The politics of Cheap Oil

It is an old tactic. When a mature industry is threatened by a wave of new players, the established businesses cut prices below cost. This means that they lose money, but so do the start up concerns, which have fewer reserves. Done correctly, the new companies will fail and the mature concerns can buy their assets at a discount. It is called "Predatory Pricing" and is illegal in many circumstances.

Many believe that Saudi Arabia is doing exactly this. Crude oil prices are falling rapidly, yet the Saudis are not cutting back to keep the price up. Some think that the massive boom in North American production is the target--oil sands in Canada and shale in USA.

Another theory is that Saudi Arabia and USA are conspiring against Iran and Russia. Both are heavily dependent on oil exports, which have been hammered by the price decline.

Still another theory is that it is all a miscalculation. The Saudis simply need the money in the short term and do not mind the ripples.

For now, the following are easily documented:
1) Many US and Canadian companies are failing. This is common in a traditionally boom/bust industry. Established concerns are soaking up the assets, but there is a limit.

2) Iran, Russia, Venezuela and other exporting countries are hurting, because their oil is not sufficiently profitable at this price level.

3) Gasoline consumers are benefiting at the pump. A business example is the airlines. The question is, for how long?

http://www.presstv.com/Program/389897.html
http://businessdayonline.com/2014/11/the-politics-of-a-plummeting-global-oil-price/

J

As a dude who spends, on average, 2 hours a day 5 days a week commuting to and from work, I'm not minding the lower prices at all, although I keep waiting for the other shoe to drop and everything to suddenly rocket back up to be higher than ever before.

My understanding was the the lower prices right now are primarily due to fracking, but that's hearsay that I can neither confirm nor deny, I'll leave it to someone with real knowledge of the subject to flesh that out.

Personally I'm just waiting for someone to make an all electric car that is both low cost enough that I can afford it and has the kind of range I require (at least 100 miles so I can commute worry-free, more would be better for the times I have to drive to LA for concerts and the like).

As someone who spends 15 minutes on a bus each way getting to work, and doesn't own a car, I want oil prices to go up to $200 a barrel, so that politicians are forced to focus on public transit a lot more.

I realize that this will cause a whole bunch of problems as well, but I'm sticking to my guns.

The Economist looked at his last week. The consensus is that the Saudis are engaging in a system where the large-scale projects that required a certain price are going to fail, and thus allow the Saudi gov't to maintain a monopoly of sorts.

The analysis also shows that it might not work as well as they thought, since much of the shale oil and fracking is done very easily in a piecemeal way. You don't need a $700 million drill rig, requiring a large consortium of conservative investors. You just need an intrepid group willing to put together a few million. So, as soon as OPEC lets the price rise again, the hordes of small players can resurface. The current crop will get wiped out, but the start-up costs are so small, that other players will just try the next time the opportunity is there. The large, expensive sites though, are going to be avoided out of fear.

Ideally, this is the time to buy improvements in efficiency, since they're they're going to be cheaper (in a real sense) and because people will have more literal money in their pocket after they satisfy their standard lifestyle needs.

From an environmental standpoint, it's frustrating. Technically, the lower price means the efficiency will be cheaper to purchase. But, people are less likely to purchase efficiencies, since their perceived return is now lower too. And, of course, fuel consumption will increase with the lower price, but will be used to create a larger addiction instead of the increased wealth being used to help us wean off the oil more safely. The lifestyle standards will grow with their increased access to cheap fuel, and then they'll have a harder time reigning in consumption when we need to slow the spigots.

Wasn't Saudi Arabia like, America's #1 ally in the Middle East? The question is not if there are political reasons for this, but how big its role is. Is America just passively accepting this or was it the primary cause?

onejayhawk said:

It is an old tactic. When a mature industry is threatened by a wave of new players, the established businesses cut prices below cost. This means that they lose money, but so do the start up concerns, which have fewer reserves. Done correctly, the new companies will fail and the mature concerns can buy their assets at a discount. It is called "Predatory Pricing" and is illegal in many circumstances.

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So if I support regulations against "Predatory Pricing," then I am opposed to free markets. But if I support letting it happen, then the result will be a controlled market, not a free market.

LamaGT said:

Wasn't Saudi Arabia like, America's #1 ally in the Middle East? The question is not if there are political reasons for this, but how big its role is. Is America just passively accepting this or was it the primary cause?

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The lack of leverage of the West on the Saudis is well established. There are things the US can do and obtain, but they have little influence on oil production. Their influence might extend to nudging the timing of a change, but not to the change itself.

J

onejayhawk said:

1) Many US and Canadian companies are failing.

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What? Can you name a few Canadian ones?

warpus said:

As someone who spends 15 minutes on a bus each way getting to work, and doesn't own a car, I want oil prices to go up to $200 a barrel, so that politicians are forced to focus on public transit a lot more.

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As someone who spends 15 minutes in a car each way going to work, and doesn't like traffic, I want oil prices to go up to $200 a barrel to price out poor people from driving and make my commute more enjoyable.

Zelig said:

What? Can you name a few Canadian ones?

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Is Calgary going to be a ghost town the next time I visit?

Harv said:

Is Calgary going to be a ghost town the next time I visit?

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I hope so, I'd like to buy a ton of real estate, which I'll do if prices go like Detroit.

LamaGT said:

Wasn't Saudi Arabia like, America's #1 ally in the Middle East? The question is not if there are political reasons for this, but how big its role is. Is America just passively accepting this or was it the primary cause?

