Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on September 10, 2014
If oil prices stay low for long, Putin and OPEC are headed for trouble
Oil plunged today below $100 a barrel, a psychological threshold that, if it holds, threatens the rulers of Russia and numerous OPEC states that rely on higher prices to mollify their populations. A critical question, then, is whether we are looking at a sustained period of lower prices or a blip before a swing back up.
The price of Brent crude—the type that dominates international trade—fell as low as $99.36 today, its lowest price in 14 months. (West Texas Intermediate, the oil produced in the United States, plummeted to $91.70 a barrel, frighteningly close to its own $90 threshold.)
Voices from OPEC said they are not alarmed and that prices will go back up over the next few months when Winter demand commences. Bernstein’s Oswald Clint told Quartz that the long-term trend is for prices to rise, supported by higher costs to produce oil and constrained supply.
But there is reason for OPEC members to worry. For starters, China’s GDP growth is slowing, Citi said in a Sept. 3 note to clients. Changes in GDP closely track oil demand, so that means that oil demand—the main factor underlying bullish long-term forecasts—is slowing, too.
This year, the Chinese are targeting GDP growth of 7.5%, lower than last year’s rate, and some analysts think it will struggle even to achieve that. Citi’s Ed Morse tells Quartz that growth will go lower still in the medium term–below 6%. “Anyone who thinks a rebound in Chinese oil demand will drive a rally in oil prices needs to think twice given [that] crude import growth is slowing and refined product net imports are in outright decline,” Citi wrote in the note.
Production constraints may also fail to raise oil prices. On his Financial Times blog, former BP executive Nick Butler writes that prices are falling despite contrary pressures, including unusual geopolitical upheaval (Ukraine, Iraq, Syria, and Libya) and oil sanctions on Iran and Russia. As an example, Libyan production is soaring after months of being off line—it is pumping 720,000 barrels a day, compared with 500,000 just a couple of weeks ago.
As a result, oil executives in search of higher prices will need to cut costs, Butler writes: “Goodbye once again to the corporate jets, the lavish expenses and the padded leather of town center offices.”
Which brings us back to the petro-rulers. Generally speaking, the oil-exporting nations are not democracies, but instead led by strongmen or royal families. To stay in power and keep their fiefdoms stable, they dole out perks such as subsidized energy prices, patronage jobs, special payments, and so on, and those perks can be expressed in a simple mathematical equation: the maximum number of barrels of oil they can drill per day multiplied by the price of oil. From that, you can derive the rough average oil price each nation requires to cover such spending.
Russian president Vladimir Putin, for instance, needs an oil price of roughly $110 to $117 a barrel to cover state expenses. With some fiscal finagling, he can weather bad days like these, as long as they don’t last for long.
As you see in the chart above, the same goes for a slew of OPEC nations. At least seven of them—and especially Iran—are in genuine trouble if Citi is right and Bernstein wrong.
22 Comments on "If oil prices stay low for long, Putin and OPEC are headed for trouble"
MSN fanboy on Wed, 10th Sep 2014 7:42 pm
“Russian president Vladimir Putin, for instance, needs an oil price of roughly $110 to $117 a barrel to cover state expenses. With some fiscal finagling, he can weather bad days like these, as long as they don’t last for long”
Russia isnt a dictatership
secondly… people who throw stones shouldnt live in glass houses lol… “fiscal finagling”
Like we havn’t been kicking the can down the road with our debt’s with zirp and quantative easing.
Makati1 on Wed, 10th Sep 2014 7:54 pm
“If oil prices stay low for long, Putin and OPEC are headed for trouble”
Don’t they wish! But then, reality is not a factor in TBTF Bank projections or the Stock Market Casino.
If it were possible for oil prices to fall and stay there, it would end the Age of Oil. Wells all over the world would shut down and crash the global financial system.
FYI: “Quartz is a digitally native news outlet, born in 2012, for business people… (it is owned by) Atlantic Media, a print and online media company owned by David G. Bradley and based in the Watergate in Washington, D.C. The company publishes several prominent news magazines and digital publications including The Atlantic, Quartz, Government Executive and those belonging to its National Journal Group subsidiary:[1] National Journal, The Hotline, National Journal Daily (previously known as Congress Daily), and Technology Daily.[1] The National Journal Group also publishes books and directories, the most known of which is the biennial Almanac of American Politics.[2]… Before his career as a publisher, Bradley founded the Advisory Board Company and Corporate Executive Board, two Washington-based consulting companies.”
