Oil price wars – who blinks first?

In the green corner we have the US shale producers. In the red corner we have the oil exporting countries of OPEC. Assuming the fight is fought to a conclusion, who wins?

OPEC wins. The US shale producers will shut down first. The reasons are:

The US shale producers are motivated by economics, and all other things being equal will have an incentive to cut production at or around the point where production cost exceeds sales price.

• The OPEC countries are motivated by social imperatives. They have historically used their oil wealth to finance social programs, build infrastructure and subsidize basic foodstuffs and other items such as gasoline (which costs one cent/liter in Venezuela). Cutting back on social spending courts civil unrest and cutting back on oil production cuts spending, so they have a disincentive to cut oil production. (As long as the oil price exceeds cash production costs, which it does in all OPEC countries by a substantial margin, they in fact have an incentive to increase production.)

But not all OPEC countries are created equal. Some can stand the pain longer than others, and here we will look into the question of who might go to the wall first if low oil prices persist.

But first the US shale producers. The recent graphic from Business Insider reproduced in Figure 1 is not backed up by much in the way of explanation but my understanding is that it shows current production and breakeven production costs at US shale oil plays based on  Citigroup estimates. If we take these results at face value we find that almost all US shale oil production is economic at crude prices of $70/bbl, but 40% of it becomes uneconomic at prices below $60/bbl and almost 90% of it at prices below $50/bbl:

Figure 1: Breakeven production cost estimates, US shale oil plays

Keeping these results in mind we will now move on to the OPEC countries. They have two different production costs. One is the cash production cost, which is usually much lower than the cash production cost in US shale plays. The other is the “budget breakeven” cost, which is the oil price needed to cover production costs plus social spending and which is usually considerably higher than the cash production cost in US shale plays. Figure 2, which  superimposes the approximate 95% range of US shale play production costs (from Figure 1) on 2012 OPEC production and budget breakeven costs, summarizes the situation. If production cost was the only thing that mattered to OPEC the US shale producers would rapidly go under:

Figure 2: Budget and production breakeven cost, OPEC, Russia and US shale oil plays (Original graph credit Agora Financial and Total S.A).

OPEC’s production and budget costs are, however, not well-defined. The table below summarizes the results of my search for hard numbers to use in the analysis:

Having no particular reason to prefer one set of estimates over any other I discarded all of them and used the “oil price needed to balance fiscal 2015 budget” numbers provided by the Wall Street Journal, which a) are from a single source, b) cover all the OPEC countries, c) are broadly in line with the budget breakeven numbers in the Table above and d) are specific to 2015 budgets. Here are the estimates:

It’s important to note here that these estimates are not the same as the OPEC countries’ “official” budget estimates, which are generally lower and already being lowered further (Iraq has already cut its 2015 budget estimate to $70/bbl and is now considering a further cut; Venezuela is reportedly down to $60). However, they do provide a fixed point of reference that we can use to evaluate relative exposure.

Note also that a non-OPEC country –Russia – appears at the end of the table. I added Russia to the mix because it’s a major oil exporter that finds itself in a similar position to the OPEC countries. The $100/bbl number comes from the Moscow Times.

A simple way of gauging a country’s overall exposure to low oil prices is to calculate the percentage of its GDP supplied by oil export earnings. This, however, is not a straightforward exercise in practice because different data sources sometimes give wildly conflicting figures. For example, the 2013 nominal GDP of Venezuela was $US 227.2 billion according to the IMF and $US 438.3 billion according to the World Bank, and according to OPEC 2013 oil export earnings in Angola were $US 68 billion but only $US 27 billion according to EIA. The numbers I used were derived as follows:

GDP: I used the median value of the three 2013 nominal GDP estimates given by Wikipedia plus the 2013 nominal GDP estimates from OPEC (link below).

Export earnings. I used the 2013 estimates from the OPEC 2014 Annual Statistical Bulletin. As noted above these are sometimes quite different to the numbers given in the EIA’s OPEC Revenues Fact Sheet but they are comparable to the numbers I backed out of the BP 2014 Statistical Review (earnings = production minus consumption times price). The estimate for Russia is from EIA.

Oil export earnings as a percentage of GDP are summarized in Figure 3:

Figure 3

Kuwait is the most oil-dependent economy, closely followed by Libya and Angola, and Russia the least oil-dependent. The estimates for Libya and Iran are distorted by civil unrest and sanctions but by how much is hard to say.

