He’s losing the price war:
Well before Crimea, European nations resented Russian natural gas price gouging. The Kremlin used pricing threats to bully Ukraine, Poland and even Germany into political concessions.
After the Crimean travesty, the Baltic States and Poland demanded alternative gas supplies. The Obama administration quietly agreed to permit U.S. gas exports and the development of a liquefied natural gas exporting facility.
American LNG supplies might reach Poland in three years. That’s good news. Here’s the bad news: Putin has three years to exploit E.U. divisions and politically split NATO.
Or he had three years. Enter Saudi Arabia. America’s “fracking” success challenges Saudi global oil dominance. What’s the price point where fracking becomes unprofitable? Estimates run from $55 to $70 a barrel for oil. The Saudi oil ministry intends to find out and says it will not cut production. The market will determine price.
Though Russia can strangle Ukraine by denying gas supplies, the stunted and corrupt Russian economy survives on energy sales. Without its cash crop of oil, and gas, Russia is a big cabbage farm with a second-rate armaments industry. Cabbage, tanks, ICBMS and nuclear weapons mean Russian is not quite a petro-emirate writ large, but the cruel analogy has instructive utility.
If Russian nukes mean open war with Moscow is too risky, then attacking the Kremlin’s cash generator is war by appropriate means.
The question is, how long will the Saudis be able and/or willing to try to break the US energy industry? Regardless, OPEC is dead. Which is bad news not just for Russia, but Venezuela and Iran. It’s a shame that the administration has been doing almost everything it can to hamstring us.
Does anyone really know what is going on? Is this a Saudi plot to wage economic war on their Persian rivals, tweak the Russians, and send a message to the oil patch in North Dakota?
Or is this just the dynamics of the market when a cartel is involved? Back when oil “skyrocketed” in 2006 to what we consider a depressed price of 60-some dollars/barrel, back in the days of Katrina and Nasralah, Steve Forbes was prognosticating that oil “ought to be $30/barrel” and that certainly never happened, and the Usual Suspects (not just around here) were jumping around gloating about “Steve Forbes is a moron.”
It is the old thing about price revolutions and market bubbles that in the long run things even out but in the long run we are all dead, and that if you “short” a bubble, the market momentum has a lot more money behind it than what you can put into your margin account? I had this feeling that “eventually” the oil market would peak and come down, but this eventually is at least 8 years in the making?
For all of the talk about Peak Oil, if the price is high enough long enough, consumption declines or at least is capped by either conservation of people too broke to purchase and enough producers (and tank farms) come out of the woodwork with new supplies. The tank farm situation was supposed to be in “contango” (some jargony commodities trader word I never understood) for a long time, but prices stayed high for longer than many of us thought. And now they seem to be tumbling down. But if you believe the Peak Oilers, Saudi doesn’t really have the capability to manipulate the market because they are already at peak production (Twighlight in the Desert, Gahwar is Dying and all of that) meaning they cannot turn on the taps, and they cannot cut back at will because even they have a need for cash to keep their restive population happy and their elites in power?
Even the insane $12/barrel oil prices of the late 80’s and 90’s was attributed to Saudi leaders waging economic war on the Russians, but others argue it was horizontal drilling tech producing a glut and we are giving Saudi too much credit? It was said that horizontal drilling was actually speeding the day of Peak Oil and the global economic apocalapse because we were sucking the formations dryer faster. But is fracking really that much of a difference?
Why have prices stayed high for so long? Could it be “fool me once, shame on you, fool me twice, shame on me”, that producers held back on boosting production “this time around” because they didn’t want to get burned by the resulting glut crashing prices? But market forces have an inevitable logic to them, even when people are trying to forestall the inevitable?
Good time to expand the strategic oil reserve.
Well a lot of EU countries have had natural gas port facilities for quite some time now. The gas mostly comes from Nigeria and Algeria. Which are not exactly stable either. Qatar also sells LNG but it ends up being a lot more expensive.
http://www.css.ethz.ch/fsk/policy_consultancy/Grafiken/CSS_Analysis/No-36/CSS-Analyses-36_Origin-oil-natural-gas.jpg
Problem is most of the Eastern and Central European countries are hooked into the Russian pipeline network and a lot of them like Germany have made little effort to change the situation.
Supply growth is slowing but still positive. Demand in China is growing but still half of U.S. demand. Wages are down and debt is up.
The big drop in prices came in the second half of 2008. Otherwise it’s been slowly growing but also flattening out (oddly following supply?)
I think we’re stretching a rubber band that is going to snap with a collapse to follow. Interest rates have no place to go but up.