I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market.
Did the rideshare companies actually jack up their prices at any point? How would they do that when they're still in competition with each other and the barrier to entry to the market remains low? Any attempt to raise prices would immediately result in more competitors.
That was the whole thing with the taxi medallions. It was a cartel, because that market has very low barriers to entry and the taxi companies didn't want the competition.
Uber didn't make prices artificially low, they just provided competition which stopped them from being artificially high. They're not losing money on rides, they're "losing money" on self-driving car R&D and things like that.
And "fair trade" is a marketing device. People want to feel good about not exploiting people, so companies not exploiting people get to charge a premium for that. That doesn't mean companies who are paying suppliers less don't still exist or offer similar products for lower prices purchased by customers who don't care as much about that.
Neither of these are examples of what you're describing.
If that’s all “fair trade” is, that’s an impressive marketing tactic.
For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.
In what world would any company make zero profits in a "perfect" sense?
Companies exist to make profit...
Where does this conclusion come from?
So I wouldn't say that the oil market is broken, as much as it has never really worked as a close-to-ideal market.
Given these prices, shale oil and tar sands production is going to shut down at some point. This is good news in a way, because these are among the dirtiest sources of oil in terms of environmental impact. Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered.
Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.
Wait, what? A desert is just as much an ecosystem as a rainforest or a city.
Sure I guess technically anything is an ecosystem, but some clearly support far more life (and variety of life, and sometimes exclusive life) than others. They obviously have different ecological "value".
Also pumping oil in the desert doesn't lead to the local residents being able to set their tap water on fire, you know, the way fracking can.
Which would be bad for energy independence and in the end give more price control back to OPEC.
After all that time Saudia Arabia now lets the price rise. How much time will it be over $30 before the shale producers start up again? Will it really pay off compared to the amount of time they had to spend with it under $30? And say they keep it _just_ over $30 - just how much over $30 can they go and for how long?
It seems like in the long run you'd better be prepared to keep it not much over $30 if you want to keep the shale producers out for good. That the idea of "put them out of business and then double the price" won't really work in a practical manner.
I'm failing to think of an example where this did work. Diamonds? I thought that the producers either bought or colluded to create an effective monopoly. That would be like S.A. just buying producers. That doesn't seem practical but who knows -maybe it is.
The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.
Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.
I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit.
From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.
If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.
Description of the names:
https://en.m.wikipedia.org/wiki/Sweet_crude_oil
https://www.thebalance.com/the-basics-of-crude-oil-classific...
"Nineteenth-century prospectors would taste and smell small quantities of oil to determine its quality."
Thanks, TIL.
For what that's worth.
The supply chain is set up to flow, so when demand drops or spikes up you get a flood or a shortage.
If there's a flood, some companies will go out of business, leaving the survivors with a bigger slice of the pie.
If there's a shortage, companies will respond, and some will over-react and build over-capacity and then fail when the shortage evens out, leaving the survivors with a bigger slice of the pie. I think this may happen with ventilator companies. After this event, there may be an over-supply of ventilators, leading to failure of some companies or lines of business.
This exact scenario has happened before, with masks (I think during SARS? there was an article on HN recently) - companies were ordered to produce more, then the crisis fizzled out and the orders were cancelled, making some companies almost go out of business.
Instead, politicians should simply commit to buying said quantities of widgets, and then respect those commitments regardless of the outcomes (widgets are needed or not at all). It's unfair (and sets a bad precedent) to expect companies to take the loss for public good.
Like, who foresaw COVID? Who foresaw fidget spinners? etc. How do you plan for a central supply system when a news story about kids eating Tide pods drops the demand (increasing the supply) by 20% overnight?
The soviets essentially tried to do this with a communist style-command economy -- and it didn't work well. Maybe modern tech can do it better but it would have to be able to predict the social, political, and logistical challenges enough to outperform the alternatives.
I bought and sold tanker stocks based on the following:
IMO 2020 regulatory retrofits.
Coronavirus
Saudi Russian Oil Price War
Shipyard Shutdowns
My next bet is going to be based on the drawdown in US Oil operations. I'm gambling on $FCG based on the notion that the price of natural gas will go up a bit because the associated gas from oil wells is no longer in play.
Right now, the volatility is a gambler's paradise.
