. It makes sense to wait and see if anticipated production gains are really going to hold before anybody makes major adjustments.

    In terms of surging U.S. production, the key question is how low the price can get before significant numbers of U.S. producers decide to pull out. If world economic growth indeed slows, and if most of the frackers are willing to keep going strong even if the price falls to $80 a barrel, trying to maintain the price at $90 could be a losing bet for the Saudis. They'd be giving up their own revenue just in order to keep the money flowing into ever-growing operations in Texas and North Dakota.

    Jeffrey J. Brown

    October 19, 2014 at 8:52 am


    Saudi Net Export Response to Rising Oil Prices 2002-2005 and 2005-2013

    In my opinion, the most likely scenario for 2005 to 2013 was that the Saudis were unable to match or exceed their 2005 net export rate of 9.1 mbpd, at least not without doing unacceptable long term damage to their oil fields.

    Note that Saudi net exports did show a large decline from 8.8 mbpd in 2008 to 7.6 mbpd in 2009, as annual Brent crude oil prices fell from $97 in 2008 to $62 in 2009, which was (so far) the only large year over year decline in annual oil prices since the 2000 to 2001 decline.

    I suspect that the Saudis have been justifiably concerned about rising US production. However, that they have been unable or unwilling to match or exceed their 2005 net export rate of 9.1 mbpd, they have been waiting for a material decline in oil prices, so that they could maintain their production and net export rates in the face of declining demand, as a way to hurt competitors, especially high cost tight/shale producers. Also, the Saudis are past their high demand summer season, which frees up more oil for export during the lower demand months.

    However, a longer term issue to consider is depletion. By definition, it's not whether the Saudis have depleted their remaining post-2005 CNE (Cumulative Net Exports), the question is by how much?

    The Saudi Export Capacity Index (ECI, the ratio of production to consumption) Ratio fell from 5.7 in 2005 to 4.0 in 2013. Based on the eight year rate of decline in their ECI Ratio, I estimate that their post-2005 CNE are on the order of 60 Gb (billion barrels), with 25 Gb having been shipped from 2006 to 2013 inclusive, putting their estimated post-2005 CNE at about 40% depleted in only 8 years.

    The Six Year Case History consists of the six major net exporters that hit or approached zero net exports from 1980 to 2010, excluding China. Based on the initial 1995 to 2002 rate of decline in their combined ECI Ratio, their estimated post-1995 CNE were 9.0 Gb. The actual value turned out to be 7.3 Gb.

    Here is the critical Net Export Mathematical Fact of Life: Given an inevitable ongoing decline in production in a net oil exporting country, unless they cut their domestic consumption at the same rate as the rate of decline in production, or at a faster rate, the resulting net export decline rate will exceed the production decline rate, and the net export decline rate will accelerate with time. It's a mathematical certainty.

    Jeffrey J. Brown

    October 19, 2014 at 1:50 pm


    A couple of news items:

    Economist: The sword unsheathed
    Protests break out after a Shia cleric is sentenced to death
    http://www.economist.com/news/middle-east-and-africa/21625868-protests-break-out-after-shia-cleric-sentenced-death-sword-unsheathed

    Saudi oil pipeline briefly set alight after shots fired at patrol
    http://www.reuters.com/article/2014/10/18/saudi-oil-fire-idUSL6N0SD0GZ20141018

    And a recommended book:

    On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future
    http://www.amazon.com/Saudi-Arabia-People-Religion-Future-ebook/dp/B007MDK5GM/ref=sr_1_1?ie=UTF8&qid=1413751560&sr=8-1&keywords=on+saudi+arabia

    Book Description
    Publication Date: September 18, 2012


    From the Pulitzer Prize–winning reporter who has spent the last thirty years writing about Saudi Arabia-as diplomatic correspondent, foreign editor, and then publisher of The Wall Street Journal-an important and timely book that explores all facets of life in this shrouded Kingdom: its tribal past, its complicated present, its precarious future.

    Through observation, anecdote, extensive interviews, and analysis Karen Elliot House navigates the maze in which Saudi citizens find themselves trapped and reveals the mysterious nation that is the world's largest exporter of oil, critical to global stability, and a source of Islamic terrorists. In her probing and sharp-eyed portrait, we see Saudi Arabia, one of the last absolute monarchies in the world, considered to be the final bulwark against revolution in the region, as threatened by multiple fissures and forces, its levers of power controlled by a handful of elderly Al Saud princes with an average age of 77 years and an extended family of some 7,000 princes. Yet at least 60 percent of the increasingly restive population they rule is under the age of 20.

    The author writes that oil-rich Saudi Arabia has become a rundown welfare state. The public pays no taxes; gets free education and health care; and receives subsidized water, electricity, and energy (a gallon of gasoline is cheaper in the Kingdom than a bottle of water), with its petrodollars buying less and less loyalty. House makes clear that the royal family also uses Islam's requirement of obedience to Allah-and by extension to earthly rulers-to perpetuate Al Saud rule. Behind the Saudi facade of order and obedience, today's Saudi youth, frustrated by social conformity, are reaching out to one another and to a wider world beyond their cloistered country. Some 50 percent of Saudi youth is on the Internet; 5.1 million Saudis are on Facebook.

    To write this book, the author interviewed most of the key members of the very private royal family. She writes about King Abdullah's modest efforts to relax some of the kingdom's most oppressive social restrictions; women are now allowed to acquire photo ID cards, finally giving them an identity independent from their male guardians, and are newly able to register their own businesses but are still forbidden to drive and are barred from most jobs. With extraordinary access to Saudis-from key religious leaders and dissident imams to women at university and impoverished widows, from government officials and political dissidents to young successful Saudis and those who chose the path of terrorism-House argues that most Saudis do not want democracy but seek change nevertheless; they want a government that provides basic services without subjecting citizens to the indignity of begging princes for handouts; a government less corrupt and more transparent in how it spends hundreds of billions of annual oil revenue; a kingdom ruled by law, not royal whim. In House's assessment of Saudi Arabia's future, she compares the country today to the Soviet Union before Mikhail Gorbachev arrived with reform policies that proved too little too late after decades of stagnation under one aged and infirm Soviet leader after another.

    She discusses what the next generation of royal princes might bring and the choices the kingdom faces: continued economic and social stultification with growing risk of instability, or an opening of society to individual initiative and enterprise with the risk that this, too, undermines the Al Saud hold on power. A riveting book-informed, authoritative, illuminating-about a country that could well be on the brink, and an in-depth examination of what all this portends for Saudi Arabia's future, and for our own.

    jonathan

    FYI, an interesting book about the Saudis is John R. Bradley's Saudi Arabia Exposed: Inside a Kingdom in Crisis. He was hired to work by a Saudi publication and was accredited as a Saudi journalist, which allowed him free travel around the country.

    Steven Kopits

    Let's keep in mind that supply was entering the market at a 4 mbpd/ year pace during the last several months. That's a big number.

    Here's my take on the matter. http://www.prienga.com/blog/2014/10/18/oil-demand-hasnt-collapsed

    Jeffrey J. Brown October 19, 2014 at 5:43 pm

    As you noted, the question is, what happened in the third quarter? Brent averaged $109 in the first half of 2014 (averaging $112 in June), and the decline in the Brent price really started to speed up in August.

    Through June, the EIA shows that global Crude + Condensate (C+C) averaged 77 mbpd for 2014. If we subtract out estimates for rising condensate production, I suspect that we have seen little or no increase in actual global crude oil production (45 and lower API gravity crude oil) through the first half of 2014, versus the 2005 annual rate.

    The following chart shows normalized global gas, NGL and C+C production from 2002 to 2012 (2005 values = 100%).

    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps45f11d98.jpg

    The following chart shows estimated normalized global condensate and crude oil production from 2002 to 2012 (2005 values = 100%). I'm assuming that the global Condensate/(C+C) Ratio was about 10% for 2002 to 2005 (versus 11% for Texas in 2005), and then I (conservatively) assume that condensate increased at the same rate as global gas production from 2005 to 2012, which is a much lower rate of increase in condensate (relative to the increase in gas production) than what we saw in Texas from 2005 to 2012.

    http://i1095.photobucket.com/albums/i475/westexas/Slide2_zpse294f080.jpg


    PeakTrader

    "Vehicle Miles Traveled: A Structural Change in Our Behavior:"

    http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

    Luke The Debtor

    There really are no signs that weakening demand is causing oil prices to slide. That appears thought to be residual apprehension from the recession. James is right that Libyan production, an extra 700,000 barrels, since the start of this summer is causing the current slide in prices. He is also correct that lower prices do not necessarily help SA.

    Lower oil prices Econbrowser

    2slugbaits

    October 12, 2014 at 10:21 am

    Oil from shale formations costs $50 to $100 a barrel to produce

    That seems like a pretty large estimate spread for a product that's been around for awhile. If the Citigroup guy meant to say that there's a lot of variability in the costs due to geological factors, the presumably the only estimate that's relevant here is the high end of $100 because that represents the cost to frack the most difficult formations. How much of that oil comes from high cost formations and how much from the $50 formations? Of course, an alternative explanation for the wide range in cost estimates is that no one knows until they start drilling and find out after-the-fact.

    If production from North Dakota is most at risk, what does this say about all of the economic activity supporting that region (viz., banking, home construction, entertainment, etc.)? Back to the days of King Wheat?

    Finally, if Europe's slump is prolonged and demand remains weak for a long time, what does this say about the economic viability of the northern leg of Keystone?

    Steven Kopits, October 13, 2014 at 7:12 am

    I think you're touching on one of the interesting points, Slugs. Right now, it's extraordinarily difficult to determine what marginal cost is and who has it.

    The bullish case for shales reads like this: shales are subject to a wide range of marginal costs by producer and region, and within regions, to "sweet spots" and more marginal areas. As prices decline, marginal shale players will be pushed out but core shale players will be able to continue to expand production, essentially an intra-sector cannibalization. Thus, marginal cost will decline over time.

    This is exactly what happened in shale gas, where the Marcellus cannibalized the Barnett, Fayetteville and most particularly, the Haynesville. Shale production expanded until price was brought down marginal cost. At this price, demand growth was limited to inherent demand growth, call it 1-2% per year in the US. The Marcellus was still able to grow much more quickly at lower prices, thereby displacing production from both conventional sources like the GoM, and from other unconventional sources, like the Haynesville.

    There are some differences. Oil has to move the global needle, not just the national one, as oil is traded globally and US natural gas is not. Second, the gas resource seems comparatively bigger than the oil resource. But still, if you could continue to add 1.5+ mbpd / year from North American unconventional oil, well, that could have a material impact on oil prices globally. The dust has settled yet.

    Jeffrey J. Brown

    What's causing decline in crude oil: Dan Dicker

    http://www.cnbc.com/id/102078540

    The last $4 in the decline of crude oil prices was due to distressed players getting out of the market, MercBloc President Dan Dicker said Friday. "What have been speculative positions are now at the lowest levels since 2010," he said, adding that it meant commodities-based hedge funds were "expecting a lot of redemptions in the fourth quarter."

    Brent crude traded lower to around $88 per barrel, its lowest level since December 2010, according to Reuters. West Texas intermediate crude dipped below $84 per barrel, its lowest level since 2012.

    On CNBC's "Halftime Report," Dicker also said marginal shale oil producers are behind the drop in oil. Energy exploration and production companies, he added, "are really forced to do some hedging here where they haven't before just to survive the next three quarters because if oil prices stay down here for the next six months to a year, if they do, they won't live."

    Dicker, author of "Oil's Endless Bid," also said that highly leveraged companies, such as those focused on the Eagle Ford and Bakken shale oil fields, were particularly at risk.

    Jeffrey J. Brown
    October 14, 2014 at 5:45 am

    "This has been in the offing for several years…Higher prices begets higher production, until the cycle repeats itself."

    Globally, so far (through 2013) I think that this has been true for natural gas and associated liquids, condensate and natural gas liquids (NGL), but almost certainly not for actual crude oil production (45 and lower API gravity crude oil).

    And as noted below, despite annual Brent prices doubling from $55 in 2005 to the $110 range for 2011 to 2013 inclusive, Global Net Exports of oil have been below the 2005 rate for eight straight years.

    Peak (Crude) Oil in 2005?

    In my opinion it is very likely that actual global crude oil production (45 or lower API gravity crude oil) peaked in 2005, while global natural gas production and associated liquids (condensates & natural gas liquids) have so far continued to increase.

    I've always thought it odd that when we ask for the price of oil, we get the price of 45 or lower API gravity crude oil, but when we ask for the volume of oil, we get some combination of crude oil + condensate + NGL (Natural Gas Liquids) + biofuels + refinery gains.

    This is analogous to asking a butcher for the price of beef, and he gives you the price of steak, but if you ask him how much beef he has on hand, he gives you total pounds of steak + roast + ground beef. Shouldn't the price of an item directly relate to the quantity of the item being priced, and not to the quantity of the item plus the quantity of (partial) substitutes?

    In any case, the closest measure of global crude oil production that we have is the EIA data base that tracts global Crude + Condensate (C+C). In regard to this data base, a key question is the ratio of global condensate to C+C production. Unfortunately, we don't appear to have any global data on the Condensate/(C+C) Ratio. Note that when the EIA discusses "crude oil" they are talking about C+C.

    Insofar as I know, the only complete Condensate/(C+C) data base, from one agency, is the Texas RRC data base for Texas, which showed that the Texas Condensate/(C+C) ratio increased from 11.1% in 2005 to 15.4% in 2012. The 2013 ratio (more subject to revision than the 2012 data) shows that the 2013 ratio fell slightly, down to about 15%, which probably reflects more focus on the crude oil prone areas in the Eagle Ford. The EIA shows that Texas marketed gas production increased at 5%/year from 2005 to 2012, versus a 13%/year rate of increase in Condensate production. So, Texas condensate production increased 2.6 times faster than Texas marketed gas production increased, from 2005 to 2012.

    The EIA shows that global dry gas production increased at 2.8%/year from 2005 to 2012, a 22% increase in seven years. If the increase in global condensate production only matched the increase in global gas production, global condensate production would be up by 22% in seven years. If global condensate production matched the 2005 to 2012 Texas rates of change (relative to the global increase in gas production), global condensate production would be up by about 67% in seven years.

    In any case, we don't know by what percentage that global condensate production increased from 2005 to 2012. What we do know is that global C+C production increased at only 0.4%/year from 2005 to 2012. In my opinion, the only reasonable conclusion is that rising condensate production accounted for virtually all of the increase in global C+C production from 2005 to 2012, which implies that actual global crude oil production was flat to down from 2005 to 2012, as annual Brent crude oil prices doubled from $55 in 2005 to $112 in 2012.

    The following chart shows normalized global gas, NGL and C+C production from 2002 to 2012 (2005 values = 100%).

    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps45f11d98.jpg

    The following chart shows estimated normalized global condensate and crude oil production from 2002 to 2012 (2005 values = 100%). I'm assuming that the global Condensate/(C+C) Ratio was about 10% for 2002 to 2005 (versus 11% for Texas in 2005), and then I (conservatively) assume that condensate increased at the same rate as global gas production from 2005 to 2012, which is a much lower rate of increase in condensate (relative to the increase in gas production) than what we saw in Texas from 2005 to 2012.

    http://i1095.photobucket.com/albums/i475/westexas/Slide2_zpse294f080.jpg

    Based on foregoing assumptions, I estimate that actual annual global crude oil production (45 or lower API gravity crude oil) increased from about 60 mbpd
    (million barrels per day) in 2002 to about 67 mbpd in 2005, as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005.

    At the (estimated) 2002 to 2005 rate of increase in global crude oil production, global crude oil production would have been up to about 90 mbpd in 2013.
    As annual Brent crude oil prices doubled again, from $55 in 2005 to an average of about $110 for 2011 to 2013 inclusive, I estimate that annual global crude
    oil production did not materially exceed about 67 mbpd, and probably averaged about 66 mbpd for 2006 to 2013 inclusive.

    Hans
    October 14, 2014 at 6:46 am

    Mr Brown said: "And as noted below, despite annual Brent prices doubling from $55 in 2005 to the $110 range for 2011 to 2013 inclusive, Global Net Exports of oil have been below the 2005 rate for eight straight years."

    This is indeed true and quite an extended period of time with little increase in crude production.

    Why, I do not known perhaps a variety of events which effected production but certainly NOT Peak Oil.
    One would need a much longer period of time, to suggest that crude oil growth was coming to an end.
    It would also mean accelerated price increases as well and not declining oil prices.

    If one back tracks some twenty years or so, both non and OPEC production has seen growth.

    http://www.wtrg.com/oil_graphs/PAPRPOP90.gif

    http://www.wtrg.com/oil_graphs/USSR90.gif

    http://www.wtrg.com/oil_graphs/PAPRPNT.gif

    I have said it before, as spare capacity declines crude oil prices will
    rise.

    http://www.wtrg.com/oil_graphs/lspare.gif

    As significant as oil is in the economic well being of nations and
    it's complexities, it maybe rather difficult to find all cause and effects.

    Also remember, that 70% of reserves and production are controlled by
    government units, which is less than desirable for optimal market conditions
    and performance..

    Jeffrey J. Brown
    October 14, 2014 at 7:48 am

    Unfortunately, none of your links worked for me. In any case, some clarification is in order.

    What the EIA calls Crude Oil is actually Crude + Condensate, and Condensate is a byproduct of natural gas production. Insofar as I know, there is no global data base for actual crude oil production (45 and lower API gravity crude). But as noted above, based on some very reasonable assumptions, it's very likely that we have not seen a material increase in global crude oil production since 2005.

    When we calculate net exports, we have to use total petroleum liquids (BP data base) or total petroleum liquids + other liquids (EIA data base).

    Jeffrey J. Brown
    October 14, 2014 at 6:24 am

    Following is my 2002 to 2012 "Gap Chart" for Global Net Exports of oil (GNE*):

    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps3161a25b.jpg

    Note the very large increase in GNE as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005. At the 2002 to 2005 rate of increase, GNE would be at about 70 mbpd in 2013, versus the actual value of 43 mbpd.

    As annual Brent crude oil prices doubled from $55 in 2005 to the $110 range for 2011 to 2013 inclusive, GNE have been below the 2005 rate for eight straight years (at 43 mbpd in 2013).

    And as China & India have (so far) increased their oil consumption as oil prices increased, Available Net Exports (ANE, or GNE less Chindia's Net Imports, CNI) fell from 41 mbpd in 2005 to 34 mbpd in 2013.

    Here's the problem: Given an inevitable ongoing decline in GNE, unless China and India cut their net imports at the same rate as the rate of decline in GNE, or at a faster rate, the resulting rate of decline in ANE will exceed the GNE decline rate and the ANE decline rate will accelerate with time.

    Here are the observed 2005 to 2013 rates of change in GNE and ANE (EIA data):

    GNE: -0.8%year

    ANE: -2.3%/year

    *GNE = Combined net exports from top 33 net exporters in 2005

    macroduck
    October 17, 2014 at 10:23 am

    As a matter of simple logic, the fact the there is a trend in place reflecting medium-term supply and demand dynamics in no way excludes an effect in the short run from shifts in speculative positions. If your knowledge is limited to physical market factors, you really have no basis for commenting on the issue of short-term price moves. Are you claiming to know what specs were doing during the $4 move in question?

    eric
    October 12, 2014 at 1:55 pm

    The chart makes it look like $80 might be a floor. In any case I'd be very surprised if it's $60.

    Steven Kopits

    October 13, 2014 at 7:46 am


    Who are the discipline-busting members of OPEC?

    That's everyone in OPEC.

    So who exactly are we trying to discipline?

    You know, there are a lot of smoke-filled back rooms in Europe and the Middle East just now. A lot of deals are being made for political, rather than economic, reasons. That would seem to be a more reasonable place to look.

    westslope

    October 14, 2014 at 2:51 pm

    Precisely Steven.

    The question about disciplining quota-busting OPEC members was meant as rhetorical given that most OPEC members are experiencing difficulties maintaining current production levels let alone increase them as you point out.

    It is fun to discuss how the Saudis make decisions. But let us focus on what is the prime economic challenge from their perspective at this juncture: catering oil prices.

    OPEC production could either be insufficient or too painful for some member states. The No. 1 challenge is growing US production and reduced US imports. The only mechanism the Saudis have for disciplining US production is to allow prices to fall well below the threshold of risk-adjusted profitability for US tight oil explorers and producers. It might also be helpful if a few more Canadian heavy oil projects were mothballed for the foreseeable future.

    Rather than coming up with dramatic images of smoke-filled back rooms, perhaps it is more useful to wonder about what the experts that work for various Saudi and OPEC agencies think. What are they advising their ministers, their governments to do? I have in mind all those well-educated economists, financial experts and applied mathematicians that toil away in OPEC and member state governments.

    Stepping aside and allowing oil prices to sharply decline is the only way to get the job done. OPEC has no other way to influence North American oil production growth rates going forward. High stable prices decrease the cost North American oil e&p capital. Low and volatile oil prices will increase the cost of capital.

    Short-term pain for longer-term gain. Moreover, cratering oil prices provide a legitimate excuse for either saying no to increased public expenditures, or actually cutting some public expenditures.

    I am assuming that rent-seeking and special-interest politics prevail in key OPEC member states just like they appear to do in North America.

    Jeffrey J. Brown

    October 13, 2014 at 6:25 am


    Some interesting data about China's latest oil import data follow, which are particularly interesting in the context of the longer term data (discussed below).

    China's September crude oil imports rise 7% on year to 6.74 mil b/d, exports fall to nil
    http://www.platts.com/latest-news/oil/singapore/chinas-september-crude-oil-imports-rise-7-on-27719307

    Following is an essay I wrote on net oil exports, which I define as total petroleum liquids + other liquids proudction less liquids consumption (EIA data). Note that Saudi net oil exports rose from 7.1 mbpd (million barrels per day) in 2002 to 9.1 mbpd in 2005, as annual Brent crude oil prices rose from $25 in 2002 to $55 in 2005.

    Saudi net oil exports have so far been below the 2005 rate of 9.1 mbpd for eight straight years, falling to 8.7 mbpd in 2013, as annual Brent crude oil prices rose from $55 in 2005 to the $110 range for 2011 to 2013 inclusive.

    So Far, Global Net Exports of Oil Peaked in 2005

    Because of the way that we define net exports, we have to deal in terms of total petroleum liquids (plus other liquids for the EIA data set).

    Some definitions:

    Global Net Exports (GNE) = Combined net exports from (2005) Top 33 net oil exporters, total petroleum liquids + other liquids (EIA), which accounted for about 99% of total global net exports of oil in 2005

    Available Net Exports (ANE) = GNE less Chindia's Net Imports (CNI)

    CNE = Cumulative Net Exports (for a given time period)

    ECI (Export Capacity Index) Ratio = Ratio of production to consumption

    GNE/CNI Ratio is analogous to the ECI Ratio

    Six Country Case History. The Six Country Case History consists of the major net oil exporters (net exports of 100,000 bpd or more) that hit or approached zero net exports from 1980 to 2010, excluding China. China, like the US, became a net importer prior to a production peak, because of a rapid rate of increase in consumption. Combined production from the Six Countries virtually stopped increasing in 1995, showing only a 2% increase from 1995 to 1999.
    The following chart shows the normalized values for production, ECI Ratio, net exports and remaining post-1995 CNE (Cumulative Net Exports) by year (1995 values = 100%).

    http://i1095.photobucket.com/albums/i475/westexas/Slide2_zps6c3a6280.jpg

    Note that even as production increased slightly from 1995 to 1999 (by 2%), net exports fell, because of rising consumption, as illustrated by the decline in the ECI Ratio. And note that even as production increased from 1995 to 1999, remaining post-1995 CNE fell by 54%.

    Estimated Six Country post-1995 CNE were about 9.0 Gb (billion barrels) based on the 1995 to 2002 rate of decline in their ECI ratio. Actual post-1995 CNE were 7.3 Gb.

    The key point is that a declining ECI Ratio corresponded to a rapid rate of depletion in remaining CNE, and even as Six Country production rose from 1995 to 1999, the rate of depletion in remaining post-1995 CNE accelerated, from 15%/year in 1996 to 26%/year in 1999.

