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Peak Cheap Energy and Temporary Oil Price Slump

Fighting MSM disinformation and oversimplifications about cost of shale oil and other energy related topics:
as Arthur Berman noted "Shale oil is not a revolution, it is a retirement party"

News Casino Capitalism Recommended Links Secular Stagnation Gas wars Oil glut fallacy Subprime oil: Deflation of the USA shale oil bubble
Paper oil, Minsky financial instability hypothesis and casino capitalism Slightly skeptical view of oil price forecasts Paper oil and record oil futures trading volumes MSM propagated myth about Saudis defending this market share Russia oil production Iran return to western oil markets fear mongering Oil Burden: amount on money spend on energy vs. global GDP
Energy returned on energy invested (ERoEI) Energy Geopolitics Great condensate con A note of ERoEI decline Cushing is filling up hysteria Plato Oil as Hubert Peak in condition of rising oil prices Media disinformation about Plato oil and Hubert peak
Energy disinformation agency and friends Big Fukushima Debate Oil consumption growth The fiasco of suburbia US military energy consumption Media-Military-Industrial Complex Neoconservatism
Neocolonialism as Financial Imperialism  All wars are bankers wars Predator state Bakken Reality Check Junk bond bubble Debt enslavement Neoliberalism as a New Form of Corporatism
IMF as the key institution for neoliberal debt enslavement Media disinformation about Plato oil and Hubert peak Fiat money, gold and petrodollar Energy Bookshelf Financial Quotes Financial Humor Etc
80 years ago the Nobel Prize winning chemist explained where oil DOES come into the picture:

Though it was not understood a century ago, and though as yet the applications of the knowledge to the economics of life are not generally realized, life in its physical aspect is fundamentally a struggle for energy, …

Soddy, Frederick M.A., F.R.S.. Wealth, Virtual Wealth and Debt (Kindle Locations 1089-1091). Distributed Proofreaders Canada.

The ‘backing’ for the petrodollar now includes the monetized value of Chinese and third world labor and natural resources as well as OPEC oil. But controlling the outcome of life’s “struggle for energy” is still the crumbling cornerstone of both US foreign and domestic economic policies:

  • control the world’s access to energy and it has no choice but submitting to the hegemon’s will
  • the U.S. political system is now owned lock, stock and barrel by a financial / military industrial / fossil fuels complex (am I forgetting anybody?). The powers that be are trying to preserve the existing status quo by insuring that life remains a “struggle for energy”.

The denizens of Wall Street and Washington can perhaps be forgiven for believing they were the “masters of the universe” at the conclusion of WWII. What they can NOT be forgiven is their belief – then or now – is that “the end of history” had arrived (unless they cause it).

Steven comment on Michael Klare Delusional Thinking in Washington, The Desperate Plight of a Declining Superpower


Introduction

Nemesis eventually catches hubris.

"Shale oil is not a revolution, it is a retirement party"
Arthur Berman

When oil is traded too cheaply, the victim of such trades is always the future generations. The current drop in oil prices might have been a curse, not the blessing as it slowed down or stopped the adaptation processes that were already in place with $4 per gallon ($1 per liter) gas in the USA.  The reality is a harsh mistress: the situation with depletion of existing oil deposits and new discoveries is now worse than in, say, 2000. But we still continue to do the same things. Such as buying large SUVs. Which fits Albert Einstein definition of insanity ("doing the same thing over and over again and expecting different results"). As one NYT commenter noted (Moscow on the Brazos):

I don't get it. We're supposed to be running out of oil, right? Or has that changed? $2 gas and we've gone past the Bell Curve of supply and use? And now we're all drunk on cheap gas. I'm happy to see new innovative efficient technology, new electric and hybrid cars but now they're selling boatloads of SUVs and pickup trucks. They are back in big style. They are better now, instead of 11 mpg they're 15 mpg.

As IEA noted in iea.org

In a Low Oil Price Scenario, longer payback periods mean that the world misses out on almost 15% of the energy savings seen in our central scenario, foregoing around $800 billion-worth of efficiency improvements in cars, trucks, aircraft and other end-use equipment, holding back the much-needed energy transition.

At the same time, the current slump in oil prices proved to be pretty long and any person who tried to predict commodities price in the current environment is suspect ;-). At the end of the day the supply/demand dynamic is at work, but market under neoliberalism is an unstable system with a built-in positive feedback loop. As such neoliberalism is quite capable of dragging us through shortages, depressions, environmental disasters, and even wars on the way from one equilibrium to another. So all those general considerations that are provided below are nothing but an educated guess. As John Kenneth Galbraith aptly said: "The only function of economic forecasting is to make astrology look respectable." Readers beware...

This is a skeptical page that was created due to strong doubts about MSM coverage of the current oil prices slump. especially the idea of oil glut (which in the USA for some strange reason coincide with rising imports of oil and the deflation of shale bubble) and Saudis supposed decision to defend their share of the market" (aka predatory pricing used by Saudis since mid 2014 to slam the oil prices). There are strong indications that that was the political decision make by Saudi elite to hurt Iran after the decision to lift sanctions was made by the USA and allies in mid 2014. Approximately since this very moment they started to dump their oil on the market at artificially low prices (which is called predatory pricing). It might be a coincidence, but it might be a reaction of Saudis to the deal reached with Iran.

Also, MSM cries about glut on oil look strange as the USA from month to month imports more and more oil. Oil glut and rising oil imports are two incompatible trends. But not for the US MSMs. This looks like a phenomenon which came directly from  Geroge Orwell's novel 1984  where it was called "doublespeak". 

The first thing to understand is that at a given stage of developing of drilling and other related technologies there is a minimal price of oil below which production can be continued only at a loss. This price point is different for different types of oil, and slightly varies between different regions but it does exist. For example, a shale/tight oil well often costs around $6-8 million, which needs to be amortized over the life of a well which in the case of shale/tight oil is approximately five-six years. To make things worse unlike conventional wells that can produce approximately at the same rate for a decade, those wells experience a steep decline after two first years, with more half of oil extracted in the first two years. The cost is much higher for non-conventional oil producers than for conventional producers. Canadian tar sand production is even more expensive. Deep water drilling is somewhere in between conventional and non-conventional oil, pricewise.

There are different estimates, but most analysts agree that the US shale/tight oil producers need around $70-$80 per barrel to be able to pay their debts and around $50-$60 to break even. Those numbers are slightly less for deep water oil ($40-$50) and slightly higher for Canadian tar sands. The picture below illustrated difference prices to produce different types of oil ( see below) is reproduced from What Me Worry About Peak Oil  by Art Berman (December 27, 2015 ):

This means that production of light oil from tight zones need the price of $70-80 per barrel to break even.  The same applies to extra heavy, deep water, and EOR projects. Offshore arctic and ultra deep water are extremely expensive and with their own special environmental risks as BP recently discovered. The implication seems to be that most industry investments do require prices in $80-$100 range to continue pump oil at the same rate (Red Queen's race - Wikipedia). In this sense 2010-2013 were gold age for oil production worldwide, as prices were close or above $100 and billions were invested in high cost oil resources ( "Shale oil is not a revolution, it is a retirement party" as aptly observed Arthur Berman).

Now prices dropped below $33 (as of Jan 6, 2015) and at this level of prices all tight oil producers  are losing money  on each barrel of oil they produce. Debt fueled boom in the shale space will most likely never return. Most shale players managed to survive 2015 (some due to hedges; some due to junk bond dent they accumulate and still did not put into capex). But to survive in 2016 will be more difficult and they are in danger of defaulting on their bonds. Mass extinction might well be in the cards, if low prices persist for the whole year.

 when the almighty money almagamations like the Carlyle Group swoop in and buy up all the distressed assets, we just might see oil prices rebound. The vultures won’t have the motive to short the heck out of oil, like they are now.

Junk bonds has duration around five-seven years, so bonds taken in 2010 will be due soon and refinancing them now is very difficult. That means weaker non-conventional oil producers will probably be bankrupt if not in 2016, then in 2017, if prices stay low. This process already stated with something like a dozen bankruptcies in 2015. According to OilPrice.com more expected in 2016:

At the same time world demand for oil will continues to grow and will grow in 2016 probably by 1.3 Mb/d or more.  In 2015 it rose from 92.45 to 93.82 Mb/d. The only country that has additional capacities now is Iran but how quickly it can expand production in low price regime and whether it will be willing to sell additional oil at such low prices to get currency is difficult to predict. Some think that Iran will be able to add another 0.5 Mb/d in 2016 which can only compensate for the drop of US production and nothing else. Production in all other countries will be iether stable or slightly declining due to natural decline of wells with age and lack of capital investments in new drilling. Typical estimate is 1% decline or around 1MB/d of lost supply. Natural rate of decline of most conventional wells is around 6% and non-conventional around 20 (not evenly distributed; the first year production can even rise).  It it doubtful that remaining capital investments will be able to offset everything but 1% of decline. Real decline from non-OPEC members in 2016 can be more.

Actually even Saudis managed only marginally increase their exports in 2015; they just exported slightly more oil  (around  +0.3Mb/d more) at very low prices which supports the current low oil price regime, but not their economy which ended 2015 with a record deficit around $100 billions by Saudis estimates ($150 by IMF estimates). What is Saudis motivation of doing this (and depleting both their coffers and oil reserves) is a difficult question to answer but probably this is an economic war with Iran. The second important source of support of low prices is Wall Street games with futures.

The key problem here is that shale and tight oil producers were not that profitable at above $100 per barrel oil price range that existed in 2010-2013 and accumulated large amount of debt (several hundreds of billions, mostly in junk bonds) during those "good times" . The debt that now needs to be serviced so they have an albatross around their necks.

The destruction of oil supply while very gradual already started albeit slowly, as decline of wells is still compensated by hedging, new drilling and projects that have been started in the "good old days" are still coming online. This decline might well accelerate toward the middle of 2016, if prices do not recover. In any case hedges will expire somewhere in 2016 and after that it will be clear who is swimming naked.

In other words the current oil prices are IMHO not sustainable (too low) even in one-two year timeframe. When most hedges expire and the number of bankruptcies start to increase, Wall Street might be unable to press oil futures down anymore so push back in prices can be pretty violent. .

BTW Saudis lost around $100 billions this year and their foreign reserves shrunk to around $600 billions. Projected loss for 2016 is around $85 billions. So they need around one decade to deplete their foreign currency reserves.

Some suspicious consistency in the US MSM stories about oil price slump

“Where ideas are concerned, America can be counted on to do one of two things: take a good idea and run it completely into the ground, or take a bad idea and run it completely into the ground.”

—George Carlin

Oh what a tangled web we weave, When first we practice to deceive!"

Walter Scott, Marmion, Canto vi, Stanza 17

 

To make the story short current MSM behaviour is highly irresponsible and suggests that all of them are in the pockets of Wall Street or worse. After all oil is a irreplaceable commodity that will eventually run out. Low oil prices from this point of view are the last thing we need. It's like drinking party on the deck of Titanic. What should be done is creating the infrastructure for living with much less oil available. Which is possible only with high prices for this commodity. also the destruction of oil patch that now is happening should be get so much cheerleading. It is a tragedy for many people. The ability to fill gas tank for less then 2 dollars is not everything in this life. 

Economist Herbert Stein (1916-1999) wrote in 1986: "if it can’t go on forever it will stop." Despite this self-evident truth there is interesting, highly correlated bias, in coverage of oil prices slump for most of the US MSM: all predict essentially that current low oil prices will stay if nor forever, then for a very long time. And that what happened in 2015 is not anomaly, despite clear indicators that at this price most US producers sell their barrels at loss.  They salivate that this situation will continue in the first half of 2016 and well into 2017. They also completely discard negative externalities of this event.  As oil has crashed to $33 levels there is  a lot of MSM talk that the current price is really the long term historical average price, that 2005-2014 was an anomaly (bubble) and that we will stay in this range (say, $20-$40) for years to come.  Actually you can bet that at any price point MSM will claim that the cost of extraction is 20% lower, no matter what the price level is.

You can bet that at any price point MSM will claim that the cost of extraction is 20% lower, no matter what the price level is.

Yes, there are few places in the Middle East and Russia from which oil can be profitably extracted at this price range. But those countries depend on oil for revenue to balance the budget so even in those places this situation is unsustainable.  More then 80% sources of oil are unprofitable at those prices. That includes all shale/tight oil and all deep offshore anywhere in the world.

Still for some unknown to me reason in MSM low oil prices (below the cost of production) and depletion of valuable natural resource are now considered to be a universal good. While at best this is nothing more then initiated by Saudis "Hail Mary pass" to save Western civilization from secular stagnation. Externalities be damned, full speed ahead. Shale oil industry and destruction of its workforce, junk bond market troubles are just collateral damage. Does not matter one bit. Give us cheap oil brother and all will be fine.
 

For some unknown to me reason in MSM low oil prices (below the cost of production) and depletion of valuable natural resource are now considered to be a universal good. While at best this is nothing more then initiated by Saudis "Hail Mary pass" to save Western civilization from secular stagnation. Externalities be damned, full speed ahead. Shale oil industry and destruction of its workforce, junk bond market troubles are just collateral damage. Does not matter one bit. Give us cheap oil brother and all will be fine.

But at the same time never try to catch falling oil barrel ;-). Market can stay irrational longer than you can stay solvent.

Also strange and suspicious is that most MSM peruse suspiciously similar and questionable, or outright false, if we look at the facts, stories:

  1. Quicker depletion of a valuable and irreplaceable national resource due to low prices does not matter.  Existing wells deplete 5-8% per year (tight oil more that that) so you need to discover, drill and put on line at least the same amount in order to maintains the same volume of oil production. That costs money, and if money are not here nobody will drill. So natural tendency of production at low oil price (which now man below $70-$80 per barrel) is down, not up. 
     
  2. Saudis are fighting for their market share and flooding the world with oil.  This hypothesis is advanced despite the fact that their exports are stagnant and had grown in 2015 only by around 0.2-0.3 Mb/d (see Saudi Arabia oil production and forecast for 2016). Which is a miserable amount. What fight for market share: they can sell all theoil they produce.  In 2014 they exported around 7.1 Mb/d and in 2015 around 7.3 Mb/d. Plus/minus 0.1 Mb/d. So nothing essentially changed as for the level of their exports taking into account that the growth of world consumption for 2015 is over 1 Mb/d.   Their real strategy is dumping their exports at low price undercutting other producers to bring the price down.  In other words they are using what is called "predatory pricing" and to achieve that they tapped into their currency reserves to the tune of $100 billion a year. They are burning their currency reserves at the speed at which they can exhaust them from six years to decade, losing the investment grade in three.  Also most of their fields are old and semi-exhausted, so maintaining high production might even damage them, cutting short their useful life and the total amount of oil Saudis can recover from them. 

    Saudi shipments rose to 7.364 million barrels a day in October, 2015, according to the latest figures from the Joint Organizations Data Initiative (JODI).  Shipments averaged 7.11 million barrels a day in 2014, down from an 11-year high of 7.54 million barrels a day in 2013 and the lowest in three previous years. So Saudis failed even match their 2013 exports in 2015.

  3. Iran is able and willing to throw on the market another 0.5-0.7 Mb/d in 2016 further depressing prices. This hypothesis is advanced despite explicit statements from the Iran leadership that they will not give any future customer additional discounts above those that exist today.  while Iran leadership is definitely irrational, blocking the temporary freeze agreement, and willing to hurt the county future by increasing oil production as much as they can in low oil price environment (hurting their ally Russia in the process), they are not completely stupid and they do not have much money to drill anyway.  As they now have access to their previously frozen foreign reserves they definitely can wait a year or two before coming to the market with the new supply.  also increase of supply is not instant, it requires time and money, even taking into account that Iran has some underdeveloped fields that can be profitably put into production even at low prices that exist to today. This is a better strategy then coming with new supply at the point of ridiculously low prices. Although everything can happen. Middle Eastern nations are unpredictable.
     
  4. A very conservative estimate of the decline of non-OPEC production for the next year. Most assume that it will be limited to roughly 0.5 Mb/d. But the rate of natural decline of existing conventional oil wells is 3-6% and reduced capital expenses mean less new production is coming online in 2016 and 2017. Assuming 1% depletion that's around 1MB/d that should disappear in 2016. Add to this hard crash that is possible for the US shale producers and the estimate 1.5 Mb/d drop does not look outrageously high. But those consideration somehow disappeared from all considerations from MSM and they operate under assumption that supply from existing wells is indefinite and decline is a rounding error.  Only increase in supply is material and eminent (again Iran supply story get the most prominence). 
     
  5. The US MSM propagate the following bogus narrative: "there is an oil glut in the USA market in particular despite the fact that the USA increasing their import of oil. To cry about glut on oil in the country which imports each month in 2015 more and more oil is something new to me.  This is something from Orwell novel Nineteen Eighty-Four and is called doublespeak. If you are an oil producer, you don’t pump oil unless you have orders for it.  If you pump oil without orders, then you need your own storage to store it. In no way you ship it to Cushing, Oklahoma with their 80 Mb storage capacity as your customers can be in completely different part of the USA and it's you who need to pay for storage. That's the privilege used by refineries to regulate their input in case of maintenance, seasonal peaks, etc.  You don’t ship any oil without getting paid for it. So oil glut theory claim that they are producers which have oil shipped to customers and customers did not use it. Putting it in storage instead. And this bogus "theory" is propagated by MSM for more then 18 month now. It' time for MSM to stop to propagate this nonsense. 
     
  6. Cheap oil is here to stay and current situation will last to 2017 in worst case or to 2020-2040 in the best. IEA forecasts are viewed as facts, despite clear interest in lower oil prices.  In reality just cutting capital investment along with depletion of  existing fields (almost 6% for conventional wells, around 20% per year but very unevenly spread for shale/tight oil wells) guarantee diminishing supply. To compensate for 5% depletion the world now needs to find and put into production approximately 5 Mb/d of oil. In other words the world is losing approximately 1 Mb/s of supply per quarter. This loss a very difficult to stop, although it was possible for the last several years because huge capital investments in oil industry caused by high oil prices. 2010-2014 has shown that with high oil prices the decline can be stopped and reversed.  The problem is that adequate capital investments are thing in the past and now most oil companies need to adapt to starvation mode as for capital investment in the oil industry. That spells huge trouble for Norway, Russia, GB,  and other nations with mostly conventional wells.  It will be a miracle if they can maintain they level of production at prices below $40 for more then one-two years (there is some inertia here and new projects are continuing to come online for around 18 months since the start of the price drop; that means till mid, or last quarter of 2016, depending were you put the start of oil price drop). 
     
  7. MSM instantly forgot about previous concerns and the reversal of efficiency of the US car fleet. In 2015 SUVs again became the most popular category of personal car with sales of large SUVs booming. This deterioration of the US fleet efficiency happens along with slow down of sales of hybrids and, especially, electrical cars.
     
  8. Growth of demand during the current period of below $2 per gallon gas for some, unexplained reason will be slower then the explosive growth of demand in 2015. for some reason is is expected to be  limited to around 1% or 1.3-1.4 Mb/d worldwide.
     
  9. China slowed down and her oil consumption will be stagnant or down despite boom in car sales, as if the number of cars of the road is disconnected with oil use. In reality transportation is around 60% of country oil use. Right, but China oil consumption is still growing and will continue to grow in 2016. Those trends can co-exist for a while. So electrical consumption decline does not mean that the oil consumption decline is eminent.

    The same situation can exist in other countries such as the USA - slowing of the economy along with growth of oil consumption. All those new SUVs on the road need fuel to run.
     
  10. The assumption that the destruction of shale/tight oil companies with excessive debt loads in the USA  will be gradual and slow. Despite the fact that they currently produce at a loss  each barrel of oil they sell.  Also it will be orderly without major disruption of production -- just a gradual decline despite dramatically lower capital expenses. The assumption of most US MSM is that US production will stay close to current levels due to Gulf production or due to by waiving some magic wand by Obama administration.
     
  11. Junk bond problem does not exist or is of minor importance despite the fact that there are over 100 billions of shale oil book related junk bonds on the market. Similarly losses of financial sector from hedges in 2015 are non-existent as well (only Mexicans got several billions or additional revenue due to hedges).

The question is from where all those MSM deceptive and false  "talking points" originate.

The end of cheap oil hypothesis

The "end of cheap oil" hypothesis can be simplified to several postulates:

  1. Mankind demand for oil will continues to grow, although the pace of growth slows down with the increase of the price of oil as well as due to stagnation of world economy caused by high oil prices. That does not exclude temporary (often multiyear) oil price slumps or highs: instability is the nature of financial system under neoliberalism. 
  2. The supply of oil profitably extractable at any given price point below $100 (such $40, $50, $60 per barrel) will continue to shrink. Total extractable supply of oil can grow only by adding more and more expensive source of oil, sources with lower EROEI. New technology of extraction (especially horizontal drilling) can somewhat offset decline of EROEI but can't reverse it.  Simple calculation by dividing "proven world reserves" by annual consumption suggest that at prices below $100 in 2014 dollars they will be exhausted in approximately half a century (assuming $50 a barrel price point) peakoilbarrel.com, comment 12/11/2015 at 7:34 am)
    Proved oil reserves at 1700.1 billion barrels, 52.5 years of supply.

    Reference:

    http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/oil-review-by-energy-type/oil-reserves.html

    At 50 USD per barrel, the value is 50×1,700,100,000,000=85,005,000,000,000 usd

    Not enough, 100 USD per barrel will be better. 85 trillion dollars to spend so 1700.1 billion barrels of oil can be extracted and burned in 52.5 years. An absolute bargain. Current consumption at 32.85 billion per year, 365×90,000,000, 1700.1/32.85=51.75 years.

  3. The search for new sources of hydrocarbons by G7 countries will intensify over time and will likely generate resources wars. At least two resource wars already happened: Iraq and Libya. Wars are fought over access to and control of oil resources with high EROEI as well as other vital natural resources. With rising human population, competition for these resources might increase triggering conflicts, large and small. Industrialized nations already started to invade weaker countries to secure access to oil which is essential to the survival of modern industrial civilization (Iraq and Libya, and if we think about pipelines to Europe, Syria). 
  4. Very high price of oil (let's say above $100 per barrel)  leads to stagnation in all major industrialized countries and first of all the USA as well as eventual debt collapse of neoliberal economies and slow down or reverse of neoliberal globalization.
  5. The current "Race to burn what's left" is irrational.  Low oil prices destroy and delay investment in new supplies, slow down efficiency gains, encourage consumption and sow the seeds of the next big boom in prices.  If we assume that at each price point only a finite amount of oil can be profitably extracted from Earth (which is a planet, that is now well researched for oil), the current year and a half slump in oil prices looks extremely suspicious. It means robbing future generations, as conservation efforts are now derailed. Sales of SUVs and small trucks in the USA are up.  Trillions in equity and bond losses, hundred thousands of ruined retirement accounts and there is a severe recession knocking on the door for the US economy. The US are selling their last drops of oil at prices below production cost. In my opinion it would be wiser to save the oil that is currently  produce in strategic reserves and sell it when prices are much higher.

Please note that the US government patiently observes the current situation and does not try to influence the price by buying oil for their strategic oil reserve, although in the past it used to do such things. MSM coverage of oil also suggests strong establishment bias toward lower prices. As if this is the last "Heil Mary" pass in geostrategic game for the USA dominance.  So there are higher priorities in play here then the destiny of the US shale industry and more rapid exhaustion of national oil reserves. At the same time oil price slum is equivalent to a huge stimulus  to the USA economy, but it does have some significant side affects. If we assume $93.17-49.08=44.09 price drop for 2015 and the daily consumption of around  19.58 Mb/s that comes to 222 billions a year.

The current drop of oil prices also represent huge stimulus to EU,  China, Japan and other all other industrialized countries without or with little own oil reserves. If this were organized as a part of Russian sanctions package, this was a brilliant strategy. All industrialized countries in which own consumption far exceeds own production, are essentially isolated from negative affect of countersanctions   by the low price of oil.  In other worlds this is a huge global economic stimulus to the "masters of the universe" and at the same time stern warning to one of the last "resource nationalists" which try to pursue independence from Washington foreign policy.

The key question here: was it engineered by neoliberal strategists in Washington, DC and their masters in major Wall Street banks (in this case this was a really brilliant move)? Or is this ugly side effect of unhinged capitalism known as neoliberalism where oil companies overinvested in new projects due to greed and many new projects are coming simultaneously  online, while demand for oil grows more slowly then they expected. In any case at one point Saudi Arabia decided to dump its oil on the market and fun started. Was it the order from Washington or thier own initiave is unclear.

In recent years oil consumption was growing at slower pace dur to high oil prices. Per Michael Klare 2005 projection of oil consumption in 2015 was 105 Mb/d (millions of barrels per day); actual in 2015 was around 93 Mb/d as high price of oil stimulated investment in energy saving technologies. That includes not only small and hybrid cars (which actually did not improve much from, say, 1990 level, as the size of small car in the USA had grown considerably, but also cars and trucks working on natural gas, blending gas with alcohol (up to 10%), tax breaks for electrical cars ($7500 currently on many "pure electrical" models of small passenger cars, half of that on hybrids). Now this positive trend is partially reversed.  

But there were other signs of introduction of energy saving technologies which indirectly cut oil consumption, especially in chemical industry which will stay:     

For example the energy cost to major chemicals of running their plants is significant in the united states this about 6% of the national energy consumption. Since 1994, Dow has reduced its energy intensity by 22 percent through a structured program targeting process improvements. This has saved 1.6 quadrillion BTUs, equivalent to the energy required to generate all of the residential electricity used in California for one year. The savings have totaled $8.6 billion on an investment of $1 billion.

Note on the term "conspiracy theories"

Conspiracy theory was the term invented by CIA to whitewash their participation in JFK assassination, which got a wider use and became a common term in English language.  Here is how the term is defined in Wikipedia:

A conspiracy theory is an explanatory hypothesis that suggests that two or more persons, a group, or an organization of having caused or covered up, through secret planning and deliberate action, an event or situation which is typically taken to be illegal or harmful. Although the existence of a proven conspiracy involving United States President Richard Nixon and his aides in the Watergate scandal of the 1970s has been claimed as validation of conspiracy theories in general,[1] the term "conspiracy theory" has acquired a derogatory meaning and is often used to dismiss or ridicule beliefs in conspiracies.[2]

Such things as the current oil slump probably could never happen purely due to market forces (and notion of "free market" is another neoliberal lie; neoliberal markets are neither free nor fair). Oil is not a regular commodity. Oil is a strategic resource. So I think it is naïve to analyze it strictly in supply-demand terms.  Geopolitics plays very important role in oil prices and always was. Remember how the USSR was brought to its knees by dropping the oil prices in late 80th.

Remember Iraq war with one million of Iraqis dead. Was not this a blatant attempt to secure oil resources for the USA majors? Remember Libyan color revolution and Hillary reaction to the horrible death of poor colonel. Is not this about collision of French desire to secure oil supplies and Washington desire to get rid on a dictator who was an obstacle to neoliberal agenda?

And Syria war unleashed to achieve what ? It all about remapping Middle East by toppling "not friendly enough" to Washington regimes. It took longer then "seven countries in five years"  as Rumsfeld promised (https://www.youtube.com/watch?v=9RC1Mepk_Sw) but it looks like the plan itself is still current: 

“We’re going to take out seven countries in 5 years, starting with Iraq, and then Syria, Lebanon, Libya, Somalia, Sudan and, finishing off, Iran”

General Wesley Clark. Retired 4-star U.S. Army general,
Supreme Allied Commander of NATO during the 1999 War on Yugoslavia .

It is clear that recent "petro wars" in the Middle East were about execution of a  US strategy which was not only about globalism and the USA world dominance, but also about oil.

The oil market has always been driven by geopolitics, and it was a factor that contributed to unleashing both WWI and WWII. Or, if you want, geopolitics has been very strongly influenced by the supply and distribution of crude oil for at least a century. To talk in pure supply/demand terms about such a strategic, vital for human civilization commodity is absurd.
and the whole idea the Kingdom of  Saudi Arabia, a vassal state completely dependent in its survival on the USA unleashes a price war against the USA shale production looks very suspect. nevertheless it is propagated by major MSM like 100% true.

In other words oil was and is a major weapon of economic war. And dumping oil prices is especially potent weapon against countries with significant oil exports such as Russia, Venezuela, Iran, Iraq, etc.  You can kill several birds with one stone.

The key question here is classic cue bono ? Which country is the major beneficiary of the current oil prices crash. The answer is -- the USA (despite some troubles of shale producers which started in late 2015 when most hedges expired). So  it is plausible to suggest that the USA elite including Wall Street banks played an important role in slamming oil prices to reach some important geopolitical goal, significance of which supersede the value of destruction of the USA shale industry.  After all the US financial industry can for a short time distort price of any commodity to any desired level.  HFT is a perfect tool for that and that was explicitly mentioned on Aleynikov trial  by Goldman officials.

It might well be that the current low price is playing double role: to stimulate Western economies and simultaneously serve as the most important part of package of sanctions against Russia. Obama actually hinted that this is true. And Saudi Arabia did play similar role in the past -- crash of oil prices did  facilitated the dissolution of the USSR, which lost the major part of its export revenue).

I would like to stress it again that the idea that Saudi Arabia is engaged in price war against the USA to defend its market share is extremely questionable. By all measures KSA is a satellite state, vassal of the USA if you like. How vassal state can act in such a way without the USA blessing ?  Economic conditions are now not equal to 2008 so the current drop of oil prices can't be explained by panic.  And without using the power of US-controlled financial markets it id doubful that it is possible to accomplish such a quick and sustained drop. 

The USA has long history of using oil as a geopolitical tool. Not only to crash the USSR but also to lure Japan into WWII. Oil embargo against imperial Japan served essentially as a declaration of war and it was read by Imperial Japan leadership exactly this way  (the leadership, which actually has little or no illusions that Japan will lose, but decided not to surrender without armed struggle). There is some evidence that Perl Harbor was not defended specifically to make entrance into the war with Japan more dramatic and more acceptable to the population of the USA, as a reaction on the clear act of aggression by Japan (although air carriers were sent to sea to save them).

And population of Earth still grow, as well as the number of cars and, especially tracks on the road. Similarly the number of airplanes and ships.  Until that trend stops the "long term"  trend for oil price should be up as chances of finding large deposit of "cheap oil" are not close to zero.  Of course "In a long run we all are dead" maxim applies.

But as of 2015 the planet is pretty well explored for this vital commodity. That means that the cost of oil extraction rises with time because the cheapest to extract oil is removed first. Actually this is now true for most commodities, including metals.

To get oil now deeper wells are needed, or fracking equipment and fracking sand and liquids, or you get oil that is too heavy or oil which contains too much sulfur. That means that  special refineries need to be build. In any case more resources are need to produce the same amount of petrol and diesel for transportation and other purposes. It is natural to think that price will gradually rise due to diminishing returns on capital used for extraction.  According to Barclays Capital (cited by  Steven Kopits),  the costs of extracting oil began increasing by 10.9% per year, since 1999 from $5 to almost $25 per barrel.  Add to this transportation cost to refineries, interest on debt, etc and we are probably talking about "magic" figure of $60 per barrel.  So in 2015 any price below it is strongly suspect and probably is temporary. Although the4 rule is "never to say never" and for investors in oil ETNs (such USO, OIL, etc) Keyes saying that market can be irrational longer the you can stay solvent fully applies.  The same saying is now looming over the heads of shale companies executives. As of December 2015 bloodbath has began.

So the question is really about how long the current low oil prices (oil slump) will last. One year is definitely enough to eliminate hedges. And in December of 2015 they are mostly gone (two year hedges do exist but are a rarety)  Capital expenses are now slashed to the bones, but project that take several years to complete will still come into production and that will support the level of oil production at least for one year till Jan 2017. We also can probably see some consolidation of the oil industry. Weak players start being eliminated.

Three years are enough to eliminate most new capital investment and to finish projects which started before slump. Capital investment goes to a screeching halt. After that much depends on the speed of decline of existing wells and pace on increasing of global consumption. that actually includes growth of internal consumption in three major oil producing nations such as USA, Russia and Saudi Arabia. Of those three Saudi Arabia experiences especially quick rise in internal oil demand.

In any case since mid 2015 the price of oil on spot market dropped almost to one third of max price previously achieved. As of Aug 8, 2015 the spot price for October, 2015 delivery was around $44 per barrel. This is a dramatic drop from over $100 per barrel price peak achieved earlier. 

"Cheap oil" is the cornerstone of the current neoliberal world order; it's end means end of US dominated world

We need to understand that "cheap oil" is the cornerstone of the current neoliberal social system including the level of neoliberal globalization that is underway since late 80th. So for the USA elite a lot is in stake if price of oil consistently stays, say, over $100. The USA world domination which is so cherished by neocons and for which they are ready to fight endless wars is in stake.  Also countries that "do not deserve it in view of neoliberal elite (and are only partially controlled by the USA), such as Iran and Russia, can became fabulously rich. And they understand that "the end of cheap oil" might bring great socio-economic changes within the USA itself as neolibel fairy tale about "tricke down" prosperity will be exposed as a fraud. and American people can became rightfully angry, despite all efforts to brainwash them and to fond external target for their anger. In this sense we can view the current oil slump as a brave attempt, "The Last Hurrah" attack of the old neoliberal guard  which came to power in 1980th to postpone inevitable social changes (and first of all demise of neoliberalism and by extension the USA role as a global hegemon). the important of oil for the US as the center or global neoliberal empire was well described in 2002 article by Bill Christison (Oil and the Middle East)

April 5, 2002

Back in March CounterPunch published Christison's devastating critique of the strategies and conduct of the US war of terrorism. (See our archive by scrolling down to "Search CounterPunch.)) These new remarks, which he has made available to CounterPunch were delivered to various peace groups in Santa Fe, New Mexico on early April.Bill Christison joined the CIA in 1950, and served on the analysis side of the Agency for 28 years. From the early 1970s he served as National Intelligence Officer (principal adviser to the Director of Central Intelligence on certain areas) for, at various times, Southeast Asia, South Asia and Africa. Before he retired in 1979 he was Director of the CIA's Office of Regional and Political Analysis, a 250-person unit His wife Kathy also worked in the CIA, retiring in 1979.Since then she has been mainly preoccupied by the issue of Palestine.

I've been asked to talk today about the topic, "U.S. Oil Policy as a Juggernaut in U.S. Foreign Policy." That's a great title. When you hear the word "juggernaut," what you think of--at least what I think of--is a monster machine of some sort, maybe the heaviest heavy tank you can imagine, rumbling down a city street, unstoppable, crushing everything in its way, and even destroying the paving of the street as it goes. Well, that comes pretty close to describing what I believe about the long-term effects of our oil, and other, foreign policies in the Middle East. But if we look ahead, rather than at the past or the present, my hope is that, by changing some of our own foreign policies, U.S. oil policy will in the future no longer be a destructive juggernaut.

It's worth spending a minute to talk about why oil is so important to the United States. The world's total use of energy from all sources--from petroleum, natural gas, coal, wood, hydropower, nuclear, geothermal, solar, and wind power--has increased in recent years roughly as the global population has also increased. Petroleum contributes the greatest single amount -- about two-fifths of the world's total energy output, and natural gas (which is in some ways related to oil) more than another one-fifth. The United States alone uses about one-quarter of the world's total energy output, but has less than five percent of the world's population. The U.S. itself does not produce anywhere near the amount of energy that it consumes. According to statistics of the U.S. Department of Energy, the United States used in the year 2000 almost 100 quadrillion Btu's--or British Thermal Units--of energy. But of those 100 quadrillion Btu's, the U.S. had to import close to 30 percent. The United States is, hands down, the most profligate user of energy, by far, on this whole globe.

