OPEC Can’t Win

As the oil price war unfolds it becomes easier to understand the outcome. There is ongoing speculation about the motives of the main players. Is it a battle between OPEC and US shale? Or a battle by the USA and Saudi Arabia  against Russia and Iran? I lean quite strongly towards a market driven version of the former and believe that OPEC (i.e. Saudi Arabia) cannot win against the USA. Low oil prices are a major benefit to the US economy and US citizens, a disaster for OPEC and Saudi Arabia. Figure 1 shows how halving oil prices slashes export revenues for the exporting countries while halving the cost of oil imports to the USA.

Figure 1 Oil export and import figures based on BP 2014 for the year 2013. Values based on constant $2014. The average oil price in 2014 was $110, shown in blue. Had the oil price been $50 in that year, the value of oil exports to the exporting countries would have halved (red). On the other hand, the cost of oil imports to the USA would also have halved. One man’s poison is another man’s candy.


The methodology employed is very simple and some may argue too simple, but it serves to demonstrate a few points. I have used BP oil production and consumption data, average annual oil price data and World Bank GDP data, all for 2013 to calculate the value of production, exports / imports compared with GDP. Exports are simply the difference between production and consumption. I’m aware of the limitations here.

Figure 2 shows the value of oil production to the various economies expressed as % of GDP.

Figure 2 The oil price averaged $110 in 2013. The value of production, therefore, is barrels per day * 365 * 110. For Saudi Arabia 11.393 Mbpd * 365 * 110 = $457 billion. with GDP reported as $748 billion, oil production works out as 61% of GDP.


The main point I want to make is that oil production is 2.4% of US GDP. The US has the biggest oil industry in the world and yet it has rather small importance to the economy as a whole. The fall in the value of oil production to $50 may turn out to be catastrophic for some OPEC countries, it barely affects USA GDP at all and bestows major benefits via lower energy costs and a positive impact on the trade balance. The gigantic size of the US economy compared with the other players is shown in Figure 3.

Figure 3 In green is actual GDP when oil was $110 / bbl. In blue is a notional GDP if oil had been $50 / bbl. Its difficult to see what is going on with the OPEC states, so they are reproduced separately in Figure 4.

Figure 4 The same data as shown in Figure 3, but for OPEC countries only. The drop from $110 to $50 is particularly painful for the Gulf States. While they may be the most wealthy, they are also being hit the hardest. Kuwait with a possible 39% drop in GDP, Saudi Arabia 33%. These numbers could be quite far out but indicate the scale of the consequences (Figure 5).

Figure 5 Had oil traded at $50 in 2013, this chart illustrates the drop in GDP that oil exporting countries may have experienced. 

To Sum Up

Cheap oil is a major benefit to the US economy. Cheap oil reduces the cost of US oil imports and is good for the trade balance. The lost value of indigenous oil production in the US is of little consequence to its gigantic economy. In summary, cheap oil is really, really good for America and Americans.

In contrast, oil production is the major part of OPEC GDP, especially the Gulf states that have rather undiversified economies. The drop to $50 is a disaster for them. With WTI flirting with near term lows (on $40.73), the time of reckoning is nigh for the oil price. Things could be about to become a lot worse. It is very difficult to understand the OPEC strategy unless there is in fact a hidden political agenda. A production cut of 2 Mbpd (shared with Russia) would see the price and all their economies bounce. Sticking to the current course will see 2016 worse than 2015 for oil producers while the consumers party.

Heads the USA wins. Tails Saudi Arabia loses.

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49 Responses to OPEC Can’t Win

  1. Any OPEC member who wants OPEC to cut oil production is going to get no help from Iran:

    Iran won’t negotiate with OPEC or seek the group’s permission before boosting oil exports by a planned 500,000 barrels a day once sanctions are removed from the nation’s economy. The Persian Gulf state is unconcerned about the impact this additional supply may have on crude prices, which already reflect the expected increase in Iranian shipments, Oil Minister Bijan Namdar Zanganeh said Tuesday at a news conference in Tehran. “The drop in prices won’t be a concern for us,” Zanganeh said. “It should be a concern for those who have replaced Iran.” Iran doesn’t expect difficulties selling the additional barrels, and “the market has taken into account our return,” he said.