Another government propaganda rag?
Davy on Wed, 10th Sep 2014 8:01 pm
Czar Putt is playing a risky game of poker. He is spending serious money on militarism and foreign adventures while neglecting his oil sector “And” doubling down with a trade and finance war that will surely hobble world economic activity with turmoil and volatility. A hobbled world economy will not be conducive to high oil prices. It is a game of chance he may win but this article is right in the regards time is a fundamental factor to his strategy. His China and Bric card will take time to realize. If this game ends up a draw he may be in trouble.
Makati1 on Wed, 10th Sep 2014 8:02 pm
MSN, careful! Your good memory is a ‘terrorist act’ in the USSA today. You are not supposed to think or remember facts, just propaganda. ^_^
FYI: http://www.tradingeconomics.com/russia/government-budget
If I read this right, Russia has a deficit of 0.50. THE USSA has a deficit of 4.10. You are correct about stones and glass houses.
rockman on Wed, 10th Sep 2014 8:43 pm
Let’s try a very simple analysis. Putin (or pick any other gov’t) needs $X/bbl to meet their budget requirements. So oil drops 10% less the $X/bbl. The simple solution: reduce the budget 10%. But how will the gov’t survive making such a “drastic” cut? Maybe the same way they survived just 10 years ago when they we’re getting just 1/3 of $X/bbl for their oil. With the exception of Norway what freaking gov’t doesn’t create a budget to spend every penny they bring in…plus what they can borrow?
Granted it won’t be that simple but I just don’t see life as they know it coming to an abrupt end if the price of oil drops 10% – 15% from record all time high prices.
Perk Earl on Wed, 10th Sep 2014 9:11 pm
Oil price has never been nor is it guaranteed to pay all exporters national expenses. The price for a commodity is determined by supply & demand and what the seller does with their money is their business, not ours.
Plantagenet on Wed, 10th Sep 2014 9:42 pm
Some of the most successful parts of the US economy will also be in trouble if oil prices stay low. Texas and North Dakota and other oil producing states are currently brights spots in the weak US recovery, but they’ll take a hit if oil prices continue down.
Solarity on Wed, 10th Sep 2014 10:49 pm
Russia, Iran and ISIS are selling crude on the black market at about $30 to $40 a barrel. These trades are bound to have an effect on above-board trades.
MKohnen on Thu, 11th Sep 2014 12:51 am
If the oil price stays low, all sorts of commodity based economies will have to juggle their budgets. So what? Due to the fact that I’m not a new born Canadian, I’ve seen this tons of times in many different provinces. But I have yet to see low oil prices take out a single government. I’m sure Putin is shaking in his boots. He’ll adjust, as will all countries. There will be some budgetary pain. But let’s not forget that lower oil prices can also lead to budgetary gain, even for Russia.
Davy on Thu, 11th Sep 2014 4:55 am
MK, the important point with Russia is the price of oil is drifting lower as Czar Putt is increasing his budget not reducing it. I have seen comment here how Russia and others will adjust but especially with Russia the opposite is true. More money for Syria, Crimea, Ukraine situation, more military spending, increased economic cost of trade/finance war reducing tax revenue, and the normal increased expense of everything. In addition to this Putt is making deals with China that are advantageous for China not Russia. This whole Bric bullshit is not a “Kumbaya circle of love”. These Bric countries are out for their own advantage if that works out through a Bric relationship fine. None of the other Brics have ever shown the inclination to sacrifice for other Brics. It is all about self-interest. In Russia’s case they are trying to reinvent the global financial system in a new smaller arrangement that bypasses the west. I can assure you this is not going to lower cost but to the contrary it is going to be more expensive until the usual economies of scale and structures of exchange establish. This shit does not happen by “Osmosis” it takes time and money. Czar Putt is pissing away years of generally good economic policy for a new vision. He is doing this through failed Chavez style economics and foreign adventurism. He may be on to something with what we know here about PO and collapse potential but it is a gamble and not one that can go on for very long. Russia has resources and foreign exchange but it has many disadvantages as a basket case banana republic relying on resources to fund its budget. All countries have some kind of comparative disadvantages Russia is no different. Russia must get some result soon maybe by winter. This cannot play out too long. The “Putt Plan” may be a leap frog plan with the coming descent by regionalizing and withdrawing from the western system. I would not put it past Putt to come out a winner. They guy is cunning and smart but gambles are gambles even for the best of the gamblers.
