Tag Archives: oil

Professor Vijay Prashad: Saudi Arabia Is in trouble & makes a big mistake

Summary: In our age some of the greatest conflicts see no shots fired, such as the oil price “war” begun by the Saudi Princes. Opinions differ about the eventual outcome. I say bet on the Saudis to win. But nothing is simple. Here regional expert Vijay Prashad sees the Saudi Princes making a foolish and serious mistake amidst the economic stress of the oil war and the pressure of running a theocratic monarchy in the 21st century.

Oil prices falling

Why Saudi Arabia Is Suddenly in Serious Trouble

A report forces Saudi Arabia to consider a future without oil
By Vijay Prashad from AlterNet, 4 May 2016
Reposted with his generous permission

Saudi Arabia is in serious trouble. The Binladin Group, the kingdom’s largest construction company, has terminated the employment of fifty thousand foreign workers. They have been issued exit visas, which they have refused to honor. These workers will not leave without being paid back wages. Angry with their employer, some of the workers set fire to seven of the company’s buses.

Unrest is on the cards in the Kingdom. In April, King Salman fired the water and electricity minister Abdullah al-Hasin, who had come under criticism for high water rates, new rules over the digging of wells and cuts in energy subsidies. The restructured ministry was to save the Kingdom $30 billion — precious money for an exchequer that is spluttering from low oil prices. Eighty-six percent of Saudis say that they want the water and electricity subsidies to continue. They are not prepared to let these disappear. They see this as their right. Why, they say, should an energy rich country not provide almost free energy for its subjects?

When King Salman took over last year, he inherited a kingdom in dire straits.  Saudi Arabia’s Treasury relies upon oil sales for over 90% of its revenue. The population does not pay tax, so the only way to raise funds is from oil sales. As oil prices fell from $100/ barrel to $30/barrel, oil revenues for the Kingdom collapsed. Saudi Arabia lost $390 billion in anticipated oil profits last year. Its budget deficit came to $100 billion — much higher than it has been in memory. For the first time since 1991, Saudi Arabia turned to the world of private finance to raise $10 billion for a five-year loan. That this country, with a vast sovereign wealth fund, needs to borrow money to cover its bills is an indication of its fragile fundamentals.

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Stratfor looks at the Saudi Princes’ plans for a 21stC Kingdom under their rule

Summary:  Saudi Deputy Crown Prince Mohammed bin Salman gave his first-ever live interview to announce a bold new plan for the Kingdom. Stratfor sketches the details. It’s the standard conservative schtick: “tightening the social contract” (i.e., cutting subsidies to the public), privatizing national assets, and big talk about a glorious future — in which the Saudi Princes will still live like Croesus.

Stratfor

A Vision of Reform in Saudi Arabia

Stratfor, 24 April 2016

Summary

Saudi Arabia has lifted its veil of secrecy ever so slightly. Deputy Crown Prince Mohammed bin Salman gave his first-ever live interview to Saudi-owned Al-Arabiya television on April 25, less than an hour after the Cabinet in Riyadh approved the kingdom’s National Transformation Plan.

The five-year plan, which will kick off officially in the next couple of months, outlines Saudi Arabia’s strategy to expand and develop its economy while de-emphasizing oil revenue. Within the framework of the larger Vision 2030 (text here, other materials), the plan focuses on broadening privatization efforts, lifting power and water subsidies across socio-economic classes, decreasing unemployment, bolstering domestic industrial military production, and spinning off some of Saudi Arabian Oil Co.’s assets into what the kingdom hopes will become the world’s largest sovereign wealth fund.

Analysis

Among the Gulf Cooperation Council (GCC) countries, Saudi Arabia has the longest tradition of setting out ambitious economic goals encapsulated in five-year plans. The kingdom implemented its first five-year development plan in 1970, 11 years before the GCC even formed, and finished its ninth plan in 2014. Nonetheless, compared with its neighbors, Saudi Arabia is a late adopter of grander “vision” plans. Bahrain, the United Arab Emirates and Qatar announced National Vision 2030 plans in 2008, and Kuwait announced its State Vision 2030 in 2010 {Ed. note: it’s State Vision 2035}.