    Global Net Exports of oil (GNE). GNE, the combined net exports from the top 33 net exporters in 2005, fell from about 46 mbpd (million barrels per day) in 2005 to about 44 mbpd in 2012. Preliminary 2013 data show that GNE in 2013 fell to 43 mbpd. Combined production from the top 33 net exporters in 2005 rose slightly from 2005 to 2013, but because consumption increased faster than production, net exports fell, as evidenced by the decline in the ECI Ratio.

    The following chart shows the normalized values for production, ECI Ratio, net exports and estimated remaining post-2005CNE (Cumulative Net Exports) by year (2005 values = 100%).

    http://i1095.photobucket.com/albums/i475/westexas/Slide14_zpsbd9a272e.jpg

    Based on the 2005 to 2012 rate of decline in the Top 33 ECI Ratio, I estimate that remaining post-2005 Global CNE fell by about 21% by the end of 2012. As noted above, this methodology was too optimistic for the Six Country Case History, in regard to estimating post-1995 CNE.

    Available Net Exports of oil (ANE). ANE are defined as Global Net Exports of oil (GNE) less the Chindia regions (China + India's) net imports (CNI). ANE fell from 41 mbpd in 2005 to 35 mbpd in 2012. Based on the preliminary 2013 data, ANE fell to 34 mbpd in 2013.

    The GNE/CNI Ratio is analogous to the ECI Ratio. The following chart shows 2002 to 2012 GNE/CNI data, with the extrapolation based on the 2005 to 2012 rate of decline in the ratio.

    http://i1095.photobucket.com/albums/i475/westexas/Slide20_zps26112103.jpg

    At a GNE/CNI Ratio of 1.0, China and India alone would theoretically consume 100% of Global Net Exports of oil, leaving no net oil exports available to about 155 net importing countries. Of course, the global economy can't survive if only two countries are consuming anywhere close to 100% of Global Net Exports of oil, but that has been direction we have been headed in since 2002, up to and including 2013.

    I've called what happens from 2012 to 2022, and in following years, to the GNE/CNI Ratio the "$64 Trillion Question." The conundrum is that we continued to slide, at least through 2013, toward a point in time–a GNE/CNI Ratio of 1.0–that we cannot arrive at.


    Jeffrey J. Brown

    October 13, 2014 at 1:11 pm


    As noted above, we clearly saw a demand related year over year oil price decline in 2009, and an additional question is to what extent QE by central banks has been propping up demand, especially in developed countries. GNE/CNI Vs. Total Global Public Debt (2002 to 2012):

    http://i1095.photobucket.com/albums/i475/westexas/Slide23_zps62b6932a.jpg

    Bruce Hall

    October 13, 2014 at 9:20 am

    $2.72/gallon regular this morning. Offsets some of the much higher food prices we've been experiencing. The pendulum will swing the other way… on both… unless some government tries to "fix" the marketplace.

    Dan,

    Look way up toward the top of the stack for Steve Kopits. He started a brief exchange about Russia, ISIS and Saudi Arabia.

    As I understand it, Russia has budgeted for $100/bbl Brent next year, with 40% of government revenue coming from oil. Loss of access to foreign investment, falling oil and non-oil revenue and a substantial drain on reserves is a bad combination. At a quess, Europe has no reason to fear a gas cut-off from Russia this winter. Russia may be in the perverse situation of facing higher inflation due to falling energy prices, through the ruble exchange rate.

    Michael Moran

    Take any numbers regarding cost of shale production with grain of salt. Citi likely right with big range. Impacted by productivity of shale play (Permian better than Bakken), royalty interest to landowner (can range from 12.5% to 25%), location within play, and operating efficiencies of operator within play (some companies have bigger discount from service providers or use own rigs, which can lower costs) among other factors.

    US production going up, so even with lower prices may just go up less.

    Another big factor is when Russia or Iran or another country whose economy is driven by oil produce more and sell the oil at a higher price their economy goes into high gear and they use more oil. US shale production does not meaningful increase US oil usage.

    Thus a barrel of US shale oil reduces the call on OPEC oil by more than 1 barrel (i., e., the barrel it replaces plus another portion of a barrel which is not used because the oil producing countries economy is not as robust because of lower prices for its oil).

    [Oct 18, 2014] Factors Behind Lower Oil Prices

    Oct 12, 2014 | economistsview.typepad.com

    Jim Hamilton:

    Lower oil prices: For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments. ...

    One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. ...

    In terms of factors specific to the oil market, one important development has been the recovery of oil production from Libya. ...

    But the biggest story is still the United States. Thanks to horizontal drilling to get oil out of tight underground formations... Just how low the price can go before some of the frackers start to drop out is subject to some debate. ...

    Jeffrey678 said...

    "Oil prices at 27-month low: How US, Saudi Arabia oil collusion could kill ISIS funding"

    "In fact, by cutting the price of oil, the Saudis also hope to neutralize the shale oil boom in the United States and Canada. This boom has led to the United States and Canada producing much more oil than they were a few years back. But shale oil is expensive to produce and it is financially viable only if oil price remain at a certain level. As Bank of America-Merrill Lynch analysts point out "With production costs ranging from $50 to $75/bbl at the well head, a decline in Brent crude oil prices to $85 would likely be a major blow to US shale oil players and lead to a significant slowdown in investment."

    "The threat is that ISIS might want to go beyond Syria and Iraq in the days to come. "It should perhaps not come as a surprise that the threat of a stateless group that challenges the status quo by attempting to redraw national borders is shifting incentives for key regional and global players...The Islamic State could present a direct threat to the Arab monarchies at a time of growing social discontent...In our view, Saudi and other regional rulers may prefer to reengage the US to help protect established borders from the expanding caliphate. What could Arab countries offer the West to help contain this threat? Lower oil prices," the Bank of America-Merrill Lynch analysts point out."

    http://firstbiz.firstpost.com/economy/oil-prices-at-27-month-low-how-us-saudi-arabia-oil-collusion-could-kill-isis-funding-103649.html

    sglover said...

    Just how sustainable is the fracking boom? I can't make out if the new techniques are a rather drastic way of wringing the sponge dry, or if they really can yield energy for the next several decades. There's a gold rush fervor that makes it difficult to sort out fact from hype. And the way politicians have leaped on it as the salvation from difficult decisions sets off my bullshit detectors.

    pgl said in reply to sglover...

    The pro-fracking crowd tells us there is a lot of oil down there. Only problem is that even the private costs of digging it up are high and even the environmental damage, the social costs are likely much higher.

    cm said in reply to sglover...

    I have seen a lot of TV ads for domestic oil/gas extraction that were not in the names of commercial oil companies but made to appear to come from "independent" organizations. That's an even stronger red flag for me. In fact something being endorsed on TV seems to be a good counter-indicator these days.

    cm said in reply to sglover...

    Other good counter-indicators (or at least cautionary signs) are promises of "job creation" and "supporting small businesses".

    sglover said in reply to cm...

    "Other good counter-indicators (or at least cautionary signs) are promises of 'job creation' and 'supporting small businesses'."

    Yep. Put it that way,

    sglover said in reply to sglover...

    Ritholz points to a Bloomberg article that nicely illustrates the problem:

    http://www.bloomberg.com/news/2014-10-09/ceos-tout-reserves-of-oil-gas-revealed-to-be-less-to-sec.html

    pgl said in reply to anne...

    2008 ( 99.67) (High)
    2009 ( 61.95) Obama

    This is why doing oil prices annually is so misleading. Yes prices were high in early 2008 but then they plummeted the rest of the year.

    pgl said in reply to pgl...

    An even better chart as it shows real oil prices from 1946 to today:

    http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart.htm

    Note this hovered around $20 a barrel in real terms until the 1970's OPEC explosions. After that, the real price of oil drifted down to only $17 a barrel by 1998 (the commodity bust). Since 1998 we have been in the commodity boom in large part because China is buying a lot more commodities including oil.

    pgl said in reply to anne...

    There are many graphs of historical oil prices on a a daily basis. This one goes from 2000 to current:

    http://www.infomine.com/investment/metal-prices/crude-oil/all/

    pgl said in reply to pgl...

    A better graph as it shows inflation adjusted oil prices:

    http://www.stlouisfed.org/publications/itv/articles/?id=1214

    Condoleezza Rice: We need to stop Putin, gas and oil can be supplied to Europe from the USA

    Geological dimension in dropping of oil prices.
    YouTube

    [Oct 15, 2014] Saudis Dump Oil To Increase Leverage Over U.S. Middle East Policies

    moonofalabama.org | Comments (77)

    During the last years U.S. president Obama talked a lot about energy independence:

    In his fifth State of the Union address on Tuesday, President Barack Obama celebrated the efforts his administration has made to cut greenhouse gas emissions, while also praising recent increases in domestic oil and gas production.

    Obama said early in his address that there is now more "oil produced at home than we buy from the rest of the world," for the first time in two decades.

    Obama did not say that the increase in U.S. fossil fuel production was only possible because international oil and gas prices had increased above the magic $100 per barrel equivalent. Below that price shale gas and oil extraction as well as oil production from tar sands are only marginally profitable or not profitable at all.

    But the "energy independence" talk allowed various experts to claim that the U.S. could now ignore the Middle East:

    Clearly, the booming American oil and gas businesses are not problem-free, but the benefits -- economic, geopolitical and environmental -- of this impending energy independence far outweigh the drawbacks.

    The days when Mideast oil-producing dictatorships and their friends at OPEC could so easily wave their power over a trembling, oil-thirsty West are on their way to becoming a relic of the past.

    As a new world-wide recession is creeping in, consumption of fossil fuels has declined. Typically such a decline would be followed by a decline in production by major producers to keep the prices and their income somewhat stable. But that is not happening.

    The Saudis and other Gulf state rulers disliked U.S. energy independence talk very much. They need to keep some leverage over U.S. policy. They now decided to end the U.S. "energy independence" talk and to push the U.S. to again do their bidding. The simple method they apply is to keep oil production high enough during a period of declining consumption to take prices lower and to thereby make new U.S. domestic production a money losing business:

    [T]he [Saudi] kingdom, OPEC's largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

    The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.

    The aim is clear. Kick producers with higher production costs than OPEC out of the market and thereby retain the global market share as well as the leverage needed to pursue the Gulf countries' political aims:

    Kuwait's oil minister Ali al-Omair was quoted as saying by state news agency KUNA on Sunday that OPEC is unlikely to cut oil production in an effort to prop up prices because such a move would not necessarily be effective.

    Omair said $76-$77 a barrel might be the level that would end the oil price slide, since that was the cost of oil production in the United States and Russia.

    The Saudis and the other Gulf producers all have positive current account balances (pdf, Fig 3). They can easily afford lower oil prices.

    U.S. shale and tar sand production costs are higher than Saudi or Russian production cost. They are the first to die when prices are kept low:

    Allowing Brent to fall below $85 could slow the U.S. shale boom because some producers would lose money pumping at that price, Francisco Blanch, head of commodities research at Bank of America, said in a report Sept. 9.
    ...
    Curtailing the shale boom would ensure continued U.S. reliance on Middle Eastern energy, Bank of America's Blanch said.
    ...
    "For Saudi Arabia, I can't see why they'd come in and manage prices unless it falls below $90," Torbjoern Kjus, an analyst at DNB in Oslo, said by phone Sept. 10. "It benefits the Saudis to test where the limit is for U.S. shale."

    OPEC's de facto leader has the "fiscal firepower" to tolerate prices as low as $70 for two years without experiencing economic difficulties, according to Energy Aspects Ltd., a consultant in London. The kingdom held reserve assets valued at $741.6 billion in July, almost double the level five years earlier, according to the Saudi Arabia Monetary Agency.

    This strategy will not only allow the Gulf dictators to retain their market share but the Saudis and others will use this strategy to slow down, if not stop, U.S. overtures to Iran as well as to press for U.S. enabled regime change in Syria.

    ===

    Putin is just a bonus for House of Sods.

    http://www.zerohedge.com/news/2014-10-13/china-russia-sign-cny150-billion-local-currency-swap-plunging-oil-prices-sting-putin

    Price at the pump is predicted to reach 2009 levels. October surprise for dems at the mid-terms? People often vote pocket-book.

    Posted by: Ben Franklin | Oct 13, 2014 10:07:36 AM | 3

    ===

    Sorry, b. I think you've missed the mark here. US involvement in the middle east was never primarily motivated by its own domestic oil consumption. ME oil has never been a significant source of oil for the US. Most of our oil is either domestically produced, or else it comes from somewhere else in the western hemisphere (Mexico, Venezuela, Canada).

    No, US control of the ME is about maintaining control over Europe and Japan, who get most of their oil from there. (Europe also gets a lot of oil/natgas from Russia, but from Washington's point view, that's a danger.)

    I think the Saudis are actually trying to help us more than hurt us. Dramatically lower oil prices will weaken Iraq and Iran economically (just as it did during the 80's), making it harder for them to save Syria. And--though I hate to agree with Coldy!--it could also have a negative impact on Russia, too.

    The only wildcard here is China. The PRC imports the vast majority of its oil, and most of it presently comes from the ME. I suspect that dramatically lower oil prices could help China economically, giving them faster economic growth and more money to help out Iran, and perhaps to finance drilling projects in Russia, too. And, even if it hurts the frackers in the US, I also think this could possible be good for the economies of America, Europe and Japan--again, just as it was in the 80's.

    Posted by: Seamus Padraig | Oct 13, 2014 10:24:40 AM | 4

    ===

    Also, Russia's economic forecasts are based on $100 per barrel (oil currently account for 50% of state revenues, so any dip in price will cause a big bite out of the budget)

    Posted by: ralphieboy | Oct 13, 2014 11:19:37 AM | 5

    Just think of the impact of lower oilprices for Russia !!!

    http://www.truthdig.com/report/item/obamas_new_oil_wars_20141010

    Posted by: Willy2 | Oct 13, 2014 11:22:46 AM | 6

    ===

    Big impact on US shale oil companies. Even with crude above $100 a barrel, shale producers were spending money faster than they made it. Currently stock prices are tanking at Chesapeake Energy Corp and QEP Resources Inc.

    Posted by: Don Bacon | Oct 13, 2014 11:28:00 AM | 7

    ===

    My view is that the price of oil is not dictated either by US/EU consumption or by the Saudis anymore - it is now Asia/BRICS.

    Yes, the US and EU has been lowering it oil consumption slightly in recent years with US domestic oil production rising. However, a significant portion of this decrease is due to lack of economic activity, while the domestic oil production still represents a minority of US oil consumption (i.e. imports are still dominant).

    On the other hand, the overall demand from BRICS and developing nations has more than compensated for all US/EU declines:

    http://www.energytrendsinsider.com/wp-content/uploads/2012/06/Oil-Consumption.png?00cfb7

    Thus oil production from Saudi Arabia can only reduce overall oil prices if demand from the BRICS/developing nations stops growing. A major recession in China might do it, but then again, might not.

    Thus the ability of the Middle Eastern countries to sustain lower oil prices is likely true, but the ability of said nations to actually lower oil prices is very much in doubt - unless they're willing to deliberately undercut the market by selling at lower than market prices. In order for price undercutting to work, the Middle Eastern producers must also be able to supply enough at the undercut prices to price out existing producers.
    It is far from clear they're willing and able to do either of these things.


    Posted by: c1ue | Oct 13, 2014 11:29:52 AM | 8

    ===

    Keystone?

    "Sechin said that production of oil from the Kara Sea field could begin within five to seven years. The field discovered would be named "Victory." There is more than a little irony in that name. Because of the economic sanctions drafted by the US Treasury Undersecretary for Terrorism and Financial Intelligence, David S. Cohen, as of October 10, ExxonMobil will be forced to withdraw from the Russian project and incur huge losses or violate the US Government sanctions and face severe penalties. The Obama Administration has just scored an own goal (Eigentor?) with its brilliant new precision financial and economic warfare unit inside the Treasury Department. Bravo, Washington! You have just inflicted major damage on one of the largest corporations in the United States. When ExxonMobil did the deal with Rosneft, it gambled that the Arctic region, the world's greatest unexplored potential oil region, could be the company's salvation in terms of assuring long-term crude supplies. The gamble proved correct and did so just as the stupid Obama Administration bureaucrats imposed sanctions on Sechin and the Arctic project they intended to damage Russia."

    http://journal-neo.org/2014/10/13/obama-s-stupid-sanctions-give-putin-new-oil-bonanza/

    Posted by: Nana2007 | Oct 13, 2014 1:07:58 PM | 17

    ===

    On the "war against Russia" through oil prices.

    Reagan did that in the 1980s. But now there is shale and there was a lot of Obama hyping about energy independence and providing oil to Europe and about jobs, jobs, jobs.

    That will all go away when the Saudis dump.

    I have added links in the piece above that clearly show that U.S. shale production costs much higher than Russia's production cost. Shale and tars sands will be snuffed out first and so will the "energy independence".

    If you believe that the U.S. engineered the Saudi dump you must also believe that Obama is willing to give up some of his few policy successes for that. I don't think that is the case.

    It is also obvious that the Saudis are in a pretty bad mood towards the U.S. over several issues while they are mostly friendly with the Russians.

    Posted by: b | Oct 13, 2014 1:12:53 PM | 18

    ===

    @B: The truth is even more complicated. According to my info, the Soviet Union had (large) debts in German Marks but their oilrevenues were in USD. The Soviet Union was squeezed between falling oil prices (from $ 40 in 1980 down to say $ 20 in 1990) while during the 1980s the USD fell against the German Mark. Think about what that meant for the Soviet Union ..........

    Falling oil prices were also responsible for ending the war between Iraq & Iran (1980-1988). The war has cost both countries LOTS of money while their oil export revenues fell sharply (falling oilprices).
    That war was started by one Saddam Hoessein with the full knowledge & support of the US. And that war marked the start of the deterioration of the relationship between Washington & Baghdad.

    Posted by: Willy2 | Oct 13, 2014 3:23:32 PM | 31

    ===

    In that regard falling oilprices could end the wars in Syria & Iraq as well. Because then Saudi Arabia & Qatar could get squeezed finacially as well, forcing them to drop financial support for ISIS & the rebels in Syria.

    Posted by: Willy2 | Oct 13, 2014 3:31:01 PM | 34

    ===

    Matthew Simmons in his 2005 book Twilight in the Desert stated, Saudi oil was in irreversable decline. That everry time KSA had promised more production they didn't deliver.

    I expect the same will be true this time. KSA just suggesting they will increase production was successful in keeping oil prices down. I don't think they'll get away with this time.

    Posted by: okie farmer | Oct 13, 2014 4:16:17 PM | 35

    ===

    Yet as Mr. Simmons observes: "History has frequently shown that once secrecy envelops the culture of either a company or a country, those most surprised when the truth comes out are often the insiders who created the secrets in the first place."
    Mr. Simmons became suspicious of Saudi claims after taking a guided tour of Aramco facilities in 2003. To penetrate the veil, he turned to the electronic library of the Society of Petroleum Engineers, which regularly publishes technical papers by field geologists. After downloading and studying more than 200 reports by Aramco personnel, Mr. Simmons came up with his own portrait of Saudi Arabia's oil resources. It is not a pretty picture.
    Almost 90% of Saudi production comes from six giant fields, all of them discovered before 1967. The "king" of this grouping -- the 2000-square-mile Ghawar field near the Persian Gulf -- is the largest oil field in the world. But if Saudi geology follows the pattern found elsewhere, it is unlikely that any new fields lie nearby. Indeed, Aramco has prospected extensively outside the Ghawar region but found nothing of significance. In particular, the Arab D stratum -- the source rock of the Ghawar field -- has long since eroded in other parts of the Arabian Peninsula. The six major fields, having all produced at or near capacity for almost 40 years, are showing signs of age. All require extensive water injection to maintain their current flow.
    Based on these observations, Mr. Simmons doubts that Aramco can increase its output to anywhere near the level it claims. In fact, he believes that Saudi production may have already peaked. Is he right?
    Mr. Simmons's critics say that, by relying on technical papers, he has biased his survey, since geologists like to concentrate on problem wells the way that doctors focus on sick patients. Still, the experience in America and the rest of the world shows that oil fields don't last forever. Prudhoe Bay, which was producing 1.2 million barrels a day five years after being brought on line in 1976, is now down to less than 400,000.
    The mystery of Saudi oil capacity bears an eerie resemblance to Saddam Hussein's apparent belief that his scientists had developed weapons of mass destruction. Who are the deceivers and who is the deceived? No one yet knows the answers. But at least Matthew Simmons is asking the questions. (Wall Street Journal, June 28, 2005)
    The water injection refered to, is 80%, which means the oil has to be cleaned of the water before it can be processed.

    Posted by: okie farmer | Oct 13, 2014 4:31:03 PM | 37

    ===

    The US ignore the ME? Never. The US has the military for leverage in the ME. US control of ME oil has nothing to do with US usage.
    Since the US is busily sucking Canada dry

    http://business.financialpost.com/2013/08/19/oil-sands-crude-not-as-expensive-to-produce-as-it-used-to-be/

    "The report pegs supply costs for oil sands projects in the range of US$50 to US$90 per barrel. That compares to the US$70 to US$90 a barrel needed to blast light, sweet crude through underground fissures in North Dakota's Bakken shale"

    Making an oil sands barrel an average of $70.
    The oil sands are big producers

    Controlling ME oil is the ticket to controlling the EU. Possibly China.
    Lower oil prices are certainly harder on Russia. Venezuela too.
    Lower oil prices help with the fuel costs for the war machine
    It would seem the Saudis are still aiding the US

    Posted by: Penny | Oct 13, 2014 5:05:13 PM | 39

    ===

    The world oil consumption pattern in the 1980s was primarily the US and EU - and Russia had just annoyed the Saudis with their move in Afghanistan. Couple that with the long standing Saudi feud with Iran - these were the twin pillars underlying the oil price decline in that era. OPEC was also significantly more monolithic in that era - and the post Embargo efficiency mandates in the US and EU dropped demand very significantly.

    As I note above: the US and EU no longer drive oil pricing because of the massive upswell in demand from BRICS and developing nations. If the Saudis truly can chop the price of oil down into the $70s per barrel, that will prove that their much maligned reserves and production capacity is what the Saudi state says it is vs. what many industry types have opined.

    But until that happens, I will reserve judgment.

    Posted by: c1ue | Oct 13, 2014 5:53:21 PM | 43

    ===

    The German government has some free advice for the Saudis as well ...

    German Delegation Meets Saudi Prince in Islamic State Talks

    The European power wants to convince Saudi Arabia and other Middle Eastern nations to join in the fight against the Islamic State.

    Before flying into Saudi Arabia, Steinmeier said in a statement on Sunday: "Saudi Arabia plays a central role in facing crises in the region. In fighting IS, it will be crucial to reach an understanding and develop a common political strategy above and beyond military action."

    ... 'a common political strategy above and beyond military action against ISIS?'

    Like defunding them?

    Like ending the US -> KSA -> ISIS arms flow?

    Posted by: jfl | Oct 13, 2014 6:38:48 PM | 44

    ===

    Here's another thing A LOT OF people don't know. The US invasion of Iraq was done for 2 reasons:

    - Control of oil supplies. If the US can control the oil supplies form the Middle East then it also can control China that gets oil form the Middle East as well.
    - Anyone who wanted to buy iraqi oil in the timeframe 2000- May 2003 had to pay for that oil in EUROS, instead of in USD. Oil priced in EUROS is the mortal enemy for the US. It would send US interest rates through the roof.

    Posted by: Willy2 | Oct 13, 2014 7:14:24 PM | 45

    ===

    I think it is fairly amusing that people like Cold Hole think that "markets" really do rule the world, and that Russia, China, and other nations fates rest on nothing more than Wall Street traders and the whims of some desert tyrants.

    Unlike the US - who is stuck in this hopeless economic and ideological straightjacket by its oligarchy - China, Russia, Venezuela, Cuba and other countries are open to other forms of exchange and different economic modes. Unlike the US people, who are merely victims of their oligarchs who run the supposedly "free" markets, these other countries are willing to pour stimulus into their economies, trade with others in new ways, including barter. The countries know that they either stick together, or all is lost. China will not let Russia fall, nor will Russia let China fall. China will stand up for ALBA, and ALBA will stand up for China. And on, and on, and on...

    The countries are not bound only be the buck. They still have their humanity. And my guess is they will weather any storm far, far better than that storm which is coming to the US if the precarious petro-dollar collapses.