Makati1 on Thu, 11th Sep 2014 7:43 am
‘…Russia has resources and foreign exchange but it has many disadvantages as a basket case banana republic relying on resources to fund its budget…”
Change that to: “Us has few resources and negative foreign exchange and is a basket case banana republic relying on printing USD to fund its budget…” and you would be more correct.
China and Russia are working together to take out the USD as a reserve currency and trade tool. I just read about a new deal between Iran and Russia and one in process between Iran and China. And one about the new arrangement in process to take the power of the BIS away. The non-Western countries are lining up to join.
The EU is fragile and the rats are looking for ways off that sinking ship. Russia is already playing the ‘sanctions’ game a bit harder by cutting NG shipments to Poland. Russia lost ~28 million people fighting Germany in WW2 and won. They had winter on their side then also.
No, the game is far from certain in any direction, but if the US and EU keep shooting off their own legs (their feet were gone long ago)…
shortonoil on Thu, 11th Sep 2014 8:16 am
“If it were possible for oil prices to fall and stay there, it would end the Age of Oil.”
The Etp model gives us a way to calculate what price oil must bring to cover production costs for the average barrel. It shows that production costs are increasing, have always increased, and will continue to increase. The laws of physics require it.
What it did not give us was a direct way to calculate the maximum price that the consumer could pay for a unit of oil. That is because we didn’t known at what level of efficiency the end user was using their petroleum products. We were using its theoretical maximum efficiency to calculate the maximum price the consumer could pay.
Recently someone around here produced a graph. The graph was passed around, and everyone agreed that it had to be wrong. So we went over, and over, and over it. It’s not wrong! The efficiency on the consumer side is much lower than the theoretical. Our, yet to be confirmed analysis, puts the maximum price of oil on the consumer side in the low $100/barrel range.
Our model has predicted all along that non-conventional would be phased out before conventional. Its per unit production costs is much higher. The model also predicted that the world’s usable reserve, as of 2012, was 73% depleted. That was based on its per unit energy content. What it did not give us was the point at which the consumer could no longer afford oil. It looks like we may have overcome that problem
Credit were credit is due; Gail Tverberg several months ago wrote an article where she stated that from her determination oil price could not exceed about $100/barrel. I don’t think anyone took her seriously at the time, including us. I think we will have confirmation of her appraisal in a few weeks. We will then eat a little crow, and then apologize.
http://www.thehillsgroup.org/
Kenz300 on Thu, 11th Sep 2014 12:13 pm
Even oil producing countries need to develop a plan to diversify their economies.
Putting all your eggs in one basket is always risky.
LOL on Thu, 11th Sep 2014 1:03 pm
The oil companies will make billions if oil hits $60 a barrel. There is little overhead in the oil industry and ample consumers. Give me a break.
Speculawyer on Thu, 11th Sep 2014 1:08 pm
We really need to get off oil. Think about the fact that these countries are so reliant upon oil prices . . . well, what makes prices go up? Lots of Demand, low supply, and volatility from an international crisis. Well they can’t do anything about demand. They can reduce supply and that may raise prices but then they are selling less oil. And OPEC’s members are known to cheat on their quotas all the time.
But volatility from international crises? . . . well, that is something they can do easily. Roll tanks into Ukraine, fund a crazy Islamic terrorist group that takes over oil producing regions, bomb another oil producing nation like Libya. Any of that sound familiar?
Feemer on Thu, 11th Sep 2014 2:31 pm
Well said Davy! The Brics nations are absolutely out for their own interests (particularly China and Russia). However, Brics (again mostly china and russia) greatly worry me. I by no means think the current economic system is perfect, but the lesser of two evils (environmentally and in human rights issues) is the west. But if Putin plays his cards right then the dollar is certainly in trouble and Europe is already in trouble. Europe really needs to establish closer ties with south america as well as increase its renewable/energy efficiency programs. But I think we all took western dominance for granted, but the US’s absolute fuck up in the middle east, a conflict we will be involved in until our collapse, really weakened us. I think Russia is realizing just how much power it has, whereas countries like the UK and France still think they are more powerful than russia just because they have bigger economies. The next century will be determined by resources, and Europe has nothing left 🙁
shortonoil on Thu, 11th Sep 2014 4:19 pm
“The oil companies will make billions if oil hits $60 a barrel. There is little overhead in the oil industry and ample consumers. Give me a break.”