With respect to oil alone, the U.S. imported in the year 2000 almost two-thirds of the oil that it used. The importance of Saudi Arabia as a supplier of the U.S., needs to be emphasized, but not just because the Saudis hold the largest known but still untapped oil reserves in the world. What is even more important to the U.S. at the moment is that Saudi Arabia has the largest installed but unused rapid production capacity--that is, oil wells, pumping equipment and so forth already there but not used to meet current, or "normal," production needs. In any emergency that cut off oil supplies from anywhere else in the world, Saudi Arabia would one of very few, and maybe the only, nation that could easily and quickly increase its oil production without a waiting period measured in months rather than a few days. This obviously adds to what any general or admiral would call the strategic value of Saudi Arabia to the United States.

There is another characteristic of the global oil industry that we should all understand. It is an industry dominated by a half-dozen extremely large, global corporations--including ExxonMobil (these two firms merged in 1999), British Petroleum, Shell, Texaco, Gulf and Socal. Fifty to 75 years ago these companies might have been swashbuckling, unregulated corporations seeking to maximize profits and avoid the controls of any governments by all means fair or foul. Today, however, these companies by no means have the same personalities that they had years ago. In the Middle East, at least, the governments of the area have nationalized practically all oil production, and the companies or their subsidiaries have gradually worked out mutually supportive relationships with the local governments, under which the companies continue to manage most of the oil production and global oil trade, while the governments, and OPEC, make the basic decisions on how much oil to produce. The companies continue to make large profits, which keep them happy enough.

In their relations with the U.S. and other advanced nations, the companies no longer shun government regulation, because most of the regulations imposed on them are supportive of, and increase the profits of, the companies themselves. The regulations fall more into the area of corporate welfare than into the area of inducing the corporations to become better citizens. In the U.S., the ties of the oil companies with both of the major political parties are close and mutually profitable. Up to a few months ago, these same comments would have applied to Enron, which was clearly one of the world's largest energy companies, even though it was not one of the largest global oil companies.

I started out by comparing the long-term effects of U.S. oil policies to a juggernaut. To show you why, I want to go back almost 60 years, to February 1945. In that month, President Franklin D. Roosevelt, while returning from the Yalta Conference, met with King Ibn Saud of Saudi Arabia on a U.S. warship in the middle of the Suez Canal. Two months later, Roosevelt was dead, but this meeting was probably one of his most important acts as a world leader The actual records of the conversations between these two men have never been released by either of their governments, but it is quite clear that an agreement was reached under which the United States guaranteed for the indefinite future the security and stability of the Saudi monarchy. In return, the Saudi King guaranteed U.S. access to, and joint development of, the massive Saudi oil reserves, also for the indefinite future. These mutual guarantees were later, implicitly at least, extended to apply to the other, and smaller, Gulf state monarchies, from the Arab Emirates to Bahrain and Kuwait. All of these guarantees were reinforced by the U.S. war against Iraq in 1990-1991, and these guarantees still today form the basis of U.S. oil policies in the Middle East.

So for close to 60 years now, the U.S. has continued to prop up and support these authoritarian governments. I'd like to give you an example of how this has worked in the case of Saudi Arabia. This is from an article that appeared in The Nation magazine last November, written by a British expert on world security affairs. Here are a few lines from this article. "To protect the Saudi regime against its external enemies, the United States has steadily expanded its military presence in the region. [T]o protect the royal family against its internal enemies, US personnel have become deeply involved in the regime's internal security apparatus. At the same time, the vast and highly conspicuous accumulation of wealth by the royal family has alienated it from the larger Saudi population and led to charges of systemic corruption. In response, the regime has outlawed all forms of political debate in the kingdom (there is no parliament, no free speech, no political party, no right of assembly) and used its US-trained security forces to quash overt expressions of dissent. All these effects have generated covert opposition to the regime and occasional acts of violence"

The United States pursued policies like these not only in Saudi Arabia and the smaller Gulf States, but elsewhere in the Middle East as well. When the U.S. overthrew Mossadegh in Iran in 1953, and reinstalled the Shah in power, Washington began carrying out precisely the same policies in Iran as it employed in Saudi Arabia. The Shah's secret police, known as SAVAK, and the Iranian military forces both grew markedly stronger. For 26 years the Shah's repressive regime succeeded in smothering internal dissent. In 1979, however, major internal dissent did erupt, supported by radical Islamic clerics who wanted all U.S. influence out of their land. The Shah was quickly overthrown. U.S. experiences in Iran since that date should have suggested to people in Washington that just perhaps the strong U.S. support for repressive regimes in the Middle East was not the ideal long-term policy for us to pursue. No reexamination of U.S. foreign policy ever got started, however, because the United States was immediately consumed by the horrible insult Iranians imposed on us when they held over 50 Americans from the U.S. Embassy hostage for more than a year.

Then, in the 1980s, the U.S. spent the decade quietly cozying up to Saddam Hussein, the dictatorial ruler of Iraq, which was and is another big oil producer of the Middle East. Since Iran was now a U.S. enemy, the U.S. supported Iraq in its war against Iran. The U.S. did not criticize Saddam Hussein even when he employed chemical warfare to gas sizable numbers of Kurdish people in his own country. The United States only abandoned him in 1990, when he crossed the U.S. over Kuwait. Even here, the diplomatic signals Saddam received from the U.S. until shortly before he invaded Kuwait were very unclear. Once again, when the break finally came, the U.S. administration gave no thought to reappraising its own policies throughout the region. A decision was made in favor of going to war to end this threat to U.S. hegemony and U.S. access to oil, and that was that.

Now, in the year 2002, this almost-60-year-old Middle East oil policy of the United States is showing signs of even more fraying at the edges. Beyond any question in my opinion, one of the root causes behind the terrorism of September 11 was this very U.S. policy of supporting for the past half-century and more these authoritarian and often corrupt Arab and Muslim governments. There exists a high degree of anger among many Muslims with their own governments, which have for so long been supported by the U.S.

Osama bin Laden is a good example of this particular root cause behind the September 11 terrorism. His wrath was directed as much against the Saudi government, for example, as it was against the United States. His opposition to what used to be his own government was probably the main reason why he had the support of a majority of the young men under 25 in Saudi Arabia. He received similar support from many young men in other Arab and Muslim states as well. Right now these groups of angry young men obviously no longer have a viable leader in Osama bin Laden, but other extremist leaders are almost sure to arise. In addition, the next generation of leaders in at least some of these states may well emerge from among these young men. If any of them do come into power, their future governments will likely be more anti-American than the present governments, which Washington likes to call "moderate," but which are really nothing of the sort. If we have not reduced our energy dependence on oil in the meantime, we may face serious trouble.

The U.S. should therefore adopt quite draconian measures immediately to reduce its overall energy usage, including its dependence on Mideast oil. It is unlikely, for the near future at least, that the U.S. will solve a future energy crunch through alternative power sources or by "clean" coal, nuclear power, or Alaskan oil usage. The U.S. also should not count on oil supplies from Central Asia as a way to ignore the need for conservation.

The U.S. should also, over time and gradually, reduce its ties with the present governments in many Muslim states, and try to develop improved relations with opposition elements there, actively seeking out democratically inclined groups. Such steps will be necessary if there is to be any hope of reducing support for future Osama bin Ladens that arises from the anger of Arabs and Muslims with their own governments.

I want to turn now to another foreign policy problem that the U.S. faces in the Middle East, one that has become more tightly intertwined with U.S. oil policies since September 11. Ever since shortly after World War II, the U.S. has had not one but two fundamental foreign policies in the Middle East. The first policy, which I've already talked about, has been to support authoritarian and undemocratic governments in the oil nations in an effort to guarantee the long-term easy access to Middle East oil at "reasonable" prices. The other policy, equally important, has been to provide strong support to Israel and to guarantee the security of Israel as a Jewish state, also for the long term.

Over the last fifty-plus years, there has been a fair amount of tension and conflict between these two policies. The United States under President Harry Truman was, as I'm sure you all know, instrumental in helping to establish the state of Israel in 1948. But even then, one of the reasons for the opposition to Truman's desires by many other U.S. officials, including the Secretary of State, General George Marshall, was that it might endanger the west's access to oil from the Arab nations.

As it has turned out, for most of the period since World War II, the U.S. has managed to keep its two basic policies in the Middle East pretty much apart from each other--in separate boxes so to speak--and to keep the tensions between them in check. The very existence of the Cold War, which provided the bogey-man of a common enemy, helped in this regard. The one obvious time when the U.S. proved unable to keep the tensions between its two policies under control was the OPEC oil embargo against the west in late 1973 and early 1974. The Arab-Israeli war of 1973, and specifically the U.S. response of resupplying Israel with large amounts of new military equipment, precipitated the embargo, and many of us here can remember the gas lines that resulted in this country. But the gas lines only lasted a few months, and then we all went back to normal. But we should remember those months as a perfect example of the fact that there are indeed real conflicting interests involved in the two basic U.S. foreign policies in the Middle East.

Overall, though, because the United States has been able to hold these conflicting interests in check for most of the past half century, I think that Washington has allowed the tensions to grow, more or less ignored by U.S. policymakers, to a point where they are going to be exceedingly difficult to deal with in the future. Since September 11, a number of things have happened that make it more impossible than ever to separate the effects of the Israel-Palestine problem from the effects of the continuing U.S. support for most authoritarian governments of the oil nations in the area.

In Saudi Arabia and most of the small Gulf States, the position of the monarchies has become more precarious, as these monarchies have been subjected to more criticism since September 11 from public opinion in the United States than has been the case for years. In normal circumstances, when these monarchies are confident that the U.S. guarantee of their security is strong and unbreakable, most of them will not worry too much about other issues that might further weaken their domestic position. The George W. Bush administration is undoubtedly reassuring them that the U.S. security guarantee is still in effect, but they cannot help but be worried about its permanence when they see public opinion in this country changing. This puts pressure on the monarchies to pay more attention to the opinion of their own Arab "street." And the opinion of this Arab "street" is today more intensely critical than ever of Israel's policies on Palestine and the continued occupation of the West Bank and Gaza.

The U.S. government, from September 11 right up to the present, has made it clearer than ever to the world at large that it will unilaterally decide what actions around the world constitute "terrorism," and what actions do not. Specifically, in the minds of Arabs and Muslims everywhere, the U.S. seems to have accepted all actions by Palestinians against Israelis, including acts against Israeli soldiers as well as those against innocent civilians, as being terrorism. At the same time, however, the U.S. appears to believe that no acts by Israelis against Palestinians constitute terrorism. Arabs see this as a double standard. When, also at the same time, Arabs see their own rulers expressing support for the "war on terrorism" as it is defined by the U.S., their antagonism toward their own rulers intensifies. And the rulers themselves, recognizing this antagonism, feel greater concern for their own positions.

I'd like to express a note of caution here. I certainly do not know for sure whether any, or some, or all of the governments in Arab oil nations--the dictatorial governments whose stability and security the U.S. has guaranteed for almost 60 years--will collapse in the near future. Of course change can happen rapidly and without warning. The best minds in the U.S. government had no inkling that the Shah of Iran was going to be ousted a week before it happened in 1979. But even governments that seem to be falling apart can sometimes last for years, until some totally unforeseen shove comes along that pushes them over the edge.

What I am more sure of is that these Arab oil governments are now under greater pressure to change than they have been for years, because of developments since September 11. Therefore the U.S. should be actively encouraging--though never using military force to do so--a gradual movement toward greater political democracy in these nations. And in order to reduce the importance of one major factor leading to greater instability in the region, the U.S. should immediately begin to play a far more active role than it has recently in pressing for a solution to the Israel-Palestine problem based on two truly sovereign nations, with strong treaty guarantees from the United States of the future security of both of these nations.

Simultaneously,  wars for access to cheap oil (Iraq, Libya) can  be viewed as desperate attempts to find a way out of "secular stagnation", in which advanced economies found themselves after 2008 (or, more correctly, after 2000). And history proves that war is not always necessary. Sometimes other mechanisms work as well. So lowering of oil price for a considerable perios can also be viewed as a  clever "Hail Mary" pass to save Western economies which suffer from stagnation (aka "new normal") characterized by low economic growth, high level of debt,  and high unemployment rate --  along with deflationary tendencies at the end of debt expansion super cycle. 

And this precious product then is by-and-large wasted. In most Western countries population uses a lot more energy than they absolutely have to use, burning lion share of it in personal transportation.  Industries produce a lot of unnecessary or outright harmful crap, which sell only by the power of marketing.  Some industries produce crap exclusively and can be eliminated ;-). Most people in the USA could probably cut their private gas consumption by 50% or more with little or no harful effects (less car trips, sharing of cars, use of hybrid and electrical cars for commute, telecommuting, etc).

But this is not true of major industries, air and sea transport.  Those are areas where the limits set by "end of cheap oil" strike hard. At $4 per gallon and higher some (heavy/bulky) goods produced in China are already uneconomic to ship to the USA. That already started to affect  furniture industry. And we need get serious about planning, and the subsequent modifications in our energy usage pattern. Transition to the world with less "cheap oil" takes a lot of time and money to implement.

It might well be possible to replace around 20% of today’s oil consumption with renewable. Hybrid and electrical cars don't save much energy (lithium battery production consumes a lot of energy and rare metals which are very expensive to mine and refine) but they allow to substitute burning of oil to burning coal to produce electricity. 

Just the fact that oil industry now resorted to two  ecologically dangerous methods of extraction of shale oil and tar sands oil indirectly proves "top cheap oil" hypothesis. Why bother if cheap oil is plentiful? It's simply stupid to invest money in such extraction schemes unless you really believe in the "end of cheap oil".  If you object to this that means that you can't think clearly an dispassionately.

In both cases the size of ecological damage will be certain only decades later. it might be something like destroying America to save it. IMHO in no way the US shale production could be the decisive factor in spot prices drop of this magnitude (to closer $30 in 2015 dollars which so 30/2.4 in 1983 dollars ). And in 2014-2015 economic contraction did not reached 2008 levels to justify it from this point of view. EROEI of shale oil is way too low for shale oil to be competitive at current prices:  it is a complex and not very efficient process of conversion of energy and junk bonds into oil. It is far from just drilling a hole  and collecting oil which  flows under internal pressure  like in old good times.  Horizontal drilling greatly helps (and is the essence of most new methods of oil extraction with one (upper) well used to inject stream or chemicals and the other below it to collect oil) , but does not change the whole picture or lower EROEI of those methods. According to Wikipedia:

A 1984 study estimated the EROEI of the various known oil-shale deposits as varying between 0.7–13.3[75] although known oil-shale extraction development projects assert an EROEI between 3 to 10. According to the World Energy Outlook 2010, the EROEI of ex-situ processing is typically 4 to 5 while of in-situ processing it may be even as low as 2. However, according to the EIA most of used energy can be provided by burning the spent shale or oil-shale gas.[76]

Same problem of low EROEI is true about tar sands. Simplifying you can think about extraction of oil from tar sands as the industrial process of converting energy of  natural gas and junk bonds into oil. Approximately  280–350 kWh of energy is needed to extract a barrel of bitumen and upgrade it to synthetic crude. Most of this energy is produced by burning natural gas. Assuming $.1 per kilowatt we will get energy cost alone around 28-$35 a barrel. You probably should double this number to account for capital expenses and other costs.  

Is oil commodity or under neoliberalism this is another currency subject to standard currency attacks

A commodity currency is a name given to currencies of countries which depend heavily on the export of certain raw materials for income. These countries are typically developing countries, e.g. countries like Burundi, Tanzania, Papua New Guinea; but also include developed countries like Canada and Australia.

Befor assendance of neoliberalism in 1980th world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980th They had their eye set on transforming how oil is traded in world markets.

It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned inn polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables. Essentially they invented another commodity currency. In the foreign exchange market, commodity currencies generally refer to the Australian dollar, Canadian dollar, New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso.

It looks like oil also became not pure commodity, but a new commodity currency. New York really trades overwhelmingly on a non-physical oil basis these days. Nobody checks if sellers of the futures have actual oil to settle. All settmenta are in dollar. In other words oil was virtualized.

In addtionan there are multiple oil ETFs (which are prefect way to rob lemmings -- naive investors who decided that oil is more reliable store of value then stocks)

Symbol  Name  Assets*  Avg Vol  YTD  1 Year  3 Year  5 Year  Inception  ER  ETF Home Page  Liquidity  Expenses 
USO United States Oil Fund $2,578,400.00 25,967,785 -28.05% -57.77% -59.14% -56.62% 2006-04-10 0.45% View A+ A+
OIL S&P GSCI Crude Oil Tot Ret Idx ETN $866,760.90 4,389,938 -33.41% -63.17% -64.50% -62.10% 2006-08-15 0.75% View A B
DBO DB Oil Fund $513,040.00 331,095 -27.39% -58.67% -58.24% -53.53% 2007-01-05 0.78% View A B-
BNO United States Brent Oil Fund $91,324.50 128,165 -26.08% -57.43% -59.34% -35.66% 2010-06-02 0.90% View A- C+
USL United States 12 Month Oil $70,752.00 84,619 -22.71%

As with futures, several questions arise about OIL ETFs. In any case as dollar finance is unlimited (via printing press) that creates completely new environment for commodities, when the price can be completely detached from reality.  In a way, oil ETFs are not that different then gold EFT which became pure "virtual currency" called "gold"  -- yet another financial speculation vehicle (Something Just Snapped At The Comex Zero Hedge):

As of Friday the comex gold "coverage" or amount of paper claims on every ounce of physical, was literally off the chart, soaring to a mindblowing 207 ounces of paper gold claims for every ounce of deliverable gold. This also means that the dilution ratio between physical gold and paper gold has hit a new all-time low of just 0.48%!

Similarly to games with gold we see "naked" shorting of oil:

United States Oil Fund LP (ETF) Short Interest Down 6.7% in July (USO) by Max Byerly

Aug 18th, 2015 | Ticker Report

Shares of United States Oil Fund LP (ETF) (NYSE:USO) were the target of a significant decline in short interest in the month of July. As of July 31st, there was short interest totalling 45,855,306 shares, a decline of 6.7% from the July 15th total of 49,139,106 shares, AnalystRatings.NET reports. Based on an average trading volume of 23,230,679 shares, the short-interest ratio is currently 2.0 days.

United States Oil Fund LP (NYSE:USO) opened at 13.89 on Tuesday. United States Oil Fund LP has a 52 week low of $13.86 and a 52 week high of $35.83. The company’s 50-day moving average is $16.41 and its 200 day moving average is $18.44.

United States Oil Fund, LP (NYSE:USO) is a commodity pool that issues limited partnership interests (shares) traded on the NYSE Arca, Inc. The investment objective of USO is for changes in percentage terms of its shares’ per share net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract for light, sweet crude oil traded on the New York Mercantile Exchange (the NYMEX). The Company’s general partner is United States Commodity Funds LLC. The net assets of USO consist primarily of investments in futures contracts for light, sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other the United States and foreign exchanges.

Here is an interesting graph of money manager positions on NYMEX WTI (only NYMEX and only WTI):

The key question here is: "To what extent oil is still a commodity, and to what extent it is now yet another "virtual currency" subject to standard currency attacks ?" Naked selling of oil futures via shorting of OIL ETFs is not only possible, but highly profitable path for such attacks (4 Ways to Short Oil with ETFs - May 16, 2013 - Zacks.com).  All those tricks are possible due to free convertibility to US dollars, which unlike oil do not have any Earth-based limitations as for quantity and, what is more important, quality (gas liquids and shale oil are not equivalent to "classic' oil and refining of them produce mainly gasoline, instead of full spectrum of products; they should be considered "oil substitutes" and counted separately). And small amount injected in ETF can move spot oil market vary efficiently. So tail can wag the dog.

Who finance such attacks as losses can be substantial is an interesting question the answer on which I do not know, but recent behaviour of oil prices is typical for a currency attack as data about real oil extraction does not produce any optimism as for elimination of "peal cheap oil" phenomenon. But for speculators and gulling retail investors this does not matter. Casino is a casino. What is interesting the US MSM produce highly deceptive and well coordinated picture suggesting that there is government involvement in the whole scheme ( see below Russia sanctions section).

All those talks about crisis of overproduction are suspect. To a certain extent this might be a factor  due to slowing down of China economy and perma recession in the USA along with better small cars efficiency. But it is impossible to hide the fact that it was Saudi Arabia that decided to lower the oil prices and started to move in this direction ( An Oil Price 'Cold War' With Saudi Arabia Experts Disagree - US News) much like that did to economically crash the USSR in late 80th, early 90th.  I think that talk about attack on the USA shale industry does not make much sense, as Saudi Arabia is a vassal state and such move is punishable for a vassal:

Some experts declared it the start of a “cold war” with Saudi Arabia, as described by two University of Texas professors in an op-ed in the Dallas Morning News. Other analysts, however, contend that the Saudis are merely trying to defend against other exporters to the U.S.

“There’s another conflict brewing in the Middle East — the intensifying oil battle between Saudi Arabia and Texas,” Isaac Barchas and Michael Webber, who teach at the University of Texas at Austin, wrote in the op-ed.

As Webber, deputy director of the university's Energy Institute, describes to U.S. News, "Ford versus GM, Dell versus Apple: these are big companies duking it out for market share. Why would it be any different for oil. Is it a military war? No. But it's a market share war."

There are three main parts to his and Barchas' argument:

  1. Hydraulic fracturing, or fracking, has unleashed an energy boom here in the U.S., reducing net crude oil and petroleum product imports to their lowest levels since 1987.
  2. With more oil now available on the market, combined with a sluggish global economy that’s reduced demand in Europe and China, benchmark Brent crude oil prices have fallen by roughly 27 percent since June – their lowest point in four years.
  3. Saudi Arabia, the U.S's.second-largest source of imported oil behind Canada, is trying to retain its market share by undercutting American producers. The goal: drive down prices far enough to scare away Wall Street investors or simply make fracking unprofitable, forcing U.S. companies to take their drill rigs offline to reduce supply and clearing the way for more Saudi oil imports.

As Chip Register, managing director of consulting firm Sapient Global Markets asserted in a blog post on Forbes, “The Saudis have put a bull’s-eye on the U.S. shale industry.”

Other experts, however, expressed strong skepticism with this view.

“It’s not a personalized attack,” Steven Kopits, managing director of the consulting firm Princeton Energy Advisors, says of the Saudi discount. “Saudi Arabia is looking out for its own interests, not trying to undermine other people’s interests.” 

Jan Kalicki, public policy scholar and energy lead at The Wilson Center, a nonpartisan think tank, agrees.

“Any real impact on shale in the U.S. is going to require more than a price adjustment of this kind," he says.

U.S. shale fields can start and stop production relatively quickly. Technological advances, meanwhile, have sharply lowered the break-even point – no longer does fracking rank as one of the most expensive forms of oil production. It can still turn a profit at current prices of $80 a barrel, but depending on the type of well, fracking operations might even be able make money at prices as low as $55 a barrel.

Hence, “trying to apply predatory pricing in the oil business will only work in the very short run, if at all,” says Paul Sullivan, economics professor at National Defense University.

I think here the target is probably Russia. Telegraph reported  that Saudis offer Russia secret oil deal if it drops Syria - Telegraph

The revelations come amid high tension in the Middle East, with US, British, and French warship poised for missile strikes in Syria. Iran has threatened to retaliate.

The strategic jitters pushed Brent crude prices to a five-month high of $112 a barrel. “We are only one incident away from a serious oil spike. The market is a lot tighter than people think,” said Chris Skrebowski, editor of Petroleum Review.

Leaked transcripts of a closed-door meeting between Russia’s Vladimir Putin and Saudi Prince Bandar bin Sultan shed an extraordinary light on the hard-nosed Realpolitik of the two sides.

Prince Bandar, head of Saudi intelligence, allegedly confronted the Kremlin with a mix of inducements and threats in a bid to break the deadlock over Syria. “Let us examine how to put together a unified Russian-Saudi strategy on the subject of oil. The aim is to agree on the price of oil and production quantities that keep the price stable in global oil markets,” he said at the four-hour meeting with Mr Putin. They met at Mr Putin’s dacha outside Moscow three weeks ago.

“We understand Russia’s great interest in the oil and gas in the Mediterranean from Israel to Cyprus. And we understand the importance of the Russian gas pipeline to Europe. We are not interested in competing with that. We can cooperate in this area,” he said, purporting to speak with the full backing of the US.

Oil futures

Oil ETNs such USO or OIL does not have any intrinsic value. They are based on oil futures. Like is that case with currency future contracts, empirical studies suggest, not only is the oil futures price a biased estimate of the future spot price, but more often  it even gets the direction wrong. If the futures price suggests the oil will depreciate, it can well appreciate instead. In addition you can buy or sell options on oil making this commodity a real paradise for speculators.

Speculators definitely have expectations about the future oil spot price.  But often they demonstrate herd behavior driving the price to extremes as trading futures is trading "virtual oil" (futures are settled in dollars, never in actual commodity). This is especially true about short selling which can drive oil to really unprofitable for all major producers price. Recently they manage to drive it to less then $40 a barrel, the price at which only selected low cost producers can get the oil form the ground (to say nothing to invest in additional exploration or pay the cost of infrastructure and such). You ability to see oil short via specialized ETF or other means is limited only by your dollar reserves and the availability of counter party (and you can play certain games with this counterparty issue). 

Here is example of prices on Aug 31, 2015 (which also is a nice demonstration of dramatic dynamics that is possible in a single day) :

Chart Current Session Prior Day Opt's
Open Time Set Chg Vol Set Op Int
Oct'15 45.00 19:28
Aug 31
49.20
3.98 719704 45.22 440212 Call Put
Nov'15 45.69 19:28
Aug 31
49.93
3.95 137067 45.98 215025 Call Put
Dec'15 46.57 19:29
Aug 31
50.77
3.91 162736 46.86 243840 Call Put
Jan'16 47.50 19:28
Aug 31
51.63
3.91 57430 47.72 102471 Call Put
Feb'16 47.50 19:28
Aug 31
52.38
3.93 38475 48.45 50167 Call Put
Mar'16 48.25 19:29
Aug 31
52.98
3.92 38170 49.06 73615 Call Put
Apr'16 48.75 19:29
Aug 31
53.47
3.86 14106 49.61 25925 Call Put
May'16 48.99 19:28
Aug 31
53.85
3.76 7934 50.09 23357 Call Put
Jun'16 49.86 19:28
Aug 31
54.16
3.64 44230 50.52 103798 Call Put
Jul'16 50.29 19:28
Aug 31
54.38
3.53 3938 50.85 21832 Call Put
Aug'16 50.03 19:28
Aug 31
54.61
3.42 2511 51.19 16337 Call Put
Sep'16 50.72 19:28
Aug 31
54.87
3.31 8091 51.56 42572 Call Put
Oct'16
-
19:28
Aug 31
55.16
3.20 1164 51.96 17226 Call Put
Nov'16
-
19:28
Aug 31
55.48
3.11 1038 52.37 17809 Call Put
Dec'16 52.59 19:28
Aug 31
55.81
3.02 56618 52.79 133005 Call Put
Jan'17
-
19:28
Aug 31
56.05
2.94 598 53.11 14894 Call Put
Feb'17
-
19:29
Aug 31
56.31
2.87 277 53.44 8034 Call Put
Mar'17 55.45 19:29
Aug 31
56.59
2.81 988 53.78 9195 Call Put
Apr'17
-
19:28
Aug 31
56.85
2.75 465 54.10 3543 Call Put
May'17
-
19:29
Aug 31
57.08
2.69 435 54.39 2930 Call Put
Jun'17 53.69 19:29
Aug 31
57.34
2.64 5669 54.70 21475 Call Put
Jul'17 56.32 19:28
Aug 31
57.55
2.60 143 54.95 3120 Call Put
Aug'17
-
19:29
Aug 31
57.81
2.57 48 55.24 1760 Call Put
Sep'17
-
19:28
Aug 31
58.11
2.56 71 55.55 3982 Call Put
Oct'17
-
19:28
Aug 31
58.41
2.54 15 55.87 1184 Call Put
Nov'17
-
19:28
Aug 31
58.73
2.53 15 56.20 1270 Call Put
Dec'17 55.75 19:28
Aug 31
59.05
2.51 9588 56.54 44135 Call Put
Jan'18
-
19:28
Aug 31
59.21
2.49
-
56.72 1532 Call Put
Feb'18
-
19:28
Aug 31
59.38
2.46
-
56.92 312 Call Put
Mar'18
-
19:28
Aug 31
59.57
2.43
-
57.14 2688 Call Put
Apr'18
-
19:29
Aug 31
59.77
2.40
-
57.37 63 Call Put
May'18
-
19:28
Aug 31
59.98
2.37
-
57.61 516 Call Put
Jun'18
-
19:29
Aug 31
60.21
2.34 226 57.87 3700 Call Put
Jul'18
-
19:28
Aug 31
60.35
2.30
-
58.05 296 Call Put
Aug'18
-
19:28
Aug 31
60.52
2.27
-
58.25 61 Call Put
Sep'18
-
19:28
Aug 31
60.69
2.23
-
58.46 461 Call Put
Oct'18
-
19:28
Aug 31
60.87
2.20
-
58.67 61 Call Put
Nov'18
-
19:28
Aug 31
61.05
2.16
-
58.89 311 Call Put
Dec'18 58.54 19:28
Aug 31
61.24
2.12 2002 59.12 19416 Call Put
Jan'19
-
19:28
Aug 31
61.35
2.10
-
59.25 204 Call Put
Feb'19
-
19:28
Aug 31
61.48
2.08
-
59.40 4 Call Put
Mar'19
-
19:28
Aug 31
61.62
2.06
-
59.56 454 Call Put
Apr'19
-
19:28
Aug 31
61.78
2.04
-
59.74 4 Call Put
May'19
-
19:28
Aug 31
61.96
2.02
-
59.94 4 Call Put
Jun'19
-
19:28
Aug 31
62.15
2.00
-
60.15 1185 Call Put
Jul'19
-
19:28
Aug 31
62.20
1.98
-
60.22 5 Call Put
Aug'19
-
19:28
Aug 31
62.29
1.96
-
60.33 4 Call Put
Sep'19
-
19:28
Aug 31
62.41
1.94
-
60.47 4 Call Put
Oct'19
-
19:28
Aug 31
62.55
1.92
-
60.63 4 Call Put
Nov'19
-
19:28
Aug 31
62.72
1.90
-
60.82 104 Call Put
Dec'19
-
19:28
Aug 31
62.93
1.88 158 61.05 6628 Call Put
Jan'20
-
19:29
Aug 31
63.00
1.86
-
61.14
-
Call Put
Feb'20
-
19:29
Aug 31
63.08
1.84
-
61.24
-
Call Put
Mar'20
-
19:28
Aug 31
63.17
1.82
-
61.35
-
Call Put
Apr'20
-
19:28
Aug 31
63.28
1.80
-
61.48
-
Call Put
May'20
-
19:28
Aug 31
63.41
1.78
-
61.63
-
Call Put
Jun'20
-
19:28
Aug 31
63.56
1.76
-
61.80
-
Call Put
Jul'20
-
19:28
Aug 31
63.57
1.74
-
61.83
-
Call Put
Aug'20
-
19:28
Aug 31
63.62
1.72
-
61.90
-
Call Put
Sep'20
-
19:29
Aug 31
63.70
1.70
-
62.00
-
Call Put
Oct'20
-
19:29
Aug 31
63.83
1.68
-
62.15
-
Call Put
Nov'20
-
19:28
Aug 31
63.97
1.66
-
62.31
-
Call Put
Dec'20 64.00 19:28
Aug 31
64.14
1.64 14 62.50 1935 Call Put
Jun'21
-
19:28
Aug 31
64.59
1.57
-
63.02
-
Call Put
Dec'21
-
19:28
Aug 31
65.04
1.50 1 63.54 440 Call Put
Jun'22
-
19:28
Aug 31
65.34
1.50
-
63.84
-
Call Put
Dec'22
-
19:28
Aug 31
65.64
1.50
-
64.14 180 Call Put
Jun'23
-
19:29
Aug 31
65.64
1.50
-
64.14
-
Call Put

Is this  the mixture of overproduction crisis and intelligence operation with unforeseen side effects (blowback)

If we assume that the current event are a complex mixture of overproduction crisis, secular stagnation and intelligence operation with the goal to squeeze Russia (and as a side effect hurt Iran revenues)  that we should expect it lasting for several years, enough to destroy the opponents economically. So changes of recovering of oil prices in 2016 from this point of view are slip. For Russia this is a double blow as oil prices also affect natural gas prices. And it is true that Russian leadership were completely unprepared to this course of events, so the damage is great and real. As noted "Obama’s foreign policy goals get a boost from plunging oil prices" (Washingtonpost, Dec 23, 2015):

Plunging crude oil prices are diverting hundreds of billions of dollars away from the treasure chests of oil-exporting nations, putting some of the United States’ adversaries under greater stress.

After two years of falling prices, the effects have reverberated across the globe, fueling economic discontent in Venezuela, changing Russia’s economic and political calculations, and dampening Iranian leaders’ hopes of a financial windfall when sanctions linked to its nuclear program will be lifted next year.

At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration’s foreign policy goals: pressuring Russian President Vladi­mir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue. At the same time, it is pouring cash into the hands of consumers, boosting tepid economic recoveries in Europe, Japan and the United States.

https://www.washingtonpost.com/business/economy/as-crude-oil-prices-plunge-so-do-oil-exporters-revenue-hopes/2015/12/23/ed552372-a900-11e5-8058-480b572b4aae_story.html?hpid=hp_hp-top-table-main_oil-910pm%3Ahomepage%2Fstory

But there are some visible side effect, with some probably not well anticipated:

All that means that dramatic drop in oil prices is a mixed blessing. Mike Whitney lists several other factors( Oil Price Blowback , Jan 6, 2015, Counterpunch)

Up to now, of course, Russia, Iran and Venezuela have taken the biggest hit, but that will probably change as time goes on. What the Obama administration should be worried about is the second-order effects that will eventually show up in terms of higher unemployment, market volatility, and wobbly bank balance sheets. That’s where the real damage is going to crop up because that’s where red ink and bad loans can metastasize into a full-blown financial crisis. Check out this blurb from Nick Cunningham at Oilprice.com and you’ll see what I mean:

“According to an assessment from the Federal Reserve Bank of Dallas, an estimated 250,000 jobs across eight U.S. states could be lost in 2015 if oil prices don’t rise. More than 50 percent of those job losses would occur in Texas, which leads the nation in oil production.

There are some early signs that a slowdown in drilling could spread to the manufacturing sector in Texas… One executive at a metal manufacturing company said in the survey, “the drop in crude oil prices is going to make things ugly… quickly.” Another company that manufactures machinery told the Dallas Fed, “Low oil prices will drive reductions in U.S. drilling rigs, which will in turn reduce the market for our products.”

The sentiment was similar for a chemical manufacturer, who said “lower oil prices will adversely impact margins. Energy volatility will cause our customers to keep inventories tight.”