    Posted by: guest77 | Oct 13, 2014 8:18:37 PM | 47

    ===

    I'm trying to imagine just what kind of massive threat or crisis would cause the US to turn from it's neo-liberal, phony "free market" ideology - even if it meant the existence of the country.

    I can't ever imagine any threat that would cause the elite to look to the American people as an asset, to say "we need our people to be stronger" instead of "we need taxes on our corporations to be lower". Even if faced with World War 3, we will never see a return to the America that fought World War 2 as a united front.

    The US will stick with corporate system until the whole regime expires. There is no turning this ship around. The oligarchy has too much power. They have all the power at this point. The American people are not an asset to them, we are just "the 47% of freeloaders". They'd happily bring people from India to do any job for a little cheaper - no matter that real unemployment grows. At best, we are shoppers and consumers - 350 million little bees to make their honey, send them their taxes, fight their wars, buy their crap, and do as we're told.

    They own this place. We're paying the rent.

    Posted by: guest77 | Oct 13, 2014 8:36:02 PM | 48 >

    ===

    b@18

    Personally, I see Obama as a team member that does his part. His 'legacy' is the payoff comes after office from his library, books, speaking engagements, and (maybe) selling access via a consultancy like Clinton and Kissinger. I think the loss of shale jobs is meaningless to him. It seems clear that he caters to/works for TPTB. Thus, he is essentially a neolibcon. Virtually every initiative that he 'sells' to the public has great(er) benefits for TPTB.

    So I would put no store whatsoever in any analysis that relies on Obama having any interest in policy from the standpoint of his 'legacy' in the public eye. Do you recall his outright lying about his signature initiative, Obamacare? ("If you like your doctor you can keep your doctor") and his evident disregard for its smooth start? And that is merely one of many examples that could be cited.

    Also, to what extent is the oil drop simply due to economic slowdown? And there may be multiple policy objectives to driving down the price (lower than the market would take it naturally) from geo-political to economic (jumpstart Western economies?) to election-fixing (lower price for gas at the pump might increase support for Democratics in the up-coming US election).

    Posted by: Jackrabbit | Oct 13, 2014 10:30:50 PM | 53

    ===

    Here's an interesting take from Ilargi:

    "This is not a purely economic issue, it's political. The US has a large voice in it in the director's role, and the House of Saud plays the part of the protagonist. This is a major development in world politics, it's not just some financial market-driven move.

    World power relations are being hugely changed on the fly as we're all watching and trying to figure what to make of all this. One thing's for sure: the world will never be the same.

    Why it happens now is a great question, which is impossible to answer. And that's fine: it's enough to try and understand exactly what is going on, let alone why.

    But I bet you it has to do with the US and Europe realizing they can no longer keep pretending their economies are growing or recovering or doing fine.

    We've landed in the next phase of what arguably started in 2007, but what you could place back many years before that, an economic system based on the fantasy that is debt driven growth, inflated by a factor of a trillion, give or take a few zeros.

    That system is in the process of dying. And the people who have tried to make you believe, and succeeded, that it would all be fine in the end, are now jockeying for position in the aftermath of the demise of a world built on debt.

    And they are the same people who built that world, profited from it to an insane degree, and want to use those profits to hang on to power in a world that will be dramatically different from the one they called the shots in. And that doesn't bode well; it tells us violent clashes will be on the horizon."

    http://www.theautomaticearth.com/how-to-blow-up-opec-in-3-easy-steps/

    Posted by: Nana2007 | Oct 14, 2014 1:14:16 AM | 63

    ===

    The drop in oil price is because the USA has its flunkies in the oil commodity market deliberately shorting the price so the impact will be felt mostly in Russia.

    OBOMBER and his terrorist buds are hoping the Russian people tire of their economy being savaged by the USA and throw Putin out.

    As for our fracking, wait until those chemicals used to frack the oil out drifts down in the water aquifers. Then try drinking that poison.

    Posted by: Catman | Oct 14, 2014 6:49:18 AM | 67

    ===

    A couple of topical theories from Xymphora...

    Tuesday, October 14, 2014

    Bluff
    "Exclusive: Privately, Saudis tell oil market - get used to lower prices" This is bluff (perhaps a manic phase of Prince Bandar's mental illness). The Saudis can't afford to do this - they need big revenues to fund their own social programs or face the revolution they fear, and they certainly don't benefit by wrecking OPEC. It may just be a warning to the Americans to get with the Saudi plan for Syria (the Americans need the high oil price numbers to keep the fracking illusion going, an illusion that creates the phony economic numbers that keep up the deception that the US isn't in severe economic difficulties), a plan which at least the Pentagon seems to be resisting (the Pentagon has been choosing bombing targets which appear to be helping the Syrian government).

    Posted by: Hoarsewhisperer | Oct 14, 2014 8:59:07 AM | 72

    ===

    @ChipNikh #69
    You state that world energy demand has been flat - but the subject here is oil.

    Please post your data - I am curious as to where you got this information.

    However, the BP annual energy review shows that oil consumption continues to increase dramatically. World oil consumption has gone from under 70 million barrels per day (MMBPD) to just under 90 MMBPD from 1988 until 2013, and growth has been pretty much uninterrupted. Furthermore, the vast majority of this growth has come from Asia Pacific - not just China although China is a large part of it.

    What I've posted above repeatedly is that this surge in oil demand is what keeps prices up. Price cuts by the Saudis - even if truly part of a plan to drive oil prices below $70/barrel - will only work if the Saudis are both able to supply enough oil to overcome latent demand and replace sufficient alternative supply.

    It is far from clear they are able to do either.

    BP oil data link:
    http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy/review-by-energy-type/oil/oil-product-consumption.html
    Look at the powerpoint slide presentation, page 5

    Last note: oil prices right now are still 5x what they were 10 years ago, and 30%+ below peak. I could certainly believe demand would slacken as the world economy turns back down into recession, but the GFC only caused a 1 year dip in oil consumption growth - with overall oil consumption exceeding pre 2008 levels in just 2 years.

    Posted by: c1ue | Oct 14, 2014 12:44:36 PM | 75

    ===

    "Saudis Dump Oil To Increase Leverage Over U.S. Middle East Policies"

    Keeping their heads off the inevitable pikes
    ----------------------------------------

    "Saudi Prince "Astonished" At Oil Minister's "Disastrous Underestimation" Of Effect Of Price Cuts"

    "Saudi Prince Alwaleed says falling oil prices 'catastrophic'"

    It is telling that he has to resort to a letter posted on the internet to make his point.

    From January 2012: "Why the Saudis want $100-a-barrel oil":

    "According to the Financial Times, the Saudis now prefer to keep oil prices at about $100 per barrel. What's changed?

    In a word, spending. Over the past few years, the Saudi government has taken advantage of sky-high crude prices to spend lavishly on public works and social programs to stave off the unrest that's capsizing parts of the Middle East. As a result, the country now needs prices to stay above $80 per barrel to balance its budgets, up from $60 per barrel in 2008 and way, way up from $20 per barrel a decade ago"

    Posted by: Anti-Semanticism | Oct 15, 2014 2:59:07 PM | 77

    [Oct 13, 2014] Here's How President Obama Is Using the 'Oil Weapon'-Against Iran, Russia, and ISIS

    marknesop.wordpress.com

    et Al ,

    October 11, 2014 at 3:56 am
    Mother Jones: Here's How President Obama Is Using the 'Oil Weapon'-Against Iran, Russia, and ISIS

    http://www.motherjones.com/politics/2014/10/president-obama-oil-weapon-war-russia-iran-isis

    And we shouldn't be surprised if they use it against us, too.

    patient observer says:

    , October 11, 2014 at 7:41 am

    Russia hits back where it hurts:

    http://www.examiner.com/article/russia-dumping-dollars-to-use-to-protect-currency-and-falling-oil-prices

    With a nice quote from ZeroHedge:
    "Despite the reassuring narrative from The West that Russia faces "costs" and is increasingly "isolated" due to sanctions for its actions in Ukraine, the most recent data suggests reality is quite different. First, capital outflows slowed dramatically in Q3 (from $23.7 billion in Q2 to $13 billion in Q3) with September seeing capital inflows for the first time since Sept 2013. Second, Russia's current account surplus was significantly stronger than expected ($11.4 billion vs $8.8 billion expected) driven by increased trade. Third, and perhaps most crucially, Russia paid down a massive $52.8 billion in foreign debt as Putin "de-dollarizes" at near record pace, reducing external debt to the lowest since 2012."

    kirill,

    October 11, 2014 at 8:21 am

    The US leadership are indeed mentally deficient. There is no possibility of staging a 1980s style oil glut today. Zero. Back during the 1980s Saudi Arabia had vast spare capacity and could dial the world price with ease. Today it cannot increase production even by 10% and most of its new output is heavy sour crude. The global oil market is also much tighter in terms of demand and supply since global crude and condensate production has been on a plateau since 2006 until the last three years. This change is due to the increase in US oil production from non-conventional reservoirs. And this is not some long lasting new order, it is a flash in the pan that will not last past 2020. Meanwhile, the global reservoir depletion rate is 6% per year and there is not enough new discovery to replace it.

    The current oil price fall is a combination of the triple dip recession in Germany, Japan and elsewhere and futures speculation games engineered by Washington. Watch as this hoax fades in the next six months. The only thing that can bring about a serious oil price shift is a prolonged collapse of economic activity in parts of the world. This is nothing like the 1980s.

    http://ourfiniteworld.com/2014/08/06/making-sense-of-the-us-oil-story/

    http://ourfiniteworld.com/2014/07/23/world-oil-production-at-3312014-where-are-we-headed/

    patient observer, October 11, 2014 at 8:56 am

    Saudi Arabia is producing at maximum capacity to nudge down oil prices to please the US but the global recession and the corresponding reduction in consumption is mostly responsible for driving down crude prices I believe. The easiest way to confirm this supposition is if consumption is collapsing versus an increase in production.

    The oil frackers will take it in the shorts. With production costs of $70+/barrel and relatively high transportation costs they may already have in a negative cash flow. Assuming that the fracking boom was financed by debt, significant bankruptcies and debt defaults can be expected.

    [Oct 12, 2014] Why oil prices are "falling dramatically"

    crimsonalter.livejournal.com
    1. Oil prices for several years fluctuates in the interval from 70 to 115 USD per barrel. Now oil costs about 90 dollars, which is about the middle of the interval. So it does not make sense to talk about some terrible fall: in the spring of 2013 oil fell below the current level.
    2. If oil falls below $80, budget of Saudi Arabia start to collapse. After that, it will be very hard for Americans to keep OPEC from cutting production in order to raise oil prices back to comfortable levels.
    3. On the same 80 dollars is the edge of the profitability of shale deposits. Should oil fall below $ 80 as shale segment will burst and companies start to close -- after which oil prices will go up.

    Thus, the strong decline in oil prices is unlikely.

    In the long term, we need to understand that the planet doesn't have any additional substantial reserves of oil, and to exact remaining deposits, while maintaining the volume from year to year will be more and more difficult.

    This means that oil prices in the future will inevitably rise.

    [Sep 29, 2014] Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

    September 21, 2014 | ourfiniteworld.com

    I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.

    Selected Skeptical Comments
    Paul, September 21, 2014 at 10:32 pm

    An excellent article – as usual.

    "Prices of many commodities crashed in 2008, and it was only with massive intervention that prices were propped up to 2011 levels."

    That's one of the hamsters we need to keep running on the wheel.

    Looking at prices at the moment looks like the central banks losing control - or are they playing a game - do not intervene when the prices increase with the purpose being to encourage investment - but this of course destroys growth - so do they phase it down purposely - to prevent a collapse of the economy …. then phase it back up again before oil producers shut down….

    Hopefully it is the latter - because if prices keep dropping and stay low - we have a problem.

    I think the latter is more likely because otherwise we surely would see some sort of reaction out of the central banks to offset this drop - the reaction may find it is pushing on a string - but none the less - I can't imagine that they would sit idly by and let oil tumble out of control…

    Of course all of these measures are stop gap – there is no solution … at some point it all unravels and that is the end of oil and most other resources - they will simply remain in the ground

    My position remains we end up with an 'economy' somewhere between a cave man and Mad Max.

    Food will surely be the issue – not trying to tape together the detritus of a collapsed civilization and trying to keep vehicles on the road…

    Stilgar Wilcox,

    If Gail's article is correct, we will be separated from non-conventional oil sources first as they become unaffordable, on down the line until we are mostly reliant on conventional oil which is already being taken out of the ground via horizontal super straws at an alarming rate of depletion.

    At this point I'm very interested to see if oil price does go back up and how much, and for how long. There seem to be two peak oil camps; those that think oil price can go up to $130-200 a barrel and those that think the price is currently residing at the affordability ceiling, which is the camp I am in. Recently there was an article about the Saudi's plan to cut back on oil production to get price back up, which should prove interesting to see if that works or not.

    Paul, September 22, 2014 at 12:49 am

    Stilgar – I think it was posted on this site something to the effect that oil over $50 is not really affordable… that the economy can only tolerate that for so long…

    I think this all ties back to this:

    HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

    If that is the case then even $50 oil would be putting a significant drag on the economy …

    I think to even stay afloat with 90 oil massive offsets must remain in place (stimulus, QE, ZIRP …) - of course these offsets cannot hold back the tsunami forever…

    I really don't think any of the numbers we are seeing are doable - and of course we can't go back to 20 or even 50… because that the cost to pull much of the oil of the ground is well beyond that number…

    Really a very bad situation… I remain amazed that they are able to hold this together

    Gail Tverberg, September 22, 2014 at 9:28 am

    If there is a price spike, I am expecting it will be a brief one.

    Ghung, September 22, 2014 at 12:12 pm

    BBC this morning: "Rockefellers to switch investments to 'clean energy'"

    "Heirs to the Rockefeller family, which made its vast fortune from oil, are to sell investments in fossil fuels and reinvest in clean energy, reports say.
    The Rockefeller Brothers Fund is joining a coalition of philanthropists pledging to rid themselves of more than $50 bn (£31 bn) in fossil fuel assets….."

    http://www.bbc.com/news/world-us-canada-29310475

    One wonders if this level of dis-investment will start a cascade of dis-investment resulting in an oil price spike-cum-crash, ala 2008. I speculated over at peakoil.com that this, on the surface, looks like a good thing for the growth of 'green energy' and the climate, but there may well be another side to this; disaster capitalism at its best. If the Rockefellers can spur an exit from fossil fuel investment on much of a scale, all hell could break lose in the oil markets as investors follow the 'smart money' out. As we've seen, major oil players are already selling assets to keep up profits and dividends. Of course, if you're the Rockefellers and can risk a few $billion loading up on credit default swaps, etc., and position yourselves to buy back the peices, all-the-while investing heavily in alternatives, just the movie rights could be worth billions.

    Nothing wrong with having a little fun with this stuff, eh?

    Gail Tverberg, September 22, 2014 at 8:01 pm

    I suppose that there may be some clean energy investment that sort of works–for example, geothermal in the right location. But there is an awfully lot that has no chance of being cost effective, and makes the electric grid less resilient. Such investment takes money away from where investment does (sort of) still work. It makes people feel like they are doing something useful, but it just makes the crash come sooner, as far as I can see.

    PeterEV, September 23, 2014 at 9:44 am

    I think this is a smart mover on the Rockefellers' part. I was reading where in one of GM's Labs they are getting their gray matter wrapped around the Lithium Sulphur battery technology and it appears that they have a battery in the lab that can store 1,000 wh/kg. This is about 10 times the energy density of Lithium Iron Phosphate batteries of the same weight. They showed a graph where there was very little capacity loss after 600 cycles. In other words, an EV pack with a 100 mile range is likely to be replaced with a pack of a 1,000 mile range. This, if there are no "side effects" (e.g., it's not volatile, has a wide operating temperature range, long shelf life, long cycle life, etc.), is a real game changer.

    The other game changer would be if there were economical photovoltaics with an efficiency of greater than say 45%. I wonder if they have gotten wind of something?

    We sometimes look at something like this and say how wonderful life will be if this comes to pass. For some it will be. It always is. This will at least cut our fossil fuel usage out the tail pipe and maybe out the smoke stack.

    I wonder if this is what some of the people who fought carbon capture were seeing: No one giving up their cars and hot showers but having them fueled by solar with excess solar energy stored in batteries.

    I wonder what life would look like under a solar/battery epoch? What would we really need coal, oil, and natural gas for? What could not be done by energy stored in high energy batteries?

    Paul, September 23, 2014 at 9:52 pm

    Even if this worked out it is not a game changer – see Things Made from Oil http://www-tc.pbs.org/independentlens/classroom/wwo/petroleum.pdf

    We need oil. Easy to extract oil. Unless someone comes up with something that is cheap and can do what oil does - then the discussion is not worth having

    ;PeterEV, September 24, 2014 at 6:13 pm

    Hi Paul,

    I read through your referenced list under Automotive. Gasoline was listed and EVs do not use gasoline.

    If the fleet turnover is once every 16 years, then at the end of 16 years, there will be very little gasoline used. Also EVs do not use antifreeze, coolant ( not sure if this is redundant with antifreeze), motor oil, oil filters, fan belts, etc.). The amount of petroleum used in battery cases, bearing grease, traffic cones, brake fluid, windshield wipers, visors, etc. might be supplied from Colonel Drake's original well either because the material does not wear out such as battery cases or the amount used is so minimal such as less than a teaspoon of grease every100+K miles, to the point we could be supplied with grease for an extremely long time.

    After 16 years, the body of cars that used to use gasoline would be using electricity that could be supplied solar, wind, and hydro with excess stored in those batteries. Is that not a game changer? If the USA uses 180 million gallons of gasoline per day, that's 10 million barrels of oil per day that are not used. Is that not a game changer??? We decrease oil usage to the point of becoming "energy independent". Is that not a game changer???

    The only ones I saw that might be a problem are asphalt and tires. The question back to you is how much asphalt do we use a year in barrels of oil? What substitutes could we use instead?

    How many barrels of oil are used per day to make tires? What can be used as a substitute? When I posed this situation to my son, he said there are alternatives and he is in the tire business.

    I see EVs in the form of cars and trucks as buying us a lot of time to find substitutes to make the adjustments we need. This is **not** BAU but an evolution into the next era. There may be less cars and more bicycles but then that is part of the evolution.

    The discussion we need to have is what do we do with the remaining oil given our current infrastructure, resources, and our attitudes? We don't need to be blinded by list of things that might disappear but to find substitute(s) or alternatives for those things. There are a lot of smart people out there who have solved problems and there are those that have said that man will never fly so why try. There have been a lot of people who have seen this coming and are finding and suggesting ways forward.

    Jan Steinman, September 24, 2014 at 6:24 pm

    It isn't direct use of fossil sunlight that counts, it's the pyramid-effect.

    A modern, computer-controlled, high-tech EV essentially requires all of current human civilization in order to exist.

    I think older EV technology could last for some time, but next to fossil sunlight, I think our biggest addiction is to "human exceptionalism," the thought that our brains and our technology can get us past the basic laws of physics.

    I would absolutely love it if some brave, daring individual would produce EVs using no technology that didn't exist in 1950. That's going to be the only way EVs can continue past the decline of fossil sunlight.

    I'm currently working on a Vanagon re-powering, using flooded-cell NiCd batteries and a series-wound DC motor. That may have a chance of surviving a couple decades, but the sealed Curtis controller can't be repaired if the semiconductor industry falters.

    PeterEV , September 24, 2014 at 8:15 pm

    What will be present in the future is hard to say. I can see the military trying to keep some facilities open to produce electronics. The spill over would be to produce controllers for various vehicles. Greer mentioned a stair step down scenario and I think I would agree. We may even go back to a Henney Kilowatt controller.

    However, we are still producing and have access to FF of various types. We recycle CPUs and other electronic parts. Not sure of all that we can retrieve.

    BTW, good luck with your Vanagon!!

    Paul, September 24, 2014 at 8:42 pm

    "I can see the military trying to keep some facilities open to produce electronics."

    Factories are not closed systems … they require inputs from BAU in order to produce electronics…

    So to keep a factory operating you would also need to keep the mines open that supply the copper … the smelters open that smelt that refine the copper … you need mining equipment, spare parts etc… so you have to keep the factories that produce all of that open … you also need to transport stuff from one place to another etc…. etc…. etc… etc….

    Basically if you want to keep even one electronics factory producing – you need a fully functioning global economy.

    PeterEV, September 25, 2014 at 7:45 am

    They are called contracts and the Gov't will increase debt to pay for them. During the great depression, FDR created a number of civic projects and paid people to work them. It was not BAU but it was a way to prime the pump

    If energy is represented by money and energy dwindles, then money dwindles. It is one of the reasons that the Gov't has tax incentives on home owner solar energy projects. In the summer, I am basically energy neutral and can recharge an EV while others burn gasoline.

    Gail Tverberg, September 26, 2014 at 7:56 pm

    We need to keep the whole system operating. This means that we have to keep demand for oil high enough that the price stays (or rather, rises) high enough that we can actually get it out of the ground. Getting rid of all automotive uses is not necessarily helpful.

    ordinaryjoe, September 24, 2014 at 10:35 am

    'Even if this worked out it is not a game changer' I disagree. If the kind of battery advances he is talking about come to fruition then electrical vehicles become feasible. PV home systems become feasible. An army of segways. Sure the copper for the motors still has to be mined with fossil fuels. Sure the tractors and farm equipment will not be converted or replaced with electric. Batteries like he is talking about could extend BAU for a long time however. Thats a game changer in my book.

    Gail Tverberg, September 25, 2014 at 3:39 pm

    Even if these could be invented tomorrow, we are talking a minimum 20 year change-over time period, because current cars need to wear out before they are replaced. (We cannot afford the loss of value on existing cars.) We need to keep oil demand and oil prices high during that period, so that oil is available for other uses where it is still needed. We have to find ways to continue to produce electricity as coal is phased out and nuclear wears out. We need to maintain electrical transmission lines, or we won't have electricity for recharging all of these vehicles.

    We would need coal, oil and natural gas as before. In fact, we would need rising prices for these products, to make it worthwhile for producers to continue to extract them. Without fossil fuels, we could not make the cars or the new batteries or the new PVs.

    kesar,September 25, 2014 at 4:05 pm

    There are many calculations of the electric grid investment required to make that transition.
    One of them (link below) says about $500 billion a year till 2050 across the globe. Other say even about $900 billion.

    http://books.google.pl/books?id=MZ3DklIQuT0C&pg=PA1255&lpg=PA1255&dq=US+electric+grid+investment+2050&source=bl&ots=5Jn7h_I_1q&sig=tvl3aGBXvDcgJxiGcukaV-mVjgM&hl=pl&sa=X&ei=kn8kVKW9CoKd7gbj_IHgDQ&ved=0CCoQ6AEwAQ#v=onepage&q=US%20electric%20grid%20investment%202050&f=false

    How any one could expect that humanity is able to raise all these investment projects in such long period of time? Stable economy is needed for once. And I do not even mention the money. There are resources (steel, copper, oil, coal and full Mendeleev's periodic table considering current material/technological needs) behind all of these works.

    Where are we going to find and peacefully extract them? On Venus, Mars, Jupiter or Saturn? And the energy for that task comes from which natural resource? And please add the results of demographic bomb we are sitting on.

    Oil is gone. Liebig's LotM. The humanity will follow. Sorry.

    an Steinman, September 25, 2014 at 7:40 pm

    "we are talking a minimum 20 year change-over time period, because current cars need to wear out before they are replaced."

    Older vehicles with sound body, brakes, steering, etc. could be retrofitted to electric drive fairly simply.

    I haven't gone through a full emergy analysis, but I suspect that an electric drive retrofit would have less embedded energy than the original internal combustion engine. Plus, electric drive is simpler, and easier to maintain.

    The rub is batteries. There are rumblings about "peak lithium," should electric cars really take off. Lithium batteries require a lot of technology, too, and long supply lines.

    I'm using NiCd, but they are horribly expensive, even though they have a very long life, compared to the lowest common denominator, lead-acid batteries, which are heavy and need to be replaced every few years - but they can be rebuilt using simple technology at the disposal of a large village or small town.

