Yves here. We’ve been of the view that the US fracking industry is one of the major targets of the Saudi “keep pumping” oil strategy. And since US shale gas players are still pumping in bankruptcy, it will take more pain to lead to a sustained reduction in activity. One key objective not mentioned here is presumably to undermine the case for building LNG transport facilities.
By Rakesh Upadhyay, a writer for US-based Divergente LLC consulting firm. Originally published at OilPrice
Saudi Arabia single-handedly scuttled the Doha meeting, knowing all along that Iran would not participate, with a valid reason. The Russians and others agreed to proceed without Iran, planning to include them at a later date. So if everything was known beforehand, why did the Saudi’s pour cold water on the aspirations of the remaining members, risking its alienation from Russia and the OPEC community?
Was it simply Saudi enmity toward Iran? Not exactly. Upon closer scrutiny, we can find the Saudi masterstroke behind Doha.
It is well known that Saudi Arabia is heavily dependent on oil revenues, and that those revenues are on the brink of collapse. They have sought financial aid from various international agencies to support their dwindling economy. But the trick here is to determine exactly how desperate the Saudis are. Certainly not as desperate as other countries.
Angola has recently sought support from the International Monetary Fund (IMF). Venezuela’s struggles started well before crude prices dropped to 12-year lows and is fighting to avoid a disaster. Azerbaijan has also approached the IMF and the World Bank for help.
Nigeria is also seeking the World Bank’s support. Without external support, Iraq will find it difficult to continue its war against the Islamic State (ISIS). Lower oil prices continue to make matters worse, and Iraqi Kurdistan has taken advantage of the situation and works towards independence and beefing up its unilateral export plans. Ecuador is the worst hit, and now the devastating earthquake has crippled the nation. It will need help from the IMF, the World Bank and a few other lenders to reconstruct.
After a 3.5 percent contraction in 2015, Russia’s gross domestic product will take a further 1.5 percent hit in 2016, as projected by the Central Bank. Kazakhstan is faring no better. Its growth shrunk to 1.2 percent in 2015 from an impressive 6 percent in 2013 and is expected to slow down further to 0.1 percent in 2016.
Most of the participating nations are financially ruined. They have to undertake drastic measures to reduce their dependence on oil. Disaster is imminent.
The Saudis are definitely not immune, even if on the surface disaster isn’t obvious. Saudi Arabia is burning through its reserves at a record pace, but at the same time, it can sustain low prices for the next three to four years. Not only that, it can increase its production by another 2 million barrels per day, according to the International Energy Agency (IEA), if more funds are required.
But why the drastic action on the eve of the meeting disregarding the plight of the participating member nations?
Though the real reason for the about face is known only in the secretive halls of the royal palace, consider this:
Saudi Arabia has held the mantle as the world leader in oil for decades, and has largely enjoyed veto power on all things concerning oil. However, since 2014, it has waged a losing battle against the U.S. shale oil drillers, who are phenomenally more resilient than anyone expected.
The first signs of the shale producer vulnerability are now, however, becoming visible, with oil production in the U.S. dropping below 9 million barrels a day—the lowest in 18 months. If oil prices continue to remain below $40 per barrel, a few more shale oil producers will fall by the wayside.
But if crude prices rise above $50 per barrel, the shale producers have made their intentions clear, that they will be back in business.
If Saudi Arabia had accepted the deal, oil prices would have jumped to $50/b, giving the shale oil industry a new lease on life. Shale producers would have started pumping at a frantic pace, increasing the glut and pushing oil prices back down.
This whole exercise would permanently dent Saudi Arabia’s reputation as the leading oil player. The baton would have passed to the shale oil drillers—an event that the Saudis simply cannot allow.
With Iran’s return post-sanctions, Saudi Arabia’s leadership in OPEC is under threat. By scuttling the meeting, Saudi Arabia has asserted its supremacy and reminded the OPEC nations just how much power the Saudis still wield.
The Saudis have ascertained their importance in the new cartel as well. They have not let Russia assume sole leadership, they have ensured that they remain at the centre of any decision making in the new cartel.
By voicing their objection to the meeting, Saudi Arabia has attempted to win back the leadership baton from American shale producers. It has shown the OPEC members that it still is the leader, thereby blocking Iran from challenging it, and finally, it has maintained its importance in the new bigger cartel, demanding an equal say in the scheme of things alongside Russia.