    And here’s the underlying logic:

    “Our oil will probably double within a short while of sanctions being lifted,” Zanganeh said, without specifying the amount of such an increase in exports. “So if the price does go down, it won’t worry us because it means, for instance, if the price drops but then export volumes increase, the income will stay the same as before.”


    • Euan Mearns says:

      But the point being Roger, for a number of years OPEC jointly managed their production sharing cuts to match supply to demand. In the past all would have cut to a quota to make room for Iran. But Gulf politics seem to be in greater turmoil than before. The pursuit of market share at any price is a new strategy for the Cartel. The US will work towards making shale profitable at $50, what then for Saudi who need $100.

  2. artberman says:

    Euan, It might be helpful to express GDP on a per-capita basis to remove the outsized population bias of the U.S. compared to the Gulf States. I doubt that it changes your thesis but at least it normalizes the argument.

    When this is done, for example, with vehicle miles traveled in the U.S., we find that the much-touted record VMT in 2015 is actually a bit lower than VMT per-person in 2000 and only high compared with the post-Financial Collapse years in the U.S. It does not change the value of the observation but provides a useful insight.

    All the best,


    • Euan Mearns says:

      Art, on this occasion I disagree. I don’t see what per capita analysis brings to this story. It is the sheer size of the USA that makes it largely immune to the negative impacts combined with the diversified nature of its economy.

  3. GV says:

    One (non-oil) element that economically cannot be ignored: a reduction in the military spending by SA which is about 80B, will be a negative for the US. Something that is not on their agenda for the time being but should not be excluded when the oil price remains low.

  4. RDG says:

    United Solar/Wind of Alternativa can’t win either.

    Therefore the USA GDP is a lot of hot air.

  5. Hugh Sharman says:

    Art Berman, this is surely the moment of truth for shale oil/gas or actual finding to production to refinery costs a lot less than we were led to believe only 3 – 4 years ago.

    The resilience of the upstream shale industry looks like walking on water! To me, at least, very much a mere amateur!

    • Euan Mearns says:

      Hugh, I have long maintained that the USA can run on shale but not with current capitalist system. It would require state ownership of energy industries – not the American way. But it was Gunther who made the point in another thread that the US shale debt is small compared with the size of the economy and that benefits of cheap oil, even loss making, outweigh the risk of load defaults. I guess it was that comment that got me thinking. I tried to build the debt status into this story but did not feel comfortable with all the numbers.

      But imagine a situation where the FED has a quiet word with the banks to keep the shale party alive. Not state ownership but state intervention which is the norm these days.

      • Roger Andrews says:

        Euan: A quiet word from the fed could well explain why banks went so easy on the shale producers last month:


        It’s not unheard of for the US govt to bail out failing institutions. It forked out over $600 billion – not much less than Saudi Arabia’s GDP – in bailouts during the 2008/9 recession, including $60 billion to GM and Chrysler. Something to keep an eye on, I think.

      • gweberbv says:


        let me extend my argument: Are there US banks/investment vehicles that are specialized in financing the energy industry? Probably yes. Are they able to absorb the losses if the whole industry goes belly-up? Probably no.

        So, besides the macroeconomic perspective there might also be a microeconomic logic behind this pretend-and-extend scheme.

      • Luís says:

        Hi Euan, it is a pity you did not dive further into this. The “shale” industry is not that big in the bond market as a whole, but on the “junk” bond market is huge. In the beginning of this year it accounted for over 20% of this market, on which rests an unidentified volume of other instruments such as CDSs. If such a large section of the junk bond market goes away in a short enough span of time there will be consequences – and likely not only in the US.

        The ease with which banks are rolling over debt lines of what are pretty much dead companies is not natural. Fed or no Fed, they seem to at least be trying to avoid a bankruptcy watershed, slowly winding down this market.

        I am not sure Saudi Arabia considers the US an enemy to shoot down in this market. There are enough divisions within OPEC to worry them. With Iran returning in full to international trade, Saudi’s power will certainly wane. And lest not forget that Saudi’s forex reserves amount to 90% of their GDP – this is pretty different the bond market situation in the US.

        Another issue worth pondering in the US is unemployment. This year alone over 100 000 folk lost their jobs in the “shale” industry. In states like Texas and Oklahoma theft has now become a serious issue, with a black market emerging for oil and drilling gear. This is not something easily accountable.

