Drop in Gasoline Prices a Bad Thing?

[Derec]

So the Saudis "did this" by doing the same thing they have been doing for these last many years?

No, they have traditionally sought to keep prices stable within a range. That they are not supposedly fine with even a $20 price (although I suspect they will cry "uncle" in the $40s) raises the question of why. They are still the world's biggest exporter and so stand to lose with low prices. Is it a question of "asking the genie to be beaten half to death"? It will hurt them a lot but it will hurt Iranians and Russians, who need even higher prices to balance their budgets, even more. That's possible. Or is it a question of taking shale producers out of the business. I don't think so. The deposits will not go anywhere. The technology will not go anywhere. So even if stopped, shale will come back when prices rebound.

 

[Underseer]

Fox Now Asking: Is The Drop In Gas Prices A Bad Thing? | Blog | Media Matters for America

Earlier this year, Fox News hyped the rise in gasoline prices, blaming President Obama even though experts agree that worldwide market factors, not U.S. policies, set gas prices. So what is Fox saying now that gas prices are falling? ...

Stuart Varney, the Fox Business host pictured at the top, tried to explain the claim that the recent gas price drop might be "BAD," saying it may be "just a sign of a weakening economy." The Wall Street Journal reported that one of the reasons for the drop in gas prices was the "softening economies in the U.S. and Europe," along with easing tensions in Iran and changes in the oil market.

Will the Saudis drive U.S. shale out of business? Kemp | Reuters from their lowering their crude-oil prices.

Why might they be doing it? My best guess is a price war with Iran to try to hurt that nation. Saudi Arabia's leaders may figure that they can survive less oil revenue better than Iran's.

But what might other oil producers say to Saudi King Abdullah? Stephen Harper with the Alberta tar sands? Charles and David Koch with their involvement in North Dakota oil-shale fracking? Vladimir Putin?

The Kochs: "We have politicians' careers to finance. They need money for ads. We have propaganda mills. They also need money to get their propaganda widely featured. We are your biggest protectors, and we'll help get elected politicians who will protect you. Without money, your protectors could lose elections, and we'd lose business to those hippie fairy renewable energy sources."

Vladimir Putin: "I have a Ukraine dismemberment to finance. It's especially bad given that our troops' cover has gotten blown there. We had been succeeding where US President JFK had failed half a century ago in Cuba, but now it looks like we'll only get some territory."

Aren't shale extraction techniques more harmful to the environment anyway?

 

[fromderinside]

So the Saudis "did this" by doing the same thing they have been doing for these last many years?

No, they have traditionally sought to keep prices stable within a range. That they are not supposedly fine with even a $20 price (although I suspect they will cry "uncle" in the $40s) raises the question of why. They are still the world's biggest exporter and so stand to lose with low prices. Is it a question of "asking the genie to be beaten half to death"? It will hurt them a lot but it will hurt Iranians and Russians, who need even higher prices to balance their budgets, even more. That's possible. Or is it a question of taking shale producers out of the business. I don't think so. The deposits will not go anywhere. The technology will not go anywhere. So even if stopped, shale will come back when prices rebound.

Better update that divining rod of yours. Saudis are tired of supporting those who keep pumping when limits are set. ARAMCO provided the Saudis with an infrastructure capable of recovering their oil for less than $5. This is win-win for the Saudis. Us too if we schmooze them at about $60 a barrel.

If US and friends who frack want to 'break' OPEC they're going to have to subsidize or give in. Judging from whats happening to Russia and Iran I don't think we'll go here.

 

[Derec]

Better update that divining rod of yours.

Ditto.

Saudis are tired of supporting those who keep pumping when limits are set.

That is true. OPEC has failed to keep discipline among its members.

ARAMCO provided the Saudis with an infrastructure capable of recovering their oil for less than $5.

