
Crude Falls Below $30 a Barrel for the First Time in 12 Years - siscia
http://www.bloomberg.com/news/articles/2016-01-12/wti-oil-falls-below-30-for-first-time-since-dec-2003
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dharma1
Many oil producing nations require $50+/barrel oil to have a balanced budget.
After their foreign exchange reserves are depleted (a few years from now),
they will start accumulating more debt at their current spending levels, and
will likely have to cut public spending. This might not go down so well in
some Gulf states

[http://uk.businessinsider.com/imf-regional-economic-
outlook-...](http://uk.businessinsider.com/imf-regional-economic-outlook-for-
the-middle-east-and-central-asia-oil-prices-2015-10)

~~~
tonyedgecombe
Yes, it's going to be interesting to see how this unfolds politically,
particularly in Saudi Arabia.

~~~
TheOtherHobbes
The IMF thinks Saudi has cash reserves to cover five years - which is more
than competing countries have.

So they can play white knuckle poker and out-wait everyone else, then jack up
prices again around 2019/20 - just in time to kill any recovery that might be
happening by then.

~~~
toomuchtodo
> So they can play white knuckle poker and out-wait everyone else, then jack
> up prices again around 2019/20 - just in time to kill any recovery that
> might be happening by then.

The rest of the world better move off of oil quickly then.

~~~
sospep
is there a way to move off oil _quickly_?

~~~
toomuchtodo
Provider greater incentives for electric vehicles, place a carbon tax on
petroleum fuels.

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wingsonfire
Countries that export crude are having recession.. To name few Canada, Russia,
Brazil, Nigeria, Venezuela, Australia (commodities not just crude), at the
same countries like India who import and depend heavily on crude are having
good times (relatively).

So finally is it crude that runs all economies and everything else is
overrated.. That scenario if true is so scary!

~~~
Andaith
Australia has managed to avoid recession so far. I know that's only
technically true, but that's the best kind of true. (We had a lot of defense
spending in one quarter that pushed us over the line between
contracting/expanding.) It'll be interesting to see how Q1 2016 goes. Even if
it is a recession, it's not a normal one, since unemployment is going down.

~~~
fratlas
Do you think we (Aus) will in 2016?

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mrfusion
It's weird how us energy independence was such a big deal 10 and 20 years ago
and it seemed like a hopeless idea.

But now we've actually gotten there and there wasn't even a celebration.

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cpursley
Interesting perspective: Oil Limits And The End Of The Debt Supercycle

[http://davidstockmanscontracorner.com/2016-outlook-oil-
limit...](http://davidstockmanscontracorner.com/2016-outlook-oil-limits-and-
the-end-of-the-debt-supercycle/)

~~~
danmaz74
> Ultimately, diminishing returns with respect to human labor–what some of us
> would call falling inflation-adjusted wages of non-elite workers–tends to
> bring economies down.

The article doesn't show at all that there are diminishing returns from human
labor. What we have, instead, is that even if technology is making labor ever
more productive, these gains in productivity are going more and more towards
companies and investors (mostly thanks to the competition from Chinese
laborers) instead of (western) non-elite workers. Just look at the big fat
profits of most big companies.

The article is thought provoking, but as it usually happens when trying to
find a simple explanation to complex phenomena, it doesn't stand to deeper
scrutiny.

~~~
danbruc
_[...] these gains in productivity are going more and more towards companies
and investors (mostly thanks to the competition from Chinese laborers) instead
of (western) non-elite workers._

This seems illogic to me - if you have to compete with cheap labour you have
to cut your costs in one way or another, pay less to your work force, make
them more efficient, accept smaller profits or what have you. Putting more
money - in absolute terms - into the pockets of the capitalists only makes it
harder for you to remain competitive. Therefore I could at best see that
capitalists receive a larger share of the cake in relative terms but not in
absolute terms due to competition with cheap labour.

~~~
danmaz74
It's not the "capitalists" that have to compete with cheap labour, it's the
labourers. Big brands can move their production where cheap labour is, keep
their prices up, and pocket higher profits. This won't work forever, but it
works for now.

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ck2
So is Saudi Arabia going to (also) become a terrorist factory once they have
to cut all the massive handouts they do and implement heavy austerity?

I mean the amount of income in the middle-east is going to severely drop over
the next few years - the wealthy won't be affected, just annoyed but the
people who have to work for a living are going to be out of jobs, starving and
homeless and extreme belief systems often jump in to fill that void.

~~~
liveoneggs
"become"?

~~~
ck2
Well it's been pretty quiet from there since 9/11

I mean the USA made more than 15 domestic terrorists since 9/11

I'm just wondering what happens when the comfortable over there have to give
up their luxuries - do they take it in stride or does their belief system go
to extremes to compensate?

~~~
Apocryphon
It's quiet, mostly, in North America. If you're in the Levant, on the other
hand

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alkonaut
How much oil can be stored by producers, and for how long? If you run an
operation that gets oil out of the ground at $50, you wouldn't want to sell at
$30 (you wouldn't want to take it up at all, but likely need to keep your
machines running). Are there producers that sit on lots of oil now, hoping to
sell at a higher price, maybe years from now?

~~~
fulafel
Speculating on oil price happens mostly on paper (derivatives and other
contracts). It is cheaper than paying for its storage. You can also of course
stop pumping if you're fine with getting less oil out of the ground this year.

~~~
aianus
> Speculating on oil price happens mostly on paper (derivatives and other
> contracts). It is cheaper than paying for its storage.

Speculating using futures is the (roughly) the same marginal cost as
speculating by storing it in tankers and storage depots.

Otherwise there would be an arbitrage opportunity where you could empty your
tanks today, save the storage costs, and get the same quantity back x months
in the future.

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s_kilk
Anyone who knows this stuff care to explain what the consequences of this are
likely to be?

