Gwynne Dyer: How long will the oil stay cheap?

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      I’m in Alberta, the province that produces most of Canada’s oil, and there’s only one question on everybody’s lips. How long will the oil price stay down?

      It has fallen by more than half in the past nine months—West Texas Intermediate was $48 per barrel on March 11—and further falls are predicted for the coming weeks.

      This hits jobs and government revenues hard in big oil-producing centres like Alberta, Texas, and the British North Sea, but its effects reach farther than that.

      “Clean” energy producers are seeing demand for their solar panels and windmills drop as oil gets more competitive. Electric cars, which were expected to make a major market breakthrough this year, are losing out to traditional gas-guzzlers that are now cheap to run again.

      Countries that have become too dependent on oil revenues are in deep trouble, like Russia (where the ruble has lost half its value in six months) and Venezuela. Countries like India, which imports most of its oil, are getting a big economic boost from the lower oil price. So how long this goes on matters to a great many people.

      The answer may lie in two key numbers. Saudi Arabia has $900 billion in cash reserves, so it can afford to keep the oil price low for at least a couple of years. The “frackers” who have added four million barrels/day to U.S. oil production in the past five years (and effectively flooded the market) already owe an estimated $160 billion to the banks.

      They will have to borrow a lot more to stay in business while the oil price is low, because almost none of them can make a profit at the current price. Production costs in the oil world are deep, dark secrets, but nobody believes that oil produced by hydraulic fracturing (“fracking”) comes in at less than $60 to $70 per barrel.

      The real struggle is between the frackers and Saudi Arabia, because the latter is the “swing producer” in OPEC (the Organization of Petroleum-Exporting Countries), the cartel that has dominated the global oil market for the past 50 years.

      All oil exporters want to keep the price high, but Saudi Arabia was the one OPEC member that could and would cut its production sharply for a while when an over-supply of oil in the market was driving prices down. It could afford to do that because it has a relatively small population, very large savings—and a cost of production so low that it can make some profit on its oil at almost any price.

      But even the Saudis cannot work miracles. They can aim for maximum production or maximum price; they cannot do both at the same time.

      Normally they would cut production temporarily to get the price back up. This time they refused to cut production and let the price collapse, despite the anguished pleas of some other OPEC members that need money now.

      The Saudis are thinking strategically. OPEC only controls about 30 percent of world oil production, which is a very low share for a cartel that seeks to control the price. If fracking continues to expand in the United States, then OPEC’s market share will fall even further. So it has to drive the frackers out of business now.

      At first glance the Saudis look like sure winners, because they can live with low prices a lot longer than the deeply indebted frackers can. The banks that have lent the frackers so much money already won’t get it back if the industry implodes in a wave of bankruptcies, but they don’t want to throw good money after bad.

      The real wild card here is the U.S. government, which wants the “energy independence” that only more domestic oil production through fracking can provide. Will it let the American fracking industry go under, or will it give it the loan guarantees and direct subsidies that would let it wait the Saudis out?

      Stupid question. Of course it will do what is necessary to save the fracking industry. Ideology goes out the window in a case like this: you can get bipartisan support in Washington for protecting a key American industry from “unfair” foreign competition. That will certainly be enough to keep the frackers in the game for another two or three years.

      Meanwhile, the OPEC members that depend on oil income to keep large populations well fed and at least marginally content (e.g. Iran, Nigeria, and Venezuela) will be facing massive public protest, and possibly even the threat of revolution. Their governments will be putting huge pressure on Saudi Arabia to save them by cutting production and driving the price back up.

      It’s impossible to say how this game will end, but it’s pretty easy to say when. Two years ought to do it. Once the outcome is clear, the price of oil will start going back up no matter which side wins, but it will go up relatively slowly. We are unlikely to see $100-a-barrel oil again before 2020 at the earliest.

      Comments

      8 Comments

      I Chandler

      Mar 12, 2015 at 3:07pm

      DYER: : "Will [Obama] let the American fracking industry go under, or will [Obama] give it the loan guarantees"

      US frackers were protected to a very large degree, through derivative contracts (CDS..). It is Wallstreet Banks, that are on the losing end of those contracts that were going to get burned.

      DYER: "American fracking industry go under, or will it give it "

      Will it give it? Freudian typo? Last year , Obama already gave WallStreet an early Xmass present and retroactively guaranteed their bad bets. Did Hoover feel this kind of love at the race track?

      http://ellenbrown.com/2014/12/19/russian-roulette-taxpayers-could-be-on-...