Speaking of updating the divining rod, you seem to be talking about the 70s, before the nationalization. Saudi ARAMCO is "the Saudis" for all intents and purposes. As far as infrasttructure, that has been greatly expanded since than. As far as $5, that is a thing of the past too. Saudi production costs are still low, but not nearly that low. Huge fields like Ghawar are ageing and large quantities of water or CO₂ must be injected into the wells to maintain reservoir pressure. That also means that there is significant water cut in the pumped liquid that has to be separated from the oil. Khurais field which was revived in 2009 requires 2 million bbl/day of treated seawater to be injected to maintain a 1.2 million bbl/day production. All that costs money.

This is win-win for the Saudis.

They will still make money but less of it but they will harm their rivals more than they harm themselves.

Us too if we schmooze them at about $60 a barrel.

Explain.

If US and friends who frack want to 'break' OPEC they're going to have to subsidize or give in. Judging from whats happening to Russia and Iran I don't think we'll go here.

OPEC is already broken.

 

[dismal]

So the Saudis "did this" by doing the same thing they have been doing for these last many years?

No, they have traditionally sought to keep prices stable within a range. That they are not supposedly fine with even a $20 price (although I suspect they will cry "uncle" in the $40s) raises the question of why. They are still the world's biggest exporter and so stand to lose with low prices. Is it a question of "asking the genie to be beaten half to death"? It will hurt them a lot but it will hurt Iranians and Russians, who need even higher prices to balance their budgets, even more. That's possible. Or is it a question of taking shale producers out of the business. I don't think so. The deposits will not go anywhere. The technology will not go anywhere. So even if stopped, shale will come back when prices rebound.

What were they doing 3 months ago they aren't doing now? Specifically, I mean. Not vague generalities or statements about aspirations.

 

[TV and credit cards]

The Saudis still pump oil at between $5-$6 a barrel. They have been burned in the past reducing their production only to see other countries bring more wells on line when there is price support. The Saudis may have a break even point in the $40 range somewhere to support their economy but they have a $900B reserve fund.

$100 a barrel oil put a lot of production on line, more than what is needed. Barring anything unforeseen, we will not see $100 oil again. The question now becomes geopolitical for Venezuela, Iran, and Russia.

 

[Derec]

What were they doing 3 months ago they aren't doing now? Specifically, I mean. Not vague generalities or statements about aspirations.

I'm thinking more in terms of years rather than months.

 

[Derec]

The Saudis still pump oil at between $5-$6 a barrel.

Lifting costs are only one part of the total production costs. Finding and drilling for oil costs money as well.

The Saudis may have a break even point in the $40 range somewhere to support their economy but they have a $900B reserve fund.

According to this, not even close. WSJ has Saudi Arabia's budget break even price at $106, so they must already be dipping into their reserve fund to pay the bills.

$100 a barrel oil put a lot of production on line, more than what is needed. Barring anything unforeseen, we will not see $100 oil again.

I think the opposite. We will see $100/bbl oil by Summer of 2016 for sure, and probably in 2015 already. That's because lower prices discourage investment in production, reducing supply (with a delayed effect), while at the same time they encourage increases in demand. Thus a price swing in one direction is followed by a price swing in the opposite direction.

 

[fromderinside]

First about durrent production costs in Saudia Arabia. Reuters FACTBOX-Oil production cost estimates by country http://www.reuters.com/article/2009/07/28/oil-cost-factbox-idUSLS12407420090728

Saudi Arabian crude is the cheapest in the world to extractbecause of its location near the surface of the desert and the
size of the fields, which allow economies of scale. The operating cost (stripping out capital expenditure) of
extracting a barrel in Saudi Arabia has been estimated to be
around $1-$2, and the total cost (including capital expenditure)
$4-$6 a barrel.

We will see $100/bbl oil by Summer of 2016 for sure, and probably in 2015 already. That's because lower prices discourage investment in production, reducing supply (with a delayed effect), while at the same time they encourage increases in demand. Thus a price swing in one direction is followed by a price swing in the opposite direction.

I justified my bloviation now its your turn.

 

[Derec]

I justified my bloviation now its your turn.

