Given that so much attention has been focused on other things, many may have missed that Friday OPEC, lead by Saudi Arabia, failed to set caps on oil production by it members.
We are now in an uncontrolled oil market for the first
time since the early 1970s, and the production trend is up. I wrote earlier on the Saudi boost on production, and what it might be about, but what seems fairly clear now is that part of it was designed to put a stop to increased US and Russian
production. The Saudi effort did at least slow the upward US trend but it didn't return
Saudi market share to the pre US boom level and US production, if not exploration, has remained surprisingly high. The Saudis may simply have missed their chance to achieve their goal without it taking a long time, and without it ultimately being pretty costly.
Prices have been going
down, and given this development, they're going to keep going down. My
guess is that they could go down quite a bit. I
saw gasoline for sale for $1.87 today for the first time in years.
It's hard to imagine. This has to start having some sort of
deflationary effect on prices in general at some point. And its hard to imagine that it doesn't result in an increase in domestic consumption, although this doesn't really seem to be occurring.
Indeed, the question would seem to be now if we are about to enter a deflationary period. We haven't, but with this particular cost going down, some impact has to occur. It will not stand to be a disastrous one, like the deflationary period of the Great Depression, and in fact it would appear that except for the US energy sector, it will likely be a positive one for most of the world's economy, assuming that the price continues to go down or that it stabilizes. It will be hard, however, on the US energy industry, although the irony is that with so much new production in North America having done on line, the US now has the ability basically to absorb increases in price which in turn might keep the Saudis from allowing that to occur.
Some energy analysts have been claiming that we're now in a new environment in terms of oil production. This seems to be becoming very much the case. The Saudis are maintaining a dedicated effort to keep their share of the world market, but at a great loss to themselves. Global production has reached the point where they don't have much choice, if that's what they want to do.
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As I find this topic really interesting, I've posted an item on this in two other places, one an email list serve. That brought this really interesting reply, which I set out in part here:
"Saudi reserves will last 80 years at the current level of production and currently known reserves. In 2013, Solar power in SA crossed the cost line with the oil powered electrical generation plants. Last spring a group of ‘investors’ announced they were building a plant to manufacture Solar PV panels in Jiddah. The plan announced would target 110 MegaWatts of panels per year. US production of PV Panels in 2012 was 1,400 MegaWatts - over 10 times. Caution: The US was only the 7th largest producer of PV panels in the world.
The Saudi plan is to have 100% solar electricity by 2040. Double oil production, and they still have 15 years of proven reserves. Where will that put us."
I think there's a lot to that analysis, and it essentially equates with what I've been stating here for awhile.
I replied to that with this:
"I think what you note very clearly illustrates what I think is going on.
The Saudis can’t produce like this forever, but they can for a long time. Probably longer than 80 years actually, as the way proven oil reserves are calculated always has an intentional short term time frame to it. In spite of what critics in the US have said over the last decade or so, the same sort of advancement of technology that made the US oil boom possible is also ushering in the age that will greatly reduce the use of petroleum as fuel (petrochemicals are another matter) and so we’re likely in the end of the oil age. Technology combined with concerns over the climate will end up relatively rapidly causing petroleum to decrease as a fuel and it already has put coal in the intensive care unit in the US. I strongly suspect that the Saudis appreciate this a lot more than we do and have made a strategic determination to dominate the market, and hence maximize the sale of their resource, in the declining phase. They almost have to, as they aren’t a democracy that can survive economic turmoil and remain relatively intact. The Saudis have to work out their next economy right now, and having only one thing to sell, this is the only way to do it.
I don’t know what the Boone Pickens plan is, but I don’t think any plan we come up with matters. If we are in a declining phase of importance for oil, and I think we are, and if a drop in price doesn’t cause an increase in demand, which so far it isn’t (suggesting that we are truly in a new era), it’s also to our economic advantage to let the Saudis sell it to us as cheaply as possible. It will have a benign deflationary impact on our economy fairly soon, as long as it stabilizes or doesn’t fluctuate a great deal, and it makes our incomes accordingly greater. We lose our domestic petroleum industry, but that only hurts people like me (and I’m well aware I’m going to be taking a pounding on this within the next couple of years), and states like mine, that depend on the oil industry directly or vicariously. Our oil won’t be going anywhere, so if this all proves to be wrong, we’ll still be in the picture when the Saudi oil runs out or the price climbs. So, we oddly have received what we were always wishing for, prior to the increase in our own production. Cheap oil. I’ll be in real terms its cheaper now than its every been.
And likely to go cheaper. While this will sound crazy at this point, my prediction is that sometime in the next couple of years we’ll see gas at $1.00 again."
We'll see how correct I am on this, but this stands to potentially be pretty rough on oil producing states and provinces in North America.
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