The Doha washout was the Saudi masterstroke to regain its importance. However, with many OPEC nations on the edge of collapse, the next OPEC meeting will confirm if the Saudi move was indeed a masterstroke, or if it was just a short-lived power grab.
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The 100 Years Oil War started when ships began burning oil instead of coal. We are in the death throes of this war. How it resolves would appear to be more dramatic than any fiction or all of the past wars demands on our abilities to resolve conflicts and adapt.
The Saudi Prince F. went so far as to threaten to dump 750 billion in US debt on the market over secret papers. The intent was to trash the US & world economy to prevent any legal actions to be taken against Saudi citizens complicit in the 9/11 attacks.
This is significant for showing more evidence that the Petrodollar is dead. I called it dead in Yemen.
It also indicates the danger of all with power just deciding to bring everyone down all together instead of all finding whatever realistic win win resolutions possible.
So what win win could there possibly be?
The writing was on the wall decades ago and the opportunities to make a smoother transition, create a transformative set of systems and infrastructure was missed.
Now it is so extremely difficult to see any perfect way out for the nations completely dependent on fossil fuels the risk of apocalyptic riot presents itself.
The writer Rakesh says the cry is aimed at banks for loans. Against what? What but sand & oil are the collateral?
We have been told that the temperatures in the regions will rise so far that human beings will not be able to live there unless they have space suits to wear if ever they go outside to do anything.
Machiavelli wrote that “A struggle with the environment is not enough to make a nation.”
For some reason inherent in human nature war with each other over natural resources, is more likely than transformational building to overcome the threat that everything status quo about the fossil fuel world caused and will cause if another plan is set to going.
What was produced in the way of airplanes, and tanks and all manner of war materiel` by the US fighting a two front war supplying allies and Russia, as Russia also produced for itself amazing numbers of tanks and airplanes would show that it is possible for us to build in 4 years whatever it would really take to end the dependence on fossil fuels and forestall complete collapse, complete catastrophe.
In the state I live in I discovered that the engineers who are vital to any hope we still have of overcoming this situation, live in fear, and will not speak until spoken to.
A politician in need of a better way has to ask for them to speak, or they stay mute.
If this is the case now, and no appropriate response is made, as it appears will be the case, apocalyptic riot is just around the next bend.
Russell – That 4 years of production was only possible because the resources to achieve it were easily procured in huge abundance for very very cheap and the detrimental effects to the environment were completely ignored.
Now the resources needed to “end the dependence on fossil fuels ” are extremely difficult to get, highly toxic/polluting to the whole biosphere, and therefore expensive as hell. Everyone who proposes the great transition to “renewables” (the reason for the quotation marks is because there is no such thing) completely dismisses this reality.
A shale oil well output will drop by 72% the first year of operation and an additional 20% the second year. Bankrupt companies can no longer use the bond market to finance new wells, so they must stop drilling. Although the spot price of oil is low, many producers have been selling to fulfill future contracts at higher prices. The contracts are rolling over at much lower prices this year and that will drive more companies into bankruptcy.
If you look at charts of US oil production you can see the dramatic increase starting in 2012 and peaking in 2015. The price per barrel made a corresponding drop during the same period. You can also see US oil production dropping rapidly caused by the decrease in output of shale wells, now that new wells are no longer coming online.
All of this forms a perfect storm for oil prices to rise more rapidly than people are predicting.
In a vacuum that’s true, but Russia is in the same boat as US shale companies (they desperately need the cash flow) and Iran is about to start pumping furiously to generate whatever revenue they can. Prices probably drift higher over time but there is likely to be an ongoing glut of supply for years to come. Coupled with demand softer than it’s been in some time – China serves as the swing “demander” much as Saudia Arabia serves as the swing producer – that it’s hard to picture a scenario where oil prices take off.
The tar sands/shale oil “gold rush” will turn out to be one of the great calamities of modern times. The allure of riches and “energy independence” made the US greedier and stupider than usual at a moment where it needed to lead the way off of fossil fuels. The window has likely closed and the contenders for November are either too stupid or too corrupt to make a change. What we will need is a massive global recession that cuts into fossil fuel use combined with wartime-like measures to push energy efficiency, renewables, car-pooling, and mass transit. I’m a civil libertarian and don’t like the draconian and coercive measures that lay ahead, but we’ve left ourselves no choice. Riots when the distribution system fails will be a lot worse and lead to even sterner measures. We will have to pick out poison soon.