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The oil bust will deepen before prices skyrocket. Even wilder swings lie ahead.

Summary: The great struggle to manage or even control oil prices again dominates the world economy and the news headlines. Yet even the basics are poorly understood, cloaked in myths and misunderstandings. Here is a quick sketch of how the oil boom brought us here, how the bust will end, who will win, and what comes next.

 

What’s happening with the oil markets? Oil has gone from $150 to $30, and some experts say it will drop to $15. Just as in the previous cycle it crashed to $10 (the low) and experts predicted it would go to $5.

Both cycles ended, as commodity cycles usually do, with massive excess production. Now oil “producers” (i.e., miners) and their creditors must decide how to reduce output and raise prices so that most of them are profitable.

Note: the term used here is “oil”, but the numbers shown are for liquid fuels: crude oil (which includes that from oil sands and lease condensate), petroleum broadly defined (natural gas plant liquids and shale oil), and other liquids (from coal, gas, and plants). Over time different liquid fuels gain competitive advantage; we need not fetishize crude oil.

The daily balance produced by prices

Oil is expensive to store commercially. This forces production into an almost daily balance with consumption. There is no long or large surplus of output over production.

The increased crude production during the past few years was small: 1.7% per year for the five years ending Oct 2015 (a total of 7.8 million barrels/day).  Slow growth plus increased efficiency meant slow demand growth — three-quarters of which came from America (5.9 million b/d) and the rest came from Iraq (1.9 million b/d) — both of which could continue boosting production.

Then came the end of sanctions on Iran, allowing a flood from its massive oil reserves. A collision was inevitable. When ex ante oil demand (i.e., before price feedbacks) exceeds production — as it did in 2008 — we get “demand destruction” — rationing by price. Rising oil prices motivate people to reduce discretionary consumption, invest in methods and tools to increase efficiency of use, and adopt substitutes. If those prove insufficient or too slow, the economy slows enough to balance demand and supply.

The process works just as inevitably in reverse when ex ante production exceeds demand — a “rationing” of the market among producers. Either they voluntarily reduce output as prices fall, or falling prices push them to do so through bankruptcy (i.e., the weak fail). The process is painful without collective action, which is why cartels are born.

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Mining and manufacturing are in recession. Will America follow?

Summary: The mining and manufacturing sectors of the US economy have rolled over. Perma-bear websites publish lurid descriptions of the horrific effect this will have on the US economy. What’s the truth? {2nd of 2 posts today.}

Recession

A warning. AP Photo/Mark Lennihan.

(1) The manufacturing collapse

Perma-bears often describe the manufacturing sector as in a downturn, sometimes as in a collapse, sometimes as in a recession. Here are the numbers describing the sector, indexed to the December 2007 peak before the recession. An explanation follows.

FRED: Manufacturing Sector Data

What does this tell us? Looking at these lines describing the manufacturing sector as of December, from top to bottom.

  • Inventories are high and stable.
  • Sales are down 8% from July 2014, and falling.
  • Its industrial production index is down 2% from July 2014, and stable.
  • Employment has grown slowly since March 2010 (+900 thousand); been flat as sales fell.
  • Not shown: average hours worked & overtime hours are flat since 2013.

It’s the new industrial revolution at work: tech and capex boost output without more workers. The level of activity in manufacturing (sales and IP) is back to the 2007 peak, but inventories are 15% above the 2007 peak — but employment is unchanged (increased productivity allowed output to increase without more workers).

What will happen if sales continue to fall? Production will drop even faster as companies reduce inventories. Employers will eventually cut hours worked and fire workers. We do not known when and how, but it manufacturing employment is too small to have a significant effect on the overall US economy. Even its output is only 12% of US GDP.

Bottom line: hold the hysteria.

(2)  Collapse of the mining sector (including oil & gas)

Output in red. Employment in green.

FRED: January 2016 Employment and Production of the Mining Sector

The US mining sector — which includes extraction of coal, oil, and natural gas — has hit hard times. Prices and volume are down. It’s a smaller sector than manufacturing (only 2% of GDP).