When you see numbers that seem too good to be true, you have to ask yourself if they make any sense. Your link listed no source for this claim for Saudi Arabia and thus there is no indication who made these estimates or when. They listed a source from 2008 (the Article itself is itself old, from 2009) for the list at the bottom of the article, which lists a range for Middle East oilfields from $6-$28. Does it really make sense that the average for all KSA oil fields corresponds to the very bottom of the Middle East oil field range? And that's not all. The biggest KSA oil fields are old. Ghawar, which provides almost half of the country's production is over 60 years old. It relies on things like water and CO₂ injection to maintain production levels this late in its life cycle, but those things cost (at least $30/bbl as per your link).
All these figures were also compiled before expensive projects like Khurais and Manifa came online.

Saudis are infamously secretive about their oil industry so concrete numbers are hard to come by. And we need to be skeptical when numbers surface that do not pass the smell test.

Also look at the graphic below. Rystad Energy and Morgan-Stanley estimate Middle East production costs to be in the range of ~$10-~$37/bbl, with an average of $27/bbl. Far cry from your figure of $4-$6/bbl.

 

[fromderinside]

I justified my bloviation now its your turn.

When you see numbers that seem too good to be true, you have to ask yourself if they make any sense. Your link listed no source for this claim for Saudi Arabia and thus there is no indication who made these estimates or when. They listed a source from 2008 (the Article itself is itself old, from 2009) for the list at the bottom of the article, which lists a range for Middle East oilfields from $6-$28. Does it really make sense that the average for all KSA oil fields corresponds to the very bottom of the Middle East oil field range? And that's not all. The biggest KSA oil fields are old. Ghawar, which provides almost half of the country's production is over 60 years old. It relies on things like water and CO₂ injection to maintain production levels this late in its life cycle, but those things cost (at least $30/bbl as per your link).
All these figures were also compiled before expensive projects like Khurais and Manifa came online.

Saudis are infamously secretive about their oil industry so concrete numbers are hard to come by. And we need to be skeptical when numbers surface that do not pass the smell test.

Nice numbers. References please. Notice how you were able to use my references. Show me the same courtesy.

You are trying to justify Saudi costs in terms of just infrastructure and new technology. That might be adequate for a backwater country with no taxes or social care system. I'd be more interested any numbers you can generate where, as Russia and Iran, Saudis use some of their oil for social programs. My guess is that the Saudis, being a more moderate economic enterprise, targeted their current social welfare back in the '90s when oil averaged between $40 and $80 a barrel. I'm pretty sure their current policy is based on calculations against that kind of a baseline, say about $50 a barrel, (confirmed by 2013 document referenced below) which would significantly stress everybody else, the new producers and the greedy social planners.

The Rentier Dilemma of Development: A Comparison of Economic Diversification in Saudi Arabia and Abu Dhab http://sites.dartmouth.edu/worldoutlook/files/2013/09/Fall-2013-Issue-441.pdf#page=64 Quote from page 67.

New Ways to Buy Popular Support Abu Dhabi and Saudi Arabia’s experience in the 1980s proved that buyingpopular support with one currently valuable commodity is dangerous. Neither regime depends on high oil prices for a balanced budget: the UAE’s threshold price for a balanced budget is $40 per barrel of Brent oil, and Saudi Arabia’s is $50.28 Nor does either
regime fear running out of oil. Saudi Arabia’s reserves will last for eighty years at today’s production levels, and Saudi Aramco keeps “pushing that eighty years forward every year” because of new discoveries.29

So I'm pretty sure Saudi Arabia will continue to keep its oil flowing attempting to regain market share while doing whatever to other states that haven't anticipated prices below production costs even below $50 cost for profitability some time.

As for my original cost estimates without social costs I'm sure Saudi Arabia can produce as much oil as needed to support social systems at these bargain basement production costs since their original oil fields still can produce more than they require using old technology (9 million barrels a day) from unimproved sources.

Taking my original post's cost of $6 a barrel for production, Saudi Arabia's social system (buying compliance of citizens cost) is about $45 a barrel. When higher production costs need be factored in I suspect diversification the Saudi economy will take much of the added cost load off of oil.

Still, its putting quite a load on me for you to not include references.

 

[Derec]

Nice numbers. References please. Notice how you were able to use my references. Show me the same courtesy.