States like Texas, North Dakota, Oklahoma, and Louisiana have seen their economies boom over the last few years as oil production surged. But the sector is now deflating, leaving gashes in employment rolls and state budgets.” (Low Prices Lead To Layoffs In The Oil Patch, Nick Cunningham, Oilprice.com)

Of course industries lay-off workers all the time and it doesn’t always lead to a financial crisis. But unemployment is just one part of the picture, lower personal consumption is another. Take a look:

“Falling oil prices are a bigger drag on economic growth than the incremental “savings” received by the consumer…..Another way to show this graphically is to look at the annual changes in Personal Consumption Expenditures (PCE) in aggregate as compared to the subsection of PCE spent on energy and related products. This is shown in the chart below.

Lower Energy Prices To Lower PCE (Personal Consumption Expenditures):

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(The Gasoline Price Myth, Lance Roberts, oilprice.com)

See? So despite what you might have read in the MSM, lower gas prices do not translate into greater personal consumption or more robust growth. Quiet the contrary, they tend to intensify deflationary pressures and reduce activity which is a damper on growth.

Then there’s the knock-on effects that crashing prices and layoffs have on other industries like mining, manufacturing and chemical production. Here’s more from Oil Price:

“Oil and gas production makeup a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas has comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve…

The majority of the jobs “created” since the financial crisis have been lower wage paying jobs in retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail….

The obvious ramification of the plunge in oil prices is that eventually the loss of revenue will lead to cuts in production, declines in capital expenditure plans (which comprise almost 1/4th of all capex expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability…

Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.” (The Gasoline Price Myth, Lance Roberts, oilprice.com)

None of this sounds very reassuring, does it? And yet, all we hear from the media is how the economy is going to reach “escape velocity” on the back of cheap oil. Nonsense. This is just more “green shoots” baloney wrapped in public relations hype. The fact is, the economy needs the good-paying jobs more than it needs low-priced energy. But now that prices are tumbling, those jobs are going to disappear which is going to be a drag on growth.

Now check out these headlines I picked up on Google News that help to show what’s going on off the radar:

Measuring oil production and consumption: BBL,  MMbbl and Mb/d

In a way the USA (along with Canada) is an exceptional (read backward) country which still was unable (or more correctly unwilling) to switch to metric system.  In the USA oil production and  consumption by volume is usually measured in  barrels (BBL). One BBL equals 42 US gallons  or approximately 159 liters; 6.29 barrels equal one cubic meter and (on average) 7.33 barrels weigh one metric ton (1000 kilograms). Energy-wise one barrel of crude approximately equals 5604 cubic-feet of natural gas, 1.45 barrels of liquefied natural gas (LNG), or about one barrel of gas condensate.

When converting volume measures into weight measures a coefficient based on so called API gravity  is used. The latter is a measure of how heavy or light a petroleum liquid is compared to water: if its API gravity is greater than 10, it is lighter and floats on water; if less than 10, it is heavier and sinks. In other words this is a measure that is inverse of density. Although mathematically, API gravity is a dimensionless value,  for historical reasons it is measures in 'degrees' like angles. In this case this is degrees on a hydrometer instrument. API gravity values of most petroleum liquids fall between 10 and 70 degrees. From Wikipedia:

Crude oil is classified as light, medium, or heavy according to its measured API gravity.

Crude oil with API gravity less than 10° is referred to as extra heavy oil or bitumen. Bitumen derived from oil sands deposits in Alberta, Canada, has an API gravity of around 8°. It can be diluted with lighter hydrocarbons to produce diluted bitumen, which has an API gravity of less than 22.3°, or further "upgraded" to an API gravity of 31 to 33° as synthetic crude.[7]

Oil companies that are listed on American stock exchanges typically report their production in thousand or million barrels. Abbreviations like Mbbl (one thousand barrels), or MMbbl (one million barrels) are used. Often Mb/d is used instead of MMbbl per day.  This actually preferable notation that is used in this page.

As density of the oil varies it is not that easy to convert one metric into another for example volume into weight  as the following quote illustrates (Open Thread, Oil and Gas - Peak Oil Barrel ):

One problem is the estimate of Russian average barrels per metric ton, often it is assumed that this is 7.3 or 7.33 barrels per metric ton. If 7.33 barrels per ton is correct the average API gravity would be 33.4 degrees.

The Urals blend is about 31.7 degrees API or 7.25 barrels per metric ton.

On political motives for reporting less Russian output, possibly the US government wants the sanctions to affect Russian oil output and has some influence on what is reported by the EIA. Likewise the Russian government wants to show that sanctions are not affecting them and might influence the Russian oil ministry to report higher output.

Possibly this could happen or the average API gravity of Russian output may be different than we think, if API gravity is 31.7 degrees (Urals blend) then output in April would have been 10.55 Mb/d, JODI had about 10.1 Mb/d in April.

AlexS showed that the NGL numbers reported by the EIA and Jodi may be about 350 kb/d too high (perhaps some condensate is being included in NGL that should be part of C+C output). If we added 350 kb/d to JODI’s April 2015 estimate of C+C output we get about 10.45 Mb/d for Russia, now the difference is only 100 kb/d, take the average and call it 10.5 Mb/d+/- 50 kb/d. That is a better explanation than “politics” in my opinion.

Great Condensate Con: What liquids are counted as oil in statistical reports such as EIA

There are several different liquids that are usually counted as oil.  Three major are crude, condensate and Natural Gas Liquids. The total all three is often counted as would oil production which now is over 90 Mb/d. But by how much nobody knows. The EIA reports crude plus condensate  as "oil".  EIA has total world production of Crude Oil, NGPL, and Other Liquids at 93,770,000 barrels per day in June 2015.  This type of reporting provides oil traders with wrong data and was called "Great condensate con" :

Lease condensate consists of very light hydrocarbons which condense from gaseous into liquid form when they leave the high pressure of oil reservoirs and exit through the top of an oil well. This condensate is less dense than oil and can interfere with optimal refining if too much is mixed with actual crude oil. The oil industry's own engineers classify oil as hydrocarbons having an API gravity of less than 45--the higher the number, the lower the density and the "lighter" the substance. Lease condensate is defined as hydrocarbons having an API gravity between 45 and 70. (For a good discussion about condensates and their place in the marketplace, read "Neither Fish nor Fowl – Condensates Muscle in on NGL and Crude Markets.")

Refiners are already complaining that so-called "blended crudes" contain too much lease condensate, and they are seeking out better crudes straight from the wellhead. Brown has dubbed all of this the great condensate con.

Brown points out that U.S. net crude oil imports for December 2015 grew from the previous December, according to the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. U.S. statistics for crude oil imports include condensate, but don't break out condensate separately. Brown believes that with America already awash in condensate, almost all of those imports must have been crude oil proper.

Brown asks, "Why would refiners continue to import large--and increasing--volumes of actual crude oil, if they didn’t have to--even as we saw a huge build in [U.S.] C+C [crude oil plus condensate] inventories?"

Part of the answer is that U.S. production of crude oil has been declining since mid-2015. But another part of the answer is that what the EIA calls crude oil is actually crude plus lease condensate. With huge new amounts of lease condensate coming from America's condensate-rich tight oil fields -- the ones tapped by hydraulic fracturing or fracking -- the United States isn't producing quite as much actual crude oil as the raw numbers would lead us to believe. This EIA chart breaking down the API gravity of U.S. crude production supports this view.

Exactly how much of America's and the world's presumed crude oil production is actually condensate remains a mystery. The data just aren't sufficient to separate condensate production from crude oil in most instances.

Brown explains: "My premise is that U.S. (and probably global) refiners hit in late 2014 the upper limit of the volume of condensate that they could process" and still maintain the product mix they want to produce. That would imply that condensate inventories have been building faster than crude inventories and that the condensate is looking for an outlet.

That outlet has been in blended crudes, that is heavier crude oil that is blended with condensates to make it lighter and therefore something that fits the definition of light crude. Light crude is generally easier to refine and thus more valuable.

The trouble is, the blends lack the characteristics of nonblended crudes of comparable density (that is, the same API gravity), and refiners are discovering to their chagrin that the mix of products they can get out of blended crudes isn't what they expect.

So, now we can try to answer our questions. Brown believes that worldwide production of condensate "accounts for virtually all of the post-2005 increase in C+C [crude plus condensate] production." What this implies is that almost all of the 4 million-barrel-per-day increase in world "oil" production from 2005 through 2014 may actually be lease condensate. And that would mean crude oil production proper has been nearly flat during this period -- a conjecture supported by record and near record average daily prices for crude oil from 2011 through 2014. Only when demand softened in late 2014 did prices begin to drop.

Here it is worth mentioning that when oil companies talk about the price of oil, they are referring to the price quoted on popular futures exchanges -- prices which reflect only the price of crude oil itself. The exchanges do not allow other products such as condensates to be mixed with the oil that is delivered to holders of exchange contracts.

But when oil companies (and governments) talk about oil supply, they include all sorts of things that cannot be sold as oil on the world market including biofuels, refinery gains and natural gas plant liquids as well as lease condensate. Which leads to a simple rule coined by Brown: If what you're selling cannot be sold on the world market as crude oil, then it's not crude oil.

The glut that developed in 2015 may ultimately be tied to some increases in actual, honest-to-god crude oil production. The accepted story from 2005 through 2014 has been that crude oil production has been growing, albeit at a significantly slower rate than the previous nine-year period--15.7 percent from 1996 through 2005 versus 5.4 percent from 2005 through 2014 according to the EIA. If Brown is right, we have all been victims of the great condensate con which has lulled the world into a sense of complacency with regard to actual oil supplies--supplies he believes have been barely growing or stagnant since 2005.

"Oil traders are acting on fundamentally flawed data," Brown told me by phone. Often a contrarian, Brown added: "The time to invest is when there's blood in the streets. And, there's blood in the streets."

He explained: "Who of us in January of 2014 believed that prices would be below $30 in January of 2016? If the conventional wisdom was wrong in 2014, maybe it's similarly wrong in 2016" that prices will remain low for a long time.

Brown points out that it took trillions of dollars of investment from 2005 through today just to maintain what he believes is almost flat production in oil. With oil companies slashing exploration budgets in the face of low oil prices and production declining at an estimated 4.5 and 6.7 percent per year for existing wells worldwide, a recovery in oil demand might push oil prices much higher very quickly.

That possibility is being obscured by the supposed rise in crude oil production in recent years that may just turn out to be an artifact of the great condensate con.

 

But counting such a diverse group of liquids is impossible without substantial errors in each category. That mean that the error margin of and global production figure has margin or error around  +- 0.5% or even 1% or one Mb/d.  for example amount of oil produced and pumped to the surface at wellhead is different and greater that amount of oil that got to refineries (which along with chemical plants are major consumers) because of losses during transportation and evaporation or light fractions in case weather is hot during the period before oil is processed at refinery or chemical plant.  Also there are differences in reporting and errors in measuring oil density by various countries, difficulties of converting weight into volume and vice versa, etc.  There are also large differences in reporting between agencies ( aspofrance.viabloga.com)

Reporting of small producers (and small producer countries) is often very fuzzy and here various games can be and often are played with those report with compete impunity, if you have some agenda.  So any analyst who take published by agencies figures  as precise amount produced accuracy equal to five meaningful digits is iether idiot or crook. Only first three digits  probably can be countered as meaningful. In no way the forth digit is.  If the analyst is talking about "oil glut" based on those figures he/she is definitely a crook ;-). 

Now you understand that all talk about 1Mb/d glut is very suspect.

Que Bono and Wall Street HFT games with oil futures

Low oil prices are essentially a crime against humanity as oil is exhaustible resources and burning it now in oversized SUVs means depriving of fuel and extremely important important for chemical industry commodity future generations. So the question is "que bono"

From this point if view (which is a standard starting point of any crime investigation) the origin of low oil prices lies probably in Wall Street  which capitalized on the US government desire to hurt Russian economy, Saudi machinations (with Saudis as a partner in this crime ;-) related to thier declining market share in oil market.

It is not that difficult on the level of Wall street cguant to play the short game for a long time,  skillfully dropped the market prices by exploiting rumores, and with the help of MSM distorting statistics (just read a typical CNBC article to feel the level of crap they are trying to infuse in readers), exploiting Saudi desire to preserve market share combined with temporary oil overproduction. Temporary overproduction due to the period of oil prices over $100, when everybody and his brother in the USA were trying to discover and drill new shale well and convert junk bonds into flow of oil trying to get rich in such supposlydly lucrative market. 

World production at the same time stagnated. Russia exports are actually in decline for many years. After all Libya production now is off the market, due to destruction of their country and subsequent civil war caused by French intervention in alliance with the USA, Qatar and several other mid-eastern countries. If you analyze the US press the bias toward lower oil prices is  evident. 

 

Production by country and total world production

Estimated average world daily production of 95.71  Mb/d for 2015 ( (Jan 12, 2016 forecast) exceeds EIA’s Annual Energy Outlook 2015 forecast (April 2015) by 2.6 Mb/d! so much for EIA forecasting abilities.

For 2016 IEA predicts 95.93 (Jan 12, 2016 forecast) and for 2017 96.69 (also  Jan 12, 2016 forecast)

OPEC predictions were 94.5 Mb/d for 2015 (December 2015  forecast) with growth in 2020 to 97.6 (it presupposes investment of  around $250 billion each year in non OPEC countries and $40 billions annually by OPEC countries; money that with current oil prices are nowhere to come by):

In the downside supply scenario, 3.3 mb/d from non-OPEC supply is assumed to be lost by 2040 with respect to the Reference Case.

Oil production is highly concentrated.  The top dozen of out of 100 oil-producing countries accounted for over 73% of the world's oil production. The top three (Russia, Saudi Arabian and the USA) account for almost 40%. 

Here is a chart from  Bloomberg Business

Iraq and Iran are also large and important players but currently  they are definitely the second tier players.  That might change in the future.

Now what will (most probably) happen in 2016 with the major players

Now let's discuss Iran and Iraq

All three major oil producers (troika) are severely affected by the oil price slump, but for the USA as one of the largest world oil importers it is a mixed blessing (destruction of shale  industry and connected with it jobs is just a collateral damage for approximately $200 billion stimulus due to lower prices.

For the Russia and Saudis this is a huge negative development which  leads to unbalanced budgets (especially for Saudies who need $100 oil to balance the budget and  lost $100 billions of their foreign reserves in 2015) and depletion  of currency reserves (more for Saudis then Russia, but Saudis had bigger currency reserves and can benefit from being a vassal of the USA by commanding a higher prices for state assets in fire sale). 

All-in-all around 100 countries produce oil with top three producing around 40%,  and the top ten over 63% of the world's oil production.

According to International Energy Agency (EIA), in 2011 the top ten oil-producing countries accounted for over 63% of the world's oil production.[2] As of November 2012, Russia produced 10.9 million barrels of crude per day, while Saudi Arabia produced 9.9 million barrels.[3]

Top oil producers: According to EIA top 10 oil producer countries produced over 64 % of the world oil production in 2012. The top oil producers in 2012 were: Russia 544 Mt (13 %), Saudi Arabia 520 Mt (13 %), United States 387 Mt (9 %), China 206 Mt (5%), Iran 186 Mt (4 %), Canada 182 Mt (4 %), United Arab Emirates 163 Mt (4 %), Venezuela 162 Mt (4 %), Kuwait 152 Mt (4 %) and Iraq 148 Mt (4 %). In 2012 total oil production was 4,142 Mt. [4] In 2011 the world oil production was 4,011 Mt demonstrating an annually rising trend in oil production.[5]

  Country Production (bbl/day) Production (MT) Share of
World %
Date of
Information
 World 84,951,200 10,194 100% 2014 est. Peak Production
1 Russia 10,107,000 1212 14.05% 3/2015.[6] 10,107,000 (3/2015)
2 Saudi Arabia 9,735,200 1168 13.09% 12/2014.[6] 9,900,000 (1/1980)
3 United States 9,373,000 1124 12.23% 4/2015.[6] 9,610,000 (6/2015)
4 China 4,189,000 502 5.15% 5/2015.[6] 4,189,000 (5/2015)
5 Canada 3,603,000   4.54% 12/2014.[6] 3,603,000 (1/2015)
6 Iraq 3,368,000   4.45% 5/2015.[6] 3,368,000 (5/2015)
7 Iran 3,113,000   4.14% 12/2014.[6] 6,060,000 (1/1974)
8 United Arab Emirates 2,820,000   3.32% 12/2014.[6] 2,820,000 (1/2013)
9 Kuwait 2,619,000   2.96% 12/2014.[6] 2,650,000 (1/2013)
10 Mexico 2,562,000   3.56% 12/2014.[6] 3,476,000 (1/2004)
11 Venezuela 2,501,000   3.56% 12/2014.[6] 3,280,000 (1/1997)
12 Nigeria 2,423,000   2.62% 12/2014.[6] 2,627,000 (1/2005)
13 Brazil 2,255,000   3.05% 12/2014.[6] 2,255,000 (1/2015)
14 Angola 1,831,000   2.31% 12/2014.[6] 1,946,000 (1/2008)
15 Kazakhstan 1,573,000   1.83% 12/2014.[6]
16 Qatar 1,553,000   1.44% 12/2014.[6]
17 Norway 1,539,000   2.79% 12/2014.[6]
18 Algeria 1,462,000   2.52% 12/2014.[6]
19 Colombia 1,003,000   1.19% 12/2014.[6]
20 Oman 940,000   0.95% 12/2014.[6]
21 Azerbaijan 871,000   1.20% 12/2014.[6]
22 Indonesia 828,000   1.66% 12/2014.[6]
23 United Kingdom 801,000   1.78% 12/2014.[6]
24 India 772,000   1.04% 12/2014.[6]
25 Malaysia 570,000   0.82% 12/2014.[6]
26 Argentina 540,000   0.93% 12/2014.[6]
27 Ecuador 526,000   0.58% 12/2014.[6]
28 Egypt 514,000   0.80% 12/2014.[6]
29 Libya 470,000   0.85% 5/2015.[6]
30 Australia 338,000   0.70% 12/2014.[6]
31 Vietnam 337,000   0.36% 12/2014.[6]
32 Equatorial Guinea 270,000   0.41% 12/2014.[6]
33 Congo, Republic of the 265,000   0.33% 12/2014.[6]
34 Sudan 259,000   0.13% 12/2014.[6]
35 Thailand 241,000   0.45% 12/2014.[6]
36 Gabon 239,000   0.29% 12/2014.[6]
37 Turkmenistan 229,000   0.22% 12/2014.[6]
38 Denmark 175,000   0.31% 12/2014.[6]
39 Yemen 131,000   0.34% 12/2014.[6]
40 Brunei 112,000   0.17% 12/2014.[6]
41 Italy 106,000   0.17% 12/2014.[6]
42 Ghana 105,000   0.01% 12/2014.[6]
43 Chad 98,000   0.13% 12/2014.[6]
44 Romania 85,000   0.14% 12/2014.[6]
45 Trinidad and Tobago 81,000   0.18% 12/2014.[6]
46 Pakistan 81,000   0.16% 12/2014.[6]
47 Cameroon 81,000   0.09% 12/2014.[6]
48 Timor-Leste 79,000   0.11% 12/2014.[6]
49 Peru 69,000   0.17% 12/2014.[6]
50 Uzbekistan 65,000   0.08% 12/2014.[6]
51 Tunisia 55,000   0.11% 12/2014.[6]
52 Germany 52,000   0.19% 12/2014.[6]
53 Bolivia 51,000   0.06% 12/2014.[6]
54 Bahrain 50,000   0.06% 12/2014.[6]
55 Cuba 50,000   0.06% 12/2014.[6]
56 Turkey 48,000   0.06% 12/2014.[6]
57 Ukraine 41,000   0.12% 12/2014.[6]
58 New Zealand 40,000   0.07% 12/2014.[6]
59 Ivory Coast 36,000   0.07% 12/2014.[6]
60 Papua New Guinea 34,000   0.04% 12/2014.[6]
61 Belarus 30,000   0.04% 12/2014.[6]
62 Netherlands 28,000   0.07% 12/2014.[6]
63 Syria 23,000   0.48% 12/2014.[6]
64 Philippines 21,000   0.02% 12/2014.[6]
65 Albania 21,000   0.01% 12/2014.[6]
66 Mongolia 21,000   0.01% 12/2014.[6]
67 Burma 20,000   0.02% 12/2014.[6]
68 Congo, Democratic Republic of the 20,000   0.02% 12/2014.[6]
69 Poland 19,000   0.04% 12/2014.[6]
70 Austria 17,000   0.03% 12/2014.[6]
71 France 15,000   0.08% 12/2014.[6]
72 Suriname 15,000   0.07% 12/2014.[6]
73 Serbia 12,000   0.01% 12/2014.[6]
74 Hungary 11,000   0.03% 12/2014.[6]
75 Guatemala 10,000   0.02% 12/2014.[6]
76 Croatia 10,000   0.03% 12/2014.[6]
77 Chile 7,000   0.01% 12/2014.[6]
78 Mauritania 7,000   0.02% 12/2014.[6]
79 Spain 6,000   0.03% 12/2014.[6]
80 Japan 5,000   0.16% 12/2014.[6]
81 South Africa 4,000   0.22% 12/2014.[6]
82 Bangladesh 4,000   0.01% 12/2014.[6]
83 Czech Republic 3,000   0.01% 12/2014.[6]
84 Lithuania 2,000   0.01% 12/2014.[6]
85 Belize 2,000   0.00% 12/2014.[6]
86 Bulgaria 1,000   0.00% 12/2014.[6]
87 Georgia 1,000   0.00% 12/2014.[6]
88 Kyrgyzstan 1,000   0.00% 12/2014.[6]
89 Barbados 1,000   0.00% 12/2014.[6]
90 Greece 1,000   0.00% 12/2014.[6]

Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil.

Here are the data for crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the EIA in their total liquids number.

The 1.1 million bpd gain in US oil production was the largest year over year gain for any country in 2013, and the largest gain in US history. Mostly due to shale oil. The US remained the world’s third-largest oil producer at 10 million bpd in 2013, trailing Saudi Arabia’s 11.5 million bpd and Russia’s 10.8 million bpd. Rounding out the top five were China (4.2 million bpd) and Canada (3.9 million bpd).

Just to put the current US oil boom into further perspective, over the past five years global oil production has increased by 3.85 million bpd. During that same time span, US production increased by 3.22 million bpd — 83.6 percent of the total global increase.

If the current “low oil price crisis”  does indeed destroy high cost production capacity then this will raise the question if the high cost sources can  be brought back? And at what cost?  Especially interesting is the question: "Can the shale industry can come back from the near death experience?"

What MSM do not discuss: depletion rates

Low oil prices are suicidal for mankind in a long run. Oil is too valuable and irreplaceable resource  for chemical industry to be burned in excessive qualities in transport due to low prices, especially when hybrid and all electrical cars is a reality and price differential with ordinary cars for small card is not that great (less then twice). Electricity unlike oil can be produced from renewable resources such as nuclear (breeder reactors are a reality), wind and solar (solar panels improved dramatically in the last ten years).  At the same time in the USA (and probably elsewhere) sales of SUVs and light trucks are again booming.  That say something about level of intelligence of the USA government. 

With producers in the US and across the world pumping as much as they can, they are doing it at a cost of running into diminishing production rates (depletion) on those existing wells sooner. The 2008 IEA survey of ~800 major fields (including all giants and supergiants) which produced over 60% of that year crude showed an average annual decline rate of 5.1%.

Most countries in the world now face depletion of their reserves. Some face acute depletion (Indonesia, Mexico, etc), some still manage to maintain plato (Russia, Saudi Arabia) or even increase production (the USA, Canada, Iraq, Iran, in the future probably Libya and Syria),  But generally around 4% of total world capacity is depleted per year and without adequate investment can't be replaced. in 2008 IHS estimated global oil field decline rates to be around 4.5%. EIA did a study estimated the worldwide decline rates to be around 6.7%.

When peak oil has been discussed decades ago it was considered a 3% decline rate in production was manageable -- 5% would considered extremely difficult to deal with  (The Guardian)

Now depletion rates are higher (source: IHS, Deloitte & Touche and USGS databases; other industry sources; EIA estimates and analysis)

Outside a couple of countries such as Iran, Iraq and Venezuela offshore production grows faster the onshore production. Shale production growth in the past was the fastest, especially in the USA.  That means a switch to more expensive sources of oil.

Given the increasing decline rates, the oil industry needs considerable capex investments. In the absence of them it slide into irreversible decline.  New technologies greatly help but there are natural limits of what you can achieve with them. they are not substitute to finding new fields which is a very expensive activity.

US oil production and forecast for 2016

Among three major oil producing nations (USA, Russia and Saudi Arabia) the USA is the most dynamic nation, and the most difficult to predict due to large share of shale oil in the USA output. Gradual destruction of the US shale industry ability to pump oil  due to low prices is now established fact. That only discussable item is how quick it will proceed. The first 12 months were cushioned by hedges, but at the and of 2015 most companies are now  "swimming naked". 

Still there are signs that the US oil production peaked in 2015. Decimation of shale can't be compensated by offshore drilling. The sinking shale that could easily lose 1 Mb/d in 2016

At the same time in 2015 total US oil production remained remarkably stable, bank loans were extended or refinanced and bankruptcies were few and does not look like an epidemic. So forecaster of "doom and gloom" were wrong by at least one year. There are no signs of panic in view of drop of oil prices below the level of sustainable production. After all oil is the strategic industry and to leave to market forces is extremely unwise. Wall Street probably has other opinion. As John Kenneth Galbraith said “The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil.” (The Great Crash of 1929). They live by the next quarter results.

Dec 8, 2015 EIA data  can be found http://www.eia.gov/forecasts/steo/tables/?tableNumber=29#

EIA estimates that total U.S. crude oil production declined by about 60,000 b/d in November 2015 compared with October. That decline will accelerate in December. Crude oil production will probably gradually decrease through the third quarter of 2016 before growth resumes late in 2016, it higher oil prices (at least above $50) materialize. 

Projections of the U.S. crude oil production

Saudi Arabia oil production and forecast for 2016

Oil production

There are signs that Saudi Arabia oil production peaked or close to a peak. A terror attack in 2016 Saudi Arabia is not very likely. Shiite organizations have not resorted to terrorism in many years and they seem now focused on fighting ISIS. which although sponsored by Saudis is a distinct organization.

Saudi Arabia produced 10.28 million barrels a day in October, 2015,  up from 9.69Mb/done year ago.   Chances that production will reach 11 Mb/d are slim. There are strong signs that they have huge difficulties in increasing oil extraction volume.  All their efforts to increase production led to increase of less then 1Mb/d  increase in 2015 (7% increase in production). Which is partially offset by  increase in internal consumption (In 2015 Saudi Arabia oil demand rose by a notable 0.21 mb/d, which equates to a nearly 8% rise y-o-y, )  Here is relevant quote (OilPrice.com, Dec 21, 2015)

Crude exports from Saudi Arabia rose from an average of 7.111 million barrels per day in September to 7.364 million per day in October, according to the latest data from the Joint Organizations Data Initiative (JODI), which monitors the oil industry. The report said this quantity was the most oil exported from Saudi Arabia since June and 7 percent higher than in October 2014.

And those doubts about Saudis ability to increase production exist for some time. When U.S. president George W. Bush asked the Saudis to raise production on a visit to Saudi Arabia in January 2008 they declined. After that Bush questioned whether they had the ability to raise production any more.

But they did managed to achieve temporary production peak: in April 2015, the Saudi oil minister Ali Al-Naimi said that Saudi Arabia produced 10.3 million barrels per day in March that year, which was the highest figure based on records since the early 1980s.  The previous peak in production was in August 2013 at 10.2 million barrels per day.

Theoretically as its own population and internal consumption is growing and depletion of its wells reached critical level, they should concentrate of providing the standard of living for future generations, not dump the oil at the lowest price.  In three decades if the current annual increase in internal consumption continues at, say, 5% and production stays flat Saudi Arabia paradoxically may became oil importing county.

Still Saudi are known to use the most advanced (and most expensive) technologies of boosting the extraction rate to counter the natural decline curve.   They now are exploring shale technology and reportedly are trying to hire workers from the USA who became unemployed during the downturn of shale industry started in mid 2014.

Exports

Contrary to MSM coverage about Saudis flooding world with their oil, year over year increase in exports is slim. Basically they are flat (due to rapidly increasing population and domestic consumption): 

Net exports were around 7.111 Mb/d (September, 2015). But with current low prices this is an economic suicide, even if this is an economic war against Iran -- attempt to hurt its major competitor when  sanctions are lifted.

The net revenue dropped more then a half and the country is burining its currency reserves (which are substantial and at current burn rate will last for more then three years)  So there is something fishy in this propagated by Western MSM idea of Saudis defending their market share. The cost of defending their market share proved to be in hundred billions of lost revenue, which far exceeds their losses from rise of the US shale oil production (if the prices remained above $100 per barrel).  Also the question arise, why now. Shale was a long story in the USA and reached present size around decade ago (2005).

This is definitely a declation of war. But if the target is not the USA (and it can't be the target as Saudis are the USA vassal state), then war of whom ?  The USA is actually a beneficially of this  war (like most wars in this region) and  got a half trillion subsidy due to lower price of oil.  And  "corrupt and atheistic" Western Europe also got similar subsidy.

Business Insider

A report by Citigroup has warned that Saudi Arabia could run out of oil to export by 2030, raising fears that oil prices may rise significantly in coming years.

... ... ...

Its export capacity could steadily reduce and, “if nothing changes, Saudi may have no available oil for export by 2030”, Citi analyst Heidy Rehman wrote.

Saudi Arabia consumes 25pc of its oil output and oil accounts for about 50pc of its electricity production. With peak power demand rising by about 8pc per year, the nation is aiming to more than double its power capacity by 2032 through new nuclear and solar instalations.

Internal consumption

Saudi Arabia produced 10.28 million barrels a day in October 2015 and exported  7.364 million barrels a day. the difference  is less then 3 Mb/d

In September figure were 10.28 and 7.111. The difference is above 3 Mb/d.

So we can assume that 2015 internal consumption is approximately 3 million barrel a day.  In 2015 Saudi Arabia oil demand rose by a notable 0.21 mb/d, which equates to a nearly 8% rise y-o-y, driven by transportation fuels such as jet/kerosene, gasoline and diesel oil, which grew at high rates. The higher consumption of jet fuel reflects the increase in travel activity towards the end of the summer vacation, which coincided with the Hajj season.

Internal consumptions rapidly growing year over year with some years (2009) close to 10% growth (Saudi Arabia Crude Oil Consumption by Year (Thousand Barrels per Day)):

2005 1,963.64 4.20 %
2006 2,020.02 2.87 %
2007 2,094.33 3.68 %
2008 2,236.99 6.81 %
2009 2,436.12 8.90 %
2010 2,579.73 5.90 %
2011 2,760.91 7.02 %
2012 2,861.00 3.63 %
2013 2,925.00 2.24 %

Russia oil production and forecast for 2016

Russian oil production considered to be at "over peak" stage with increases mainly due to offshore drilling. In 2014 total petroleum and other liquids production in 2014 were 10.8 Mb/d  (EIA). Russia crude oil production in late 2015 was around 10.20M, up from  10.08Mb/done year ago. That's was an unanticipated, even by Russian Ministry of Energy result of activities of small companies. which managed to increase of  production by  1.12% from one year ago, when most analysts expected a slight decline (Russia Crude Oil Production (Monthly, Barrels per Day).

Despite severe depreciation of ruble and sanctions, in 2015 Russia managed to reach the level of production that exceed the level of former USSR period. At the same time most of Russia's fields are mature fields and the production from them is declining for long time,  offset only by new more expensive projects with less total volume. Unless Arctic oil and other expensive oil are economical to produce (which requires over $100 bbl price) the national path for Russian production is iether long plato or down. 

Russian oil extraction (red) and oil exports (green) in metric tons

 

In 2015 Russia managed to increase exports the first time in six years, but that does not change general situation: internal consumption is growing pretty robustly with growth of car fleet and decline of production due to national depletion of oil conventional wells became more and more difficult to compensate with new discoveries. And new fields, even if such exist, can't be now tapped because capital expenditures by most Russian oil companies now are slashed to the bone (russia is more like the USA in this respect with over dozen of major oil companies producing   oil).

At current oil prices Arctic oil now is out of reach and only existing platforms will remain in production. All of them are losing money. conventional wells are still profitable with same remaining profitable up to $20 per barrel. Still for the next several years Russia probably will be able to keep the current level of production due to huge previous investments dome in 2010-2014 in a few new fields (Bloomberg Business, December 20, 2015):

The other big boosts to Russian production this year have come from a few mid-sized new fields like those of Severenergia in the Arctic Yamal region. Co-owners Novatek OJSC and Gazpromneft PJSC invested in the $9.2 billion project back when oil prices were high. With most of the capital already committed, operating costs now are relatively low and output of gas condensate, a light and especially valuable form of crude, is up five-fold this year.

One side effect of falling oil prices -- the 52 percent plunge in the ruble over the last two years -- has helped Russian oil producers, chopping their costs in dollar terms since between 80 and 90 percent of their spending comes in rubles.

... ... ...

To be sure, few in the industry expect Russia to be able to sustain the current performance for more than a few years. Tax hikes and lack of financing have cut deeply into exploration drilling, which is down 21 percent this year, and handicap the larger new projects that are needed to replace the country’s older fields as they run dry.

... ... ...

In some parts of the Russian oil patch, low prices are already causing pain. At $40 a barrel, “half of our fields could be stopped. Heavy oil, low horizons, mature horizons are all unprofitable at a price of $40-45. We are waiting for better times,” Russneft OJSC Board Chairman Mikhail Gutseriev said in an interview on state television early this month.

Unfortunately just before the oil prices crush Russia was engaged in several high cost drilling projects in Arctic and was caught naked when oil price dropped. ( see Petroleum industry in Russia - Wikipedia).  Timing can't be more bad as this is a really expensive oil, probably around $60 per barrel or higher at wellhead.  Which are now sold at a huge discount.  Igor Sechin proved to be a weak leader of the Russia major state owned oil company Rosneft.  Government refused to bail out the company which faces large external debt and it was saved by some "white knife" billionaire.

Moscow Exile, December 19, 2015 at 11:19 am

Undeterred by OPEC’s decision to keep pumping and drive out U.S. shale rivals, Russian oil output continued to grow, in October setting a new monthly record for the post-Soviet era. Explorers have remained profitable under a friendly tax system and low production costs.

Mystery Benefactor

Rosneft assuaged concerns over the sustainability of Russia’s biggest corporate debt load after the company received a $15 billion advance payment for oil supplies from a source the company didn’t identify, according to quarterly reports published Nov. 13. The inflow of cash will help Rosneft meet $2.5 billion in debt due in the fourth quarter, $13.7 billion in 2016 and $11.3 billion in 2017, according to a presentation on its website.

See: One Year Into New OPEC Era, You Made 12% Buying These Oil Bonds

It looks like the board is in denial of the blunder with overinvest they made:

18 December 2015
Rosneft Holds Board of Directors Meeting

On December 18, Rosneft Board of Directors considered in Vladivostok interim results of its 2015 operations, the business-plan for 2016-2017, the Long-term development program and the energy efficiency program of the Company.

The following decisions were taken:

1. The Board of Directors considered and acknowledged 2015 Rosneft interim results and the intermediate results of the implementation of the long-term development program of the Company. The Board of Directors welcomed the results of the implementation of programs aimed at raising efficiency in challenging economic environment: the Company maintained low levels of OPEX and eased its debt burden.

2. The Board of Directors considered and acknowledged the business-plan for 2016-2017, structured in accordance with a conservative macroeconomic scenario and focused on the implementation of the Long-term development program of the Company, approved by the Government of the Russian Federation.