    This situation isn't going to change much. There are rumblings of better battery technology available Any Day Now™, but any highly advanced technology will require much of today's civilization to maintain it. My vote is that lead-acid will be around for the long term.

    fireofenergy says: , September 27, 2014 at 12:58 am

    That battery thing is interesting. I do know that it takes about half the energy that a lead acid will ever store, just to make, that is energy stored on investment, ESOI, and that certain li-ions can achieve an ESOI of up to 10. However, I'm not sure if that includes the average of whatever gains gathered with recycling. So, imagine a solar panel with an ERoEI of about 7 coupled with the lead acid. We need to store about 4/5ths of the energy for "later" (and for making more batteries and solar panels). Just not happening, because the battery eats fully half the energy (in this extreme case). Also not happening because we humans are just a little too impatient for all that, as we are used to extracting and consuming "instantly".

    O the other hand, imagine a (somewhat) clean source that doesn't require 4/5ths storage, and a form of storage that has an ESOI of over 100. Also imagine the source itself having an ERoEI of that of windpower or higher (>20). That would be nuclear, because the power of fission by far offsets the energy intensive process of mining and enrichment. Efficiency in energy gathering and storage (and usage) is key to surviving peak oil. What we need to do is make nuclear itself far more efficient. We do that by chemically reprocessing spent fuel. This voids the negative inputs to ERoEI caused by both mining and enrichment. It also voids the need to mine for any extra uranium (or thorium) for many centuries!

    Given a civilization powered almost completely by fission (and then fusion), there would be plenty of hydrocarbons for tires and roads, etc

    [Sep 23, 2014] Playing with Fanatic Fire How the Saudis (and the U.S.) have perilously exploited radical Islam in their pursuit of power by Dan Sanchez

    September 22, 2014 | antiwar.com

    As the new war on ISIS widens, and the media war drums pick up the tempo, some nice breaks in the rhythm have been the few peeps made about the role of the U.S. and its allies (especially Saudi Arabia) in feeding the beast, by arming and training ISIS's fellow travelers and prospective members in Syria.

    Yet, this is no new phenomenon. Less-than-pious rulers (especially American presidents and decadent Saudi royals) have cynically harnessed radical Islam to fuel their worldly wars of conquest and dominance for centuries. And they have done so with the indispensable help of radical Islamic scholars, clerics, and preachers who formulate and communicate the doctrines that underpin that fanaticism.

    ... ... ...

    The two men discovered a particularly volatile blend of the defining chemical formula for state power: dogma-propagating violence mixed with violence-sanctifying dogma. The sword and the scepter had once again joined forces, and Araby would soon quake.

    Recently in The Huffington Post, British diplomat and former intelligence officer Alastaire Crooke told the story of this dynamic duo's fanaticism-fueled march through the Middle East.

    Ibn Saud's clan, seizing on Abd al-Wahhab's doctrine, now could do what they always did, which was raiding neighboring villages and robbing them of their possessions. Only now they were doing it not within the ambit of Arab tradition, but rather under the banner of jihad. Ibn Saud and Abd al-Wahhab also reintroduced the idea of martyrdom in the name of jihad, as it granted those martyred immediate entry into paradise.

    In the beginning, they conquered a few local communities and imposed their rule over them. (The conquered inhabitants were given a limited choice: conversion to Wahhabism or death.) By 1790, the Alliance controlled most of the Arabian Peninsula and repeatedly raided Medina, Syria and Iraq.

    Their strategy-like that of ISIS today-was to bring the peoples whom they conquered into submission. They aimed to instill fear. In 1801, the Allies attacked the Holy City of Karbala in Iraq. They massacred thousands of Shiites, including women and children. Many Shiite shrines were destroyed, including the shrine of Imam Hussein, the murdered grandson of Prophet Muhammad.

    A British official, Lieutenant Francis Warden, observing the situation at the time, wrote: "They pillaged the whole of it [Karbala], and plundered the Tomb of Hussein… slaying in the course of the day, with circumstances of peculiar cruelty, above five thousand of the inhabitants …"

    Osman Ibn Bishr Najdi, the historian of the first Saudi state, wrote that Ibn Saud committed a massacre in Karbala in 1801. He proudly documented that massacre saying, "we took Karbala and slaughtered and took its people (as slaves), then praise be to Allah, Lord of the Worlds, and we do not apologize for that and say: 'And to the unbelievers: the same treatment.'"

    ... ... ...

    And the U.S. has been playing with that same fire all along. It allied with the Saudis in their Afghan proxy war against the Soviets, funding, supplying, and CIA-training a Mujahadeen movement that included Al Qaeda founder bin Laden and ISIS godfather Zarqawi. This led to that country, which had been secularizing, falling into the hands of the puritanical Taliban.

    And, after the Bush administration's 2007 Middle East pivot away from the Shias and toward the Sunnis that Seymour Hersh termed "the Redirection," the U.S. joined the Saudis in its proxy wars on Hezbollah and Assad, funding, supplying, and CIA-training Sunni Islamist fighters in Lebanon and Syria.

    Under Obama, Washington also aided Islamist rebels in Libya, helping them overthrow that country's secular ruler Moammar Gaddafi, which turned that country too into a chaotic "jihadist wonderland," to use Rand Paul's term. (Also, in 2011, Reuters reported that, "U.S. officials also have said that Saudi Arabia and Qatar, whose leaders despise Gaddafi, have indicated a willingness to supply Libyan rebels with weapons.")

    And Obama recently announced that part of his grand strategy in the new war on ISIS is to double-down on U.S. support for the Syrian "rebels," the very policy that helped lead to ISIS's rise in the first place.

    And these are only incidents in which the U.S. partnered with the Saudis. For a more complete rundown of the U.S. government's history of playing with fanatic fire, bookmark to read later Robert Barsocchini's recent post on Washington's Blog, "How and Why the USA Has Sponsored Terrorism in the Mid East Since at Least 1948."

    The U.S. also sponsors Islamic fanaticism simply by virtue of its propping up, through military and financial aid, the Saudi monarchy, whose very existence hinges on fostering fanaticism, due to its centuries-old dependence on the Wahhabi clerics for public legitimacy. While the U.S. government is indignantly launching a war over ISIS's beheading of two journalists, it simultaneously continues to prop up a theocracy that beheads scores of people every year for such crimes as "apostasy" and "sorcery." And while the U.S. assassinated one of its own citizens for preaching jihad, it continued to sponsor a state whose founding and very existence are predicated on preaching, sponsoring, and manning world jihad. If the baleful regime in Washington cared more about world peace and domestic security than it did about enriching its cronies and trying to more fully conquer the world, it would cease support for this other baleful regime entirely and immediately.

    This is not to say that the U.S. should take on an adversarial stance toward Saudi Arabia. Doing so to Iran has only tightened that besieged theocracy's grip on power, and it would likely do the same for this theocracy as well. It is highly doubtful that such an oppressive and contentious regime as the Saudi/Wahhabi machine would persist with neither a foreign bogeyman to rally the people against, nor a foreign hegemon militarily securing the state and its grip on the country's oil wealth. Just take out the props and watch the thing fall, to the great benefit of the Arabian people.

    And oil is no excuse not to. U.S. support for Saudi Arabia may be necessary to preserve the exclusive concessions to favored American oil companies. But it is not necessary to preserve Americans' access to oil. Worrywarts raise the 1970s oil crisis, but as Jerry Taylor and Peter Van Doren argued, the impact of the 1973 Saudi oil embargo has been completely overblown. The crisis, as they say, was chiefly due to U.S. price controls.

    Did the subsequent embargo stoke the crisis further? No-it was an economically meaningless gesture. That's because the embargo had no effect on imports. Once oil is in a tanker, neither Petroleum Exporting Countries nor OPEC nor Knick-Knack-Paddywack can control where it goes. Oil that was exported to Europe during the embargo was simply resold to the United States or ended up displacing non-OPEC oil that was diverted to the U.S. market. Supply routes were shuffled but import volumes remained steady.

    Guest

    "neither a foreign bogeyman to rally the people against, nor a foreign hegemon militarily securing the state"

    Great article. But is the general public capable of understanding the ugly political irony of the USA's dual role in Saudi Arabia?

    Sam Lowry

    "U.S. support for Saudi Arabia may be necessary to preserve the exclusive concessions to favored American oil companies. But it is not necessary to preserve Americans' access to oil."

    Unfortunately, U.S. support for Saudi Arabia is about far more than exclusive concessions to favored American oil companies. It's about making sure the oil is sold exclusively for dollars.

    http://goldforecaster.com/course-gold-price-manip...

    A tiny group of political and financial elite have asserted for themselves the exclusive privilege of creating money out of nothing. But this scam only works as long as others are using your money as money. So a whole lot of foreign and military policy is really about forcing the rest of the world to use dollars as money. The other role of the court intellectual is to obfuscate the true nature and global scope of this massive act of theft.

    A couple more links:

    [Sep 19, 2014] Shale Fracking Is a "Ponzi Scheme" … "This Decade's Version of The Dotcom Bubble" … "A Lot In Common With the Subprime Mortgage by George Washington

    I think everybody noticed a boom in junk bonds...
    zerohedge.com

    In 2011, the New York Times wrote:

    "Money is pouring in" from investors even though shale gas is "inherently unprofitable," an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. "Reminds you of dot-coms."

    "The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work," an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

    "And now these corporate giants are having an Enron moment," a retired geologist from a major oil and gas company wrote in a February e-mail about other companies invested in shale gas.

    Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and a] former stockbroker with Merrill Lynch ... showed that wells were petering out faster than expected.

    "These wells are depleting so quickly that the operators are in an expensive game of 'catch-up,' " Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.

    A review of more than 9,000 wells, using data from 2003 to 2009, shows that - based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well - less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.

    "Looks like crap," the Schlumberger official wrote about the well's performance, according to the regulator, "but operator will flip it based on 'potential' and make some money on it."

    In 2012, the New York Times pointed out:

    The gas rush has ... been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.

    Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market's peak, most of the industry has been bloodied - forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.

    Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.

    Rolling Stone reported the same year:

    Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."

    According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."

    In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year

    delivered

    I'm by no means an expert but do understanding accounting and finance and would like to point out two key issues. First, the availability of cheap/easy capital as noted in numerous posts (driven by the Fed and other CBs) has certainly contributed to the perceived economic value of fracking. Hell, with free flowing money, just about any business can stay afloat for quite some time as rates, terms, struture, etc. are all extremely favorable during the "salad days". But once a business actually realizes that debt has to be, dare I mention, repaid, the combination of very highly capital expenditure requirements and debt service payments basically consume all cash/liquid resources.

    Second, I've studied/analyzed a number of fracking company financial statements and have noticed that the annual capital expenditures (i.e., the cost of acquiring and drilling) compared to revenue growth and cash flow (both EBITDA and free) supports a number of the comments made in GW's article. That is, there is a constant need to drill more and more to maintain a base line production level so what I'm guessing is that the capitalized well devlopment costs are being "managed" by the accountants to keep an inflated asset on the books (which probably should be written down based on high production decline rates after 12 months). What would be interesting to evaluate is the actual oil production in units (or barrels) compared to production development costs over time. This might be the canary in the coal mine that really helps quantify the economics of the fracking industry.

    So let's combine the end of easy/cheap money, with accountants "managing" fracking company assets, and a declining price of oil and most likely what you are setting up is a major shakeout in the industry. No doubt the weak are going to get creamed in this environment and the strong, just waiting to acquire resources but only at the right price, will get even stronger.

    El Vaquero

    Here is a talk from somebody who up until the beginning of this year was a bean counter for the oil industry:

    http://energypolicy.columbia.edu/events-calendar/global-oil-market-forec...

    You can say that it's from a .edu and question the source, but then you can go through his talk and presentation (there is a link to his slides) to see what the actual sources were, because the .edu was just a forum for presentation.

    Magooo

    The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

    But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

    http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

    See: the Killer Equation starting on p.59.... rather fascinating reading....

    El Vaquero

    The economy stops dead without energy, but the monetary side allows us to distort things. When those distortions become realigned with reality, it is going to be a violent process, because we're not looking to what the future actually has in store for us, but rather what we want the future to be. There's nothing wrong with trying to mould your own future, but we must be realistic about it.

    zuuma

    As soon as I saw: "New York Times wrote:"...

    I lost faith in any objectivity. That rag is just a PR dump for obamunism.

    Even if they occasionaly print something that's true, it's hard to accept - given their solid track record as lefty shills.

    numapepi

    Even a stopped clock is right twice a day.

    AdvancingTime

    Thanks for a very interesting look into this industry that has become another myth of hope.

    As to the subject of the Ponzi Scheme I often forget that what may seem familiar to me and many Americans is not always common knowledge, the story behind the term is very interesting. To those who are unfamiliar with the term Ponzi Scheme or just would like to know more on where it originated and such see the article below that is titled Ponzi Scheme 101.

    http://brucewilds.blogspot.com/2013/04/ponzi-scheme-101.html

    Bangin7GramRocks

    Big difference is the Dot-Com bubble left empty office space. Fracking leaves a scarred and polluted landscape that was mostly pure before the wells were built. Disgrace!

    Felix da Kat

    True B7. Take a look on Bing maps (satellite view) at the northern one-third (60 miles x 300m.) of Pennsylvania. What was once a nearly unbroken, deep and thick forest from New Jersey to Ohio, is now pock-marked with many hundreds of disgraceful fracking operations where large 25-50 acre areas are clear-cut along with crude access roads. This might as well be a war zone with bomb craters throughout. Enviromental concerns were the least of Dick Cheney's/Halliburton's heinous fracking invention. Pennsylvania was the pushover state selected to be the guinea pig. Fracking is a colossal failure, period.

    givenoquarter

    If a tree falls in the forest and no one is there to hear it, does it make a sound?

    If a tree is cut down in the forest, and no one is there to see it, who gives a fuck if it is cut down to extract a needed commodity?

    We have tons of trees. More oil please. All of my vehicles need a regular diet of delicious dinosaurs.

    AdvancingTime

    Sustainability means planning our future in a way that we do not set ourselves up to crash and burn at some future date. Long-term planning has not been something politicians excel at or are even good at. Our system is geared at getting politicians reelected and fulfilling the most pressing needs of today.

    Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in front of longer term issues and needs. Mapping out a logical and sustainable long-term plan requires delving into some rather hefty philosophical questions like what brings real happiness. More on this important topic in the article below.

    http://brucewilds.blogspot.com/2014/04/planning-sustainable-future-for-m...

    [Sep 12, 2014] Oil Price Plunge It's The Global Economy, Stupid!

    09/12/2014 | Zero Hedge

    The decline in the price of oil - in the face of surging geopolitical pandemonium - has been lauded as indicative of both US' awesomeness in energy independence and a tax cut for Americans... but, as the following chart suggests, there may be another - much more realistic - explanation for why oil is plunging... demand!

    World GDP expectations for 2014 just tumbled to their lowest since estimates started...

    Maybe - just maybe - that explains the price of oil...

    Charts: Bloomberg

    [Aug 11, 2014] Oil and gas company debt soars to danger levels to cover shortfall in cash By Ambrose Evans-Pritchard

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000.
    Aug 11, 2014 | Telegraph
    The world's leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry.

    The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.

    This is a major departure from historical trends. Such a shortfall typically happens only in or just after recessions. For it to occur five years into an economic expansion points to a deep structural malaise.

    The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.

    The EIA said the shortfall between cash earnings from operations and expenditure -- mostly CAPEX and dividends -- has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.

    The agency, a branch of the US Energy Department, said the increase in debt is "not necessarily a negative indicator" and may make sense for some if interest rates are low. Cheap capital has been a key reason why US companies have been able to boost output of shale gas and oil at an explosive rate, helping to lift the US economy out of the Great Recession.

    The latest data shows that "tight oil" production has jumped to 3.7m barrels a day (b/d) from half a million in 2009. The Bakken field in North Dakota alone pumped 1m b/d in May, equivalent to Libya's historic levels of supply. Shale gas output has risen from three billion cubic feet to 35 billion in just seven years. The EIA said America will increase its lead as the world's largest producer of oil and gas combined this year, far ahead of Russia or Saudi Arabia.

    However, the administration warned in May that "continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development". It said that upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9pc in 2012, and 11pc last year.

    Upstream costs rose by 12pc a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs. Major disruptions in Libya, Iraq, and parts of Africa have since prevented oil from falling much below $100, even though other commodities have been in the doldrums. But even flat prices for three years have exposed how vulnerable the whole oil and gas edifice is becoming.

    The major companies are struggling to find viable reserves, forcing them take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment.

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. "The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120," he said.

    Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the "single-most important source of new low-cost world oil supply." The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50pc deeper than BP's disaster in the Gulf of Mexico.

    Petrobras is committed to spending $102bn on development by 2018. It already has $112bn of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras's share price has fallen by two-thirds since 2010.

    The global oil and gas nexus is clearly over-extended and could face a severe crunch if oil prices slip towards $80. A growing number of experts say it would be wiser to shrink the industry to a profitable core, returning revenues from existing ventures to shareholders and putting some companies into partial "run-off" rather than risking fresh money on projects that may prove to be ruinous white elephants.

    The International Energy Agency in Paris says global investment in fossil fuel supply rose from $400bn to $900bn during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950bn last year. The returns have been meagre. Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

    A study by Carbon Tracker said companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120. "The oil majors like Shell are having to replace cheap legacy reserves with new barrels from much more difficult places," said Mark Lewis from Kepler Cheuvreux.

    The new worry is that many companies will be left with "stranded assets" as climate accords kick in. The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

    For now the major oil companies are mostly pressing ahead with their plans. ExxonMobil began drilling in Russia's Arctic 'High North' last week with its partner Rosneft, even though Rosneft is on the US sanctions list.

    "Exxon must be doing a lot of soul-searching as they get drawn deeper into this," said one oil veteran with intimate experience of Russia. "We don't think they ever make any money in the Arctic. It is just too expensive and too difficult."

    Related Articles

    sophocles

    I read an article from the US recently, which gave a full in depth report on the fracking boom, turns out the companies are running up huge debts in the hope that export restrictions will be lifted, the 1974 legislation, made because of the oil shortage and middle east troubles, stopped all but a trickle leaving US shores, that law is still in force, which means most of the gas and oil, has to be sold on the US internal market, which means there is a huge glut, which in turn, means cheap prices, to break even, or make some profit they have to export, which is why they are hoping Europe, takes action on Russian gas, ban Russian gas and the US will lift sanctions, they will start making profits, and cheap energy in the US will be no more, and that is how it will be here, so don't even think we will get cheaper energy prices.

    Chevron Cancels Bulgaria Fracking, Shell Postpones Ukraine Plans by Richard Smallteacher

    June 12th, 2014 | corpwatch.org

    Fracking for oil and gas across Europe has suffered a series of setbacks with Chevron closing its offices in Sofia, Bulgaria, and Shell postponing fracking plans in the Ukraine by at least two years. Meanwhile the French government is standing firm in its opposition to fracking.

    Fracking - which is short for hydraulic fracturing - is not entirely new. Since the 1940s engineers have attempted to drill the deep underground reserves of gas and oil reserves. Advances in technology during the 1980s led to new horizontal hydraulic drilling techniques, which involves boring a mile deep into the earth and then pumping in millions of gallons of water, sand and hazardous chemicals to fracture rock and extract gas contained inside.

    Shell announced that it would take a respite from drilling for gas in the 8,000-square-kilometer Yuzivska field in the eastern Ukraine in early June. The company was awarded the concessions by the government of Viktor Yanukovych in January 2013, a year before he was ousted from office by violent protests this past February.

    Since then, clashes between government forces and pro-Russian militias have caused Shell to reconsider, not least because Shell has other lucrative energy deals in Russia.

    "We obviously need to assess the future security situation as it develops because the safety of our own people is our first priority," Simon Henry, Shell's chief financial officer, told Bloomberg TV. "Russia is a major holder of hydrocarbon reserves, possibly the largest in the world. So in the long term it really does matter."

    Chevron, which was awarded a permit to drill for shale gas in the 4,000 square-kilometer Novi Pazar field in north eastern Bulgaria in June 2011, has faced an uphill political battle. Just six months after the initial contract was signed, a moratorium on fracking was declared in Bulgaria in January 2012.

    A little over two years later, this past May, Chevron announced that it would close down its Sofia offices. "The uncertainty over Chevron's ability to explore for natural gas from shale in Bulgaria means the opportunity is no longer competitive with other opportunities in our global portfolio," the company told the Financial Times Chevron continues to explore and evaluate investment opportunities in Central and Eastern Europe."


    That's not the only place that Chevron has pulled out of in recent months. Last October the company pulled out of Lithuania citing regulatory uncertainty, just a month after being awarded a 1,800 square kilometer concession in Silute-Taurage.

    While the oil companies blame politicians of canceling their projects, new studies are emerging that suggest that many of the shale gas estimates are overblown: Shell's initial explorations in Kharkiv, Ukraine, came up dry and Lithuanian studies were questioned. Exxon Mobil, Talisman, and Marathon pulled out of Poland last year after 40 wells yielded little.

    Europe is not the only place where fracking estimates seem to have been wildly optimistic. Last month, U.S. government officials slashed their estimates of shale gas in the Monterey field in northern California by a staggering 96 percent.

    Meanwhile France – the other European nation to have a ban on fracking – is also standing firm. Last October, Schuepbach Energy LLC, a Texas company, lost a lawsuit to overturn the 2011 policy. "It's a judicial victory but also an environmental and political victory," French Environment Minister Philippe Martin told reporters after the court issued its decision. "With this decision the ban on hydraulic fracturing is absolute."

    [May 27, 2014] Iraq: The Biggest Petroleum Heist in History? By Mike Whitney

    May 23, 2014 | unz.com

    Mission Accomplished, Indeed

    "Prior to the 2003 invasion and occupation of Iraq, US and other western oil companies were all but completely shut out of Iraq's oil market. But thanks to the invasion and occupation, the companies are now back inside Iraq and producing oil there for the first time since being forced out of the country in 1973."

    – Antonia Juhasz, oil industry analyst, Al Jazeera.

    These are the 'best of times' for the oil giants in Iraq. Production is up, profits are soaring, and big oil is rolling in dough. Here's the story from the Wall Street Journal:

    "Iraq's oil production surged to its highest level in over 30 years last month, surprising skeptics of the country's efforts to restore its oil industry after decades of war and neglect." (Wall Street Journal)

    Mission accomplished?

    You bet. But for those who still cling to the idea that the US was serious about promoting democracy or removing a vicious dictator or eliminating WMD or any of the other kooky excuses, consider what we've learned in the last couple weeks. Here's the story from Aljazeera:

    "While the US military has formally ended its occupation of Iraq, some of the largest western oil companies, ExxonMobil, BP and Shell, remain.

    On November 27, 38 months after Royal Dutch Shell announced its pursuit of a massive gas deal in southern Iraq, the oil giant had its contract signed for a $17bn flared gas deal. Three days later, the US-based energy firm Emerson submitted a bid for a contract to operate at Iraq's giant Zubair oil field, which reportedly holds some eight million barrels of oil.

    Earlier this year, Emerson was awarded a contract to provide crude oil metering systems and other technology for a new oil terminal in Basra, currently under construction in the Persian Gulf, and the company is installing control systems in the power stations in Hilla and Kerbala. Iraq's supergiant Rumaila oil field is already being developed by BP, and the other supergiant reserve, Majnoon oil field, is being developed by Royal Dutch Shell. Both fields are in southern Iraq." ("Western oil firms remain as US exits Iraq", Dahr Jamail, Aljazeera.)

    If it sounds like the big boys are dividing the spoils among themselves; it's because they are. Exxon, BP, Shell; they're all here. They all have their contracts in hand, and they're all drilling their brains out thanks to the American servicemen and women who gave their lives for some trumped up baloney about WMD. Isn't that what's going on?

    Sure it is. And even now–after all the reasons for going to war have been exposed as lies–the farce continues. Nothing has changed. Nothing. There's still no talk of reparations, no official investigation, no indictments, no prosecutions, no trials, no penalties, no nothing. Not even a stinking apology. Just a big "up yours" Iraq. We're way too important to apologize for killing a million of your people and reducing your five thousand year old civilization to a pile of rubble. Instead, we'll just screw you some more and paper it over with a little public relations, like Obama did a couple weeks ago when he promised to "leave behind a sovereign, stable and self-reliant Iraq, with a representative government that was elected by its people".

    Oh yeah. Obama's all about sovereignty and stability, everyone knows that. That's why Baghdad is the terror capital of the world, because Obama's so committed to security.

