![[courtesy Google Images]](http://m5.paperblog.com/i/139/1398890/interesting-times-in-the-oil-patch-L-Ls20G8.jpeg "“Interesting Times” in the Oil Patch")
[courtesy Google Images]
Ancient Chinese curse: “May you live in ‘interesting’ times.”In the first week of A.D. 2016, Salon magazine published an article entitled “A year of war: 10 destructive armed conflicts the U.S. fueled in 2015”. According to Salon,
“2015 was marked by violence and war. The most prevalent story in the U.S. media throughout the year was ISIS. The Paris attacks, mass shootings, police brutality, terrorism, the Charleston massacre and the refugee crisis were also among the top 10 stories of the year.”
That article illustrated an important point: As A.D. 2015 ended, the mainstream media and the American people were focused on questions of war. Would Syria erupt in full-scale war? Would Russia declare war on Turkey? Saudi Arabia with Iran? Shiites with Sunnis? ISIS sneaking backpack nukes into the US? Israel with . . . well, Israel could be fighting with anyone. What about the US goading China or Russia into WWIII?
At the end of A.D. 2015, we were all much concerned, even primarily concerned, with the seemingly imminent outbreak of significant war.
However, as I write this article roughly two weeks later, the issue of war—even a thermonuclear WWIII—is almost forgotten. Today, we’re focused on the fantastic declines in the price of crude oil and in the stock market indices.
In the first two weeks of the new year, the Dow has fallen over 8% and the price of crude oil dropped almost 20%. Forget thermonuclear war—we’re talking about something really important: money!
Public attention is so fickle. One week it’s the Kardashians. Next week it’s thermonuclear war. The week after that, it’s the stock markets and crude oil.
The Usual Suspects
There’s some disagreement as to what caused the recent, global stock declines. Some blame China, some blame the Federal Reserve, some say Uranus was in retrograde.
But there’s not much doubt about the causes for the price of crude oil to fall over 70% in 18 months from about $105/barrel in mid-2014 to $29 today. Those causes include human meddling, stubbornness, spite, greed, desperation and even stupidity. Given that we haven’t seen the end of mankind’s most negative attributes and inclinations, we probably haven’t seen the bottom in the price of crude, either.
Most agree that Saudi Arabia precipitated the oil price decline. Some say they acted at the US government’s behest and kept pumping crude oil, despite a fall in global demand, in order to cause economic havoc for Russia. Others claim the Saudi’s increased pumping in order to destroy the US fracking industry.
Whatever the Saudis’ real motive may have been, Russia has adjusted and survived (and might be carrying a big grudge against the Saudi’s) and, to some degree, so did the US fracking industry. In fact, according to Christof Ruhl, head of research at ADIA (Abu Dhabi Investment Authority), “Conventional oil producers can’t win in battle to drive U.S. shale producers out of market because U.S. oil shale is showing relentless efficiency gains.”
Nevertheless, the price cutting that the Saudi’s started in A.D. 2014 continues and seems to have spiraled out of control. Everyone is losing revenue. Even the Saudis are suffering serious financial losses. Despite the losses, no oil-producing nation can or will quit the game.
Ten Bucks a Barrel?!
Result? According to ZeroHedge.com, “Forget $20 Oil: StanChart Says ‘Prices Could Fall As Low As $10 A Barrel’”
Ten bucks a barrel?!
Hard to believe. The possibility is mind-boggling. At $10 a barrel—after adjusting for inflation, and recognizing that there can be about 19 gallons of gasoline in a barrel of crude—gasoline could soon be cheaper than the 25-cent-per-gallon gas I saw in the mid-1960s.
Already $8/Barrel for Canadian Bitumen
On January 14th, OilPrice.com published “Forget $20—Oil Prices At $8 Per Barrel In Canada”. According to that article,
“WTI (West Texas Intermediate oil) has declined to $30 per barrel, the lowest level in more than 12 years. But heavy oil producers in Canada would love to have $30 oil.
