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Page added on December 3, 2015
Prices Are Expected To Stay Low
As the world’s oil producers gather in Vienna, they are all hurting from prices that crashed a year ago and are hovering at a little over $40 a barrel. One country, Saudi Arabia, could probably drive up prices if it wanted to cut its production.
But the Saudis appear willing to endure the pain rather than make a move that would help rivals like Iran and Russia.
One of the key reasons oil is cheap today is a decision made by the Saudi and other OPEC countries one year ago. There was a massive increase in supplies, thanks in large part to shale oil production in the U.S., says Jason Bordoff, director of Columbia University’s Center on Global Energy policy.
“Production in the U.S. was growing over 1 million barrels per day per year, it was a huge growth, the largest multi-year growth of production of any country in history,” he says.
In the past when there was too much supply leading to low prices, Saudi Arabia, the world’s largest oil producer, would step in and slow the spigot which in turn would raise the world price for everyone.
But last year OPEC said forget it. Why should it help out the competition? The Saudis decided to keep production rates as they were even if it meant oil prices would stay low.
Jim Krane, an energy specialist at Rice University’s Baker Institute, says that policy is unlikely to change when OPEC meets Friday in Vienna.
“I think that the Saudis and their Gulf allies are going to stick to their guns and basically keep production unchanged,” he says.
Pain Throughout OPEC
But Krane says the policy is hurting some OPEC members who rely heavily on oil revenues to balance their budgets.
“OPEC’s poorer members like Algeria, Nigeria, Venezuela, they’ve been making these increasingly desperate calls for production cuts to try to get the price back up,” he says.
Columbia’s Bordoff, who was an energy adviser to President Obama, says Saudi Arabia has vast cash reserves and can wait it out. But even the Saudis are feeling the pinch of low oil prices.
“The Saudis can weather this, but even for them it’s been incredibly costly,” he says. “I mean over 100 billion dollars in reserves that they’ve had to draw down, at a time when they’re engaged in a costly conflict next door in Yemen and have a host of other support they need to provide to their people.”
Greg Priddy, director of Global Energy and Natural Resources at the Eurasia Group, says Saudi Arabia is likely to stay the course because of long-term strategic interests.
One of those is beating back its non-OPEC competitors, such as Russia. American production has been hit hard as well. It’s down about 500,000 barrels a day from its peak a year ago. Priddy says it’s been particularly tough for those involved in the more costly shale industry.
“I think what some of the OPEC producers, including the Saudis, had hoped was that it would buckle pretty rapidly. And it hasn’t,” he says.
Greater Efficiency In The U.S.
Priddy says the OPEC policy forced many U.S. producers to improve technique, cut costs and increase efficiency.
“So under that pressure they’ve proven to be very resilient, improving their business practices very rapidly,” he says.
Saudi Arabia’s other major concern is geopolitical. Most sanctions on its regional rival Iran are expected to be lifted some time next year — which could release an additional 1/2 million to 1 million barrels of oil a day onto the global market.
Brenda Shaffer, an energy specialist at Georgetown University, says Saudi Arabia believes cutting production to raise prices would only help its rivals.
“Iran, who is little by little going to be re-entering the market, would benefit. Russia would benefit. North America would benefit. But Saudi Arabia wouldn’t get any benefit out of it,” Shaffer says.
19 Comments on "Prices Are Expected To Stay Low"
BobInget on Thu, 3rd Dec 2015 5:44 pm
Want a reason why I’m bullish?
When Cesar Rodriguez travels across Venezuela on business for an aluminum company, he likes to carry the equivalent of $200 in cash as well as his debit card. But since Venezuela now has an inflation rate of more than 150 percent—the worst in the world—that means taking more than 180,000 bolivars, the local currency, which fills up half of a backpack. And with the greater fear of getting mugged, he also stashes bills in his socks and various pants and shirt pockets, in case his bag is taken. “Just making simple transactions has become a real challenge,” says Rodriguez, 42. “I have bills counted out in bundles of 2,000 or 10,000 bolivars, so I can pull them out quickly without showing all my money.”
