You guys are the best! You humor my half witted science and political posts, gently correct my errors and quietly talk me off the suicide ledge. And the last couple of days have been great for my end of the year desperate plea for virtual change by way of my Paypal account at DarkSydoTheMoon-at-aol. Which I’m using in part to help an amazing, courageous lady who has been through a harrowing battle with brain cancer. Thank you all so much, one more day of begging and it’s all over.
On to the main event: If politics makes for strange bedfellows, the energy industry swings live online with barnyard animals. So it is that right now our best alley, in terms of both low gas prices and in hitting domestic shale oil and tar sands producers right in the corporate jewels, is our good fundamentalist Sunni pals in Saudi Arabia:
Seeking Alpha — Saudi Arabia does not care if oil prices crash because it is relatively insulated from any significant decline in revenue because of lower oil prices. Saudi Arabia is insulated because it has extremely low production costs and modest economic diversity, as exemplified by its religious tourism. Saudi Arabia has historically used oil as a tool to advance its geostrategic interests and it is again deploying this method to fight shale producers. This is a Pyrrhic War that many shale producers cannot win. This oil-shale production war will have profound consequences for shale producers and the entire oil industry in 2015 and beyond.
I don’t think anyone really knows why the Saudi’s are dumping oil. But if the idea here is to hurt tar and shale producers, it seems to me they’re going to have to keep dumping for awhile. Those companies have deep pockets for one thing, and calling the investment they’ve made a shitload is an understatement. They don’t have a hell of a lot of choice except to ride it out and, one would assume, they’re hedged up the ying-yang in the commodities and option markets against low prices.
Those hedges typically go forward at least several months and there are some long term ones that go out several years. Again, assuming the shale and tar producers weren’t total dumbasses who missed locking in a profit when it was cheap to do so. Always a dicey assumption when dealing with self appointed masters of the universe. So, if that’s good reasoning, it will take months of low prices to really hurt the Bakken and Keystone folks.
What worries me a lot more than the earnings of energy companies is how low oil prices could echo through the global economy in some as yet unpredictable way. You’d think low oil prices would be good. You’d Think. And you’d be forgiven for thinking that because that’s what every media outlet is telling you to think and it’s reinforced every time you stop for gas. But the real world is a little more complicated and way more fucked up.
Let’s say sustained low energy prices caused Russia to really fall apart, breakaway cities, oligarchs with private armies battling for towns, and that spreads to take down part of Asia, which could cause a downturn or partial collapse in China => parts of China break away or just become ungovernable. Sino civil war, even sustained civil unrest, would curtail China’s continued buying of US debt, which would cause a huge glut of t-notes and a giant interest rate spike, ending our deficit financed madness with a crash that would make the Great Recession of 2008 look more prosperous than the heady go-go 90s. And that’s just one scenario. There are dozens more.
It’s not analytically solid, I’m not an expert and I’m ignoring my inner skeptic here. It’s just a hunch, probably brought on by a long period of terrible luck in my own life. But this low oil price thing might end up being real bad for everyone.
China has ten times the population of Russia, and an economy five times as large. China’s economy benefits from a low oil price. The Russian Far East, which does border China, has a population of just 5 or 6 million. The vast majority of Russia’s population lives in the west. Russia’s possible economic collapse is Russia’s problem (and particularly Putin’s problem), and it could cause trouble in states that Russia regards as its satellites. None of this is China’s problem. Eastern China is also relatively homogenous ethnically, and is not very likely to break apart.
As much as I hate the fracking going on in Texas, I was hoping that the economic boom, and the high real estate prices that have gone along with it, would last for another year or so. We need to get our house ready to sell and I need time to recover from the spinal surgery that I have scheduled for the spring.
Within two years, we hope to get the house sold and get out of Texas. I would hate to see the state’s economy go down the hole and cause us to lose money on the house. That happened when we sold our first home in Oklahoma.
TBrandt I appreciate those points and I agree with them as stated, but the point is, the world economy is chaotic, people are greedy and stupid, and things don’t stay local or spread off to and amplify or dampen with other volatile events the way we think they will. In 1998 for example, a drop in Russian currency almost stopped the US dot-com stock market boom in its tracks, all because one somewhat obscure derivative trading company got themselves into a situation that required a sort of mini fed-private-banking bailout to resolve.
That particular situation only took a few billion to fix, but it came out of nowhere and landed on a healthy US bull market when the Ruble crashed half a world away in a smallish economy … when oil spiked in 2007-2008 it caused inflation concerns which contributed to interest rate resets on ARMS and revolving lines of credit that exposed the credit default swap schemes and triggered a near depression despite the injection of a trillion dollars in TARP, billions in sweetheart loans, and another $700 billion stimulus on top of it. When global oil prices move fifty percent plus in a short period of time, up or down, we’re talking huge amounts of change in underlying securities, commodities and derivatives, hundreds of billions to trillions of dollars of face value in bonds, energy contracts, materials contracts, rate contracts, land value vs production rates, and inter bank currency markets are affected at the nexus of the largest economies on Earth. Throw in obscure firms betting high out on a limb with insane levels of leverage acting with little or no regulations or reserves run by corrupt, greed-crazed well armed megalomaniacs in nasty places full of desperate fundie nationalist nutcases and it’s scary to speculate on what all could come of nowhere in that scenario.