A more complex question is the impact low oil prices will have on national economies. Impacts will of course vary depending on the specific circumstances of the country, but since a detailed country-by-country analysis is beyond the scope of this post I performed a simplified analysis using the following assumptions:

• Base year 2015

• The volume of oil exports in 2015 is the same as in 2013

• Budget deficits at different assumed oil prices can be calculated as the difference between the price/bbl needed to balance the 2015 budget and the assumed oil price, times oil export volume.

The results at $70/bbl oil, with the deficits expressed as percentages of GDP, are shown in Figure 4:

Figure 4

Kuwait and Qatar have no deficits because their budget breakeven prices are lower than $70. Ecuador, the UEA and Russia have minor deficits. Nigeria, Iran, Venezuela, Iraq, Algeria, Angola and Saudi Arabia have significantly larger ones. Libya looks hopeless.

And at $50/bbl oil (Brent is at $63/bbl as I write) the situation begins to look bleak for Angola and maybe Saudi Arabia as well:

Figure 5

These results are semi-quantitative at best, meaning that there is no certainty that Angola would in fact suffer a 25% budget deficit should the oil price stay at $50. However, they do provide a measure of relative risk, and the indication here is that Angola, Saudi Arabia and Iraq are potentially a lot more vulnerable to protracted low oil prices than Ecuador, Russia and Kuwait.

But this does not necessarily mean that Saudi Arabia will fold before Ecuador. Another factor that must be taken into account is how much money each OPEC country has in the bank, one measure of which is its foreign reserve holdings. How long could each country cover its annual budget deficits by drawing on its foreign reserves? Figure 6 shows the results for the $50/bbl scenario, which we can probably take as the “worst case”. Libya moves up to mid-pack and Venezuela, Nigeria and Ecuador are now the first to cry uncle (the foreign reserves data are from Wikipedia.)

Figure 6

So what do we conclude from all this? I asked Euan Mearns for his opinions and he kindly offered the following insights:

All of the OPEC countries have money in the bank while all of the shale operators are reported to have large debts. This argues in favour of the OPEC countries being significantly fitter than the shale operators in the low price environment.

Nigeria and Venezuela seem most exposed to the downturn and will have to borrow within months to survive. I dare say that the wealthy Gulf States may help in order to maintain solidarity.

The UAE looks surprisingly vulnerable which points to the crisis being over within two years.

My opinion? No OPEC country is going to stop pumping because of economic constraints, nor is any OPEC country facing budget shortfalls – which is all of them except for Kuwait and Qatar – going to cut production in an attempt to drive up the oil price. A more likely eventuality is that growing economic woes will lead to insurrections in some OPEC countries, and here I agree with Euan that Venezuela and Nigeria are prime candidates. (Iran bears watching too.) But as we have seen from recent events in the Middle East, oil has a habit of continuing to flow come what may.  So barring a major uptick in global demand it’s conceivable that low oil prices could be with us for some time.

This entry was posted in Energy and tagged , , , , . Bookmark the permalink.

52 Responses to Oil price wars – who blinks first?

  1. Willem Post says:


    Again, I am amazed at all the work you have to put in to hunt down the data to make these plausible conclusions.

    As you note, the weak link is the shale oil producers. They are deeply in debt, have little reserves, will fold or get bought out as banks call in loans; shale oil sector boom to bust, anyone?

    Even though Russia is derided as a gas station, it has much greater resilience, as you show, than any of the other oil producers, because of its industrial and project execution capabilities.

    Also, its multi-decade experience as a world power comes in handy to form new partnerships with other nations, which will require significant construction activities, some of it financed by the partners, that will pay off in future years.

    Example: Putin will be going to India to negotiate building up to 25 nuclear reactors India. None of the other oil producers have such skills, except the US.

    • Greg says:

      Canada, an oil producer, supplied Candu reactors to India back in the 70’s I think. Maybe the ’80’s. Unfortunately they were used to enrich and give India the bomb. At least it was considered unfortunate at the time. Given today’s geo politics, I’m quite happy India has nuclear weapons.

