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Oil at $40 Possible as Market Transforms Caracas to Iran
1676 words

2 Dec 2014
PANAPRESS - Pan African News Agency
PAFAGEN
English
© 2014 PANAPRESS. All rights reserved. Provided by Syndigate.info, an Albawaba.com company

Oil's decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union.

Russia, the world's largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades.

"This is a big shock in Caracas, it's a shock in Tehran, it's a shock in Abuja," Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of oil, told Bloomberg Radio. "There's a change in psychology. There's going to be a higher degree of uncertainty."

A world already unsettled by Russian-inspired insurrection in Ukraine to the onslaught of Islamic State in the Middle East is about be roiled further as crude prices plunge. Global energy markets have been upended by an unprecedented North American oil boom brought on by hydraulic fracturing, the process of blasting shale rocks to release oil and gas.

Cheap Gasoline

Few expected the extent or speed of the U.S. oil resurgence. As wildcatters unlocked new energy supplies, some oil exporters abroad failed to invest in diversifying their economies. Coddled by years of $100 crude, governments instead spent that windfall subsidizing everything from 5 cents-per-gallon gasoline to cheap housing that kept a growing population of underemployed citizens content.

Those handouts are now at risk.

"If the governments aren't able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval," said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group. "The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems."

Costs as Benchmark

Oil has dropped 38 percent this year and, in theory, production can continue to flow until prices fall below the day-to-day costs at existing wells. Stevens said some U.S. shale producers may break even at $40 a barrel or less. The International Energy Agency estimates most drilling in the Bakken formation - the shale producers that OPEC seeks to drive out of business - return cash at $42 a barrel.

Canadian Natural Resources Ltd. Chairman Murray Edwards said crude may sink as low as $30 a barrel before rebounding to stabilize at $70 to $75 a barrel, the Financial Post reported.

"Right now we're seeing a price shock coming out of the meeting and it will be a couple of weeks until we see where the price really falls," said Yergin. Officials "have to figure out where the new price range is, and that's the drama that's going to play out in the weeks ahead."

Brent crude was down $1.40 at $68.75 as of 9:14 a.m. in London, while New York oil lost $1.47 to $64.68. Brent is now at its lowest since the financial crisis - when it bottomed around $36.

Not All Suffer

To be sure, not all oil producers are suffering. The International Monetary Fund in October assessed the oil price different governments needed to balance their budgets. At one end were Kuwait, Qatar and the United Arab Emirates, which can break even with oil at about $70 a barrel. At the other extreme: Iran needs $136, and Venezuela and Nigeria $120. Russia can manage at $101 a barrel, the IMF said.

"Saudi Arabia, U.A.E. and Qatar can live with relatively lower oil prices for a while, but this isn't the case for Iran, Iraq, Nigeria, Venezuela, Algeria and Angola," said Marie-Claire Aoun, director of the energy center at the French Institute for International Relations in Paris. "Strong demographic pressure is feeding their energy and budgetary requirements. The price of crude is paramount for their economies because they have failed to diversify."

Brent crude is poised for the biggest annual decline since 2008 after OPEC last week rejected calls for production cuts that would address a global glut.

Like this year's decline, oil's crash in the 1980s was brought on by a Saudi-led decision to defend its market share, sending crude to about $12 a barrel.

Russia Vulnerable

"Russia in particular seems vulnerable," said Allan von Mehren, chief analyst at Danske Banke A/S in Copenhagen. "A big decline in the oil price in 1997-98 was one factor causing pressure that eventually led to Russian default in August 1998."

VTB Group, Russia's second-largest bank, OAO Gazprombank, its third-largest lender, and Russian Agricultural Bank are already seeking government aid to replenish capital after sanctions cut them off from international financial markets. Now with sputtering economic growth, they also face a rise in bad loans.

Oil and gas provide 68 percent of Russia's exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 35 percent against the dollar since June.

This Will Pass

While the country's economy minister and some oil executives have warned of tough times ahead, President Vladimir Putin is sanguine, suggesting falling oil won't force him to meet Western demands that he curb his country's interference in Ukraine.

"Winter is coming and I am sure the market will come into balance again in the first quarter or toward the middle of next year," he said Nov. 28 in Sochi.

Even before the price tumble, Iran's oil exports were already crumbling because of sanctions imposed over its nuclear program. Production is at a 20-year low, exports have fallen by half since early 2012 to 1 million barrels a day, and the rial has plummeted 80 percent on the black market, says the IMF.