        Finally, some of the numbers in your graphs look “funny”, particularly regarding Russia. It is about time you quit using the hugely flawed database published by BP.


        • Euan Mearns says:

          Luis, there are still 574 rigs drilling oil in the USA, just about enough to offset declines. The plunge in US production that many expected has not happened and on current form will not happen any time soon. The rout of the shale drillers that was expected, did not happen.

          You make two astute observations that are probably connected, 1) the banks are supporting shale companies when they shouldn’t be and 2) there is a precarious and opaque debt structure.

          Two things can happen. 1) the whole financial thing unravels creating a new 2008 style banking crisis – OPEC big loser; 2) the USA does everything they can to keep this thing alive (which is what I think they will do) – OPEC big loser.

          65,000 jobs gone in UK N Sea, many in Aberdeen. But our production is rising and may continue to do so for years as projects begun 5 years ago come to fruition. The industry has huge inertia and now has huge momentum. The inertia caused the inelastic moment in supply 2002 to 2008. But elasticity returned. OPEC now seem to want to reverse this situation. It may take years to unwind.

          So what are the foreign currency reserves of Iran, Iraq, Libya, Algeria, Nigeria and Venezuela. Low oil prices must be badly impacting these countries and their social programs – while the OECD and China parties. True the whole oil industry is going through Hell, but for most of the OECD that doesn’t matter. It matters a lot for OPEC.

  6. Henrik M. Poulsen says:

    Euan, thanks for yet another thoughtful piece of work. I agree that OPEC(Saudi-Arabia) can’t win an economic oil price war against US – that’s obvious. However, Saudi-Arabia is protecting their market share by letting more expensive production bleed. In the meantime the Saudi-Arabian state finances are picking up their share of the bill.

    • Euan Mearns says:

      The last time OPEC lost market share, the bear market went on for decades (post 1980)


      Unless they can see the oil price recover to over $100 in a year or two then OPEC lose. And even in that scenario, the US shale fleet sets forth to drill faster, cheaper, better wells.

      • Henrik M. Poulsen says:

        That is true Euan, but in the first half of the 80’ies Saudi cut back they production from more than 10 mbbls/d to less than 4. Hence, in 1986 they were left with a spare capacity close to 7 mbbls, which was gradually put back in the market as demand increased during the 90’ies. This time Saudi doesn’t have any spare capacity.
        We (Rystad Energy) expect oil prices to be back at $100 in 2020, unless Saudi-Arabia do production cuts. If they do, we will face higher prices more rapid. The world will need all the shale oil we can get in the coming years, remember that production is declining with around 4 mbbls/y from producing fields. This will probably increase in the years to come due to less infill drilling (IOR) and higher portion of LTO wells with very high decline rates. Could you imagine where the oil price would have been today without LTO?

        • Matthew Biddick says:

          It is my understanding that OPEC is producing full out currently. If so, we might be witnessing the beginnings of a true free market price for oil. OPEC has always monkeyed with their production to achieve one goal or another and the price fluctuated accordingly. Once demand catches up to the current (very small) supply cushion, we’ll see the true price for oil (with the speculator’s premium thrown in) materialize. Henrik, you are correct that without the American shale revolution, the price of oil would have been much, much higher than what we witnessed.

          • Euan Mearns says:

            we might be witnessing the beginnings of a true free market price for oil

            Interesting concept. If you have read Yergin’s “The Prize” you will find that a free market in oil has rarely existed. The industry has a long history of boom, bust and regulation. OPEC has done the world a huge favour with production constraint and stabilising prices in recent years. The economy likes stability and predictability. The OECD should find a way of rewarding this market regulation. I believe within months we may see $20 and then by 2018 $100+ – pure educated speculation 😉 This is really not beneficial for anyone (apart from the speculators).

        • Euan Mearns says:

          OPEC are damned if they do and damned if they don’t. Had they supported prices there was a good chance that the shale “bubble” would have run its course in a few years and that growing global demand would have allowed them to keep market share at $100+.