  2. Aslangeo says:

    A little bit about oil company finances from somebody who has worked for one for 24 years

    Breakeven value depends on several factors which is why figure for companies vary so much

    The spend part of the equation comprises the following

    Non-discretionary expenditure

    1. Taxes (not just profit taxes but also royalties, which can be fixed e.g. $5 per barrel , and production bonuses within PSCs)
    2. Debt interest on bonds and loans (including repayment of debt if not re financed)
    3.Opex (operating expenditure including lifting costs, transport tarrifs etc)
    4. Legally committed (contracts signed) Capex or associated penalties
    5. Commitment exploration expenditure or associated penalties
    6. A basic level of overhead (also known as G&A this is typically a small portion of the cost base, employee costs are typically only about 5% of turnover or less)

    The following is hard to reduce because of legal reasons

    1. Capex on sanctioned projects – changing designs is a very expensive business
    2. Exploration expenditure

    for older existing projects the exploration and development costs have already been recovered so that the minimum costs are effectively the Opex, plus the pro-rata parts of the Tax, Debt etc.

    The truly discretionary part of the equation are shareholder returns in the form of dividends and buy backs as well as non-sanctioned projects which can be postponed (but this only brings benefits a year or two later when project execution would have taken place)

    A league table of low oil price impact on companies was prepared by a proprietary oil industry consultancy (copyright) so I can only give hints

    Small explorers are in real trouble
    North Americans focusing on tight oil and shale gas in moderate difficulties, although a few are doing just fine (depends on their debt position)
    Majors are OK particularly if they cut dividends and buy backs
    Larger explorers would be OK if they cut exploration

    hope this helps

    • Fred says:

      Yes, but if they delay dividends, etc. AND the price is low, so profits are non-existent, then the valuation of those companies tanks on equity markets.

      So even if they don’t go to the wall because of debt, their value on the market is significantly cut – leaving it easy for Saudi, say, to swoop in and grab them up. Then once acquired the OPEC production falls, the price rises, and the OPEC nations that went carpetbagging are winners, increasing their control of the market and profit line.

      Breakeven in these terms is the wrong metric – it’s at what level profit is below expectations of the market – and I’d suggest we are already well below that level.

      And since Putin and Iran are getting hurt whilst the consumer gets a price cut, the US isn’t going to say a thing.

      • Willem Post says:

        “leaving it easy for Saudi, say, to swoop in and grab them up.”

        The Saudis would be insane to buy up near-failure shale oil producers.

        • Fred says:

          When you can control the oil price by reducing your production in fields you’d like to keep producing into the future – such that the shale oil remains profitable whilst the best prospects last – then no, it’s not insane.

          Or to misquote, “control of the means of production is a way to exert power”.

          • Dude. Oil leases expire in 5 years unless you put a pumpjack on top. So you’d have the Saudi’s buy and rebuy billions of oil leases on the off chance that the Canadian Oil Sands Producers wouldn’t eat their lunch in the mean time.

  3. Sam Taylor says:

    I must admit I’ve found most of the analysis on shale breakeven flying around the net very unsatisfying. There’s been no indication if the costs are half cycle or full cycle, whether they need at amount at the wellhead or at the market, whether that’s the cost of the marginal barrel in the play of the cheapest, how much can be produced at that price. More questions unanswered than not.

    Also it’s worth noting that Russia’s economy is heavily dependant on commodity exports, and many of those commodities are currently behaving in a similar manner to oil. This might hurt Russia more than you conclude. Though Russia has extremely low debt to GDP, so could probably borrow if needed.

  4. Aslangeo says:

    Russian trade statistics from the Russian ministry of finance website which I translated into English

