you could probably write a phd or a book about this topic; cheaper energy benefits advanced economies but hurts resource-based economies - e.g. compare USA and Russia. Russia is suffering quite a bit whereas most of the USA are probably happy. you can also check who are net importers and net exporters of oil, etc., and those would be only the first-order consequences. what happens after the economy feedback loops start being impacted is hard to tell...
Domestic political turmoil in the countries whose budget depend largely on the oil price: See e.g. election upset in Venezuela, Russia aggressive in middle east potentially to overshadow news of worsened economy at home, Turmoil in Nigeria etc).
Internationally it means states like Russia won't have the same economical and political clout they had at $100+, so instead will rely on other means to throw their weight around, such as military threat.
Economically it's good: lots of the saved money ends up in the hands of consumers.
Environmentally, it's less good of course. Alternative energy will be less attractive in the near future.
So it's not all rosy, but the downsides are mainly due to a falling oil price, rather than a low one. The volatility upsets budgets, which causes problems.
Oil companies depending on higher prices (most of them), will start having to reduce number on employees, or, worst case, go bankrupt and take financial institutions with them (because of debt).
As with anything there are winners and losers. Most companies are not oil companies, most people are oil consumers and not employed by oil companies. The "mostly good" here is of course for an average company (oil buyer) or average consumer (employed by a non-oil company, and an oil buyer), or even an average country (net oil importer).
Government spending in the UK is controlled by something called the Barnett Formula, which presently results in about £60Bn/year being transferred from England to Scotland. Should Scotland have become a separate country, this river of money would have run dry overnight. The Scottish Nationalists calculated that with oil at $100/barrel, they could manage without it. However a) the price of oil collapsed and b) the part of Scotland that actually "owns" most of the oil, the Shetlands, was adamant that it wanted to stay part of the UK. So 28 out of 32 voting districts in Scotland, decided the present arrangement suited them well enough!
is the fact that it's dropping below $30 right now mean that the previous $100+ prices were completely inflated compared to COGS? The massive fluctuations for something that you just need to pump out of the ground doesn't make too much sense to me (compared to, say, price of potatoes)
In addition to that, sanctions lifted from Iran. Iran and Saudi Arabia are the most influential members of OPEC and they don't get along whatsoever. Meaning the Saudis and the Iranians will break rank and try to claw out more market share by ramping up production.
Additionally, more in response to rtpg's comment: it is very costly and technically challenging to stop or reduce oil production, hence the price volatility is the result of volatile demand fighting it out with very stable supply.
I also suspect Saudi Arabia is trying to rattle sabers with Iran for a variety of reasons. The recent execution of the Shia cleric had to be aimed at Iran. Plus the Yemen conflict etc.
They might be about to bite their nose off to spite their face. They have a supine populace on the back of their state handouts and cushy government jobs. If that goes away as a result of falling government revenue then the country will probably become less politically stable.
Yes, a barrel of oil brought up by fracking costs around $62 (Canadian oil sands cost $74) per barrel(according to NPR below). Though that is total cost, marginal cost of pumping after you drill and frack the well is around $35.
Oil demand tends to be fairly inelastic. Almost all of oil pricing is supply driven. OPEC decides on a target price and produces to meet that price. The current price has happened because Saudi usually stops producing to keep prices stable and high, and for now they just haven't slowed down at all. Either they need money badly enough that they will take any profit at all or they are using oil prices as a weapon.
I don't understand the "they need the money argument". They were producing 9 million barrels per day and that achieved a price of $100 per barrel... now they are producing 10.5 million barrels per day and price is <$30 per barrel.
1. strategic decisions to keep the price low (in some cases below the cost of production) to make it uneconomic for competitors to invest in oil projects
2. time lags in the system. e.g. the global economy went into recession the last time the oil price spiked. that'd reduce oil demand in some cases. now as prices are much lower again we might expect demand to keep growing until supply isn't able to satisfy demand (again), then the price will spike again
3. (long term trend) oil is becoming genuinely more costly (in physical terms - i.e. required energy) to extract as we deplete the low hanging fruit. i guess this makes it much harder / impossible for supply to ramp up and satisfy demand in a short enough time period before another recession is triggered. this isn't necessarily a problem in itself but perhaps it influences the behaviour in item 2
This is probably only semi-coherent. I read the "limits to growth" book a couple of weeks ago, and one of the claims there (from a system dynamics perspective) was roughly that any system that combines both delays in feedback and erodible limits is expected to either behave like "overshoot and oscillation" or "overshoot and collapse".