This hyperinflation has become one of the most visible symbols of the crumbling economy of this South American nation, ruled since 1999 by the socialist alliance of the late Hugo Chavez. The currency crisis has vaporized people’s salaries and contributed to chronic shortages of everything from chicken to toilet paper. The political opposition, which has come together in the Democratic Unity coalition, has put the economy at the heart of its campaign for Congressional elections held on Dec. 6. Recent polls show it ahead by 15 points or more, putting it on a path to break the rule of the socialists, or Chavistas, in the National Assembly after 16 years.
Davy on Thu, 3rd Dec 2015 5:59 pm
Bob, are you implying a Venezula collapse will remove enough supply to boost the market? I imagine a significant amount of crude will still get out via martial law.
I feel anything is possible at this point and we can call it a stormy market for both supply and demand. I see no reason to be bullish or bearish. I see every reason to treat this period like a casino not a market.
Boat on Thu, 3rd Dec 2015 6:41 pm
Bob,
Ready to back down from projections of $100 oil by the end of the year?
makati1 on Thu, 3rd Dec 2015 6:54 pm
Since, long term, the world economy is going to dictate how much oil is recovered, no one can even guess when or what is going to happen to prices or quantity. My bet is that oil will stay low until it crashes totally. Then there will be no oil for anyone, at any price.
It is not like going out in the backyard and digging up a bunch of potatoes. All hydrocarbon recovery requires a long and complicated supply chain to exist. As does most of the stuff we take for granted today. They too will disappear in the not-too-distant future.
Boat on Thu, 3rd Dec 2015 8:26 pm
mak,
This great debate will declare winners and whiners/losers. As long as I have been alive when a commodity gets in short supply the price goes up.
What is up with the quality of oil BS. If a refinery buys product that is low on the quality end they get it cheaper. Why? Because it takes more of it to refine the same amount of product. How you think that drives prices down is another one of your, short etc confusing trains of thought. Education gone wrong. lol
twocats on Thu, 3rd Dec 2015 10:02 pm
ummm, the global economy is on the precipice of total collapse. The only real question is what will “they” do with the election a year away. If they “spike it” then you gotta figure Obama is going to be slammed as the cause and that could hurt Sanders/Clinton. But if they don’t spike it, then it might collapse in a way not of their choosing and timing, which could be even worse. Glad I’m just a drone.
Mike616 on Thu, 3rd Dec 2015 10:16 pm
Saudi’s are in talks with Russia.
If Russia cuts production, prices will rise, otherwise, no.
makati1 on Thu, 3rd Dec 2015 10:17 pm
Boat, you have lived in the exception, not the rule. You have been to a huge hydrocarbon party for all of your life, not the real world of the last 10,000 years. No one alive today has seen a world without abundant, cheap hydrocarbon slaves. Soon, you will.
You cannot use past performance as proof of the future. You live in a capitalist world, which is also an exception to history, not the rule. That too is about to end.
So, prep and sit back and enjoy the ride as we switch back into a pre-hydrocarbon, pre-capitalist world where staying alive is the goal every day, not a visit to Starbucks.
makati1 on Thu, 3rd Dec 2015 10:21 pm
Mike, what will they ‘rise’ to? Make a guess. $50? $60? $70? $80? $90? $100?
If they climb to $80 and stay there for a few months before dropping again, I will be surprised. Anything higher will likely cause the financial collapse that is coming sooner rather than later.
It takes consumers willing and able to pay those higher prices, not production numbers. I don’t see those consumers anywhere today.
Boat on Fri, 4th Dec 2015 1:15 am
mak,
Boat, you have lived in the exception, not the rule. You have been to a huge hydrocarbon party for all of your life, not the real world of the last 10,000 years.
I agree with you there Makman. Only about the last 100 years or so has there been hot water for a shower, building out of roads and farm life to city life.
