Wednesday, December 10, 2014

Pump it up

You've certainly noticed that gasoline prices have dropped significantly in the last few months. I'm seeing about $2.45-$2.50/gallon in my part of town, and even in California the price is mostly below $3 a gallon. It's definitely a benefit to all of us in the short term. Still, issues may arise.

Oil is a commodity, but the cost involved in bringing a barrel of oil to market varies significantly. Some of the worst actors on the world stage are oil producers -- Iran, Russia, Venezuela. These countries are getting crushed:
The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned. 
Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe. 
Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said. 
The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.
The BofA analysts may be wrong in the particulars, but I suspect the the general trend is true. I can't prove it, but I suspect the reason the Saudis are willing to make less per barrel is that the impact of lower prices on them is far less than it is on Iran. If Iran starts to become impoverished, things could get dangerous.

Enjoy it all while it lasts.


Bike Bubba said...

I have to wonder if the Saudis are pumping to throw the Bakken and other fracking operations off balance. Venezuela and Iran are likely to ruin their petroleum industries without help, but Nordakota seems to be smarter.

Except for, apparently, massive use of debt to finance drilling. Sigh. Did we learn nothing from 2008? And 1929?

Gino said...

this lower oil price puts the screws to Putin's resurgent Russian empire, as well as providing less funding for the terrorists who receive tribute from the sheikdoms seeking protection.

Gino said...

i remember the anti-oil left was telling us to carpool and save gas to prevent further funding for Bin Laden.
the slogan:
'when you drive alone, you ride with Bin Laden.'

maybe we need a new slogan:
'when you drill a shaft, you're shafting the IS'.