          The course they have followed has guaranteed a huge loss of income for their members and no guarantee of succeeding in their goal. And it seems to be a rather open ended commitment right now. A year ago I thought we would see a strong recovery in 2016. Now not until 2017 at the earliest. A year ago I fooled myself into believing I understood the market. Now I don’t believe forecasting is possible. There are far too many unconstrained variables.

          • Matthew Biddick says:

            Euan, otherwise known as the free market. I think this is a good thing and I am in the exploration and production business. Let the chips fall where they may and may the fittest survive. Hope it’s not a 15-17 year depression like the last one.

        • Euan Mearns says:

          Henrik, I’d be interested to know what Rytsad’s forecast was for 2015. My forecast was $56.50 for December 2015 but I arrived at that by the wrong route which removes some of the satisfaction, and it is not yet December. The main error I (and many others) made was to underestimate the momentum behind supply growth. And that in part is linked to underestimating resilience of the industry confronted with low prices.

          I think it is incredibly hard to forecast for 2016. As Art Berman has pointed out $45 is not low enough. Companies are not experiencing enough pain. If WTI neckline support at $38 fails then I think we see $20. One thing that makes forecasting difficult are long delays between price signal and production response. Hence, the North Sea has had a good year with declines arrested. This in part due to low maintenance programs. One of the perverse market responses to low price is to pump flat out.

          One thing to ponder is the level at which supply becomes inelastic to price. The charts I was using to understand this don’t work any more and need updating and re-thinking. One thing I believe I know is that price volatility has returned and we will see another upwards spike before 2020. But I’m not sure how high it goes. The Olympic spike of 2008 was driven by extraordinary demand side circumstances. And the debt doomers argue that the whole cycle was driven by easy money. Well money is still easy but not getting easier.

          I also believe that the probability of momentous events taking over has increased. Currently these seem bearish for the economy to me – e.g. Brussels closed down today. But an attack on Abqaiq or Ras Tanura is only ever a heart beat away.

  7. Leo Smith says:

    Well its one way to prosecute the ‘war on terror’ I suppose…

  8. Retired Dave says:

    Thanks for your insights as always Euan and the comments of others here as well.

    I live in the UK and was in the pub yesterday evening – a friend told me that as I was a know-all, could I explain what was happening with oil-prices. I don’t think it was a compliment? Anyway with the use of “Energy Matters” even the one-eyed man can be king in the land of the blind (as they say).

    Thanks again for a great Blog Euan (and Roger) – helping to make some sense of the mad world of Energy and Climate.

  9. Lars says:

    Why don`t the Gulf states want OPEC to cut production to raise prices? The official version is that they want to “defend market share”. If that turns out to be the true reason it means the Gulf states are not concerned about peak oil being imminent, because if they were there would be no reason logically to defend market share if one assume the Gulf states have decades left of high production.

    But is it the true reason? OPEC has ceased to be a cartel for all practical purposes, at least temporarily. Perhaps there is a hidden political agenda behind it after all like Euan asks. In that case I would favour the idea that the real purpose is to break the back of the Russian and Iranian economies while boosting Western economies with lower priced oil for a while. And what do the Gulf States gain from their present economic suffering? Probably political and practical support to topple Syria`s Assad to install a new regimè that would look favourably towards building pipelines from the Gulf through Syria to the Med. Long term this would be beneficial for the West and the Gulf States but rather disastrous for both Russia and Iran in several ways. Only time will tell if this is big scale war fought with all weapons available including the price of oil.

    The US doesn`t care about trade balances or imbalances, they haven`t done in decades because it is irrelevant for now.

    • Colin MacDonald says:

      I suppose SA could maintain a $100 oil price by cutting 1 million bbls production each year. However they could only do this for 10 years because you can’t reduce production to less than zero. Ultimately the Saudi’s are in a bind; they can only maintain market share with $50 oil and their social programs require $100.
      There WOULD be an immediate boost to revenues if they were to cut back production, the reduction in volume would be more than compensated by the increase in price. However this would only work in the short term as the higher price increased production elsewhere.

      The strategy of full on production is really an attempt to kill off more expensive oil. It’s a bit of a gamble because it’s difficult to know the true cost of oil production. Shale was thought to need $90 oil to be profitable, now it’s more like $45. During a boom oil service companies make a fortune but during the bust they take a haircut. the cost of production goes down, as the riggers trade their their Porsches for Chevy’s.

