Tuesday, December 16, 2014

The Manipulative Oil Politics

Upon experiencing the cheaper prices at pumps, general public expected a drop in food prices as well, yet that hasn’t happened simply because Canadian dollar (known as “petro dollar”) gains its strength from the higher fuel prices. This means the higher the price of oil goes, higher the value of loonie will be and vice versa. Second, Let’s not be surprised as the price of imported grocery continues its trend of rising or staying the same at least; it’s all based upon the going exchange rate.
As long as Canadian dollar negatively travels below parity with the US dollar, the imports will be becoming more expensive and costlier.
Declining oil prices have significant economic consequences around the world; there is some uncertainty over how long the low oil prices would last. However, the ongoing global over-supply of oil despite the weak demand due to economic slow-down in China, and Europe is a cause of concern for the oil producing countries. Beyond doubt, cheaper gasoline brings relief to the general consumers.
As said above, the countries doing trade in the US currency are in trouble, because the imports remain expensive for them.
The Canadian buck already nosedived quite a bit below parity against the greenback. Since the Canadian oil is also priced in US dollars, the lower loonie keeps offsetting most of the price drop.
The factor of weaker demand and higher supply caused oil prices to start lowering from their June 2014 peak of $115 per barrel down to around $70-$75 per barrel now; but a decade ago or so it was around $40 per barrel.
Energy economist James Hamilton points out, instability in Libya, Iraq, or Nigeria could do it. And, of course, if Canadian and the US oil producers pull back sharply in response to lower prices to stabilize the oil market, that will be great.
True, the producers prefer to sell despite the lower going price to avoid extremely high cost of storing. Actually, oil production can’t be paused/discontinued, as such exercise of stopping oil production and then starting is highly expensive, hence not recommended.
Obviously, the winners are those who have more than enough financial resources to outlast the competitors.
Negative effect of low interest rates: Most probably, over-production of shale oil is result of a long stretch of too low interest rates. Easy money has resulted in over supply causing a big inventory all over. Other fear is prolonged availability of low interest rates may cause deflation. But the current dis-inflation is the result of low priced oil and low interest rates, if the condition persists and becomes chronic then deflation will ruin us all economically.
Furthermore, there was a lot of heated debate among OPEC (the Organization of the Petroleum Exporting Countries) in Vienna on November 27, about how best to respond to this currently low oil prices. Venezuela and Iran, wanted Saudi Arabia to cut back on her production in order to jack up the price of oil.
Bad news/good News: If the price of oil keeps falling, some US producers may go out of business. If oil prices stabilize and OPEC maintains its market share, the beneficiaries would be dancing.
According to the International Energy Agency, about 4 percent of US shale projects need a price higher than $80 per barrel to stay afloat. But many projects in North Dakota's Bakken formation are profitable if prices are above $42 per barrel.
It seems as if the “strategy of over producing” is designed to push the vulnerable oil boomers out of the market.
Apparently, some oil producing countries are playing manipulative politics by over supplying to make oil boom of other countries vulnerable.
Steven Mufson of The Washington Post estimates that the annual revenue of OPEC nations could shrink by $590 billion if prices stay this low. Russian government, for its part, have been planning for $100-per-barrel oil in its 2015 budget. As prices are down to around $70, Russia is likely to go through a difficult economic condition.
Moreover, the price-fall also poses unpleasant economic scenarios for some of the US states that are particularly dependent on oil drilling. Wyoming, Oklahoma, North Dakota, Alaska, and Texas are likely to be hard hit. Certainly, lower prices mean less revenue and less economic activity.
It was the high prices that also spurred companies to mine the oil sands of Alberta — leading to a similar boom up in Canada. This year, oil prices have been crashing, with the price for West Texas Intermediate crude falling from $100 per barrel in July to below $70 in early December. That's partly because there's so much new oil coming out of the US and Canada, and partly because demand in Europe and Asia continues to weaken. Some experts believe falling oil prices may adversely affect US and Canadian oil production.
Scotia Bank’s estimates of the breakeven price for various US shale and Canadian oil sands projects:
"The reasons for the oil price collapse are varied. China’s energy-reliant economy is slowing down. New shale oil production from the U.S. is creating an excess. The OPEC has been unwilling or unable to enforce high prices."
Most of the OPEC nations except the Saudis are willing to "enforce high prices," through production cuts. Nevertheless, the Saudis are fearful that Congress would lift the overseas export ban on U.S. crude, so they're attempting to push as many of the U.S. shale oil producers out of business as they can.
The U.S. shale oil drillers can survive with $42.00 per barrel.
while, Saudi Arabia can break even at $30.00 per barrel. It’s sitting on huge foreign currency reserves, so it can afford the expensive strategy of keeping the oil oversupplied to keep cheaper oil available. This appears to be the classic price manipulation on the part of Saudi Arabia to retain market share for some time to come.
Is there a ‘U Turn’ in future? Yes, it can be safely forecast based on past experience: Provided, there is a shortage in supply in the next few years, the prices will start soaring back up as part of the next economic cycle.


points out                                          http://econbrowser.com/archives/2014/11/a-glut-of-oil
estimates                                          http://www.gbm.scotiabank.com/English/bns_econ/bnscomod.pdf

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