The mining story is the same as manufacturing’s — the new industrial revolution allows tech and capex to boost output without more workers since 2012. The decline has run in the opposite way as manufacturing, however: so far employment has fallen more than output (-16% vs. -11%). This is uncharted terrain; we can only guess what this will look like in a year or two.

The geographic concentration of mining means that a few states will suffer disproportionately: mining is one-third of Wyoming’s GDP, one-quarter of Alaska’s, one-sixth of West Virginia’s, one-eighth of Oklahoma’s, and one-tenth of Texas’ GDP (source: EIA).

So far the decline in mining output and employment has been in the non-petroleum industries. The below graph of oil & gas mining shows that since 2012 fracking boosted output with few new workers.

FRED: January 2016 Employment and Production of the Petroleum Sector

Now everything unravels. The price of natural gas (Henry Hub spot) peaked in February 2014; crude oil (WTI) peaked in June 2014, employment peaked in October 2014, it Industrial Production Index peaked in April 2015. A collapse will result eventually if prices do not rise — but we can only guess at its shape.

But the oil & gas extraction only employees 183 thousand people. The bankruptcies will affect investors. Some communities will suffer. But the national macroeconomic effects will be small.

Bottom line: no hysteria warranted.

Conclusion

The declines in manufacturing and mining have produced a clickbait extravaganza at some  popular perma-bear websites. However exciting, most of that exaggerates the national impacts.

Business investment and consumer spending are the powerful and volatile drivers of the US economy. When they turn down — and they have not yet done so — the overall economy will drop with them. There are indications that might happen in 2016. Keep your eyes on the center rings of the circus. Should the picture darken, do not delay taking steps to protect yourself.

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And these about the US economy…

Lessons from the hysteria about peak oil (2005-2013)

Summary: The peak oil hysteria provides rich lessons for us today about learning from activists and the value of listening to our major professional institutions. Easy cynicism led people to believe outlandish forecasts, wasting valuable time and resources. Worse, we have had many such barrages by doomsters — aided by their clickbait-seeking enablers in the media — which have left us almost numb to warnings, no matter how well-founded. We can do better.

It's an Oil World

Where were you during the peak oil hysteria? It began in 2005 and died in 2013, marked by the opening and closing of The Oil Drum website. Despite their analysis and forecasts proving to be mostly wrong, most of their authors are still “experts” publishing elsewhere (see this bizarre example). That follows the pattern of modern American doomsters, such as those in the 1970s who predicted global catastrophes from pollution and famine. Perhaps the activists predicting a climate catastrophe will add their names to this list in the next decade.

It’s not just historical trivia. We must learn from these bouts of irrationality if we have any hope of regaining the ability to govern ourselves.

Maximum World Oil Production Forecasts

Memories have faded, but a decade ago the predictions of end of oil were hot news. Comment threads overflowed with people terrified of the future. Conferences were held and books sold trumpeting certain disaster as the lifeblood of our industrial civilization dried up. Many of the following names were highlighted in journalists’ Rolodexes as the go-to people for hot quotes. Then as now, the names least often consulted proved to have the more accurate forecasts.

  • 2005 – Pickens, T. Boone (Oil & gas investor).
  • 2007 – Bakhitari, A.M.S. Oil Executive ((Iranian National Oil Co. planner).
  • 2007+ – Groppe, H. (Oil / gas expert & businessman).
  • 2007 – Herrera, R. (Retired BP geologist).
  • 2008+ – Westervelt, E.T. et al (US Army Corps of Engineers).
  • 2009 – Deffeyes, K. (retired Princeton professor & retired Shell geologist).
  • 2009 – Simmons, M.R. (Investment banker; see the posts about his work).
  • 2010 – Goodstein, D. (Vice Provost, Cal Tech).
  • 2010 – Wrobel, S. (Investment fund manager).
  • 2010 – Bentley, R. (University energy analyst).
  • 2010 – Campbell, C.  (Retired oil company geologist; see the posts about his work).
  • 2010 – Skrebowski, C. (Editor of Petroleum Review).
  • 2011 – Meling, L.M.  (Statoil oil company geologist).
  • 2012 – Koppelaar, R.H.E.M. (Dutch oil analyst).
  • 2012 – Pang Xiongqi (Petroleum Executive, China).
  • 2015 – Husseini, S. (retired Saudi Aramco).
  • 2020 – Laherrere, J. (Oil geologist , France).
  • 2020+ – CERA Energy (consultants).
  • 2020+ – Wood Mackenzie (consultants).
  • 2025+ – Shell.
  • 2030+ – EIA and IEA.
  • No visible peak – Lynch, M.C. (Energy economist).