  10. Reader says:

    I always enjoy reading this kind of analysis and it is extremely difficult to achieve any kind of authority on such a broad and complex topic.

    However the analysis in the link below gives the most complete picture I have seen of 2015, anywhere to date.


    The net import balance of USA (~5MMbb) is completely dwarfed by the import balance of Europe (11MMbbl) or Far East (19MMbbl).
    If you look at the World Oil Movements detailed in the BP Statistical Review it blows a lot of myths (historical assumptions) completely out of the water.

    For example, today 80% of the oil that is exported from the Middle East is destined for Asia. Just 20% of Middle Eastern oil goes to North America and Europe combined.

    There are basically two huge oil sinks in the world economy, Europe and Far East. There are also two huge sources of oil for international markets the Middle East and Russia.
    The US is no longer the 800lb gorilla market for the world’s oil exporters. Not by a long long way.

    What we have is a fractured OPEC and Russia competing for market share in both Europe and the Middle East. Russia has a tight grip on Europe, the Middle East has a tenuous grip on the Far East.

    Once all of these parties reach “an understanding” (game theory) the oil market will likely tighten dramatically under policy decisions.

    I tend to agree with the conclusions in the link, that Russia are/have out manouvered OPEC and that the Far East has benefited most from all this wrangling with greater diversity of supply.

  11. john eardley says:

    When calculating the affect on the USA you surely need to include the fact that oil is paid for in $ and any income earned by the producers is recycled back to the reserve currency by bond purchases and investments. I calculate that to be around $1T to date that has gone missing.

  12. Rob Slightam says:

    I hope that the large and growing SA population does not grow restive

  13. Mike Nelson says:

    What OPEC is doing is tearing down the infrastructure that supports the unconventional shale plays in the U.S. These are very labor, equipment, and capital intensive development programs. The service companies are laying off 100K plus workers and scrapping frack trucks and associated equipment. The drilling companies are selling all of the older rigs for scrap. When this process is complete the ability of the industry to quickly ramp up drilling and completion of shale wells will be severely diminished. I saw it happen in 1986 through the early 90s. The oil companies and service companies will be very cautious about rebuilding their shale development capacities. Once laid off staff are redeployed into other industries, they will not quickly return. The shale plays and drilling locations will still be there, but the infrastructure will not be in place. The expertise will be gone, the equipment will be scrapped, and the willingness to deploy capital to rebuild will only return slowly.

    • Euan Mearns says:

      Mike, thanks for this insight. What I see is 574 rigs still drilling oil, 193 gas for a total of 767. In shale gas it is alleged that most operators never turned a profit. And yet the debts have been rolled over. Maintaining indigenous production and protecting the banking sector is of huge importance to the USA. If the shale / LTO industry is to be totally dismembered then its taking longer than I and many others anticipated. But you may well be correct.

      So lets imagine that oil is back to $150 in mid 2018. Will shale drillers not be tempted back?

      • Mike Nelson says:

        Having worked in the industry through many of its ups and downs, I see the caution that comes after a hard landing in prices like we are seeing now. The Saudis are watching for key thresholds to be crossed in the industry downsizing. They know how hard it is to rebuild once manpower, materials, and willpower have reached a low level. We haven’t reached those levels yet. I think it will take several years. But as you point out, OPEC is feeling the pain of lost revenue, although their revenue was already declining as they lost market share to the U.S. shale producers. It is a war and OPEC can only maintain its position for so long.

  14. Erica Skoko says:

    What about Canada, Obama cancelled Keystone, and yet they have relied on Alberta for at least 50 years. This is the 2nd time have experienced a major down turn, the first was in the 80s when I was 21. It gutted the industry as most of my age group went on to do something else. If this turn down lasts as long as the 80s, I don’t think the industry will recover. My oldest kid just turned 18 and is studying mechanical engineering, both hubby and I will encourage him to look elsewhere and never go near the industry again. Alberta has lost 28,000 jobs in 6 months over this price war and shale oil and gas is very short lived and hard on the environment. Alberta is no longer shipping oil by rail and I would be interested to see what you estimate our GDP part from oil revenue is. Canada has around 34 million, the US 306 million. There is a great deal of poverty in the US and I would say this has been a jobless recovery for them. And we are suffering here in Calgary. I am totally sick and tired of this oil economy, and would like to move to something else, nucleur anybody?