What I find somewhat mystifying in all this is why Washington is not trying to protect the tight oil business as a matter of strategic importance. SA is slowly going rogue in the Middle East and is dragging the US with it in Yemen and Syria, meanwhile it is destroying any hope of US oil independence (always a chimera, but I was under the impression it was part of formal US policy since the Bush years). Is it simply that US arms manufacturers simply have a bigger say in Washington that the oil industry? Or perhaps Obama thinks cheap oil is so important that its worth destroying the US oil industry (and a chunk of the banking industry) for? I really don’t see the logic in inaction over SA’s policy of dumping oil on the market.
I share your puzzlement. One factor behind Washington’s attitude may be the fact that for many years the leading exponent of hydraulic fracturing was the late Aubrey McClendon of Chesapeake Energy. McClendon bankrolled the PAC that Swift-boated John Kerry during Bush II’s re-election. A dirty trick, and it worked. That’s the kind of thing our politicians understand, and they don’t forget.
Talk about priorities? The producers of shale oil and gas reduced US dependence on Arab dictators, produced a ton of well-paying jobs, and never out-sourced anybody. For that, they get Bernie Sanders and his followers braying about how they should all be shut down – right now. James Levy is right about how ugly things will get if these folks get to screw up the energy system.
The Carlyle Group came to town around 2012 and has since organized a formidable local coalition of business, government and labor leaders to back the big time vision of becoming a Global energy hub that will be the platform for all kinds of manufacturing based on dirt cheap energy and feedstock from the Marcellus Shale as well as Bakken crude by rail. Major conferences are held extolling the multi-modal transportation capacity of the Port of Philadelphia, which includes the NJ side of the Delaware river. And of course, the Carlyle Group with the $Billions it takes realize this vision and a global reach with matching credibility. Even the politicians who publicly condemn and pass local and state laws regulating fracking, natgas pipeline expansion plans and all other manner of shoving big corporate projects down the throat of locals from the middle of Pennsylvania clear through the neighborhoods of Philly in order to reach the port facilities, respect what is being sold as an energy source in the form of natgas 2nd only to Saudi Arabia.
The following is an excerpt from the Philadelphia Magazine piece on the man behind the Energy Hub plans and his successful efforts so far in building a coalition to get behind the Carlyle Groups massive investment proposals.
And natgas is already having a large scale impact on revitalizing heavy industry in the city. Kinder Morgan has order 4 natgas tanker ships to be delivered this year and the next. The former US Navy Yard drydocks, large enough for air craft carriers, have been adapted by Aker ship building company to produce these tankers as well as oil tankers for Exxon. Additionally, some pipelines as well as LNG transfer sites are ready for business to export with larger capacity being planned. HOWEVER, The fall in energy commodity prices has been wreaking havoc with these plans moving as fast as the promoters would like. See the link from the Phila Inquirer provided under Oil Crash in today’s NC Links. Saudi Arabia’s desired consequences seem to be playing out in the PA Marcellus shale industry, once a juggernaut, now operating at a fraction and with a new Democrat Gov stopping new fracking on state lands and who proposes a new energy tax on the wells, currently there is no extraction tax at all, unlike Texas, Alaska and the rest of the states, excepting CA maybe?
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“In recent years, the American energy sector has hit a series of massive gushers: crude in the Bakken formation beneath the grasslands of North Dakota, gas in the Piney Woods of Texas and Louisiana, and, above all, the Marcellus Shale here in Pennsylvania.
So far, the Marcellus find hasn’t reverberated much in Philadelphia, apart from creating a small number of jobs and a lot of anti-fracking bumper stickers. But it’s hard to overstate the national and even global significance of the gas field in the Marcellus Shale, which is one of the two or three largest, not just in the U.S., but in the world.
Fracking, the controversial and relatively new drilling technique that blasts shale rocks with fluids at tremendous pressures in order to fracture the rocks and release the gas and oil they contain, has utterly upended the old energy world order. According to the International Energy Agency, the United States became the globe’s top producer of natural gas last year. In 2015, the U.S. is projected to become the second largest producer of oil, trailing only Saudi Arabia.”
