Obama and Oil Prices. Is Anyone That Lucky?

January 5, 2015

Recent political history reinforces the maxim that it’s better to be lucky than smart.
What happens when you are both smart, and lucky?
Recent economic events related to falling oil prices have had one thing in common. The chaos and pain in global markets and economic impacts seem to have fallen disproportionately on countries, groups, and interests that have been thorns in Barack Obama’s side. Go figure.

One does not have to suppose that there has been formal, specific collusion between the Obama administration and the Saudi’s, whose recent decision to let oil prices continue falling has been a key driver in price drops.  These folks are all astute enough to know who their competitors are, who their friends are, and who is the enemy of their enemy.

NYTimes:

BRUSSELS — A plunge in oil prices has sent tremors through the global political and economic order, setting off an abrupt shift in fortunes that has bolstered the interests of the United States and pushed several big oil-exporting nations — particularly those hostile to the West, like Russia, Iran and Venezuela — to the brink of financial crisis.

The nearly 50 percent decline in oil prices since June has had the most conspicuous impact on the Russian economy and President Vladimir V. Putin. The former finance minister Aleksei L. Kudrin, a longtime friend of Mr. Putin’s, warned this week of a “full-blown economic crisis” and called for better relations with Europe and the United States.

But the ripple effects are spreading much more broadly than that. The price plunge may also influence Iran’s deliberations over whether to agree to a deal on its nuclear program with the West; force the oil-rich nations of the Middle East to reassess their role in managing global supply; and give a boost to the economies of the biggest oil-consuming nations, notably the United States and China.

Politico:

But now that Russia’s economy is rapidly imploding, with oil prices plunging and the ruble collapsing, Putin is the one feeling the pain. And the question already being debated in Washington is whether President Barack Obama’s strategy of economically sanctioning and isolating Russia deserves any credit.

“It’s hard to disaggregate out the independent effects of the sanctions from the bigger story. Obviously the driver is oil prices,” said Obama’s former ambassador to Moscow, Michael McFaul.

“That said, there is no doubt that sanctions raise uncertainty about the Russian economy. Their own minister of economic development said today that the ruble is falling faster than the macroeconomic indicators would suggest it should be,” McFaul added.

Wall Street Journal:

MOSCOW—As Russian President Vladimir Putin has ratcheted up the conflict with the West for most of the year, the economic fallout on ordinary Russians has been limited.

Suddenly, though, the plunging ruble is reawakening fears of rising prices and the kind of financial crisis Mr. Putin has sought to put behind his country. As the ruble hit a record low, falling as much as 20% against the dollar Tuesday, Moscow residents rushed to buy electronics and other big-ticket items and drained rubles from ATMs to swap them for dollars and euros—signaling a new feeling of vulnerability among Russians and a fresh challenge to their leader.

From St. Petersburg to Siberia, money changers ran out of foreign currency and were raising exchange rates. Sberbank , Russia’s state savings bank, and Alfa Bank, Russia’s largest private lender, said they were experiencing a rush for dollars and euros.

Obama and Putin

NYTimes:

Earlier this month, Iranian President Hassan Rouhani said the sharp fall in global oil prices was the result of “treachery,” a remark interpreted as a reference to Saudi Arabia.

“I want to say from this podium that talk about a Saudi conspiracy has no basis of accuracy at all and points to a misunderstanding,” Naimi said.

india_oil2

Screen shot from NDTV news, India.

A lot of reporting on the oil price plunge has focused on the role of increased North American “unconventional” oil production from horizontal drilling.  This technology, like deep ocean drilling, and exploitation of low grade Alberta tar sands, exists only because the price of oil has been high, and the market believes it will stay high in the long run. In the shorter term, the unexpected price collapse is a reminder of the boom and bust nature of fossil fuel economies, and a further blow to fossil fuel dependence,  as renewable energies become more competitive each week.

It’s significant that even some sectors of the conservative financial media get it that, in the long run, roller coaster prices make fossil fuels less attractive as more stable and predictable alternatives have become available.

Barrons:

The price of oil is plunging–and the shares of producers with it–after Opec decided not to cut production yesterday. Wolfe Research’s Paul Sankey and team think this is the beginning of the end for oil:

This is going to be volatile, and we can’t understand how that helps the Saudis. Volatility sells Teslas (TSLA). There seemed to be a clear degree of irritation in Saudi oil minister Al-Naimi’s comments to the crush of journalists; as ever, he had front run his position: no real cut because as he said, he expects the market “to stabilise itself eventually“. He is wrong…

We don’t think that global oil demand will significantly react to lower oil prices, and thus we think the market will clear at the point of US supply growth destruction. That will take six months to work through, at which point we will likely hit a significant slowdown in US oil production growth, falling Russian production, deteriorating OPEC member stability – notably in Venezuela, Nigeria, and of course Libya – and rising global demand. So we go low, to storage economics (likely $50/bbl WTI) in Q1 2015 and then squeeze supply. And then we squeeze radically higher. As a result, the world accelerates its move away from oil. The conclusion will be, OPEC, like Rockefeller, ultimately damned itself.

westeroswind

Business Insider:

The more obvious losers in the current oil climate are Iran and Russia — the former of course being Saudi Arabia’s arch rival in the region, and the latter being no great friend of the Saudis’ either.