    crude oil petroleum products Gas LNG all hydrocarbons all goods all non hydrocarbons % Hydrocarbon % crude % Petroleum Products % gas imports balance non HC balance
    2000 25,272 10,919 16,644 52,835 105,033 52,198 50.3% 24.1% 10.4% 16% 44,862 60,171 7,336
    2001 24,990 9,375 17,770 52,135 101,884 49,749 51.2% 24.5% 9.2% 17% 53,764 48,120 -4,015
    2002 29,113 11,253 15,897 56,264 107,301 51,037 52.4% 27.1% 10.5% 15% 60,966 46,335 -9,929
    2003 39,679 14,060 19,981 73,720 135,929 62,209 54.2% 29.2% 10.3% 15% 76,070 59,859 -13,861
    2004 59,045 19,269 21,853 100,167 183,207 83,040 54.7% 32.2% 10.5% 12% 97,382 85,825 -14,342
    2005 83,438 33,807 31,671 148,915 240,024 91,109 62.0% 34.8% 14.1% 13% 123,839 116,185 -32,730
    2006 102,283 44,672 43,806 190,761 297,481 106,720 64.1% 34.4% 15.0% 15% 163,187 134,294 -56,467
    2007 121,503 52,228 44,837 218,568 346,530 127,962 63.1% 35.1% 15.1% 13% 223,084 123,446 -95,122
    2008 161,147 79,886 69,107 310,140 466,298 156,158 66.5% 34.6% 17.1% 15% 288,673 177,625 -132,515
    2009 100,593 48,145 41,971 8.4 190,718 297,155 106,437 64.2% 33.9% 16.2% 14% 183,924 113,231 -77,487
    2010 135,799 70,471 47,739 24 254,034 392,674 138,640 64.7% 34.6% 17.9% 12% 245,680 146,994 -107,040
    2011 181,812 95,710 64,290 22.8 341,835 515,409 173,574 66.3% 35.3% 18.6% 12% 318,555 196,854 -144,981
    2012 180,930 103,624 62,253 21.4 346,829 527,434 180,605 65.8% 34.3% 19.6% 12% 335,771 191,663 -155,166
    2013 173,670 109,335 67,232 26.3 350,263 523,275 173,012 66.9% 33.2% 20.9% 13% 341,337 181,938 -168,325

    sorry about the formatting

    Basically in 2013 Russia exported, $bn 173 of crude, $109 bn of petroleum products and $67 Bn of gas and $ 26 Bn of LNG, and $ 173 BN of non hydrocarbons, imports totalled $341 Bn, with a trade balance of + $182 BN

    according to the WTO Russia exported 6% agricultural goods, 71.3 % mineral products and fuels and 19.6% manufactured goods.

    Imports comprised 13.3% agriculture (mainly fruits, meat and dairy produce, Russia is now a grain exported) , 2.9% minerals and 80.1 % manufactured goods

    Russia has a deficit in services but overall has a current account balance of 103 billion $.

    If oil export revenue is halved then Russia still has a trade surplus

  5. Hugh Sharman says:

    Awesome analysis! High quality discussion. I feel a little out of my depth but privileged to be in the same place! Keep up the good work!

  6. Javier says:

    Very nice post, Roger

    Especially useful to compare OPEC countries and Russia where I was surprised. The problem with shale oil breakeven prices is that they are wildly different between sources, and the producers have started to claim lower breakeven prices to try to stop the bloodbath at the markets.

    Bussiness Insider has also published Wood McKenzie estimates that are much. much higher than Citigroup’s here:
    Almost everybody is underwater at $60 and as they say is probably worse at the corporate level.

    This agrees well with the >40% reduction in drilling permits in 2 months. I think US Shale Oil already blinked and is on its way to bite the dust.

    Keep well

    • euanmearns says:


      US oil rig count from 10 Oct to 5 Dec. Still no major sign of a downturn – but it will definitely be coming soon.

      • Willem Post says:

        This from a Bloomberg article:

        “The number of U.S. oil rigs has fallen from the 2014 peak of 1,609 amid a global surplus of crude that has dragged prices down by more than $45 a barrel and threatens to slow the nation’s unprecedented shale boom. OPEC decided last week to maintain production, placing more strain on U.S. oil producers that have some of the world’s highest drilling costs.

        “There’s just so much momentum built up in the system right now and a lot of projects have already been funded,” Kurt Hallead, co-head of RBC Capital Markets’ global energy research team, said yesterday by telephone from Austin, Texas. “There are some projects that will continue on into the next quarter. Right now, you’re seeing the smoke, and you won’t really see the fire until about the second quarter.””

      • Aslangeo says:


        a president would be the rig count for dry gas plays such as Haynesville, Barnett and Fayetteville vs the Henry Hub gas price – please can you have a go

        This would show how fast US onshore drillers respond to price signals

        my gut feel is that this should take several months as rig contacts are booked some time in advance and effectively paid for under contract (I know invoies take months to settle but AFE’s are agreed) and would take some to unwind

        Thanks in advance

        • Euan Mearns says:

          I had a quick look at this in a recent post:


          Following the 2008 crash US drilling activity plunged (Figure 1). It may look immediate so here are the numbers for total US rigs:

          Jul-08 1923
          Aug-08 1988
          Sep-08 2002
          Oct-08 1964
          Nov-08 1923
          Dec-08 1771
          Jan-09 1543
          Feb-09 1308
          Mar-09 1092
          Apr-09 984