Read more at http://www.phillymag.com/articles/philadelphia-pipeline-americas-next-energy-hub/#gOGqQ56oh2RjgZvJ.99
When did Buffet buy his train set again – ?????
I think Buffet has been invested in rail for a while,2009, it being one of those businesses he can easily understand without a 19 year old from MIT translating into English just what packet switching is all about. But his rail investment was steadily losing its big business, hauling coal all over America to coal fired utility plants for electricity due also to uncertainty about coal pollution regs that could crimp the industry. It was crippled not crimped, as recent events have shown.
Natgas was displacing coal as the cheaper and cleaner fuel. What wasn’t as apparent, was that crude oil was displacing coal hauling, making up for its loss. This more than anything doomed XL as a project. While all eyes were on the idealistic environmentalism against the pipeline, sending the cheaper Bakken and Canadian crude to domestic oil refineries by rail, while it was still illegal to export American crude, Buffet was the preferred ally to be rewarded, not the Texas oil interests held by the Koch bros. and their pipelines to the Gulf Coast.
90% of oil energy industry political campaign donations go directly to the republican party. While the remaining 10% is not chopped meat, it is not enough to sway a lot of policy. This analysis is perfectly obvious and you can read those that concur with me in yesterdays unbelievably long piece in the links on NC, ACTIVISM IS DEAD. Buried in that detailed analysis is the Warren Buffet railroad investment connection.
While there are environmental policy wins that stand on their own merit as real wins for the public good, the confluence of events, factional business interests all play a role, which do not the diminish the beneficial outcome. Warren Buffet gets richer, but tight oil moves by rail, causing its own problems that compared to the problems of burning coal may be better, but not if you are directly affected the crude by rail accidents. Eventually, even this crude will be in less demand and solar panels and wind turbines will be hauled all over America. Buffet doesn’t care what he hauls as long the as the train keeps on rolling with someone paying the freight. We need to push for that cargo to take the place of the bomb trains.
ok, i wrote 4 paragraphs on Doha and included 2 dozen linked paragraphs as it happened in my post this week, and i see the Saudi position targeted largely at Iran:
http://focusonfracking.blogspot.com/2016/04/what-we-learned-from-doha-new-push-for.html
“the tell is from reports from Venezuela oil minister Del Pino, who said that Saudi representatives at Sunday’s meeting didn’t have authority to negotiate a freeze”
thus:
young Mohammad bin Salman has emerged as the power behind the Saudi crown…Mohammend, who often speaks of Saudi Arabia in the first person singular, has been gradually assuming all the important positions in the Kingdom, including Minister of Defense and Chief of the Royal Court…the outcome of this meeting at Doha confirms that he is in charge of Saudi energy policy as well, and that Ali al Naimi, who for 21 years has not only been the Saudi oil minister but also the voice of OPEC, is now answering to the young Crown Prince…
Zerohedge has articles saying the US intervened with Saudi Arabia because it wants to keep oil low to encourage regime change or generally to weaken Russia by denying Russia oil revenue. ZH even claims the US threatened to freeze Saudi assets it allowed an oil freeze
ZH can be hype so I read it with but with my skeptical glasses on, but it’s a thought.
On the other hand, the Fed does seem usually lax in letting so much credit being extended to frackers. Why is that?
The US and the Saudis are not on good terms now, so the idea that the Saudis will jump when the US gives orders is a huge stretch. Look at what the Saudis perceive as the latest threat, the law to allow 9/11 litigation v. the Saudis. They are ripshit over that. No way would they do any favors when that is in play.
Pepe Escobar has an alternate theory about the meeting: that the US put pressure on the Saudis to keep prices low in order to hurt Russia.
more
http://www.informationclearinghouse.info/article44510.htm
Interesting. Russia and China have both pursued oil and lng field development proposals with Iran. Keeping prices low could delay or eliminate those projects. The US and SA both have political reasons for wanting to undermine Iran’s economy. If low prices cause smaller, weaker US companies to fail that will make their properties cheaper to buy, benefiting the stronger US players. Politicians have been known to put their thumbs on the scales to benefit favored companies.
This is a “what if” range of speculation.
The funny thing is that the Saudis needs to do little or nothing at this point. The changed OCC regulations (mid-March) are going to curtail secured leverage rates across the upstream, midstream and oil & gas service industries. Expect at least 1 less turn of debt per AEBITDA just to be a conforming loan. For a new loan subtract another 1/2 turn. This increases the equity requirement by a minimum of 20%, increasing the WACC demonstrably. With no change in oil supply or price at all, there will be less drilling as the equity returns for another group of fields just fell below acceptable.