How much oil can be stored by producers, and for how long? If you run an operation that gets oil out of the ground at $50, you wouldn't want to sell at $30 (you wouldn't want to take it up at all, but likely need to keep your machines running). Are there producers that sit on lots of oil now, hoping to sell at a higher price, maybe years from now?
Iran oil is going to enter the market in the next few months. That would bring down the prices further.
With the production already lot higher than consumption already don't expect the prices to go up anytime soon.
In many oil importing countries where people were getting subsidies earlier those countries have stopped gives subsidies are also charging extra taxes so the prices have not come down dramatically. Which has resulted in little growth in consumption.
Speculating on oil price happens mostly on paper (derivatives and other contracts). It is cheaper than paying for its storage. You can also of course stop pumping if you're fine with getting less oil out of the ground this year.
> Speculating on oil price happens mostly on paper (derivatives and other contracts). It is cheaper than paying for its storage.
Speculating using futures is the (roughly) the same marginal cost as speculating by storing it in tankers and storage depots.
Otherwise there would be an arbitrage opportunity where you could empty your tanks today, save the storage costs, and get the same quantity back x months in the future.
From the little I've read, you can store it on any container (with some cheap-ish safety measures), what is cheap. But oil is also very cheap, requiring huge volumes of storage, so this usually does not make sense.
You can not pump it (with some risks of losing your capital), but you'll still need to pay interest on the money you spent creating your wheels, thus companies tend to pump it and sell even when they can't recover their investment, and pump faster the cheaper oil becomes.
Yukon XL Denali here I come! Seriously though, I thought Saudi and worldwide peak oil was in 2005. Is that a myth or are prices not really constrained by supply until way past the peak?
I think the problem is that demand for oil can change way more quickly than supply. At peak everybody was investing in production capacity and increasing production to profit from the high prices. Now demand has slipped (for example China), it's difficult to scale back production and supply exploded (fracking, and the Saudi-Iranian competition for market share).
We are at the peak, have been since around 2005. I don't think anybody expected a 10 years+ peak, but well, we are here.
Prices are set by supply and demand. A worldwide depression has a way of pushing the price down, even with restricted supply. And not that decreasing oil supply is supposed to cause it some of the times, leading to huge price instability, not simple price increases.
TLDR, this price is much more a gauge of our current depression than anything else.
This is speculation on my part, but I would think that the threat to the oil producers is not that they may run out of the stuff in 100 years...rather, it's that oil may become obsolete before then (because alternative energy). At $30/barrel, it puts tremendous pressure on electric cars, solar, wind, etc. At $100+/barrel, they were creating a major incentive for the alternatives to thrive.
I'd like to hear about this from anyone more qualified than me (which would really be anyone).
I think we're going to see prices cycle like this for at least a few more swings. If there were no speculators in the oil markets you might see slightly more stable prices but there's a tremendous amount of speculation which adds to the price swings, which make the underlying activities more severe.
It takes anywhere from a couple of months to a couple of years to go from "acquired mineral rights" to "pumping oil out of the ground" which you can then sell. It also costs a lot of money. On the order of multiple tens of thousands per day on land and multiple hundreds of thousands per day at sea.
So when prices are up people are expanding and drilling and going gangbusters. When prices are down people are trying to figure out how to cut costs and ride it out. During high prices there tends to be "over" investment and during low prices, "under" investment, both relative to the average investment over say a 5-10 year period. Maybe by a lot.
As you mentioned one of the dynamics is that during low price periods alternative energy is a fool's errand and during high price periods it's genius. During average prices it'll slowly make more and more sense as the average price continues to slowly rise.
