So I'm by no means an energy trading specialist. Not even close. My interest in that field is peripheral and vague. I am also not a Middle Eastern politics specialist, also not even close. In fact, my interest there is also peripheral and vague, sort-of like you care about sperm whales. "Oh, there exist sperm whales ? And they go around on wheels chewing nonpareils ? How interesting." sort of thing.
Nevertheless, there is a theory that I wish to air, mostly because I can't evaluate on my own - is it something like the whales on wheels or is it more like the Earth spinning around the Sun rather than the reverse ? By all means, actual specialists in either field please, chip in, be it publicly or privately. It goes like so :
- Oil does not come out of the ground naturally, is the unfortunate fact of the matter. Extracting oil is an industrial process, and that industrial process has costs, like any other. The cost to extract one barrel of oil varies, from about 170 dollars in Venezuelai to about fifty-something in Saudi Arabia. Pretty much every producer worth the mention out there falls somewhere on this range, from fifty to a hundred and more.
The current price of oil is ~47 for WTI, ~50 for Brent. In any case oil is currently being sold for prices under production cost, by all producers. This rare situation, giving the "Peak Oil" agitation a few short years back the very chilling "Global Warming" treatment, is the result of a very amusing interplay of unforeseen consequences, illustrating just how much of governmental policy is essentially built on a "nobody could have foreseen using a plane as a rocket". (Hint : all of it.)
So : ever since the normalisation of relations after the Oil Shock ('73), the agreements between OPEC and NATOii included a fixed minimal allocation of oil to be sold "no matter what". Price was not specified, on the general assumption of all those involved that Peak Oil, and so generally speaking there's no need. The exact amount can be discerned by simply looking at outputs.
The current winter has been very mild, and unexpectedly so, which means energy reserves are not drawn as quickly as expected. The US industry (notwithstanding an 8th consecutive quarter of "growth" reported by Wall Street on the strength of sheer inflation) is weaker than it has ever been, and not likely to ever recover. These factors together worked to bring the actual NATO oil need under its allocation for the first time in the forty years since that allocation exists, and otherwise for the first time since the Industrial Revolution some centuries ago. It's really an incredible, history bending first, this. For the first time ever, what used to be the growing body of the West no longer can absorb all energy available and grow on it. Peak Oil indeed, just... a different kind. But anyway.
Normally the Saudis would have denounced or modified this agreement, but they do not for a number of reasons. One is that the dim, anemic but also only attempt by the US to reindustrialise is centered among the "alternative energy" flag, which is entirely predicated on oil being scarce and thus expensive. Things like Obama's signature "we'll take oil, make fertilizer, pay Monsanto, ferment the corn, make ethanol, change all the engines to less efficient types, because this indirect path creates more jobs than simply distilling the oil" entirely relies on oil not ever going under 100 a barrel, and that in inflation adjusted dollars, so it'd be about 140 by now. The scheme barely works even then, but it's beyond ridiculeiii with a barrel under 50 2015 dollarsiv.
The US side meanwhile doesn't say anything because hey, cheap oil!!1 (the anti-industrial politicos don't say anything because they figure, in their very dim witted approach to figuring, that this would hurt Russia, at which they're very shake-child-fists angry because it made a mockery of their precious NGO "activists"/nulities, whom they nevertheless whiteknight with all the dedication displayed by the average Internet-enabled chronic masturbator). Russia doesn't particularly mind, because on the mid and long term the destructuring of the US's only [half]serious attempt at reindustrialisation is doing more for its strategic goals than anything it could directly do, and on the short term it really makes no difference, in fact if anything it seriously strengthened Putin's political position (especially in things he wants that aren't easy to get, like get the country more industrially independent, but without using Stalin's methods to achieve such). China doesn't actually believe in interacting with the lower beingsv, so what would it say.
Cheap oil will therefore continue for at least a year, its most important effect being the unexpected, unprepared for and uncontrollable de facto ballooning of derivatives. The way this works is that if you have ten dollars' worth of actual oil, atop which fifteen dollars' worth of sensible derivatives are carried, the pile of two hundred dollars' worth of insane derivatives are anchored to reality at a ratio of 1:8 or 1:13, depending on how stringent you are with your "banking sector stress tests". Should the oil volume fall to a third, and its price by half, and the derivatives by 80% you now have the much more economically sound situation of a dollar and a half's worth of oil plus three dollars' worth of oil derivatives. Upon which more economically sound situation the same pile of two hundred dollars' worth of insane derivatives are anchored at a ratio of 45:1. Obviously reality doesn't work that simply, because there's also precious metals (heh) and real estate (heh-heh) and other things (like you know, Sony's Intellectual Property, a good anchoring for tons of speculative debentures etc).
In short : nothing could have been worse for the US in 2015 than very cheap oil, and it's getting it. Good luck and all that.
Comments welcome below.———
- That country is completely nuts, incidentally. It is perfectly possible for their costs to reflect more of the antieconomic nature of their social arrangements than have anything to do with the topic of oil extraction. Speaking of which, here's a still open exercise. [↩]
- Calling it the "US" would be a misnomer. There's layers in the cake the US presents to the world, one's the US proper, a wider one's the 5Eyes spying conglomerate, wider still is the NATO military conglomerate, an even wider one is the "Democracy" ideological conglomerate (notably, there's no difference between "democracy" as used by the US propaganda and the same "democracy" used by the Soviet propaganda - they're both propaganda items, chosen for the positive feelings likely to evoke in the naive target, otherwise unrelated to reality), the sort of folks making a lot of hay about the "public opinion" composed of their own agenda items and how outraged it is, and so on. In this case, it seems to me the proper layer's the third. [↩]
- Which will readily explain why all the "comedians" avoid ridiculing it. [↩]
- About 15 cents in 1973 dollars. [↩]
- You perhaps forgot, having the short memory of white worms, but the original reason the Chinese imperial government didn't want to sign trade agreements with the English two centuries ago was that such a deed would imply some sort of similarity between the white worms in question and the Celestial Throne, a concept thoroughly incomprehensible for the locals at the time. At this time. [↩]