You Thought The Saudis Were Kidding? (More on these low oil prices)

[GliderGuider]

First, some commentary from Ilargi at The Automatic Earth:

You Thought The Saudis Were Kidding?

And I also don’t understand why nobody seems to understand what Saudi Arabia and OPEC have consistently been saying for ever now. They’re not going to cut their oil production. Not going to happen. The Saudis, probably more than anyone, are the guys who know what demand is really like out there (they see it and track it on a daily basis), and that’s why they’ll let oil drop as far as it will go. There’s no other way out anymore, no use calling a bottom anywhere.

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up OPEC’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” He said the world may never see $100 a barrel oil again.

The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail. They represent a “fundamental change” in OPEC policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy. “We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.”

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.

His writing partner Nicole Foss puts it more bluntly in a comment on Facebook:

We've been saying this would happen for a long time, that oil prices would drop as demand falls on a move into economic depression. A temporary supply glut opens up, price support evaporates, prices fall to those of the lowest cost producer and all the expensive and complex production goes out of business. No one invests in exploration or drilling or production, or probably even maintenance, for years, meaning that supply will follow demand to the downside over time. Any kind of economic recovery way down the line will then be energy supply-constrained. First financial crisis buys you time in terms of peak oil, because you burn through remaining high energy profit ratio energy sources less quickly, but then it aggravates the situation later, but collapsing supply more quickly. We are headed into a much lower energy future, and that means life is going to change.

In short, Nicole believes that this drop in oil prices is a leading indicator of economic collpase, with a deflationary depression lurking around the corner. Of course, she's been saying that since 2007. Lets see if reality has caught up with the theory in the last 7 years, shall we?

[bhikkhu]

1. Perhaps the Saudis have in mind the collapse of their energy rivals -

Venezuela and Russia, all the fledgling solar power companies, the tar sands, electric and hydrogen technologies, and the more expensive extraction methods here. I remember in the mid 80's when low oil prices (and Reagan's policies) killed off all the solar and wind power companies in the US, as well as all the early electric car efforts. If the Saudis have the money to ride it out, its not a bad long-term strategy for them, and may well work.

[elehhhhna]

2. selling a finite resource at halfprice so as to slow your competitors,

...who can ramp up in 2 - 5 months when prices improve, makes no sense to me. Yes, some will go bankrupt. Many will merge or sell off large assets. Saudi production costs may be low but the KSA relies heavily on oil revenues to fund the gov., and the huge extended royal family who IS the gov. What's the point? How do they benefit?

[MADem]

4. VZ is also a member of OPEC. What the Saudis do NOT want is

US and Canadian oil taking a big piece of the market--that shale oil was cutting into their share.

The Saudis are investing in solar power to the tune of tens of billions --they intend to transition to being purveyors of that energy resource once the oily gravy train runs out.

[EX500rider]

30. "Perhaps the Saudis have in mind the collapse of their energy rivals"

If they aimed this at anyone I would say it's the Iranians, who've made comments that they should be in charge of Mecca and Medina.

[Scuba]

3. So leaving our oil in the ground will result in a "collapsing supply". WTF?

[GliderGuider]

6. The theory is that later on, when we might want to get it out of the ground

the economics will no longer support it - a global depression and significant infrastructure degradation will have intervened, and it will be too expensive in many cases to restart production.

The thing that we Peak Oilers failed to take into account back in 2006 was economics: that the world would be willing to throw such massive amounts of capex at the oil supply in the face of declining economic and energetic returns. Now and in the future the problem will again be economics: our inability to throw enough capex at the supply in order to bring it back.

[Scuba]

7. The theory is severely flawed. The only thing that would make the oil "too expensive to restart ...

... production" would be the lower cost of alternative energies.

[ProfessorGAC]

8. I'm With You On This!

I think Nicole's facebook comment is really two dimensional and makes little sense.

[GliderGuider]

10. We'll find out one way or the other, won't we?

If she's right we'll see the effects within a couple of years. if she's wrong, everything will be fine, just fine.

Nicole and Ilargi have been looking at this situation from the downside for a decade now. If she says this is much more than a case of the Saudis wanting to wound Putin, I'm inclined to believe her. Of course I'm inclined that way anyway, since I think that major world changes are driven by our interactions with our resource infrastructure rather than our politics. IMO politics is an emergent human phenomenon that arises in response to our interactions with the infrastructure (as per Marvin Harris).

But I'm quite willing to wait and see.

[ProfessorGAC]

12. We Shall See

I've read her stuff before as well. I think she is far too in love with X therefore Y. When, in fact there are 30 X's and 4 Y's, with both direct and tangential interactions. And, some of those intereactions are political, so leaving that out of the equation in favor of a supply driven set of conditions will too conveniently lead to the preconceived conclusion.

[bemildred]

5. I believe it.

"Apres moi, le deluge." They see the writing on the wall. Do we?