    These PR blurbs are effective though, they provide the necessary cover for leaving enough troops behind to protect the oil installations and pipelines. That's the kind of security Obama cares about. Security for the oiligarchs and their stolen property. Everyone else can fend for themselves, which is why Baghdad is such a bloody mess. Here's more from Aljazeera:

    "Prior to the 2003 invasion and occupation of Iraq, US and other western oil companies were all but completely shut out of Iraq's oil market," oil industry analyst Antonia Juhasz told Al Jazeera. "But thanks to the invasion and occupation, the companies are now back inside Iraq and producing oil there for the first time since being forced out of the country in 1973." (Aljazeera)

    Yeah, thanks for that invasion, Mr. Bush. We couldn't have done it without you, guy. Hope you have a great retirement painting pictures of poodles and stuff while people continue to get blown to pieces in the terrorist Hellhole you created. Here's more Al Jazeera:

    "Juhasz, author of the books The Tyranny of Oil and The Bush Agenda, said that while US and other western oil companies have not yet received all they had hoped the US-led invasion of Iraq would bring them, "They've certainly done quite well for themselves, landing production contracts for some of the world's largest remaining oil fields under some of the world's most lucrative terms."

    Dr Abdulhay Yahya Zalloum, an international oil consultant and economist …(said) he believes western oil companies have successfully acquired the lions' share of Iraq's oil, "but they gave a little piece of the cake for China and some of the other countries and companies to keep them silent". (Aljazeera)

    How do you like that? These guys operate just like the Mafia. The Bossman pays off China with a few million barrels, and China keeps its mouth shut. Nice. Everyone gets "their cut" so they don't go blabbing to the media about the ripoff that's taking place in broad daylight. The stench of corruption is overpowering.

    And here's something else you won't see in the media. In a White House press release, the Obama administration announced that they would continue to support Iraq's "efforts to develop the energy sector" in order to "help boost Iraq's oil production."….

    According to Assim Jihad, spokesman for Iraq's ministry of oil, "Iraq has a goal of raising its oil production capacity to 12m bpd by 2017, which would place it in the top echelon of global producers." (Aljazeera)

    "12 million barrels-per-day by 2017″?

    That makes this the biggest petroleum heist in history. And we're supposed to believe that the oil bigwigs didn't know anything about this before the war? What a crock! I'll bet you even money the CEOs and their lackeys figured out that Saudi Arabia was running out of gas, so they decided to pick up stakes and move their operations to good old Mesopotamia. That's why they put their money on Bush and Cheney, because they knew that two former oil men would do the heavy lifting once they got shoehorned into the White House. The whole thing was a set-up from the get-go, right down to the 5 shady Supremes who suspended the voting in Florida and crowned Bush emperor in 2000. The whole thing was probably mapped out years in advance.

    Big oil runs everything in America. People talk about the power of Wall Street and Israel, but oil is still king. They run it all, and they own it all. And "what they say, goes." Here's more:

    "Juhasz explained that ExxonMobil, BP and Shell were among the oil companies that "played the most aggressive roles in lobbying their governments to ensure that the invasion would result in an Iraq open to foreign oil companies".

    They succeeded," she added. "They are all back in." (Aljazeera)

    Hooray. Big oil wins again, and all it cost was a million or so Iraqis who got blown to bits air raids or shot up at checkpoints, or beaten to death with a rubber hose at Abu Ghraib or any of the other democracy reeducation centers that dot the countryside. But, hey, look at the bright side: At least production is up, right? Can you see how sick this is? Here's more:

    "Under the current circumstances, the possibility of a withdrawal of western oil companies from Iraq appears remote, and the Obama administration continues to pressure Baghdad to pass the Iraq Oil Law." (Aljazeera)

    And what is the "Iraq Oil Law", you ask?

    It's a way to privatize the oil market using Production Sharing Agreements (PSAs) which disproportionately benefit the corporations. Obama's a big backer of the law since it means even heftier profits for his thieving friends. In other words, the humongous profits they're already skimming off aren't quite good enough. They want more. They want to own the whole shooting match lock, stock and barrel.

    This is really an outrage. What other country behaves like this?

    No one. No other country in the world goes out and kills a million people, destroys their country, and leaves them to scrape by on next to nothing just so they can pad the bank accounts of voracious plutocrats have more dough than they know what to do with. No one else would even dare to act like that for fear that they'd get bombed into annihilation by the world's biggest bullyboy, the US of A. Only the US can get away with this type of crap, because the US is a law unto itself.

    Iraq was the Cradle of Civilization. Now it's the cradle of shit. The US decimated Iraq; blew it to bits, bombed its industries, its bridges, its schools, its hospitals, leveled its cities, polluted its water, spread diseases everywhere, killed its kids, pitted brother against brother, and transformed a vibrant, unique country into a dysfunctional cesspit run by opportunists, gangsters, and fanatics.

    And, here's the corker: No one gives a rip. Face it: No one gives a flying fu** about Iraq. The American people lost interest long ago, the politicians can't be bothered, and the UN is too afraid of the US to lift a finger to help. They'd rather stamp their feet and scold Putin over Crimea than utter a peep about the genocide in Iraq. That's the state of things today, right? No accountability for the men who started the war, and no justice for the victims. Just the infrequent (phony) pronouncement of support from the White House or the all-too-frequent sectarian bombing that leaves an untold number of civilians dead or wounded. This is all the US leaves behind; hatred, death and destruction.

    Here's a clip from a poem by Iraqi writer who wants readers to take a minute and think about all the suffering the United States has created. The poem is titled "Flying Kites":

    "Come and see our overflowing morgues and find our little ones for us…

    You may find them in this corner or the other, a little hand poking out, pointing out at you…

    Come and search for them in the rubble of your "surgical" air raids, you may find a little leg or a little head…pleading for your attention.

    Come and see them amassed in the garbage dumps, scavenging morsels of food…

    Come and see our little ones, under-nourished or dying from disease. Cholera, dysentery, infections…

    Come and see, come…." ("Flying Kites" Layla Anwar)

    A million people were killed so a few rich fu**ers could get even richer. That's a hell of a legacy.

    MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

    (Reprinted from Counterpunch by permission of author or representative)

    [May 24, 2014] The Birth of a Eurasian Century: Russia and China Do Pipelineistan By

    www.tomdispatch.com

    HONG KONG -- A specter is haunting Washington, an unnerving vision of a Sino-Russian alliance wedded to an expansive symbiosis of trade and commerce across much of the Eurasian land mass -- at the expense of the United States.

    And no wonder Washington is anxious. That alliance is already a done deal in a variety of ways: through the BRICS group of emerging powers (Brazil, Russia, India, China, and South Africa); at th ooperation Organization, the Asian counterweight to NATO; inside the G20; and via the 120-member-nation Non-Aligned Movement (NAM). Trade and commerce are just part of the future bargain. Synergies in the development of new military technologies beckon as well. After Russia's Star Wars-style, ultra-sophisticated S-500 air defense anti-missile system comes online in 2018, Beijing is sure to want a version of it. Meanwhile, Russia is about to sell dozens of state-of-the-art Sukhoi Su-35 jet fighters to the Chinese as Beijing and Moscow move to seal an aviation-industrial partnership.

    This week should provide the first real fireworks in the celebration of a new Eurasian century-in-the-making when Russian President Vladimir Putin drops in on Chinese President Xi Jinping in Beijing. You remember "Pipelineistan," all those crucial oil and gas pipelines crisscrossing Eurasia that make up the true circulatory system for the life of the region. Now, it looks like the ultimate Pipelineistan deal, worth $1 trillion and 10 years in the making, will be inked as well. In it, the giant, state-controlled Russian energy giant Gazprom will agree to supply the giant state-controlled China National Petroleum Corporation (CNPC) with 3.75 billion cubic feet of liquefied natural gas a day for no less than 30 years, starting in 2018. That's the equivalent of a quarter of Russia's massive gas exports to all of Europe. China's current daily gas demand is around 16 billion cubic feet a day, and imports account for 31.6% of total consumption.

    [May 24, 2014] Putin's Audacious $400 Billion Gas Deal by Jacob Heilbrunn

    ...American preeminence is triggering a balancing coalition.
    May 21, 2014 | nationalinterest.org

    ...American preeminence is triggering a balancing coalition.

    The deal allows Putin to conduct his own pivot toward Asia. It allows him to ameliorate the economic damage caused by sanctions. ... it allows him ... Russia as an independent actor rather than the supplicant of the West, as it was during the Yeltsin era.

    If the deal is good for Russia, it may even be better for China. Beijing won't ally itself firmly with Moscow. Instead, it will likely seek to play the role of honest broker, maneuvering between the Moscow and Washington.

    Right now, the U.S. has a lot more to offer. But playing the Russia card gives China increased flexibility.

    CBCalif

    As the author begrudgingly notes,

    "the deal ... signals another shift on the road to a new geopolitical constellation--one in which the U.S. figures as the target of joint Russian and Chinese [responding to] Washington[s ill gotten belief it] could do whatever it wanted wherever it chose. No longer. What realists predicted would occur is indeed occurring. American preeminence is triggering a balancing coalition."

    Obama was simply wrong, when he asserted that Russia is merely a regional power and that the U.S. is truly the [only] world power. The two are out maneuvering this country, despite our leaders denials of that fact.

    Arti Fact

    It is good that this deal masquerades all other deals signed. Let you think we are gas station, let you :) But as for the text, IMHO it states obvious things, what was the purpose of writing it? Btw try to read newspapers and blogs and forums in China: the words used towards Russia is "neighbour", "friend", "ally". Words used towards US are in best case: "trade partner". Just to give some material for thinkin

    [May 21, 2014] China, Russia sign $400 billion gas deal

    The Washington Post

    With the stroke of a pen, Russia significantly shifted its economic relations with its neighbors, creating a major new export market to the east and reducing its reliance on European customers at a time when its relations with the West are at their lowest point since the Cold War.

    ... ... ...

    U.S. Treasury Secretary Jack Lew appealed to China in a visit last week to avoid actions that might limit the impact of recent Western sanctions against Russia. But a U.S. official, who was not authorized to speak by name, said the United States would distinguish between deals that have long been in the works - such as this one - and new agreements that seek to fill space left by U.S. and European Union sanctions.

    ... ... ...

    Russian officials on Wednesday also hinted at a possible "prepayment" totaling $25 billion.

    [May 21, 2014] China and Russia Reach 30-Year Gas Deal

    NYTimes.com

    Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based on the market price of oil, just as it was for European countries.

    "The gas price formula as in our other contracts is pegged to the market price of oil and oil products," Itar-Tass quoted Mr. Putin as saying.

    The deal is the largest ever for the Russian natural gas industry, he said.

    Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei B. Miller, the chief executive officer of Gazprom.

    AK, US

    This gas deal shows that the US attempts to isolate Russia economically are destined to fail. These attempts are getting little traction even in Europe. Nobody wants to take economic pain to help people in the State Department advance their agenda. And countries like China and India will absolutely refuse to treat Russia like a pariah state. These countries have their own economic and geopolitical interests. Working with Russia helps them further their interests. The relative economic power of these countries will continue to grow.

    The US-centered world order established after the fall of the Soviet Union was never going to last. Instead of trying to maintain it, US policymakers should think about how to act in a multipolar world. Considering other countries' interests – now, that would be a change!


    Nick Wright, Halifax, Nova Scotia 4 hours ago

    The geostrategic and environmental implications of this deal are huge.

    The West, in a hamfisted continuation of the Cold War, has been trying to isolate and contain a resurgent Russia. However, it found itself strategically and tactically outplayed by Vladimir Putin as it blundered around in his neighbourhood--Ukraine, Syria and Iran--and its Cold War bluster and saber-rattling over military interference in sovereign nations just look hypocritical to educated people worldwide.

    On the environmental front, China looks good for succeeding in lowering its reliance on energy from coal, while Europe--especially Germany--is building more coal-fired generating capacity, and Canada is offending the world with its determination to develop its massive, polluting oil sands. Western claims of superiority on the environmental front sound hollow by comparison.

    Socially--from Ukraine, to Europe, to Canada, to the U.S.A.--the world is watching the rise of aggressive, intolerant, divisive parties of the extreme right in the West, raising the legitimate question of which of the world's regions are improving and which are in decline. Throw in Western levels of indebtedness, and the question becomes even more pointed.

    And finally, Western chauvinism is pushing Asian countries into closer economic alliances--and who knows, perhaps eventually military ones as well. But it didn't have to turn out this way; we can change direction before things get worse; it's just a matter of political will.

    Stephen Miller, Oakland

    This deal is just the tip of the iceberg. Russia has astonishingly huge reserves of gas, and all those oil and coal burning plants are going to need to switch over in the coming years to reduce pollution and greenhouse gas emissions. Russia will become the undisputed energy superpower and likely overtake the US eventually.

    As the easy oil disappears and energy demands continue to rise globally, prices will rise very dramatically. More gas and oil from fracking and tar sands and shale will slow the rise, but eventually the prices will go up.

    The US and Europe can whine about Russian gas all they want, but in the end, everybody pays.

    Quandry, is a trusted commenter LI,NY

    Although this is very important to the US's and the world's survival from an environmental perspective, this is another faux pas upon Obama's and the EU's statecraft. The big winners in all of this are Russia who now can thumb its nose at the US, and even more China which who will pay less than the EU for its gas. Unfortunately, China has continued to prevail in its economic policy over the US from Iraq to Africa, while the US has paid in lives and unrequited financial aid. Our statecraft can use some changes and improvement.

    Judyw, cumberland,

    Congratulaton to our State Department who have made this deal possible. Oh yes our Congress helped out too. By our reckless of expansion of NATO we have driven the Russian into the army of China. I hope we are proud of ourselves for doing that.

    I have never seen the US government make such a mess of Foreign Policy as this government has made. And I don;t mean to leave out the government from Bill Clinton forward - they have contributed to this mess with the the whole Kosovo creation.

    It is important that we now recognize that we are driving countries away from the US who are sick of our efforts of trying to "run the world", be "the indispenable power" and all that malarky.

    Our pivot to Asia seems more like it was Russia's pivot to Asia while we sat and watched. Perhaps it would be better if we did more watching and less acting. It seems that whenever we interfere, we create more hatred of the US and increase our separation from the world.

    I hope this lesson on "the pivot to Asia" has taught us a lesson. We thought we could punish and sanctions Russia to behave as we dictated. We just found out we can't bully Russia. In the world today Sanctions have little meaning as they are easily broken by countries who have no interest in "toeing the US line".

    We had wanted Russia as friend, but our actions have driven into the arms of China. Congratulations USA -- you just had another foreign policy failure.

    Efren, Texas 6 hours ago

    All of this is the result of not understanding that the world is headed to a multipolar world, and that the US must learn to deal with it (see conference of Bill Clinton in Davos). Why does US insist on destabilization of governments claiming democracy interests? Don't you remember all dictatorial regimes supported by the US in Latin America? Now, US is so engaged in bringing back the cold war. It's not only Russia-China being together now, most of main Latin American countries have leftist governments. Don't be surprised if they start achieving important deals with Russia and China.

    Let's take it easy. No empire last forever. It would be better for US to respect others and try to build a leadership based on ethical and real reasons, not on bullying everybody else who thinks differently.

    Smartlegov Oleg, Moscow 7 hours ago

    This is an epic deal and just on time. Putin compromised the price, but showed how quickly he can respond in a big wave to US/EU symbolic sanctions.

    Cato, California 5 hours ago

    Another positive step by Russia and China in brokering a deal that doesn't involve the West. Please note that the almighty USD wasn't invited to this party. The deal, coupled with massive historic accumulations of gold by both countries, spells doom for the world's reserve currency. This will be over the next 10 years the nightmare of all nightmares for Americans when we lose world currency status. A word to America: Hope is not a strategy.

    Edwin, NY 4 hours ago

    China is learning how to do its things. I'm actually glad for them and for Russia also. I'm a citizen of the United States but I'm tired of foreign policies. Its time to realize that we are not the only kid in the block. Let them join in and play the game of capitalism. Focus our money and our strength our Nation in serving our people, in educating them, and helping them become more competitive in this global marketplace instead of throwing money and effort to keep others down while we stand at the top. Those days are over. Lets work together, accept our differences, and be the best we can be. Invest in healthcare, social programs, education, research, technology and we will remain at the top no matter what without the need to isolate or bomb everyone that stands on our way

    Babeouf, Ireland 7 hours ago

    The US desperately needs joined up thinking in it foreign policy. The US 'Pivot to Asia' to contain China may make sense. The US funding of the coup in Ukraine may make sense. Doing both at the same time doesn't make sense. It is US foreign policy which has provided the incentive for Russia and China to draw closer together. Of course for imperial powers foreign policy appears just another part of domestic policy.

    With the result that, due to political competition in the US, a rational US foreign policy seems out of reach.

    PuppetMaster11 -> FighTheBrainwashing

    Even better. NYT, yesterday, already ran with the story of the failure of the gas deal.

    http://www.nytimes.com/2014/05/21/world/asia/china-russia.html?google_editors_picks=true

    China and Russia Fail to Reach Agreement on Gas Plan

    I'd like to see them eat their hats.

    PuppetMaster11, 21 May 2014 6:14pm

    The US attempt to sever the economic tie between Europe and Russia forced Russian into an alliance with China.

    Now, a lot depends on whether this rearrangement will congeal into a permanent line of confrontation, or the new Russia-China alliance will work as a leverage to entice Europe away from the confrontational US.

    raindancer68, 21 May 2014 6:15pm

    Energy makes the world go around, not money. The Russians are in a strong position, as the western world tries to make up for the falling energy dynamic in their economies by scrabbling around for fracked oil and gas.

    structurequity, 21 May 2014 6:21pm

    I find it of interest that no one is reporting on the meeting of nations where this sideline contract was signed, The CICA meeting is tremendously important for the entire world and seems not to be covered by Western press or its political drivers.
    http://en.wikipedia.org/wiki/Conference_on_Interaction_and_Confidence-Building_Measures_in_Asia
    and http://english.peopledaily.com.cn/n/2014/0521/c90883-8730684.html
    but, am unable to access http://www.xinhuanet.com/english/ seems blocked at every road I travel to get to it.

    titipap

    21 May 2014 6:23pm

    The price that Russia was formerly selling gas to Ukraine at was $268.50 per thousand cubic metres. Now, thanks to the so-called international community's destabilisation, Russia is selling its gas to China instead, and getting a 30 per cent higher price.

    So, as less Russian gas is available to Europe, the Ukrainians and people in the rest of Europe can look forward to paying more. Well done, our leaders! But no doubt their masters in Saudi Arabia and Qatar will be able to provide supplies, at rather higher prices.

    MyDown titipap, 21 May 2014 6:32pm

    Not that simple. Urengoy from which gas goes to Europe is 5 thousand kms away from Yakutiya and 6 thousands kms away from Sakhalin from which gas will go to China.

    Mr1Cynical, 21 May 2014 6:23pm

    This has gone under the radar but Rouhani is also in China perhaps its to do with this ?
    U.S. Issues Threats Over Pending Russia-Iran Oil Deal
    FTMDaily.com – Russia and Iran are forging ahead with a controversial oil-for-goods deal that is being criticized by Washington as a violation of Iran's interim nuclear agreement. .

    Under an interim agreement reached with world powers last year, Iran is permitted to continue exporting no more than 1 million barrels a day of oil to six countries: China, India, Japan, South Korea, Taiwan and Turkey.

    Now, Russia is offering to buy 500,000 barrels of Iranian oil per day, which Washington says will violate the terms of the interim agreement.
    U.S. Secretary of State John Kerry has already begun threatening more 'sanctions.
    Iran's response: The country refuses to 'wait for America's permission' to increase its oil exports.
    On the surface, Washington is pointing to Iran's "violation" of the interim agreement. But, when you follow the money, you find something much different. Not only will a Russian-Iranian oil deal inject a massive amount of fresh revenue into Tehran while emboldening Russia, but the proposed oil deal will completely sidestep the U.S. dollar. rest of article

    http://ftmdaily.com/daily-briefing/040914/

    Will May 20th Go Down In History As the Day the U.S. "Petrodollar" Monopoly Was Finally Shattered?
    May 21, 2014
    The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship that it has russia-dollarwith the United States. If it starts trading a lot of oil and natural gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar, and it could end up dramatically – and negatively – impacting the average American's current standard of living. Let me explain.rest of article

    http://www.munknee.com/will-may-20th-go-history-day-u-s-petrodollar-monopoly-finally-shattered/

    ID5677229 Mr1Cynical, 21 May 2014 6:36pm

    …The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship that it has russia-dollarwith the United States.

    Nonsense! The West's reaction regarding Ukraine has been entirely immaterial. Putin has been committed to the geopolitical policy of Eurasianism for a decade, as have those in positions of power and influence around him.

    Mr1Cynical ID5677229

    Yes but i think you'll find Iran and Syria are a part of that plan Iran the wildcard I think they wanted the west to lift sanctions but realize now that the G5+ 1 are demanding that Iran gives up their ICBMS as part of the Nuclear deal it won't happen so Iran has joined the triparte and will now ignore sanctions. Iv'e heard they now have the S300 So Israel becomes less of a threat I think the US fck fest in the Ukraine has forced Russia China Iran to man up, and put the crazies from the shite house back in their boxes

    John Mack, 21 May 2014 6:28pm

    Truly ironic. Mich of the US long term strategy has been to prevent China from becoming dependent on Russia for energy. That was the point of the Iraqi war. The US feared a Russian-French plan to assassinate Saddam Hussein and replace him immediately with a stable military government that would agree to respect certain human rights an Shiite rights and Kurdish rights. That would have made Russia in control of the largest store of energy resources. The US feared that would mean that Russia gained a position where it vastly increase the costs of energy to China, Japan, and India, or even starve them at least partially of their energy needs, this crippling their economies or making them ally with Russia. So here we are, over Ukraine ...

    elti97

    Europe's long-term energy policy seems clear: reduce energy dependence on Russia. Fortunately there are good alternatives: oil and gas imports from the Middle East, Africa and North America, fracking, nuclear, renewables and increased efficiency.

    With a little smart planning, in 5-10 years time, Russian threats to cut off the gas will be a mild annoyance. More importantly, a variety of competing suppliers will give European countries greater bargaining power.

    AlexRussia elti97

    If you decline dependence from Russia then you increase dependence from someone and it is not fact that the second is good for you

    elti97 AlexRussia

    Wrong. If you increase the number of potential suppliers, you gain bargaining power.

    For example, if Estonia has the option to buy gas from Russia, Norway or the US, it is obviously in a better position than if it could only buy from Russia. That is exactly why a massive gas terminal is currently in construction in Estonia.

    Estonia will probably still buy some gas from Russia, but at a better price.

    Robert Sandlin elti97

    Dream on.Estonia is one country Russia wouldn't mind seeing fall off into the Baltic Sea.

    Robert Sandlin elti97, 21 May 2014 7:41pm

    On yes,who would ever doubt that gas from North Africa and the Middle East wasn't a reliable source,cough,cough,Libya,Al Queda,cough. And were you talking about the DOA Nabucco pipeline.

    But seriously, I have no doubt giving up Russian gas could be done. But the question is WHY in the first place give up a cheap easy supply. To pay out the a$$ for uncertain other supplies of gas.

    kenlinuk, 21 May 2014 6:39pm

    Russia tells the EU to go frack itself. China and Russia stand united against the US-EU sponsored fascist coup in Ukraine! UKIP landslide is a certainty. Good times for democratic freedom. Fuck the EU!

    Kingston Elenwo kenlinuk, 21 May 2014 8:05pm

    It's Frack the EU... If ur gonna say it, say it right :)

    ID7776906, 21 May 2014 6:40pm

    West always treated Russia like a dog anyways. They`re better off going East.

    burnageblue11 ID7776906, 21 May 2014 7:09pm

    I find it all very sad. I would much rather closer ties with Russia and see a declining US influence in Europe.

    What we have done, is push an economic neighbor East. We are now fully dependent on US gas imports(with transit costs).We are now more dependent on the United States than ever.

    Talk about cutting off your nose to spite your face.

    Huge hike in Gas bills this winter.

    indietinker

    21 May 2014 6:41pm

    this is all in the US plan for Russia and China am afraid to say.

    http://thediplomat.com/2014/05/dont-contain-russia-push-it-east/

    "Instead of containment, the US should block Russia's ambitions in Europe while encouraging them in Asia".