Within the ambit of delivering strategic goals of boosting production, securing deliveries of oil and oil products, maintaining a market share (both in Russia and abroad), the Company plans to increase capital expenditures by a third (compared to 2015 levels). The investment development program envisages the achievement of strategic goals of hydrocarbon production growth by means of accelerated commencement of oil and gas greenfields whilst exercising a balanced external financing program. After the completion of transition to Euro-5 motor fuels production in December 2015, refineries’ modernization program will be focused on increasing processing depth. Also, the program of cutting operating costs and enhancing operating and financial efficiency will be continued. Hence the leadership in the industry by the operating costs and capital costs will be guaranteed.

... .... ...

Commenting on the results of the Board meeting, Rosneft Chairman of the Management Board Igor Sechin said: “Measures taken by the Company for strengthening its oilfield services business dimension in 2015 enabled Rosneft to increase production in order to guarantee supplies to its traditional markets while keeping operating and capital expenditures at the record-low levels. The Company consistently generates free cash flow, providing funding sources for its investment decisions in accordance with 2015-2016 business plan approved by the Board of Directors and the Long-term Development Program”.

In August 2014, it was announced that preparations by the Russian government to sell a 19.5 percent stake in the company were underway and would most likely be sold in two tranches. So far this chunk of the company was not sold, probably because of low oil prices. 

Russia oil internal consumption is generally more or less stable and growling at a very slow page outside several 'abnormal" years. In 2016 it will not probably grow much as the economy remain is conditions close to recession. Lukoil chairman has said that he  expects Russia to produce less oil  in 2016 than in 2015

Russia internal oil consumption is currently around 3.3 Mb/d, up from 3.2 Mb/d one year ago. This is a change of 3.15% from one year ago.

2005 2,785.14 1.25 %
2006 2,803.47 0.66 %
2007 2,885.10 2.91 %
2008 2,981.92 3.36 %
2009 2,888.53 -3.13 %
2010 3,081.82 6.69 %
2011 3,352.11 8.77 %
2012 3,395.11 1.28 %
2013 3,320.00 -2.21 %

It is expected that it will continue to grow by around 0.1 Mb/d per year as car fleet is rapidly growing.. Also Russia will process more raw oil in 2016 then in 2015 which also negatively influence export of raw oil

Oil producing countries with civil wars/sanctions/military conflicts  

This is a very complex topic that is beyond the scope of this analyses. But paradoxically such countries are the "last hurrah" for increasing the oil production, as they do have reserve that can't be tapped at reasonable costs now but at the same time represent the last spot of "cheap oil" deposits. Some facts:

Oil consumption

Mankind dependency on oil is hardwired into fabric of our civilization.  It is an irreplaceable product. But as much as  2/3 of this extremely valuable chemical industry resource is burned in transportation. That actually means that sales of cars and trucks are instrumental to predicting future demand at least one year ahead.  And they are growing especially fast in China and India. They also accelerated in the USA.

World oil consumption is often given in millions barrels per day (mbpd or Mb/d). BP stated that in 2014 global oil demand increased by 1.4 Mb/d over 2012 to 91.3 Mb/d.  Assuming on average $60 per barrel this is 5.5 trillion dollars a year of additional expenses on energy.   Here are actual figures of world consumption for the last decade ( World Crude Oil Consumption by Year (Thousand Barrels per Day))

2005 84,668.04 1.79 %
2006 85,586.39 1.08 %
2007 86,700.09 1.30 %
2008 86,027.86 -0.78 %
2009 84,953.36 -1.25 %
2010 87,839.10 3.40 %
2011 88,657.70 0.93 %
2012 89,668.91 1.14 %
2013 90,354.27 0.76 %

As BP noted in February 2015 "Global demand for energy is expected to rise by 37% from 2013 to 2035, or by an average of 1.4% a year".  So it is reasonable to assume that oil demand will rise approximately the same rate, which taking into account the current rate of consumption is above 1Mb/d.

The oil consumption proved to be extremely resilient  to economic conditions (that only drop in the last decade happened in 2009) and is growing globally each year by rate about 1 Mb/d due to increase of population and cars and trucks on the road. ( Peak oil - Wikipedia )

The table above does not contain data for 2014 and 205. Here they are:

As for the forecast of 2015, the growth of consumption is predicted in the range of 1.2-1.4 MB/d:

According to IEA "an annual $630 billion in worldwide upstream oil and gas investment – the total amount the industry spent on average each year for the past five years – is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels" (iea.org). It is easy to see that such amount is difficult to come by when prices of oil are in $30-$40 range,  do the decline of world oil output might happen faster then growth of consumption.

OPEC forecast is usually more reliable then EIA but generally very similar, despite having different set of biases (G7 bias in case of IEA and Saudi Arabia bias for OPEC forecast) They predict higher growth of demand in 2015 and lower growth in 2016:

World oil demand is expected to grow by 1.50 mb/d in 2015 to average 92.86 mb/d, ...  In 2016, world oil demand growth is seen reaching 1.25 mb/d ...  to average 94.14 mb/d.

India is set to become the world’s third largest oil importer after the US and China before 2025, according to the International Energy Agency (IEA). India’s energy needs would overtake Japan as the third largest net importer of oil before 2025. EIA predict stable consumption level until 2040 only 1.1% growth on average (EIA)

The bulk of that demand growth is expected to come from developing countries in Asia. With U.S. supply falling, where are the new oil supplies coming from ? There simply isn’t enough to go around.

Double-digit percentage increases in oil consumption were recorded by Pakistan, Venezuela, and Azerbaijan from 2012 to 2013, and over the past five years double-digit percentage consumption increases were recorded by Central and South America (15.2 percent), the Middle East (18.3 percent), Africa (12 percent), Asia Pacific (17.4 percent), and the former Soviet Union (12.8 percent). World Sets New Oil Production and Consumption Records

Per country picture: not all countries are created equal

The most significant factor affecting petroleum demand has been human population growth. Large countries that previously were dirt poor and consumed minuscule amount of oil now now rapidly growing (India and China) are primary drivers of consumption. Arab countries also experience rapid population growth (Saudi Arabia is one example). The United States Census Bureau predicts that world population in 2030 will be almost double that of 1980. Oil production per capita peaked in 1979 at 5.5 Giga barrels/year but then declined to fluctuate around 4.5 Giga barrels/year since. In this regard, the decreasing population growth rate since the 1970s has somewhat ameliorated the per capita decline.

Not all consumers of oil are created equal.

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as of January 1, 2014

See also: Oil consumption per capita bar chart

Country Name Oil consumption per capita
 (bbl/day per 1000 people)
Year of Estimate
Singapore 202 2012
Nauru 139 2012
Kuwait 134 2012
Luxembourg 119 2012
Bahamas, The 111 2012
United Arab Emirates 103 2012
Saudi Arabia 100 2012
Falkland Islands (Islas Malvinas) 96 2008
Seychelles 89 2012
Qatar 85 2012
Greenland 69 2012
Canada 64 2012
United States 61 2012
Netherlands 60 2012
Belgium 60 2012
Cayman Islands 57 2012
Antigua and Barbuda 56 2012
Iceland 56 2012
New Caledonia 54 2012
Libya 51 2012
Norway 47 2012
Malta 46 2012
Oman 46 2012
Korea, South 45 2012
Australia 44 2012
Taiwan 43 2012
Hong Kong 42 2012
Brunei 42 2012
Finland 41 2012
Puerto Rico 41 2012
Saint Kitts and Nevis 39 2012
Sweden 39 2012
Bahrain 38 2012
Japan 35 2012
New Zealand 35 2012
Greece 34 2012
Austria 34 2012
Trinidad and Tobago 33 2012
Slovenia 32 2012
Israel 31 2010
Barbados 31 2012
Germany 31 2012
Spain 31 2012
Switzerland 31 2012
Ireland 30 2012
Macau 29 2012
France 28 2012
Panama 28 2012
Grenada 28 2012
Suriname 27 2012
Venezuela 27 2012
Portugal 26 2012
United Kingdom 26 2012
Lebanon 26 2012
Denmark 25 2012
Italy 25 2012
Turkmenistan 25 2012
Estonia 24 2012
Iran 23 2012
Iraq 22 2012
Jamaica 22 2012
Belize 21 2012
Saint Vincent and the Grenadines 19 2012
Czech Republic 19 2012
Malaysia 19 2012
Lithuania 19 2012
Saint Lucia 18 2012
Mexico 18 2012
Chile 18 2012
Mauritius 18 2012
Armenia 18 2012
Belarus 17 2012
Fiji 17 2012
Cuba 16 2012
Djibouti 15 2012
Russia 15 2012
Brazil 10 2012
Turkey 8 2012
China 7 2012
India 3 2012
Pakistan 2 2012
Bangladesh 1 2012

Consumption in net oil exporting countries is limited to the volume of production and price while consumption in net oil importing countries by the price of oil and the oil that is left for export after internal consumer got their share (which depends on price of oil).  In other words, to paraphrase “Animal Farm,”  all pigs are equal but some pigs are more equal then others.

Of course pigs with strong military (read G7) are also more equal then others and can change this equation in their favor by force and already started doing this (USA in Iraq, France in Libya).

While demand for oil continues to increase globally, oil producing countries also increase their internal consumption rapidly. For example increase in internal consumption of Saudi Arabia led to a situation when since 2005 their exports are essentially flat despite increase of production.

Having noted Steven Kopits’ continuing track record of being remarkably prescient regarding global oil supply and demand analysis, I do have one issue with global supply & demand analysis -– consumption in net oil exporting countries versus consumption in net oil importing countries, to -- wit, to paraphrase “Animal Farm,” in my opinion some consumers are more equal than others.

Let’s assume a scenario where all oil production and refining operations are in oil exporting countries and let’s ignore things like refinery gains. Total petroleum liquids production is 80 mbpd and consumption in the oil exporting countries is 40 mbpd, and they therefore net export 40 mbpd to oil importing countries.

Production rises by 2.5 mbpd in the oil exporting countries, so total supply increases from 80 mbpd to 82.5 mbpd. However, consumption in the oil exporting countries rose by 5 mbpd. So, Net Exports = Production – Consumption = 82.5 mbpd – 45 mbpd = 37.5 mbpd.

My point is that a global supply and demand analysis would not accurately represent the situation in the net oil importing countries, i.e., a 6.25% decline in the supply available to net importers (40 mbpd to 37.5 mbpd), although global supply is up by 3.125%, 80 mbpd to 82.5 mbpd.

Of course, the crux of what I call “Export Land Model” or ELM, is that for a number of reasons (subsidies, proximity to production, legal restrictions, etc.), consumption in oil exporting countries tends to be satisfied before oil is exported.

Interesting enough, the case histories tend to show that regardless of how oil exporters treat internal consumption, given an ongoing production decline, the net export decline rate tends to exceed the production decline rate and the net export decline rate tends to accelerate with time.

For example, Indonesia subsidizes petroleum consumption and the UK heavily taxes petroleum consumption, but both former net oil exporters showed accelerating rates of decline in their net exports (in excess of their respective production decline rates).

Here are the ELM Mathematical Facts of Life:

Given an ongoing production decline in a net oil exporting country, unless they cut their domestic oil consumption at the same rate as the rate of decline in production or at a faster rate, the resulting net export decline rate will exceed the production decline rate and the net export decline rate will accelerate with time. Furthermore, a net oil exporter can become a net oil importer, even with rising production, if the rate of increase in consumption exceeds the rate of increase in production, e.g., the US and China.

The (2005) Top 33 net exporters showed a slight increase in production from 2005 to 2013, from about 62 mbpd to 63 mbpd (total petroleum liquids + other liquids, EIA), but their rate of increase in consumption exceed their rate of increase in production and their combined net exports (what I call Global Net Exports, or GNE) fell from 46 mbpd in 2005 to 43 mbpd in 2013.

Furthermore, China and India (“Chindia”) consumed an increasing share of a post-2005 declining volume of GNE. What I call Available Net Exports (ANE, or GNE less Chinidia’s Net Imports, CNI) fell from 41 mbpd in 2005 to 34 mbpd in 2013.

Here’s the Available Net Exports problem:

Given an ongoing decline in GNE–and it’s when, not if–then unless the Chindia region cuts their oil consumption at the same rate as the rate of decline in GNE, or at a faster rate, the resulting rate of decline in ANE will exceed the GNE decline rate and the ANE decline rate will accelerate with time.

From 2005 to 2013, GNE fell at 0.8%year. From 2005 to 2013, ANE -- the supply of Global Net Exports of oil available to importers other than China & India -- fell at 2.3%/year.

The USA consumption

The United States remains the world's largest consumer of petroleum. The United States uses most of oil per capita in the world.  Between 1995 and 2005, US consumption grew from 17.7 Mb/d (2,810,000 m3/d) to 20.7 Mb/d (3,290,000 m3/d), a 3,000,000 barrels per day (480,000 m3/d) increase. According to EIA Jan 12, 2016 report (eia.gov):

In other words the USA consumption is approximately equal to total Saudi export capacity. 

The U.S. Energy Information Administration (EIA) includes volumes of biofuels in data on total petroleum consumption. Per capita consumption of oil in the USA is one of the highest in the worlds and exceeds, for example, Russian per capita consumption four times.

Looking forward, both the EIA and the EIA project that U.S. oil demand will oscillate around 20 Mb/d mark. That might change if oil price stays low for several years.

The USA consumption is highly concentrated on transportation sector and in private cars sector is quite wasteful. The same population in Germany, Great Britain, France, Poland, the low countries and Scandinavia use 10 Mb/d.

Peter, 12/21/2015 at 4:33 pm
Watcher

1)US consumption is besides a couple of small countries the highest in the world.

http://www.indexmundi.com/map/?v=91000

compared to other western industrial countries it’s consumption is totally unjustifiable.

2) Driving a Ford F150 or an ampera to work has nothing to do with GDP and everything to do with needless oil consumption. So stop saying things which even an 8 year old would find obvious

US consumers will not cut consumption out of the goodness of their hearts, they will be forced to do so when prices make cuts necessary.

China consumption

China, by comparison, increased consumption from 3,400,000 barrels per day (540,000 m3/d) to 7,000,000 barrels per day (1,100,000 m3/d), an increase of 3,600,000 barrels per day (570,000 m3/d), in the same time frame.

China surpassed the United States as the world’s largest crude oil importer in 2015. As China’s economic growth is predicted to decrease from the high rates of the early part of the 21st Century that level might grow more slowly, but still China is so far behind the USA in consumption of gasoline per capita the trend toward more equal consumption clearly will increase china figures dramatically. Much depends how quickly china will grow middle class, which owns individual cars.

India consumption

India is burning over 4 mbpd now. India's oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million barrels per day.  Look at Energy Export Databrowser to see the consumption line for each country. 45 degree slope for India, just a few degrees less than China’s slope. KSA’s slope looks early exponential. No reason why it shouldn’t be. It’s their oil.

Russian consumption

Russian internal consumption grows rapidly and that means that in the future Russia will export less oils. Russian leadership have found itself unprepared to the dramatic drop of oil prices and now will take moves to refine more oil at home, and selling less raw oil. The fact that Russia sells mostly unprocessed oil was a blunder that costs Russia billions and Putin had shown ability to learn from mistakes. 

Russia's Key Energy Statistics world rank
Total Primary Energy Production
2012
55.296
Quadrillion Btu
3
Total Primary Energy Consumption
2012
31.522
Quadrillion Btu
3
Dry Natural Gas Production
2011
22,213
Billion Cubic Feet
2
Total Petroleum and Other Liquids Production
2014
10,853
Thousand Barrels Per Day
3
Total Primary Coal Production
2013
388,013
Thousand Short Tons
6

Compare that with the USA

United States' Key Energy Statistics world rank
Total Primary Energy Production
2012
79.212
Quadrillion Btu
2
Total Primary Energy Consumption
2012
95.058
Quadrillion Btu
2
Dry Natural Gas Production
2011
22,902
Billion Cubic Feet
1
Total Petroleum and Other Liquids Production
2014
13,973
Thousand Barrels Per Day
1
Total Primary Coal Production
2013
984,842
Thousand Short Tons
2

India

India's existing domestic production of about 0.86 Mb/d is only about 25% of its current consumption of 3,47 Mb/d.  According to the EIA, its production peaked at 996,000 barrels per day in 2011. Energy consumption in India is likely double by 2031.   The CAGR (compound annual growth rate) for the ten years ending in March 2014 is above 3.5%.

Domestic production of  oil is relatively stable. The EIA (US Energy Information Administration) estimates that India had close to 5.7 billion barrels of proven oil reserves at the beginning of 2014. About 44% of the reserves are onshore resource.

 Imports is likely to rise  from current 75 percent to 80 percent by the end of the 12th five year plan (2016-17). According to the Directorate General of Commercial Intelligence and Statistics, crude oil and refined products made up over 28 percent and 30 percent of India's import of principal commodities in 2010-11 and first half of 2011-12 respectively.

India is a major crude oil refiner. India petroleum refining capacity has outstripped demand consistently. Since 2002, the country's export of petroleum products has risen from 10 million tones to around 60 million tones in 2011-12, an average annual growth of over 20%.

Analyzing India’s oil consumption

According to IES (International Energy Statistics) presented by the EIA (US Energy Information Administration), the CAGR for total petroleum consumption for the world was 0.8% from 2005 to 2013. This consumption has been measured in thousand barrels per day. In the same period, China saw its consumption increase by 5.1%. In CAGR terms, India’s consumption increased by 4.1%. In contrast, the US saw its consumption decrease by 1.2%.

Per sector consumption

Oil consumption is distributed amongst four broad sectors: transportation, residential, commercial, and industrial. In terms of oil consumption, transportation is the largest sector and the one that has seen the largest growth in demand in recent decades. This growth has largely come from new demand for personal cars. In the USA it accounts for approximately 68.9% of all the oil used. Globally it is close to 55%

There are also "shadow" consumers of oil. For example military is important but often underreported or unreported consumer. So in no way published figured of consumption can be taken at face value. 
 

Consumption by transportation sector

Approximately two-thirds of U.S. oil consumption is due to the transportation sector. Slightly less for the world. 

In the USA consumption is depicted on the following picture

Private transportation is gradually became more efficient in miles per gallon metric (so energy consumption is shifted to the production of battery and electrical motors).  Most of the efficiently is already obtained on cars such as Toyota Prius which averages probably 40 miles per gallon and can run on electrical engine at low speeds/city traffic which is killing regular car efficiency.  Further substantial improvement is unlikely as traffic jams are the most important feature of morning commute in the USA. Traffic congestion, especially at rush hour, is a problem in most of the USA large cities. A 2009 study found that traffic congestion costs the United States almost $87.2 billion. The economic costs of traffic congestion have increased 63% over the past decade, and despite the declining traffic volumes caused by the economic downturn, Americans still waste more than 2.8 billion US gallons (11,000,000 m3) of fuel each year as a result of traffic congestion. Motorists also waste 4.2 billion hours annually, or one full workweek per traveler.

Private transportation sector oil consultation with gradually rise with the growth of population.

It's not only car and trucks burn fuel on the roads. Maintaining road surface is pretty fuel-intensive activity as well. With the development of the  Eisenhower Interstate Highway System in the 1950s, the road system in the USA, as of 2010, has a total length of 47,182 miles (75,932 km), making it the world's second longest after China's, and the largest public works project in US history. A large number of multilane roads while improving peak hours traffic is considerably more expensive to maintain. A Federal Highway Administration report saying the number of roads in good condition each year is going up.  As the same time roads and surface transportation will only get about half their projected $1.7 trillion need for capital projects.  The high cost of America's bad roads and bridges - Feb. 12, 2013

Industrial transportation use efficient diesel engines and improving efficiently on such engines is a very difficult task. So it will approximately consume the same amount of fuel per ton per mile of transported goods as now. Some improvement are possible by increasing of usage of railways. for maritime transportation saving are possible by lowing the speed of vessels, which was already done when price of oil was high.

In air transportation larger planes, more efficient engines can improve fuel efficiency. Between 1960 and 2000 there was a 55% overall fuel efficiency gain. Optimal amount of passengers/cargo  and fuel are also important factors. As over 80% of the fully laden take-off weight of a modern aircraft such as the Airbus A380 is craft and fuel (Fuel economy in aircraft - Wikipedia )

Pilots of turbine airplanes actually have less control over the fuel efficiency of their flights because there are so many variables, first among them being air traffic control. Turbine engines are at their least efficient down low where the air is dense. As the airplane climbs up and the air thins, the turbine produces less power and thus consumes less fuel, but the drag of the thinning air on the airplane decreases faster than the power from the engine drops, so the airplane speeds up and the fuel flow goes down. Takeoff delays really cut into fuel efficiency in a jet compared to a piston engine.

Military aviation also consumes large amount of fuel and is known for very low fuel efficiency.

Chemical industry consumption

Chemical industry consumes approximately 30% of oil.

Residual Fuel Oil Consumption By Chemical Industry - By Country - Data from Quandl

Military consumption

Also we should not forget that one of the largest consumer of oil is military which will get oil at any price. And we have the recent trend in re-armament. So the consumption of oil by military grows again. Here are some 2007 data (US military energy consumption- facts and figures)

As the saying goes, facts are many but the truth is one. The truth is that the U.S. military is the single largest consumer of energy in the world. But as a wise man once said, don't confuse facts with reality. The reality is that even U.S. Department of Defense (DoD) does not know precisely where and how much energy it consumes. This is my Fact Zero.

Below I give some facts and figures on U.S. military oil consumption based mostly on official statistics.[1] If you want to reproduce them make sure you read every footnote even if you need to put on your glasses. Also read the footnotes in this article.

According to the DoD's Federal Energy Management Report for FY2006, the DoD spent approximately $3.5 billion on facility energy and $16.5 billion on energy for tactical vehicles. To this we should add 238 million spent on non-tactical vehicles.[6] Overall, total actual cost[7] for DoD energy consumption is over $20 billion. By the way, remember that a billion has nine zeros.

According to Pentagon spokesman Chris Isleib a $10 increase per barrel of oil increases Defense Department costs by $1.3 billion per year.

Hurting Russian economy

Oil is a strategic resource using which countries pursue geostrategic interest. So manipulation on oil price is a war by other means. As Patrick J. Buchanan  noted in his article America Regains the Oil Weapon The American Conservative in American Conservative (Nov 14, 2014)  "...price, Adam Smith notwithstanding, is something we can control and manipulate"  although strangely enough he consider Saudis to be an independent player, as if they are not a vassal state dependent on Washington:

In July of 1941, after Japan occupied French Indochina, the Roosevelt administration froze Japan’s assets in the United States. Denied hard cash, Japan could not buy the U.S. oil upon which the empire depended for survival. Seeing the Dutch East Indies as her only other source, Japan prepared to invade.

But first she had to eliminate the sole strategic threat to her occupation of the East Indies—the U.S. battle fleet at Pearl Harbor. FDR’s cutoff of oil to Japan was thus a primary cause of WWII in the Pacific, which led to hundreds of thousands of U.S. war dead, the destruction of Japan, Mao’s triumph in China and a U.S. war in Korea.

A second stunning use of the oil weapon came in 1973. Arab members of OPEC imposed an embargo in retaliation for Nixon’s rescue of Israel with an airlift in the Yom Kippur war. Long gas lines helped to bring Nixon down.

Now the oil weapon appears to be back in America’s hand.

Due to the substitution of natural gas for oil in heating homes and buildings, horizontal drilling, and hydraulic fracking, which enables us to bring oil and gas out of shale rock in places like North Dakota, U.S. production has exploded. We now produce more oil than Saudi Arabia and the benefits are not only economic, but geostrategic.

... ... ...

What is Riyadh’s game?

Is the Saudi strategy to let prices fall to where it is no longer profitable for Americans to begin new fracking? Are the Saudis thinking of doing to the new oil-producing champion, USA, what we are doing to Venezuela, Russia, and Iran? Riyadh may want to let the price of oil sink below where it makes sense for energy companies to prospect for new sources of oil or invest more billions in expanding production.

Are the Saudis out to cripple us with an oil glut?

Today, not only are Iran and Iraq producing below potential, so, too, is Libya. And we have been bombing ISIS’ oil facilities in Syria.

A contrarian’s question: Would we not be better off if these countries not only restored oil production, but also expanded production and put more oil on the market than they do today? Demand creates supply, and a world oil market where there is more supply than demand would seem to be to America’s benefit. For we remain the world’s largest consumer of petroleum products. And surely it is to our benefit to enlarge both the reserves and production of oil and gas in North America.

Price pays a huge role in creating, and shrinking, supply. And price, Adam Smith notwithstanding, is something we can control and manipulate, even as China manipulates its currency.

In “America’s New Oil Weapon” in National Review, Arthur Herman of the Hudson Institute urges the United States to take bold steps to increase our supplies of oil and gas.

We should relax the rules on drilling in Alaska’s Arctic National Wildlife Refuge, which has 10 billion barrels of oil locked up. We should use as an economic weapon against OPEC the 700 million barrels in the Strategic Petroleum Reserve. We should allow the export of oil from the United States to enable us to cope with OPEC cutbacks. We should build the Keystone XL pipeline, and the other oil and gas pipelines between us and Canada now sitting in limbo.

What Herman is urging upon us is a new nationalism, a new way of thinking about international economics that puts the U.S. and its allies first, and uses our economic leverage to advance national rather than global interests.

High oil prices pressured the US economy and its perennially-undercapitalized banking system. US economy health depends on low oil prices.   But there is geopolitical dimension of the current drop of oil prices. In is not unconceivable to think that Washington reused Reagan plan of hurting Russian economy (which catalyzed dissolution of the USSR) by pushing down oil prices.

Among the many threats facing Russia’s economy, cheap oil could be the biggest of all. Low crude are depressing the ruble (at some point in early 2015 ruble  dropped to 69 per dollar from 30-35 or so; in August 24, 2015 it reached 69.96) and knocking export on which Russia depends due to its integration in the global economy: the direction Russian neoliberal pushed for since 1991. And Russian elite was taking high oil prices for granted. For example,  Russia’s draft budget for 2015 was based on $100-a-barrel oil (Oil Prices Are Hurting Russia's Economy - Businessweek, October 13, 2014)

Because of Russia’s outsize dependence on oil and gas, which account for more than two-thirds of its exports, lower energy prices can easily tip its $2 trillion economy into recession. “Growth is likely to remain positive only with oil prices above $92 to $93 a barrel,” says economist Charles Robertson of Renaissance Capital. At $90 a barrel, the economy would contract 0.4 percent next year, and at $80 a barrel it would shrink 1.7 percent, he predicts.

Do the US tried to subdue Russia the second time via decimating oil prices and thus cutting dramatically the stream of revenue from oil exports?  It is difficult to say.   But now this strategy is better understood by Russians, which created certain difficulties in its implementation despite the huge power of the US financial sector. The sector which can allow itself to play with oil futures the way it wants due to unlimited supply of the US dollars -- the world reserve currency.  The Fed remains a monetary superpower controlling the world's main reserve currency and xUSSR  and emerging countries currencies are formally or informally pegged to dollar. Therefore, its monetary policy is exported across the globe. The Fed was exporting its easy monetary policy to the rest of the world in the early-to-mid 2000s. Now  the attempt of normalization of monetary policy creating huge tightening of monetary conditions for the rest of the world.  It also dramatically devalue large export oriented Russian companies:

How Russian energy giant Gazprom lost $300bn  Justin Burke for  the New East network

Aug 07, 2015  |  The Guardian

annamarinja airman23 8 Aug 2015 09:09

Poor airman23. Have you ever heard about Dick Cheney? Have you ever looked at the Wolfowitz Doctrine? If not, then you are very much behind the nowadays understanding of fascism and fascists. On the other hand, you are such a concrete success of Mrs. Nuland-Kagan' (and likes) travails.

yemrajesh  -> psygone 8 Aug 2015 07:36

Difficult to say. If the costs are true'ly low it would have reflected at the Pump. But it hasn't. Another flaw is how can oil pumped from deeper well ( Fracked Oil) is cheaper than conventional oil. It looks more like US flexing its muscles to subdue Russia. Besides its not Just Gazprom , shell, BP, Exxon , Gulf, Mobil etc also many of US vassal states are affected. It would be interesting to see how long this artificial price drop continue with zero benefit to the customers.

Kaiama 8 Aug 2015 06:07

Since the Russians haven't rolled over the first time, the US is trying again. These days, the price of oil is determined by activity in the futures market impacting the spot price. Likewise, I expect for shares and wouldn't be surprised if someone is shorting the stock. Any oil and gas not pumped today is available to be pumped tomorrow - possibly at higher prices. Gazprom isn't going bankrupt. Neither are any of the other major oil companies.

AlbertEU  -> alpamysh 7 Aug 2015 17:09

The crisis of one industry necessarily will hurt other sectors. Hard-hit banking sector, which is credited US shale industry. The effect can be like an avalanche. Especially if it is strengthened by additional steps. I think for anybody is not a secret the existence of a huge number of empty weight of the dollar, which is produced by running the printing press. Oil trade is in the dollar, which in turn keeps the volume of the empty weight of the dollar. Now imagine a situation where part of the oil market has not traded more in dollars. It is equally affected, the USA and Russia.

But there is one important detail. Russia has never in its history, was a rich country (if you count all the inhabitants of Russia, not individuals). In the country there is no cult of consumption. The traditional religions of Russia, that is, those that have always existed in Russia (Orthodox Christianity, Islam and Buddhism) did not contribute to the emergence of such a cult.

Orthodoxy says plainly that material wealth is not important for a man. Wealth is only supplied in addition to achieve the main goal in the life of an Orthodox Christian. Therefore, to be poor in Russia is not a problem. This is a normal way of life. Hence the stoic resistance to any hardship, challenges, wars and so on. Expectations of great social upheaval in Russia, caused by the lowering of the standard of living is a little naive. Russia used to run in the marathon. Who would have more strength, intelligence and endurance is a big question. Geopolitics is a very strange science...

If this is a deliberate maneuver, an economic war on Russia, it can became very costly and might have made sense only on a short or medium-term basis (three-five years), to shock Russian elite into submission and depose Putin and his faction of "resource nationalists" which are like a bone in the throat of US multinationals.  This time Washington managed to catch  Putin's government completely  unprepared to such development of event, which increased the chances of success.

And they really took Russian elite by surprise. That's why the USA oil Blitzkrieg initially enjoyed such a huge success and immediately crashed the ruble (100% devaluation happened) as well as put Russian economy in recession. But Russians quickly realized what's going on and the game in the second part of  2015 became more complicated as those futures and shale industry junk bonds now also weight on the USA financial sector.  It this was a deliberate maneuver, it does has unanticipated side effects.

Those who sell futures for 2017 for $58 can be hit with $30 loss per barrel, if the game turn bad.  So the current low oil price movements should be viewed as  yet another neoliberal financial casino gambling session, in which stakes are really high.  It is completely counter productive from the point of view of future of mankind, but the last thing the USA elite care about is the future of mankind. They are preoccupied with the desire to preserve and enhance their global neoliberal empire and that requires crashing all potential competitors, including Russia and China. The paradox is that while they weaken Russia they really strengthen China (although they try to compensate this with playing Chinese stock market to their advantage). But Putin severely underestimated the damage West can inflict to Russian economy:

Opportunities for the West to hurt the Russian economy are limited, President Vladimir Putin said Thursday. Europe cannot stop buying Russian gas without inflicting pain on itself, and if the US tries to lower oil prices, the dollar will suffer.

If the West tries to damage Russia’s influence in the world energy market, efforts will likely backfire, the Russian President said during his twelfth annual televised question and answer session.

To really influence the world oil market a country would need to increase production and cut prices, which currently only Saudi Arabia could afford, Putin said.

The president added he didn’t expect Saudi Arabia, which has “very kind relations” with Russia, will choose to cut prices, that could also damage its own economy.

If world oil production increases, the price could go down to about $85 per barrel. “For us the price fall from $90 to $85 per barrel isn’t critical,” Putin said, adding that for Saudi Arabia it would be more sensitive.

Also the President said that being an OPEC member, Saudi Arabia would need to coordinate its action with the organization, which “is very complicated.”

Meanwhile, Russia supplies about a third of Europe's energy needs, said Putin. Finland, for example, is close to Russia economically, as it receives 70 percent of its gas from Russia.

“Can Europe stop buying Russian gas? I think it's impossible…Will they make themselves bleed? That's hard to imagine,” the Russian president said.

Since oil is sold internationally on global markets cutting the price would mean lower dollar circulation, diminishing its value in the global currency market.

"If prices decrease in the global market, the emerging shale industry will die,” Putin said.

The US shale industry has boosted domestic production, but President said that the so-called "shale revolution" was expensive and not quick to come.

Russia’s economy largely relies on energy. In 2013 more than 50 percent of the national budget was funded by gas and oil revenues. The main revenue comes from oil, as last year, oil revenues reached $191 billion, and gas $28 billion.

“Oil and gas revenues are a big contribution to the Russian budget, a big part for us when we decide on our government programs, and of course, meeting our social obligations,” the president said.

As Reuters reported:

“The Obama administration has opened a new front in the global battle for oil market share, effectively clearing the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world…

The Department of Commerce on Tuesday ended a year-long silence on a contentious, four-decade ban on oil exports, saying it had begun approving a backlog of requests to sell processed light oil abroad.

The action comes at a critical juncture for the global oil market. World prices have halved to less than $60 a barrel since the summer as top exporter Saudi Arabia, once a staunch defender of $100 oil, refused to cut production in the face of surging U.S. shale output and tempered global demand…

With global oil markets in flux, it is far from clear how much U.S. condensate will find a market overseas.”
(Analysis – U.S. opening of oil export tap widens battle for global market, Reuters)

Why would the oil producers, who have over the years raised the price of oil  suddenly agree to drop the price from roughly $120 a barrel to lower then $60  a barrel (Want To Hurt Russia Lower The Price Of Oil OilPrice.com?).

Let us look first at who the major oil producers are today: Saudi Arabia, Qatar, the United Arab Emirates and the United States, as well as Russia, Iran and the Islamic State.

Of those, we can make a clear distinction between the first four countries who have solid economies and ample amounts of cash reserves and who can sustain a sharp drop in revenue when oil is sold at a lower price...

The big losers in this case will clearly be the last three countries on that list: Russia, Iran and the Islamic State.

Coincidentally, these countries are currently engaged in highly controversial conflicts and are facing opposition from the United States and the West.

Russia is involved in Ukraine’s civil war, supporting the separatists in a highly criticized move condemned by the United States and its Western allies. In response, the allies began to impose sanctions as punishment and, given the ruble’s recent downturn, Russia’s credit rating being slashed and desperate gas deals in the Asian markets, it seems that the sanctions have, thus far, been highly successful.

CNN reported that Russian is Russia losing $140 billions from sanctions and low oil price according to estimates from Russia's finance minister Anton Siluanov. For every $10 drop in the per-barrel price of oil, Russia loses up to $14.6 billion a year in revenues, according to Alfa Bank. This is a real economic war (Russia has just lost the economic war with the west Business The Guardian)

The phrase “perfect storm” is over-used, but the combination of a collapsing currency, a collapsing economy and punitive interest rates make it apposite. The question now is how Putin responds. If he softens his line over Ukraine, the west’s gamble will have paid off and it will be mission accomplished. But there are hardliners in Moscow who will argue that the response to the crisis should be a siege economy and the ratcheting up of military pressure on Ukraine. If economic agony makes a wounded Russian bear more belligerent, it will prove a hollow victory.