This is the same reason the Obama administration did little to discourage fracking from hockey stick'ing. Given the state of the economy was one of the few tools they had to goose the economy. Essentially, like it or not, selling out Mother Nature for the economy.
https://www.forbes.com/sites/rrapier/2016/01/15/president-ob...
Coal was a fraction of market share. It was on its way out regardless. However, a lower oil price increases consumption across the board. Thus it wouldn't take much increase for oil's aggregate pollution to exceed oil + coal.
Yes maybe on a per kilowatt basis oil is better than coal. But given the usage of oil, that is the scale, the price drop triggered increases in consumption could in fact cover and then exceed the gain from less coal.
[0] https://en.wikipedia.org/wiki/Futures_contract
[1] https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
If the price were to rise in the future, the value of the contract would be much higher than what you bought it at, and someone interested in further trading in the options contract or even buying the actual underlying world more pay the market value of that options contract to you.
I just checked: the current price of a single options contract of crude for 18 Sept at buying price (CALL) of USD 10, is 0.3. So buying a 100 (the minimum), would cost about USD 30. Now, ID between now and September the price of crude were to shoot up, then the market price of this option would likely rise.
Unlike stock, though, Options expire. But unlike stock, you get to buy the rights to buy or sell at a particular price and thus the capital needed is far lesser.
If you can store the oil you can earn a lot of money now. But most people can't store much oil, compared to the volumes that are being pumped out of the ground. And for many of the producers, slowing down production by more than a few per cent is also difficult — once you turn off the tap you don't really know whether the oil is going to start flowing again later. So the effect is a steep price fall.
Wait, really? I'm Googling but can't seem to find anything at all about shutting down oil wells temporarily.
What exactly is the difficulty? Why would "turning off the tap" be a risk -- the pressure oil might be under isn't going to go away, is it? (If it doesn't require pumping.) Is it a risk that materials in the drilled hole harden if not moving? I would have thought the difficulty might be how to effectively cap a well that is under pressure -- is it so difficult that closing a well risks damaging the equipment that it can't be safely opened back up?
Really curious here if you have the answers! The fact that oil wells can't be slowed down is definitely one of the most surprising economic facts I've learned in a long time.
To begin with, the oil is there, stably, at rest. At some point people come along, estimate the layout of the rocks (many km³ and far underground) and drill holes to change the way the pressure works and make as much as possible of the oil flow to a particular location. The geology decides how much that is, modified by the paths of the holes involved, and also by how much water is pumped in, where.
If you now close it quickly, the pressure's going to change somehow and you don't know precisely where and how. The end effect may be that when you reopen, something has changed down there such that instead of extracting 40% of the total oil you can only get 39%. Or such that you have to drill more holes in order to gain back your production velocity, the cost of which is far higher than producing at a loss for a month.
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
You mean it can actually physically stop if the flow from the ground is blocked for a while? Can you expand if possible.
Edit: I understand it comes out of the ground quite hot (I've heard of 200 C) and if it flows into cool pipes and stays still maybe it would 'congeal'.
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
You never have to exercise if you don't want to so there's a fixed maximum cost
Am I misunderstanding?
Selling the futures is the profitable end of the trade. Spot prices for WTI are about $20. That same oil can be sold in May 2021 for 35.53. Part of that difference is cost of carry (storing and insurance), but there is still a profit to be made.
https://adventuresincapitalism.com/2020/03/19/crude-contango...
> USO holds near-month NYMEX futures contracts on WTI crude oil.
Without looking any deeper I don't think this is what OP is looking for. They want to bet that oil delivered a year from now is under-priced today, while buying this ETF is betting that oil delivered a month from now is under-priced today (and holding this ETF is repeatedly renewing that bet). It's a completely different thing.
gasoline degrades with a shelf life measured in weeks-months-years, depending on grade and preservative measures
Depending on the curve of the pandemic, 2021 may be too early. The way the US govt is responding, it may drag out much longer
We have to drastically cut down oil use, let's not pretend that the pre-corona oil consumption was tolerable, much less desireable.
Now would be a good opportunity make internaltional agreements to cap oil consumption and extraction to its current level in shutdown, and when the shutdown starts to get rolled back, the shock will be smaller as rising demand and price mechanisms reconcile how the remaining lower oil supply gets used.
