Explain the oil situation to me

It seems that the oil production world is in a huge price war right now.

OPEC said they wouldn’t cut their production, claiming oil would still be profitable at $10/barrel.

Some Shale producers could make money at $20 but probably not long term.

Russia, Brazil, Venezuala, I’m not sure on their position, but guarantee they are pumping like mad.

How does this make sense? Or rather where does it end? Will we just pump until someone runs out or oil goes to $0?

With a finite resource like oil, does a price war benefit anyone?

Many factors at plan, Saudi Arabia wants to stick to to Iran (or Iraq). But besides that the higher the oil prices climb the more incentive for people to get oil, and hence the dilution of market share and power that SA and OPEC has. Also after many have just started pumping and fracking, what better way to squash them then dropping the price to bankrupt them.

Also, higher oil prices promote green energy, low prices tend to discourage it. Tesla has several new electric models in development, and GM announced major enhancements to the Volt, and there’s less interest in such vehicles right now. Incredibly, large gas-guzzler purchases tend to go up and down very much in tandem with gas price fluctuations, as if people believe low gas prices today mean low gas prices forever. I’m not a conspiracy theorist but the net effect of it all is that the Saudis are setting us up so they can stick it to us big time later on.

There is no price war. Oil prices are dropping because supply is higher than demand.

The Saudis are continuing production at usual levels rather than cutting it, as they have in the past to steady markets. Why they haven’t done so now is disputed, with some saying they’re about to cut and others saying they are enjoying the problems their enemies are having.

That’s not the same as a price war and Saudi Arabia is not the same as OPEC. Venezuela is part of OPEC too. I doubt that it’s pumping like mad. Why would it when prices are dropping?

Because they are part of OPEC? Not saying or requesting cite, however as part of such a group there is pressure to perform.

That’s kind of backwards. OPEC mostly sets limits on production, not minimums. The ‘just-so’ story is that OPEC should be setting stricter limits in the face of lower prices to drive them back up.

Rather than pressure to perform, if anything, there’s pressure NOT to perform so the collective group can make higher profits.

And that’s still no sign of a price war. Rather than oil producers trying to drive up low demand (there’s not really particularly low demand), the problem, if low oil prices are a problem, is an oversupply.

The business talking heads that come on the radio blame the softening economy in Europe and China for abruptly whacking overall world demand for petroleum. The producers were producing to meet the needs of those booming economies and inertia means they keep producing even when there’s less demand.

I wonder if no one wants to be the first to cut back. There’s nothing to guarantee anyone else will follow, so the only one screwed would be the first to cut back production.

Of course, in theory a cartel could come to a consensus and cut production in unison, which might have the market impact needed without unduly screwing anyone. But the Saudis nixed that. I wonder what their game is. Dumping to drive out the newer higher-cost producers (like the Dakotas)? Recent business editorials seem to think so.

Venezuela supplies several billion dollars worth of oil to Cuba. (Don’t think the warming Cuba-US relations are ignorant of that.) Their economy is already hurting for other reasons; the oil price plunge could actually force them into default.

Geo-oil politics isn’t as simple as the OP implies. Saudi Arabia has more than enough wealth to keep at it (despite their public pronouncements to the contrary) for a while. Their goal is geo-political power in the Middle East, specifically at Iran (and lesser, Iraq). Also, too, taking down Iran economically might, just might, reduce Israel’s saber-rattling over Iran’s nuclear ambitions. Combine that with the West’s Russian sanctions (Ukraine) already hurting Putin, an oversupply of oil because demand is down (Exapno Mapcase), and probably haf a dozen other interlocking puzzle pieces, and we are where we are.

I fully expect some serious economic turmoil ahead (even for the US) because of this, including the military industrial complex using it as an excuse to alleviate their itchy trigger finger, too. With a complete Republican Congress, many want American boots on the ground someplace.

The Saudi’s say in the past when OPEC has agreed to production cuts it’s SA that ends up cutting and everybody else cheats and SA loses market share, so this time they’re saying screw it. It’s a shame most of the oil exporting countries waste their oil buying the support of their population with part of it and looting and pissing away the rest. Even though US is the biggest producer, more or less, oil is only about 10% of our economy, and because exploration, production and refining are done for corporate profit the economic damage is limited to corporations, with the smaller ones dying and being happily scavenged by the monster producers. Now it’s going to break Sean Hannity’s heart(?) if there is an employment downturn in the Bakken Shale, but for most of the US low oil is nothing but doubleplusgood.

Perhaps because they need the money, and when prices are low you must pump more oil to receive the same amount of money?

Why doesn’t the US govt buy up a bunch of oil, stick it in a greatly expanded strategic reserve and sell it later for a profit? And by a bunch, I mean a massive, multi-year supply.