    Last month, The New York Times reported that in the wake of the Ukraine Crisis, U.S. President Barack Obama had decided to abandon the reset with Russia in favor of a policy of containment 2.0. According to the report

    Given Russia's intransigence, it's completely understandable that Obama would be tempted to pursue this approach. It's also a mistake. Instead of containing Russia completely, the U.S. should block its ambitions in Europe while encouraging it to turn eastward towards Asia.

    Despite the hopes of many in the post-Cold War era, the U.S. and Russia are not going to have compatible interests in Eastern Europe anytime soon. Russia will always see this as its natural domain, which is a status that the U.S. is unwilling to grant Moscow, especially since NATO's expansion over the past two decades. On the other hand, as John Allen Gay recently noted, American and Russian interests are almost perfectly compatible throughout Asia. It is in this region that the strategic rationale of the reset was always on the firmest ground.

    The challenge is forcing Russia to turn eastward. Europe's dynamism throughout the modern era has forced the Russian state to adopt a westward orientation. This is reflected in the country's geography - with most of the major cities being located in western Russia - and deeply ingrained in Moscow's strategic culture.

    Over the long-term, it's nearly inevitable that the Asian Century will force Russia to reorient itself towards the east. Indeed, as I have noted before, this is already taking place to a growing degree. Still, the question for U.S. policymakers is what actions can be taken to accelerate this natural progression?

    The first step is blocking Russia's ability to expand westward. This doesn't mean that the U.S. and its NATO allies have to deploy troops to Ukraine. All that is required is to introduce greater uncertainty into Putin's calculus about Russia's ability to successfully expand westward. Most importantly, the U.S. must disabuse Putin of the notion that Russia could easily take and hold territory in Ukraine and Eastern Europe.

    The more Putin fears that an invasion would expose the weaknesses of the Russian armed forces, and either fail completely or turn into a prolonged debacle in the mold of Afghanistan during the 1980s, the less likely he is to order Russian troops across the border. The good news is that Putin appears to already have these fears, as evidenced by his restraint in an overt invasion of eastern Ukraine.

    In addition, the U.S. should continue underscoring its commitment to the security of all NATO member states, and intentionally create ambiguity as to how it might react to Russian expansion in non-NATO countries in Eastern Europe. This will increase Putin's apprehension about becoming too adventurous in Europe. After all, he has already squandered Russia's influence in most of Ukraine and can hardly endure another embarrassing international setback.

    At the same time, the U.S. should encourage Russia to expand its influence in Asia, and thus give Putin an outlet in which to act upon his grand ambitions for Russia. The most immediate area of focus should be in Central Asia, where the U.S. is currently withdrawing from Afghanistan. Given Russia's largely congruent interests with the U.S. in Central Asia, Moscow should be encouraged to play a leading role in helping to fill the vacuum the U.S. withdrawal is bound to create, as it is already starting to do with India in the region. Moscow and Delhi can help ensure a modicum of stability in Central Asia even as they cooperate in opposing radical Islamist terrorist groups. This would be entirely to America's benefit.

    Furthermore, as Russia has been focused elsewhere in recent years, China has quickly filled the role Moscow historically has played in Central Asia. Already, many analysts see China as the most important external actor in Central Asia, a position that Russia has held since the 19th Century. Beijing is in the process of trying to further entrench its new position further through organizations like the Shanghai Cooperation Organization (SCO) and its new Silk Road Economic Belt.

    As Russia reengages in Central Asia, it will increasingly find itself clashing with China for influence in the region. This would inevitably create tensions in the increasingly close relationship between Beijing and Moscow. These tensions would force Russia to concentrate more on the long-term threat a rising China poses to its national security. In grappling with this challenge, Russia will naturally seek to assert itself more forcefully in Eastern Asia to hedge against China.

    Mr1Cynical -> indietinker

    To try and spin this as an American plan is wishful thinking I think you'll find the NYT is hailing defeat as victory. The Dollar as the worlds reserve currency has been in decline for many years this deal between Russia and China will hasten it The EU won't save the US, it will only ever be it's prostitute with little economic clout outside of Germany.

    loveminuso -> indietinker, 21 May 2014 6:56pm

    Yeah right...The only problem here is this shit might work in Africa and the ME, with one big difference...Russia and China have Nukes with the capability of strategic delivery...

    "We have powerful enemies but we don't have powerful friends, that's why we need the support of such a giant as China," said Ruslan Pukhov, director of the Centre for the Analysis of Strategies and Technologies in Moscow.

    Even the threat of use by this new alliance will set the American working class against it's 'leadership'; and the Americans know how to deal with criminals - even those in leadership positions...I think Obama, and those NeoCons who own him have huge problems right at Home suddenly. The Revolution is coming...

    docrhw -> Mr1Cynical, 21 May 2014 7:01pm

    I agree about the reserve currency thing. One day we Americans will wake up and discover that the dollar is now part of a basket of currencies needed to buy raw materials. It will happen gradually, but I think is inevitable. The sad thing is that Congress, the Fed, and of course the American public are completely oblivious to this issue. (At least the first two don't talk about it.) When that day comes it will be mighty ugly here.

    Robert Sandlin indietinker, 21 May 2014 7:17pm

    So basically what your saying is that since Russia is to feel nothing for Europe. Then in a crisis they'll have no remorse about destroying it in a nuclear holocaust. OK,maybe they'll get the point.Now me, if I was a European leader, I'd want to have Russia as friendly and connected to me as possible.

    Because countries friendly and interconnected don't want to destroy each other. And with thousands of nukes, and a rightful paranoia about being attacked by the west, I'd want as much friendship as I could get with Russia.

    But maybe I'm wrong, maybe the right thing is to slap Russia around like the EU is doing now. Spit in their face and all. After all just how mad would a country once ruled by Stalin get anyway. But then maybe dusting off the old bomb shelters might be prudent. Just encase following the US's advise isn't the best idea. It was Britain that followed the US into Iraq right. I forget,how did that work out anyway.

    Mr1Cynical docrhw, 21 May 2014 7:20pm

    A lot of American Patriots want the Dollar to collapse, to get rid of the Fed. introduce a new Currency, kick the thieves and jackals out ,rebuild the constitution,.and start afresh, these people who've run the US into the ground are neocon globalists inhuman completely without reason,barking mad Narcissists For all our sakes i hope you get rid of them.

    ID075732, 21 May 2014 6:45pm

    So the EU$A have blundered into the Ukrainian kitchen.

    Vicky Nuland's half-baked attempt with the cookies was a failed recipe. Even Chaz has now brought his flaky biscuit to the table. The only question now remaining is who could believe any of them could make anything?

    So it's not surprising Putin's gone to the Chinese!

    kenlinuk, 21 May 2014 6:46pm

    US loan repayments to China are going to end up in Russia. Sweet justice!

    tfernando, 21 May 2014 6:54pm

    I ask all Americans to read this article without burying head in sand.

    http://www.munknee.com/will-may-20th-go-history-day-u-s-petrodollar-monopoly-finally-shattered/

    The US really shot itself on the foot. This self-inflicted wound of interfering to destabilize other countries for its own interest, the US will only accelerate its decline that should/could have been avoided with sensible thinking.

    I live in the US and, as it is, times are far from being good compared to what it was just ten years ago. And despite the fact there is not much indications the country's economy is improving, the US wants to act as if no economic or financial crisis took place and wants to live on just 'confidence'.

    Well, I think it is very sandy ending for the people of this nation who, to begin with, has a tough me making ends meet.

    lesnouveauxpauvre tfernando

    There still is enough people with good jobs to keep the illusion afloat. I live in San Francisco and it's a bubble here in Silicon Valley. There are a lot of young people like myself and younger with good jobs making really good money. They have no concern about what you are talking about; and you could never convince them their bubble they are living in is not real.

    They think this country is wonderful and so do all people here who still support Obama; including gays who don't care Obama has a 'kill list', and can imprison any American without cause; as long as he supports gay marriage they and a lot of people will support war crimes!?

    It seems unbelievable but it is true. I have gotten into arguments with people about this; and I am gay.

    burnageblue11, 21 May 2014 6:58pm

    The USA can now fill that big void that is left in the gas market. It can supply Gas at vastly inflated prices knowing the EU,UK are now fully dependent on all they gas they can get

    EU leaders want sacking for this.They are not looking after Europeans interests only those off the corporate USA.We will pay the price.

    evolution2now burnageblue11, 21 May 2014 7:07pm

    Europe getting American Natural Gas is fantasy. This is a fact for at least the next 10 years.

    richiep40 burnageblue11, 21 May 2014 7:25pm

    Despite the US pretends to be into free trade it is a lie, even though it basically runs WTO.

    LNG exports from the US are not in a free market, they are restricted to only about 20 countries which the US classifies as FTA agreement countries. These FTA trade deals are almost as catastrophic for the client nations as the proposed TTIP deal with the EU.

    I am a member of 38 degrees, I was surveyed yesterday by them about my views on TTIP. Although 38 degrees have many priorities, my vote was to put TTIP close to the top of their priority list ( I am only a member, nothing to do with those that run 38 degrees, so don't blame 38 degrees for my opinions).

    JVC120, 21 May 2014 7:00pm

    America should reevaluate the direction of ots foreign policies. It is antagonizing a few important countries and the remaking are sitting on the fences or are looking from the sidelines.
    Can US afford the vives of militaristic arrogant and unreasonable messages it is sending to the Asian ,African,and Latin American?

    Its foreignolicy has been hijacked by the warmongers who have never seen a war from frontline and have never wavered on supporting a war from close distance.

    Blenheim, 21 May 2014 7:02pm

    "Russia's new pipeline to China will increase competition for natural gas from 2018 and will most likely increase the cost we pay for natural gas here in the European Union. It will certainly increase the pressure on European countries to find alternative gas supplies," he said.

    Yup, you just have to love the way the west handled the Ukraine situation. Brilliant!

    KingRolo, 21 May 2014 7:02pm

    Interesting article on ZH

    http://www.zerohedge.com/news/2014-05-21/russia-dumps-record-amount-us-treasurys-here-what-it-buying

    evolution2now, 21 May 2014 7:04pm

    Reducing China's massive dependence on coal based energy is a great win for the world. This deal does more for the environment than any western climate regulations could possibly do.

    Let's not forget India, which also relies heavily on coal. I would guess they are next to make a deal with Russia.

    Babeouf, 21 May 2014 7:05pm

    Yes this is the first mega deal which breaks the ice it won't be the last though will it. The US regime will still continue attacking both Russian and China. It will still bore the world rigid with its ' Pivot to Asia' and its 'Isolation of Russia' . The really really funny part is the sudden suggestion that the EU's Russia policy is actually going to raise gas prices for European customers. Must be part of the EU's new competition strategy built on raising production costs for the various European based industries that consume large amounts of energy. Still you must admit that the EU's Russian policy has worked a treat for the Chinese government. So among the nations of Europe there is at least one ' Manchurian Candidate'. The servile spirit of Europe's political leaders is only matched by the bone headed stupidity of their imperial US masters.


    Peabody94

    Nice deal, take a loss for a few years, smacks of desperation by Russia. It's nowhere near being a deal big enough to bother European supplies, Europe takes about 170 bn cubic meters a year, this is only for 38bn and from an undeveloped field. Desperate dealing at a low price.

    So as Europe weans itself off Russian gas Gazprom takes a mighty big hit over time. That's what happens when you have a one trick pony economy and you need western technology to extract the minerals, one trick pony technology as well, decades behind the west.

    AlexRussia Peabody94

    Generally less and in Europe are important only a few countries - everything else is not so important

    http://www.gazpromquestions.ru/en/foreign-markets/


    Shiku101

    Great job that EU is doing with antagonising Putin with the Ukrahinian saga. Now we have to bail out a broke country and pay more for the gas. Great news.

    vr13vr Shiku101, 21 May 2014 7:28pm

    This deal will definitely make it more difficult for Ukraine to claim any discount. Ukraine will have to eat at least this price and guess who will have to pay it? That's right, the "Western partners," a.k.a EU.

    ID5677229, 21 May 2014 7:15pm

    The contract [is for Russia ]to provide 38bn cubic metres of gas each year [to China at] .... about $350 (£207) per thousand cubic metres.

    This deal has some symbolic value I suppose but otherwise it is a rather desperate and only partially successful move on Russia's part to shore up its export market for gas.

    Reacting to Russia's aggression in Ukraine, a month ago the EU announced plans to effect a 25% cut in its gas imports from Russia by 2020. Since the EU has been importing 180bn cubic metres of gas a year Russia's deal with China barely makes up the shortfall. In fact, from Russia's viewpoint the situation is even worse: China will pay $30 per thousand cubic metres less than the EU has been paying; moreover, Ukraine's imports of Russian gas are going to be greatly reduced too.

    vr13vr ID5677229

    This deal is bigger than the current European deal, and it is muuuuuuch bigger than whatever reduction EU will be able to make in the future. China got some 9% of volume discount compared to EU prices, but that's reasonable given the volume. At the end of the day both countries will end up with newly developed infrustructure. And both will be better diversified to deal with "pressure" from the West. Not a bad deal at all.

    mustspeak, 21 May 2014 7:17pm

    @article:
    "But one British energy expert warned last night that the move could drive up prices for European gas consumers who are becoming increasingly dependent on Russia and now face a competition for supplies"

    Serves Britain and EU right, only pity and concern is that I happen to be British, so also EU citizen. The West's gerrymandering around the world is going to spectacularly bite their asses harder and harder as time goes by.

    daylight101 mustspeak, 21 May 2014 7:22pm

    It's unlikely. Russia already sells gas to Europe at premium price and setting it higher now might be self defeating in longer terms. I am sure that Russia will attempt to undermine the US gas proposal to EU by offering more competitive bargains.

    SteveK9, 21 May 2014 7:21pm

    The comment about 'finding financing' betrays the faulty economic thinking that pervades the West right now. If Russia does not import anything to build the pipeline, then 'financing' is irrelevant. The Russian state cannot run out of Rubles. The only question is whether this is a worthwhile investment of workers and materials. Since this is becoming a strategic question for Russia ... you can bet your ... they will 'find the financing'.

    I don't know how much help China will be providing to this project but if there is one thing that China seems to be very capable of these days it is large construction projects.

    natalifoley, 21 May 2014 7:25pm

    Putin checkmates Obama in "gas war"
    http://voiceofrussia.com/news/2014_05_21/Putin-checkmates-Obama-in-gas-war-0503/

    MyDown, 21 May 2014 7:56pm

    Just incredible: infrastructure investment from both sides will be more than $70
    billion and will be the world's largest construction project, with Russia providing $55 billion up front and China $22 billion. Fuck my boots...

    efreelittlehelps

    http://www.zerohedge.com/news/2014-05-20/birth-eurasia-russia-china-do-pipelineistan

    burnageblue11, 21 May 2014 8:04pm

    All this is fallout over the Crimea because off US hegemonic foreign policy. It was a Russian base to start with, its not like they were invading. We had to make a big song and dance over it, because the United States really wanted it as a warm water base for the US 6th fleet in Sevastopol.

    It was never going to happen, we knew it, they knew it.

    Sanctions, provocative rhetoric, more sanctions.

    End result. New Cold war. Redirected gas supplies to China that Europe badly needed. The irony is, the United States will be totally unaffected. Europe will become dependent on US gas imports. How could European leaders allow this to happen. How could they pursue a US foreign policy that will have a detrimental affect on Europe European industry, and consumers.

    Our leaders are nothing more than traitors.

    It wont be the citizens off the United States freezing this winter. They wont be paying though the nose for gas, it will be us in the EU,UK.

    Not sure how traitorous EU leaders who have screwed their own people, economies over will survive long term. Germany will be the biggest loser. Merkel pursuing US hegemonic foreign policy despite the fact German industry is very dependent on Russian imported supplies. German Business leaders were totally against Merkel position to start with.

    Russia has said it will turn off supplies to Ukraine on June 3rd if their debt is not paid in full. And unless they pay in advance.

    European supplies come through the Ukraine. This could get much worse.

    I hope this winter is not a cold one.

    mikebraksa Fednad

    Europe will fall apart into three parts soon - that's all

    Already has. Eastern EU states. Western EU states. And France.

    Slo27, 21 May 2014 8:04pm

    So, they are getting $350 from China and $380 from Europe and what will they do? Sell more to Russia and less to Europe .... Eeeh, not exactly.

    BrissieSteve Slo27, 21 May 2014 9:19pm

    The gas comes from totally different gas fields thousands of km apart and with different extraction costs. Geography wasn't one of your school subjects was it?

    GAHenty, 21 May 2014 8:06pm

    The significance is in the continued rise of China. Putin may believe himself clever but in any Chinese-Russia alliance Russia will quickly become the junior member. The provider of raw materials for the Chinese machine.

    venerablejohn, 21 May 2014 8:12pm

    Far be it from me to say "I saw this coming" but

    http://www.theguardian.com/world/2014/apr/15/ukraine-armed-conflict-east#comment-34409619

    I saw this coming.

    Taku2, 21 May 2014 8:16pm

    Russia and China have to guard against America's sanctions-happy foreign policy, so the more business they can do together, it will be the more 'sanction-proof' their economies become.

    We already see America gunning for China, in her attempt to delay China's ascendancy to top-dog status.

    Eaglesson, 21 May 2014 8:27pm

    What the article forget to mention is both countries with this deal are bypassing the (petro)dollar, so it will be in their domestic currencies.

    Another bold move from both sides..After a similar bold move between Russians and Iranians short time ago

    Russia and China took a small step toward undercutting the domination of the U.S. dollar as the international reserve currency on Tuesday when Russia's second biggest financial institution, VTB, signed a deal with the Bank of China to bypass the dollar and pay each other in domestic currencies.

    Japan got the news and is running fast to get a piece of the deal, quoting that is paying a hefty price for US LNG...why should't they? And Russians have thought about that, the plan of a gas pipeline through North Korea are targeted for markets of South Korea and Japan.
    In a period of one year neocons have done so much damage to US and Europe that it cannot be revoked any more. The biggest loosers are EU in this deal and right away after the deal Barroso send a pledge letter to Putin, pleading him to keep his gas running for Europe and (they were prepared to pay the price dictated by russians for Ukraine's gas supply)

    wimberlin AlexRussia

    In spite of all the space that the 'Prince's' stupid comments are receiving from the Guardian - in fact the US today is much more similar to Nazi Germany than any other country. Ask Edward Snowden, he has all the dirty details that the US does not want you do know. He is presently in Russia, so therefore all the anti-Russia hysteria.

    Oh but not by Luke Harding - he is really good and never lies about Russia - no I certainly do not include him!

    Ciarán Here

    When you compare this deal to the "DEAL" Russia had with Ukraine since 1991- Russia lost - subsidised Ukraine to the tune of up to 300 billion it now seems that Russia has Ukraine and EU over a barrel. Russia won't be subsidising Ukraine a saving of 300 billion over the next 30 years and a gain of over 400 billion from China . I guess Russia with not be to concerned about others taking on the burden of Ukraine.....

    daylight101 Ciarán Here

    There will be some attempts to rebuild Ukraine but it will be not subsidising, I am sure.

    finnja, 21 May 2014 8:42pm

    Notably, also

    the plans for South Stream, which does not go through Ukraine, are on track
    , at least when it comes to the directly involved EU countries (like Bulgaria, Hungary, Austria) and Russia.

    The question now is: will the EU force its Southeastern member states (the ones that depend on Russian gas) to fall on their swords in order to make a point and to prop up fracking and TTIP?

    GAHenty natalifoley, 21 May 2014 9:26pm

    Oh look. Articles from a Russian news corporation. No bias there then.

    windies GAHenty, 21 May 2014 9:56pm

    ABC, NBC or CNN, they do objectivity, they do equal points of view, don't they!!

    American news is as bias as Russian news..

    What is your point.

    Mark Chaloner, 21 May 2014 8:47pm

    Sounds like a good deal but it won't make the Russian economy grow. Russia needed this just to stand still. In the long term Russia can't do without the EU. Russia needs the EU as much as the EU needs Russia.

    daylight101 Mark Chaloner

    My understanding is that Russia can actually substitute many of its high-tech EU imports by chinese ones.

    ploughmanlunch Mark Chaloner, 21 May 2014 9:04pm

    Standing still might be more desirable than back tracking, as this still fragile Euro economy may yet do.
    It's true that the EU and Russia would mutually benefit from unimpeded trade and commerce, but the EU, following the lead of the US appears to be willing to sacrifice it's own prosperity at the behest of US geo-political interests.

    daylight101 Mark Chaloner, 21 May 2014 9:19pm

    Russians will not quit EU market, I am sure. They will keep selling gas to EU and, probably, will even offer bargain to undermine the US gas proposal. They will compete, not leave.

    bulldoggy, 21 May 2014 9:11pm

    Reporter needs to get the story straight. One paragraph describes a deal, "ten years in the making". Another paragraph quotes a Russian spokesman who attributes the deal to western hostility. What it really looks like is Russia and China not letting a PR opportunity slip by without exploitation.

    A deal ten years in the making wasn't spawned on western hostility. It was spawned by economic reality. An eastern Siberian gas field is conveniently close to China and half a planet away from Europe. I'd guess the low price China wrung out of Russia had a lot to do with Chinese perception that Russia has no other buyers for this gas.

    knuckles66, 21 May 2014 9:18pm

    Businessweek and Bloomberg both think the deal is more fumes....that the Chinese and Russians agreed on the volume to be shipped, but still have not agreed on the price. The Chinese will kick in 25 billion in pre-payment to fund the cost of building the pipeline, but the final pice will still be in negotiations.

    Since the pipeline will take several years to build, they have plenty of time to fight over the price.

    windies knuckles66, 21 May 2014 9:31pm

    They will make it work, the "west" pisses them off..

    American financial reporting are so boned faced one-sided, objective reporting is beyond them. Course they want it to fail.

    The US/EU point of view is now redundant in their eyes.

    richiep40 windies

    The 'markets' and the western press have been predicting the collapse of the Chinese economy for more than a decade. It will not happen.

    MyDown, 21 May 2014 9:22pm

    Almost 700 comments, yet there is none about the agreement is somehow affecting gay rights. Strange, but it shows that Guardian readers are confused. )))

    zchabj5, 21 May 2014 9:27pm

    Much more important than the deal itself is the agreement to open up Russia to Chinese investment for infrastructure.

    The UK has agreed to become a clearing house for the renminbi. Osborne is not stupid, we can see which way the wind is blowing, and it is blowing east. Israel has also made significant moves to encourage trade with China, to mitigate the fallout of US decline.

    For last 20 centuries, China has had the largest GDP for 15 to 18 of them. The two centuries right after the industrial revolution saw European hegemony, brief lived, but the world will return to it's Asia dominated status quo.

    MyDown, 21 May 2014 9:46pm

    Economical and infrastructural aspects are significant, but political one is just huge. Talking to my Chinese friends - they are as excited on green light the deal brought as Russians are. The whole story is kind of step up in friendly relations between Russia and China and money is not the main issue.

    followthemonkey PoiticalWatchDog, 21 May 2014 9:59pm

    Saddam Hussein paid a high price but Russia and China are not defenceless like Iraq or Afghanistan. They're completely capable of defending their countries interest.

    geoprobe, 21 May 2014 9:49pm

    I think we need to thank the neo-cons in the Obama administration to apply the pressure to make this deal happen. Without them, the Russians might have held firm on their price and the Chinese might have held out for a lower price.

    Due to the Americans' imperial might it brought these players to the table. It might be a bad move for American might, but it just might save the planet, as it will provide the Chinese a more climate friendly fuel than their current coal.

    My hats off!

    tiye60

    About the pipeline "Sila Sibiri", from Gazprom website.
    http://www.gazprom.com/about/production/projects/pipelines/ykv/

    Wagram, 21 May 2014 9:52pm

    "We have powerful enemies but we don't have powerful friends, that's why we need the support of such a giant as China," said Ruslan Pukhov, director of the Centre for the Analysis of Strategies and Technologies in Moscow.

    Telling statement.

    Robert Sandlin Wagram, 21 May 2014 10:53pm

    And it works both ways.Only a fool couldn't see that if Russia was destroyed,China would face the West alone.A strong Russia in support is China's greatest aid.So in many ways the Russo-Chinese relationship is a marriage made in Heaven.And they can both thank the US for being the Matchmaker.The US trying to humble Russia,and threatening China,did the trick

    The Guardian

    Bismarx , 21 May 2014 5:38pm

    Our dependence on their gas is their dependence on our money. Both sides are well advised to diversify. However, i would be careful if i had to decide for Russia: China and Russia have animosities and while the Europeans are a bunch of hysteric merchants, the Chinese will know how to get what they want once Russia is dependent on THEIR money.

    followthemonkey -> Bismarx, 21 May 2014 8:59pm

    the Chinese will know how to get what they want

    I'd rather be a Chinese than an American.