Really what they should do right now is take the opportunity to put in place a carbon tax. That would raise current prices back to previous prices, but it would also suppress demand even after the pandemic passes, so that the wholesale price stays low. You'd essentially have the tax getting paid by Russia and Saudi Arabia because demand would never return to a level that would absorb the supply glut.
Who would want to be the governor seen as increasing taxes at the beginning of economic troubles? In general any kind of tax increase at the moment is going to fall flat.
And then if it happens to still exist two years from now, it's already the status quo.
I think it would be incredible for the US do push towards renewables and cut oil consumption, but sometimes you have to accept the world as it is, and not how you want it to be.
Also just want to borrow your phrasing to say I think it would be incredible for all those shale oil folks to keep pulling in those paychecks, but sometimes you have to accept the world as it is, and not how you want it to be.
You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply.
So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most of the demand because most of the people with oil jobs aren't in those constituencies. And the people who gain jobs from replacing them would be -- solar installations are inherently local. So would everyone receiving the dividend, even though part of it would be paid for by suppliers.
And it's really the same in Europe -- Eastern Europe has most of the supply but Western Europe has most of the demand. And China and India have negligible oil production per capita.
Texans can buy as many pickup trucks as they like, but if you stamp out 80% of the world demand like that, nobody is going to buy their oil. And once the jobs are already gone and the industry isn't interested in making ICE cars just for Texas and Russia and Saudi Arabia, there won't even be that.
It would be make more economic sense to pay these people to stay home and do nothing!
We’re going to need to bounce back as much as we can, which means increased oil consumption.
It might mean coal gets knocked back, however!
Just saw a coal train going to the coal export terminal by my house that looked mostly empty.
Already, coal is down to just 22% of US electricity as of the end of January. It’s possible it could fall below nuclear power by the end of the year.
Price is a good way to reduce consumption, but price spikes are not.
My opinion is, the focus should be on switching consumption to renewables one large milestone at a time. For example, diesel would be produced less and used more enough for a renewable alternative engine and fuel supply chain for cruise ships to make economic sense, then within a few years all cruise ships will be on renewable. Fossil fuel is not the enemy, fossio fuel dependency is.
You can make similar economic arguments for more public electric transport for example (what people pay in tax is miniscule to what they pay for gas every year).
This will increase pollution and energy demands in the coming months at a higher level than before the crisis.
Well, from what I've read. I am a total idiot in these matters.
You first have to give the corporate world a gift before you take it away. Similarly to how the corporate world treats consumers.
I think that it's possibly efficient because it burns one clock cycle of a respondent's thoughts, and lets them remember the human.
Same goes for most other industries. This isn't a situation where you just wake up one day and it's over. It's not a war where you just make up and get back to work. This virus is out there, and most experts say even if you were already infected, you will only become temporarily immune (similar to flu).
So until you see a vaccine develop, coronavirus is not going away by any stretch. It will continue to cause problems in the medium term.
@trvrb on Twitter. And this other guy, with this thread: https://mobile.twitter.com/PeterKolchinsky/status/1244029896...
(Which doesn’t mean I disagree with your overall point that this won’t be an instant-bounceback.)
“Public” tourism industry is going to be okay (and aren't too worry about it for better or worse) but OTA and traditional tour operators are bleeding and some will eventually die.
Small local actors too but they will be replaced (or back after a year of unemployment, with loans from bailout banks).
Of course oil is a problem but a tax or cap and trade system would make more sense to address it.
Taxes and cap-and-trade systems are indeed the mechanisms of how current international agreements try to attempt CO2 emissions, they're a fine way to implement it.
Where did I go wrong? Was it when I evolved?
However shale oil requires constant drilling because production rises then falls very quickly (18 months to 2 years). With low oil prices, drilling will dry out and oil will dry out soon, too. Plus total oil production (conventional + non conventional) will probably peak anyway in the next decade (see WEO 2018, once again), and this may be quickened by the coming lack of investment due to low oil prices.
What could happen? With low demand and low price, the non conventional oil industry is deemed to go bankrupt, and the US banks will have to part with trillions of debt. That won't be pretty. Until this industry is rescued and starts pumping again, there could be a severe crunch of oil production, initiating an oil shock and a huge recession, sometimes in the coming next few years.
You seem to interpret this as a problem. However, I've read many times that it's basically a solution, because what it means is that production is responsive to demand in a far shorter timeframe than conventional oil. On top of that, supposedly you can drill a well and not complete it until a price war is over.
