Oil illusions and/or delusions – pt 2

(Part 2)
What is interesting is that for years we heard the Mid East production level adjustments, such as OPEC’s or Saudis’, had little to do with the price we were paying for refined goods. When we complained in general about high oil prices, we were told their decisions and production had really no effect on overall prices. We are always reminded that supply and demand are driving those prices. It’s the hidden hand of the economy.

But now we have a situation where Saudis are actively flooding the market with their oil to drive oil prices down, which makes it hard for others to do business. So are they now admitting Saudis’ production control has an effect on prices? Yes, they are. Flashback to all those times we were told it was only consumer demand, no foul. We were imagining things. Remember, they said the free market was setting those prices. Which is it?

Apparently, someone woke them up and told them the power they have over oil prices. Who let that out of the bag? Do you think it took them all these years to realize it? And took our domestic fracking ability and development to show them? Anyway, now they know the dirty little secret and are using it against us to curb our ability to produce.

Here is a newer article examining the issue that Saudis are at war with our domestic production. He compares this reaction to the subprime bubble, and presumably meltdown, as the perfect analogy.

As soon as oil’s price headed in the undesired direction in this highly leveraged market, the dreams evaporated, just as they did in the highly leveraged housing market. The debt of the most indebted producers, now losing money, is worth less than face value. Their creditors will eventually recognize losses. As previously noted, the one wrinkle is that so many producers are governments. They have not, in most cases, explicitly backed their debt with oil revenues, but they had assumed those revenues and based their future spending plans on them. Call it “soft” debt. — Robert Gore; straightlinelogic

Long ago I figured if Saudis’ had real fear about Iran, they could put pressure on the market and oil prices, which Iran is dependent on. This would have the effect of sanctions. Maybe this is what they did, or maybe they are only reacting to us? If we listen to these economists, Saudis are responding namely to us.

I admit having a bias that I prefer to buy gas below 3.00 to paying about 4.00 per/gallon. (or at 2.00) At 4.00 per/gallon, the fracking is more profitable. So am I supposed to be happy knowing they are producing and growing, and just pay 4 dollars and shut up?

I realize how much high prices affect the whole economy. So that works in favor of my bias for lower prices. Am I to say: our economy is sputtering and people can’t afford the high costs… but at least we are producing more oil, thank goodness? I’m not there yet.

On the other hand, should I worry prices will decline so far the market will collapse to where no drilling is profitable? Well, I already heard one person put it this way: ‘you have to produce something before it is consumed.’ IOW, oil must be profitable to be produced, so we can consume it — in all its forms. If it is not, we will not have it available.

But in that case, prices would go up due to lacking supply, per supply and demand.

Here is an interesting article about the scoreboard

Biggest Winners and Losers of International Oil Price Crash

By Isaac Arnsdorf Dec 4, 2014 | Bloomberg

Oil prices around the world have fallen more than 38 percent since the year’s high in June.

Among the winners are airlines, which are saving on fuel and not reducing fares for customers. Bank of America Corp. predicts earnings will gain 73 percent in 2015.

Saudi Arabia flexed its muscle at November’s OPEC meeting by overruling other members, showing that it’s still the dominant producer. The desert kingdom needs oil at $83.60 a barrel to balance its budget, according to the International Monetary Fund, but it’s got $736 billion in reserves.

Apollo Global Management LLC, the New York buyout firm run by billionaire Leon Black, announced the sale of shale driller Athlon Energy Inc. on Sept. 29 — before oil dropped 29 percent.

More on Bloomberg

See the list of winners and losers. Saudis need 83.60 and currently it is below that, though they have substantial revenues.(they should) Iran needs 117. And we know that OPEC members cheat on quotas anyway. They probably want to sell what they can even at a lower price. But I don’t see articles about the negative effects to them.

I know it’s a complex issue. Yes, lower prices are hurting the producers, like fracking and development. It is in Saudis interest that we decrease our production.I understand the price declines are undermining fracking. Hey, there’s an angle for the enviro-gurus. They should favor lower prices. Though judging market effects as either good or bad is tougher. And motives can be almost as hard.

[My past article]

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