Here’s a clip from an NPR interview with the president just last week. About halfway through the interview, NPR’s Steve Inskeep asks Obama: “Are you just lucky that the price of oil went down and therefore their currency collapsed or …is it something that you did?

“Are you just lucky that the price of oil went down and therefore their currency collapsed or …is it something that you did?

Barack Obama:

If you’ll recall, their (Russia) economy was already contracting and capital was fleeing even before oil collapsed. And part of our rationale in this process was that the only thing keeping that economy afloat was the price of oil. And if, in fact, we were steady in applying sanction pressure, which we have been, that over time it would make the economy of Russia sufficiently vulnerable that if and when there were disruptions with respect to the price of oil — which, inevitably, there are going to be sometime, if not this year then next year or the year after — that they’d have enormous difficulty managing it.” (Transcript: President Obama’s Full NPR Interview)

Obama just admit that he wanted “disruptions” in the “price of oil” because he figured Putin would have “enormous difficulty managing it”?

Isn’t that the same as saying that it was all part of Washington’s plan; that plunging prices were just the icing on the cake for their asymmetrical attack on the Russian economy? It sure sounds like it. And that would also explain why Obama decided to allow domestic producers to dump more oil on the market even though it’s going to send prices lower. Apparently, none of that matters as long as the policy hurts Russia.

So maybe the US-Saudi oil collusion theory isn’t so far fetched after all. Maybe Salon’s Patrick L. Smith was right when he said:

“Less than a week after the Minsk Protocol was signed, Kerry made a little-noted trip to Jeddah to see King Abdullah at his summer residence. When it was reported at all, this was put across as part of Kerry’s campaign to secure Arab support in the fight against the Islamic State.

Stop right there. That is not all there was to the visit, my trustworthy sources tell me. The other half of the visit had to do with Washington’s unabated desire to ruin the Russian economy. To do this, Kerry told the Saudis 1) to raise production and 2) to cut its crude price. Keep in mind these pertinent numbers: The Saudis produce a barrel of oil for less than $30 as break-even in the national budget; the Russians need $105.

Shortly after Kerry’s visit, the Saudis began increasing production, sure enough — by more than 100,000 barrels daily during the rest of September, more apparently to come…

Think about this. Winter is coming, there are serious production outages now in Iraq, Nigeria, Venezuela and Libya, other OPEC members are screaming for relief, and the Saudis make back-to-back moves certain to push falling prices still lower?

You do the math, with Kerry’s unreported itinerary in mind, and to help you along I offer this from an extremely well-positioned source in the commodities markets: “There are very big hands pushing oil into global supply now,” this source wrote in an e-mail note the other day.” (“What Really Happened in Beijing: Putin, Obama, Xi And The Back Story The Media Won’t Tell You”, Patrick L. Smith, Salon)

As New York Post tabloid, a mousepiece of Rupert Murdock,   gleefully reported

The price collapse could not have come at a worse time for Bad Vlad Putin. The Russian president needs an oil price around $100 a barrel to prop up what’s become a wartime economy. Oil and gas provide up to a third of budget revenue and compose two-thirds of exports.

Sanctions imposed over Putin’s aggression have gnawed at Russia’s economy, but this price drop bites deep: The ruble has crashed, Russian bonds are pathetic, and foreign reserves are bleeding.

While Russians will put up with harder times than Westerners will, Putin’s made extravagant commitments (bet he’d like to have back the $50 billion he squandered on corrupt Olympic construction). The world’s fave bare-chested bully had embarked on a massive arms buildup, with a hi-tech $5 billion command center just unveiled. But Putin’s visions of military resurgence are becoming unaffordable. He also made election promises to improve Russia’s wretched health-care system. Instead, he’s firing health-care workers and shuttering hospitals.

He promised higher living standards, but now the average Ivan’s feeling squeezed. And Putin faces enormous costs in Crimea and eastern Ukraine, two booby-prize welfare states, with the latter shot to ruins. Putin’s popularity remains high. For now. The gravest worry is that, with his back to the wall, he’ll play the Mother Russia card and attack again.
 

Iraq war was a war for oil

Oil, the U.S.-Middle East Free Trade Area and the Bush Agenda By Antonia Juhasz,

 Antonia Juhasz, a visiting scholar at the Institute for Policy Studies, is the author of The Bush Agenda: Invading the World, One Economy at a Time, on which part of this article is based. She is working on a new book that will make the case for the break-up of the largest American oil companies. Learn more at www.TheBushAgenda.net

Remember oil? That thing we didn’t go to war in Iraq for? Now with his war under attack, even President George W. Bush has gone public, telling reporters last August, “[a] failed Iraq … would give the terrorists and extremists an additional tool besides safe haven, and that is revenues from oil sales.” Of course, Bush not only wants to keep oil out of his enemies’ hands, he also wants to put it into the hands of his friends. 

The President’s concern over Iraq’s oil is shared by the Iraq Study Group, which on December 6 released its much-anticipated report. While the mainstream press focused on the report’s criticism of Bush’s handling of the war and the report’s call for (potential) removal of (most) U.S. troops (maybe) by 2008, ignored was the report’s focus on Iraq’s oil. Page 1, chapter 1 laid out in no uncertain terms Iraq’s importance to the Middle East, the United States and the world with this reminder: “It has the world’s second-largest known oil reserves.” The group then proceeds to give very specific and radical recommendations as to what should be done to secure those reserves. 

Guaranteeing access to Iraq’s oil, however isn’t the whole story. Despite the lives lost and the utter ruin that the war has brought, the overarching economic agenda that the administration is successfully pursuing in the Middle East might be the most enduring legacy of the war—and the most ignored.  Just two months after declaring “mission accomplished” in Iraq, Bush announced his plans for a U.S.-Middle East Free Trade Area to spread the economic invasion well-underway in Iraq to the rest of the region by 2013. Negotiations have progressed rapidly as countries seek to prove that they are with the United States, not against it.

The Bush Agenda

Within days of the 9/11 terrorist attacks, then-U.S. Trade Representative Robert Zoellick announced that the Bush administration would be “countering terror with trade.” Bush reiterated that pledge four years later when he told the United Nations, “By expanding trade, we spread hope and opportunity to the corners of the world, and we strike a blow against the terrorists. Our agenda for freer trade is part of our agenda for a freer world.” In the case of the March 2003 invasion and ongoing occupation of Iraq, these “free trade”—or corporate globalization—policies have been applied in tandem with America’s military forces.

The Bush administration used the military invasion of Iraq to oust its leader, replace its government, implement new economic and political laws, and write a new constitution. The new economic laws have transformed Iraq’s economy, applying some of the most radical—and sought-after—corporate globalization policies in the world and locking in sweeping advantages to U.S. corporations. Through the ongoing occupation, the Bush administration seeks to ensure that both Iraq’s new government and this new economic structure stay firmly in place. The ultimate goal—opening Iraq to U.S. oil companies—is reaching fruition.

In 2004, Michael Scheuer—the CIA’s senior expert on al-Qaeda until he quit in disgust with the Bush administration—wrote, “The U.S. invasion of Iraq was not preemption; it was … an avaricious, premeditated, unprovoked war against a foe who posed no immediate threat but whose defeat did offer economic advantages.”  How right he was. For it is an absolute fallacy that the Bush administration had no post-invasion plan for Iraq. The administration had a very clear economic plan that has contributed significantly to the disastrous results of the war. The plan was prepared at least two months prior to the war by the U.S. consultancy firm, Bearing Point, Inc., which then received a $250 million contract to remake Iraq’s economic infrastructure.

L. Paul Bremer III—the head of the U.S. occupation government of Iraq, the Coalition Provisional Authority (CPA)—followed Bearing Point’s plan to the letter. From May 6, 2003 until June 28, 2004, Bremer implemented his “100 Orders” with the force of law, all but a handful of which remain in place today. As the preamble to many of the orders state, they are intended to “transition [Iraq] from a … centrally planned economy to a market economy” virtually overnight and by U.S. fiat.  Bremer’s orders included firing the entire Iraqi military—some half a million men—in the first weeks of the occupation. Suddenly jobless, many of these men took their guns with them and joined the violent insurgency. Bremer also fired 120,000 of Iraq’s senior bureaucrats from every government ministry, hospital and school. {By removing the Sumi bureaucracy, they removed opposition to globalization.  The U.S. could now shop for support from what would soon be a newly elected factionalized parliament—jk.}  His laws allowed for the privatization of Iraq’s state-owned enterprises (excluding oil) and for American companies to receive preferential treatment over Iraqis in the awarding of reconstruction contracts. The laws reduced taxes on all corporations by 25 percent and opened every sector of the Iraqi economy to private foreign investment. The laws allowed foreign firms to own 100 percent of Iraqi businesses (as opposed to partnering with Iraqi firms) and to send their profits home without having to invest a cent in the struggling Iraqi economy. Iraqi laws governing banking, foreign investment, patents, copyrights, business ownership, taxes, the media, agriculture and trade were all changed to conform to U.S. goals. 

After the U.S. corporate invasion of Iraq

More than 150 U.S. companies were awarded contracts for post-war work totaling more than $50 billion.  The American companies were hired, even though Iraqi companies had successfully rebuilt the country after the previous U.S. invasion. And, because the American companies did not have to hire Iraqis, many imported foreign workers instead. The Iraqis were, of course, well aware that American firms had received billions of dollars for reconstruction, that Iraqi companies and workers had been rejected and that the country was still without basic services. The result: increasing hostility, acts of sabotage targeted directly at foreign contractors and their work, and a rising insurgency.

Halliburton received the largest contract, worth more than $12 billion, while 13 other U.S. companies received contracts worth more than $1.5 billion each. The seven largest reconstruction contracts went to the Parsons Corporation of Pasadena, Calif. ($5.3 billion); Fluor Corporation of Aliso Viejo, Calif. ($3.75 billion); Washington Group International of Boise, Idaho ($3.1 billion); Shaw Group of Baton Rouge, La. ($3 billion); Bechtel Corporation of San Francisco ($2.8 billion); Perini Corporation of Framingham, Mass. ($2.5 billion); and Contrack International, Inc. of Arlington, Va. ($2.3 billion). These companies are responsible for virtually all reconstruction in Iraq, including water, bridges, roads, hospitals, and sewers and, most significantly, electricity.

U.S. Air Force Colonel Sam Gardiner, author of a 2002 U.S. government study on the likely effect that U.S. bombardment would have on Iraq’s power system, said, “frankly, if we had just given the Iraqis some baling wire and a little bit of space to keep things running, it would have been better. But instead we’ve let big U.S. companies go in with plans for major overhauls.”

Many companies had their sights set on years-long privatization in Iraq, which helps explain their interest in “major overhauls” rather than getting the systems up and running. Cliff Mumm, head of Bechtel’s Iraq operation, put it this way: “[Iraq] has two rivers, it’s fertile, it’s sitting on an ocean of oil. Iraq ought to be a major player in the world. And we want to be working for them long term.”

And, since many U.S. contracts guaranteed that all of the companies’ costs would be covered, plus a set rate of profit (known as cost-plus contracts), they took their time, building expensive new facilities that showcased their skills and would serve their own needs should they be runing the systems one day.

Mismanagement, waste, abuse and criminality have also characterized U.S. corporations in Iraq—leading to a series of U.S. contract cancellations. For example, a $243 million contract held by the Parsons Corporation for the construction of 150 health care centers was cancelled after more than two years of work and $186 million yielded just six centers, only two of which are serving patients. Parsons was also dropped from two different contracts to build prisons, one in Mosul and the other in Nasiriyah. The Bechtel Corporation was dropped from a $50 million contract for the construction of a children’s hospital in Basra after it went $90 million over budget and a year-and-a-half behind schedule. These contracts have since been turned over to Iraqi companies.

Halliburton’s subsidiary KBR is currently being investigated by government agencies and facing dozens of charges for waste, fraud and abuse. Most significantly, in 2006, the U.S. Army cancelled Halliburton’s largest government contract, the Logistics Civil Augmentation Program (LOGCAP), which was for worldwide logistical support to U.S. troops. Halliburton will continue its current Iraq contract, but this year the LOGCAP will be broken into smaller parts and competitively bid out to other companies.

The Special Inspector General for Iraq Reconstruction (SIGIR), a congressionally-mandated independent auditing and oversight body, has opened 256 investigations into criminal fraud, four of which have resulted in convictions. SIGIR has provided critical oversight of the U.S. reconstruction, but this fall it nearly fell prey to a GOP attempt to shut down its activities well ahead of schedule. Fortunately, it survived.

SIGIR’s October 2006 report to Congress reveals the failure of U.S. corporations in Iraq. In the electricity sector, less than half of all planned projects in Iraq have been completed, while 21 percent have yet to even begin. Even the term “complete” can be misleading as, for example, SIGIR has found that contractors have failed to build transmission and distribution lines to connect new generators to homes and businesses. Thus, nationally, Iraqis have on average just 11 hours of electricity a day, and in Baghdad, the heart of instability in Iraq, there are between four and eight hours on average per day. Before the war, Baghdad averaged 24 hours per day of electricity.

While there has been greater success in finishing water and sewage projects, the fact that 80 percent of potable water projects are reported complete does little good if there is no electricity to pump the water into homes, hospitals or businesses. Meanwhile, the health care sector is truly a tragedy. Just 36 percent of planned projects are reported as complete. Of 20 planned hospitals, 12 are finished and only six of 150 planned public health centers are serving patients today.

Overall, the economy is languishing, with high inflation, low growth, and unemployment rates estimated at 30 to 50 percent {being part of a militia is providing employment} for the nation and as high as 70 percent in some areas. The International Monetary Fund has enforced a structural adjustment program on Iraq that mirrors much of Bush’s corporate globalization agenda, and the administration continues to push for Iraq’s admission into the World Trade Organization.

Iraq has not, therefore, emerged as the wealthy free market haven that Bush & Co. had hoped for. Several U.S. companies are now preparing to pack up, head home and take their billions of dollars with them, their work in Iraq left undone.  The Bush administration is likely to follow a dual strategy: continuing to pursue a corporate free-trade haven in Iraq, while helping U.S. corporations extricate themselves without consequence. The administration will also focus on the big prize: Iraq’s oil.

Winning Iraq’s oil prize: 

The Bush Agenda does have supporters, especially those corporate allies that have both shaped and benefited from the administration’s economic and military policies.  In the 2000 election cycle, the oil and gas industry donated 13 times more money to Bush’s campaign than to Al Gore’s. The Bush administration is the first in history in which the president, vice president and secretary of state are all former energy company officials. In fact, the only other U.S. president to come from the oil and gas industry was Bush’s father. Moreover, both George W. Bush and Condoleezza Rice have more experience running oil companies than they do working for the government.

Planning to secure Iraq’s oil for U.S. companies began on the tenth day of the Bush presidency, when Vice President Dick Cheney established the National Energy Policy Development Group—widely referred to as “Cheney’s Energy Task Force.” It produced two lists, titled “Foreign Suitors for Iraqi Oilfield Contracts as of 5 March 2001,” which named more than 60 companies from some 30 countries with contracts for oil and gas projects across Iraq—none of which were with American firms. However, because sanctions were imposed on Iraq at this time, none of the contracts could come into force. If the sanctions were removed—which was becoming increasingly likely as public opinion turned against the sanctions and Hussein remained in power—the contracts would go to all of those foreign oil companies and the U.S. oil industry would be shut out.

As the Bush administration stepped up its war planning, the State Department began preparations for post-invasion Iraq. Meeting four times between December 2002 and April 2003, members of the State Department’s Oil and Energy Working Group mapped out Iraq’s oil future. They agreed that Iraq “should be opened to international oil companies as quickly as possible after the war” and that the best method for doing so was through Production Sharing Agreements (PSAs).

PSAs are considered “privatization lite” in the oil business and, as such, are the favorite of international oil companies and the worst-case scenario for oil-rich states. With PSAs, oil ownership ultimately rests with the government, but the most profitable aspects of the industry—exploration and production—are contracted to the private companies under highly favorable terms. None of the top oil producers in the Middle East use PSAs, because they favor private companies at the expense of the exporting governments. In fact, PSAs are only used in respect to about 12 percent of world oil reserves {such as Nigeria}. 

 

Weakness of the propagated by MSM hypothesis about Saudi Arabia fighting for its market share

In 2013 before oil prices slump started Saudies shipped 7.54 million barrels a day on average up from 7.41 million barrels a day in 2012 (JODI website ). Saudi Arabia exported 5.49 million barrels a day in 2002, when the group began collecting oil data. Saudi monthly exports in 2013 peaked at 7.84 million barrels a day in August, the most since April and May of 2003. North Sea Brent, the benchmark for more than half of the world’s oil, averaged $110.82 a barrel during the 2010-2013.

Saudi Arabia produced 10.28 million barrels a day in October, 2015,  up from 9.69Mb/done year ago.   Chances that production will reach 11 Mb/d are slim. There are strong signs that they have huge difficulties in increasing oil extraction volume.  All their efforts to increase production led to increase of less then 1Mb/d  increase in 2015. Which is partially offset by  increase in internal consumption (In 2015 Saudi Arabia oil demand rose by a notable 0.21 mb/d, a nearly 8% annual rise)  Here is relevant quote (OilPrice.com, Dec 21, 2015). All they can achieve is 7% increase of exports.

Crude exports from Saudi Arabia rose from an average of 7.111 million barrels per day in September to 7.364 million per day in October, according to the latest data from the Joint Organizations Data Initiative (JODI), which monitors the oil industry. The report said this quantity was the most oil exported from Saudi Arabia since June and 7 percent higher than in October 2014.

The key question about propagated by MSM hypothesis about Saudi Arabia fighting for its market share is "Why piss yourself without any need?". 

That means that if Saudis withdraw one Mb/s from the market in 2015 and exported the same 7 Mb/d (instead of 7.5 Mb/d, saving around 0.5 Mb/d of their oil reserves, not counting rise in internal consumption)  their revenue would be  125 billions.  While after increasing oil production to maximum (no spare capacities) they got oil revenue $118 billions.  Less money for more effort.  Their proven oil reserves are only 268 billion barrels (EIA)  which at current rate of production (which is around 3.6 billion barrels per year) get them less then a hundred years.

Moreover they need approximately $100 oil to balance budget, so low oil prices mean depletion of their currency reserves, which if prices say on the current level will last less then 10 years.  Saudi Arabia’s record deficit of  $98 billion in 2015 At the end of October, its reserves fell to $644 billion from $732 billion at the end of last year.  The finance ministry has issued bonds worth $20 billion for the domestic market. projected means that dumping oil on the market was a self-destructive action.

The only reasonable explanation for such suicidal actions is that they launched "all-out" economic war against their arch-enemy Iran depriving it of oil revenue after lifting sanctions, hitting simultaneously Russia, Venezuela and couple of other countries they do not like.  In any case such an action should be approved by Washington as Saudis are a vassal state completely dependent on Washington for survival of their monarchic regime.

And it is easy to see huge benefits for Washington from such Saudis-Iran oil war.  Moreover may be lifting sanction itself was a gentle push for Saudis to unleash this war.

Not everybody buy MSM propagated version of Saudis behaviour. For example here is a comment from Yahoo (Saudi to diversify economy away from oil King Salman)

brian  Dec 30, 2015

This oil collapse is engineered by Saudi with the Western media. As the analysts are saying the daily over production is 1.5 million barrels. 1.5 out of 100 million daily production is ONLY 1.5% percent. Why did Saudi keep on over producing and with the media bombarding over production, the future's market is easily manipulated as oil collapsed to $36 per barrel.

This just does not make sense and not fair to the commodity producing nations. If you look at the U.S., Euro, Japan, China all they are doing is QE, printing money to supercharge their economy. On the other hand, the commodity nations are contracting.

Si

Saudi Arabia is in a conundrum, it has propped up its Clergy and kept majority of its population illiterate. This was done to keep the Kingdom under full control of its population, their women folk are even further worst off. The country is run by expatriates from around the world, mostly from Egypt, Pakistan, India, Bangladesh and Malaysia. According to Saudi rules these expatriates can not ever become citizens, even after many generations. Unlike Iran whose population is highly educated (Men and Women), Saudi administrators are afraid if Saudi gets educated there will be a revolution and that will affect how Saudi Arabia is ruled. My bet is Saudi Arabia can not progress beyond oil based economy.

 

And in another Yahoo thread Oil down 3 percent; Brent near 11-year low as oversupply worries return
Old Midwest Geezer
Saudi Arabia is fighting a financial war against Iran, its mortal enemy. Iran's main source of income is oil and SA is putting the screws to them and their Russian buddies. They picked up a perk by squeezing the US shale oil producers.

Hedging and junk debt: shale oil as subprime oil


"There are too many ugly balance sheets," warns one energy industry analyst, adding simply that "the group is not positioned for this downturn." While the mainstream media continues to chant the happy-clappy side of lower oil prices, spewing various 'statistics' about how the down-side of low oil prices is 'contained' and the huge colossal massive tax cut means 'everything is awesome' for America, the data - and now actions - do not bear this out.

Zero Hedge

Shale oil companies were not making as bandits when prices were $100. They operated in a very risky and rather unstable environment and mot of them took substantial amoount of debt.  Many used hedges regularly to make the environment more stable which is double edge sword -- it helps if price drop but deprive you of profits if price surge. Those who did were in better shape in 2015 when oil prices dropped to $35 per barrel (WTI).  Here is a good explanation of hedging from a post in peakoilbarrel.com blog:

shallow sand, 12/20/2015 at 8:56 am
Donn. Companies hedge with counter parties. Those are usually large banks. The there are 3 basic types of hedges.
  1. SWAP. The producer and counter party agree to a fixed price, say $70 per barrel. If the price goes above $70, the producer pays the counterparty the difference. If it goes below $70, the counterparty pays the producer.
  2. Cost less collars. These are like SWAPS, but in a range. Say the parties agree to a collar of $60-80. No money changes hands unless the price goes outside the range.
  3. The third is a floor, or put. The producer pays a premium to the counterparty. Say the producer buys $60 puts. If the price falls below $60, the counterparty pays the producer.

There are various hybrids and modifications of the above.

The price levels and cost of puts are based on the futures market. It is now impossible to hedge anything remotely profitable for the shale industry and a good portion of US conventional.

Furthermore, it is difficult to hedge production past 24 months. This is especially true for shale, with the high declines.

One concern with SWAPS or collars is in the event of a price spike, the producer produces less barrels than that hedged. That can wind of costing the producer a lot of $$. Also, theses types of hedges can result in very large margin requirements of the producers, but they commonly avoid those by allowing a first lien on production.

Another problem with hedges is giving up upside. If it were possible, someone who hedged in 2003 for the next ten years at $30 a barrel would be BK, as the price rocketed up, which caused OPEX to also skyrocket.

Most companies do not hedge past 24 months. Also, they do it in layers so that not as many barrels are hedged n the later years.

Many companies had significant hedge gains in 2015. There will be much less in 2016 and almost none in 2017.

Shale companies debt was typically rated as junk which means that chances for repayment of the load are low.  Just due to this fact the current talk about profitability of certain parts of shale at below then $50 prices looks a little bit suspicious even with some technology advances which were sped up by the price slum as well as lower service companies costs.   To many observers $60-$75 per barrel looks like a more reasonable minimal price for shale oil sustainable extraction, if the amount of junk bond debt is counted.

The current talk about profitability of certain parts of shale at below then $50 prices looks a little bit suspicious.   To many observers $60-$75 per barrel looks like more a reasonable minimal price for shale oil sustainable extraction, if the amount of junk bond debt is counted. 

Some technological improvements can cut costs. Neglecting ecological concerns can cut costs. The strong dollar and crash of other commodities can cut some costs (as steel and some equipment, can be bought at much lower prices). But whether all three factors mentioned can cut 50% of costs is a big multibillion question.   Gail Tverberg, a well known commentator on "end of cheap oil" problem,  thinks that the current drop of prices looks more like a harbinger of the collapse of financial system then oversupply problem on world markets (Deflationary Collapse Ahead?  Aug 28, 2015  Our Finite World )

The entire shale oil industry in America is complex mix of new technological methods and new schemes of creation of  junk bonds by Wall Street (200 billion of this debt might also be securitized like subprime mortgages). There also might be some complex derivative bets  (including but not limited to related to hedging of oil prices by shale producers, airlines, etc).

Shale oil is impossible to understand without  proper context which is the existence of  sophisticated financial system and complex financial products under neoliberalism. Wall Street can be trusted as for its ability to produce exotic financial instrument tailored for particular purpose, which can blow in your face in case of any Black Swan event.  In this case this might be securitization of debt of shale oil companies that could play a role somewhat similar to subprime mortgages but on much smaller scale as the amount of dent is miniscular in comparison with subprime mortgages.  Still, in this sense, we can call shale oil subprime oil (Broken Energy Markets and the Downside of Hubbert’s Peak Energy Matters): 

The second example of a broken energy market I want to explore is the US shale industry.  This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.

If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.

US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would  go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.

At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.

A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterized as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.

The so-called “shale revolution” in the U.S. was partially powered by innovation in horizontal drilling but  its cornerstone is the junk bond market. Which questions boom’s the long-term sustainability.  As The Wall Street Journal  reported total debt is   almost $200 billion. At 7% that's 14 billion of interest a year. Or at $40 per barrel 350 million barrels per year are needed just to service the debt. That's almost million barrels per day or almost total production of Bakken field (dmr.nd.gov )

And now,  the bankruptcies have begun as financing costs are not just prohibitive, there is no liquidity available at any price for many...

American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.

Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.

But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.

Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”

...

In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.

As of their latest quarter, such companies had $199 billion of combined total debt.

Even is "good times", before the start of current oil price slump,  the whole shale industry was financed only via junk bond market:  75 of the 97 energy E&P companies were rated by S&P below investment grade (Shale Boom Built on ‘Junk’ - GE Reports Ideas, May 19, 2014)

Although share prices for most U.S. exploration and production (E&P) companies are at all-time highs, the elephant in the room is an industry financed by the high-yield debt market, better known as “junk bonds.” The S&P says that 75 of the 97 energy E&P companies it rates are below investment grade.

The report cites a recent analysis by Energy Aspects, a commodity research consultancy, of 35 independent companies that shows a steadily worsening financial picture across the last six years. The analysis showed the companies spent as much as they brought in and “net cash flow is becoming negative while debt keeps rising.”
 

Many of the oil-drilling newcomers set up shop in order to take advantage of the low rates and easy money available in the bond market. Now that oil prices have crashed, investors are avoiding energy-related junk bonds. Moreover the whole US bond market started to turn south (in correlation with stocks) in anticipation of rate hikes. Which is making it impossible for the smaller companies to roll over their debt or attract fresh capital. The most indebted companies from Here Are America's Most Levered Energy Companies Zero Hedge are:

Source: CapIQ

When these companies need to refinance their bond they are forced to default or, if they have valuable properties, be acquired by larger companies. The whole situation with junk bonds from shale companies has some analogy with subprime loads and while lesser in scale still can serve as a catalyst for another financial meltdown (WSJ.com)

Energy companies, the fastest-growing segment of the high-yield bond market in recent years, account for nearly 18% of all outstanding high-yield bonds, up from 9% in 2009, according to J.P. Morgan.

Mr. Hamid says that the 40% possible default rate is the upper limit over the next few years, and that energy companies will take steps to avoid falling into bankruptcy, including cutting spending and selling assets.

Still even if companies make smart moves to cut costs, with oil at $65 per barrel or below for the next three years, he estimates that default rates high-yield bonds from the energy sector could still hover around 20% to 25%. “It would become a very dire scenario,” Mr. Hamid said.

After a steep plunge in oil prices last week, WTI crude, the U.S. benchmark, was recently up 3% to $68.14 a barrel in Monday morning trading.

He predicts that not that many companies will default in 2015 because many companies have hedged their exposure. But he expects that energy companies will run into trouble in 2016 as even the most conservative energy companies will see most of their hedges run off.

Energy companies are the largest sector in the high-yield universe by a wide margin. The next largest sector, J.P. Morgan estimates, is the healthcare sector, which accounts for 7.1%.
 

The total size of shale companies junk bond debt is estimated at 200 billions out of which at least 20 billions are not recoverable.

The additional huge problem is that the banks again have bundled a lot of shale companies debt into financially-engineered products like Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs), which much like subprime CLO and CDO are overrated and might fail when borrowers are no longer able to service the loans. The rot can be concealed for a while (may be two-three years -- as long as existing well produce oil in quantity to pay the debt), but eventually, if oil prices don’t recover, a significant number of these companies are going to go under

Vultures start circling shale companies

If low prices persist for all 2016 many shale oil companies are doomed. And vultures already started circling them:

Clueless, 12/19/2015 at 10:40 pm
I would guess that by now, most can see what is happening and therefore, what is going to happen in the future since the model has been established. The banks are not going to take serious hits. Re: Magnum Hunter and New Gulf Resources.

I remember seeing some vulture investor discussions back in 2009. They were stating that they would never buy equity in failing companies: they would take control thru the debt. Much more upside possible. So, a company with $1 billion in debt has its bonds trading at say 70 cents on the $ and it is rated junk. The bond funds that hold the debt [their covenants prohibit them from holding “bankrupt” rated debt] sells to novice speculators. Then the debt plunges to 10- 30 cents on the dollar. The investment/hedge funds step in. They can buy $1 billion of debt for $300 million or less, and the are praying that the company does go belly up. If it does, they get 100% of the equity, and agree to put in another $200 million to ride out the storm. A totally non-contested, prearranged bankruptcy. If things come back [even partially], they might own a company worth $2 billion for their $500 million investment. 

shallow sand, 12/19/2015 at 11:20 pm
Clueless. You are correct. I might add that the vultures do not appear to be just purchasing the debt. They are trading unsecured debt for second lien debt. I am not sure how this works, but from what I have read, the unsecured bonds have very weak covenants. The vultures give the unsecured bond holders the option of taking pennies on the dollar or becoming subordinate the vultures on all the debt the vultures are able to trade out.

The vultures better be pretty sharp, however. 1st, they better have a good handle on the assets they are trying to acquire. Second, they better have a good team put together to operate the assets. Third, they better have a better handle on future oil and gas prices than schmucks like me.

I saw something similar to this up close in the aftermath if the 1998-99 crash. An investor group bought the bad debt from a bank for pennies on the dollar, took assignment of the liens and foreclosed.

The investor group found out in a hurry that they didn’t quite know what they had bought, and that it wasn’t easy to manage from 1000+ miles away. They had a hell of a field superintendent, but of course they thought they were smarter than him, despite him having grown up in the middle of the field.

In any event, after burning several million dollars, the sold the assets and I am sure took a big loss. They also screwed up on timing the sale. Had they held on for about 3 more years they could have at least quintupled the sale proceeds. But they knew about as much as I, or really any of us, know about where oil prices are headed.

I am sure these distressed buyers are real sharks. But sharks can die too.

What is the sustainable minimal oil price with the current oil reserves depletion

As oil is important geopolitical resource there can be no definite answer to it. Still there is a probability that the peak "cheap oil" has already occurred, but we won’t know that until several years after the fact.  There is a large discrepancy in estimates ;-).  Much depends of the type of oil in question with shale, oil sands, as deep water oil as the most expensive.

Shale oil has a break even price around $70-75 / barrel for most shale producers and at below $50, every single well is losing money. There are also pretty expensive oil extracted from  deepwater (around 7 Mb/d). Which at current oil prices will shrink approximately 10% per year.  And there are around 20 MB/d in shallow water with higher staying power but also declining 10% due to lack of investments in current price situation.  Half of oil production from future developments is uneconomic at US$60/bbl (post of AlexS 01/29/2016 at 7:06 pm )

EIA projects that in 2030 the average real price of crude oil is projected to be $72 per barrel in 2006 dollars or about $113 per barrel in nominal dollars. Projected U.S. crude oil production averages 9.3 Mb/d in 2015 and 8.8 Mb/d in 2016.  Decline is 0.5 Mb/d.  EIA is always on optimists side (they were major cheerleaders of shale bubble, which makes them more of propaganda agency then statistical outlet)  so you can probably assume that 2020 prices of oil will be above, especially if low prices will last the whole 2016.  

Pricewise EIA projections are dropping all 2015 (Short-Term Energy Outlook)

EIA short term predictions as of December 3, 2015 suggest that low oil prices might continue to dominate the first quarter of 2016:

Previously common wisdom was around that price will return to $100 per barrel on average in 2016, which the following post from Zerohedge illustrates:

6344498 Magooo

HOW HIGH OIL PRICES WILL PERMANENTLY CAP ECONOMIC GROWTH For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.  http://www.bloomberg.com/news/articles/2012-09-23/how-high-oil-prices-will-permanently-cap-economic-growth

HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.  http://www.EIA.org/textbase/npsum/high_oil04sum.pdf

BUT WE NEED HIGH OIL PRICES:  Marginal oil production costs are heading towards $100/barrel http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/

The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth.  http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production costs “the dark side of the golden age of shale”. In a recent analysis, it estimates that non-Opec marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in 2011.   http://www.ft.com/intl/cms/s/0/ec3bb622-c794-11e2-9c52-00144feab7de.html#axzz3T4sTXDB5

Now all those consideration looks far less plausible in a short term (one year) period. Here are some "post oil price slump" considerations (in 2013 dollars):

Wikipedia article gives a more wide range of prices at wellhead (without cost of servicing the debt and transportation costs) from $35 to $95 for shale oil (Oil shale economics - Wikipedia)

The United States Department of Energy estimates that the ex-situ processing would be economic at sustained average world oil prices above US $54 per barrel and in-situ processing would be economic at prices above $35 per barrel. These estimates assume a return rate of 15%.[6] The International Energy Agency estimates, based on the various pilot projects, that investment and operating costs would be similar to those of Canadian oil sands, that means would be economic at prices above $60 per barrel at current costs. This figure does not account carbon pricing, which will add additional cost.[4] According to the New Policies Scenario introduced in its World Energy Outlook 2010, a price of $50 per tonne of emitted CO2, expected by 2035, will add additional $7.50 per barrel cost of shale oil.[4]

According to a survey conducted by the RAND Corporation, the cost of producing a barrel of oil at a surface retorting complex in the United States (comprising a mine, retorting plant, upgrading plant, supporting utilities, and spent shale reclamation), would range between $70–95 ($440–600/m3, adjusted to 2005 values). This estimate considers varying levels of kerogen quality and extraction efficiency. In order for the operation to be profitable, the price of crude oil would need to remain above these levels. The analysis also discusses the expectation that processing costs would drop after the complex was established. The hypothetical unit would see a cost reduction of 35–70% after its first 500 million barrels (79×10^6 m3) were produced. Assuming an increase in output of 25 thousand barrels per day (4.0×10^3 m3/d) during each year after the start of commercial production, the costs would then be expected to decline to $35–48 per barrel ($220–300/m3) within 12 years. After achieving the milestone of 1 billion barrels (160×10^6 m3), its costs would decline further to $30–40 per barrel ($190–250/m3).[7]

 

Floor for oil prices for 2016

The only function of economic forecasting is to make astrology look respectable.
 ~John Kenneth Galbraith

The most common view is that most US shale producers are highly vulnerable if price falls below $60 and are losing money on each barrel of oil they produce  at prices below $50. With difficulties of junk bond re-financing this figure should be higher. Some Russian sources cite $75 per bbl as a breakeven price for US shale oil.  This estimate is supported by the following detailed report BAKKEN - Single Well Economics  (Jan 4, 2016).