Lower oil may increase the pain on Iran's population, though it may be insufficient to push its leaders to accept an end to the nuclear program, which they insist is peaceful.

'Already Losing'

"The oil price decline is not a game changer for Iran," said Suzanne Maloney, senior fellow at the Brookings Institution, a Washington-based research organization, who specializes on Iran. "The Iranians were already losing so many billions of dollars because of the sanctions that the oil price decline is just icing on the cake."

While oil's decline wrenches oil-rich nations that squandered the profits from recent high prices, the world economy overall may benefit. The Organization for Economic Cooperation and Development estimates a $20 drop in price adds 0.4 percentage point to growth of its members after two years. By knocking down inflation by 0.5 point over the same period, cheaper oil could also persuade central banks to either keep interest rates low or even add stimulus.

Energy accounts for 10 percent to 12 percent of consumer spending in European countries such as France and Germany, HSBC Holdings Plc said.

Nigerian Woes

As developed oil-importing nations benefit, some of the world's poorest suffer. Nigeria's authorities, which rely on oil for 75 percent of government revenue, have tightened monetary policy, devalued the naira and plan to cut public spending by 6 percent next year. Oil and gas account for 35 percent of Nigeria's economic output and 90 percent of its exports, according to OPEC.

"The current drop in oil prices poses stark challenges for Nigeria's external and fiscal accounts and puts heavy pressure on the exchange rate," Oliver Masetti, an economist at Deutsche Bank AG, said in a report this month. "If oil prices remain at their current lows, Nigeria will face tough choices."

Even before oil's rout, Venezuela was teetering.

The nation is running a budget deficit of 16 percent of gross domestic product, partly because much of its declining oil production is sold domestically at subsidized prices. Oil is 95 percent of exports and 25 percent of GDP, OPEC says.

"Venezuela already qualifies for fiscal chaos," Yergin said.

Venezuelan Rioting

The country was paralyzed by deadly riots earlier this year after police repressed protests about spiraling inflation, shortages of consumer goods and worsening crime.

"The dire state of the economy is likely to trigger renewed social unrest, while it seems that the government is running out of hard currency," Capital Economics, a London research firm, wrote in a Nov. 28 report.

Declining oil may force the government to take steps to avoid a default including devaluing the currency, cutting imports, raising domestic energy prices and cutting subsidies shipments to poorer countries in the region, according to Francisco Rodriguez, an economist at Bank of America Merrill Lynch.

"Though all these entail difficult choices, default is not an appealing alternative," he said. "Were Venezuela to default, bondholders would almost surely move to attach the country's refineries and oil shipments abroad."

China Bailout?

In an address on state television Nov. 28, President Nicolas Maduro said Venezuela would maintain social spending while pledging to form a commission to identify unnecessary spending to cut. He also said he was sending the economy minister to China to discuss development projects.

Mexico shows how an oil nation can build new industries and avoid


Panafrican News Agency

Document PAFAGEN020141202eac200134

Oil Is Quick To Recover When It Sinks To These Levels

Frank Holmes, U.S. Global Investors

Dec. 5, 2014


...................................................................“The theme going into 2015 is mean reversion,” says Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX). “Oil prices are below where they should be, and hopefully they’ll start gravitating back to the equilibrium price of between $80 and $85 a barrel.”

Crude oil is currently down 1.2 standard deviations for the 10-year period. This might not sound like much, but as you can see, oil has rarely gone above or below one standard deviation during this time. Plus, its wild volatility during the financial crisis rejiggered the commodity’s mean.

What the oscillator above also shows is that oil has eventually returned to where it should be, as it did not only after the financial crisis but also in the third quarters of 2011 and 2012. Barron’s pointed out in a piece published this week that “prior price slides lasted roughly 20 weeks. The current slide is already at week 24. History suggests the panic… is near its end.”

Indeed, oil markets have historically been quick to recover because exploration and production become unsustainable otherwise. Several shale regions in Texas were already unprofitable at $75 per barrel. At $70, expect more companies, especially those involved in fracking and deepwater drilling, to cut production even further. The problem is, they really can’t afford to do so. It currently takes output from four or five new wells to replace the cost of one previously drilled unconventional well, which is why companies must keep up with exploration and production...................................................

http://www.businessinsider.com/are-oil-p...14-12?IR=T&

Economist thinks that shale industry is here to stay.
---

The new economics of oil
Sheikhs v shale

The economics of oil have changed. Some businesses will go bust, but the market will be healthier
Dec 6th 2014
THE official charter of OPEC states that the group’s goal is “the stabilisation of prices in international oil markets”. It has not been doing a very good job. In June the price of a barrel of oil, then almost $115, began to slide; it now stands close to $70.