But it's far better in some ways to instead of making the average price on an average day to some times make a lot and some times make a little by letting the price vary wildly. Price instability makes alternative energy investing chaotic and unappealing to big institutional investors who might plow substantial money in. Better to wait until the chop settles down and it looks good over a 10+ year timeframe.
So if you get to make the average price on average and destabilize your competitors by letting the price wander all over, what's the downside? As long as you have the money to ride out the low price periods, none!
I don't know when this interesting ride will come to an end, but supply/price management is going to continue to be very important to people with a lot of oil left in the ground.
Shouldn't intelligent speculators drive down the price swings? If there are going to be price swings, shouldn't speculators make money by issuing futures and options, thereby decreasing the eventual swings?
The big oil companies do a fair amount of this I'm sure, but do you really want to bet a few billion as to exactly how much oil will cost in 2-6 years?
The US consumes 20 million barrels a day, so at current prices that's $600 million a day at $30/bbl and $2 billion a day at $100/bbl. How much do you think you'd have to buy or sell in the futures market to move the price to smooth it out?
Finally, it's very, very hard to know what's short term volatility and what's long term structural. Everyone "knew" that oil prices were going to be high forever because of peak oil and declining production. Turns out, maybe not.
There's also major political tensions with the Saudi's and Iran. Some have predicted that if a war were to break out oil would rush back to $100 per barrel. Also, Iran must first past nuclear inspections before they are able to lift the ban.
Which is pretty scary; that gives some already volatile countries massive incentives to have a war. Humans are good enough at coming up with reasons on their own without paying them to do it.
If I was Iran, would I want to come online now? Or ride-out the bottoming of the market until Saudi Arabia implodes and its rulers hastily depart to their apartments in Paris.
On the other hand, one has to time production to ramp-up before renewables become too dominant. Interesting calculus.
Fascinating. Never considered the price pressure of finite storage capacity.
That said, about half the article could be summed up in "commodity prices are falling because demand from most of the global working class is falling".
There's a second effect. Companies that are near 100% indebted (and a dropping oil price will seriously lower their expected value, therefore getting them far closer to their debt limits even if they don't actually loan anything). Such companies, how do they respond to price shocks ? You have capital invested, and debt to pay back. But capital is a sunk cost, the debt won't disappear because you stop pumping. Therein lies the rub.
So there's 2 options:
1) you can stop working, stop producing, and use cash on hand (cashflow which they have spent years minimizing) to pay down debt. As soon as this cash on hand is gone, it's over.
2) they can keep working, and keep selling. Doing everything they can to increase revenue just a little bit (ie. selling more oil, making prices drop). This way the cash keeps flowing, even if they become less and less likely over the long term to pay back their debts, but they don't go under right now
Which would you pick ? Keep in mind that price of oil will of course go back up at some point. Wouldn't you want to delay the point where you have to give up, in hopes of delaying it past the point where prices recover and you don't have to give up at all ?
Of course not all companies will succeed at that. But the immediate result of oil companies becoming unprofitable due to price fluctuations is ... more oil getting pumped up. It makes sense if you think about it even if it is thoroughly counterintuitive.
Thanks for the thoughtful comment. However, I respectfully disagree with the statement "price of oil will of course go back up at some point". I don't think it will ever go back to $80+ for two reasons:
- more producers (US, Iran's embargo over, other countries exploring shale)
> Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down.
The article doesn't show at all that there are diminishing returns from human labor. What we have, instead, is that even if technology is making labor ever more productive, these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. Just look at the big fat profits of most big companies.
The article is thought provoking, but as it usually happens when trying to find a simple explanation to complex phenomena, it doesn't stand to deeper scrutiny.
[...] these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers.
This seems illogic to me - if you have to compete with cheap labour you have to cut your costs in one way or another, pay less to your work force, make them more efficient, accept smaller profits or what have you. Putting more money - in absolute terms - into the pockets of the capitalists only makes it harder for you to remain competitive. Therefore I could at best see that capitalists receive a larger share of the cake in relative terms but not in absolute terms due to competition with cheap labour.
It's not the "capitalists" that have to compete with cheap labour, it's the labourers. Big brands can move their production where cheap labour is, keep their prices up, and pocket higher profits. This won't work forever, but it works for now.
