Monday, September 14, 2015

No Worms for the Oily Bird

It took millions and millions of years for the earth to crush and marinate ancient flora and fauna to create the organic treasures of raw fossil fuels. Today, those massive caches are found in profoundly differing climates and places, from icy tundra and under polar ice caps to the driest deserts in the world. Even here in the United States, where we once believed that we had run out of at least our indigenous petroleum reserves, pernicious hydraulic fracking has moved us back to near the top of the petroleum producing universe. We still do not allow export of petroleum crude, but the world seems rather flush with that slippery liquid anyway.
Indeed, being in the oil business these days – where the price-per-barrel is literally less than half of last year’s rate (today between $40 and $50) – is not fun. 100,000 American jobs have been lost in that industry, and some very rich people are a lot less “very rich.” Okay, let me see a show of hands out there. How many of you want to see oil prices back over $100/barrel? I see a few hands. Oklahoma. South Dakota. Texas. And scattered hands from other states with obvious oil reserves.
How about those who want oil prices to stay low? Whew! Wow! That’s a lot of people! Sorry, oil producers, most of us like prices the way they are. It’s taking a little pressure off the years of slams to average buying power, and there’s not a lot of sympathy to oil tycoons anyway, especially the bad guys overseas. Sorry, oil workers, we didn’t mean you, but accepting collateral damage has become an American way of life.
Meanwhile, Saudi Arabia is clamoring for more money to fight Houthis in Yemen and the potential threats from ISIS, while Vladimir Putin needs oil money to placate his growing masses whose standard of living is slip-sliding away by reason of their over-reliance on oil and gas revenues to support the economy. He can rally the populous with shows of bravado and disdain for anything that the United States holds dear only for so long. Baked old shoe eventually tastes like old bake shoe. The Russian economy is contracting fast – 4.6% in the past year alone – and the ruble is now at half its peak value against the dollar. That the Russian oil/gas industry has heavy government ownership only makes the issue more difficult for Mr. Putin.
Hey, China’s contraction, increased efficiency in automotive engineering, and the general marginal economic reality for most countries in the world, combine with the new oversupply of oil, have shoved oil prices to their current nadir. If Iran is able to join the world of legitimate oil exporters by reason of the new accord, that extra supply sure isn’t going to move oil prices higher. Experts tell us, even with instability within oil producing nations in the Middle East, they see nothing on the horizon – looking two years into the future – that is likely substantially to increase the price of oil.
Yup, remember that Chinese connection was supposed to show a Sino-Russian united front against those nasty Americans, bolstered by a huge fossil fuel deal announced over a year ago between those two countries? But the price, well, the price for that product is very much in contention: “Russia's strategic embrace with China has so far failed to produce much beyond warm words. A $400 billion gas deal signed in May 2014 has run into trouble as the Chinese haggle hard over prices and stall on $55 billion of financing for the construction projects. Hopes for a second pipeline to China from West Siberia have come to little.”, September 6th.
So what ever happened to that price-fixing oil cartel, the Organization of Petroleum Exporting Countries (OPEC), and their ability to control the flow of oil and dictate prices? Is there a conspiracy afoot by the biggest supplier-nations to contain the glut? Part of this glut has been the rather purposeful efforts of Middle Eastern producers, notably Saudi Arabia, to make oil so cheap that the difficult/expensive-to-extract North American oil processes and venues would simply go out of business, unable to compete. But American engineering is surprising everyone.
Adnan Shihab-Eldin, the former secretary-general of OPEC, said the oil cartel is in ‘bad shape’ and may have to rethink its current strategy. ‘Can OPEC really afford to the policy started in November of letting the market determine prices,’ said at the [recent Ambrosetti forum of world policymakers on Lake Como in Italy]… Mr Shihab-Eldin said US shale drillers have proved remarkably resilient, slashing costs from $70 a barrel to near $50 through new technology and a switch to higher-yielding ‘sweet spots.’ The rig-count has halved, but production has hardly fallen.” Business
So the fact that Saudi and Russian oil magnates have been huddling, perhaps on the verge of creating a “super-OPEC” with Russia as a member player, can come as no surprise. “Riyadh [Saudi Arabia] has made it clear that it will not cut output to shore up prices unless non-OPEC producers share of the burden. This essentially means Russia, the world's biggest producer… [Arkady Dvorkovich, a deputy prime minister], the head of Russia's economic and energy strategy, said his country was in constant talks with OPEC in order to bring about a ‘more rational policy’ but was coy on whether the Kremlin would break the impasse and strike a deal with the Saudis.
‘Our consultations do not imply directly that we are going to see any coordinated action. Perhaps 'yes,' perhaps 'no,' most likely 'no,'’ he said, speaking at the Ambrosetti forum of world policymakers on Lake Como. ‘We are sending signals to each other… Russia insists that it cannot switch off output as easily as the Saudis, given the harsh weather in the Siberian fields, a claim dismissed by OPEC as a negotiating ploy.
“Nor can the Kremlin order Russian drillers to slash production without undercutting its insistence that these oil groups are genuine companies, answerable to their shareholders. Yet there are subtle ways of achieving the same outcome… Mr. Dvorkovich hinted that output cuts could be on the way. ‘We are not going to cut supply artificially. Oil companies will act on their own. They will look at market forces and decide whether to invest more or less,’ he said.” You can expect a few concerted efforts along the way, official and unofficial parallel actions. Oil producers are getting close to desperate mode.
Yet imagine, we are getting increasing oil efficiency, Americans are living a bit better with lower prices at the pump and there is rising hope that these changes might just help us get a handle on reducing greenhouse gasses, perhaps taking a dictator or two down a big notch along the way. Collateral damage, eh? Who really are the winners? And who are the actual losers?
I’m Peter Dekom, and if we have to be forced into being more efficient with our fossil fuel use, then we might as well enjoy the silver clouds with a few gray linings.

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