          And here is the oil price (WTI $/bbl):

          Jul-2008 133.37
          Aug-2008 116.67
          Sep-2008 104.11
          Oct-2008 76.61
          Nov-2008 57.31
          Dec-2008 41.12
          Jan-2009 41.71
          Feb-2009 39.09
          Mar-2009 47.94
          Apr-2009 49.65

          The oil price peaked in July two months ahead of the crash that began in September. Drilling peaked in September and only began to fall rapidly in December.
          One difference now is that the 2008 crash was a well-defined event and the consequences became immediately clear. This time it has been a slide in oil price with no clearly defined reason at the outset. The recent peak in WTI was June / July. Then the slide began, but it’s only when support was broken at $80 did the market become aware that this was a little different. That support was only broken at the end of october – a mere 6 weeks ago. In 2008 it took three months for drilling to react. So it might be end january before we see a shale drilling slow down. But all the while there is momentum and production will continue to rise – unless the shale producers decide to withhold supply to support price 😉

          The dry gas plays are even more complicated to look at than shale since there is always a large backlog of drilled wells waiting for the frackers and pipelines to arrive – large time delays between price signals, action on the ground and production.

    • Aslangeo says:

      It depends what people count as breakeven so you would get two different answers

      The low case number is essentially OPEX (lifting costs and tariffs) plus maybe some for G&A – this represents would it would take for existing wells to continue production assuming all capital costs, exploration costs etc are already payed off

      The high case number is full cycle – including Capex and Opex, under this scenario – everything except core Bakken and core Eagleford is underwater at $60.

      I feel that for unconventionals the full cycle is more relevant as wells have to be drilled continuously to maintain production, also pay-back (when the cash flow curve exceeds zero) is some way in the future 5-8 years at even $100 on average so many shale drillers would still be carrying costs

      Hope this helps

  7. Euan Mearns says:

    Here’s the chart from Wood Mac that Javier links to. The breakevens are about $20 higher than on the chart Roger used. There are so many different ways to calculate this. I guess we’ll know by June 😉

    Blood bath underway in Aberdeen.

    • Sam Taylor says:

      I watched a talk by Art Berman recently, he said something like “if you hide enough costs, you can always show a profit”. One imagines that the accountants are earning their keep.

      • Euan Mearns says:

        I know that Art believes breakeven is much higher price than indicated on the chart Roger used. One of the points that Art has made for a long time is over-optmistic assumptions made by shale players on the EUR (estimated ultimate recovery).

        • sam Taylor says:

          Yeah they do fit pretty long tails to their curves. I thought most shale wells paid back in a few years though.

  8. Richard Miller says:

    I think the comment (near the top of the piece), that OPEC has a financial incentive to raise production even when the price falls, is a bit too simplistic. OPEC has made exactly the opposite decision in the past, which the inelasticity of oil price suggests makes the more money. I think the other incentives for Saudi are more important today, including deep politics with the US, Russia and China, and (increasingly) its allies and enemies in the Middle East; long-term market share and contracts with buyers; deliberate crushing of competition; and revival of the global economy it needs for its customers, which seems a forlorn hope to me.

    • Euan Mearns says:

      Richard, agreed that the motives may be a bit more complex, but what we know for sure is 1) Saudi / OPEC have managed the oil market and price for 5 years with great skill, they have decided to stop doing it 2) those who are going to be hurt most are the highest cost and small producers 3) low oil price should be good for global economy, but also deflationary.

      Its tempting to speculate about political motives but very difficult to prove them. US and OECD oil production, given time, will be hit hard.

  9. A C Osborn says:

    Does the US Shale position depend in any way on what the US Government decides to do.
    I know Obama is anti Oil/Coal but will the GOP allow Shale to go under as it is powering their Industrial Revival?

    • Euan Mearns says:

      Whether or not shale producers go under is hard to answer. But what seems more certain is that there is a LARGE cut in drilling and we see either a pause in the rise of shale oil production or even a decline. But it will take many months to work through the system. If the shale producers make heavy losses then it may become more difficult for them to fund on-going activity.

    • Gas generation emits only half as much CO2 as coal (and a lot less than biomass), so the Obama administration could in fact make a case for subsidizing it, like wind and solar. 😉

      • S.C. Schwarz says:

        The Greens are a major Democratic interest and donor group so neither Obama nor any other Democrat will ever support any fossil fuel.