      DYER: “Clean” energy producers are seeing demand for their solar panels and windmills drop as oil gets more competitive. "

      Clean energy producers are being taken over by the frackers - Big Oil took over renewable ( wind and solar ) trade groups in Europe to push gas:

      "Energy utilities and fossil fuel firms began moving into the renewable associations in 2010.. Oliver Joy a EWEA spokesman said. “gas and wind actually complement each other”

      http://www.theguardian.com/environment/2015/jan/22/fossil-fuel-firms-acc...

      DYER:" will be facing massive public protest, and possibly even the threat of revolution."

      One of The Latest ‘National Security Threats may see a NED colored revolution or invasion:
      http://www.counterpunch.org/2015/03/11/venezuela-the-latest-national-sec...

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      P.Peto

      Mar 12, 2015 at 3:14pm

      Two more years of cheap oil,eh? Whether it's a blessing or a curse depends on where you stand,eh? Something has got to give way in the next couple of years but it's anybodies guess on what will break. I would stay away from the Canadian oil patch, companies are going to lose money when their hedges expire. The Alberta economy is going to go into a deep recession and the real estate bubble will burst as unemployment rises. This is not reflected in the prices of oil companies in todays market. From an environmental point of view it would be desirable for the oil sands and fracking business to choke to death but they will burst forth again when oil prices rise. How vulnerable are Canadian banks to oil loans and bankruptcies or to a faltering canadian economy? Bank shares should decline but the big bust is coming in the American financial derivatives market. If that happens Gold will spike upwards and Canadian Gold miners will finally get out of the doghouse. We are due for a good shake out complements of Ahab de Arab!.

      Bruce

      Mar 12, 2015 at 10:16pm

      Gwynne Dyer usually writes good articles, but it's a bit strange here that he seems to include Alberta's tar/oil sands in with 'fracking' which is a very different process, and very different economically.
      Tar sands extraction takes huge capital over many years to get large projects up and running, while fracked wells are quick to drill and run out. Tar sands plants have to keep going to pay back capital pretty much regardless of oil prices, where fracking rigs can start and stop drilling on a couple months' notice.
      That sure looks like a picture of a tar sands project, not a fracking operation that the photo caption seems to suggest. Presumably the Straight made that choice.

      Glad I Didn't Move to N. Dakota

      Mar 13, 2015 at 3:40pm

      $2.89 / Gallon in Washington state. Still glad I get 30 - 35 mpg. Where's that fission engine!???

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      Oily rant

      Mar 13, 2015 at 9:29pm

      Oh goody goody goody oil is down! Hey, wait a minute, where are the oily transfer payments going to come from for the 6 welfare provinces in Canada, who I assume don't want dirty money for their health, education and social services costs which they cannot cover by themselves.
      In the 2013-2014 year, the following provinces will receive equalization payments:

      Quebec ($7.833 billion)
      Ontario ($3.169 billion)
      Manitoba ($1.792 billion)
      New Brunswick ($1.513 billion)
      Nova Scotia ($1.458 billion)
      Prince Edward Island ($340 million)
      yea, that's right the other provinces have an oil and gas industry, so they pay. Which is fair, but why slam producing provinces when you are on the receiving end without doing squat and use the product to move around, heat homes, get stuff to you and much of that stuff is made from the devil product - right down to the keyboard I'm typing on. I find it very odd that there are so many critics of oil/gas in the Vancouver area when we are the greatest energy hogs west of Toronto - we just can't do without exotic products from the other side of the world in every corner store. Also odd are the very vocal green-in-name-only people who are flying around the globe several times a year. If you check out carbon footprint calculators that's the number one sin.

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      Herb Barbolet

      Mar 15, 2015 at 9:30am

      DYER:" will be facing massive public protest, and possibly even the threat of revolution."

      Bill C51 should take care of that once it is passed.

      petr aardvark

      Mar 17, 2015 at 4:44pm

      Fracking will continue as much as possible for the short term -because eventually, like coal, it will not be worth taking out of the ground.

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      Dane Ramsey

      Mar 21, 2015 at 3:50am

      Very good commentary,we will
      Just have to wait and see what happens on both side of the fence and see who are the real winners in this ,shall we say game!

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