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Stratfor: Who Wins and Who Loses in a World of Cheap Oil

Summary: Stratfor looks at one of the big questions for 2016. Low oil prices will devastate those nations dependent on oil revenue and provide small benefits to those that consume oil. The destabilizing effect of the former will affect everybody, to vary degrees. Ten years ago people worried about running out of oil (see the comments to Peak Oil Doomsters debunked, end of civilization called off). Now they worry about too much oil. The Saudis have decided to financially destroy much of their competition (the first financial world war). When this is over Texas will beg to join OPEC. I predict that in ten years people will again worry about running out of oil. See the links at the end for more information.

Stratfor

Who Wins and Who Loses in a World of Cheap Oil

Stratfor, 8 January 2016

Oil prices hit their lowest level since summer 2004 this week, continuing the rapid tumble that began in June 2014. The global benchmark, Brent crude oil, closed trading Jan. 8 at $33.37 per barrel, closing out the lowest week of prices in more than a decade. A number of factors contributed to the drop. The Chinese economy and financial markets performed poorly this week, sparking fears that a slowdown will dampen demand. In the major markets of Europe and North America, a mild winter has lowered seasonal consumption of natural gas and heating oil. On the supply side, Iranian oil will soon be back on the global market, and OPEC signaled that it would continue to supply high volumes of oil. The United States, too, has managed to produce a significant amount of oil, despite increased financial pressure on many U.S. producers. All of this may well push prices into the $20 to $30 per barrel range.

Oil is the most geopolitically important commodity, and the ongoing structural shift in oil markets has produced clear-cut winners and losers. Between 2011 and 2014, major oil producers became accustomed to prices above $100 per barrel and set their budgets accordingly. For many of them, the past 18 months have been a period of slow attrition. And with no end in sight for low oil prices, their problems are going to only multiply. Each nation, though, has its own particular level of tolerance, and the following guidance highlights the key break points to monitor.

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The first financial world war has begun, over oil. Bet on the Saudi Princes to win.

Summary: We have not begun a new era of low oil prices, fruits of new tech and a beneficent Fate. Low oil prices are the wreckage of an ongoing war — a financial war waged by the Saudi Princes for control of the world oil markets. We can predict who will win but only guess at the effects.

It's an Oil World

Nukes made conventional interstate war among great powers as obsolete as jousting. But war is protean, always assuming new forms. Fourth generation warfare is one form, as non-state actors use asymmetric tactics to defeat larger and better financed state forces. We might be in the midst of the first financial world war, waged by the Saudi Princes for control of the world oil market. The outcome seems likely to reshape the world, inflicting massive damage on nations relying on oil income — with Brazil, Venezuela, Russia, Iraq, and Iran among the notable casualties. A major victory by the Saudis — making them leader of a stronger OPEC — might reshape the Middle East and the world more than our 14-years of wars since 9/11.

To understand this new age of war I recommend reading Unrestricted Warfare, published in 1999 by Qiao Liang (乔良) and Wang Xiangsui (王湘穗), Colonels in the air force of the People’s Liberation Army. They describe the 1997 attack on the currencies of Southeast Asia by George Soros and other hedge funds as the first financial war. Here’s a key excerpt…

“When people begin to lean toward and rejoice in the reduced use of military force to resolve conflicts, war will be reborn in another form and in another arena, becoming an instrument of enormous power.

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