Your problem is one of forecasting. You doomers let your emotions get the best of you. I believe climate change will cause the calamity and the crash but decades from now. Just a slight difference of opinion. lol
Davy on Fri, 4th Dec 2015 1:24 am
Oh Boater this is just a kettle calling the pot black statement “You doomers let your emotions get the best of you. I believe climate change will cause the calamity and the crash but decades from now. Just a slight difference of opinion. Lol”.
I can turn that around on the cornucopians just as easy. “You cornucopians let your emotions get the best of you. I believe climate change will cause calamity and crash and possibly soon but you corns are in denial of that. Just a slight difference of opinion. Lol”. The difference is let’s hope we have some time. At least you are not a climate denier.
joe on Fri, 4th Dec 2015 8:01 am
Iran is much better suited to be a strategic ally. They have a much more developed economy and are more capable of delivering energy at any price that Saudi wishes to dictate, in fact lower prices might provide a strategic economic benefit for Iran because it might prevent them g from being a one trick pony.
Unlike the other US backed Oilistans.
rockman on Fri, 4th Dec 2015 8:51 am
“In the past when there was too much supply leading to low prices, Saudi Arabia, the world’s largest oil producer, would step in and slow the spigot which in turn would raise the world price for everyone.” I guess I hadn’t been paying attention: exactly when the f*ck did that happen? LOL. Maybe it was when the KSA cut production in the early 80’s? Naa…that’s when they cut production and the inflation adjusted price of oil fell from $107/bbl to $31/bbl. Maybe they mean the late 90’s? Hmm…no, that’s when the KSA forced the price of oil down from $31/bbl to $17/bbl by not reducing their production. Maybe they mean in 2015 when the KSA helped oil prices to fall from $90+/bbl to less than $50/bbl by increasing production.
It always amazes me when some asshole tries to rewrite history to show the mighty power of the OPEC “cartel”. The last truly effective oil cartel was run by the Texas Rail Road Commission in the 50’s and 80’s. Even today it still has the legal authority to force ever oil producer in the state to cut their production 50% (or more) if they chose to do so.
shortonoil on Fri, 4th Dec 2015 11:51 am
“This great debate will declare winners and whiners/losers. As long as I have been alive when a commodity gets in short supply the price goes up.”
According to USGS there is maybe as much as 4,200 Gb of oil on the planet. We should be seeing a shortage of supplies in about 300 years. Your supply/ demand hypothesis doesn’t seem to be working very well.
marmico on Fri, 4th Dec 2015 12:21 pm
Even today it still has the legal authority to force ever oil producer in the state to cut their production 50% (or more) if they chose to do so.
Get on it you blathering bloviating blowhard.
idontknonmyself on Fri, 4th Dec 2015 1:20 pm
Allo shortonoil.
I found your post on a physics blog about ETP model and how they were making fun of you
idontknonmyself on Fri, 4th Dec 2015 1:22 pm
Here is the link.
http://www.thephysicsforum.com/general-discussions/8341-oil-depletion-second-law-thermodynamics.html
I also learn a lot about your personality reading this physics blog.
Enjoy people, shortnooil is the typical enfant-roi
Davy on Fri, 4th Dec 2015 2:02 pm
Idont, that blog looks like a great place for you to hang out. Why not stay there because everyone here thinks you are a goof. That way everyone is happy.
shortonoil on Fri, 4th Dec 2015 4:01 pm
“I found your post on a physics blog about ETP model and how they were making fun of you”
Neither I, nor anyone else from The Hills Group has ever posted on the blog that you are referring to. We are more than happy to leave the explanation of Newtonian mechanics to physics professors.
But, everyone here feels blessed, and awe struck with your presence most mighty troll. So that you don’t accidentally over exert yourself, why don’t you go crawl back under the rock from which you came out from under —- and rest! When you feel rejuvenated stop back to see us. A couple of centuries would be nice.
About that case of crabs you caught last month; wash them gasoline, and use a match!