So I'm not sure why you think "non conventional oil industry is [doomed] to go bankrupt" when not only do people in the industry say it is relatively easy and cheap to put resources on hold, but obviously the sources of conventional cheap oil tried their best to kill the newcomers and failed, only a few years ago. According to both theory and recent history, your prediction doesn't make sense to me.
However, I have no experience whatsoever in the industry, so maybe you have some expertise?
- demand is destroyed by coronavirus - prices go down (maybe as low as $10 a barrel according to some analysts) - existing wells maybe kept pumping, or not - new drilling stops, ditto exploration, etc. - cash flow in tight oil industry falls to about zero - huge debt (trillions) can't be paid back, companies go belly up, banks must be rescued by the Fed...
several scenarii open up from there: would the Fed rescue the oil companies? may the government nationalise the oil industry? What can be the impact on US$? On US debt? financial markets? Who knows, all bets are off at this point.
The crucial moment will be there: in the few months between this moment when the shale oil industry defaults on its debt, and when it's bought back (debt free, therefore in a sane situation), there may be a large gap in production, that could kill world oil demand by sending prices through the ceiling ($100 barrel? $120? $150?) because normal demand can't be fulfilled by conventional production anymore.
Lots of graphs here: https://jancovici.com/en/energy-transition/oil/when-does-the...
I myself have no particular expertise, but I've been following quite closely oil and energy since 2005.
What they got wrong was the overall estimate of how much of this stuff there is to be extracted. The easy oil is indeed being used up, but as you invest more and more energy (EROEI decreases) the amount of oil available actually increases. Look at how much tar sands, oil shale, offshore, and heavy crude there is, but all that requires more energy to get.
We would eventually run out of oil to be had at a reasonable energy (and thus economic) cost, but after that if we still needed it we could get it by converting coal. That assumes we decide we don't need the ice caps, or the coastal cities.
We probably have enough carbon to destroy the world.
I recall watching an old 50s documentary on Antarctica when I was bored years ago and they mentioned that there was enough fuel there to satisfy our energy needs for hundreds of years. This was before anyone was very worried about CO2.
(Ignoring all the other reasons for cost fluctuations.)
But mostly, "Peak Oil" fears were ginned up by a press who love to promote tales of doom and destruction. Those trumpeting the threat of "Peak Oil" demanded broad governmental and social intervention to avoid what was assured to be a massive economic disaster. There were assertions that those denying the threat of "Peak Oil" were the Neville Chamberlains of their time or villagers refusing to vacate under the imminent threat of volcanic eruption.
No mistake - oil has a fixed supply. It will run out. But it turns out that won't happen for some time.
https://www.forbes.com/sites/michaellynch/2018/06/29/what-ev...
The supply grows alongside with the price people are willing to pay for it. As you yourself pointed out.
Nowadays the demand falls, the prices fall, this would be followed by a fall in production. But whatever happens oil will be available at an affordable price because world just doesn't work without it. If oil gets too pricey, reserarch into digging up more oil more cheaply will be funded. As it happened with shale. And it will end up in one more oil price crisis same as the one we're witnessing. And the one after it.
What does grow with demand is technological innovation and effort, and while we were not as close to the actual limit as we assumed with "peak oil", that doesn't mean the limit itself was fictional.
It came, and past. Production is down from the peak, and down from last month too.
source: https://www.bloomberg.com/news/articles/2019-10-14/peak-shal...
Russia has more flexibility imo and can cope a lot better with low oil prices, but Iran will probably see an even bigger economic collapse since they were already selling at a steep discount to offset trade sanctions.
Venezuela was also selling at really low prices and couldn't even afford to keep It's oil infrastructure from collapsing at 50$/barrel so I have no idea how they will avoid total economic destruction soon. Maduro won't be able to pay off the army for long now
So they are all going to be badly hurt, I don't see how saudi arabia can afford prices these low for long. They can't do like they did in the past and just drive everyone else from the market by crashing prices at will.
I haven't seen it this low in maybe 20 years.
It's hard to sell even sweet oils right now, so heavy blends that have little access to international markets like the Western Select are especially hurt by this enormous supply glut.
I don't exactly have much sympathy for the fossil fuel industry, but like it or not they're deeply entangled with our economy, and these prices indicate a lot of upheaval.