Again, I’m being pessimistic here and probably downright alarmist. I’m not saying the end is nigh. Only that it’s worth playing devil’s advocate; crashing oil prices sound great for a nation utterly dependent on energy prices, but it may not work out the way everyone assumes it will when they’re smiling at the pump filling up their Hummer.
Perhaps the way to drive a stake through the heart of the Keystone pipeline would be to require that it be used to deliver a set amount of tar sands oil each year. Also require a bond to pay for the decommissioning and removal (with associated decontamination costs) of the pipeline in the event of a default on the agreement.
This would have the effect of causing the oil producers to operate at a loss while prices are low, and help keep prices low by bolstering the supply of oil on the world market. As a small fringe benefit (depending on how you look at it) it would be a poke in the eye for Putin, hitting him when the Russian economy is down.
The Republicans really like Putin and the Oil Barons. Would they really want to do this to them?
Actually – since Russia earns dollars for its oil price, and the rubel also drops – the effect on the internal Russian economy is is not severe. Russia was actually able to increase or at least keep its budget.
“The weak rouble protects the country’s budget revenues and provides a soft stimulus for domestic manufacturers.
It allows the country to survive the crisis but at the expense of growth and investment flows, both of which are being sacrificed over the medium term in order to try and remain in a relatively better shape to recover after the crisis and also to ensure that any loss of public support for the government is contained.”
https://www.opendemocracy.net/od-russia/chris-weafer/putin-stays
But the effect on western economies and the future of oil could be much in peril:
“So with great delight we present the latest blowback from Obama’s “brilliant” strategy to cripple Putin: in addition to the default wave about to crush America’s own shale industry, America’s biggest foreign ally and military partner when it comes to “ideologically pure missions of liberation” – the UK, and specifically its North Sea oil industry which according to the BBC is in a “crisis” and according to Robin Allan, chairman of the independent explorers’ association Brindex, the industry was “close to collapse”.
http://www.zerohedge.com/news/2014-12-18/its-huge-crisis-uk-oil-industry-close-collapse-people-are-being-laid
“The Saudis won the argument that the US shale boom must be countered by undermining the profitability of North American producers, curtailing current US production and future investment. At $70 for a barrel of oil, an awful lot of shale producers – particularly relatively small outfits that have driven much of the increase in US production from 7.5m barrels daily to 10m over the past four years – won’t be able to operate. ”
“Oil is priced in dollars. All the major Opec producers peg their currencies to the dollar. Given that, when the dollar rises, all other things being equal, the price of oil falls. This is an axiomatic truth. ”
http://www.telegraph.co.uk/finance/oilprices/11262690/Why-black-golds-low-prices-wont-last-long.html
And then there is this:
“Saudi Arabia’s push to drive down oil prices is not just an attempt to undermine the US shale oil boom, but also the global clean energy industry, Virgin founder Richard Branson has said in an interview with British media.
“They have done it before and it hurt,” the Guardian cited Branson as saying. “They don’t just want to damage the US fracking industry, but also the clean energy business. The collapse of oil prices is going to make it much more difficult for clean energy.”
Branson, the founder of the venture capital conglomerate Virgin Group, who has invested an estimated $350 million in clean technologies, said that both fracking and renewables had put a drastic dent in the bottom line of oil producing countries over the past few years.”
http://russia-insider.com/en/2014/12/18/1997
I suspect the oil-price drop involves both Saudi calculations and US attempts to smack Russia down (again). With further US Ukrainian adventurism, or similar stunts in other neighboring nations, Eurasian dominoes might get quite wobbly.
Renewable-energy businesses and energy-conservation programs will fail long before the (major) frackers, with consequent long-term planetary damage. With gas prices falling below $2.50/gallon, we may even see the Hummer® return. :-P
Expect the economy to over-react to lower energy prices with yet another boom-&-bust cycle, this time amplified even further by deregulated financial cowboys. One possible silver lining – if the bust phase can hold off for just 22 months, a better employment situation may help keep the Repubs out of the White Palace in ’16.
I seem to be persona non grata on FTB – okay, I get it
Bye
It’s Russia that’s the big adventurist in Ukraine. If you believe that it’s an entirely spontaneous rebellion against the Ukrainian government without Russian involvement, you will also believe that the Bay of Pigs invasion of Cuba in 1961 was completely gringo-free. But the head Yanqui gringo himself, JFK, was willing to own up to the failure of that invasion. Vladimir Putin has yet to do anything comparable.
As to renewable energy sources, they have been most successful for generating electricity. Not only hydroelectric, but also wind and solar. Also, the fossil fuels most commonly used to generate electricity are coal and natural gas, with oil being much smaller. So oil-price gyrations will not affect that very much. However, natural-gas-price gyrations will, and we are seeing a slump in natural-gas prices also.
The previous big oil-price slump happened in 2008-09, and it lasted about 1 year from peak to peak. This current slump started about half a year ago, and it’s still continuing.
Natural gas has been having a somewhat different pattern of variation. But most recently, it’s been declining since roughly early last year, and it also shows no sign of bottoming out. It is still above the most recent trough in early 2012, however.
Source: NASDAQ