This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.
[...]

http://www.economist.com/news/leaders/21...et-will-be

The new economics of oil

Sheikhs v shale

The economics of oil have changed. Some businesses will go bust, but the market will be healthier

Dec 6th 2014

THE official charter of OPEC states that the group’s goal is “the stabilisation of prices in international oil markets”. It has not been doing a very good job. In June the price of a barrel of oil, then almost $115, began to slide; it now stands close to $70.

This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.

Fuel injection

Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise. The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy. The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.

There will, of course, be losers (see article). Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive.

Just how positive will depend on how long the price stays low. That is the subject of a continuing tussle between OPEC and the shale-drillers. Several members of the cartel want it to cut its output, in the hope of pushing the price back up again. But Saudi Arabia, in particular, seems mindful of the experience of the 1970s, when a big leap in the price prompted huge investments in new fields, leading to a decade-long glut. Instead, the Saudis seem to be pushing a different tactic: let the price fall and put high-cost producers out of business. That should soon crimp supply, causing prices to rise.

There are signs that such a shake-out is already under way. The share prices of firms that specialise in shale oil have been swooning. Many of them are up to their derricks in debt. Even before the oil price started falling, most were investing more in new wells than they were making from their existing ones. With their revenues now dropping fast, they will find themselves overstretched. A rash of bankruptcies is likely. That, in turn, would bespatter shale oil’s reputation among investors. Even survivors may find the markets closed for some time, forcing them to rein in their expenditure to match the cash they generate from selling oil. Since shale-oil wells are short-lived (output can fall by 60-70% in the first year), any slowdown in investment will quickly translate into falling production.

This shake-out will be painful. But in the long run the shale industry’s future seems assured. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. IHS, a research firm, reckons the cost of a typical project has fallen from $70 per barrel produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one.

The firms that weather the current storm will have masses more shale to exploit. Drilling is just beginning (and may now be cut back) in the Niobrara formation in Colorado, for example, and the Mississippian Lime along the border between Oklahoma and Kansas. Nor need shale oil be a uniquely American phenomenon: there is similar geology all around the world, from China to the Czech Republic. Although no other country has quite the same combination of eager investors, experienced oilmen and pliable bureaucrats, the riches on offer must eventually induce shale-oil exploration elsewhere.

Most important of all, investments in shale oil come in conveniently small increments. The big conventional oilfields that have not yet been tapped tend to be in inaccessible spots, deep below the ocean, high in the Arctic, or both. America’s Exxon Mobil and Russia’s Rosneft recently spent two months and $700m drilling a single well in the Kara Sea, north of Siberia. Although they found oil, developing it will take years and cost billions. By contrast, a shale-oil well can be drilled in as little as a week, at a cost of $1.5m. The shale firms know where the shale deposits are and it is pretty easy to hire new rigs; the only question is how many wells to drill. The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.

Sheikh out

So the economics of oil have changed. The market will still be subject to political shocks: war in the Middle East or the overdue implosion of Vladimir Putin’s kleptocracy would send the price soaring. But, absent such an event, the oil price should be less vulnerable to shocks or manipulation. Even if the 3m extra b/d that the United States now pumps out is a tiny fraction of the 90m the world consumes, America’s shale is a genuine rival to Saudi Arabia as the world’s marginal producer. That should reduce the volatility not just of the oil price but also of the world economy. Oil and finance have proved themselves the only two industries able to tip the world into recession. At least one of them should in future be a bit more stable.

http://www.economist.com/news/leaders/21...et-will-be

Just like to add there are actually two fronts from what i saw. Shale oil and Shale gas supplies. Their extractions are totally different. This doesn't look like 2 years things. So the economics of oil have really changed. Oil price will likely stays low till the world economy consume a lot more more from today. And consumption is not going to change overnight even with robust economic growths. And with more solar panel and sea rigs otw, we suddenly have a game change in the energy industry.