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Saudi Arabia has never been anything other than an enemy of the US. However, they are enemies in a symbiotic relationship. They need us to guarantee their safety. We need them to guarantee the continuation of the modern economic model of the world. Both are screwed without the other. Neither could coexist were it not for the mutual need.

Cutlass said:

Saudi Arabia has never been anything other than an enemy of the US. However, they are enemies in a symbiotic relationship. They need us to guarantee their safety. We need them to guarantee the continuation of the modern economic model of the world. Both are screwed without the other. Neither could coexist were it not for the mutual need.

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Hardly. Saudi Arabia only supplies the US with approximately 8% of the US's oil needs and only accounts for approximately 13% of total oil production in the world. Hell, they aren't even the largest oil producer in the world, Russia is. Saudi Arabia is number 2 in oil production with the US being a very close third.

In short, Saudi Arabia's role in the global economy is vastly overstated and the world could not only live without their oil, but do so quite easily.

Wolfbeckett said:

As a dude who spends, on average, 2 hours a day 5 days a week commuting to and from work, ...

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warpus said:

As someone who spends 15 minutes on a bus each way getting to work, and doesn't own a car, ...

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As someone who has about a 5 minute commute to work & owns a sports car that gets terrible city gas mileage... as soon as someone develops an electric or even hybrid car that a) doesn't look like it was built out of Legos, 2) doesn't cost $200,000, & III) won't randomly blow up & kill me, I'll be all over it.

It's kind of a shame Tesla is "suffering" from the lower gas prices, 'cause they looked like they were on track to fit my selfish requirements.

Cutlass said:

Saudi Arabia has never been anything other than an enemy of the US. However, they are enemies in a symbiotic relationship. They need us to guarantee their safety. We need them to guarantee the continuation of the modern economic model of the world. Both are screwed without the other. Neither could coexist were it not for the mutual need.

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I would say nothing more than an ally of convenience. The Kingdom owes USA some favors, not allegience. That may be a quibble, but enemy is a bit strong.

J

I thought I was really smart for figuring out, by myself, that Saudi Arabia was doing this to screw with Iran and Russia. The new shale operations in the US and Canada didn't even occur to me. It looks like it has the potential to be win-win for Saudi Arabia, if it works as they plan. It may very well not, given the information provided by ElMach.

RobAnybody said:

As someone who has about a 5 minute commute to work & owns a sports car that gets terrible city gas mileage... as soon as someone develops an electric or even hybrid car that a) doesn't look like it was built out of Legos, 2) doesn't cost $200,000, & III) won't randomly blow up & kill me, I'll be all over it.

It's kind of a shame Tesla is "suffering" from the lower gas prices, 'cause they looked like they were on track to fit my selfish requirements.

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I'm not sure Tesla is really suffering from this. Their current models are status symbols, they're too expensive to be serious conservation efforts, and temporarily low oil prices don't change the status they bestow amongst the hip young eco-friendly people that want to buy them.

And since Tesla is now letting other companies use their patents free of charge, I still maintain hopes that someone is going to use that tech to come out with a reasonably priced consumer model.

Commodore said:

Hardly. Saudi Arabia only supplies the US with approximately 8% of the US's oil needs and only accounts for approximately 13% of total oil production in the world. Hell, they aren't even the largest oil producer in the world, Russia is. Saudi Arabia is number 2 in oil production with the US being a very close third.

In short, Saudi Arabia's role in the global economy is vastly overstated and the world could not only live without their oil, but do so quite easily.

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The modern system that America is a part of is more than America. where does the rest of Saudi oil go? Largely to the rest of the US centered economic system. Western Europe, Japan, Korea. You know, all our allies and trading partners.

Cutlass said:

The modern system that America is a part of is more than America. where does the rest of Saudi oil go? Largely to the rest of the US centered economic system. Western Europe, Japan, Korea. You know, all our allies and trading partners.

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I addressed that in my post. Saudi Arabia only produces 13% of the world's total supply of oil. If Saudi Arabia were to up and disappear tomorrow, the global economy would only suffer a minor hiccup and then get right back to business as usual.

Cutlass said:

The modern system that America is a part of is more than America. where does the rest of Saudi oil go? Largely to the rest of the US centered economic system. Western Europe, Japan, Korea. You know, all our allies and trading partners.

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Doesn't that mean that America has gigantic leverage over Saudi Arabia? Just get your vassals partners to boycott its oil and this will "crisis" will stop very quickly.

Also, if this move is really as ineffective as El Mac says, then isn't that yet another clue that this is purely political? I'm sure that the Saudi aren't dummies when it comes to oil related stuff.

It's not so much 'ineffective'. It will still wipe out large projects and cause wide-spread jitters. The Economist's point, though, was that this new beastie, shale oil, is tougher than it looks. It will always be more expensive that OPEC oil, but it's so bite-sized that you cannot intimidate away investors based on traumatizing older ones. As well, they rapid-response, too, as these things go. Both groups, though, will benefit from demand inflation much more since the larger projects have a harder time.

They figured it's going to be a net benefit overall, economically, since lower fuel prices are good for both growth and demand. It benefits both sides of the supply-side, demand-side economic paradigms of economic growth.

Like I said, I think the biggest risk is environmental. Not only will consumption rise, but very little of the resulting economic growth will be used to make it easier to wean the consumption more easily.

It's like the guy who gets a pay raise and then leases a nicer car. Just like that, he's dependent on his raise instead of being more liberated by it.