Sunday 28 December 2014

Oil prices

The collapse in oil prices ONLY affecting Russia, eh?!

Crude price drop triggers major layoffs in US oil industry

Reuters / Jonathan Alcorn

27 December, 2014

Thousands of recently highly paid workers have been laid off after the oil price plummeted 50 percent in 2014. At least four American oil-producing states are already facing budget problems due to decreasing oil revenues.

The price plunge has affected petroleum production in all oil-extracting countries, including the US.

Currently cheap fuel is still believed to be providing an overall boost to the US economy, as consumers can spend less on gasoline and more on shopping and services. But for the American energy sector the future looks less bright. It’s effecting places like Alaska, Louisiana, Oklahoma and Texas, the New York Times reports.

US oil experts recall the 1980s oil price downturn, accompanied by economic disasters around the globe and arguably becoming one of the causes of the fall of the Soviet Union. Some experts are positive and say America’s oil-producing states won’t suffer too much because they “diversified their economies.”

Reuters / Shannon Stapleton
Reuters / Shannon Stapleton

This doesn’t apply to the state of Alaska. According to the NYT, approximately 90 percent of state’s budget is formed from oil revenues. Alaska’s government is considering a 50 percent capital-spending cut for bridges and roads in the face of the oil price drop, with Moody’s, the credit rating service, lowering Alaska’s credit outlook from stable to negative.

The state of Louisiana’s 2015-16 budget is going to be $1.4 billion short, with 162 state government positions already eliminated and more to be discontinued starting from January. Contracts and projects are being either reduced or frozen in state agencies. According to the state’s chief economist Greg Albrecht, for every $1 fall in price of an annual average barrel of oil, Louisiana loses $12 million.

For Texas, which has a far larger and more diversified economy than Louisiana, the oil price downturn is no good either. In just October and November Texas lost 2,300 oil and gas jobs, the federal Bureau of Labor Statistics reported last week. Through the last half a year the state has been losing $83 million in potential revenue every day, the Greater Houston Partnership recently reported. They blamed this on crashing price of its West Texas Intermediate crude oil, which has depreciated to $54.73 per barrel this week, from more than $100 six months ago.

AFP Photo / David McNew
AFP Photo / David McNew

The situation in other oil-extracting states could be even worse. In a study published last year, the Council on Foreign Relations warned the largest job losses caused by sharp decline in oil prices are going to take place in North Dakota, Oklahoma and Wyoming, where the number of drilling rigs is decreasing.

The US oil industry has showed 50 percent employment growth since the recession officially ended in mid-2009, giving jobs to over 779,000 people as of October 2014, the Wall Street Journal reported. A total of 10 million jobs have been associated with the US oil and gas industry, Mark Mills, a senior fellow at the Manhattan Institute, estimated.

Now according to Tom Runiewicz, a US industry economist at IHS Global Insight, if oil stays around $56 a barrel till the middle of the next year, companies providing services to oil and gas industry could lose 40,000 jobs by the end of 2015, while oil and gas equipment manufacturers could slash up to 6,000 jobs.

These workers can earn more than $1,700 a week, much higher than the average $848 a week payment for other workers, the WSJ reported. When experienced workers lose their highly paid jobs, they stop paying their bills.

There are also fears of a house-price slump. Fitch Ratings has already warned that with the price of oil continuing to plummet, home prices in Texas “may be unsustainable.”

Saudi Arabia asserting itself as ‘dominant’ oil producer

Reuters / David Mdzinarishvili

27 December, 2014

Unlike many oil producing countries, including the US and Russia, Saudi Arabia wants to send a message to the world that it has the most power in the oil market, and will be able to ride out low oil prices for years, economist Max Fraad Wolff told RT.

RT: The deficit will reportedly be covered by the Saudi stock of net foreign assets – one of the largest in the world. But how long can the government afford to dig into the fund if oil keeps falling?

Max Fraad Wolff: The good news for Saudi Arabia is that their wealth is such, and so large and internationally diversified and deployed, that they can ride out probably a lot longer than we’re likely to see oil as cheap as it presently is. The bad news is, is that there are demographic and secular economic trends that are very much working against the Saudi economic model, and that’s really brought out to light by the kind of plunging oil prices. But those long-term secular and structural economic problems are a lot harder to solve than a short-term decline in oil prices.

RT: How will Saudi Arabia really be able to weather the storm of low oil prices?