I used your own source to refute the idea that KSA's cost is $4-$6/bbl. I also gave you the chart by Rystad Energy and Morgan Stanley that shows the range and average cost for Middle East. Even the low-end of the range is twice your figure for average Saudi production cost.

You are trying to justify Saudi costs in terms of just infrastructure and new technology.

Saudis are notoriously secretive about the details of their oil business. Thus the figures for Saudi production costs are by necessity estimates. I am giving reasons for dismissing the lowball $4-$6/bbl figure you favor. And the complexities inherent in new Saudi developments are are big reason why that estimate doesn't make any sense. Look at this video about the Khurais development to see just how much effort and technology has to go into modern oil developments. Even in places like Saudi Arabia the low-hanging fruit has long since been picked and what remains is much more difficult to get out.

That might be adequate for a backwater country with no taxes or social care system.

What the hell are you talking about? The cost of production and budget break even prices are two completely separate things. Talking about the former doesn't mean that one is implying that the country in question is not using oil revenues to fund social programs and other budget items.

I'd be more interested any numbers you can generate where, as Russia and Iran, Saudis use some of their oil for social programs. My guess is that the Saudis, being a more moderate economic enterprise, targeted their current social welfare back in the '90s when oil averaged between $40 and $80 a barrel. I'm pretty sure their current policy is based on calculations against that kind of a baseline, say about $50 a barrel, (confirmed by 2013 document referenced below) which would significantly stress everybody else, the new producers and the greedy social planners.

Actually that is underestimating the budget break even price. WSJ estimates KSA's budget break even price to be $106 using IMF as a source. Oil and Gas Financial Journal estimates it at $97/bbl. Even Reuter's FACTBOX sees Saudi budget price at $92/bbl for 2013.

New Ways to Buy Popular Support Abu Dhabi and Saudi Arabia’s experience in the 1980s proved that buyingpopular support with one currently valuable commodity is dangerous. Neither regime depends on high oil prices for a balanced budget: the UAE’s threshold price for a balanced budget is $40 per barrel of Brent oil, and Saudi Arabia’s is $50.28

The author seems to be using inaccurate or outdated figures here. Note that the she was a college student writing for Darthmouth's undergraduate journal.

Nor does either regime fear running out of oil. Saudi Arabia’s reserves will last for eighty years at today’s production levels, and Saudi Aramco keeps “pushing that eighty years forward every year” because of new discoveries.29

Saudis take about 3 billion bbl out of the ground each year. Where are the corresponding 3 billion bbl in new discoveries each year? In fact, there is evidence that KSA and the rest of OPEC have been overstating their oil reserves significantly.
Opec believed to overstate oil reserves by 70%

So I'm pretty sure Saudi Arabia will continue to keep its oil flowing attempting to regain market share while doing whatever to other states that haven't anticipated prices below production costs even below $50 cost for profitability some time.

They will not be able to keep it up for long, given their budgetary constraints.

As for my original cost estimates without social costs I'm sure Saudi Arabia can produce as much oil as needed to support social systems at these bargain basement production costs since their original oil fields still can produce more than they require using old technology (9 million barrels a day) from unimproved sources.

Their "original oil fields" are old and have been produced for decades. With "old technology" and "unimproved sources" they would have run dry a long time ago.
In order to keep production up they had to rely on modern technology such as sophisticated reservoir monitoring and modelling, water injection, gas injection, horizontal drilling and maximum reservoir contact wells.

Taking my original post's cost of $6 a barrel for production,

Fictional as it may be.

Saudi Arabia's social system (buying compliance of citizens cost) is about $45 a barrel.

Using the more realistic $20/bbl for production costs and at least $90 for budget cost it's more like $70/bbl which translates to about $250 billion per year or about $8k per person.

When higher production costs need be factored in I suspect diversification the Saudi economy will take much of the added cost load off of oil.

I do not think they are doing too good a job diversifying, given the harsh theocratic laws and the population that has grown lazy and over-reliant on foreign workers.
And production costs will keep rising with each year as the remaining oil will be ever more difficult to get out.

Still, its putting quite a load on me for you to not include references.

Tell me what in particular you are missing. Although I can't say I am too impressed with a 5 year old Reuter's FACTBOX and an undergraduate paper.