    • Euan Mearns says:

      Erica, the last time this happened was in 1998. I was running a small service company here in Aberdeen with a staff of 12. Success turned to failure. I recall 1 month where we had no work at all. I laid off 1 person. We never recovered after that. A major problem was contraction of our client base. Total, Fina and Elf (all were clients) became Total. BP, Amoco and Arco (BP and Amoco were clients) became BP. And so on. I eventually threw in the towel in 2001.

      This time around it is reported that 65,000 jobs have gone in UK North Sea, many in Aberdeen. My wife, who worked for A Major and was our sole breadwinner was an early casualty. So we have had a very tough year and I am under a lot of pressure to find gainful employment – not easy for a geologist right now.

      Aberdeen is in a world of hurt and decommissioning delayed has now become decommissioning accelerated. But the media and government are schizophrenic about oil. A few thousand steel workers lose their jobs and its all over the MSM. I’m not sure job losses in the oil industry have been mentioned once. The reporters are so ignorant I don’t think they understand that coal is used to make steel.

      I live in a country where our last coal fired station will close next year. Our only gas station is being de-mothballed. There is no plan to replace our 2 ageing nukes and the countryside is plastered with wind turbines. We used to be a proud engineering nation. Now we are run by morons and a failed academia.

      PS – I am on the look out for a billionaire sponsor 😉

      • gweberbv says:

        I do not want to sound cynic, but geologists should in general be qualified for producing construction site reports. These are needed for nuclear power plants as well as for wind generators.

        • Euan Mearns says:

          I hope for your sake Gunther that this is an attempt at German satire.

          • gweberbv says:

            Not at all. A close friend of my mother moved from Germany to South Africa in the 80s because there he saw better perspectives for him as a mining engineer. About 15 years later he came back. As there were still mines being closed in Germany, he earned his money as a ‘Baugrundgutachter’. (=a person who investigates the ground/soil of a future construction site)

            But of course, I would prefer that you find your millionaire/billionaire.

  15. Euan Mearns says:

    Mike / Erica, I have to be out for most of today but will get back to you later. E

  16. David L says:

    I wonder if a secondary but still important objective of the of SA is take some of the air out of the Climate Change policies. Looking at the EU’s fossil fuel import numbers -quantity and costs, it is obvious that this cannot continue especially if you factor in future tightness of supply.

    It would stand to reason, EU who have been the main driver behind Climate Change would have an ulterior motive. Without the switch away from fossil fuels by all major developed countries, international competiveness of and the standard of living in the EU will continue to deteriorate.

    This does not mean that all the groups with various ideologies who support Climate Change are aware of this goal.

  17. Isn’t Russia converting the dollar oil income to local currency, which is way weaker now than 2 years ago? If they do so, they have same Rouble income per barrel like before.

  18. Erica Skoko says:

    It is interesting that some of you see a recovery sooner than others, our new NDP government, we turfed the conservatives after 57 years(provincial) is big on the climate change/fossil fuel connection and now is attacking the coal industry as 80% of our electricity comes from coal in Alberta, even though we have many billions of cubic feet of natural gas and could do cogen plants that are smaller footprint. It is like a Dr Jekyll and Hyde relationship for energy development and tar sand development has cost the province a lot. Capital expansion projects that were not already going were all cancelled, even though every stinking one of those oil companies is very profitable and still able to pay out share dividends. I am getting bitter here because my hubby is losing his job to India after 27 years with A MAJOR, these companies view regular employees as pieces of flotsam that can be easily discarded at will. Of course, he is only 51, so cheating him out of a pension is key. Anyhow, we have a new liberal prime minister in Canada, a Mr. Justin Trudeau whom has fallen hook line and sinker for the climate change fish, along with his multicultural cabinet. I wonder what will come out of the Paris meeting’s and the G20 schmooze fest. With the mess in Paris, and the US laying off over 60,000 troops, I don’t think the general public south of the border is inclined for a big push on ISIS cause that would involve having to be nice to Russia, who is probably doing quite nicely selling oil to China.