(07-12-2014, 08:51 AM)corydorus Wrote: [ -> ]Just like to add there are actually two fronts from what i saw. Shale oil and Shale gas supplies. Their extractions are totally different. This doesn't look like 2 years things. So the economics of oil have really changed. Oil price will likely stays low till the world economy consume a lot more more from today. And consumption is not going to change overnight even with robust economic growths. And with more solar panel and sea rigs otw, we suddenly have a game change in the energy industry.

I think oil prices should stablise in 2015 given the oversupply of market hitting Russia the hardest.

Before Freaking Out Over Plunging Oil Prices Remember These Charts

By Motley Fool, December 06, 2014

http://www.nasdaq.com/article/before-fre...s-cm420475

(07-12-2014, 08:51 AM)corydorus Wrote: [ -> ]Just like to add there are actually two fronts from what i saw. Shale oil and Shale gas supplies. Their extractions are totally different. This doesn't look like 2 years things. So the economics of oil have really changed. Oil price will likely stays low till the world economy consume a lot more more from today. And consumption is not going to change overnight even with robust economic growths. And with more solar panel and sea rigs otw, we suddenly have a game change in the energy industry.

Global Energy Mix Projection:

2012:
Total primary energy demand = 13,361 Mtoe
Coal = 29%
Oil = 31% = 4,142 Mtoe
Gas = 21%
Nuclear = 5%
Renewables = 14%


2040:
Total primary energy demand = 18,290 Mtoe
Coal = 24%
Oil = 26% = 4,755 Mtoe
Gas = 24%
Nuclear = 7%
Renewables = 19%

In absolute term – demand for oil is on the rise.
___________________________________________________________________________

In 2040, Fossil Fuels Still Reign

By Katherine Tweed
Posted 14 Nov 2014
http://spectrum.ieee.org/energywise/ener...till-reign

______________________________________________________________________________

The world has 53.3 years of oil left

Matt DiLallo,
The Motley Fool
June 28, 2014

http://www.usatoday.com/story/money/busi.../11528999/
_______________________________________________________________________________________

Why the world isn't running out of oil

Decades ago, the world was told it was running on empty. Today, we have more oil than we need. What’s fuelling the boom in black gold?

By Brian Viner
19 Feb 2013

A very good article on technological revolution in oil exploration and production

"No other substance can compete when it comes to energy density, flexibility, ease of handling, ease of transportation. If oil didn’t exist we would have to invent it.”

http://www.telegraph.co.uk/news/earth/en...f-oil.html

___________________________________________________________________________________

3/27/2013

How Big Are The Currently Known Oil Reserves And What Are The Chances Of Finding New Ones?

by Ryan Carlyle, BSChE, Subsea Hydraulics Engineer

http://www.forbes.com/sites/quora/2013/0...-new-ones/

How are the energy battles shaping up?
__________________________________________________________________________

Jun 4, 2013
http://www.cnbc.com/id/100780204/page/1

9 Powerful Trends Shaping Our Energy Battles: (9 or 10 ?)

1) Rising Nations, Rising Energy Demand
2) The Crossover
3) Peak Oil's Decline
4) Sheikh Shale
5) Sheikh Shock/Russia Seeing Red
6) Old King Coal
7) Exporting the U.S. Shale 'Miracle'
8) The Efficient Frontier
9) Drive My (Electric) Car
10) All Renewables, Great and Small

(07-12-2014, 08:58 PM)Boon Wrote: [ -> ]Global Energy Mix Projection:

2012:
Total primary energy demand = 13,361 Mtoe
Coal = 29%
Oil = 31% = 4,142 Mtoe
Gas = 21%
Nuclear = 5%
Renewables = 14%

Boon san

What's your source of data?

According to the BP statistical review (a report that has been in existence for quite a while):

Total primary energy demand in 2012 = 12,483.2 Mtoe
Coal = 30% = 3723.7
Oil = 33% = 4,138.9 Mtoe
Gas = 24%
Nuclear = 4%
Hydroelectricity = 7%
Renewables = 2%

Part of the difference could be the result of BP accounting only for commercially traded fuels. Slight difference from your data, whether it is material, I guess it depends. I prefer to strip out hydroelectricity from renewables (like what BP did) as the potential for growth in large scale hydroelectricity is limited especially as it carries huge environmental consequences. Therefore, it is unlikely that renewables can replace hydrocarbons in the short run (<10 years).

Notwithstanding the above, I would be most happy to see rapid adoption in renewables but folks do have to bear in mind that a good catalyst for a rapid adoption is high oil prices.