Oil politics

Saudi Shenanigans Threaten the World's Long-Term Oil Supply

In keeping the price low the Saudis are threatening 1 trillion worth of future oil projects

Chris Martenson

Russia Insider,

17 December, 2014

The big story today, though, was a quite historic very rare plummet in a major currency as the Russian Ruble plunged -12%.

For a major currency this was a BIG move. Who knows what sorts of trouble such a near-collapse will bring to the highly-interconnected world markets, or even if Putin will consider this assault on the ruble to be an act of economic war, but there are certain to be consequences.

Russian stocks are now down nearly 50% from just 6 months ago...a major collapse by any modern standard.

To the extent that OPEC is playing games with the price of oil we must begin to worry that Russia (and Venezuela and Iran....) will view these actions quite unfavorably and do something forceful in response.

For now, I have no idea exactly what is motivating Saudi Arabia, particularly in driving oil prices so low. But I'm confident the reason is not economic in nature. Consider that the world oil markets are perhaps oversupplied by a million barrels per day. OPEC exports 30 mbd. What if they cut 1.5 mbd?

Then the world would be undersupplied and the price of oil would rapidly rise.

For OPEC to pretend that they are happy with 30 mbd (x) $60 which equals $1.8 billion vs. 28.5 mbd (x) $90 which equals $2.6 billion is just silly. 

So whatever OPEC is up to, it's not straightforward economics. It's something else. Perhaps it's to drive a few oil companies out of business and is just cutthroat business, but I seriously doubt that's the major driver here.

Instead, the most likely reason is geopolitical in nature. And the tip of the spear is aimed right at Russia. Call me crazy, but I think it's just an insane policy that's being conducted.

Meanwhile, as we wrote earlier, this is setting us up for some very big disappointments later on because the world will be seriously under-supplied with oil in the future unless current projects are undertaken.

But the news there gets more and more dire with every passing day:

Oil price fall threatens $1tn of projects

Dec 15, 2014

Almost $1tn of spending on future oil projects is at risk after a brutal plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned.

Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade — or 8 per cent of current global oil demand.

The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects — the lifeblood of future petrol supplies, heating fuels and chemicals.

Goldman has examined 400 oil and gasfields around the world, many of which are still awaiting a final investment decision. Its analysis, based on a $70 oil price, shows that fields representing 2.3m b/d of output by 2020 and awaiting a green light have now become uneconomic. That figure rises to 7.5m b/d of production by 2025.

The analysis excludes US shale.

(Source)

The shortfalls are even worse than advertised, as those just count up the new production that will go missing.

Also going missing, irrespective of the price of oil, is a very conservative 4% per year of existing production from currently producing fields. If those are producing 76 mbd then the amount that goes missing each year is 76M (x) 4% = 3 mbd/yr.

That is, each year another 3 million barrels per day of production goes missing and has to be replaced. Some think that decline rates are closer to 5% or even 6% making things that much worse.

Without the oil companies of the world finding and bringing on line another 3 mbd (or possibly even 4 or 5 mbd) each year the world's supply of oil will shrink.

Right now those future projects are being scrapped left and right. I certainly hope that the Saudis and the Obama team have somebody from the oil business explaining all this to them.

When the Saudis proudly say that they have a war chest of $750 billion stocked up to weather this storm, what they means to say is they have $750 billion parked in the US equity market and US Treasury paper.

Good luck calling that a 'war chest' if deflation comes along and rips the whole pile to papery shreds.

Crash-O-Matic Finance

James Howard Kunstler

http://kunstler.com/clusterfuck-nation/crash-o-matic-finance/

“Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47 percent decline…!”

–James Puplava, The Financial Sense News Network

May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop!

This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing.

It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.

ZIRP ruined all that. In fact, ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. In doing so, it twerked and torqued the concept of “risk” so badly that risk no longer had any meaning. In “risk-on” financial weather, there was no longer any risk. Imagine that? It also destroyed the entire relationship between borrowed money and the cost-structure of the endeavors it was borrowed for. Take shale oil, for instance.

The fundamental limiting factor for shale oil was that the wells were only good for about two years, and then they were pretty much shot. So, if you were in that business, and held a bunch of leases, you had to constantly drill and re-drill and then drill some more just to keep production up. The drilling cost between $6 and $12-million per well. What happened the past seven years is that the drillers and their playmates on Wall Street hyped the hoo-hah out of the business — it was a shale revolution! In a few short years they drilled to beat the band and the results seemed so impressive that investment money poured into the sector like honey, so they drilled some more. It was going to save the American way of life. We were going to be “energy independent,” the “new Saudi America.” We would be able to drive to Wal-Mart forever!

Be careful what you wish for, the old saw goes. The shale oil “miracle” was an epochal stunt. They goosed so much oil out of the ground in a short period of time that they killed the goose — demand for oil at a price that made it worth drilling for. Now, much of the junk financing will default, and the result of that is no more junk financing for a long, long time, meaning that a lot of planned wells will not be drilled and completed, meaning that the current crop of short-lived wells will crap out in the 24 months ahead, and production will not be replaced by new wells, which will not be there. When and if the riggers get busy again in the Bakken and the Eagle Ford, you can be sure it will be at a much lower level of activity than the glorious year 2014. Of course, it remains to be seen how much financial illness the spoiled junk bond paper will spread through the derivatives markets, not to mention the boring old stock and bond markets and the big banks that traffic there. You can only fool reality so long. Eventually risk-on returns for real and swipes the ground with its mighty tail.

Finance was the lifeblood of the global economy and scam after scam left it riddled with wormholes of fragility. That fragility has been waiting to express itself and the ability of bank wizards to squelch and conceal it may have come to an end. There will be no quick cure for cratering oil prices and the damage it will wreak among the shale drillers. Does that sound like much?