Here is a pretty telling graph from  Scotiabank (they have way too optimistic price for Bakken I think: adding $10 to $47 we get $57 for Bakken, which is probably 10 to 20 dollars low):

 

Source Why oil prices keep falling — and throwing the world into turmoil - Vox

As you can see plausible minimum for shale oil wellhead costs is around $55( $45+$10) per barrel ( and that  does not include the cost of servicing of junk bond debt).  If prices in 2016 remain under $50/bbl (as many forecaster expect), shale oil production in the United States will likely see a substantial decline in output and many shale companies will face merger or pushed into bankruptcy. But as for total US output, this decline will be partially offset by Gulf oil coming into production so for the first six months of 2015 total decline probably will be around 0.5Mb/d or lower. 

In any case, as 2015 has shown low prices became sticky and self reinforcing via Wall Street financial mechanisms. So chances for quick reversal in 2016 are close to zero. That spells real trouble for the US shale oil industry as well as Canada oil sands production  (QE At Work Pouring Cheap Debt Into The Shale Ponzi David Stockman's Contra Corner) as well as speculators in oil futures who will be wiped out via EFN  (outside major banks and those who shorted oil):

There are two pieces of the economic puzzle when it comes to shale. First is that most shale oil deposits are not profitable to extract except at current high prices. This drilling/extraction method is not cheap. Breakeven prices vary by region but it is safe to say that no shale oil deposits are profitable below $50/barrel and most areas require much higher prices. An average might be in the range of $65 and there are plenty of areas where the price needs to be above $80 before anyone makes a nickel.

I would just note that oil traded, albeit briefly, at $34 in the last recession. Second is the production profile of shale wells; production drops off rather precipitously after the first year (in contrast with traditional wells which deplete over much longer time frames). Combine high extraction costs with rapid depletion and the economics of shale become not only dubious but frankly insane.

Usually forecasts of oil prices are not work the paper or electrons. but there are some exceptions to this rule. For example  Bill Connoly in his Oil Price Forecast 2015-2016 - Forbes was one of the few forecasters who proved to be right as for 2015; remains to be seen for 2016.

My price forecast is that today’s $60 price is likely to be the high end for the coming two years. There may be temporary market volatility higher, but don’t expect a higher price to be sustained. At the low end, $50 seems like a floor absent a global recession.

OilPrice.com analysts think that the bankruptcy of shale companies and drastic reduction of the number of new projects and capital expenditures will eventually move the oil price up to $70+ range. And that the production of shell oil in the USA will drop 1 Mb/d in 2016 or even more, while consumption rises as record number of cars was sold in 2015.  But this process in not immediate and can take more then one year as in 2015 oil production defied gloomy forecasts and remains relatively stable (Oil Price Scenarios For 2015 And 2016 OilPrice.com_

The spare capacity data suggests that demand/supply imbalance may last three years, requiring 18 months to work through to the mid-cycle point where over-supply turns to under-supply. It is by no means certain that the market will respond to the same time dynamic when we are now dependent upon natural production capacity wastage to occur as opposed to OPEC simply closing the spigot. But this is all I have to go on.

The downturn in the current price cycle began last July and we are therefore just 6 months in. Another year of pain to go for the producers, that is unless OPEC decides to intervene.

In we count start of mid cycle from December of 2014 then we can see some upward pressure in July of 2016 or so.

Low prices also might mean that only selected shale projects ("sweet spots") with continue to be explored, diminishing of flow of oil from this source to the market ( Oil under US$60 beyond 2016 suggests market rethinking shale - Channel NewsAsia). Those places will be exhausted in two-three years making extraction more expensive on average.

If U.S. shale drillers - the world's new 'swing' producers - can still turn a profit at below US$60 a barrel, then the fall in long-dated oil prices may be rational. If not, as some bullish market analysts worry, then lower prices could be choking off new supplies the world may need as soon as next year.

"If you take the curve at face value, it appears to be saying that U.S. shale can grow ... if WTI stays below US$60 for three years. That doesn’t seem very likely," Paul Horsnell, global head of commodities research at Standard Chartered, said, referring to West Texas Intermediate crude.

"One would guess that all those companies that had been holding back from cutting projects and jobs over the past few months are not going to hold on much longer, and another shakeout will start. And it probably won’t be long before U.S. rig counts start to dive again."

Link to chart: http://link.reuters.com/tef25w 

... ... ...

U.S. oil futures for December 2017 delivery have dropped by as much as US$5 a barrel, or 8 percent, in the past two days, an even deeper retreat than last November when OPEC's surprise decision to maintain oil output despite a global glut sent markets into a deepening tailspin.

CLZ17 Commodity Futures Price Chart for Crude Oil WTI December 2017

[Note that they are close to $58 as of July 24, 2015 -- NNB]

EIA forecasts change with market prices

Short-Term Energy Outlook - U.S. Energy Information Administration (EIA)

In December 2015 EIA predicted average price of oil in 2016 much lower, around $51 a barrel, so EIA forecasts change really fast with future prices and as such are just educated guesses.

  2013 2014 2015 2016
WTI Crude Oila
(dollars per barrel)
97.98 93.17 49.08 50.89
Brent Crude Oil
(dollars per barrel)
108.56 98.89 52.93 55.78

Sustained low oil price will cut capital investment in oil dramatically

An extended period of lower oil prices would benefit consumers but would trigger energy-security concerns by heightening reliance on a small number of low-cost producers, or risk a sharp rebound in price if investment falls short, says the International Energy Agency (EIA) in the 2015 edition of its  World Energy Outlook publication (WEO-2015).We need to distinguish between oil as a chemical substance, a source used by chemical companies to produce all kind of useful things and oil as a source of motor fuel.  Oil is irreplaceable resource and burning it now deprive of oil future generations. As simple as that.

The US government policy of allowing (or, most probably, facilitating/engineering) very low oil prices is extremely unwise (I would use a stronger word) because at least for one segment of transportation (which is around 70% of total oil consumption in the USA) alternative does already exist. Small hybrid and electrical cars with prices of oil over $100 (and gasoline above $4 per gallon) are absolutely viable.

Instead now we have a huge jump in SUVs sales which became No.1 personal car category. To say nothing about light trucks. Which is the last thing we need.

Switch to natural gas in large vehicles such as buses (and small delivery trucks) also experiences a dramatic slow down (transit buses in Europe already are using this fuel on mass scale).

Again I think that it is the US government which is the culprit of destruction of the US shale industry which was build with such great effort and expense and is now on the verge of extinction. By really great people working in very difficult, challenging conditions.

The US government could buy excessive oil into strategic reserve or do something similar to keep prices at least above $70 dollars level. They could also prohibit short oil ETNs and other Wall Street machinations and for good effort jail couple of too aggressive traders for violation of some New Deal era laws(after all this is gambling, plain and simple) which are still on books after all this deregulation efforts by Clinton and Bush II administrations.

My point is that wind and solar might well be not the best choices. Other alternatives of renewable fuels exists. Meanwhile we need to save oil and the best way to do it is to ramp up oil price to above $100 level, which ensure the survival of frackers, which unfortunately became a collateral damage in some larger, possibly geopolitical play.

Actually EIA recognizes the danger of oil price spikes caused by sustained low oil prices and low capex investments Sustained low oil prices could reduce exploration and production investment - Today in Energy - U.S. Energy Information Adminis

Low oil prices, if sustained, could mark the beginning of a long-term drop in upstream oil and natural gas investment. Oil prices reflect supply and demand balances, with increasing prices often suggesting a need for greater supply. Greater supply, in turn, typically requires increased investment in exploration and production (E&P) activities. Lower prices reduce investment activity.

Overlaying annual averages of the domestic first purchase price (adjusted for inflation) on oil and natural gas investment reveals that upstream investment is highly sensitive to changes in oil prices. Given the fall in oil prices that began in mid-2014 and the relationship between oil prices and upstream investment, it is possible that investment levels over the next several years will be significantly lower than the previous 10-year annual average.

Oil production is a capital-intensive industry that requires management of existing production assets and evaluation of prospective projects often requiring years of upfront investment spending on exploration, appraisal, and development before reserves are developed and produced.

Previous investment cycles provide insights into how investment responds to crude oil price changes. In 1981 and 1982, after crude oil prices significantly increased, investment topped out at more than $100 billion (in 2014 dollars) and then averaged $30 billion to $40 billion per year into the early 2000s as crude oil prices fell and remained in the $20-$30 per barrel (b) range. From 2003 to 2014, investment spending increased from $56 billion to a high of $158 billion as crude oil prices increased from $34.53/b to $87.39/b, including several months of prices reaching more than $100/b. EIA's 2015 Annual Energy Outlook Reference case projects real domestic first purchase prices to average about $70/b in 2020. This price level could result in substantially lower annual oil and natural gas investment over the 2015-20 period than the annual average of $122 billion spent during the 2005-14 investment cycle crest period

 

Additional "end of cheap energy" readings

See also my introduction to the topic of "End of cheap energy":


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[May 24, 2017] Exxon Mobil has gone on a binge of share buy backs and dividend payments that combined with the shifting marketplace led to a credit rating downgrade last year:

May 24, 2017 | www.nakedcapitalism.com
Larry , May 23, 2017 at 7:10 am

Not to be lost in the shuffle is the amount of financial engineering that goes into creating unsustainable debt levels at fossil fuel companies. Exxon Mobil has gone on a binge of share buy backs and dividend payments that combined with the shifting marketplace led to a credit rating downgrade last year:

https://www.bloomberg.com/news/articles/2016-04-26/exxon-mobil-loses-top-credit-rating-it-held-since-depression

a different chris , May 23, 2017 at 8:47 am

..and share buybacks/dividends is what you do when there isn't anything else useful you can see to do with the money . or at least it was until predator capitalism became the thing. But for government-owing behemoths like Exxon-Mobile that is still true.

And actually it probably is predator capitalism because what I am talking about is a wind down of the assets existing in the firm, but as you point out they seem to be borrowing money to do this.

[May 24, 2017] Our collective response to global challenges such peak oil and global warming has been to bury our heads firmly in the sand and gamble our future on the comforting delusion

May 24, 2017 | www.nakedcapitalism.com
Temporarily Sane , May 23, 2017 at 4:00 am

Unless you are extremely wealthy or have connections to people who are, your wellbeing probably won't be on the list of "necessary purposes" if a doomsday scenario like the one the article discusses plays out.

After decades of bigging up consumer capitalism as the only "good life" worth living the reality of global warming now requires us to dismantle the system of gratuitous consumption if we are to avoid seriously compromising our species longevity (non-human life forms are even more threatened by extinction).

Our collective response has been to bury our heads firmly in the sand and gamble our future on the comforting delusion that consuming our way out of the crisis is possible until some awesome technology comes online at the 11th hour to save the day.

Part of the problem is climate change is framed as something that may happen in the future and that "innovation" and "creativity" will invent nifty new technologies that will save the day, no compromises required! (We won't think about the "issues" that will face the global south as the atmosphere heats up.)

Neoliberalism and its co-opting of the state, which prevents governments from passing legislation that does not benefit the capitalist class, is a massive stumbling block. The oligarchs and their enablers had no qualms throwing Greece under the bus and even less exploitng earthquake ravaged Haiti, as a well known former presidential candidate knows all about.

Neoliberal kleptocrats teaming up with neocon Blofeldian fantasists to save the world what could possibly go wrong?

HBE , May 23, 2017 at 8:01 am

gamble our future on the comforting delusion that consuming our way out of the crisis is possible until some awesome technology comes online at the 11th hour to save the day.

+10 agreed. Wunderenergie is one of the biggest collective delusions of our time.

justanotherprogressive , May 23, 2017 at 10:19 am

Lets be realistic here. You can interpret what I said any way you want, but as yet, there is no alternative to kerosene for airline travel ..so whether or not we stop using oil for other reasons, we are still going to need some for the airlines.

Sooo ..what are your ideas for fueling air flight? Because if you want to completely stop the use of oil, you'd better have some No, we are never going to nuclear power plants for airplanes.

Or maybe you think we will get rid of airplanes?

I would love it if we stopped using fossil fuels – I don't think we can do that entirely, but we can certainly cut back on their use with other actually CLEAN energy sources ..remember as with everything it is the dose to the environment that counts

[May 24, 2017] We turn away from nuclear at our peril. Right now, it's the only carbon-free technology that we actually know will work.

Notable quotes:
"... While many modeled scenarios have been published claiming to show that a 100% renewable electricity system is achievable, there is no empirical or historical evidence that demonstrates that such systems are in fact feasible On the basis of this review, efforts to date seem to have substantially underestimated the challenge and delayed the identification and implementation of effective and comprehensive decarbonization pathways. ..."
May 24, 2017 | www.nakedcapitalism.com
PlutoniumKun , May 23, 2017 at 5:30 am

I think the key thing to take from that article you link to is the demonstration that there has been massive investment in compact nuclear technology by the military (indeed, by several major miltaries) for nearly 70 years now. And its failed. The latest nuclear subs are still using pretty much the same basic reactor technology as the Nautilus 60 years ago, and almost all modern reactors are essentially scaled up versions of the same thing. The Soviets got closest in the 1960's with their lead bismuth reactors for the Alfa Class subs, but they couldn't make them reliable and cost effective.

So remember this next time someone starts arguing that the latest thing in smart, modular nuclear power is going to save the world – it doesn't matter whether its pebble bed reactors , thorium based fuel, sodium modulated cores, or whatever – countless billions of dollars, pounds, francs, yuen and roubles have been thrown into that technology by the military research establishments for many decades, with nothing to show for it.

In the meanwhile, wind and solar, with, in comparison, small change invested in research, has been advancing in cost and output terms in leaps and bounds and is proven practical in almost all environments.

Grumpy Engineer , May 23, 2017 at 9:38 am

Wind and solar are proven practical in almost all environments? Hardly. They're deeply impractical on any cold winter night with low wind. That's the real problem with wind and solar. How do you deal with the intermittency?

An all-renewable power grid can actually be accomplished when 70%+ of it is hydro. [Hydro actually has some controllability because you can let water pile up behind the dam for a later release.] But if hydro only provides 7% of your power needs (like it does in the US), the grid interconnection and ENERGY STORAGE requirements become deeply problematic.

Check out the following paper: Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems . To quote:

" While many modeled scenarios have been published claiming to show that a 100% renewable electricity system is achievable, there is no empirical or historical evidence that demonstrates that such systems are in fact feasible On the basis of this review, efforts to date seem to have substantially underestimated the challenge and delayed the identification and implementation of effective and comprehensive decarbonization pathways. "

When I read articles claiming that 100% renewables is feasible, the first thing I look for is a description of the energy storage requirements. Specifically, how many gigawatt-hours. If that information isn't described, their analysis is incomplete. Do you know how many GW-hr it would take for renewables to supply all of US electricity? Do you know how large the biggest battery energy storage system is in comparison? The answers are NOT pretty.

We turn away from nuclear at our peril. Right now, it's the only carbon-free technology that we actually know will work.

Knot Galt , May 23, 2017 at 11:45 am

The SCALE at which we currently live is wasteful and unnecessary for survival. Our current thinking of energy needs is based on our capitalistic consumer based life style and economy. Therefore, your assumption on energy needs is based on maintaining the current economic models which we all know to be falling apart at the seams.

It is obvious no matter how many of us dig in that this next level of change is unstoppable. What may be left will be the random outcomes that exist with survivability. Feasible will be what ever gets you to the next day?

Grumpy Engineer , May 23, 2017 at 12:30 pm

The "scale" at which we live is indeed wasteful and unnecessary for survival, but people LIKE it. People don't want to live in 250 square-foot "microhomes" and bicycle to work every day regardless of the weather. And how would we prevent people from doing otherwise? Seize and scrap their cars? Kick people out of their 3500 square-foot McMansions and tear them down? It would be the largest forced migration in human history.

Given that people LIKE the modern lifestyle, I see that we have three choices:

[1] Let people live their lives and watch carbon pour into the sky because we can't get enough renewables online to make a meaningful difference. Wait to see if it all crashes.

[2] FORCE people to embrace a leaner existence. At gunpoint if necessary.

[3] Let people live their lives and use low-footprint, carbon-free energy technology that actually works (like nuclear) to minimize the impact on the environment.

Population levels in developed countries are stabilizing. If we quit growing food for biofuels, we could actually let a lot of farmland revert to a natural state. I don't think we're doomed yet, but as of today we're heading down path #1.

This is why a number of environmental activists have embraced nuclear:
http://www.motherjones.com/environment/2013/01/pro-nuclear-power-environmental-movement

Vastydeep , May 23, 2017 at 2:03 pm

@Grumpy Engineer: " we have three choices:"

What do you mean "we" kemosabe?

I agree that we are currently heading down path #1. The problem is, long before things get mandatory-Jimmy-Carter-cardigan-sweater unpleasant, the climate will have changed enough that crops will start failing. Maybe not huge failures, but if you're subsisting now, you won't be then. When masses of people start starving, #1 turns into #2 pretty quickly. The 4 Horsemen travel together

"Some are born lean, some achieve leanness " We need to get serious about #2 before we have "leanness thrust upon us."

[May 23, 2017] The fact that the US's status as reserve currency in large part due to oil, ensures the oil industry will not be phased out or collapse from internal pressure

Notable quotes:
"... Actually the US position of being able to control the world reserve currency is due to its having been able to maintain military dominance over the rest of the world.. And the primary role of the armies of the Empire has been to maintain access to the world oil supply by simply printing money and using it to keep the oil flowing into our SUV tanks. ..."
"... No amount of bloodshed can change the fact that a finite resource that is in high demand will eventually become scarce. In the case of an energy source the measure of impending scarcity is decreasing EROI. Cooking oil out of tar sands, drilling from floating platforms 10,000′ above the sea bed, squeezing oil out of shale rock, and trying to build platforms in icebound arctic seas-- could there be more graphic signs that the end is nigh? ..."
May 23, 2017 | www.nakedcapitalism.com
HBE , May 23, 2017 at 8:16 am

I believe the fact that the US's status as reserve currency in large part due to oil, ensures the oil industry will not be phased out or collapse from internal pressure.

It is too integral to the hegemon's status to be allowed to fail, ever.

The US is shortsighted enough that the geopolitical and economic benefits of an oil backed reserve currency, will likely outweigh the negative midterm effects of climate change and environmental instability.

The most likely scenario is, oil isn't going anywhere until climate change gets so bad the US (nor anyone else) can play hegemon.

craazyboy , May 23, 2017 at 8:31 am

Oh, dunno 'bout that. Has the perfect combination of re-flation and depressionary cost increase due to currency being whacked 50-75%. Neo dreamlike quality stuff. Cut 100% of the 99ers purchasing power combined with depressed economy and increased job dependence to pay off debt overhang.

Black donut hole economics – without any human intervention necessary. The Neolibcon World runs itself – hands off! Self driving global economy. WW3 as a jobs guarantee. But no one shows up because gas costs too much. Stagflation sets in. Everyone waits it out in Flyover Camp. Malls start doing well.

a different chris , May 23, 2017 at 8:59 am

>oil isn't going anywhere

I do agree that the US will be a big problem.. but it's less than 5% of the world's population. So when you say "oil isn't going anywhere".. that might just be exactly the problem.

It won't be going into the Chinese/Indian's/Europeans suddenly non-existent gas tanks. It may literally not go anywhere at all just sit in Oklahoma until our government finds a way to force feed it down our (again, 320million/7+billion) American throats.

Thor's Hammer , May 23, 2017 at 2:35 pm

"US's status as reserve currency in large part due to oil"

Actually the US position of being able to control the world reserve currency is due to its having been able to maintain military dominance over the rest of the world.. And the primary role of the armies of the Empire has been to maintain access to the world oil supply by simply printing money and using it to keep the oil flowing into our SUV tanks.

No amount of bloodshed can change the fact that a finite resource that is in high demand will eventually become scarce. In the case of an energy source the measure of impending scarcity is decreasing EROI. Cooking oil out of tar sands, drilling from floating platforms 10,000′ above the sea bed, squeezing oil out of shale rock, and trying to build platforms in icebound arctic seas-- could there be more graphic signs that the end is nigh?

Moneta , May 23, 2017 at 8:18 am

which can now generate more energy than oil for every unit of energy invested .
--
I doubt all energy inputs were included. Our entire economic system runs on oil and the development of new technology depends on the entire system. Huge sunk costs.

No big technological developments without transportation which is oil intensive something tells me they are not including the energy requirements of all global infrastructure that permits the development it these new technologies.

Also, I thought they were starting to see problems with the supply of silicon

Normal , May 23, 2017 at 8:54 am

problems with the supply of silicon

Sarcasm? I couldn't tell from the context.

Moneta , May 23, 2017 at 10:34 am

http://www.newyorker.com/magazine/2017/05/29/the-world-is-running-out-of-sand

http://www.economist.com/blogs/economist-explains/2017/04/economist-explains-8

[May 21, 2017] Note how quickly the price of oil fell, when the objective was to economically harm revenues of the gas station masquerading as a nation

Notable quotes:
"... Note how quickly the price of oil fell, when the objective was to economically harm revenues of the "gas station masquerading as a nation" (as McCain called his enemy), Russia. They wouldn't do that to benefit ordinary Americans, though they could have, long ago. ..."
"... And how quickly they were ready to export our own domestic oil surplus, and ordered laws be passed to do it, rather than have it accrue to the Americans to whom it really belongs. ..."
"... No, those "American Interests" are not the same as the interests of the millions of American people. ..."
"... Believe it or not, the CEOs of Exxon-Mobil, Shell or any other multinational hyper corporation don't consider what our opinions are, in the least, unless it creates a PR nightmare, in which case lawyers and liars are dispatched to distract ..."
May 21, 2017 | www.theamericanconservative.com

Fran Macadam, May 8, 2017 at 6:31 pm

"'Nor are these US interests that are of such geopolitical importance to politicians, congruent with the interests of hundreds of millions the actual American people.

"Unless those people want 'cheap' oil ?"

Note how quickly the price of oil fell, when the objective was to economically harm revenues of the "gas station masquerading as a nation" (as McCain called his enemy), Russia. They wouldn't do that to benefit ordinary Americans, though they could have, long ago.

And how quickly they were ready to export our own domestic oil surplus, and ordered laws be passed to do it, rather than have it accrue to the Americans to whom it really belongs.

No, those "American Interests" are not the same as the interests of the millions of American people.

Believe it or not, the CEOs of Exxon-Mobil, Shell or any other multinational hyper corporation don't consider what our opinions are, in the least, unless it creates a PR nightmare, in which case lawyers and liars are dispatched to distract.

[Apr 30, 2017] Global oil discoveries fell to a record low in 2016

Apr 30, 2017 | economistsview.typepad.com
im1dc , April 27, 2017 at 04:56 AM
Update re Crude Oil Discoveries

The Majors cut back spending b/c they have too much supply now and they supply they have is being increased by new extraction techniques

http://maritime-executive.com/article/eia-global-oil-supply-to-lag-demand-after-2020

"EIA: Global Oil Supply to Lag Demand After 2020"

By MarEx...2017-04-26...18:31:53

"Global oil discoveries fell to a record low in 2016 as companies continued to cut spending and conventional oil projects sanctioned were at the lowest level in more than 70 years, according to the International Energy Agency (EIA).

Both trends could continue this year, and the EIA warns that global oil supply could lag demand after 2020 unless new investments are approved soon."...

[Apr 25, 2017] The Operation and Demise of the Bretton Woods System: 1958 to 1971

Notable quotes:
"... By Michael Bordo, Professor of Economics, Rutgers University. Originally published at VoxEU ..."
"... See original post for references ..."
"... Greatest scam in history. ..."
"... So, it's not 'out of thin air. It's back by the might of the Pentagon mightier than gold. ..."
"... It is hard to believe in can continue much longer despite of Bordo's view that it will. ..."
Apr 25, 2017 | www.nakedcapitalism.com
Posted on April 25, 2017 by Yves Smith Yves here. The article makes a comment in passing that bears teasing out. The inflation that started in the later 1960s was substantially if not entirely the result of Lyndon Johnson refusing to raise taxes because it would be perceived to be to pay for the unpopular Vietnam War. Richard Nixon followed that approach.

By Michael Bordo, Professor of Economics, Rutgers University. Originally published at VoxEU

Scholars and policymakers interested in the reform of the international financial system have always looked back to the Bretton Woods system as an example of a man-made system that brought both exemplary and stable economic performance to the world in the 1950s and 1960s. Yet Bretton Woods was short-lived, undone by both flaws in its basic structure and the unwillingness of key sovereign members to follow its rules. Many commentators hark back to the lessons of Bretton Woods as an example to possibly restore greater order and stability to the present international monetary system. In a recent paper, I revisit these issues from over a half century ago (Bordo 2017).

The Bretton Woods system was created by the 1944 Articles of Agreement at a global conference organised by the US Treasury at the Mount Washington Hotel in Bretton Woods, New Hampshire, at the height of WWII. It was established to design a new international monetary order for the post war, and to avoid the perceived problems of the interwar period: protectionism, beggar-thy-neighbour devaluations, hot money flows, and unstable exchange rates. It also sought to provide a framework of monetary and financial stability to foster global economic growth and the growth of international trade.

The system was a compromise between the fixed exchange rates of the gold standard, seen as conducive to rebuilding the network of global trade and finance, and the greater flexibility to which countries had resorted in the 1930s to restore and maintain domestic economic and financial stability. The Articles represented a compromise between the American plan of Harry Dexter White and the British plan of John Maynard Keynes. The compromise created an adjustable peg system based on the US dollar convertible into gold at $35 per ounce along with capital controls. The compromise gave members both exchange rate stability and the independence for their monetary authorities to maintain full employment. The IMF, based on the principle of a credit union, whereby members could withdraw more than their original gold quotas, was established to provide relief for temporary current account shortfalls.

It took close to 15 years to get the Bretton Woods system fully operating. As it evolved into a gold dollar standard, the three big problems of the interwar gold exchange standard re-emerged: adjustment, confidence, and liquidity problems.

The adjustment problem in Bretton Woods reflected downward rigidity in wages and prices which prevented the normal price adjustment of the gold standard price specie flow mechanism to operate. Consequently, payment deficits would be associated with rising unemployment and recessions. This was the problem faced by the UK, which alternated between expansionary monetary and fiscal policy, and then in the face of a currency crisis, austerity – a policy referred to as 'stop-go'. For countries in surplus, inflationary pressure would ensure, which they would try to block by sterilisation and capital controls.

A second aspect of the adjustment problem was asymmetric adjustment between the US and the rest of the world. In the pegged exchange rate system, the US served as central reserve country and did not have to adjust to its balance of payments deficit. It was the n-1th currency in the system of n currencies (Mundell 1969). This asymmetry of adjustment was resented by the Europeans.

The US monetary authorities began to worry about the balance of payments deficit because of its effect on confidence . As official dollar liabilities held abroad mounted with successive deficits, the likelihood increased that these dollars would be converted into gold and that the US monetary gold stock would eventually reach a point low enough to trigger a run. Indeed by 1959, the US monetary gold stock equalled total external dollar liabilities, and the rest of the world's monetary gold stock exceeded that of the US. By 1964, official dollar liabilities held by foreign monetary authorities exceeded that of the US monetary gold stock (Figure 1).

Figure 1. US gold stock and external liabilities, 1951-1975

Source : Banking and Monetary Statistics 1941‐1970, Washington DC Board of Governors of the Federal Reserve System, September 1976, Table 14.1, 15.1.

A second source of concern was the dollar's role in providing liquidity to the rest of the world. Elimination of the US balance of payments deficits (as the French and Germans were urging) could create a global liquidity shortage. There was much concern through the 1960s as to how to provide this liquidity.

Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world's monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin when the tipping point occurred, the US monetary authorities would tighten monetary policy and this would lead to global deflationary pressure. Triffin's solution was to create a form of global liquidity like Keynes' (1943) bancor to act as a substitute for US dollars in international reserves.

Policies to Shore Up the System

The problems of the Bretton Woods system were dealt with by the IMF, the G10 plus Switzerland, and by US monetary authorities. The remedies that followed often worked in the short run but not in the long run. The main threat to the system as a whole was the Triffin problem, which was exacerbated after 1965 by expansionary US monetary and fiscal policy which led to rising inflation.

After a spike in the London price of gold to $40.50 in October 1960 – based on fears that John F Kennedy, if elected, would pursue inflationary policies – led the Treasury to develop policies to discourage Europeans from conversing dollars into gold. These included:

The US Treasury, aided by the Federal Reserve, also engaged in sterilised exchange market intervention.

The main instrument used by the Fed to protect the gold stock was the swap network. It was designed to protect the US gold stock by temporarily providing an alternative to foreign central bank conversion of their dollar holdings into gold. In a typical swap transaction, the Federal Reserve and a foreign central bank would undertake simultaneous and offsetting spot and forward exchange transactions, typically at the same exchange rate and equal interest rate. The Federal Reserve swap line increased from $900 million to $11.2 billion between March 1962 and the closing of the gold window in August 1971 (see Figure 2 and Bordo et al. 2015)

Figure 2. Federal Reserve swap lines, 1962 –1973

Source : Federal Reserve System.

The swaps and ancillary Treasury policies protected the US gold reserves until the mid-1960s, and were viewed at the time as a successful policy.

The Breakdown of Bretton Woods, 1968 to 1971

A key force that led to the breakdown of Bretton Woods was the rise in inflation in the US that began in 1965. Until that year, the Federal Reserve Chairman, William McChesney Martin, had maintained low inflation. The Fed also attached high importance to the balance of payments deficit and the US monetary gold stock in its deliberations (Bordo and Eichengreen 2013). Beginning in 1965 the Martin Fed shifted to an inflationary policy which continued until the early 1980s, and in the 1970s became known as the Great Inflation (see figure 3).

Figure 3 . Inflation rates

Source : US Bureau of Labor Statistics, IMF (various issues).

The shift in policy mirrored the accommodation of fiscal deficits reflecting the increasing expense of the Vietnam War and Lyndon Johnson's Great Society.

The Federal Reserve shifted its stance in the mid-1960s away from monetary orthodoxy in response to the growing influence of Keynesian economics in the Kennedy and Johnson administrations, with its emphasis on the primary objective of full employment and the belief that the Fed could manage the Phillips Curve trade-off between inflation and unemployment (Meltzer 2010).

Increasing US monetary growth led to rising inflation, which spread to the rest of the world through growing US balance of payments deficits. This led to growing balance of payments surpluses in Germany and other countries. The German monetary authorities (and other surplus countries) attempted to sterilise the inflows but were eventually unsuccessful, leading to growing inflationary pressure (Darby et al. 1983).

After the devaluation of sterling in November 1967, pressure mounted against the dollar via the London gold market. In the face of this pressure, the Gold Pool was disbanded on 17 March 1968 and a two-tier arrangement put in its place. In the following three years, the US put considerable pressure on other monetary authorities to refrain from converting their dollars into gold.

The decision to suspend gold convertibility by President Richard Nixon on 15 August 1971 was triggered by French and British intentions to convert dollars into gold in early August. The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system. The remaining part of the System, the adjustable peg disappeared by March 1973.

A key reason for Bretton Woods' collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system. The Bretton Woods system was based on rules, the most important of which was to follow monetary and fiscal policies consistent with the official peg. The US violated this rule after 1965 (Bordo 1993).

Conclusion

The collapse of the Bretton Woods system between 1971 and 1973 led to the general adoption by advanced countries of a managed floating exchange rate system, which is still with us. Yet this outcome (at least at the time) was not inevitable. As was argued by Despres et al. (1966) in contradistinction to Triffin, the ongoing US balance of payments deficit was not really a problem. The rest of the world voluntarily held dollar balances because of their valuable service flow – the deficit was demand-determined. In their view, the Bretton Woods system could have continued indefinitely. This of course was not the case, but although the par value system ended in 1973 the dollar standard without gold is still with us, as McKinnon (1969, 1988, 2014) has long argued.

The dollar standard was resented by the French in the 1960s and referred to as conferring "the exorbitant privilege" on the US, and the same argument was made in 2010 by the Governor of the Central Bank of China. However, the likelihood that the dollar will be replaced as the dominant international currency in the foreseeable future remains remote. The dollar standard and the legacy of the Bretton Woods system will be with us for a long time.

See original post for references

0 0 5 0 0 This entry was posted in Currencies , Economic fundamentals , Globalization , Guest Post , Macroeconomic policy , The dismal science on April 25, 2017 by Yves Smith . Subscribe to Post Comments 59 comments Jim Haygood , April 25, 2017 at 11:00 am

'Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade.'

Twenty years on from Britain's "lost decade" of the 1920s - caused by repegging sterling to gold at the pre-World War I parity - the same mistake was repeated at Bretton Woods. (The US had made the identical error in 1871, which required 25 years of relentless deflation to sweat out Civil War greenback inflation.)

Even as the Bretton Woods conference was underway in 1944, it went unnoticed that the US Federal Reserve had embarked on a vast buying spree of US Treasuries. This was done to peg their yield at 2.5% or below, in order to finance WW II at negative real yields. By 1945, US Treasuries (shown in blue and orange on this chart) loomed larger in the Fed's balance sheet than gold (shown in chartreuse):

http://greshams-law.com/wp-content/uploads/2012/02/Screen-shot-2012-02-12-at-21.23.00.png

Obviously a fixed gold price is utterly incompatible with a central bank expanding its balance sheet with government debt, reducing its gold holdings to the tiny residual that they constitute today.

Bretton Woods might have worked by limiting central banks' ability to monetize gov't securities. Or it might have worked with the gold price allowed to float with expanding central bank assets, according to a formula.

What was lost with Bretton Woods was fixed exchange rates, which are conducive to trade. Armies of traders seeking to extract rents from fluctuations between fiat currencies are a pure deadweight loss to the global economy.

In North America, sharp depreciations of the Mexican and Canadian currencies against the USD are fanning US protectionism, in forms ranging from a proposed border wall to countervailing duties on Canadian lumber and dairy products. What a mess.

Irredeemable fiat currencies are a tribulation visited on humanity. When the central bank blown Bubble III explodes in our fool faces, this insight will be more widely appreciated.

jsn , April 25, 2017 at 1:35 pm

Fiat currency is a tribulation visited on capitalist trade advocates and their financial backers.

International trade, which is hobbled by fiat currencies as you say, was a rounding error in most peoples lives until the Thatcher/Reagan neoliberal innovations.

Since then that rounding error has rounded away most of the distributive properties of the economic systems so distorted to facilitate capital profits through long distance trade that they are impoverishing enough people that Brits vote Brexit, Yanks vote Trump and French vote Le Pen.

Robert NYC , April 25, 2017 at 3:19 pm

Bretton Woods would have worked a lot better if Keynes had won the argument in favor of "bancor", but he was arguing from a position of weakness and lost out.

And yes, when this blows, as it will, it will all become more widely appreciated.

Gman , April 25, 2017 at 5:24 pm

+1.

gepay , April 25, 2017 at 8:30 pm

missing from the article is the decision to raise the price of oil in order to put most of the 3rd world into debt slavery. This exasperated the inflation mentioned, caused by US deficits. Because the US was still a manufacturing leader and the Unions were strong – we had the wage price stagflation of the 70's,. The elites solution – Nixon went to China – not to open up a market of a billion people but to make use of a disciplined labor force that would work for cheap – breaking the power of the unions with globalisation aided by computers. The Republicans in the US and Thatcher in England broke the unions in the 80s.Clinton went along in the 90s. Was that plan a factor in the decision to leave the gold standard?