[quaker bill]

9. Saudi oil in the ground is worthless

It will still take quite some time to pump and market their large reserves. As demand drops the value of their reserves drop. The adoption of new tech for efficiency is accelerated by high prices. Lower prices slows that development and will allow them to pump and market longer. If you are a Saudi, where you want to be is just about out of oil when the shift to other energy sources becomes complete. Selling what they have left, as quickly as they can move it, makes sense to them.

[GliderGuider]

11. I largely agree. However,

We should keep in mind that a recession or depression exacerbated by low oil demand would make the shift to other energy sources problematic. If we don't have the capex for drilling oil wells, we won't have it for building millions of windmills either.

[quaker bill]

33. That is part of the point

Their point is to slow production of other energy sources while they drain the fields. The Saudis are pursuing their own interests. Lower energy costs will damage the shale patch for sure, but a fair amount of the US economy will benefit from lower energy and transportation costs. The challenge is transition. If government is to be useful in this direction, it will continue to fund research and purchase the alternative energy products, to stimulate that development.

[Capt. Obvious]

13. Many DUers seem to be rooting for economic armageddon

[GliderGuider]

16. I don't know about others, but I certainly am.

IMO it's the only thing that will keep human activity from destroying the rest of the planet's biosphere.

[Capt. Obvious]

17. So you're the one

[GliderGuider]

19. That would be me!

[FrodosPet]

27. Are you by chance a supporter of "The Voluntary Human Extinction Movement"?

"Phasing out the human race by voluntarily ceasing to breed will allow Earth’s biosphere to return to good health. Crowded conditions and resource shortages will improve as we become less dense."

http://vhemt.org/

[GliderGuider]

29. Of course! Been a supporter of VHEMT for a decade now. A great and worthy organization!

[kentuck]

14. During my lifetime...

Most of our economic problems have been caused by sharp spikes in oil prices, not the reverse. The first time in 1974 sent us into a deep recession. Many people lost their jobs and inflation soared. I don't see anything but positive from lower oil prices.

[bhikkhu]

15. It was cheap foreign oil that fueled our dependence on the middle east

and the collapse of domestic alternative energy technologies and initiatives, and then the imports of goods based on cheap oil and manufactures from other countries. Cheap oil played a part in the shuttering of a great deal of US manufacture. At the moment we have a large number of domestic alternative energy companies which put us on a sound direction toward freedom from fossil fuel dependence and give us some hope of relief from the petro-politics that dominated the last 30 years; that may not last.

[bluesbassman]

24. Jan 1st, 1974 OPEC raised oil from $5.04 to $11.65 under pressure from the Shah of Iran.

This was in direct response to his unparalleled military spending with the US (had then reached billions) under the blessing and encouragement of Nixon and Kissinger. It's interesting to note that the Saudis were not in favor of the hike at that time.

Good read from 1979 regarding this here. http://news.google.com/newspapers?nid=932&dat=19790604&id=MfkOAAAAIBAJ&sjid=qoIDAAAAIBAJ&pg=6932,247973

[bananas]

25. Yup - that's a great summary. nt

[closeupready]

18. If it keeps oil sheiks from squandering $ on financing int'l. terrorism,

fine with me.

[GliderGuider]

20. If it ends up being a symptom of an imploding global economy

the violence will be coming from a lot closer to home than Saudi Arabia.

[closeupready]

21. Sorry if you take a bath in your energy investments.

But you know, that's how the casino known as Wall Street works.

Cheers!

[GliderGuider]

22. If I had any investments I'd be worried...

As it is,

[closeupready]

23. Only energy-vested interests complain about lower gas prices.

I mean, I guess you could very well be an exception, and my apologies if so. But you can imagine why I'm skeptical.

[GliderGuider]

26. I completely understand why you're skeptical.

My position is radically different from those who complain about low oil prices trashing their investments.

My main passions these days are systems science, complexity theory and cybernetics. My interests include investigating how the structure of global techno-industrial civilization operates, and looking for evidence of what its fundamental driving forces are. Because of that orientation, I sometimes see things in a very different light than most people. For example, what most understand to be the driving forces of society - politics, economics, trade, technology, finance etc. - I tend to see as emergent properties of the system, as part of its feedback mechanisms, simultaneously both cause and result. While many see major shifts in oil prices as evidence of speculation, manipulation or political shenanigans, I tend to see them as being driven by systemic feedbacks that are themselves the product and handmaidens of our collective evolved psychology.

Rather than complaining about low oil prices, I'm quite concerned about what their sudden drop may indicate about developing instabilities in the global system.

[bemildred]

32. +1. nt

[karadax]

31. Never bought the "kill off Fracking" theory

I've read it in many places where OPEC is doing this to eliminate competition. The fracking extraction process will only become more efficient and cost friendly as time progresses. I can't see it being completely abandoned due to cost. A lower price of oil may temporarily slow fracking production but not really stop it.

I agree with those that believe Saudi Arabia may be transitioning to alternative energy production. Solar energy production makes sense for them. I wonder if they can produce enough to export on a scale that rivals their oil riches. Do they plan on exporting energy via batteries ? Some kind of advanced transmission grid ?