    American’s are ever the optimist and are also pursuing a green economy. But it doesn’t really work because even at 306 million, they have a lot of room, so people drive, and so do Canadians. Our family doesn’t think twice about driving to Vancouver for a weekend (1200 kms) and every family has at least 2 cars, alongwith motorcycles, etc. Our whole world revolves around the car, and yet the proposed carbon taxes and wind farms and solar etc etc etc which are all so inefficient are subsidized by governments when they really cost 10X as much to produce the same energy. So we have the oil and gas industry subsidizing the alternatives when they should be subsidizing the technology industry for pollution control. How does trading of carbon credits help with CO2 emissions, it is just retarded. The push should be for better pollution control technology and maybe smarter urban development. Since 80% of the world live in cities, money should go to redesign of urban area’s to get people off their fat asses and moving a bit more.

    As it stands, I predict that the only way the average person will make money in the future is through illicit drug trade and 3D fabrication of food. If anyone had to give up their car and only rely on public transportation, there would be mayhem over here. So why are the Saudi’s even bothering with this price war if they are going to run out of product. Is it just to see the US suffer, as it doesn’t make sense to me as they could have easily diverted their production to Eastern Europe or China or pushed there own pipeline through. The US usually imports most of its product from Canada, the markets are integrated, so with Obama cancelling Keystone, a secure, safe way, to bring increased supplies to their markets in the future is gone.

    And I can’t believe these oil companies want to see themselves disappear so why aren’t they fighting harder against this climate change ideology. Instead of fighting so hard to stay profitable they should be investing in their businesses differently, funding more research than they do and trying to keep as many people employed as possible. But what do I know, my dad was a great geologist, born in 1927, fought in the war at age 16, studied mining geology, and suffered through the crazy up and downs of the market. He was an independent before it was fashionable and used to sell oil and gas plays. My older brother, whom is a geologist and 56, is down to 2.5 days a week of employment and is the only geologist left out of his company, so now it is just the chinese owner, a secretary, and my brother and the Chinese owner likes to gamble so my brother has to go the casino now as part of his remaining job…he believes he will never again be able to be employed as a geologist.

    So maybe Mike is right, the Saudi’s and Iran are just hoping this downturn will be so prolonged that it will hurt the West so bad that they will end up on top again, I don’t know. I just think it is sad, and it is societal’s race to the bottom, and the greenies won’t be happy until we are living a feudal lifestyle, although you would think they know that all that high tec ski gear, climbin gear and clothes etc is made out of plastic which comes from petroleum….

  19. Michel says:


    the point is that it is not the price of oil which is important at the end of the day (or the year), it is the quantity of oil, the only main driver of growth : energy is key compared to capital and labor.

    Of course, on a short term basis, price can be important. It triggers investment, CAPEX which are collapsing these days. Maybe in the distant future, shale oil will look like an “oil supply insurance” for USA …

    Bien cordialement,


  20. Javier says:


    I don’t think a price war accurately describes the situation. The current oil conundrum has befallen on all actors of this drama with each one playing their role according to their nature.

    The drama starts around 2002 when the trend in oil capex increase shows an inflection point and starts to climb at an unprecedented rate. On 2005 production of conventional oil stalls. This had been predicted and described as the end of cheap [to produce] oil. From then on the decline of conventional oil plus the increase in world consumption will have to be provided from expensive [to produce] unconventional oil.

    The price of oil increases significantly from 2005 due to production of unconventional oil being unable to match the increase in demand. The increase in oil prices increases CPI and interest rates while being a drag on economic growth that for the last years had been based on massive debt growth. The increase in interest rates in a less favorable economic environment causes debt defaults starting in the most sensitive scam-like US housing market, and then spreading all over the world affecting big banks (Bear Stearns, European banks) and even states (Greece).

    The economic crisis of 2008 was a brief interlude for oil due to massive global stimulus and China’s phenomenal debt growth, the most significant ever. With recovered demand from Asia, oil prices recovered despite lack of growth in Europe and Japan, and the high oil price situation became a staple of the new economy based on Asian growth. High oil prices stimulated development of unconventional oil in North America on which world production increase became to depend entirely. They also stimulated an increase in fiscal expenses by traditional oil producers (mainly OPEC and Russia) due to increased revenues.