Print to print. MAD. 45, what has changed?
The morons have gone to war with their own DNA, are losing badly, and are printing money for more of the same. Look at what is happening at the centromeres, the stack heap creating the frequencies.
Marriages based upon money and property, signals from a central bank, fail to reproduce, and you can rely on the weight of empire, blind peer pressure, to be brought to bear against yours accordingly, to subsidize the FILO bankruptcy queue. Get on the other side of that sheave and teach your children to build elevators, because the counterweight blows the motor every time.
NATO is feckless, and if Israel attacks Iran it will be game over for NATO not Iran. Russia will take care of Russia. Leave the critters to play with their gold; anything can be money. If you need to generate power, any plant will tell you how to do it.
In the 70s oil embargo, what do you suppose the % of oil came from the Saudis?
All the way to the bank.
In 1971 (price of oil: $1.75/bbl) the U.S. reached peak oil. Then, it imported roughly 30% of its consumption. The OPEC nations used the “oil weapon” in 1973 (Yom Kippur war), and the curtailed production was never more than 3% of the world’s supply (source: Daniel Yergin’s “The Prize”…worth reading).
One other thing Yergin calls out in his history of petroleum that’s worth noting: oil’s “price” has seldom been set by free markets. From Rockefeller’s monopoly, to the Texas Railroad Commission (or Oklahoma’s Corporation Commission), to FDR’s wartime regulations, to OPEC, some regulation, monopoly or oligopoly (oiligopoly!) has *always* set the price.
Back to the “oil weapon” in the ’70s: The price of oil quadrupled virtually overnight, peaking at $42/bbl (About $90 current dollars) in 1982. Between the decline in demand coming from the Fed-induced recession (prime rate reaches 21%, mortgages 16-18%) and the increase in supply because Alaska’s North Slope coming online, the price declined to the $10/bbl range during Reagan’s administration. He was one lucky guy–these events allowed him to credibly claim Supply Side economics (i.e. voodoo) produced “Morning in America” … an average business cycle recovery characterized by lower-than-average capital investment. (Krugman’s “Peddling Prosperity” outlines this)
:-)
Another twist from a Johns Hopkins prof, Steve Hanke:
Gist: the princes are afraid their time is running short, and they want to sell as much oil as they can!
Actually, the two could be consistent with each other : The best way for Saudi princes to buy oil assets on the cheap in the US is to have a longer than expected depression in the oil sector. Once shale goes into liquidation mode, buying deeply discounted junk bond with the reserve funds is a good hedge, both against economic risk (if you can’t beat them, buy them…) and political risk ( with a nasty enough political transition process, oil prices go to the roof and Princes make a killing on their US shale assets ; it is money laundering on a grand scale…)
Trade in May…
All isms are built on scale power, intolerance and disrespect, with a facade of deterrence. My wife forgave that Nazis, including her own family, immediately, and is still trying to help them, while I watch them strangle themselves. Choices.
The marriage of Islam and Eastern Christianity will fail, because power isn’t a deterrent. The choice is not between a skyscraper and a desert, fiat and gold, or socialism and capitalism
The two biggest problems with current genetic research is that PVT affects outcomes and DNA is not a closed system for everyone. The single biggest health problem in the human world is the ratio of birth to placenta weight, which is a derivative of seeing nature as the enemy. Studying disequilibrium as a fiat make work project tells you nothing about equilibrium, and there will always be a smaller particle.
Because ISIS is a construct to keep printing money does not make Constantine an angel. You will not find the future studying someone else’s interpretation of someone else’s past, but that never stops a herd from trying to control a narrative.
Vaccination is genetic modification. The critters are arguing over share of short term profit, not against modification. Of course they demand common vaccination at birth and enrollment in early childhood education. How else are they going to get compliance?
Keep your distance and let them vaccinate during a slow development period, if you want your children to attend peer pressure school for some reason, of which there are many.
Does it get any dumber than arguing over symptoms in an oil economy, with critters that cannot sustain reproduction themselves?
Islam has a point, but like all others takes a piece and builds a shrine of extortion around itself, as the expert. Tolerance.