So is Saudi Arabia going to (also) become a terrorist factory once they have to cut all the massive handouts they do and implement heavy austerity?
I mean the amount of income in the middle-east is going to severely drop over the next few years - the wealthy won't be affected, just annoyed but the people who have to work for a living are going to be out of jobs, starving and homeless and extreme belief systems often jump in to fill that void.
I mean the USA made more than 15 domestic terrorists since 9/11
I'm just wondering what happens when the comfortable over there have to give up their luxuries - do they take it in stride or does their belief system go to extremes to compensate?
possibly, however with US support they get to brush a lot of opposition under the carpet (into secret prisons) without fear of international outrage. Of course plenty of Arab Spring ousted dictators were friends of the West however non have been an ally as long as Saudi has so they may have a bit more leeway before they are called out on it. It may even take until their oil (and therefore usefulness as an ally) runs out.
Countries that export crude are having recession.. To name few Canada, Russia, Brazil, Nigeria, Venezuela, Australia (commodities not just crude), at the same countries like India who import and depend heavily on crude are having good times (relatively).
So finally is it crude that runs all economies and everything else is overrated.. That scenario if true is so scary!
I would see it the other way around, where real and stable economies don't depend on oil export. We will see them in the coming years. An economy that mostly rely on one and unique natural resource can only suffer in the medium term.
> at the same countries like India who import and depend heavily on crude are having good times (relatively).
That's not really true. If you want to scare yourself look up what the "baltic dry index" is and what level it's at. Other transport indices (e.g. free space in harbours, train freight, ...) are all down hard.
Whatever the cause, but America and Europe have slowed down in ... pretty much everything they do. Goods transport is the clearest indication of that, but far from the only one. Somehow building in the US and Europe (and India) is down. A lot of economic activity is down in fact, the exception for now is very large debt-free services corporations.
Oh, people in India are not having a good time. Retail gas/diesel prices have barely changed. Retail price is still the same as when crude prices where at $99/barrel. Taxes has been raised whenever crude prices falls, so the retail price remains the same.
rise in oil prices has never caused rupee to crash too much. Rupee has fallen a lot in last couple of years, but thats not due to increase in crude price. The govt could do better to support exports. There is still too much bureaucracy red tapes which discourages business. Unless this changes for better, it will not do any good in the long run.
Australia has managed to avoid recession so far. I know that's only technically true, but that's the best kind of true. (We had a lot of defense spending in one quarter that pushed us over the line between contracting/expanding.) It'll be interesting to see how Q1 2016 goes. Even if it is a recession, it's not a normal one, since unemployment is going down.
I think "barrel" has become a unit of measure. Much of the oil runs through pipelines, to tankers, transported and offloaded to refineries.
It wouldn't surprise me if 90% of all oil was never in an actual barrel, but even if so, I would imagine the barrels are reused, and so not factored in the price.
Many oil producing nations require $50+/barrel oil to have a balanced budget. After their foreign exchange reserves are depleted (a few years from now), they will start accumulating more debt at their current spending levels, and will likely have to cut public spending. This might not go down so well in some Gulf states
The IMF thinks Saudi has cash reserves to cover five years - which is more than competing countries have.
So they can play white knuckle poker and out-wait everyone else, then jack up prices again around 2019/20 - just in time to kill any recovery that might be happening by then.
> So they can play white knuckle poker and out-wait everyone else, then jack up prices again around 2019/20 - just in time to kill any recovery that might be happening by then.
The rest of the world better move off of oil quickly then.
It's all about dollar strength and currency pegs/stability. Oil exporting countries need to continue to export as much oil as possible to acquire the dollars needed to (try to) maintain a peg or the stability of their currency. Or they can devalue and risk social instability once domestic inflation rises.
Supply and demand are more fundamental - the revenue needs of exporting countries prevent reduction of supply, while economic weakness around the world reduces demand. That weakness also strengthens the dollar, increasing the supply available for a given dollar amount. The cascading effect of speculators exiting the falling market further reduces demand.