MFW: The Saudi macro system has long been to subsidize all various elements of the economy on huge oil reserves and pool of wealth that was pretty carefully built up over a long period of time. Part of the stress of that, is that you have a disaffected youth with a big unemployment rate that’s grown. And the other is a big demographic problem here; Saudi Arabia has one of the highest birth rates in the world, and so its population is growing very, very rapidly without an economic base to support these people working and getting paid. And so it taxes the revenues from the oil and the country’s wealth at a growing rate, as the population continues to expand much more rapidly than the economy.

RT: The budget did not include a projected oil price, but experts have said that it was built on a price of $80 a barrel. At the same time, Saudi Arabia’s oil minister said OPEC wouldn't budge on its decision not to cut production, even if oil hits $20. So is the 2015 budget wishful thinking?

MFW: Saudi Arabia is really aggressively reasserting itself in its position here as the swing producer of oil. Certainly it still controls that position; this is a very dramatic reminder to the world of the power that comes with that position. That being said, while the extraction prices are very low and Saudi Arabia can withstand much lower prices for a much longer time than almost any other large oil exporter, on the other side of that is that it costs them quite a huge amount and its very painful, and I don’t think anyone who is in the production business wants to see the $20 a barrel, and I don’t think anyone thinks oil is going to go or stay at $20 a barrel at any point in the foreseeable future. So that strikes me as a bold statement of 'Ok, you are much less than anything macro relevant in terms of forecasting where the world is likely to be.'

RT: One theory about the falling oil price is that Saudi Arabia is trying to bring down US shale production. Are there any tensions between Washington and Saudi Arabia amid such reports?

MFW: It’s certainly possible. I think that's more about saying, 'Look. We're in a situation unlike anyone else. That's why we have the power we do in the oil market, we have a huge supply, huge proven reserves, a very low extraction price.' And so unlike lots of other countries – and I think they’re thinking about Russia, they’re thinking about Venezuela, they’re thinking about Nigeria, even to some extent the US – 'unlike other people, we can deal with a lower oil price because we have more oil, it’s easier to extract at a low price and so we are not as vulnerable to these low oil prices as maybe the world thinks we are.' And that may be even more important to announce when you look a little bit vulnerable, because you’re putting out a 2015 budget forecast that says for the first time since 2009, we’re back in the red, in other words we’re running a budget deficit. So it’s even more important to assert that you’re immune, because there is some evidence that you’re not completely immune in the budget deficit.

RT: Why doesn’t OPEC do more to stabilize oil prices?

MFW: Well certainly there's a good amount of diversity, and there’s never an absolutely uniform opinion inside OPEC; different countries with different extraction prices, different macro-economic needs. That being said, Saudi Arabia and some of the other Gulf states have clearly asserted their dominant position – and whatever they do, there’s some grumbling, there’s some upset, usually the way we really see that takes more time, and that is to what extent people start to cheat. Now unfortunately it’s easier to cheat when oil prices are high and you overproduce to make a little extra money. It’s hard to cheat when oil prices are low and dump more oil in the market, because when you do that, you do things that put in place the pressures that lower oil prices further. But we’ll see the grumbling, especially if oil prices stay low, and we’ll see some people probably cheating a bit on their various quotas.

RT: The falling oil price offers some leverage in the Iran nuclear talks. If sanctions are lifted and more Iranian oil floods the market, how far will the prices drop?

MFW: So, clearly the West and Iran have been tangled up in a long-standing negotiation. It looks like the both West, particularly the US, and the Iranian authorities have a lot of political reasons to downplay the successes that they’ve likely made, although no agreement seems immediately forthcoming. If Iran is able to get out from underneath the sanctions, and if Iran therefore gets on the track to produce more, it could have long-term downward oil price pressure. 

However, the Iranian oil infrastructure has suffered decades of neglect and it would be quite a while before international investment and the removal of sanctions would meaningfully increase Iran’s average daily oil production. 

Additionally, the Iranian population has more than doubled since the sanctions began. Domestic consumption of energy resources will also serve to limit how quickly additional oil could go on the global market, even if Iran begins to move towards the long, slow process of modernizing its extraction and production facilities.

RT: Who would benefit from a lifting of sanctions against Iran?

MFW: As Iran’s limited international oil footprint presently stands, if Iran was able perhaps through production and elimination of sanctions to increase its oil production, the way it's set up now, that would probably mostly benefit China and Japan and Iran itself – as oppossed to immediately being made available to the US.

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