Susan the other , April 25, 2017 at 11:09 am

This was most interesting for its lack of regret for losing a dollar pegged to $35 oz. gold. It is almost a rationale for letting inflation and deficit spending occur because in the end the system using a reserve currency works as good as anything. I do think the expense of the Vietnam war and the obvious policy that it was necessary to allow inflation (from the 70s onward) was incomplete, looking at everything today, because it was based on an assumption that we humans could just aggressively keep growing our way into the future like we had always done. Already in 1970 there were environmental concerns, well-reasoned ones, and global warming was being anticipated. If it had been possible to use a hard gold standard we might not be in this ecological disaster today, but there would have been some serious poverty, etc. The obvious policy today is to put our money into the environment and fix it and by doing that put people to work for a good and urgent cause. As opposed to bombing North Korea; building a Wall to nowhere; giving money to corporations which do not contribute to repairing the planet; and impoverishing people unnecessarily, etc. Money, in the end, is only as valuable as the things it accomplishes.

Robert NYC , April 25, 2017 at 3:29 pm

Wrong on your poverty concept. It is the inflation associated with a reckless fiat monetary system that causes much of the poverty. Prior the fiat era there was minimal inflation. As Keynes explained in his prophetic criticism of the Treaty of Versailles, The Economic Consequences of the Peace, when he called attention to Lenin, of all people:

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless.

Lenin was certainly right. There is no subtler, nor surer means of overturning the existing basis of society that to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

jsn , April 25, 2017 at 5:25 pm

The core problem with hard currency is the power asymmetry of the fixed interest contract in whatever form.

Because costs are constant and growing under such contracts, income requirements become "sticky": in a market reverse, wage earners, renters, mortgage holders etc are obligated by these contracts and cannot accept a cut in their wage unless they have adequate financial reserves. Recessions soak these reserves from debtors to creditors despite the loose underwriting of creditors in the speculative and ponzi phases of the Minsky cycle being the root cause of the business cycle, not profligacy or irresponsibility by wage earners and small business people. In a depression, this liquidationist dynamic starts working its way up the the industrial supply chain, dismantling the actual means of production.

The main potential public benefit of fiat currency is that in such conditions it costs the state nothing to preserve the wealth of those not implicated in causing the collapse and to preserve those means of production. Unfortunately, what we saw in 2008 was Bush/Obama using the innocent victims of the business cycle to "foam the runway" for the institutions that caused it.

Poverty is a simple result of being cut off from possible income sources. To the extent that inflation is managed with what Keynes called "a reserve army of the unemployed", high levels of poverty are assured. In the high wage, high cost era of the New Deal, the intent was take what burden of financial risk could be taken off of workers and small producers and to provide good paying opportunities for one cycle's economic losers to get back on their feet in the next cycle. But this only works with full employment where labor has the power to bid for a share of the overall returns on investments.

OpenThePodBayDoorsHAL , April 25, 2017 at 6:53 pm

I found this fascinating and quite persuasive.
But unless you can posit the existence of a state that will reliably act to "preserve the wealth of those not implicated in causing the collapse and to preserve those means of production" it is just a useless academic exercise. I do not see any such state anywhere in view, with the possible exception of the Chinese, who seem to understand "preserving the means of production" as a state priority. For the West however that idea is a real howler.

Moneta , April 25, 2017 at 7:30 pm

No inflation can also lead to a form of confiscation where you are not letting new entrants (the young) into the game.

No inflation could reflect a form of protectionism.

MyLessThanPrimeBeef , April 25, 2017 at 3:30 pm

If it had been possible to use a hard gold standard we might not be in this ecological disaster today, but there would have been some serious poverty, etc.

Some serious poverty only if because the elites would have been even more neoliberal.

The last gold-standard-free 50 years of innovation and growth have made extinct

1. Shoes that last more than a few months
2. Clothes that you can pass on to future generations
3. Likewise, furniture
4. Milk or Coke in glass bottles
etc.

RBHoughton , April 25, 2017 at 7:35 pm

Isn't that because we have evicted competition from our global commercial model and replaced it with planned production so every factory knows the size of its likely market?

Enquiring Mind , April 25, 2017 at 11:18 am

At what point would China, for example, be able to assert more of a reserve currency, or at least alternative, role based on its economic and trade power and build-up of hard and financial assets? Or is their near-term internal surplus recycling through uneconomic lending enough to keep them off-balance for quite a while on the world financial stage? Many in the West are watching the development of the One Belt/One Road infrastructure and shifting country linkages and alliances with grave concern.

jsn , April 25, 2017 at 1:09 pm

The key to reserve status is large external holdings of your monetary instruments: for foreigners to transact in your currency they must have it. China, thus far, fails profoundly on this count, no one has its currency.

The inverse of this is that the best way for the US to end the dollars reserve status is to eliminate the "National Debt", which is in fact nothing other than the inventory if dollar instruments the rest of the world holds in order to be able to spend dollars into our system: eliminate that inventory and the dollar will no longer be a reserve currency.

Oregoncharles , April 25, 2017 at 1:28 pm

This raises the large question of whether "reserve status" is actually beneficial. Apparently it consists largely of being enormously in debt – and in fact, it's been a way for Japanese and Chinese to buy up large chunks of our "means of production." The prosperity of my original home town, Columbus, IN, rests on Japanese "investment." It does mean some good Japanese restaurants in town.

jsn , April 25, 2017 at 3:25 pm

To me the question is, who benefits from it? It has been of great benefit to a very particular set of people here in the US and quite destructive since the 70s to most everyone else.

It is a power relationship that has been used for imperial aims rather than for the good of citizens. It needn't be that way, but as US power has become increasingly unaccountable its abuse of this particular tool has grown.

Robert NYC , April 25, 2017 at 3:54 pm

@jsn, you get it!

Yves Smith Post author , April 25, 2017 at 9:39 pm

No, no, no, no, this is 100% wrong.

First, the US could just as easily deficit spend. We are not "in debt" because the US can always create more dollars to retire Treasury bonds.

The requirement for being a reserve currency is running trade deficits. That does require that furriners take and hold your paper. They prefer bonds or other investments to cash to get some yield.

Running ongoing trade deficits also means that you are using your domestic demand to support jobs overseas. That is the problematic feature, not all of this other noise.

Robert NYC , April 25, 2017 at 3:45 pm

The concept of a reserve currency came about from resolution 9 of the Genoa Monetary Conference of 1922. The idea was that any currency that was convertible to gold was de facto equivalent to gold and therefore an acceptable central bank reserve asset. In other words there is really no such thing as an international reserve currency without gold in the system according to the very reasoning that established the idea. The U.S. pulled off the greatest bait and switch in history when it "suspended" the gold window in 1971. The whole system because an enormous debt based Ponzi scheme after that and we are now dealing with the consequences.

And yes the key to reserve status: is large external holdings of your monetary instruments for foreigners to transact in". But what incentive do they have to hold such a currency and transact in it? Remember they don't need it since they generally run trade surpluses. The answer was, because that currency was convertible to gold. What about now when it is not tied to gold? Why hold the currency of profligate debtor nation? Answer provided in post below.

And anyone who thinks that running large trade and budget deficits is the secret to reserve currency status is a moron. Argentina or Paraguay could just as easily produce the necessary surplus liquidity under that logic.

craazyboy , April 25, 2017 at 4:07 pm

" But what incentive do they have to hold such a currency and transact in it? Remember they don't need it since they generally run trade surpluses. "

Restart back at the very beginning, forget everything you know, and try again.

"They" got foreign reserve currency by selling to the US and getting paid in dollars. Their banks then traded the dollars to the PBoC central bank for freshly printed renimbi.

Robert NYC , April 25, 2017 at 4:30 pm

yes, but why would the central bank endlessly collect another country's debt?

And you inadvertently point out one of the key frauds in the system. The dollar supports a double pyramid of credit, one domestic and the other foreign. There is also a third pyramid of credit, the euro dollar market, which is built on top of the U.S. domestic pyramid of credit, but lets ignore that for now.

So "they" give us real stuff made of raw material and labor inputs and we give them wampum!!! Greatest scam in history.

Mark P. , April 25, 2017 at 5:33 pm

Greatest scam in history.

It absolutely is. It's as much an advance on the British Empire as that was on the Roman system.

craazyboy , April 25, 2017 at 5:41 pm

"The dollar supports a double pyramid of credit, one domestic and the other foreign. "

Except the PBoC prints the Many Yuan to buy dollars from the Chinese banking system. The value of the Many Yuan is backed by sales of exports, in that case. A tiny little subset where MMT (The imaginary version) is actually in force. Then the PBoC buys our debt with these foreign reserves, which we wisely spend on our country and citizens.

Next, the Chinese banking system, thru the power of The Money Multiplier, uses that base money to make loans and expand credit to Chinese.

Robert NYC , April 25, 2017 at 8:14 pm

" The value of the Many Yuan is backed by sales of exports, in that case."

WTF? The value the "Many Yuan" is backed by the sale of exports which yields wampum, uh I mean dollars, and they purchase the dollars with the many yuan they created. The PBoC expands its balance sheet to buy those dollars with yuan created from nothing, hence the double pyramid of credit. The dollars get lent back to us in the form of U.S. government securities because we issue the word's "boomerang" currency.

And yes you can run a system like this; for how long? That is the big question.

Yves Smith Post author , April 25, 2017 at 9:45 pm

No, you have this wrong.

They want the jobs!

And you have misunderstood what those reserves are for. The Fed also can't spend all of those US assets it holds on its balance sheet either, now can it?

The use of foreign currency reserves is to defend the currency and keep the IMF away. Having a currency depreciate rapidly leads to a big inflation spike (unless you are close to being an autarky) due to the prices of foreign goods, in particular commodities, going up in your currency.

China is not self sufficient in a whole bunch of things, including in particular energy.

It had a spell last year when it was running through its FX reserves at such a rate that it would have breached the IMF trouble level for an economy of its size if it had persisted for 4-6 months more.

Robert NYC , April 25, 2017 at 4:56 pm

You sound like you must be an economist.

A chemist, a physicist and economist are ship wrecked on a deserted island with only some canned goods for food. They sit down to figure out how they are going to open the cans. To which the economist says: "assume we have a can opener"

craazyboy , April 25, 2017 at 5:47 pm

Three MMT Economists are stranded on a desert island.

They say, "WTF's a can opener? That sounds like work!" and live 3 months and are then rescued by Skipper, Gillian, Mary Ann and the Perfesser too, on an Easter Break Tour. Ginger and Mr. Howe are downstairs busy downstairs knocking up.

They are living happily ever after in Kansas City, Mo.

a different chris , April 25, 2017 at 11:41 am

>The dollar standard will be with us for a long time.

Why?

jsn , April 25, 2017 at 1:01 pm

That struck me as "famous last words" material.

Seems to me the dollar system will work until it doesn't. And those who run it have been doing all within their power for about 15 years to encourage anyone who can to come up with an alternative.

None look viable, and they won't until suddenly one is.

Yves Smith Post author , April 25, 2017 at 9:49 pm

There isn't a viable alternative.

The euro isn't one due to the mess its banking system is in. Japan doesn't want the job and in any event is a military protectorate of the US.

China is a minimum of 20 years away. Even though it would like the status of being the reserve currency, it most decidedly does not want the attendant obligations, which are running ongoing trade deficits, which is tantamount to exporting jobs. Maintaining high levels of employment and wage growth are the paramount goals for China's leaders. There are underreported riots pretty much all the time in China due to dissatisfaction over labor conditions now. The officialdom is not going to commit political suicide. Domestic needs always trump foreign goals.

lyman alpha blob , April 25, 2017 at 11:43 am

Just getting around to reading Piketty's doorstopper and was struck by his argument that prior to WWI there had been very little inflation worldwide for centuries. It was the need to pay off all the war debt that shook things up.

Graeber's book on debt also makes the argument that money as physical circulating metal currency came about because of the need to pay for wars.

Something similar seems to have been going on with the Bretton Woods agreement.

I know it's crazy but I'm just going to throw it out there – maybe if we'd like a more stable economy we could try starting fewer very destabilizing, extremely expensive wars???

wandering mind , April 25, 2017 at 3:16 pm

That is exactly my thought. There is a disturbing cycle of war, monetary expansion to pay for the war, post-war deflation leading to political instability, leading to a repeat of the cycle, at least in Europe and the U.S.

One can see this even in the period between the creation of the Bank of England through the end of the Napoleonic wars.

It is evident as well in the United States pre- and post-Civil war.

Deficit hawks never seem to have a problem with war-time deficit spending, only general welfare deficit spending.

We could have a system where the fiscal power of the state is fully harnessed for the general welfare, but that would threaten the current system which allows a small minority to overwhelmingly reap the benefits of the money creation power of the state and private banks.

This renders the issue a political one more than a purely economic one. If history is any guide, we will continue to have the kind of political uncertainty we've experienced until there has been enough war spending to start the cycle over again. :(

RBHoughton , April 25, 2017 at 7:42 pm

Wander no more Mind, you have struck on the bedrock of reality

Henry , April 25, 2017 at 12:21 pm

" The inflation that started in the later 1960s was substantially if not entirely the result of Lyndon Johnson refusing to raise taxes "

I'm almost afraid to ask, but how does this make sense? Any increase in taxes will be passed on to the consumer to increase prices even more. If you doubt this, watch what Trump's import taxes do to prices.

Yves Smith Post author , April 25, 2017 at 9:54 pm

No, you have been propagandized by the right wing anti tax people.

Taxes drains demand from the economy. Lower demand means more slack, more merchants having to compete with each other, some headcount cuts, etc.

By deficit spending in an economy that was already at full employment, Johnson basically guaranteed inflation. Both his own former economist, Walter Heller, and Milton Friedman warned against it. But because Heller was a Dem and an outlier (most Dems weren't gonna challenge their own party's policies), it was Friedman's warnings that were publicized.

Kalen , April 25, 2017 at 1:16 pm

Another subject that is relevant to the current post 2008 collapse and FED shenanigans to save the day. i.e. save their cronies. And what it is completely missing in this piece written by the insiders is exactly that Bretton Woods; Cui Bono:namely US ruling elite and new world order after WWII.

Bretton Woods was a monetary session of the overall conference 1944-1945 of new world order namely a formal switch from British empire global dominance system into American global dominance system and trade/monetary policies were just an important but small part of overall new global political and military arrangement.

Global pound was killed, global dollar has been created and blessed by western sphere of influence and defended by supposedly the most powerful US militarily in the world, [as was British navy before] US military of global reach via US navy and air force.

The political symbolism of Bretton Woods conference correlated with invasion of Normandy in June 1944, the last step in defeating Nazism in Europe cannot be understated.

Also the dominance of two figures of White and Keynes in this conference is an exemplification of closing era of British empire as a world [decaying at that time] leader which was accelerated by the role of Japanese and German/Italian aggression in colonial Asia, Africa [also helped by French surrender to Nazis that spurred western support for independent French colony of Algeria] and ME boosted up the anti-colonial movements and political parties, which like in Vietnam even US supported during WWII.

Little known fact is that Nazis championed themselves as anti-colonial force in ME while they attempted to colonize eastern Europe.The many Arabs fell for this propaganda siding with Nazis against British colonialism in Palestine setting themselves against Jews vehemently anti Nazi at that time.

In other words Bretton Woods was a consequence of the fact that British empire was collapsing fast ironically with the help of its allies and that Included Soviets. Also helped that British were broke and all the British Gold was already in the US as a payment for bankrolling British defenses in Europe since 1940 and elsewhere, so were Soviet gold payments for military technology and materiel they received from US and allies.

The political void had to be filled or it would have been filled by Soviets, and hence the Bretton Woods system was not based on unfettered exploitation of slaves of newly expanded US empire what US Oligarchy would have liked and was freely practicing before 1929, but for ideological reason was aimed for economic improvements in order to stem massive anti-capitalist, communist and anti-colonist movements that threatened western hegemony over the world and hence the dreaded anti-capitalist words used by in Bretton Woods system like fixed exchange rate or blasphemous capital controls, things the would crucify you if you utter them today during a seminar in any Ivy league economy department.

Bretton Woods was primarily a tool into an ideological war west and Soviets knew they would have to fight, cold or hot.

This [economic dominance] war ended in mid nineteen sixties when seeds of collapse of Soviet Union and betrayal of leftist ideals and socialist/communists movements all over the world were sawed and hence Bretton Woods was no longer needed and brutality of unfettered capitalist could begin to return starting with Kennedy tax cut freeing capital in private hands and then FED going full fiat in later 1960-ties, capital flow deregulation, free floating currencies, all that for benefit of oligarchic class and of colossal detriment to American workers, devastating result of which we are experiencing now.

jsn , April 25, 2017 at 1:48 pm

One of the great ironies of Bretton Woods is that Harry Dexter White, the US rep at the talks was in fact a Soviet agent. I wonder if he understood monetary economics enough to hope that the Bretton Woods gold standard system, as opposed to Keynes bancor proposal, would self immolate with a run on US gold stocks and take the West down with it.

OpenThePodBayDoorsHAL , April 25, 2017 at 6:15 pm

Let's think of "root causes", both Keynes and White were big fans of Soviet-style command and control top-down planned economies ("I have seen the future and it works!"). So that's what they divined and devised for money: a top-down price-fixing regime.

So while people would laugh themselves silly if you told them we were going to price things the way the Soviets did ("we'll raise X number of cows because we'll need Y quantity of shoe leather"), we somehow accept central planning for the price of the most important item of all: money itself. The supreme geniuses at the Fed et al, with their supreme formulae, can divine at any moment precisely what the price of money should be. This, of course, is folly.

And people should understand that the gold standard (not the gold-exchange standard it is often confused with) was not designed, was not somehow imposed, and was not agreed upon by some collective body. It simply arose organically because time and again through painful experience throughout history it was shown that any system where people can simply vote themselves more money ends in tears. Not usually, but always. You'd think that a 100% historical failure rate would clue people in to rethink the head-hammer-hitting approach.

And as Dr. Haygood points out above, "everything floating against everything else" is nothing but a colossal waste of time and money. You wouldn't attempt to build or make something without an agreed and immutable unit of measure.

jsn , April 25, 2017 at 6:46 pm

Completely untrue of Keynes. He ran the UK Treasury twice very pointedly in the interests of industrial capitalists. He was however very opposed to financial rents, a real classicist in that regard.

jsn , April 25, 2017 at 7:07 pm

Keynes ran the UK treasury twice more or less along classical lines: in favor of industrial capitalism and against financial rents. Not top down, not Soviet. Its not clear where you get your facts, fiat systems have lasted hundreds of years many times. They tend to arise in empires with secure borders. They depend on the productive relations of their societies for the value of their money rather than a commodity hedge.

Warfare favors the commodity hedge because the productive relations in a society are frequently destroyed by war. Because of the stickyness of wages, hard currency tends to choke economic growth because a fixed money supply has to be spread increasingly thin as more real wealth is created to be denominated with a fixed quantity of specie, requiring wages to drop because there is more stuff to purchase.

Each has benefits and costs, both are tools and while the one favors growth and the other war, neither must be used for either. A representative system will use either as its constituencies direct, an authoritarian one according to the intent of the authority. It isn't tools that make the problems, though some are better for some purposes than others. It is the intent of the powerful that is expressed and from which others suffer.

Robert NYC , April 25, 2017 at 8:18 pm

@jsn " fiat systems have lasted hundreds of years many times."

what? can you please back that statement up. Only major fiat system in history that I have ever seen written about is the one that existed in China several hundred years ago. If there were others you need to give some examples.

Todde , April 25, 2017 at 10:24 pm

Split Tally sticks.

OpenthepodbaydoorsHAL , April 25, 2017 at 9:58 pm

I think you objected to my comments without actually refuting them:
1. We have a top-down price fixing money system;
2. Keynes and White were a big fans of Soviet central planning (see The Battle for Bretton Woods for chapter and verse);
3. And I've never understood the "fixed quantity of specie" argument. Surely it's about price, not physical quantity. You could easily run the world economy on 100 tons of gold if it was priced accordingly.

Vikas Saini , April 25, 2017 at 2:41 pm

Michael Hudson's book Superimperialism, published astonishingly in 1972, nailed it. Details some great history of FDR's economic diplomacy during the late Depression and WW2 period that preceded the Bretton Woods settlement. Worth a read.

Mark P. , April 25, 2017 at 5:14 pm

More than worth a read. Essential.

Robert NYC , April 25, 2017 at 9:46 pm

yes Michael Hudson is great, but that is why he must be marginalized/ignored. Can't maintain control of the official narrative if people like Hudson were to ever be taken seriously..

Robert NYC , April 25, 2017 at 3:16 pm

"However, the likelihood that the dollar will be replaced as the dominant international currency in the foreseeable future remains remote. The dollar standard and the legacy of the Bretton Woods system will be with us for a long time."

That is the BIG question and the answer remains to be seen. I for one don't believe it will continue much longer, but then again nobody knows. Bordo also leaves out a critical part of the narrative, i.e., the U.S. secret deal with Saudi Arabia in 1974 to officially tie the dollar to oil. See link below for details. Without this secret arrangement the dollar would have never survived as the international reserve currency. The Saudis reportedly pushed for greater use of the SDR, but the U.S. made them a deal they couldn't refuse and the Saudi royal family realized that if they didn't go along with U.S. demands the CIA would find some other branch of the family that would.

https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret

The system is a mess and it is retarded to allow one country's currency to serve as the main reserve asset for the system. That is the ultimate free lunch and the equivalent to believing in a perpetual motion machine. It is hard to believe in can continue much longer despite of Bordo's view that it will. It has reached a point where it has created massive problems that can not continue.

MyLessThanPrimeBeef , April 25, 2017 at 3:33 pm

So, it's not 'out of thin air.

It's back by the might of the Pentagon mightier than gold.

Robert NYC , April 25, 2017 at 3:49 pm

Exactly! But nobody at the Fed is going to explain this to anyone, anytime soon.

Mark P. , April 25, 2017 at 5:30 pm

MyLessThanPrimeBeef wrote: So, it's not 'out of thin air. It's back by the might of the Pentagon mightier than gold.

And in turn the seignorage on that ability to create as much of the global reserve currency as the U.S. likes pays for the Pentagon.

https://en.wikipedia.org/wiki/Seigniorage

So in a sense when China and Russia are forced to hold dollars for global trade, they're essentially paying for the Pentagon to do what it's doing. You can see why they'd be mad.

steven , April 25, 2017 at 3:47 pm

It is almost a gift from heaven when fixing a single problem offers the chance to fix a whole bunch of them. This IMHO is very possibly one of those gifts. Without this "ultimate free lunch" the globalization scam of allowing this country's and the world's 1% to keep adding zeros to their bank accounts ("to keep score" as Pres. Trump puts it) would not have been possible. Without countries like Saudi Arabia willing to keep accepting more "debt that can't be repaid (and) won't be", the US military industrial complex would not be able to keep increasing its threat to world peace and threatening the survival of humanity. Without the Saudi stranglehold over politics and US Middle Eastern policy the US could stop killing Muslims in its bogus 'war on terror'. It could get busy replacing its fossil fuel energy sources with renewable ones and its oil-powered transportation system with an electrified one (yes, maybe even a few EVs)

@Robert NYC – Thanks for the link.

Mark P. , April 25, 2017 at 5:23 pm

It is hard to believe in can continue much longer despite of Bordo's view that it will.

And yet where is the dollar's replacement?

If you'd told me ten years that the petrodollar as an institution enforcing compliance w. the dollar as global reserve currency could end and yet the dollar would continue with that status, I'd have laughed at you. However, that increasingly looks like it might happen.

Yes, yes, I know - we await the basket of currencies solution pushed by China and Russia, and others sick of the situation. We've been waiting for a while now.

Steven , April 25, 2017 at 7:03 pm

I'm thinking globalization has something to do with the dollar's longevity. Strip a country of the ability to support itself by exporting its jobs and it's people become dependent on a strong military to insure it's money continues to be "accepted" even when it's people no longer have anything to trade for what they really need.

Moneta , April 25, 2017 at 8:19 pm

I think there is indeed a link between the usd as reserve currency and the military budget.

Robert NYC , April 25, 2017 at 9:12 pm

@Moneta, these numbers are roughly correct. The U.S. defense budget is about $600 billion, the trade deficit is about $600 billion and last year we issued $1.4 trillion in incremental debt. Foreigners own about 40% of U.S. debt. 40% of of $1.4 trillion is $560 billion so yes there is a pretty strong correlation. Massive defense budget wouldn't be possible without reserve currency scam.

Robert NYC , April 25, 2017 at 8:21 pm

@Mark P.

yes that is the conundrum. It doesn't make a lot of sense but it goes on and on. Another 50 years? Unlikely.

Adamski , April 25, 2017 at 7:20 pm

I'm completely confused. Anything available in plain English for laypeople?

"The adjustment problem in Bretton Woods reflected downward rigidity in wages and prices which prevented the normal price adjustment of the gold standard price specie flow mechanism to operate"

George Job , April 25, 2017 at 9:05 pm

That fiat currencies have lasted hundreds of years jsn is simply not true. I was thinking forty but here we see 27!
http://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

And it's the US and Canada being the only countries globally not marking their gold holdings to market. (or audit) Reserve currency indeed!
http://marketupdate.nl/en/analysis-china-marks-gold-reserve-at-market-value/

Tim , April 25, 2017 at 9:52 pm

Canada which was one of the founding members of Bretton Woods pulled out as early as 1949 in order to move to a floating exchange rate and full capital mobility. Bretton Woods was dead before it ever began.

[Apr 22, 2017] The 'Russification' of Oil Exploration - The New York Times

Apr 22, 2017 | www.nytimes.com

MOSCOW - The American and European sanctions against the Russian oil industry have dashed, at least for now, the Western oil majors' ambitions to drill in the Arctic Ocean.

But drilling will continue all the same, Russian government and state oil company officials have been taking pains to point out, ever since the sanctions took effect over the summer.

"We will do it on our own," Igor I. Sechin, the president of Russia's state-controlled oil company, Rosneft, told journalists in October. "We'll continue drilling here next year and the years after that."

Rather than throw in the towel in the face of Western sanctions intended to halt Russia's Arctic oil ambitions by stopping technology transfers, the Russians have responded with plans to "Russify" the technology to be deployed in the world's largest effort to date to extract oil from the thawing Arctic Ocean.

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The solution to tapping the Arctic, Yevgeny Primakov, a former prime minister, told a group of high officials in October, "is found first of all in our own industrial base."

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A major hurdle is already cleared: An Exxon-led joint venture discovered oil in the Russian sector of the Arctic Ocean in September, proving the region holds commercially viable volumes of oil.

Rosneft is already laying plans to drill without Western oil major cooperation. Along with Exxon, Eni of Italy and Statoil of Norway had joint ventures to work with Rosneft in the Kara, Laptev, and Chukchi seas above Russia.

After the September sanctions suspended those deals , Rosneft negotiated to rent from Gazprom four Russian ice-class drilling rigs for next season's exploration work, should Exxon still be sanction-barred from doing the work next summer.

Rosneft has also booked six rigs from North Atlantic Drilling, a unit of Seadrill of Norway, under contracts signed in July and grandfathered in under the sanctions.

The Russians are in early talks with the Chinese over sailing rigs from the South China Sea to the Arctic Ocean, industry executives say.

This spring as the threat of sanctions loomed, Rosneft bought the Russian and Venezuelan well-drilling business of Weatherford, adding to its in-house capabilities.

A further "Russification" of the industry seems inevitable. In October, President Vladimir V. Putin approved the creation of a state-owned oil services company, RBC, a Russian business newspaper reported. The intention is to duplicate, as well as possible, the services purveyed now by Halliburton, Baker Hughes and Schlumberger.

Certainly, some in the oil industry see the Russian official response as bluff, asserting Rosneft has neither the skills nor the capital to drill for oil in its 42 offshore licenses blocks. Under the joint ventures, the Western companies financed and managed the exploration work.

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The three companies, Exxon, Eni and Statoil, were to invest $20 billion in exploration, and the company has been mute on how it will replace that. Just this summer, Exxon paid $700 million to drill the Universitetskaya-1 well in the Kara Sea.

Russia, meanwhile, does not even manufacture subsea hardware like well heads. Rosneft's finances are restricted to 30-day loans under sanctions.

Yet the company and the Russian industry are already tooling up for just such an effort.

The sheer uncertainty of sanctions is pushing the Russian industry to turn inward. Russian companies, even those who prefer to work with U.S. oilfield equipment or services providers because the cost or quality is better, can never know when new sanctions might scuttle a deal.

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"The client looks at you and says 'I like you, I like your product, but you are not dependable,' " Alexis Rodzianko, the director of the American Chamber of Commerce in Russia said in an interview.

Russia now has a "hierarchy of procurement" placing domestic and Asian companies first, U.S. companies last.

"The consensus in Russia is this is not a one-off, short-term problem," Ildar Davletshin, an oil analyst at Renaissance Capital in Moscow, said in an interview, of the Russian effort to pivot to domestic and Asian suppliers.

"Nobody will just sit and wait" for sanctions to be lifted, he said.

Whether Russian technology can fill the gap left by Western oil majors as the country prepares for the extraordinary engineering challenge of oil drilling under the Arctic ice remains an unsettled question within the industry.

Russia brings Soviet legacy technologies, including the world's only fleet of nuclear icebreakers, awesome machines of immense power, with names like 50 Years of Victory and Yamal, which sail year-round in the Arctic Ocean.

"Let's not underestimate them," said one oil company executive who visited Exxon's West Alpha rig this summer, but could not speak publicly because of company policy. Russians are no strangers to the north, and the cold. "They are determined to do it. They might do it on their own."

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The Russian intention to do just that became clear out on the Arctic Ocean at the end of the short drilling window this summer.

Ice floes were already creeping down from the polar ice cap in tongues when the U.S. government announced Sept. 12 that Exxon was to halt all assistance to Rosneft by Sept. 26, in response to Russian military assistance to a rebel counteroffensive against the Ukrainian Army in late August.

The Exxon crew stopped drilling, though the well was only about 75 percent complete.

In an early indication of the Russians' intentions to go it alone after sanctions, Rosneft executives told Exxon they would not allow the West Alpha rig to leave Russian waters without finishing the well, according to the oil company executive familiar with events on the platform in September.

If Exxon withdrew American engineers, Rosneft would fly out a Russian replacement crew, putting the localization plan into immediate action, the executive said. Rosneft's press service contested this characterization of the company's position, calling it a "fiction."

In the end, Exxon obtained an extension on its waiver to the sanction from the U.S. Treasury Department, stretching the window for work with Rosneft in the Arctic until Oct. 10.

The Arctic Ocean, Mr. Sechin said later that month in the interview with Bloomberg News at the drilling site in the Kara Sea, is Russia's "Saudi Arabia" of oil, vast and pivotal to Russia's national interests.

Rosneft's website estimates the Kara Sea's reservoirs hold about 87 billion barrels of oil and the equivalent in natural gas , calling this more than the deposits of the Gulf of Mexico, the Brazilian shelf or the offshore potential north of Alaska and Canada.

After a daylong pause on Sept. 12 to Sept. 13, the Russian brinkmanship worked: The American crew continued drilling and about a week later, in mid-September, discovered a vast oil deposit, holding about 750 million barrels of oil. Mr. Sechin thanked Western partners for the find, and named the field Pobeda, or Victory.

[Apr 21, 2017] Despite Sanctions, Russia Finds Buyers for $11 Billion Stake in Rosneft - The New York Times

Apr 21, 2017 | www.nytimes.com

MOSCOW - The Russian government announced Wednesday that it will sell nearly 20 percent of its state oil company, Rosneft , to the Swiss commodity trading firm Glencore and the sovereign wealth fund of Qatar.

The deal defies expectations that no investor would dare buy a share in the Russian asset, given Western sanctions against the government of President Vladimir V. Putin.

But the emergence of foreign money suggests that investors are reassessing the sanctions after the election of Donald J. Trump, who has advocated warming ties with authorities in Moscow and is considering the chairman of Exxon Mobil, Rex W. Tillerson, as a candidate for secretary of state.

Mr. Tillerson criticized the sanctions as harmful for business after they halted an Exxon joint venture with Rosneft to drill for oil in the Kara Sea, in Russia 's sector of the Arctic Ocean.

The deal will bring Moscow $11.3 billion to help plug a widening budget deficit as Russia fights two wars, in Syria and Ukraine, and has struggled to meet pension payments and public-sector payrolls.

The agreement came as a surprise twist in the privatization of Rosneft. With an end-of-the-year deadline looming, no buyers had come forward for the 19.5 percent share in the world's largest publicly traded oil company, as measured by production and reserves. The apparent lack of bidders was a pessimistic sign for investor interest in Russia.

The Russian government had for most of the year planned to sell shares back to the majority state-owned company itself, which would hardly have qualified as a genuine privatization.

The United States decided in 2014 to impose sanctions on Rosneft and other Russian companies in response to Russia's intervention in the war in eastern Ukraine..

The sanctions limit long-term lending and transfer of American technology for drilling offshore and shale oil deposits.

The deal carries other risks as well. Both Glencore and the Qatari fund, the Qatar Investment Authority, have extensive investments in emerging markets. The Qatar fund is also an investor in Glencore.

The announced price valued Rosneft at $58 billion, slightly less than the company's stock market value at the close of trading in Moscow on Wednesday, of just under $59 billion.

Both the market price of shares and the sale price for the 19.5 percent stake announced Wednesday are a relative bargain, indicating the Russian government's eagerness to cut a deal to shore up its finances.

[Apr 18, 2017] PressTV-Saudis to shelve projects as cheap oil bites

Apr 18, 2017 | www.presstv.ir
Saudi Arabia has reportedly canceled or restructured economic and infrastructure projects worth billions of dollars.

Reuters in a report quoted government sources as saying that the Saudi government had ordered ministries and organizations to review the projects to either scrap or make them more efficient.

The report added that most of the projects that had been targeted were those that had been devised during lavish government spending buoyed by crude oil prices above $100 per barrel.

However, they would no longer be cost-efficient with oil at below $55 per barrel.

Riyadh's Bureau of Capital and Operational Spending Rationalization is now assessing the projects that are under 25 percent complete, the sources told Reuters.

"Some projects could be retendered so they can be executed in partnership with the private sector, possibly through build-operate-transfer (BOT) contracts," one source familiar with the plan told the agency.

"Other projects could be suspended if they do not meet the current economic objectives," the source said.

The finances of Saudi Arabia, the world's second largest crude producer after Russia and largest oil exporter, have been hit by a downturn in oil prices that were above $100 a barrel in 2014, but start to plunge to well below $40 in 2016.

The plunge in global oil prices prompted Riyadh to rein in public spending in a bid to save money. The kingdom's economic measures are being led by Salman's son, Deputy Crown Prince Mohammad bin Salman Al Saud.

Earlier last year, the Riyadh regime cancelled financial perks for public sector employees and slashed salaries of ministers and members of the Consultative Assembly of Saudi Arabia, also known as the Shura Council.

It further froze major building projects and made unprecedented cuts to fuel and utilities subsidies. Ren Lugay 18 hours ago Hmmm, no money to complete social infrastructure projects but always spare cash to buy cluster munitions from the Great Satan and Israel to bomb innocent civilians in Yemen.

[Apr 18, 2017] PressTV-Riyadh launches massive renewable energy plan

Apr 18, 2017 | www.presstv.ir
Saudi Arabia has launched a massive multi-billion-dollar plan which is expected to increase the kingdom's production of electricity from renewable sources by 10 percent within the next few years.

Reuters said in a report that the plan envisaged the construction of 30 solar and wind projects by 2023.