They're going to have to bite the bullet and shut some wells. They say as much at the bottom of the article. It's not like we haven't had oil downturns before...
https://www.reuters.com/article/us-opec-oil-policies-idUSKBN...
https://www.eia.gov/energyexplained/oil-and-petroleum-produc...
Saudia Arabia was trying to bring Russia in line with OPEC+ price targets, but Russia has enough state cash reserves and a much lower state budget break even point (~$40/barrel vs Saudi Arabia's ~$80/barrel), so here we are.
Great for consumers. Not so good for Google and SAS companies and thus their employees.
(but I'm not crying for oil either).
The cost to produce oil in Saudi Arabia is about $6 a barrel and they are taking this opportunity to undermine everything. Only Iraq is close in cost to produce oil as the Saudi's, and the U.S. has worked to make sure that Iraq is not a threat to the Saudi's.
I am really not sure what game the Saudis are playing.
Turns out we are drowning in them in 2000+20.
The saudis are losing money doing this (they have to eat into their reserves to fund the country). Russia at least has other industries, however small it may be.
Saudis cannot care less because they have about three times of Russia reserves nominally. In fact I suspect about five to seven times that, because Russia reserve structure is basically unknown. Saudis can certainly afford a year or three of having no income.
This is on top of the virus panic (which just cut any remaining tax revenues). Russia, Venezuela, Iran for that matter are done for.
EDIT: Which is why I think the whole OPEC+ deal went to the crapper. Middle East is able to weather this, others - not so much.
Our entire culture and urban physical infrastructure is built around a certain level of oil consumption. The current situation is temporary, the real solution is to replace the source of energy of fossil fuels. We are projected to have green energy be 30% of all energy consumption by 2024 with much of this effort lead by China.
The extreme central control and lack of freedoms that the western world hates so much is exactly what makes China so effective at protecting themselves against COVID-19 and saving the world from an energy crisis. We value freedom but the cost is too high.
Chrome users can install this directly as an unpacked extension.
For Firefox users, there's an xpi hidden in the releases tab.
As such, gasoline in some parts of the US is currently going for $0.99/gal (0.24€/L, 0.21£/L or 20 Rs/L).
And it's sort of funny/sad that what is called "blacktop" can be had for less than free. Transportation and steamroller not included.
We detached this subthread from https://news.ycombinator.com/item?id=22718650.
Damage to US shale is unintended and the Saudi's know it will be very temporary. The US companies have a near endless supply of capital, especially now with the federal government being on a spending spree. The shale fields can be easily turned off and on. Loans can be restructured and renegotiated. The last time the Saudi's tried to aim their efforts at the US it ACTUALLY caused the US shale oil companies to consolidate, innovate and they brought their production costs down significantly! The US oil industry is extremely resilient.
The goal for the Saudi's is to bring the Russians to the negotiating table and get them to agree to a meaningful cut in oil production, nothing less than 1 million bpd. They've basically said this. Their strategy is completely aimed at the Russians. The Saudi's are filling EVERY port and transfer station in the world with their cheap crude. The Russians transport all their oil in pipelines. If demand drops for Russian oil, they will be forced to turn off their wells because their pipelines can't handle extra oil, and the Russians have no where to store the extra. The Russians don't want to turn off their oil wells because its dangerous, it usually takes them offline for a long time, and they're expensive to get started again.
the current oil skirmish is a part of much bigger war - Russia went into Syria and has supported the Shia belt (Hezbollah - Asad - Iraqi Shia government - Iran) against Sunni (ISIS/Saudis) despite having no religious preference between Shia/Sunni in particular to block Saudis from being able to pipeline the stuff to Europe (which is an oil and especially natural gas market critical to Putin's Russia survival, and where Saudis have been trying for example to send oil and LNG tankers to. The LNG is more expensive than pipelined NG while Saudis have a lot of NG, so they need a pipeline to Europe and that would be existential blow to the current Russia economy and its "soft" power (like the threat of turning gas off in winter) power over Europe). In this context i don't see Russia going to negotiate wrt. current skirmish. If anything i think it would go all the way in Stalingrad style, Russian population economical suffering be damned, in hopes of forcing Saudis to come to bigger negotiations in much weaker shape.
Cheap oil is better for billions of people in India, China, and Africa
I suggest reading this, it's an older article, but the circumstances are the same: https://www.businessinsider.com/saudi-arabian-social-contrac...