87 comments
[ 0.19 ms ] story [ 147 ms ] threadInternationally it means states like Russia won't have the same economical and political clout they had at $100+, so instead will rely on other means to throw their weight around, such as military threat.
Economically it's good: lots of the saved money ends up in the hands of consumers.
Environmentally, it's less good of course. Alternative energy will be less attractive in the near future.
So it's not all rosy, but the downsides are mainly due to a falling oil price, rather than a low one. The volatility upsets budgets, which causes problems.
Oil companies depending on higher prices (most of them), will start having to reduce number on employees, or, worst case, go bankrupt and take financial institutions with them (because of debt).
Additionally, more in response to rtpg's comment: it is very costly and technically challenging to stop or reduce oil production, hence the price volatility is the result of volatile demand fighting it out with very stable supply.
Other global factors have also contributed. Fracking has really had an impact on US production:
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M...
Oil demand tends to be fairly inelastic. Almost all of oil pricing is supply driven. OPEC decides on a target price and produces to meet that price. The current price has happened because Saudi usually stops producing to keep prices stable and high, and for now they just haven't slowed down at all. Either they need money badly enough that they will take any profit at all or they are using oil prices as a weapon.
http://www.npr.org/2014/11/04/361204786/falling-oil-prices-m...
1. strategic decisions to keep the price low (in some cases below the cost of production) to make it uneconomic for competitors to invest in oil projects
2. time lags in the system. e.g. the global economy went into recession the last time the oil price spiked. that'd reduce oil demand in some cases. now as prices are much lower again we might expect demand to keep growing until supply isn't able to satisfy demand (again), then the price will spike again
3. (long term trend) oil is becoming genuinely more costly (in physical terms - i.e. required energy) to extract as we deplete the low hanging fruit. i guess this makes it much harder / impossible for supply to ramp up and satisfy demand in a short enough time period before another recession is triggered. this isn't necessarily a problem in itself but perhaps it influences the behaviour in item 2
This is probably only semi-coherent. I read the "limits to growth" book a couple of weeks ago, and one of the claims there (from a system dynamics perspective) was roughly that any system that combines both delays in feedback and erodible limits is expected to either behave like "overshoot and oscillation" or "overshoot and collapse".
Speculating using futures is the (roughly) the same marginal cost as speculating by storing it in tankers and storage depots.
Otherwise there would be an arbitrage opportunity where you could empty your tanks today, save the storage costs, and get the same quantity back x months in the future.
You can not pump it (with some risks of losing your capital), but you'll still need to pay interest on the money you spent creating your wheels, thus companies tend to pump it and sell even when they can't recover their investment, and pump faster the cheaper oil becomes.
Prices are set by supply and demand. A worldwide depression has a way of pushing the price down, even with restricted supply. And not that decreasing oil supply is supposed to cause it some of the times, leading to huge price instability, not simple price increases.
TLDR, this price is much more a gauge of our current depression than anything else.
I'd like to hear about this from anyone more qualified than me (which would really be anyone).
It takes anywhere from a couple of months to a couple of years to go from "acquired mineral rights" to "pumping oil out of the ground" which you can then sell. It also costs a lot of money. On the order of multiple tens of thousands per day on land and multiple hundreds of thousands per day at sea.
So when prices are up people are expanding and drilling and going gangbusters. When prices are down people are trying to figure out how to cut costs and ride it out. During high prices there tends to be "over" investment and during low prices, "under" investment, both relative to the average investment over say a 5-10 year period. Maybe by a lot.
As you mentioned one of the dynamics is that during low price periods alternative energy is a fool's errand and during high price periods it's genius. During average prices it'll slowly make more and more sense as the average price continues to slowly rise.
But it's far better in some ways to instead of making the average price on an average day to some times make a lot and some times make a little by letting the price vary wildly. Price instability makes alternative energy investing chaotic and unappealing to big institutional investors who might plow substantial money in. Better to wait until the chop settles down and it looks good over a 10+ year timeframe.
So if you get to make the average price on average and destabilize your competitors by letting the price wander all over, what's the downside? As long as you have the money to ride out the low price periods, none!
I don't know when this interesting ride will come to an end, but supply/price management is going to continue to be very important to people with a lot of oil left in the ground.