The projects – that would be meant to boost the kingdom's electricity generation and reduce crude oil burning – could generate 9.5 gigawatt of renewable energy.

The initiative involves investment estimated between $30 billion and $50 billion, Reuters reported.

On a related front, the news service said the Saudi Energy Minister Khalid al-Falih on Monday announced the beginning of the bidding for a project to produce 300 megawatt of solar power.

The project is expected to come online by 2018-2019.

"The energy mix to produce electricity will change, today the kingdom uses large quantities of oil liquids, including crude, fuel oil and diesel," Falih was quoted as saying.

"So the percentage of renewable energy by 2023 (will be) 10 percent of total installed capacity in the kingdom."

Based on an ambitious economic reform program launched last year, known as Vision 2030, Saudi Arabia is seeking to use non-oil means to generate much of its additional future energy needs to avoid running down oil resources and diversify its economy.

The kingdom is restructuring its energy sector as part of Vision 2030 and a focus on renewable projects is a pillar of this transformation as it would help develop the private sector and create thousands of jobs, Reuters added.

[Apr 17, 2017] 04/15/2017 at 9:35 am

Notable quotes:
"... Hopefully everyone involved in defending Bakken production upswings will not disappear into the woodwork next month, or the month after, when production drops again. ..."
"... Of course marginal shale oil wells that are at or below economic limits get shut in during winter, or get shut in and stay shut in because workover costs to restore production simply do not make economic sense. ..."
"... Re-frac's cost more money. At $20.00 per barrel net back prices a $2.5-3.0M re-frac requires ANOTHER 137,000 BO to payout. Productivity should never be confused with profitability (or lack thereof); in the end the latter always wins out. ..."
"... A little more time and realized production data will prove that downsizing actually reduced UR per incremental well and was yet another economic disaster in a string of economic disasters for the shale oil industry, the biggest being oversupply and an ensuing 70% drop in product prices. ..."
Apr 17, 2017 | peakoilbarrel.com
Mike 04/15/2017 at 9:35 am
Hopefully everyone involved in defending Bakken production upswings will not disappear into the woodwork next month, or the month after, when production drops again.

Of course marginal shale oil wells that are at or below economic limits get shut in during winter, or get shut in and stay shut in because workover costs to restore production simply do not make economic sense. There are gazillions of those kinds of well in all three of America's shale oil basins. There need not be a flush 'uptick' of production when those wells come back on line (that's investor presentation dribble), in fact it can be just the opposite because of bubble point/higher water saturations.

Re-frac's cost more money. At $20.00 per barrel net back prices a $2.5-3.0M re-frac requires ANOTHER 137,000 BO to payout. Productivity should never be confused with profitability (or lack thereof); in the end the latter always wins out.

And this SPE paper pretty much shoots the hell out of all that "halo" bunk: https://www.spe.org/en/jpt/jpt-article-detail/?art=2819 .

Imagine a situation where you are drilling these $6.5M wells so close together (Marathon at 330 feet, toe to toe) that you have to "protect" them by shutting them in for prolonged periods of time while you frac a new well 3000 feet away. That makes a lot of sense, doesn't it?

A little more time and realized production data will prove that downsizing actually reduced UR per incremental well and was yet another economic disaster in a string of economic disasters for the shale oil industry, the biggest being oversupply and an ensuing 70% drop in product prices.

People do really stupid things with OPM.

George Kaplan 04/14/2017 at 10:31 am
Dennis,

... ... ...

The actual reserve that is being produced in the Bakken was "discovered, undeveloped and developed" in 2013, and not covered by the USGS. It's difficult to find break out information for individual areas in most companies reports but I don't think there was more than about 5 Gb developed and undeveloped reserves in 2013, and it might have declined a bit since then, even including actual production.

[Apr 17, 2017] Bakken average well profile from June 2015 to Dec 2017

Apr 17, 2017 | peakoilbarrel.com
Dennis Coyne, 04/14/2017 at 12:42 pm
Hi George,

When I give the cumulative output of the scenarios, it is from the start of production in the Bakken/TF in ND, about 1.6 Gb had been produced at the end of 2015 and Bakken Three Forks proved reserves were about 5 Gb at the end of 2015, that gets us to 6.6 Gb, typically there are probable reserves as well, though we would have to guess at how much. Also as oil prices increase in the future 2P reserves are likely to increase.

Note that the F95 USGS TRR estimate for the ND Bakken Three Forks is about 7.2 Gb, if we assume probable reserves at the end of 2012 were zero (in my view not a very good assumption). What do you think is a reasonable estimate for probable reserves if proved reserves are 5 Gb? Your guess would be better than mine. For UK North Sea a typical number would be 3 Gb of probable for 5 Gb of proved (all UK North Sea reserves). For the Bakken it would likely be lower, maybe 1 Gb of probable for 5 Gb of proved reserves might be a reasonable guess.

Bakken average well profile from June 2015 to Dec 2017 shown below (after that the EUR decreases).

Dennis Coyne says: 04/14/2017 at 4:56 pm
Hi George,

That is the study I use.

https://pubs.usgs.gov/fs/2013/3013/

If you pull up data at shaleprofile.com
and look at wells from 2014 to 2017, there are 1388 Three Forks wells that have been producing for 20 months (cumulative is 118kb) and there are 1689 Middle Bakken wells (cumulative is 143kb@20 months). So lately (past 3 years) a fairly large proportion of wells have been Three Forks wells (about 45%). After 36 months the difference in cumulative output is about 30 kb (TF is lower at 155kb@36 mo, Bakken is 185 kb at 36 months).

George Kaplan says: 04/15/2017 at 2:52 am
I think you are mixing proved reserves from EIA with the undiscovered numbers from USGS. The proved reserves might have some basis and 5 to 6 might be right, I haven't sen any kind of detail of how they are arrived at. But that is not the same oil as in the USGS report – it was mostly already known about in 2012 when the E&Ps stopped drilling wildcats. Since then they have been converting probable to proven, and in some cases writing off some of the reserves. If you want to include the USGS data then it should be added to whatever there was as 2P in 2012 as a final recovery.

I don't know where there 1300+ Three Forks wells come from – the ND production wells for January shows only 1 well in the Three Forks and 45 Three Forks / Bakken. There are other pool's like Sanish and Madison. Madison is a big producer so maybe that is counted as Three Forks in USGS. The ND DMR overall production up to 2015 gives 10 million for Three Forks / Bakken, 1600 for Bakken, 950 for Madison and < 1 for Three Forks alone.

The 220,000 EUR I quoted was for the Three Forks alone from USGS, not Bakken.

[Apr 17, 2017] Changes in technology and industry practices, combined with an increased understanding of the regional geologic framework, can have a significant effect on what resources become technically recoverable

Apr 17, 2017 | peakoilbarrel.com
texas tea says: 04/14/2017 at 1:53 pm
https://www.oilandgas360.com/energy-lifetime-usgs-bumps-natgas-estimate-70-tcf-304-tcf-bossier-haynesville/

The money lines which can not be more accurate as it relates to those on this forum who take 1 or 2 data points and make industry wide conclusions 😜 are:

"Changes in technology and industry practices, combined with an increased understanding of the regional geologic framework, can have a significant effect on what resources become technically recoverable. "

"It's amazing what a little more knowledge can yield," said USGS scientist Stan Paxton, lead author of the assessment."

Boomer II says: 04/14/2017 at 2:44 pm
Which means gas prices will stay low, further killing coal.

And it may also mean more support for the Paris Accord so that gas producers will see pressure for countries to switch from coal to gas. Gas producers will have something to gain if coal burning is phased out.

Boomer II says: 04/14/2017 at 8:10 pm
It also occurred to me that if natural gas prices stay low, that should keep electricity prices low, which should help EVs. I've already seen my local utility promoting the Nissan Leaf.

If electric utilities can move into transportation that gives them a very big new market. It also expands their influence.

[Apr 17, 2017] China crude oil imports increased to a record 9.21mb/day in March 2017 versus 8.32mb/day in February 2017

Apr 17, 2017 | peakoilbarrel.com
Energy News says: 04/15/2017 at 10:35 am
China crude oil imports increased to a record 9.21mb/day in March 2017 versus 8.32mb/day in February 2017 (7.33 barrels per ton conversion) – Chinese customs data. I guess China is still filling it's SPR.

Before I had read this I had been wondering why news articles were saying that world oil inventories had decreased a little. Inventories often build into April. Also news agencies estimates are still saying that OPEC oil exports are holding steady and have not decreased in line with their production cuts, I guess that they have been exporting from their inventories.

inventory declines, news clips

Reuters Apr 11, 2017 – Nordic bank SEB said global oil inventories in weekly data have dropped by 42 million barrels in the last four weeks.
http://uk.reuters.com/article/uk-oil-opec-storage-idUKKBN17D1NH

Bloomberg 2017-04-04 – Since mid-February, between 10 million and 20 million barrels have left the Caribbean
https://www.bloomberg.com/news/articles/2017-04-03/oil-traders-said-to-drain-caribbean-hoards-as-opec-impact-hits

Clipper Data Apr 6, 2017 – This week we have seen Iranian barrels drop to 5 million barrels, while barrels offshore of United Arab Emirates have halved in the last week, dropping to just under 10 million barrels.
http://blog.clipperdata.com/floating-storage-holding-up-despite-iran-drop

[Apr 16, 2017] US banks are now new OPEC and can dictate poil prices. Supply-demand equilibrium is a neoclassic way of thinking that does not take into account the existence of banks. Oil is the strategic, political tool. So the price of the oil is a politically important variable. Thats why oil wars were fought.

Notable quotes:
"... I tend to now think oil shortages may be sooner rather than later. ..."
"... A couple of big project start-ups for Angola and Kazakhstan have been delayed for a year, Iran and Iraq are not developing at all as quickly as they'd planned (and others expected), there are much fewer, short cycle, small tie backs getting approved than I thought would be the case, offshore drilling in general just isn't picking up, and there seems to be early indications that the cuts in maintenance and brownfield investments from 2014 are impacting availabilities (e.g. with more unplanned downtime) and decline rates (i.e. steeper). So instead of late 2018 for start of big stock draws it may be autumn this year. ..."
"... It depends also, of course, on how demand changes, whether OPEC (really Saudi) are making voluntary cuts and have increasing spare capacity, or are following a forced decline due to surface facility limitations, and what happens in the Permian which at the moment seems increasingly desperate and bonkers by both investors and the E&Ps, but may turn out to be exactly right. ..."
"... I think this is a neoclassic way of thinking. Oil is the strategic, political tool. So price of oil is a politically important variable. That's why oil wars were fought. As simple as that. ..."
"... We already saw that world oil production was virtually flat in 2015 and 2016 (2015: 96.80 vs. 2016: 97.17 ) but demand increased (1.4 Mb/d per year I think, so around 2.8 Mb/d for two years) which for some reason did not affect much oil prices. ..."
"... I think the elephant in the room is the financial system and its interaction with the oil industry. They are now new OPEC and are able to dictate the price (within certain limits) via derivatives. Probably not without some help from KSA, which practiced damping in 2015 and 2016. ..."
"... Most assumed that in a year or year and a half max prices will return to more or less "normal" levels, as non-OPEC producers, which usually have higher cost of production, will be decimated. And then should move higher. ..."
"... At prices below $80 or so shale oil production is impossible without generating junk bonds and that means that money are still flowing to shale drillers. Not as much as in good old times, but they are flowing; despite clear indication that most probably those loans will never be repaid in full. Something is really fishy here. ..."
"... I wonder if the USA is able to keep oil under $60 (outside few spikes) for two more years. ..."
Apr 16, 2017 | peakoilbarrel.com
George Kaplan says: 04/14/2017 at 3:07 am
This is worth a read:

http://oilprice.com/Energy/Energy-General/Supply-Crunch-Or-Oil-Glut-Investment-Banks-Cant-Agree.html

I think I tend to agree with the banks – i.e. I don't really have a clue, and cover myself by changing my mind every couple of days.. But I tend to now think oil shortages may be sooner rather than later.

A couple of big project start-ups for Angola and Kazakhstan have been delayed for a year, Iran and Iraq are not developing at all as quickly as they'd planned (and others expected), there are much fewer, short cycle, small tie backs getting approved than I thought would be the case, offshore drilling in general just isn't picking up, and there seems to be early indications that the cuts in maintenance and brownfield investments from 2014 are impacting availabilities (e.g. with more unplanned downtime) and decline rates (i.e. steeper). So instead of late 2018 for start of big stock draws it may be autumn this year.

It depends also, of course, on how demand changes, whether OPEC (really Saudi) are making voluntary cuts and have increasing spare capacity, or are following a forced decline due to surface facility limitations, and what happens in the Permian which at the moment seems increasingly desperate and bonkers by both investors and the E&Ps, but may turn out to be exactly right.

On the other hand IEA OMR report come out yesterday – and their worries about a supply crash soon, which were evident a few months back, seem to have gone away, at least for the moment.

https://www.iea.org/oilmarketreport/omrpublic/

"Indeed, although the oil market will likely tighten throughout the year, overall non-OPEC production, not just in the US, will soon be on the rise again. Even after taking into account production cut pledges from the eleven non-OPEC countries, unplanned outages in Canada as well as in the North Sea, we expect production will grow again on a year-on-year basis by May."

Dennis Coyne says: 04/14/2017 at 8:55 am
Hi George,

You said,

I don't really have a clue, and cover myself by changing my mind every couple of days..

LOL

You are not alone. I tend to think eventually output will fall below demand and oil prices will rise if that ever occurs. When that actually happens? I do not know, perhaps never, my latest guess is first half of 2018 (tomorrow the guess may change.)

AlexS says: 04/14/2017 at 9:12 am
"I tend to think eventually output will fall below demand and oil prices will rise "

And then output will again rise faster than demand and prices will fall. And that will repeat several times until the oil age ends.

Dennis Coyne says: 04/14/2017 at 12:09 pm
Hi AlexS,

I suppose over the short term there will be cycles. In a very optimistic scenario by 2032 the 3 year centered moving average of World C+C output will be trending lower (with three year average output peaking at 87 Mb/d). A more pessimistic scenario has the 3 year peak in 2016 at about 80.5 Mb/d and a reasonable guess is mid way between these scenarios with a 3 year average peak in 2024 at about 84 Mb/d. Growth rates will vary with the boom bust cycle, so smooth trend lines will not be followed, output will cycle above and below in ways that are difficult to predict in advance.

likbez says: 04/16/2017 at 12:56 am
AlexS,

I think this is a neoclassic way of thinking. Oil is the strategic, political tool. So price of oil is a politically important variable. That's why oil wars were fought. As simple as that.

We already saw that world oil production was virtually flat in 2015 and 2016 (2015: 96.80 vs. 2016: 97.17 ) but demand increased (1.4 Mb/d per year I think, so around 2.8 Mb/d for two years) which for some reason did not affect much oil prices.

I think the elephant in the room is the financial system and its interaction with the oil industry. They are now new OPEC and are able to dictate the price (within certain limits) via derivatives. Probably not without some help from KSA, which practiced damping in 2015 and 2016.

I think there are powerful forces that will try to keep oil below $60 because that's the difference between the US economics in secular stagnation mode and the US economics in recession.

In this sense the balance of supply and demand does not matter until there are real oil shortages. Only in the latter case derivatives are of no or little help.

It is very interesting how primitive was behavior of OPEC in late 2016: they decided to cheat on themselves as Ron pointed out. This is really primitive, almost tribal level of thinking. And it might repeat. That's another factor that might limits upside. Unless they are really in trouble and reached peak production capacity.

Rereading posts and articles from early 2015 is also very sobering if you assume neoclassical "supply and demand stochastic equilibrium" exists for oil (which IMHO is a false assumption).

It suggests that few people in 2015 understood the predicament. Most assumed that in a year or year and a half max prices will return to more or less "normal" levels, as non-OPEC producers, which usually have higher cost of production, will be decimated. And then should move higher.

That did not happen. Instead we have had almost flat level of non-OPEC production(2015: 58.77 vs. 2016: 58.18 ); it lies probably within the accuracy of measurements +- 0.5 MB/d .

At prices below $80 or so shale oil production is impossible without generating junk bonds and that means that money are still flowing to shale drillers. Not as much as in good old times, but they are flowing; despite clear indication that most probably those loans will never be repaid in full. Something is really fishy here.

Also please compare your old views with the current situation:

http://peakoilbarrel.com/open-thread-oil-and-gas/comment-page-1/#comment-541443

I wonder if the USA is able to keep oil under $60 (outside few spikes) for two more years.

[Apr 15, 2017] Oil Production Cuts OPEC Saudis Want $60 Price

Apr 15, 2017 | finance.yahoo.com

As the Wall Street Journal's Benoit Faucon and Summer Said report: "Saudi Arabia, Iraq and Kuwait believe $60 a barrel will lift their economies and allow for more energy-industry investment, the officials said, without jump starting too much American shale output, which can be ramped up and down with prices more easily than most oil production. Saudi Arabia, Iraq and other members of the 13-nation cartel have signaled they will push to extend those cuts for another six months on May 25, when they meet in Vienna." Crude prices are influenced by a hard to predict group of variables, from Chinese demand and supply disruptions in the Middle East to the amount of crude U.S. frackers pull out of the ground. Oil prices hit $100 a barrel in 2014 before the market collapsed.

Read more Barrons.com

[Apr 14, 2017] If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed is the governments bank, then why does President Obama claim weve run out of money?

Apr 14, 2017 | economistsview.typepad.com
RGC , April 14, 2017 at 05:48 AM
So ask yourself this question:

If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed is the government's bank, then why does President Obama claim we've "run out" of money?

Why have Democrats and so-called progressives supported job-killing budget cuts in the name of "shared sacrifice"? Why are we throwing away the equivalent of $9.8 billion in lost output every single day? Why don't we do something about our $2.2 trillion infrastructure deficit, 25 million underemployed and unemployed Americans, 100 million Americans in or very near poverty, and so on?

The answer is simple. Most of us don't understand the monetary system. Instead of deciding how the government should wield its power over the dollar, we live in fear of the ratings agencies, the Chinese, the bond market vigilantes and other imaginary evils. And this holds all of us back. Unused resources abound, human needs go unmet, and the vast majority of Americans believe that 'There Is No Alternative' (TINA). Or, as Warren Mosler says, "Because we fear becoming the next Greece, we're turning ourselves into the next Japan."

There is an alternative. And it begins with an understanding of the monetary system. The cat is already out of the bag. Chairman Bernanke confirms it. Money is no object.

http://neweconomicperspectives.org/2012/03/where-did-the-federal-reserve-get-all-that-money.html

RGC -> RGC... , April 14, 2017 at 05:51 AM
Prominent C20th Economist Explains How the Lie is for Our Own Good

Posted on 2 January 2014

Infamous footage of Paul Samuelson, posted by Mike Norman, explaining why we can't be trusted with the truth.

Just believe the scary bedtime story about the big bad Budget Deficit and stay asleep now. There's a good child.

http://heteconomist.com/prominent-c20th-economist-explains-how-the-lie-is-for-our-own-good/

BenIsNotYoda -> RGC... , April 14, 2017 at 06:59 AM
RGC,
the people here have been brainwashed and can not think for themselves. If it has not been approved by their favorite academic, it is a crank theory. they'd rather believe in fairy tales like NGDP level targeting - the fed will wish it into reality. Rather than pay attention to the MMT that you and I subscribe to.
BenIsNotYoda -> BenIsNotYoda... , April 14, 2017 at 07:04 AM
Moreover it is logical for them to stick to the "the Fed is omnipotent" as it bids up asset prices and maintains the status quo. It vests more power in the institutions that benefit the people you see here.

Blame the right, blame the deregulators, blame the tax cutters, blame the liberatarians, etc. that is the how they maintain the status quo. And Mosler is right on - Bernanke turned us into Japan trying to save us from that fate. And he is sliding down the rabbit hole - "I should have doubled down on my failed strategy"
why? because he was able to bid up the stock market? I bet you everyone of the Fed worshippers here benefit personally from the asset price binges that the stupid Fed has gotten us addicted to.

RGC -> BenIsNotYoda... , April 14, 2017 at 07:40 AM
There has been a major propaganda element in economics for a long time.

People have to dig deep to discover the truth and many don't have the time.

There is a lot of money behind the propaganda on the neoclassical/neoliberal side so it gets a lot more publicity.

As that side sinks the society deeper and deeper into malfunction, hopefully more people will take the time to understand.

JohnH -> RGC... , April 14, 2017 at 09:13 AM
Yep! "There has been a major propaganda element in economics for a long time."

Robert Rubin had an opinion piece at the Council on Foreign Relations, another propaganda rag: "Don't Politicize the Federal Reserve"
http://www.cfr.org/monetary-policy/dont-politicize-federal-reserve/p39037

Per Rubin and his cronies in the Wall Street banking cartel, the Fed is fine as it is...serving the interests of the Wall Street banking cartel. The cartel has a good think going...why disrupt it by taking into account the public good?

Has Rubin ever done anything in the interest of the public?

[Apr 13, 2017] I hate the word manipulation in this context. China isn't doing anything in the dark of the night that we are trying to catch them at.

Apr 13, 2017 | economistsview.typepad.com
anne , April 13, 2017 at 07:44 AM
http://cepr.net/blogs/beat-the-press/china-and-currency-values-fast-growing-countries-run-trade-deficits

April 13, 2017

China and Currency Values: Fast Growing Countries Run Trade Deficits

I don't generally comment on pieces that reference me, but Jordan Weissman has given me such a beautiful teachable moment that I can't resist. Weissman wrote * about Donald Trump's reversal on his campaign pledge to declare China a currency manipulator. Weissman assures us that Trump was completely wrong in his campaign rhetoric and that China does not in fact try to depress the value of its currency.

"It's pretty hard to argue with that. Far from devaluing its currency, China has actually spent more than $1 trillion of its vaunted foreign reserves over the past couple of years trying to prop up the value of the yuan as investors have funneled money overseas. There are some on the left, like economist Dean Baker, who will argue that Beijing is still effectively suppressing the redback's value by refusing to unwind its dollar reserves more quickly. But if China were really keeping its currency severely underpriced, you'd expect it to still have a big current account surplus, reminiscent of 10 years ago, which it doesn't anymore."

Okay, to start with, I hate the word "manipulation" in this context. China isn't doing anything in the dark of the night that we are trying to catch them at. The country pretty explicitly manages the value of its currency against the dollar, that is why it holds more than $3 trillion in reserves. So let's just use the word "manage," in reference to its currency. It is more neutral and more accurate.

It also allows us to get away from the idea that China is somehow a villain and that we here in the good old US of A are the victims. There are plenty of large U.S. corporations that hugely benefit from having an under-valued Chinese currency. For example Walmart has developed a low cost supply chain that depends largely on goods manufactured in China. It is not anxious for the price of the items it imports rise by 15-30 percent because of a rise in the value of the yuan against the dollar.

The same applies to big manufacturers like GE that have moved much of their production to China and other developing countries. These companies do not "lose" because China is running a large trade surplus with the United States, they were in fact big winners.

Okay, but getting back to the issue at hand, I'm going to throw the textbook at Weissman. It is not true that we should expect China "to still have big current account surplus" if it were deliberately keeping its currency below market levels.

China is a developing country with an annual growth rate of close to 7.0 percent. The U.S. is a rich country with growth averaging less than 2.0 percent in last five years. Europe is growing at just a 1.0 percent rate, and Japan even more slowly. Contrary to what Weissman tells us, we should expect that capital would flow from slow growing rich countries to fast growing developing countries. This is because capital will generally get a better return in an economy growing at a 7.0 percent rate than the 1-2 percent rate in the rich countries.

If capital flows from rich countries to poor countries, this means they are running current account surpluses. The capital flows are financing imports in developing countries. These imports allow developing countries to sustain the living standards of their populations even as they build up their infrastructure and capital stock. In other words, if China was not depressing the value of its currency we should it expect it to be running a large trade deficit.

This is actually the way the world worked way back in the 1990s, a period apparently beyond the memory of most economics reporters. The countries of East Asia enjoyed extremely rapid growth, ** while running large trade deficits. This all changed following the East Asian financial crisis and the disastrous bailout arranged by Secretary of Treasury Robert Rubin and friends. *** Developing countries became huge exporters of capital as they held down the value of their currencies in order to run large trade surpluses and build up massive amounts of reserves.

But Weissman is right that China is no longer buying up reserves, but the issue is its huge stock of reserves. As I explained in a blogpost **** a couple of days ago:

"Porter is right that China is no longer buying reserves, but it still holds over $3 trillion in reserves. This figure goes to well over $4 trillion if we include its sovereign wealth fund. Is there a planet where we don't think this affects the value of the dollar relative to the yuan?

"To help people's thought process, the Federal Reserve Board holds over $3 trillion in assets as a result of its quantitative easing program. I don't know an economist anywhere who doesn't think the Fed's holding of assets is still keeping interest rates down, as compared to a scenario in which it had a more typical $500 billion to $1 trillion in assets.

"Currencies work the same way. If China offloaded $3 trillion in reserves and sovereign wealth holdings, it would increase the supply of dollars in the world. And, as Karl Marx says, when the supply of something increases, its price falls. In other words, if China had a more normal amount of reserve holdings, the value of the dollar would fall, increasing the competitiveness of U.S. goods and services, thereby reducing the trade deficit."

So, there really are no mysteries here. China is holding down the value of its currency, which is making the U.S. trade deficit worse. It is often claimed that they want their currency to rise. That may well be true, which suggests an obvious opportunity for cooperation. If the U.S. and China announce a joint commitment to raise the value of the yuan over the next 2-3 years then we can be fairly certain of accomplishing this goal.

This should be a very simple win-win for both countries. Walmart and GE might be unhappy, but almost everyone else would be big winners, especially if we told them not to worry about Pfizer's drug patent and Microsoft's copyright on Windows.

* http://www.slate.com/blogs/moneybox/2017/04/12/trump_changes_his_mind_decides_china_isn_t_a_currency_manipulator_after.html

** http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/weorept.aspx?pr.x=45&pr.y=7&sy=1990&ey=2000&scsm=1&ssd=1&sort=country&ds=.&br=1&c=522%2C924%2C536%2C578%2C548%2C582&s=NGDP_RPCH%2CBCA_NGDPD&grp=0&a=

*** http://img.timeinc.net/time/magazine/archive/covers/1999/1101990215_400.jpg

**** http://cepr.net/blogs/beat-the-press/trump-china-and-trade

-- Dean Baker

[Apr 13, 2017] Another face of secular stagnation and outsourcing of manufacturing

Apr 13, 2017 | economistsview.typepad.com

libezkova said... April 13, 2017 at 08:51 AM Another face of secular stagnation and outsourcing of manufacturing:

The De-Electrification of the U.S. Economy - Bloomberg View
https://www.bloomberg.com/view/articles/2017-04-12/the-de-electrification-of-the-u-s-economy

== quote ==
In much of the world, of course, electricity demand is still growing. In China, per-capita electricity use has more than quadrupled since 1999. Still, most other developed countries have experienced a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And while the phenomenon has been most pronounced in countries such as the U.K. where the economy has been especially weak, it's also apparent in Australia, which hasn't experienced a recession since 1991.
== end of quote ==

From comments:

One interesting data point that should be within that "industrial" number: "U.S. aluminum production has gone from 2.5 million tons in 2005 to 1.6 million in 2015." http://www.seattletimes.com...

Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to make a difference in that last graph.

[Apr 13, 2017] Currency manipulation vs currency management

Apr 13, 2017 | economistsview.typepad.com
anne , April 12, 2017 at 08:23 AM
http://cepr.net/blogs/beat-the-press/trump-china-and-trade

April 11, 2017

Trump, China, and Trade

It is unfortunate that Donald Trump seems closer to the mark on China and trade than many economists and people who write on economic issues for major news outlets. Today, Eduardo Porter gets things partly right in his column * telling readers "Trump isn't wrong on China currency manipulation just late." The thrust of the piece is that China did in fact deliberately prop up the dollar against its currency, thereby causing the U.S. trade deficit to explode. However, he argues this is all history now and that China's currency is properly valued.

Let's start with the first part of the story. It's hardly a secret that China bought trillions of dollars of foreign exchange in the last decade. The predicted and actual effect of this action was to raise the value of the dollar against the yuan. The result is that the price of U.S. exports were inflated for people living in China and the price of imports from China were held down.

Porter then asks why the Bush administration didn't do anything when this trade deficit was exploding in the years 2002–2007. We get the answer from Eswar Prasad, a former I.M.F. official who headed their oversight of China:

"'There were other dimensions of China's economic policies that were seen as more important to U.S. economic and business interests,' Eswar Prasad, who headed the China desk at the International Monetary Fund and is now a professor at Cornell, told me. These included 'greater market access, better intellectual property rights protection, easier access to investment opportunities, etc.'"

Okay, step back and absorb this one. Mr. Prasad is saying that millions of manufacturing workers in the Midwest lost their jobs and saw their communities decimated because the Bush administration wanted to press China to enforce Pfizer's patents on drugs, Microsoft's copyrights on Windows, and to secure better access to China's financial markets for Goldman Sachs.

This is not a new story, in fact I say it all the time. But it's nice to have the story confirmed by the person who occupied the International Monetary Fund's China desk at the time.

Porter then jumps in and gets his story completely 100 percent wrong:

"At the end of the day, economists argued at the time, Chinese exchange rate policies didn't cost the United States much. After all, in 2007 the United States was operating at full employment. The trade deficit was because of Americans' dismal savings rate and supercharged consumption, not a cheap renminbi. After all, if Americans wanted to consume more than they created, they had to get it somewhere."

Sorry, this was the time when even very calm sensible people like Federal Reserve Board Chair Ben Bernanke were talking about a "savings glut." The U.S. and the world had too much savings, which lead to a serious problem of unemployment. Oh, we did eventually find a way to deal with excess savings.

Anyone remember the housing bubble? The demand generated by the bubble eventually pushed the labor market close to full employment. (The employment rate of prime age workers was still down by 2.0 percentage points in 2007 compared to 2000 - and the drop was for both men and women, so skip the problem with men story.)

Yeah, that bubble didn't end too well. So much for Porter's no big deal story.

But what about the present, are we all good now?

Porter is right that China is no longer buying reserves, but it still holds over $3 trillion in reserves. This figure goes to well over $4 trillion if we include its sovereign wealth fund. Is there a planet where we don't think this affects the value of the dollar relative to the yuan?

To help people's thought process, the Federal Reserve Board holds over $3 trillion in assets as a result of its quantitative easing program. I don't know an economist anywhere who doesn't think the Fed's holding of assets is still keeping interest rates down, as compared to a scenario in which it had a more typical $500 billion to $1 trillion in assets.

Currencies work the same way. If China offloaded $3 trillion in reserves and sovereign wealth holdings, it would increase the supply of dollars in the world. And, as Karl Marx says, when the supply of something increases, its price falls. In other words, if China had a more normal amount of reserve holdings, the value of the dollar would fall, increasing the competitiveness of U.S. goods and services, thereby reducing the trade deficit.

At the beginning of the piece, Porter discusses the question of China's currency "manipulation." (I would much prefer the more neutral and accurate term "currency management." There is nothing very secret here.) He tells readers:

"It would be hard, these days, to find an economist who feels China fits the bill."

Perhaps. Of course it would have been difficult to find an economist who recognized the $8 trillion housing bubble, the collapse of which wrecked the economy. As the saying goes, "economists are not very good at economics."

* https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-trade.html

-- Dean Baker

[Apr 12, 2017] S hould France leave the EU, would euros held by, say, someone in Italy then become worthless?

Apr 12, 2017 | economistsview.typepad.com
Anachronism -> anne... , April 12, 2017 at 04:58 AM
Dr Krugman ignored another wrinkle in France leaving the euro; the euro itself.

While GB joined the EU, it retained the british pound. So, Brexit won't affect it monetarily. France, on the other hand, did convert to the euro (in hindsight, another enormous mistake). Each euro has an identifier, similar to how we designate the origin by Fed Reserve, which designates it's country of origin.

So, should France leave the EU, would euros held by, say, someone in Italy then become worthless? This isn't someone most people concern themselves with. When was the last time someone on this blog check to see which dollars in your wallet came from the Denver Fed? But, it may well be that the EU would stop honoring French euros, should they leave.

What a mess.

anne -> Anachronism... , April 12, 2017 at 05:18 AM
Interesting conjecture, but a Euro printed in France belongs to the Euro Area rather than to France in the same way that a dollar printed in Denver belongs to the United States. There is by the way, to my understanding, no treaty provision describing how any country in the Euro Area might leave.
pgl -> Anachronism... , April 12, 2017 at 05:42 AM
"Start with the euro. The single currency was and is a flawed project, and countries that never joined – Sweden, the UK, Iceland – have benefited from the flexibility that comes from independent currencies. There is, however, a huge difference between choosing not to join in the first place and leaving once in."

What did he ignore again?

pgl -> Anachronism... , April 12, 2017 at 05:43 AM
"should France leave the EU, would euros held by, say, someone in Italy then become worthless?"

They could readily convert existing Euros into Francs. This is the reverse of what they did in 1999.

Peter K. -> pgl... , April 12, 2017 at 08:27 AM
PGL thinks France can easily convert Euros into Francs or Germany can convert its Euros into DMs?

That would blow up the monetary union.

What a nut bar.

pgl -> Peter K.... , April 12, 2017 at 09:26 AM
"That would blow up the monetary union."

Oh gee - the end of the Euro would be the end of the universe. My internet stalker writes another incredibly stupid comment.

Peter K. -> pgl... , April 12, 2017 at 09:53 AM
" My internet stalker writes another incredibly stupid comment."

Shut up, old man. Stick to the subject at hand. Oh right you WANT to change the subject with insults.

Peter K. -> Anachronism... , April 12, 2017 at 08:29 AM
"So, should France leave the EU..."

Even if Greece left it would cause turmoil in the financial markets. That's the known unknown people are focused on to start the next crisis.

[Apr 12, 2017] What is the conceptual difference between the monetary base and outside money ?

Apr 12, 2017 | economistsview.typepad.com
Lee A. Arnold April 12, 2017 at 03:02 AM

A question, for anyone: What is the conceptual difference between the "monetary base" and "outside money"? pgl -> Lee A. Arnold ... , April 12, 2017 at 05:40 AM
Outside money is money that is not a liability for anyone "inside" the economy. Think gold and silver.

The monetary base represents bank reserves and cash which are liabilities of the FED.

Lee A. Arnold -> pgl... , April 12, 2017 at 06:23 AM
Okay, but then the bank reserves which are held at the Fed by law could be defined as part of "outside money", because they aren't backed by anything in the private economy. Those reserves are established, or insisted upon, by government fiat, in essence. We know those reserves are not really backed by a precious metal or anything else but faith. So why are bank reserves held at the Fed not included in the definition of "outside money"?
RGC -> Lee A. Arnold ... , April 12, 2017 at 07:08 AM
From the standpoint of the private economy, reserves are 'outside money", because they circulate only within the Fed system. Currency is inside money because it circulates within the private economy, although it also circulates between government and private banks.

The monetary base is both currency and reserves.

So it takes a clear understanding of the purpose of the discussion and maybe even a Venn diagram.

Lee A. Arnold -> RGC... , April 12, 2017 at 09:13 AM
According to the definitions I can find, cash notes and coins (currency) are "outside money", even though they circulate within the private economy.
pgl -> RGC... , April 12, 2017 at 09:24 AM
You are using a different definition of "outside" here.
RGC -> pg