    "Americans more afraid of being tortured by their government than Chinese are of theirs"

    Amnesty International conducted a global survey

    MyDown -> tfernando, 21 May 2014 5:48pm

    Putin said that gas price of the agreement is linked to petrol price, so it will not effect USD.

    FrankPoster -> MyDown, 21 May 2014 7:44pm

    FFS you know nothing. The price might have a formula that involved the USD somewhere, but the transactions will be in Rubles and Yuan, thereby fully bypassing the petrodollar. There are huge implication to the US for this, and therefore you will see them ramp up efforts in Ukraine and elsewhere to engage Russia in a proxy war with a view to eventually destabilize Russia in 5-10 years time to grab their oil and gas and process it in dollars to support their massively bankrupt financial system...but this time they will fails since china will side with the Russians and will drop their US treasury bills if necessary.

    HongKongBlue

    preemptive move to invade Ukraine?

    Gudwin -> HongKongBlue

    Nobody gives a rat's ass about Ukraine anymore.

    whyohwhy1 Gudwin

    Nobody gives a rat's ass about Ukraine anymore.

    At the moment Ukrainian soldiers are killing civilians in the eastern part of that country, that is why the Western media seem to have lost all interest after 24/7 coverage for a couple of months.

    AndyOC, 21 May 2014 5:39pm

    You can't blame them for forging ever closer ties, uncertain as both countries must be with regards both recent Ukraine and industrial espionage problems.

    Is it worth being worried about? Probably.

    PaulThtanley AndyOC, 21 May 2014 7:49pm

    No it isn't.

    Russia and China don't trust each other at all, despite this grandstanding. Both countries look to the West and define themselves relative to it. Their oligarchs send their kids to school here and maintain holiday homes. Many retire (or flee) here. Let the Chinese bubble accumulate more investment debt and let the Russians have a go at extracting gas that is harder to reach than the gas they currently extract and sell it for less than they are currently selling their gas that has existing infrastructure. Who knows? It may even work out.

    griffinalabama, 21 May 2014 5:39pm

    Nice to see Russia outsmarting the nefarious yanks especially after all the bullshit the US has instigated in Ukraine. A good article in Counterpunch goes into the media coverup of the Odessa massacre and US involvement. The truth is coming out. Link here: http://www.counterpunch.org/2014/05/08/false-flag-in-odessa/

    ahbowledhim

    Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on the back foot.

    Can Washington play off the back foot like the incomparable Viv Richards could is the question?

    IgAIgEIgG ahbowledhim, 21 May 2014 5:45pm

    Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on the back foot.

    Dude! What are the contingencies?!

    Carl Jones IgAIgEIgG

    Only one...world war 3. The fact is, Amerika and Britain are bankrupt. So they need some very big wars.

    iamnotwise vr13vr, 21 May 2014 7:49pm

    But this will become a new Cold War only if the US decides to stir trouble.

    Continue to stir trouble, I think you mean. This whole Ukrainian situation is another US instigated clusterfuck. Once again the failing empire (with the UK clinging to it like a tumour) tries to drag everyone else down with it.

    steavey, 21 May 2014 5:42pm

    Russia maybe unpopular with the west, but their assets are always popular everywhere. It's nice to come home in winter time heated by gas central heating, and does not matter where the gas comes from, Alex Salmond's Scotland or Putin's Russia.

    OneWorldGovernment, 21 May 2014 5:50pm

    Love the 15 minute context. The negotiations for this deal was a decade in the making and the Chinese strong armed the Russians into taking a lower price. It shows how desperate the Russians have become and their weak bargaining power.

    Carl Jones

    I like that US dollar sign in front of the 400 billion?lol This deal is a massive nail in the coffin of the US dollar!!lol Funny, but true, Western sanctions are actually hastening the end of US dollar hegemony. You should watch a Dr Paul Craig Roberts youtube vid called "Fed launders treasury bonds in Belgium"...then you`ll know just how precarious the US economy is.lol

    PaperEater Carl Jones

    Lol. The level of discourse is amazing. Lol

    Pazuzu Carl Jones, 21 May 2014 9:07pm

    Nothing like a bunch of LOLs and references to to the Youtube School of Economics to lend that much needed dose of credibility to an argument. Well played!

    Let me put things in perspective for you, if you'll allow me to interrupt your scholarly lulz for a moment: $400 billion is about the amount Uncle Sam uses to wipe his bum every day.

    Still, I admire the resolve of the Putinbots, like obedient toy poodles still firmly clamping their little jaws on the heels of a giant, convinced they're winning the fight.

    Mr1Cynical, 21 May 2014 5:56pm

    This is only a terrible deal for the US and it's prostitute EU Milov i wouldn't take to seriously, as usual the Guardian always go for the lowest denomination when it comes to experts they mean someone who has an axe to grind.

    This comes as CNN are calling Russia a pariah nation, they really mean o shi# this is great as the Bog roll called the petro dollar struggles along getting closer to the cliff O-Bama helping it along the way

    What next Sanctions on everybody outside of Utah, still cheer up you Barry o supporters, you've still got your killer drones to play with

    whyohwhy1

    Russia didn't "fall out with the West": it was threatened with sanctions by the US and their puppets in Europe after they supported a coup against the elected government of Ukraine.

    Maybe Kerry's hot air can provide enough energy for Poland and Germany next winter.

    semyorka, 21 May 2014 5:59pm

    The Kovykta field is considered to supply natural gas to China and Korea. According to these agreements signed by Rusia Petroleum with China National Petroleum Corporation and Kogas on 2 November 2000, the annual export of gas to China and Korea will be 20 billion cubic meters (bcm) and 10 bcm, respectively.[7] The Kovykta field will contribute also to the gasification of Irkutsk Oblast, implemented by the OAO East Siberia Gas Company, a joint venture of Gazprom (originally TNK-BP) and the Irkutsk Oblast Administration.
    http://en.wikipedia.org/wiki/Kovykta_field

    You tell people Putin had stomach cramps and CiF would be crawling with people announcing this latest move had the west in knots by the master strategist.

    TransAtlanticist, 21 May 2014 6:00pm

    Iraq, Afghanistan .. now Russia. I will say the Chinese are remarkably good at knowing when to capitalize on others' bad situations.

    vr13vr TransAtlanticist, 21 May 2014 6:30pm

    It says the US is remarkably good at creating bad situations that only hurt the US.

    AlexRussia, 21 May 2014 6:01pm

    Putin: gas contract with China signed today has become the largest in the history of the USSR and Russia

    Signed today contract to supply China natural gas from Russia is the biggest gas deal in the history of the USSR and Russia , said Russian President Vladimir Putin According to him, laying a gas pipeline " Power of Siberia " will come be the largest construction project in the world for the next 4 years. Meanwhile, Russia will invest in the construction of the pipeline and development Kovyktinsky and Chayandin deposits and about $ 55 billion while China is going to to create the necessary infrastructure for at least $ 20 billion. "This is the largest contract for Gazprom" - said SEO Gazprom Miller.

    Ludwitt, 21 May 2014 6:04pm

    The reporter writes

    "Gazprom and CNPC (China National Petroleum Corporation) have signed a 30-year, $400bn (£237bn) deal to deliver Russian gas to China"

    a factual statement and adds an editorial comment

    "a deal that underscores Russia's shift towards Asia amid strained relations with the west."

    It's fine for the reporter and/or editor to have an opinion: it's just that the above statement does not follow at all from the previous statement about the signing of the deal. Indeed further down the article that this deal was 10 years in the making. Indeed it is prudent to diversify one's portfolio for a variety of reasons and especially have China, a voracious consumer and a key if not THE engine of global growth as one of your primary customers.

    In fact the US and the West do roaring business with China itself. So why not Russia? And why not some analysis as to whether this deal would eventually be good or bad for the Russian economy and its growth? Or the development of the Russian Far East which has long been declared as a National Priority within Russia's domestic policy?

    In a Western government centric world, any major deals that don't have the West in the picture are seen to be a threat, to be amplified as such by the Western corporate media.

    An interesting gas story thread to chew on meanwhile is Hunter Biden - the US VP's son - being appointed to the board of Ukraine's largest gas company.

    And so it goes.

    FighTheBrainwashing

    To be honest, right now I can't but feel quite a bit of shadenfreude picturing the "ecstatic" faces of the newsmakers from the Financial Times, Bloomberg, Washington Post, Wall Street Journal, etc., etc. that spent the last 24 hours leading to the announcement of this ground-breaking deal gloating over Putin's "failure to reach a landmark agreement with China".

    As they say, he laughs best who laughs last, so, suckers, deal with it! It's our turn to laugh now!
    :)

    PS: And I'm absolutely positive it's only the beginning of good news for those who dare defy the criminally hypocritical, cynical, double faced, devious, mendacous and war-mongering United States of Lies, Propaganda and Double Standards around the world!

    [Apr 13, 2014] Why US fracking companies are licking their lips over Ukraine

    The Guardian

    For this ploy to work, it's important not to look too closely at details. Like the fact that much of the gas probably won't make it to Europe – because what the bills allow is for gas to be sold on the world market to any country belonging to the World Trade Organisation.

    Or the fact that for years the industry has been selling the message that Americans must accept the risks to their land, water and air that come with hydraulic fracturing (fracking) in order to help their country achieve "energy independence". And now, suddenly and slyly, the goal has been switched to "energy security", which apparently means selling a temporary glut of fracked gas on the world market, thereby creating energy dependencies abroad.

    And most of all, it's important not to notice that building the infrastructure necessary to export gas on this scale would take many years in permitting and construction – a single LNG terminal can carry a $7bn price tag, must be fed by a massive, interlocking web of pipelines and compressor stations, and requires its own power plant just to generate energy sufficient to liquefy the gas through super-cooling. By the time these massive industrial projects are up and running, Germany and Russia may well be fast friends. But by then few will remember that the crisis in Crimea was the excuse seized upon by the gas industry to make its longstanding export dreams come true, regardless of the consequences to the communities getting fracked or to the planet getting cooked.

    I call this knack for exploiting crisis for private gain the shock doctrine, and it shows no signs of retreating. We all know how the shock doctrine works: during times of crisis, whether real or manufactured, our elites are able to ram through unpopular policies that are detrimental to the majority under cover of emergency. Sure there are objections – from climate scientists warning of the potent warming powers of methane, or local communities that don't want these high-risk export ports on their beloved coasts. But who has time for debate? It's an emergency! A 911 call ringing! Pass the laws first, think about them later.

    Plenty of industries are good at this ploy, but none is more adept at exploiting the rationality-arresting properties of crisis than the global gas sector.

    For the past four years the gas lobby has used the economic crisis in Europe to tell countries like Greece that the way out of debt and desperation is to open their beautiful and fragile seas to drilling. And it has employed similar arguments to rationalise fracking across North America and the United Kingdom.

    Now the crisis du jour is conflict in Ukraine, being used as a battering ram to knock down sensible restrictions on natural gas exports and push through a controversial free-trade deal with Europe. It's quite a deal: more corporate free-trade polluting economies and more heat-trapping gases polluting the atmosphere – all as a response to an energy crisis that is largely manufactured.

    Against this backdrop it's worth remembering – irony of ironies – that the crisis the natural gas industry has been most adept at exploiting is climate change itself.

    Never mind that the industry's singular solution to the climate crisis is to dramatically expand an extraction process in fracking that releases massive amounts of climate-destabilising methane into our atmosphere. Methane is one of the most potent greenhouse gases – 34 times more powerful at trapping heat than carbon dioxide, according to the latest estimates by the Intergovernmental Panel on Climate Change. And that is over a 100-year period, with methane's power dwindling over time.

    It's far more relevant, argues the Cornell University biochemist Robert Howarth, one of the world's leading experts on methane emissions, to look at the impact in the 15- to 20-year range, when methane has a global-warming potential that is a staggering 86-100 times greater than carbon dioxide. "It is in this time frame that we risk locking ourselves into very rapid warming," he said on Wednesday.

    And remember: you don't build multibillion-dollar pieces of infrastructure unless you plan on using them for at least 40 years. So we are responding to the crisis of our warming planet by constructing a network of ultra-powerful atmospheric ovens. Are we mad?

    Not that we know how much methane is actually released by drilling and fracking and all their attendant infrastructure. Even while the natural gas industry touts its "lower than coal!" carbon dioxide emissions, it has never systematically measured its fugitive methane leaks, which waft from every stage of the gas extraction, processing, and distribution process – from the well casings and the condenser valves to the cracked pipelines under Harlem neighbourhoods. The gas industry itself, in 1981, came up with the clever pitch that natural gas was a "bridge" to a clean energy future. That was 33 years ago. Long bridge. And the far bank still nowhere in view.

    And in 1988 – the year that the climatologist James Hansen warned Congress, in historic testimony, about the urgent problem of global warming – the American Gas Association began to explicitly frame its product as a response to the "greenhouse effect". It wasted no time, in other words, selling itself as the solution to a global crisis that it had helped create.

    The industry's use of the crisis in Ukraine to expand its global market under the banner of "energy security" must be seen in the context of this uninterrupted record of crisis opportunism. Only this time many more of us know where true energy security lies. Thanks to the work of top researchers such as Mark Jacobson and his Stanford team, we know that the world can, by the year 2030, power itself entirely with renewables. And thanks to the latest, alarming reports from the IPCC, we know that doing so is now an existential imperative.

    This is the infrastructure we need to be rushing to build – not massive industrial projects that will lock us into further dependency on dangerous fossil fuels for decades into the future. Yes, these fuels are still needed during the transition, but more than enough conventionals are on hand to carry us through: extra-dirty extraction methods such as tar sands and fracking are simply not necessary. As Jacobson said in an interview just this week: "We don't need unconventional fuels to produce the infrastructure to convert to entirely clean and renewable wind, water and solar power for all purposes. We can rely on the existing infrastructure plus the new infrastructure [of renewable generation] to provide the energy for producing the rest of the clean infrastructure that we'll need ... Conventional oil and gas is much more than enough."

    Given this, it's up to Europeans to turn their desire for emancipation from Russian gas into a demand for an accelerated transition to renewables. Such a transition – to which European nations are committed under the Kyoto protocol – can easily be sabotaged if the world market is flooded with cheap fossil fuels fracked from the US bedrock. And indeed Americans Against Fracking, which is leading the charge against the fast-tracking of LNG exports, is working closely with its European counterparts to prevent this from happening.

    Responding to the threat of catastrophic warming is our most pressing energy imperative. And we simply can't afford to be distracted by the natural gas industry's latest crisis-fuelled marketing ploy.

    ===

    teaandchocolate

    The industry's use of the crisis in Ukraine to expand its global market under the banner of "energy security" must be seen in the context of this uninterrupted record of crisis opportunism.

    So, no worries about innocent Ukrainians, or Russians, or people, then.

    And how 'engineered' has this Ukrainian crisis been by the Americans behind the scenes? Was this the plan all along?

    I smell a rat.

    Any chance to doof the Ruskies, and the rest of us, for the love of stinky cash and they are there.

    ARebours

    Thanks to the work of top researchers such as Mark Jacobson and his Stanford team, we know that the world can, by the year 2030, power itself entirely with renewables.

    No Naomi, it can't. Substitue the word 'nuclear' for 'renewables' and he'd have a chance. Jacobson is also a rabidly anti-nuclear twonk.. You'd do well to ignore him.

    Also, in this case, the geopolitics are indeed about stiffing Putin. Ukraine is pretty much dependent on Russian gas, and currently owes billions to Gazprom in unpaid bills. Not only this, but the discount it usually pays has been removed. Without cheap energy, the country is basically sunk.

    BARONVONRATMUNCH prairdog

    So the US wants Ukraine to join the EU and for British taxpayers then to donate Billions in aid to the Ukraine via the EU and open our borders to the population of the Ukraine, so that US companies can make Billions from Ukrains resources.

    Trilbey BARONVONRATMUNCH

    The IMF will drive Ukrainians into terrible poverty, but Ukrainian plumbers and electricians - who are some of the best trained in the world - will flood into Britain lowering wages. Great new for neoliberals and capitalists, because the price of a plumber won't come down.

    retarius

    Thank you Naomi. I wonder about fracking....has it really changed the energy landscape in the US...or does it represent only 1 or 2% of energy used.

    Lord knows I'm no expert but it seems that the process uses a lot of energy and pollutes a lot of water...given this it doesn't seem to be the answer to climate change or fresh water shortages.

    The point will come when water will be denied to people in order to provide massive amounts to tracking companies....indeed I read somewhere that this has already happened in the US.

    unicronatron theharper

    You missed the point. Where does she say this is all part of some long in the design conspiracy to destabilise the former USSR?

    Isn't her accusation that the US congress (influenced by the fracking lobby) are seizing this opportunity and using the disingenuous excuse of helping Ukraine / destabalising former USSR, as cover for pushing the commercial interests of the fracking industry.

    "Now the crisis du jour is conflict in Ukraine, being used as a battering ram to knock down sensible restrictions on natural gas exports and push through a controversial free-trade deal with Europe"

    And all at the cost of the planets Environment.

    Sure, global corporations are run to benefit the shareholders (people), but that doesn't mean they act responsibly. They are run purely to benefit the shareholders financially, not in any other aspect. That's fine, but only if governments are acting when financial interests are threatening peoples wider interests. The article is trying to show an example of that not happening.

    Hostilius

    Shale gas is not as easy as most people think (even if all environmental issues were solved).

    Look at Poland, all that money and fracking and only one profitable well...

    FrankThomas

    So now it becomes clearer why the State Dept was prepared to plough $5bn into Ukraine to destabilise the Yanukovych regime.

    That's $5bn of taxpayer cash of course, in the service of multinational corporations who then place themselves offshore when the profits that the taxpayer has facilitated for them generate a notional tax bill.

    Where's Grover Norquist to defend the interests of taxpayers when you need him?

    Probably in the same place as the Taxpayer Alliance when questions need to be asked in the UK about the sale of Royal Mail at an undervaluation of £750m.

    Trilbey FrankThomas
    Loads of our taxes goes towards paying back the loans along with the interest to bankers which our government borrowed to give to big private companies. Worst still, governments can create their own money debt free and bypass the banks without raising any taxes at all, which could be better spent on our public servicers instead, therefor saving us a fortune. The Tax Payers Alliance say nothing about this.

    We Can't Afford Corporate Welfare

    http://www.huffingtonpost.co.uk/prem-sikka/budget-2014-corporate-welfare_b_4986497.html



    Successive governments claimed that privatisation would end public subsidies. Well, that has not been the case. In 1996, the railways were privatised and now over 100 companies are running the same, but subsidies have increased. The industry has received over £60bn in subsidies, and more is on the way the Crossrail and HS2 projects. The industry has paid vast amounts in dividends to its shareholders whilst the customer has ended up with the most expensive rail fares in the western world.

    The financial sector preaches free markets and deregulation, but is almost entirely reliant on the state. The deposit-taking licence is provided by the state without any quid pro quo and the state also provided insurance for deposits of up to £85,000 to promote confidence in the industry. The sector has boosted its profits through indulgence in money laundering , insider trading, cartels, tax dodges, and the sale of abusive financial products, with virtually no prosecutions for ant-social practices.

    In its boom years, between 2002 and 2007, the financial sector paid £203billion in UK corporation tax, national insurance, VAT, payroll taxes, stamp duty and insurance taxes, about half of that paid by the manufacturing sector. In return, the state has poured in billions. The latest data shows that some £976billion of loans, guarantees and other forms of support have been provided to banks. The Bank of England has helped out with another £375billion under its quantitative easing programme. Rather than building their tattered finances, the banks continue to pay exorbitant executive salaries.

    FrankThomas Trilbey
    Good post, thanks.

    All of us who've read The Shock Doctrine will understand the concept of corporate welfare, and will be aware of how it's being extended relentlessly, not just through bank bailouts and QE but by giving public wealth to pirates like Capita or G4S.

    And if Capita or G4S are proven to be inefficient, corrupt or more expensive than the public body they replaced, they lose out in the next tendering process to Atos or Serco, or another bunch of pirates.

    The possibility, the blindingly obvious solution, of ending this piracy and bringing the service back into public ownership is never even discussed or offered up as an alternative.

    Oh and all the parties are prisoners of the corporations, of course, and offer no alternative to the new reality.

    We seem to be ruled by two pervasive mantras these days, "Private good, public bad" and "Privatise the profits, socialise the losses".

    It's not a viable economic model, this.

    nishville

    This planet is in the hands of psychopaths. The lunatics have literally taken over the asylum.

    Owakahnige

    Superb article from one of the most important intellectual voices of our age.

    I read her "Shock Doctrine" a few years ago. It left a powerful and frightening impression on me and I recommend it to anyone who wants to understand the kinds of opportunistic exploitation of crisis for corporate profit that she refers to in this article

    rezaa

    Ms. Klein,
    As you can see from perhaps most comments made here, not only is the planet dealing with unscrupulous, deceitful and trickster companies, mischievous, coercive and powerful governments that are hand-in-hand with the former, but also, very sadly, people, who are too blind and are gullible enough to go with the disinformation that has been fed to them or rather shoved down their throats. And these are from the more educated and well-read layers of the society. The planet and the life on it are truly in a grim plight.

    Scipio1 rezaa

    I am afraid that the problem is beginning to look terminal, fiddling while Rome burns hardly comes into it.

    It rather reminds me of the film 'Downfall' set in the last days of the Hitler regime. AH himself was in his bunker, whilst the assorted Waffen SS Officer Corps were throwing a party seemingly oblivious to the artillery shells from the Red Army which were landing a few hundred metres away. Most already knew that it was all over, notwithstanding the few fanatics who insisted that the Russians could be driven back.

    Compare that to our climate sceptics, abject denial in the face of massive and irrefutable scientific evidence that the world is locked into a system which is producing the ultimate means of its own destruction.

    And in the face of this, nothing, nothing of the required dimensions, is done. Don't worry chaps, everything is going to be okay.

    The populace as a whole has lost the ability to resist; like sheep they tamely co-operate in their own grisly demise, a bit like the Elois in H.G.Wells waiting for the Morlocks to come and eat them.

    When and where is the resistance to this out of control going to come from one wonders? In any event it had better come soon, since if it doesn't we will, in private Fraser's words be, 'doooomed'

    martyjar

    The annexation of Crimea alone was a great day for the gas producers - US, Canada, Norway, Qatar, Saudi et al.

    The political imperative to move away from trusting Russian sources has already done huge economic damage to their economy, but there'll also be much more serious, longer-term economic consequences.

    Tacty

    so it's not about yanukovitch and corruption then?

    zchabj5 Tacty

    Any less corrupt than Timoschenko or Svodba?

    geniusofmozart Tacty

    There are plenty of corrupt governments around the world. There's a reason that Yanukovych's - which was, despite its corruption, democratically elected - was targeted.

    If the United States cared about corruption and evil governments, then it wouldn't allow the current regime to be sitting in Kiev. Since its unconstitutional inception, there have been TV station owners beaten up by them, activists murdered and a banning of governors who may have the slightest connection or sympathy with Russia.

    zchabj5

    TTIP is one of the worst things to happen for a long time.

    Fracking for gas is not very profitable, many companies are switching to oil Fracking.

    Europe and North America has a long history of exporting authoritarian regimes to their liking, as many other empires past and present also do. But crucially we are seeing increasing authoritarianism domestically, begun with the Patriot Act under Bush but consolidates further by Obama with the NDAA.

    This authoritarianism will end very badly for western nations. Its not hard to see troubling times in the next few presidencies.

    shaun
    Naomi Klein missed one disadvantage of fracking - earthquakes.

    Two references, for two 4.3 earthquakes in Oklahoma with a time interval of 36 hours between (30 march 2014). They are different quakes not aftershocks.
    Just paste the longtitude and latitude below into google earth and zoom. Almost right underneath a fracking well. (Official usgs figures).

    36.169°N 97.587°W depth=4.5km (2.8mi)
    36.159°N 97.552°W depth=5.4km (3.4mi)

    Scroll south and you will find three (+ one being installed?) fracking wells.
    Fracking = earthquakes.