  10. Pingback: News update | Peak Oil India | Exploring the coming energy crisis and the way forward

  11. Euan Mearns says:


    Totally off topic, but its very windy up here today and guess what, NW Scotland had another power cut.

    My internet is also extreme ropey today 🙁

    • Leo Smith says:

      Yes. Hugh (Sharman) and I are looking at forecast versus actual wind generation. Huge notch in it – we/I suspect several big farms had to shut down because of too much wind…introducing a 2GW shortfall onto the grid. Ho hum.

      If anyone is interested, there is not a dump of forecast versus outturn available via a link from the gridwatch links page…

      • Willem Post says:

        Recently, Germany increased its winter reserve capacity, MW, because wind and solar are too, too unpredictable. It is either too much, or too little, never just right.

  12. Shale production costs are what they are. We come up with different numbers depending on how we calculate them but there isn’t much we can do to change them.

    The OPEC countries’ budget breakeven costs, however, are a variable feast that move up and down at the whim of the government depending on social and political considerations. They are the wild card that makes prediction so difficult. With this thought in mind I attach a list of quotes from the official OPEC November meeting communiqué. I can’t make much sense of them but maybe someone else can figure out what the plan is:

    “the Conference concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing.

    “Accordingly, in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 million barrels per day (bpd), as was agreed in December 2011.

    “The Conference reviewed the oil market outlook, as presented by the Secretary General, in particular supply/demand projections for the first, second, third and fourth quarters of 2015, with emphasis on the first half of the year.

    “The Conference also considered forecasts for the world economic outlook and noted that the global economic recovery was continuing, albeit very slowly and unevenly spread, with growth forecast at 3.2 percent for 2014 and 3.6 per cent for 2015,” the communiqué added.

    Continuing, OPEC members noted that “although world oil demand is forecast to increase during the year 2015, this will, yet again, be offset by the projected increase of 1.36 million bpd in non-OPEC supply.”

    • Euan Mearns says:

      That 1.36 M bpd caught my eye. I will wager a barrel of single malt that by the end of 2015 it does not exist and the IEA will shortly thereafter be calling OPEC begging them to open the spigots again. WTI is approaching $60.

  13. Gerd says:

    When OPEC met recently Saudi were not willing to be the swing producer and most other OPEC members were not willing to cut production. Now the price is $60. If I am Iran or Nigeria or Venezuela, surely I now agree to a cut. Say I export 2mb/d at $60, that earns me $120M per day. If I agree to cut production by 5% I will export 1.9Mb/d and the price should jump back up to $80 or $90. That will earn me $152M or $171M per day, much higher than the $120M I am getting today.

    Will the reluctant producers now agree to a cut?

  14. Saudi Oil Minister Ali al-Naimi speaks his mind:


    “Why should we cut production? Why?”

    Naimi stuck to the same broad message: the market would be left to balance itself without the Kingdom’s intervention. This is seen as a shift from longstanding Saudi policy of acting as a swing supplier. While oil prices have fallen more than $10 a barrel since OPEC’s Vienna meeting, Naimi showed no greater concern.

    He said Kingdom produced 9.6 to 9.7 million barrels per day (bpd) of crude in November, a figure consistent with October estimates. “That is not going to change unless other customers come and say they want more oil,” he said.

    Asked whether the market was oversupplied, he said, “you can see from the price (that it is).” He did not specify by how much it was oversupplied. “You come from capitalist nations. You know what the market does,” he told reporters.

  15. Pingback: simpleNewz - Energy Matters RSS Feed for 2014-12-11

  16. Simon Ratcliffe says:


    Congratulations on a thorough examination of some of the key dynamics here. As has been pointed out in other comments, the shale oil sector is up to its eyes in debt. When do the producers start to default is an open question and what would be the consequences? How would this ripple through the financial system? It would be ironic if a low oil price was the cause of the next financial crisis. Along these lines, this article caught my attention


    Clearly, there are others out there worries about fracker debt defaulting.

    The other dynamic at play is the geopolitical one, Russia vs the West. Like Chris Martenson, I can’t figure the logic of picking a fight with a country like Russia that holds all the trumps in its hand. These being gas, oil and coal. Your analysis shows Russia’s resilience. With the apparent determination of the US to weaken Russia, I wonder how it will act if the frackers start to default and go out of business. Will they prop them up or let the fall?

