Using $80 oil to bankrupt Russia
*Lowest price in four years ...
*Simple economics ...
*Defending market share ...
*Plus: CDC blames the nurse!
Uncommon Wisdom Wrote:
Dear Reader;
You may have noticed a pleasant surprise at your corner service station this week: lower gasoline prices. Are SUV owners finally getting a break?
Yes; and they can thank Saudi Arabia for the lower prices.
However, Vladimir Putin isn’t thanking the Saudis. He is more likely cursing them. They just threw his regime to the wolves.
What do the Saudis have against Putin? Nothing... and everything.
***
Oil prices are plunging. Brent North Sea crude, the benchmark contract for Europe, dropped to its lowest level in four years today.
Like every commodity, crude oil’s price is a function of supply and demand. A falling price indicates some combination of increased supply and reduced demand. Right now, we can see both in the crude oil market.
You already know that the North American shale boom is tapping massive oil and gas deposits that were untouched and largely unknown just a decade ago.
Middle East supplies are also growing.
Libya’s oil output climbed by 280,000 barrels per day last month, the fifth consecutive increase as Libya emerges from a long civil war.
The possible end of U.S. sanctions on Iran may bring some of that country’s untapped potential back online.
The Islamic State, despite its violent tendencies, seems uninterested in interrupting oil shipments from Iraq. They are instead seizing oil facilities intact and smuggling the oil to market at discount prices.
On the demand side, signs of a global economic slowdown are making analysts cut their consumption estimates. Today, the International Energy Agency chopped its 2014 demand growth estimate to 650,000 barrels per day — that’s 250,000 below the prior forecast.
If the oil supply grows faster than oil demand, as now seems likely, prices have to fall. That’s simple economics. Saudi Arabia is okay with this. Russia is not.
***
The Organization of Petroleum Exporting Countries (OPEC) cartel tries to maintain world oil prices at a level it deems most profitable. OPEC can do this thanks to Saudi Arabia’s ability to dial oil production up or down.
In orchestrated leaks over the last few days, Saudi officials informed the world they will let crude oil drop as low as $80 a barrel and stay there for up to two years.
Why would Saudi Arabia do this? They want to defend their market share by keeping Asian customers dependent on Saudi oil.
China, Japan and other Asian oil importers have the opposite goal. They want to pit OPEC against other oil producing nations like the U.S., Russia and Canada.
When crude oil was over $100, there was plenty of incentive to build pipelines across Siberia and Canada to feed Asia’s energy thirst. Saudi Arabia needs to remove that incentive. Pushing oil down to $80 for a couple of years may well do it.
Some other OPEC nations don’t like this idea at all, especially Venezuela, but they can do little to stop it. Saudi Arabia has all the cards in this game.
What about Russia? President Vladimir Putin is already in a tight spot thanks to Western economic sanctions. Energy exports bring in critical hard currency to Russia. Experts think Russia needs crude to stay at $100 or more to sustain current government spending levels.
Barring some kind of catastrophic supply disruption, crude at $100+ looks increasingly unlikely. That’s bad news for Putin.
Before you cheer too loudly, remember that Putin has options. He can cause trouble in any number of global hotspots and drive oil prices higher. I won’t be surprised to see him try.
So enjoy your bargain fuel bills this winter ... but don’t think they will last forever.
***
Here is part of a comment someone left on yesterday’s Ebola Economy: Time to Mask Up article. You can follow the link and scroll down to read his full thoughts.
Reader Roger says: “There are procedures to follow when working with those infected with dangerous, infectious/contagious diseases and these are called protocols ... [A] nurse ignoring or forgetting protocol is not unusual, although some would argue that point. The results just aren’t usually quite so dramatic (or newsworthy).“
Brad: Thanks for the comment Roger. My line about “protocol“ was satirical, of course. I know that healthcare professionals use the word to describe their standard processes.
The real point I wanted to make was that the Centers for Disease Control and Prevention (CDC) and other officials presumed that the nurse must have broken protocol when, in reality, they had no idea how she became infected. They didn’t stop to consider the possibility that their protocol might be flawed.
I know enough about the scientific method to realize you don’t rule out alternative explanations without testing them first. The rush to judgment about this nurse doesn’t make the nation any more confident in the healthcare system. In fact, it does the opposite. We now have yet another reason to be skeptical of CDC pronouncements.
Thankfully, nurses across the country called “foul“ and the CDC saw its error. They are now reconsidering the protocols. Let’s hope they learned something from this episode.
***
What do you think is happening with crude oil? Will the Saudis be able to keep prices low? Will Putin try to stop them? You can leave a comment on our website or send me an e-mail.
Check out other post on this blog; you would love them.
Happy Reading!
Nwadu Obiora.
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