    Geologybob shaun

    Almost right underneath a fracking well. (Official usgs figures).

    Quote from the USGS website Link here
    "Hydraulic fracturing, commonly known as "fracking," does not appear to be linked to the increased rate of magnitude 3 and larger earthquakes".

    Note the difference between the two separate processes waste water injection and hydraulic fracturing. There is a link in that waste from fracked wells is injected, but they are not the same process. They also inject medical and farm waste, food production and metal mine waste. Waste water injection is not licensed in the UK.

    nowwhataretheyupto

    Chevron were fracking in Ukraine long before the coup was completed. The US Ukraine Business Council has long promoted US interests in Ukraine. We all know what the US want from Ukraine, it's a surprise to no-one.

    laguerre

    Good article except for the point that fracking wells are exhausted rapidly, in a year or two.

    The basic point is valid, that the US is incapable of replacing Europe's need of gas. Even if the supply were available, it would need several years to build the infrastructure necessary to transport it. And there is no evidence that it would be sold to Europe, rather than another customer.

    So Europe is left in the muck, and continues to be dependent on Russian gas, as long as it is not transited by Ukraine. However Ukraine has not paid for its gas, and Putin is justified in demanding payment in advance. That is not likely to happen, and I can't see any other logical solution than to cut the gas. Europe will suffer, because around a half of Russian gas passes through Ukraine.

    Around 40% of of Germany's gas comes from Russia. No problem, Russia can cut what comes through Ukraine. A proportion is routed through Belorussia. Let's hope that Belorussia, an ally of Putin, doesn't make objection. For the US that's not a problem, here's another regime change.

    [Feb 01, 2014] 1,400 Sue General Electric, Toshiba and Hitachi for Fukushima Disaster

    Zero Hedge

    Submitted by George Washington on 01/31/2014 19:16 -0500
    We've previously noted that General Electric should be held partially responsible for the Fukushima reactor because General Electric knew that its reactors were unsafe:

    5 of the 6 nuclear reactors at Fukushima are General Electric Mark 1 reactors.

    GE knew decades ago that the design was faulty.

    ABC News reported in 2011:

    Thirty-five years ago, Dale G. Bridenbaugh and two of his colleagues at General Electric resigned from their jobs after becoming increasingly convinced that the nuclear reactor design they were reviewing - the Mark 1 - was so flawed it could lead to a devastating accident.

    Questions persisted for decades about the ability of the Mark 1 to handle the immense pressures that would result if the reactor lost cooling power, and today that design is being put to the ultimate test in Japan. Five of the six reactors at the Fukushima Daiichi plant, which has been wracked since Friday's earthquake with explosions and radiation leaks, are Mark 1s.

    "The problems we identified in 1975 were that, in doing the design of the containment, they did not take into account the dynamic loads that could be experienced with a loss of coolant," Bridenbaugh told ABC News in an interview. "The impact loads the containment would receive by this very rapid release of energy could tear the containment apart and create an uncontrolled release."

    ***

    Still, concerns about the Mark 1 design have resurfaced occasionally in the years since Bridenbaugh came forward. In 1986, for instance, Harold Denton, then the director of NRC's Office of Nuclear Reactor Regulation, spoke critically about the design during an industry conference.

    "I don't have the same warm feeling about GE containment that I do about the larger dry containments," he said, according to a report at the time that was referenced Tuesday in The Washington Post.

    "There is a wide spectrum of ability to cope with severe accidents at GE plants," Denton said. "And I urge you to think seriously about the ability to cope with such an event if it occurred at your plant."

    ***

    When asked if [the remedial measures performed on the Fukushima reactors by GE before 2011] was sufficient, he paused. "What I would say is, the Mark 1 is still a little more susceptible to an accident that would result in a loss of containment."

    The New York Times reported that other government officials warned about the dangers inherent in GE's Mark 1 design:

    In 1972, Stephen H. Hanauer, then a safety official with the Atomic Energy Commission, recommended that the Mark 1 system be discontinued because it presented unacceptable safety risks. Among the concerns cited was the smaller containment design, which was more susceptible to explosion and rupture from a buildup in hydrogen - a situation that may have unfolded at the Fukushima Daiichi plant. Later that same year, Joseph Hendrie, who would later become chairman of the Nuclear Regulatory Commission, a successor agency to the atomic commission, said the idea of a ban on such systems was attractive. But the technology had been so widely accepted by the industry and regulatory officials, he said, that "reversal of this hallowed policy, particularly at this time, could well be the end of nuclear power."

    This faulty design has made the Fukushima disaster much worse.

    Specifically, the several reactors exploded scattering clumps of radioactive fuel far and wide.

    In addition, the Mark 1 included an absolutely insane design element: storing huge quantities of radioactive fuel rods 100 feet up in the air.

    The Christian Science Monitor noted:

    A particular feature of the 40-year old General Electric Mark 1 Boiling Water Reactor model – such as the six reactors at the Fukushima site – is that each reactor has a separate spent-fuel pool. These sit near the top of each reactor and adjacent to it ….

    Indeed, the fuel pools have caught fires several times, and now constitute an enormous danger. [More.]

    ***

    Heck of a job, GE …

    Unfortunately, there are 23 virtually-identical GE Mark 1 reactors in the U.S.

    This is not to say that Tepco and the Japanese government are not to blame also. They are.

    But GE and the American government are largely responsible as well.

    Greenpeace pointed out in in 2013:

    Former Babcock-Hitachi engineer Mitsuhiko Tanaka said in a Greenpeace video about a flawed reactor vessel Hitachi made for Fukushima: "when the stakes are raised to such a height, a company will not choose what is safe and legal. Even if it is dangerous they will choose to save the company from destruction."

    And Toshiba built 2 of the Fukushima reactors- including reactor number 3 - which is now rubble:

    Investigative reporter Greg Palast also notes that Toshiba was one of the main designers of the failed diesel generators which failed during the earthquake and tsunami ... and that the generator design was faulty.

    A 1,400-person lawsuit has just been filed to hold GE – as well as 2 other companies responsible for Fukushima reactor construction, Toshiba and Hitachi – responsible.

    AP reports:

    About 1,400 people filed a joint lawsuit Thursday against three companies that manufactured reactors at Japan's Fukushima Dai-ichi nuclear plant ….

    The 1,415 plaintiffs, including 38 Fukushima residents and 357 people from outside Japan, said the manufacturers - Toshiba, GE and Hitachi - failed to make needed safety improvements to the four decade-old reactors at the Fukushima plant ….

    Are they doing it for the money?

    Nope:

    They are seeking compensation of 100 yen ($1) each, saying their main goal is to raise awareness of the problem.

    Postscript: If these companies are not held accountable, they will do it again and again. For example, the Department of Justice announced earlier this month:

    General Electric Hitachi Nuclear Energy Americas LLC (GE Hitachi) has agreed to pay $2.7 million to resolve allegations under the False Claims Act that it made false statements and claims to the Department of Energy and the Nuclear Regulatory Commission (NRC) concerning an advanced nuclear reactor design. GE Hitachi, a provider of nuclear energy products and services headquartered in Wilmington, N.C., is a subsidiary of General Electric Company (GE) that is also partially owned by Hitachi Ltd., a multinational engineering and manufacturing firm headquartered in Tokyo, Japan. GE is headquartered in Fairfield, Conn.

    ***

    The government alleged that GE Hitachi concealed known flaws in its steam dryer analysis and falsely represented that it had properly analyzed the steam dryer in accordance with applicable standards and had verified the accuracy of its modeling using reliable data.

    A Forecast Of Our Energy Future; Why Common Solutions Don't Work Zero Hedge

    Submitted by Gail Tverberg via Our Finite World blog,

    In order to understand what solutions to our energy predicament will or won't work, it is necessary to understand the true nature of our energy predicament. Most solutions fail because analysts assume that the nature of our energy problem is quite different from what it really is. Analysts assume that our problem is a slowly developing long-term problem, when in fact, it is a problem that is at our door step right now.

    The point that most analysts miss is that our energy problem behaves very much like a near-term financial problem. We will discuss why this happens. This near-term financial problem is bound to work itself out in a way that leads to huge job losses and governmental changes in the near term. Our mitigation strategies need to be considered in this context. Strategies aimed simply at relieving energy shortages with high priced fuels and high-tech equipment are bound to be short lived solutions, if they are solutions at all.

    OUR ENERGY PREDICAMENT

    1. Our number one energy problem is a rapidly rising need for investment capital, just to maintain a fixed level of resource extraction. This investment capital is physical "stuff" like oil, coal, and metals.

    We pulled out the "easy to extract" oil, gas, and coal first. As we move on to the difficult to extract resources, we find that the need for investment capital escalates rapidly. According to Mark Lewis writing in the Financial Times, "upstream capital expenditures" for oil and gas amounted to nearly $700 billion in 2012, compared to $350 billion in 2005, both in 2012 dollars. This corresponds to an inflation-adjusted annual increase of 10% per year for the seven year period.

    Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

    Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

    In theory, we would expect extraction costs to rise as we approach limits of the amount to be extracted. In fact, the steep rise in oil prices in recent years is of the type we would expect, if this is happening. We were able to get around the problem in the 1970s, by adding more oil extraction, substituting other energy products for oil, and increasing efficiency. This time, our options for fixing the situation are much fewer, since the low hanging fruit have already been picked, and we are reaching financial limits now.

    Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

    Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

    To make matters worse, the rapidly rising need for investment capital arises is other industries as well as fossil fuels. Metals extraction follows somewhat the same pattern. We extracted the highest grade ores, in the most accessible locations first. We can still extract more metals, but we need to move to lower grade ores. This means we need to remove more of the unwanted waste products, using more resources, including energy resources.

    Figure 3. Waste product to produce 100 units of metal

    Figure 3. Waste product to produce 100 units of metal

    There is a huge increase in the amount of waste products that must be extracted and disposed of, as we move to lower grade ores (Figure 3). The increase in waste products is only 3% when we move from ore with a concentration of .200, to ore with a concentration .195. When we move from a concentration of .010 to a concentration of .005, the amount of waste product more than doubles.

    When we look at the inflation adjusted cost of base metals (Figure 4 below), we see that the index was generally falling for a long period between the 1960s and the 1990s, as productivity improvements were greater than falling ore quality.

    Figure 4. World Bank inflation adjusted base metal index (excluding iron).

    Figure 4. World Bank inflation adjusted base metal index (excluding iron).

    Since 2002, the index is higher, as we might expect if we are starting to reach limits with respect to some of the metals in the index.

    There are many other situations where we are fighting a losing battle with nature, and as a result need to make larger resource investments. We have badly over-fished the ocean, so fishermen now need to use more resources too catch the remaining much smaller fish. Pollution (including CO2 pollution) is becoming more of a problem, so we invest resources in devices to capture mercury emissions and in wind turbines in the hope they will help our pollution problems. We also need to invest increasing amounts in roads, bridges, electricity transmission lines, and pipelines, to compensate for deferred maintenance and aging infrastructure.

    Some people say that the issue is one of falling Energy Return on Energy Invested (EROI), and indeed, falling EROI is part of the problem. The steepness of the curve comes from the rapid increase in energy products used for extraction and many other purposes, as we approach limits. The investment capital limit was discovered by the original modelers of Limits to Growth in 1972. I discuss this in my post Why EIA, IEA, and Randers' 2052 Energy Forecasts are Wrong.

    2. When the amount of oil extracted each year flattens out (as it has since 2004), a conflict arises: How can there be enough oil both (a) for the growing investment needed to maintain the status quo, plus (b) for new investment to promote growth?

    In the previous section, we talked about the rising need for investment capital, just to maintain the status quo. At least some of this investment capital needs to be in the form of oil. Another use for oil would be to grow the economy–adding new factories, or planting more crops, or transporting more goods. While in theory there is a possibility of substituting away from oil, at any given point in time, the ability to substitute away is quite limited. Most transport options require oil, and most farming requires oil. Construction and road equipment require oil, as do diesel powered irrigation pumps.

    Because of the lack of short term substitutability, the need for oil for reinvestment tends to crowd out the possibility of growth. This is at least part of the reason for slower world-wide economic growth in recent years.

    3. In the crowding out of growth, the countries that are most handicapped are the ones with the highest average cost of their energy supplies.

    For oil importers, oil is a very high cost product, raising the average cost of energy products. This average cost of energy is highest in countries that use the highest percentage of oil in their energy mix.

    If we look at a number of oil importing countries, we see that economic growth tends to be much slower in countries that use very much oil in their energy mix. This tends to happen because high energy costs make products less affordable. For example, high oil costs make vacations to Greece unaffordable, and thus lead to cut backs in their tourist industry.

    It is striking when looking at countries arrayed by the proportion of oil in their energy mix, the extent to which high oil use, and thus high cost energy use, is associated with slow economic growth (Figure 5, 6, and 7). There seems to almost be a dose response–the more oil use, the lower the economic growth. While the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are shown as a group, each of the countries in the group shows the same pattern on high oil consumption as a percentage of its total energy production in 2004.

    Globalization no doubt acted to accelerate this shift toward countries that used little oil. These countries tended to use much more coal in their energy mix–a much cheaper fuel.

    Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU - PIIGS means "EU-27 minus PIIGS')

    Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU – PIIGS means "EU-27 minus PIIGS')

    Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

    Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

    Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP's 2013 Statistical Review of World Energy.

    Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP's 2013 Statistical Review of World Energy.

    4. The financial systems of countries with slowing growth are especially affected, as are the governments. Debt becomes harder to repay with interest, as economic growth slows.

    With slow growth, debt becomes harder to repay with interest. Governments are tempted to add programs to aid their citizens, because employment tends to be low. Governments find that tax revenue lags because of the lagging wages of most citizens, leading to government deficits. (This is precisely the problem that Turchin and Nefedov noted, prior to collapse, when they analyzed eight historical collapses in their book Secular Cycles.)

    Governments have recently attempt to fix both their own financial problems and the problems of their citizens by lowering interest rates to very low levels and by using Quantitative Easing. The latter allows governments to keep even long term interest rates low. With Quantitative Easing, governments are able to keep borrowing without having a market of ready buyers. Use of Quantitative Easing also tends to blow bubbles in prices of stocks and real estate, helping citizens to feel richer.

    5. Wages of citizens of countries oil importing countries tend to remain flat, as oil prices remain high.

    At least part of the wage problem relates to the slow economic growth noted above. Furthermore, citizens of the country will cut back on discretionary goods, as the price of oil rises, because their cost of commuting and of food rises (because oil is used in growing food). The cutback in discretionary spending leads to layoffs in discretionary sectors. If exported goods are high priced as well, buyers from other countries will tend to cut back as well, further leading to layoffs and low wage growth.

    6. Oil producers find that oil prices don't rise high enough, cutting back on their funds for reinvestment.

    As oil extraction costs increase, it becomes difficult for the demand for oil to remain high, because wages are not increasing. This is the issue I describe in my post What's Ahead? Lower Oil Prices, Despite Higher Extraction Costs.

    We are seeing this issue today. Bloomberg reports, Oil Profits Slump as Higher Spending Fails to Raise Output. Business Week reports Shell Surprise Shows Profit Squeeze Even at $100 Oil. Statoil, the Norwegian company, is considering walking away from Greenland, to try to keep a lid on production costs.

    7. We find ourselves with a long-term growth imperative relating to fossil fuel use, arising from the effects of globalization and from growing world population.

    Globalization added approximately 4 billion consumers to the world market place in the 1997 to 2001 time period. These people previously had lived traditional life styles. Once they became aware of all of the goods that people in the rich countries have, they wanted to join in, buying motor bikes, cars, televisions, phones, and other goods. They would also like to eat meat more often. Population in these countries continues to grow adding to demand for goods of all kinds. These goods can only be made using fossil fuels, or by technologies that are enabled by fossil fuels (such as today's hydroelectric, nuclear, wind, and solar PV).

    8. The combination of these forces leads to a situation in which economies, one by one, will turn downward in the very near future–in a few months to a year or two. Some are already on this path (Egypt, Syria, Greece, etc.)

    We have two problems that tend to converge: financial problems that countries are now hiding, and ever rising need for resources in a wide range of areas that are reaching limits (oil, metals, over-fishing, deferred maintenance on pipelines).

    On the financial side, we have countries trying to hang together despite a serious mismatch between revenue and expenses, using Quantitative Easing and ultra-low interest rates. If countries unwind the Quantitative Easing, interest rates are likely to rise. Because debt is widely used, the cost of everything from oil extraction to buying a new home to buying a new car is likely to rise. The cost of repaying the government's own debt will rise as well, putting governments in worse financial condition than they are today.

    A big concern is that these problems will carry over into debt markets. Rising interest rates will lead to widespread defaults. The availability of debt, including for oil drilling, will dry up.

    Even if debt does not dry up, oil companies are already being squeezed for investment funds, and are considering cutting back on drilling. A freeze on credit would make certain this happens.

    Meanwhile, we know that investment costs keep rising, in many different industries simultaneously, because we are reaching the limits of a finite world. There are more resources available; they are just more expensive. A mismatch occurs, because our wages aren't going up.

    The physical amount of oil needed for all of this investment keeps rising, but oil production continues on its relatively flat plateau, or may even begins to drop. This leads to less oil available to invest in the rest of the economy. Given the squeeze, even more countries are likely to encounter slowing growth or contraction.

    9. My expectation is that the situation will end with a fairly rapid drop in the production of all kinds of energy products and the governments of quite a few countries failing. The governments that remain will dramatically cut services.

    With falling oil production, promised government programs will be far in excess of what governments can afford, because governments are basically funded out of the surpluses of a fossil fuel economy–the difference between the cost of extraction and the value of these fossil fuels to society. As the cost of extraction rises, the surpluses tend to dry up.

    Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

    Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

    As these surpluses shrink, governments will need to shrink back dramatically. Government failure will be easier than contracting back to a much smaller size.

    International finance and trade will be particularly challenging in this context. Trying to start over will be difficult, because many of the new countries will be much smaller than their predecessors, and will have no "track record." Those that do have track records will have track records of debt defaults and failed promises, things that will not give lenders confidence in their ability to repay new loans.

    While it is clear that oil production will drop, with all of the disruption and a lack of operating financial markets, I expect natural gas and coal production will drop as well. Spare parts for almost anything will be difficult to get, because of the need for the system of international trade to support making these parts. High tech goods such as computers and phones will be especially difficult to purchase. All of these changes will result in a loss of most of the fossil fuel economy and the high tech renewables that these fossil fuels support.

    A Forecast of Future Energy Supplies and their Impact

    A rough estimate of the amounts by which energy supply will drop is given in Figure 9, below.

    Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

    Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

    The issue we will be encountering could be much better described as "Limits to Growth" than "Peak Oil." Massive job layoffs will occur, as fuel use declines. Governments will find that their finances are even more pressured than today, with calls for new programs at the time revenue is dropping dramatically. Debt defaults will be a huge problem. International trade will drop, especially to countries with the worst financial problems.

    One big issue will be the need to reorganize governments in a new, much less expensive way. In some cases, countries will break up into smaller units, as the Former Soviet Union did in 1991. In some cases, the situation will go back to local tribes with tribal leaders. The next challenge will be to try to get the governments to act in a somewhat co-ordinated way. There may need to be more than one set of governmental changes, as the global energy supplies decline.

    We will also need to begin manufacturing goods locally, at a time when debt financing no longer works very well, and governments are no longer maintaining roads. We will have to figure out new approaches, without the benefit of high tech goods like computers. With all of the disruption, the electric grid will not last very long either. The question will become: what can we do with local materials, to get some sort of economy going again?

    NON-SOLUTIONS and PARTIAL SOLUTIONS TO OUR PROBLEM

    There are a lot of proposed solutions to our problem. Most will not work well because the nature of the problem is different from what most people have expected.

    1. Substitution. We don't have time. Furthermore, whatever substitutions we make need to be with cheap local materials, if we expect them to be long-lasting. They also must not over-use resources such as wood, which is in limited supply.

    Electricity is likely to decline in availability almost as quickly as oil because of inability to keep up the electrical grid and other disruptions (such as failing governments, lack of oil to lubricate machinery, lack of replacement parts, bankruptcy of companies involved with the production of electricity) so is not really a long-term solution to oil limits.

    2. Efficiency. Again, we don't have time to do much. Higher mileage cars tend to be more expensive, replacing one problem with another. A big problem in the future will be lack of road maintenance. Theoretical gains in efficiency may not hold in the real world. Also, as governments reduce services and often fail, lenders will be unwilling to lend funds for new projects which would in theory improve efficiency.

    In some cases, simple devices may provide efficiency. For example, solar thermal can often be a good choice for heating hot water. These devices should be long-lasting.

    3. Wind turbines. Current industrial type wind turbines will be hard to maintain, so are unlikely to be long-lasting. The need for investment capital for wind turbines will compete with other needs for investment capital. CO2 emissions from fossil fuels will drop dramatically, with or without wind turbines.

    On the other hand, simple wind mills made with local materials may work for the long term. They are likely to be most useful for mechanical energy, such as pumping water or powering looms for cloth.

    4. Solar Panels. Promised incentive plans to help homeowners pay for solar panels can be expected to mostly fall through. Inverters and batteries will need replacement, but probably will not be available. Handy homeowners who can rewire the solar panels for use apart from the grid may find them useful for devices that can run on direct current. As part of the electric grid, solar panels will not add to its lifetime. It probably will not be possible to make solar panels for very many years, as the fossil fuel economy reaches limits.

    5. Shale Oil. Shale oil is an example of a product with very high investment costs, and returns which are doubtful at best. Big companies who have tried to extract shale oil have decided the rewards really aren't there. Smaller companies have somehow been able to put together financial statements claiming profits, based on hoped for future production and very low interest rates.

    Costs for extracting shale oil outside the US for shale oil are likely to be even higher than in the US. This happens because the US has laws that enable production (landowner gets a share of profits) and other beneficial situations such as pipelines in place, plentiful water supplies, and low population in areas where fracking is done. If countries decide to ramp up shale oil production, they are likely to run into similarly hugely negative cash flow situations. It is hard to see that these operations will save the world from its financial (and energy) problems.

    6. Taxes. Taxes need to be very carefully structured, to have any carbon deterrent benefit. If part of taxes consumers would normally pay to the government are levied on fuel for vehicles, the practice can encourage more the use of more efficient vehicles.

    On the other hand, if carbon taxes are levied on businesses, the taxes tend to encourage businesses to move their production to other, lower-cost countries. The shift in production leads to the use of more coal for electricity, rather than less. In theory, carbon taxes could be paired with a very high tax on imported goods made with coal, but this has not been done. Without such a pairing, carbon taxes seem likely to raise world CO2 emissions.

    7. Steady State Economy. Herman Daly was the editor of a book in 1973 called Toward a Steady State Economy, proposing that the world work toward a Steady State economy, instead of growth. Back in 1973, when resources were still fairly plentiful, such an approach would have acted to hold off Limits to Growth for quite a few years, especially if zero population growth were included in the approach.

    Today, it is far too late for such an approach to work. We are already in a situation with very depleted resources. We can't keep up current production levels if we want to–to do so would require greatly ramping up energy production because of the rising need for energy investment to maintain current production, discussed in Item (1) of Our Energy Predicament. Collapse will probably be impossible to avoid. We can't even hope for an outcome as good as a Steady State Economy.

    7. Basing Choice of Additional Energy Generation on EROI Calculations. In my view, basing new energy investment on EROI calculations is an iffy prospect at best. EROI calculations measure a theoretical piece of the whole system–"energy at the well-head." Thus, they miss important parts of the system, which affect both EROI and cost. They also overlook timing, so can indicate that an investment is good, even if it digs a huge financial hole for organizations making the investment. EROI calculations also don't consider repairability issues which may shorten real-world lifetimes.

    Regardless of EROI indications, it is important to consider the likely financial outcome as well. If products are to be competitive in the world marketplace, electricity needs to be inexpensive, regardless of what the EROI calculations seem to say. Our real problem is lack of investment capital–something that is gobbled up at prodigious rates by energy generation devices whose costs occur primarily at the beginning of their lives. We need to be careful to use our investment capital wisely, not for fads that are expensive and won't hold up for the long run.

    8. Demand Reduction. This really needs to be the major way we move away from fossil fuels. Even if we don't have other options, fossil fuels will move away from us. Encouraging couples to have smaller families would seem to be a good choice.



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