    The price crisis of 2014 took place due to two factors:
    On one hand global economic growth started to weaken in 2013. The continually depressed European and Japan economies had entered deflation and were not expanding consumption while China’s unsustainable growth based on debt expansion stopped increasing its rate of growth and started to grow less and less.
    On the other hand US producers of unconventional oil where fast growing their production in search of profitability with little concern for global supply/demand imbalances.
    Both factors acted to create a supply/demand mismatch that resulted in a huge fall of prices and continues today.

    All producers feel the pressure to produce more oil, not less, acting against solving the problem. North American producers of unconventional oil are producing at a loss since the cost of production is above the price, however the need for cash-flow to continue operating is more important than any other consideration, so they are trying desperately to reduce costs without reducing production and that explains why production has not plummeted despite they are producing at a loss.

    Oil exporting countries in general are still producing oil at production costs below price, so they are facing a fiscal deficit that will be smaller the more oil they can sell at any given price.

    There is no war. Everybody is fighting for survival against market conditions, not against each other. Nobody sees a reduction in production as a viable solution because the economic situation is so weak that we are at the brink of a new global recession, in which case anybody reducing production voluntarily risks worsening their situation without improving market conditions. Plus producers of conventional oil correctly see producers of unconventional oil as one factor leading to the present crisis.

    OPEC sees demand for their oil being low until the end of the decade at best (WOO 2014 section I page 176 http://www.opec.org/opec_web/en/publications/340.htm). If they do believe it, it would be incredibly stupid to reduce production in the hope of an increase in demand causing a price increase to match the lost production. They would be toast if the demand fails to materialize and prices remain depressed despite cuts in production while the rest of producers would benefit from lost OPEC market share.

    I do not think that this is a war and I do not think anybody can win. I believe we are probably going towards another global recession in the short term. Recessions are a cyclical feature of our economic system due to imbalances amplification, and frequency analysis indicates it is about time for the next. Global economy is getting weaker, not stronger. Japan just entered a new recession, China’s growth is lesser every passing quarter compared to a year before, international commerce is falling, and commodities-dependent countries are in a worsening situation.

    The only question is if the global crisis finally materializes, how are oil producers going to fare? Oil exporting countries would have to adjust their fiscal balances and this will be extremely painful, with the risk of civil unrest and revolutions. The unconventional North American oil companies would be under extreme duress shunned by investors. Oil production could take a plunge and if this causes price volatility within a recession, the economic crisis could become systemic and amplified. If this nightmarish scenario does not occur and prices remain depressed through the recession we would come out with reduced oil production and difficulties to grow, and Peak Oil would have taken place.

    If a global recession is averted and somehow we go through a period of reduced growth recovering afterwards, a combination of supply reduction mostly from unconventional oil producers (plus conventional decline) and demand increase would see prices partially recovering during the next couple of years improving the situation of all surviving oil producers. Peak Oil would become a plateau and we would get a few more years to prepare for oil decline if we are wise enough. It is a lower probability scenario.

    I will not consider scenarios that involve armed conflict between nations, even though they cannot be discarded.

    Unconventional oil is uneconomical within current price scenario. From an economy point of view it constitutes malinvestment and the longer it goes and the bigger it is, the more damage it will inflict to the North American economies. Considering that this is a war that can be won by unconventional oil is limiting the scope of the analysis to some oil companies that are going to survive, not considering the effect over the economy as a whole. Those that believe that wealth can be created with a money printing machine have been proven wrong every single time since money was invented. Unconventional oil companies can be sustained only at the expense of the rest of the economy.

    • Euan Mearns says:

      Javier, I agree with much but not all of this. There are some vital pieces missing. The most important is to recognise that oil prices recovered strongly post-2008 crash because OPEC cut 4 Mbpd production. And they fed that back with great skill to support a stable price and maintained that for 6 years.

      They have now abandoned that strategy. Not only that but Saudis have raised their production. This is an act of economic aggression. There is nothing particularly wrong with this. Its like a super market slashing the price of milk to keep those pesky dairy farmers in poverty and to attract shoppers to their store. Raw capitalism.

      OPEC have done the world a great favour acting with constraint over the decades. The lack of constraint now is the corollary of that. As you point out this may hasten peak oil. Pragmatists view peak oil with concern, The Greens view it with glee.

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