More on oil prices and global economic collapse

When Guy McPherson was in New Zealand recenlty we discussed the fall in the price of oil and I raised the question of manipulation by the Saudis for their own geopolitical aims.

This is basically what we came up with:

The only things that has kept the lights on in the US and around the world since conventional oil production peaked a few years ago has been the development of non-conventional oil – the tar sands and shale oil derived by fracking.

This was never a going financial concern because of and extremely low EROI. It costs almost as much to produce the oil as energy derived. This goes for any of the “new” sources of oil, whether it be deep-sea drilling, fracking or tar sands.

Shale oil in the US (which is the reason why the US has again become a large producer again), quite apart from the atrocious environmental cost, has always been a ponzi scheme and entirely dependent on a high oil price.

Oil, in common with other commodities has reduced sharply in price in recent weeks and months and, as of yesterday, has reached the new low of $75 a barrel.

These low oil prices (along with commodities such as iron ore, dairy etc) indicate an economy that is stalling. The Baltic Shipping Index which is an indicator of the amount of goods shipped around the world has been falling.

Now that production of all sources of cheap oil (the low-hanging fruit) has peaked the world economy depends on high oil prices to keep the lights on.

There has been talk of this being a form of economic warfare against Russia by Saudi Arabia. However, it has been clear for some years that Saudi Arabia does not have the flexibility of production to increase production to manipulate prices in this way.

Similarly, I cannot see that this can be just a temporary manipulation of prices in the spot market.

This is a collapse in price.

In the last few hours there has been some candour from Vladimir Putin who is warning that the low prices could cause the collapse of the world economy. He knows what he is talking about – and it is not just the effects of low oil prices on a Russian economy that is dependent on energy export.

Oil Falls to Price That Putin Said Could Cause Collapse of Global Economy

Hyungwon Kang / ReutersGasoline price at Costco Warehouse pump shows under $3 per gallon in Sterling, Virginia in this file photo taken Nov.15, 2013.

Moscow News,

13 November, 2014

Correction appended: An earlier version of this article said that OPEC expected demand for its oil to drop by almost 1 million barrels per day (bpd) in 2015. OPEC actually expects demand to drop by 300,000 bpd. 

Brent crude oil fell to a four-year low of less than $80 per barrel on Thursday, descending to the point that Russian President Vladimir Putin recently said could, if prolonged, trigger the collapse of the world economy.

"If world prices stay at the level of $80, all production will collapse," news agency RIA Novosti quoted Putin as saying at a press conference last month in Milan.

Besides its potential global impact, a consistently low oil price would force the Russian government to seriously rethink its spending plans. Russia's budget for 2015-17, which is scheduled to go before the lower house of parliament for its second reading on Friday, assumes that oil prices will average $100 per barrel next year.

"A serious drop in the price of oil could require us to reconsider the basic tenets of our budget policy," Prime Minister Dmitry Medvedev said at a press briefing in Myanmar on Thursday, RIA Novosti reported.

However, Medvedev added that current price fluctuations are not severe or sustained enough to warrant readdressing the budget.

A 30 percent slide in the price of oil over the past five months has seriously aggravated volatility in Russia's highly energy-export-reliant economy. Exacerbated by Western sanctions over Russia's role in the Ukraine crisis, the oil price slump has driven nearly 30 percent depreciation of the Russian ruble against the dollar this year, sending year-on-year inflation in the country soaring above 8 percent.

Ministers from OPEC, the Organization of the Petroleum Exporting Countries, are scheduled to meet in Vienna at the end of the month to determine their response to sinking prices.

Sberbank commodities analysts said in a note Thursday that "conflicting messages coming out of Venezuela" were the underlying cause of price falls this week. Power outages struck Venezuela's main oil refining complex on Monday, and reports conflict on whether the refineries are back online, the note said.

Other analysts polled by Reuters said Saudi Arabia's apparent reluctance to cut oil output, a tactic backed by some OPEC members, has convinced the market that prices will fall even further.

Meanwhile, OPEC in a report published Wednesday warned that demand for its oil will drop by 300,000 barrels per day (bpd) next year, to 29.2 million bpd. Adding to producers' concerns, data released Thursday showed that China's economy continued to lose steam in October, Reuters reported. China bypassed the United States last year as the world's biggest net importer of petroleum.