 

[Derec]

Oil prices continue to fall. WTI is now below $50, Brent is just above. I wonder how much longer this will go on before OPEC cries uncle.

 

[funinspace]

I dunno about OPEC, but US fracking companies are getting hammered. The US rig count is imploding.

http://www.bloomberg.com/news/2015-...-drop-since-2009-spells-tough-year-ahead.html

U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse.

The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. (BHI) data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp.

Drillers are already running the fewest rigs in nine months after a 46 percent drop in U.S. benchmark West Texas Intermediate oil in 2014, the steepest decline in six years and the second-worst since the commodity began trading in 1983.

And many of these companies are highly leveraged.
http://wolfstreet.com/2014/12/07/bloodbath-in-oil-patch-junk-bonds-leveraged-loans-defaults/

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.
<snip>
How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar (red line):

Venezuela is under immense stress, and Nigeria felt it needed to say it won’t become another Zimbabwe for some reason...

 

[Davka]

I'm more than a little concerned about all those people who went up to North Dakota to work on fracking rigs. The boomtowns are going to bust, hard, if this keeps up.

And the potential ripples through the economy would seriously suck. We are just beginning to recover from the reaming we got from the banks via bundled mortgages.

 

[Derec]

I'm more than a little concerned about all those people who went up to North Dakota to work on fracking rigs. The boomtowns are going to bust, hard, if this keeps up.

That is indeed one the the dangers of lack of investment due to low prices and thus low anticipated ROI.

And the potential ripples through the economy would seriously suck. We are just beginning to recover from the reaming we got from the banks via bundled mortgages.

I do not think this will affect the economy directly since it is not a big fraction of the overall US economy and because lower oil prices positively affect the rest of the economy.
The real danger to the economy comes if investment in new wells/developments drops so much that the inevitable decline of existing wells drops production volumes enough to, together with increase in demand, let the oil price spike again.

 

[arkirk]

That is indeed one the the dangers of lack of investment due to low prices and thus low anticipated ROI.

And the potential ripples through the economy would seriously suck. We are just beginning to recover from the reaming we got from the banks via bundled mortgages.

I do not think this will affect the economy directly since it is not a big fraction of the overall US economy and because lower oil prices positively affect the rest of the economy.
The real danger to the economy comes if investment in new wells/developments drops so much that the inevitable decline of existing wells drops production volumes enough to, together with increase in demand, let the oil price spike again.

Fracking and tar sands extraction are environmentally unsound practices. They are to the environment what liars loans were to housing. The reason to fear economic consequences is that these companies sucked up money (which they now owe and cannot repay) in an effort to expand an industry that needs to go away. The investment of money and human capital in polluting industries can always expect hard knocks. The problem is that our economic system allows these outliers to create conditions that hurt investors, the overall economy, and the environment.

Investment in oil drilling, fracking, and tar sands extraction is misinvestment....simply an error. But the big boys with the big money manage to get sweet talked into dreams of a glowing future based on petrochemical extraction when no such future is a reasonable expectation. How much further along would we be if all that exploratory money were invested in known technologies that would preclude the need for all this poison to be pumped to the surface of the earth?

It is true, the low prices and falling oil production and exploration will make its own dent in our economy and this dent has already been deepened by the climate change deniers. When huge amounts of money slosh around in our economy into futile ventures, we all pay for it.

 

[TV and credit cards]

Here's a little more reading from the Economist: A few short stories. Granted this is a month old which is pretty old for the oil market these days but it does lend a little insight.
I think this will shake out some weak players, some investors will get burned (that's the way the cookie crumbles) who went in on the weak players. I think things will be overall sound in the US.

 

[Derec]

I dunno about OPEC, but US fracking companies are getting hammered. The US rig count is imploding.

As the article says, this affects new drilling, not producing wells. So it will not immediately affect new production but will affect production down the road.

Venezuela is under immense stress, and Nigeria felt it needed to say it won’t become another Zimbabwe for some reason...

And both are members of OPEC.

 

[aeebee50]

I only make money when natural gas rises. Falling gasoline prices helps when I travel.