You must be kidding! Exxon, Shell and Chevron spent $130 billion last year on E&D, and their production went down!! Several of the majors last year had to borrow money to pay their dividends. ROI in the last 10 years has fallen by 50%, and the shale industry is piling up debt that is higher than their drilling rigs. The petroleum industry is already feeling the margin squeeze in a big way. A few more years of this, and you’ll be walking.
Kristen on Thu, 11th Sep 2014 7:18 pm
Ninety-one dollars a barrels is still high by historic standards. If prices retreated to under seventy dollars, then I’d be worried.
dissident on Thu, 11th Sep 2014 8:18 pm
Davy is a totally clueless Yankee chauvinist. Keep on spewing your caricatures, you sound like an infant.
Oil and gas exports account for under 13% of Russia’s GDP. But according to all the hater lemmings such as Davy Russia is doomed if the oil price falls by 50%. If oil falls by this much, then don’t expect all the non-conventional sources such as tar sands or Bakkens to be viable. It is America that needs to worry about cheap oil prices since they will kill its recent surge in production.
It’s funny to see people predict dirt cheap oil on a peak oil website. Read some of the content before spouting inane drivel.
Makati1 on Thu, 11th Sep 2014 8:34 pm
dissident, There are some Cold War, Korean War, Vietnam War, and WW2 holdovers here who see the world through ancient fogged glasses. They apparently will not spend some time on sources outside the Western propaganda rags for real news and statistics. I guess it comes with being “exceptional”. LOL
With the internet, there is no excuse for stupidity. All of the world is available 24/7/365. They could try:
http://www.onlinenewspapers.com/
rockman on Thu, 11th Sep 2014 9:31 pm
“The oil companies will make billions if oil hits $60 a barrel.” Actually that’s true. So what? This is the classic problem many have understanding the oil biz. I drill a well that produces $5 million worth of oil…did I make money or lose money? Obviously no one can answer that question. Here’s more details: I netted $5 million because the well produced $5.5 million and I spent $500k in operating costs to produce that $5.5 million. Can anyone now tell me if I made a profit or not drilling that well?
And again no one can answer. But I did make $5 million. Likewise at $60/bbl the global oil patch won’t make $billions…it will make $TRILLIONS. So again I ask: so what? Producing oil at $60/bbl will produce a very nice net income since production costs will likely average somewhere south of $10/bbl. So again I’ll repeat the same annoying question: so what?
Revenue is not profit. Netting $trillions does not lead companies to spending huge sums to drill new wells. If $60/bbl reduces the rig count from 1800 to 300 then that’s all the capex the oil patch will spend. Which means US oil production will fall. And it will fall at a time when US public companies will post record profits. And that’s because how Wall Street defines “profits”: revenue less expenditure for the same year. Companies will still have many $billions coming in while they are spending very little since $60/bbl kills many of the current opportunities being exploited.
So pubcos will show huge profits and distribute nice dividends. And Wall Street will flush those extremely profitable companies from their buy recommendations. Big profits and zero future: by not having economic justification to drill new wells they are diminishing their reserves base. A decreasing reserves base is essentially a form of cancer for a pubco: they are producing themselves out of a future. If a pubco has no future why would you pay more for their stock then what the last buyer paid. At that point your only return on your stock investment is the dividends.
And that, my friends, is a company called ExxonMobil, Chevron, etc. It’s impossible for XOM to replace their huge annual reserve depletion by drilling new wells. But XOM will brag about how they replace their reserves y-o-y. But consider the year they bought XTO: that acquisition represented 80%+ of the “new reserves” XOM added that year. They were new reserves to XOM but that huge chunk of capex didn’t add one bbl to the US reserve base.
Declining oil prices may be exactly what the CEO of XOM may be praying for: they are sitting on a huge cash reserve they can’t find enough drilling locations to spend it on. If low oil prices push many companies to the brink there will be a feeding frenzy by Big Oil. Hundreds of $billions (if not $trillions) of capex will be spent and not one bbl of new oil reserves will be created.
Davy on Thu, 11th Sep 2014 11:19 pm
Thanks Dis for the compliment. I enjoyed getting under your skin “and” not only that, the expat dog barked too. ..maestro..