The pinch to shale may just be “a wonderful byproduct to screwing the Iranians and the Russians,” said Michael Moran, Control Risk’s managing director for global risk analysis. Further, he said, doing nothing has actually been a really smart move by the Saudis. With every move further down in price, the actions of the Saudis become more closely watched, reinforcing the country’s position as the world’s oil superpower.

The major market for oil is transportation fuels, not electrical production, dominated by coal. But electric vehicles as a viable alternative are not going away. While it is true that lower gas prices always boost sales of larger, less efficient vehicles, it seems quite possible that there may be some significant buyer’s remorse for those owners, say, 18 months down the line.

Business Insider:

  • A decline in the price of gasoline induces people to drive more, increasing the demand for oil.
  • A decline in the price of oil negatively affects the economics of drilling, reducing additions to supply.
  • A decline in the price of oil causes producers to cut production and leave oil in the ground to be sold later at higher prices.

As Marks writes: “In other words, lower oil prices — in and of themselves — eventually make for higher oil prices.”

It is no secret that a primary source of friction between President Obama and the incoming Republican congress will be on energy and climate change.  One of the earliest actions we can expect the congress to take will be a vote on the contentious Keystone Pipeline, meant to transport expensive Alberta Tar sands oil to Gulf Coast refineries.  Low oil prices would tend to argue against that investment, so the continued push for the project can be taken as yet another indication that prices are widely expected to spike again eventually.

In the short term, with oil prices this low, it will be hard to argue that Obama’s policies have hurt consumers, or that the Keystone is needed to give consumer’s price relief, or even that the project is still attractive to investors. Longer term, the volatility that is fossil fuel’s achilles heel is baked into the cake.

Financial guru Jeremy Grantham quoted in again, Business Insider: 

So while some say the fracking boom has helped keep oil prices low and aided the US on its path to energy independence, Grantham thinks it might have set us on a path to nowhere.

“Its development has been remarkable,” Grantham writes.

“It will surely be seen in the future as a real testimonial to the sheer energy of American engineering at its best, employing rapid trials and errors — with all of the risk-taking that approach involves — that the rest of the world finds so hard to emulate. Similarly, it will always stand out as remarkable proof that, so late in the realization of the risks of climate change and environmental damage, the US could expressly deregulate such a rapidly growing and potentially dangerous activity.”

But for Grantham, the “red herring-ness” of fracking comes it what it hasn’t done.

“It has not prevented the underlying costs of traditional oil from continuing to rise rapidly or the cash flow available to oil-producing countries like Saudi Arabia, Iran, and especially Venezuela from getting squeezed from both ends (rising costs and falling prices)… Yes, they have been drilling more wells that chew up money, but not that many more, and good operations have lowered the costs per well by over a third. On the other hand they have drilled, as always, the best parts of the best fields first, and because the first two years of flow are basically all we get in fracking, we should have expected considerably better financial results by now. The aggregate financial results allow for the possibility that fracking costs have been underestimated by corporations and understated in the press.”

breakeven

Break even prices for US oil shale production

 

And so with an eye toward profit, Grantham writes, these companies “have drilled, as always, the best parts of the best fields first, and because the first two years of flow are basically all we get in fracking, we should have expected considerably better financial results by now. The aggregate financial results allow for the possibility that fracking costs have been underestimated by corporations and understated in the press.”

And with a decline in oil prices set off by too much supply, it will be these companies that are forced to pare production, which will reduce supply, which will create — once again — expensive oil.

“The current fall in price does nothing to offset the squeeze on the total economy from rising costs,” Grantham writes. “It merely transfers massive amounts of income from one subgroup (oil producers) to another (oil consumers), in a largely zero-sum game.

“Oil consumers tend to spend more and save less than oil companies so short-term impacts are favorable. But we should not be carried away with enthusiasm because the declining investment from the oil industry will lower future growth. When, as now, oil costs are still rising even as prices fall there is of course a particularly savage effect on the profits of oil companies, squeezed from both ends.

“They must and will rapidly adapt by reducing expenditures and therefore oil production with the fairly obvious result that prices will rise again. The only longer-term price relief and net benefit to the economy will come when either we reverse recent history and start to find more oil more cheaply, which will be like waiting for pigs to fly, or when cheaper sources of energy displace oil.”

And so for Jeremy Grantham, nothing fundamental has changed about our relationship with oil: pigs still don’t fly.

 

 

13 Responses to “Obama and Oil Prices. Is Anyone That Lucky?”


  1. The plunge in oil prices is as much related to the American derivatives market as to anything else. JP Morgan and others can trade derivatives contracts between themselves and force the price of oil down to anything they want. The CFTC is practically a wholly owned subsidiary of the banks and won’t intervene.