“The price for a barrel of bitumen, the tar-like oil sands that comes from Alberta, fell to just over $8 per barrel this week. That is not a typo. Bitumen traded at $8.35 per barrel on Tuesday [January 12th].”
Canadian “bitumen” is not the same thing as WTI crude. “Bitumen” requires more refining and produces less gasoline. Even so, $8 “bitumen” is surprising and shocking in that it gives plausibility to others’ predictions that price of crude oil could fall to $20 or even $10 per barrel.
OilPrice.com: “In fact, Amazon.com sells oil drums—just the barrel, not the oil–for $78, almost ten times the cost of the actual bitumen.
“Heavy oil producers are now losing money on every single barrel that they sell . . . . Consequently, it is shut-down time for some producers. . . .
“But some companies might stay online and lose money because shutting down carries its own trouble and costs. Shutting down can actually damage a reservoir, leaving a site with permanently lower output. As a result, production shut downs could actually be ‘extremely limited’ . . . .”
Conventional Crude
What fun, hmm?
Either way they go, at current prices, oil-producers lose money. If they keep selling at low prices, they may lose money immediately. If they stop selling now, they may “permanently” damage their oil well’s productive potential and lose money in the future.
In relation to crude oil, Energy Aspects agrees: “The high costs of halting and then restarting production makes output curbs unlikely, even at prices below $30/bbl.”
Oil producers in much of the world are trapped in a no-win situation. If they keep pumping, they lose money now. If they stop pumping, they lose market share now, and revenue later.
If a company is condemned to lose money no matter what, how long before that company goes bankrupt?
If a nation’s economy depends on the sale of crude oil at prices above $30/barrel, is political chaos more likely if that nation loses money now if it continues pumping, or more likely later if it stops pumping? Either way, political chaos is possible.
For some oil producers, the production of crude oil has become a kind of madness that can’t be endured or escaped. They can’t keep pumping and they can’t stop pumping. The geological fact that some oil wells may suffer a permanent loss of future productive capacity if they stop pumping, goes a long ways towards explaining why the oil-producing nations continue to play this game of high-stakes “chicken”.
The oil-producing corporations and nations must be desperate. Almost all of them are caught in a no-win situation and they can’t afford to stop.
The Fundamental Law of Economics
Price is determined by Supply and Demand.
If the Supply increases while the Demand holds steady, the price must fall. If the Demand increases while the Supply remains steady, the price must rise.
People adjust their economic choices according to whether the price is rising or falling. If the price is rising, people produce more, the supply grows, and the price tends to fall back to a state of equilibrium. If the price is falling, people tend to produce less, the supply declines, and the price tends to rise back to a state of equilibrium.
If the price of crude is falling at the same time the demand is falling and supply is increasing, something is out of whack. Somebody needs to cut the supply dramatically—or see a shrink to find out why they’re persistently violating the fundamental law (supply and demand) of economics.
Oil Producers’ Primary Problem
The global economy is in a state of recession and/or depression. Central banks have done all they can to restore the global economy but failed in their attempts.
Thus, there’s no way that global demand (and prices) for crude oil can be increased by artificial “stimulation” in the near future.
Oil Producers’ Primary Solution
If artificial “stimulation” can’t increase the global demand (and price) for crude, that leaves only the supply side of the supply-and-demand economic equation to solve the oil producing nations’ unprofitable dilemma.
To increase the price of crude oil, demand can’t be increased—therefore, the supply must be cut. If they don’t cut the supply, a lot of oil-producing nations won’t only lose lots of currency but also risk domestic turmoil and political revolution.
Worse, current low prices for crude contribute to deflation and might cause or at least aggravate a global economic depression.
Three Ways To Cut the Supply
I see only three ways to cut the current global supply of crude oil:
1) Voluntary Agreement
All oil-producing nations need to negotiate an agreement whereby they all cut their oil production by a fixed percentage. The idea of a voluntary agreement seems so obvious; so simple. So civilized.