    Russia is acting swiftly, and Europe will be the loser. A big gas deal with China and one this week with India and the axing of the southern pipeline.

    Interesting times.

    • Willem Post says:


      Exactly right. Russia was hoped to be more vulnerable, but knows how to deal with it, politically and economically, unlike some other oil and gas producers that have near-zero options.

      The Ukraine fiasco was a huge mistake by the Brussels bureaucrats, with blinders and on auto-pilot. Those second-rate bureaucrats, usually shoved off to Brussels by their governments, saw US support as advancing EU aims, but it backfired.

      Egg on indignant faces all around.

      NATO, the EU and US could not give a damn about Crimea, but it had to do with Russia finally and strongly objecting to further EU expansion and its further containment.

      Brussels was indignant, its plans thwarted. How could Putin do this? He has no right. We won, they lost!

      But the rule is, anything Russia does to encroach on the EU is evil, anything the EU does to encroach on Russia is good.

      Here is an article that may be of interest.


      • Willem: Re NATO not giving a damn about Crimea. I used to think Putin’s claim that NATO was after Russia’s Black Sea bases was preposterous but now I’m not so sure.

        • Willem Post says:


          NATO, a tool of the US, is after anything that derides/reduces/contains Russia’s role in the world. If that hurts the EU, so much the better.

          The UK, Canada and Australia help out, as they all sing from the same song sheet.

          During the G-20 meeting all used practically the same words towards Putin, as dutifully reported by the embedded press.

          Many people who were in charge during the cold war are now running the show in the CIA and State Dept.

          The next arena will be control of the Caucasus to ensure EU access to Caspian Sea oil and gas.

          Putin rerouting South Stream, 63 bcm, via the Black Sea and Turkey, and providing Turkey with gas at a discount is an EU-dividing move to bypass Ukraine, to supply 10 southern European nations, and to compete with Caspian Sea and Iran oil and gas.

  17. WmWatt says:

    Oil men are by nature risk takers and optimists. If it comes to a standoff with the Arabs they are likely to call the bluff and go to the wall. Their bankers, on the other hand, being more cautious, include contraints in the form of financial ratios in loan agreements. I think if one is looking at what numbers will force who to do what then the ability of oil producers to access financing and for how long would be an important consideration.

  18. Pingback: Oil and Milk Commodity Prices Continue To Fall – Batten Down The Hatches!!! | r1016132nzblogger

  19. DaveK says:

    I think your analysis forgets the difference between “lifting cost” and “project cost”. Even if the producers go bust because they can’t cover their debt, it doesn’t mean that a well can’t produce at a value greater than what it takes to get it out of the ground. Companies may go into bankruptcy, but they won’t shut in an asset that can reduce the pain of that process.

    I think that $50 oil is a realistic projection, and OPEC (or what is left of it) is going to feel a lot of pain.

  20. Amy Webster says:

    A lot of this is over my head, but living in northern Alberta (and in a city with a population of 60k, that is 99% run on the oil industry) I find myself reading your reports very closely. We are split over what the future holds (not just about our jobs, but the economy of Alberta as a whole). Some are going full-blown production without blinking twice, others are very nervous about what this means for the economy in the next 6 months to a year. In any case, thank you for taking the time to research these topics with such depth, and then to share it with everyone. Its very much appreciated!

    • Euan Mearns says:

      Hi Amy, I live in Aberdeen Scotland. Population 250,000, home of the UK oil industry. I think everywhere that has an oil industry will be negatively impacted by this. Fit companies (ones with manageable debt) will make a loss 2015 and then prices will go up again. The unfit may go to the wall or get taken over.

      The big known unknown is whether or not this causes a new banking crisis. Good luck!

      • The oil sands are a bit of a wild card. They are so Huge! Recently I was looking at property that had a 10,000,000 Barrel resource ( 10-30% recovery depending on the scenario) and it was “nothing special” as far the projects were concerned. So much capex has been sunk in to Ft McMurray creating a massive amount of production, and unlike shale which has a 40% decline y/y the sands don’t decline. My gut tells me that the big producers will take the hit and keep on trucking and since an army is needed just to keep the wheels turning it will be a welcome break from the breakneck growth we’ve seen.

  21. Pingback: Capitalist Market Parameters… – What I Found On The Internet

  22. Pingback: Interesting Blog Post On The Oil Wars!!! | suyts space

  23. Pingback: Anonymous

Comments are closed.