It’s obvious that the world is willing to pay high prices for oil. And US govt bonds, backed by the full faith and credit of the US govt, can raise plenty of cash for a pittance in interest.

So, buy out years and years of oil. Buy the entire supply from the middle east, even. Governments can take the long view. And with a finite resource, the long view looks very profitable.

This has an additional benefit of stabilizing the oil markets. And there’s also value in being able to avoid being pulled into future Middle East wars.

[li]Congress has to agree to do it.[/li][li]The current Congress probably won’t want to fund it.[/li][li]The timeline for getting the current one operational (1944-1977) and filling it (1977-1994) is too long, especially since the current capacity is only 94 days of protection.[/li][/ul]
Why do we keep concentrating on hydrocarbon use and not also focus on across the board energy conservation as well?

My guess is that people need a consistently high and stable oil price for motivation. Otherwise, people are buying huge gas guzzlers when the price dips a little, apparently under the assumption that low prices will last forever.

It takes a long, sustained period of high prices to get people to adjust their habits. People respond to slow moving disasters, often surprisingly well and with ingenuity.

If a superpower could get everyone used to the idea of slowing down our oil usage, humanity benefits. So let’s forget the logistics for a moment and discuss the merits of the idea.

Suppose another government took the long view and created a massive strategic stockpile. Good for the planet and profitable too? I’m thinking China’s central party might be able to do what the US Congress cannot.

In order to due this they would have to know that the future price of oil is going to be higher than it is now. If they knew that then everyone would know and the price would be going up now.
No one knows what the future price of oil is. The current best guess is not much more than the price of oil currently. Having the government speculate on oil prices seems like a good way to lose a couple trillion dollars.

It’s fairly simple… growth in demand is forecast to soften in Europe and Asia, but of course it won’t stay that way forever. OPEC could stabilize prices by cutting production. But they’ve learned the hard way that when they do so, other producers ramp up production, exploration, and extraction. Also, raising and lowering production involves a bit of cost and time, it’s not just like turning on a tap.

So basically, from what I’m reading, is that SA believes the period of soft demand won’t last that long, and they can weather low prices better than their upstart global competitors.

According to Wikipedia:

(bolding mine)

I happen to agree with your reasoning, but we don’t need larger physical holdings to guard against supply shock. If we want to speculate on price movement then it’s cheaper to use the one of the various financial instruments available for that purpose (commodity futures, etc). That’s what I personally am doing, but it’s not the government’s job to speculate in the futures market.

This is kind of silly. Where would you put the oil? You can’t buy and store years and years worth of oil. Maybe you could buy a few hundred thousand barrels per day. Maybe you could store that. You would never be able to buy enough to materially store up for your long term future use.

Also, why would the U.S. want to stabilize the oil markets? You think the U.S. doesn’t love the fact that this is hurting the Russia, Iran, and Venezuela type countries? The U.S. is probably behind the scenes encouraging the Saudis to hold firm.

I also agree the gov’t ought not be speculating.


There is a big difference between you and I who are trying to hedge against a purely financial risk vs. a gov’t that is also trying to hedge against a geo-political risk. Arguably Japan started their part of WWII because they were unable to buy oil at any price due to what amounted to a blockade.

As a current example, all the money in the world won’t help the EU when Putin decides to let them freeze some winter for non-economic reasons. Conversely, an actual physical supply of, say, 2 years gas consumption kept on EU soil and controlled by EU governments could break Putin’s blockade easily.

And yes, gas (or oil) is fungible worldwide. But unless you already have the excess infrastructure to import it from a different source, it’s not instantly fungible in the event of a physical supply disruption. IOW, and continuing the example, the EU *could *import replacement gas from the Mideast or the US. But only *after *a couple of years spent building enough LNG terminals and tanker ships. Meanwhile the populace shivers in the dark & cold.
My bottom line: economics and finance are very powerful & reliable forces in a peaceful world. But organized violence trumps finance with a speed and decisive finality that a lot of civilized countries & people seem to have forgotten. It’s rarely economically efficient to hedge against organized violence. But it’s often necessary.

The EU consumes 460 billion cubic meters of natural gas every year - a cube 7.7 km.

Even liquefied - reducing the volume to 1/600 of the original - you would need a cube 915 m a side to store the fuel. The Grain LGN in the UK (the largest in Eurpose) has a capacity of 1 million cubic meters. To deal with the 767 million cubic meters of LGN assumed above you would need 767 such terminals.

It would be a massively expensive undertaking.

Does OPEC have the same clout as it once did back in the 70s? I mean if their percentage of world production has fallen a lot and I assume with new markets like Mexico, Canada and Russia, all non-OPEC, opening since then, they would have less clout. If your cartel oversees a smaller market share the less clout right? Or am I looking at it wrong?