But, if the past is any indication of the future, there’ll be no enforceable agreement. The oil producers don’t trust each other to hold to any agreed supply cuts.
The costs of closing wells now, by agreement, and reopening them later, may be too great for most oil producers to risk.
Even if an agreement could be reached, it would be quickly broken and the real supply of crude oil would not be reduced as much as agreed. As evidence of the breaches of the agreement surfaced, the agreement would be quickly declared void and maximum oil production would resume.
Agreements are unlikely to cut the supply—at least not for long.
2) Voluntary Bankruptcies
If the current financial losses caused by low demand and low oil prices persist long enough, some oil-producing companies and even nations will be pushed into bankruptcy. Whatever amount of crude oil they’d been producing will be subtracted from the global supply.
Venezuela is a good example. It’s already virtually bankrupt. Its supply of oil could disappear from global markets in the near future.
But how long will Venezuelan oil wells remain off-line?
A Venezuelan bankruptcy could push Venezuela into social chaos. In the midst of that chaos, Venezuelan officials might agree to sell existing (but turned-off) oil wells to wealthy outsiders for 20 cents on the dollar. Those wells would quickly be brought back into production.
The fact of Venezuela’s bankruptcy doesn’t mean that its oil wells will be removed from production for long or even at all. In fact, it’s entirely possible that a bankrupt Venezuela will be so desperate for additional revenue that it will produce even more oil at an even lower price.
Another problem with bankruptcies is that they’ll afflict the weakest oil-producing nations first. The weakest oil-producing nations are the ones which produce the least oil.
If Venezuela goes broke, who cares? Removing Venezuela’s 3% share of global oil production from the markets will have only a negligible effect on production and prices. If other small producers go broke, the effect will also be negligible and the remaining producers will jump to seize the bankrupt’s former market share.
Net result? Little or no reduction in global supply of crude oil
More, bankruptcies take time. If Venezuela is bankrupt today, it could be months or years before a second and then a third nation’s capacity to produce crude oil is reduced by bankruptcy.
Thus, bankruptcies are unlikely to significantly reduce oil production as quickly or effectively as may be necessary.
3) WAR
If production-limit agreements and bankruptcies only reduce oil production temporarily (if at all), it appears that the only way to quickly and significantly cut some of the world’s oil production is to destroy a significant percentage of oil wells and/or oil-producing nations.
Physical destruction of hundreds or even thousands of oil wells means WAR.
I’m reminded of Kuwaiti and Iraqi oil wells that were set ablaze and thereby destroyed during the first Gulf War. Those fires were blamed on Saddam Hussein, but they could’ve been set by anyone who had a vested interest in cutting the world’s supply of crude oil. Once those wells were set on fire, it took two or three years to both stop the fires and restore the wells to operation and profitability. During those years, the supply of Kuwaiti and Iraqi crude was removed from the global supply.
If you want to cut the global supply of crude oil, the only effective and time-tested method for doing so is not voluntary agreements or slow-moving bankruptcies. Those strategies might temporarily remove some wells from production but will still leave them largely functional and generally able to be quickly turned back on.
If you want higher oil prices and you can’t raise global demand due to an economic depression, the only option is to cut global supply by destroying oil wells by means of war.
Once an oil well is destroyed, it can’t be quickly or inexpensively brought back on line.
Saudi Comeuppance
If war is the only reliable means to reduce the global, oil-supply glut, which nation(s) should be destroyed?
How ‘bout, small-timers like Venezuela that produce only a few percent of the world’s oil supply?
How many small, oil-producing nations would have to be attacked before there was a significant reduction in global supply? Somewhere between four and ten. There’s a logistical problem in simultaneously attacking several nations that are spread out over the globe. It’s dangerous to fight a war on several fronts.
More, how could The Powers That Be justify simultaneously attacking several small nations that are largely unrelated except for the fact that they’re all oil producers? Public opinion would quickly declare the “Powers” responsible for the attacks to be fascists and villains.