    Users of oil are more than happy to take the buy side of these futures contracts at these bargain basement prices. As long as the Saudis are there to supply the sellers, there’s no problem.


  2. Although the definition of “liberal” is a bit slippery, I think that any notion of Obama being “liberal” needs to be laid to rest. He’s an old-fashioned cold warrior, corporate prostitute and Wall Street toady. Sure, he knows how to give great speeches, but after six years of selling out his constituents at every turn, it ought to be obvious that he speaks with a forked tongue. The only real difference between him and ex-president Dubya is style, not substance.

  3. andrewfez Says:

    In the past there have always been aggregate cost reductions that lag the falling price:

    [From: http://seekingalpha.com/article/2757505-how-long-does-a-typical-oil-downcycle-last%5D

    “Another important observation provided on the slide relates to the strong cyclical correlation between oil prices and the industry’s costs. The graph suggests that cost changes tend to react to oil price movements with a lag of 1-2 years. BP commented that over the past 12 to 18 months, industry cost inflation had caught up with $100+ oil prices and was already showing signs of slowing, even before the recent sharp fall in oil prices. With oil prices where they are today, BP expects that this natural self-correction mechanism will lead to supply chain deflation. I should note here that BP’s view of the industry’s cost structure likely includes international and offshore segments where margins often have stronger contractual support and the cycle may be slower to turn around than in unconventional resource plays.”

  4. andrewfez Says:

    =“That said, there is no doubt that sanctions raise uncertainty about the Russian economy. Their own minister of economic development said today that the ruble is falling faster than the macroeconomic indicators would suggest it should be,” McFaul added.=

    In the short term, the value of anything is based not on fundamentals, but on the consensus of players in the market, which is subject to the whims and follies of human belief systems and herding behavior. [And incidentally, it’s this deficit that makes it hard for some conservative economists to accept science, when they apply analogical type arguments unto their own belief systems.]

  5. omnologos Says:

    Unsure why this all would be detrimental to further oil consumption. Tar sands and horizontal drilling are genies out of the bottle and if uneconomical now they’ll stand ready to become viable again in the future. This means oil prices have been capped for the foreseeable future, and the biggest players know what the ceiling is.


    • Omnologos, what exactly are you saying? 50 dollar a barrel rules out tar sands at the present, but oil companies must now start to close down unprofitable sources, meaning less exploration. 90 dollars a barrel will begin to make some marginal sources profitable, but how does that cap the price? It takes TIME to start up oil production, meaning that shortages will result unless consumption goes down substantially, which it’s not likely to do. “Capping” the price is highly unlikely.

      You might want to talk to someone in the oil business about supply issues.


      • In a normal market, and if Obama had not already said he would veto Keystone XL, you would be correct. However there is a political angle to consider . The Kochs stood to make a bundle out of Keystone through their refinery in TX. They have fought hard, and so far failed, to get it passed. That could change.

        I think the big oil companies will be quite willing to take a bath on tar sand oil if for no other reason than to defeat one of the biggest environmental movements of all time. That would be a very important PR victory for them and make it all that much harder for any future protest movements.

        You only have to look at all the money and effort they are putting in to shut down anti-fracking bylaws etc., or the murder and disappearance of native activists in South America who are/were launching massive lawsuits for the damage done to their lands (I’m not naive enough to believe the oil companies were not ultimately behind those murders).

  6. MorinMoss Says:

    The praise for Putin from those conservative jackals clearly demonstrates their persistent mendacity.
    When Putin “makes up his mind, gets it done”, he’s a statesman but when Obama does the same, he’s acting like he’s emperor, is “stubborn-headed, delusional, detached” or is grossly abusing executive powers?


  7. […] Now those the prices have collapsed, in part due to flow of non-traditional oil sources, as well some as larger movements in petropolitics I’ve posted on recently – and massive projects have to be, at least temporarily, […]


  8. […] creeping bloodbath in the Oil industry continues.  I’ve pointed out that after the Saudis engineered the recent oil price drop, a whole lot of people that had been […]


  9. […] posted several times about the current oil price situation, and the increasing suspicion among seasoned observers that what we are seeing now is more than just […]


  10. […] One of the takeaways from the Economist’s Arctic Conference in March, was that this Arctic stuff, ice, or no ice, is a harder slog than the rah-rah enthusiasm of 5 years ago would have lead you to believe. Don’t believe that drilling in the Arctic is some kind of slam dunk, even for the world’s largest corporations. And don’t believe that a fossil fuel future is inevitable – we are at an inflection point right now.  The low prices for oil globally are causing even the largest players to rethink, and many smart observers to wonder if we are in some kind of oil end game.  The remaining “exotic” oil in places like the Arctic, ocean deep water, and Alberta Tar Sands, depends on a continued high price for oil – but markets are not cooperating. And importantly, don’t believe that because the Administration ok’d this particular venture, that they don’t know this. […]


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