The US consumes 20 million barrels a day, so at current prices that's $600 million a day at $30/bbl and $2 billion a day at $100/bbl. How much do you think you'd have to buy or sell in the futures market to move the price to smooth it out?
Finally, it's very, very hard to know what's short term volatility and what's long term structural. Everyone "knew" that oil prices were going to be high forever because of peak oil and declining production. Turns out, maybe not.
This could happen pretty soon:
>"Implementation of JCPOA will finish in the next seven days," he said.
http://www.bbc.com/news/world-middle-east-35285095
On the other hand, one has to time production to ramp-up before renewables become too dominant. Interesting calculus.
http://davidstockmanscontracorner.com/2016-outlook-oil-limit...
That said, about half the article could be summed up in "commodity prices are falling because demand from most of the global working class is falling".
So there's 2 options:
1) you can stop working, stop producing, and use cash on hand (cashflow which they have spent years minimizing) to pay down debt. As soon as this cash on hand is gone, it's over.
2) they can keep working, and keep selling. Doing everything they can to increase revenue just a little bit (ie. selling more oil, making prices drop). This way the cash keeps flowing, even if they become less and less likely over the long term to pay back their debts, but they don't go under right now
Which would you pick ? Keep in mind that price of oil will of course go back up at some point. Wouldn't you want to delay the point where you have to give up, in hopes of delaying it past the point where prices recover and you don't have to give up at all ?
Of course not all companies will succeed at that. But the immediate result of oil companies becoming unprofitable due to price fluctuations is ... more oil getting pumped up. It makes sense if you think about it even if it is thoroughly counterintuitive.
- more producers (US, Iran's embargo over, other countries exploring shale)
- other sources of energy (solar, , etc)
* easy to harvest oil exhausted
The article doesn't show at all that there are diminishing returns from human labor. What we have, instead, is that even if technology is making labor ever more productive, these gains in productivity are going more and more towards companies and investors (mostly thanks to the competition from Chinese laborers) instead of (western) non-elite workers. Just look at the big fat profits of most big companies.
The article is thought provoking, but as it usually happens when trying to find a simple explanation to complex phenomena, it doesn't stand to deeper scrutiny.
This seems illogic to me - if you have to compete with cheap labour you have to cut your costs in one way or another, pay less to your work force, make them more efficient, accept smaller profits or what have you. Putting more money - in absolute terms - into the pockets of the capitalists only makes it harder for you to remain competitive. Therefore I could at best see that capitalists receive a larger share of the cake in relative terms but not in absolute terms due to competition with cheap labour.
I mean the amount of income in the middle-east is going to severely drop over the next few years - the wealthy won't be affected, just annoyed but the people who have to work for a living are going to be out of jobs, starving and homeless and extreme belief systems often jump in to fill that void.
I mean the USA made more than 15 domestic terrorists since 9/11
I'm just wondering what happens when the comfortable over there have to give up their luxuries - do they take it in stride or does their belief system go to extremes to compensate?
It's not on CNN [1] so you just don't hear about it.
[1] etc.
So finally is it crude that runs all economies and everything else is overrated.. That scenario if true is so scary!
Our recession has other causes.
That's not really true. If you want to scare yourself look up what the "baltic dry index" is and what level it's at. Other transport indices (e.g. free space in harbours, train freight, ...) are all down hard.
Whatever the cause, but America and Europe have slowed down in ... pretty much everything they do. Goods transport is the clearest indication of that, but far from the only one. Somehow building in the US and Europe (and India) is down. A lot of economic activity is down in fact, the exception for now is very large debt-free services corporations.
It wouldn't surprise me if 90% of all oil was never in an actual barrel, but even if so, I would imagine the barrels are reused, and so not factored in the price.
But now we've actually gotten there and there wasn't even a celebration.
http://uk.businessinsider.com/imf-regional-economic-outlook-...
What that means for the arab in the street is a different question.
So they can play white knuckle poker and out-wait everyone else, then jack up prices again around 2019/20 - just in time to kill any recovery that might be happening by then.
The rest of the world better move off of oil quickly then.