But some sort of pretext could always be generated for attacking and destroying one, maybe two, oil-producing nations. Destroy Venezuela and the global oil supply is reduced by 3%. Destroy Saudi Arabia, and the global oil supply would be cut by 13%.
Of course, Saudi Arabia isn’t necessarily the world’s biggest oil producer.
Everyone agrees that the US, Russia and Saudis are the top three oil producers.
Even so, we can’t destroy most of the oil wells in the US because they’re too spread out and the US has numerous ICBMs.
And we can’t destroy Russia’s oil wells because Russia might retaliate with nuclear missiles that could toast our eyeballs.
But Saudi Arabia has relied on the US to defend it for the past 44 years and doesn’t really have a credible nuclear defense. Nobody really likes the Saudis. They throw great parties, but they’re Muslims, arrogantly wealthy, despotic, and routinely inspire the world’s jealousy and secret animosity. In their own way, the Saudis are almost as despised as Israel. If some proxy nation or entity (ISIS?) could be created and persuaded to not only attack Saudi Arabia but thoroughly destroy Saudi oil wells, 13% of the world’s oil supply might disappear for several years.
If the “Powers” could precipitate a real war between Iran (#7 on the oil producers’ list with about 4% of the world’s oil production and likely to double since they’ve been freed from US-imposed economic sanctions) and Saudi Arabia (13%)— global oil supplies might be trimmed by 17%.
If the “Powers” could drag Iraq (#8 producer; 3%) into a Middle East regional war that started between the Saudis and Iran, global oil glut might be cut by 20%. Maybe more.
Would a 20% cut in the global oil supply be enough to push oil prices back into profitability? I think it would.
Regional, Middle East War
Logic suggests that if anyone really wants to preserve the oil industry’s profits, the only way to do so may be to precipitate a regional Middle East war that definitely destroys the Saudis—and, ideally, also destroys Iran and perhaps even Iraq.
Saudi Arabia is the logical, central target for any nation, corporation, conglomerate or “terrorist” organization bent on reducing the supply of crude oil and thereby raising its price.
If this reasoning is roughly correct, Saudi Arabia might be the natural target for several “backpack” nuclear bombs in the near future. After they were detonated in Saudi oil fields, the world could argue about who built the backpack nukes. But, the world could surely be led to agree that some terrorist group (OMG!) sponsored by Iran planted the bombs.
The Saudi’s might react by bombing Iran. Iran might be goaded into bombing Iraq. The oil-producing capacity of 3 of the top 10 oil-producing nations could be destroyed in a matter of days or even hours.
From the perspective of any “Powers” wishing to protect the oil industry from the global supply glut, a regional Middle East war that involved nuclear weapons would be an ideal solution. 20% of the world’s oil supply could vanish in a matter of hours. The price of crude might double just as quickly.
$250 Per Barrel?
In fact, OilPrice.com published an article entitled “War Between Saudi Arabia And Iran Could Send Oil Prices To $250.”
Hard to believe. $250/barrel? Maybe for a moment. Not permanently.
But who can say?
I doubt that merely pushing Saudi Arabia, Iran and Iraq into a conventional, regional, Middle East war could push oil prices up to $250/barrel. But toss in a half dozen backpack nuclear bombs to inspire real, global fear, and there’s no telling how high the price of crude might fly.
The question is, do The Powers That Be want to protect the oil industry bad enough to destroy some significant number of oil wells? If they do, Saudi Arabia could soon be toast.
On the other hand, if alternative energy technology is causing the oil industry to become a relic of the past, no one may want to protect it bad enough to nuke the Saudis. If so, we might see $20 and even $10 barrels of crude oil this year—but no $250/barrel oil in the foreseeable future.
How “Interesting”!
If I had to bet, I’d bet there’s a 60% chance that we’ll see regional, Middle East war in A.D. 2016 wherein Saudi Arabia is the principle target and casualty.
We really do live in “interesting times,” don’t we?
“Dangerous times,” too.