~~~
alkonaut
Domestic political turmoil in the countries whose budget depend largely on the
oil price: See e.g. election upset in Venezuela, Russia aggressive in middle
east potentially to overshadow news of worsened economy at home, Turmoil in
Nigeria etc).

Internationally it means states like Russia won't have the same economical and
political clout they had at $100+, so instead will rely on other means to
throw their weight around, such as military threat.

Economically it's good: lots of the saved money ends up in the hands of
consumers.

Environmentally, it's less good of course. Alternative energy will be less
attractive in the near future.

So it's not all rosy, but the downsides are mainly due to a _falling_ oil
price, rather than a low one. The volatility upsets budgets, which causes
problems.

~~~
joakleaf
Economically not all good.

Oil companies depending on higher prices (most of them), will start having to
reduce number on employees, or, worst case, go bankrupt and take financial
institutions with them (because of debt).

~~~
alkonaut
As with anything there are winners and losers. Most companies are not oil
companies, most people are oil consumers and not employed by oil companies.
The "mostly good" here is of course for an average company (oil buyer) or
average consumer (employed by a non-oil company, and an oil buyer), or even an
average country (net oil importer).

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nissimk
Yukon XL Denali here I come! Seriously though, I thought Saudi and worldwide
peak oil was in 2005. Is that a myth or are prices not really constrained by
supply until way past the peak?

~~~
zdean
This is speculation on my part, but I would think that the threat to the oil
producers is not that they may run out of the stuff in 100 years...rather,
it's that oil may become obsolete before then (because alternative energy). At
$30/barrel, it puts tremendous pressure on electric cars, solar, wind, etc. At
$100+/barrel, they were creating a major incentive for the alternatives to
thrive.

I'd like to hear about this from anyone more qualified than me (which would
really be anyone).

~~~
msandford
I think we're going to see prices cycle like this for at least a few more
swings. If there were no speculators in the oil markets you might see slightly
more stable prices but there's a tremendous amount of speculation which adds
to the price swings, which make the underlying activities more severe.

It takes anywhere from a couple of months to a couple of years to go from
"acquired mineral rights" to "pumping oil out of the ground" which you can
then sell. It also costs a lot of money. On the order of multiple tens of
thousands per day on land and multiple hundreds of thousands per day at sea.

So when prices are up people are expanding and drilling and going gangbusters.
When prices are down people are trying to figure out how to cut costs and ride
it out. During high prices there tends to be "over" investment and during low
prices, "under" investment, both relative to the average investment over say a
5-10 year period. Maybe by a lot.

As you mentioned one of the dynamics is that during low price periods
alternative energy is a fool's errand and during high price periods it's
genius. During average prices it'll slowly make more and more sense as the
average price continues to slowly rise.

But it's far better in some ways to instead of making the average price on an
average day to some times make a lot and some times make a little by letting
the price vary wildly. Price instability makes alternative energy investing
chaotic and unappealing to big institutional investors who might plow
substantial money in. Better to wait until the chop settles down and it looks
good over a 10+ year timeframe.

So if you get to make the average price on average and destabilize your
competitors by letting the price wander all over, what's the downside? As long
as you have the money to ride out the low price periods, none!

I don't know when this interesting ride will come to an end, but supply/price
management is going to continue to be very important to people with a lot of
oil left in the ground.

~~~
baltcode
Shouldn't intelligent speculators drive down the price swings? If there are
going to be price swings, shouldn't speculators make money by issuing futures
and options, thereby decreasing the eventual swings?

~~~
msandford
The big oil companies do a fair amount of this I'm sure, but do you really
want to bet a few billion as to exactly how much oil will cost in 2-6 years?

The US consumes 20 million barrels a day, so at current prices that's $600
million a day at $30/bbl and $2 billion a day at $100/bbl. How much do you
think you'd have to buy or sell in the futures market to move the price to
smooth it out?

Finally, it's very, very hard to know what's short term volatility and what's
long term structural. Everyone "knew" that oil prices were going to be high
forever because of peak oil and declining production. Turns out, maybe not.

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snake_plissken
It's all about dollar strength and currency pegs/stability. Oil exporting
countries need to continue to export as much oil as possible to acquire the
dollars needed to (try to) maintain a peg or the stability of their currency.
Or they can devalue and risk social instability once domestic inflation rises.

~~~
kbutler
Supply and demand are more fundamental - the revenue needs of exporting
countries prevent reduction of supply, while economic weakness around the
world reduces demand. That weakness also strengthens the dollar, increasing
the supply available for a given dollar amount. The cascading effect of
speculators exiting the falling market further reduces demand.

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mrfusion
Dumb question but I feel like an actual empty barrel costs more than $30. Or
is the barrel not included in the price?

~~~
brk
I think "barrel" has become a unit of measure. Much of the oil runs through
pipelines, to tankers, transported and offloaded to refineries.

It wouldn't surprise me if 90% of all oil was never in an actual barrel, but
even if so, I would imagine the barrels are reused, and so not factored in the
price.

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rtpg
is the fact that it's dropping below $30 right now mean that the previous
$100+ prices were completely inflated compared to COGS? The massive
fluctuations for something that you just need to pump out of the ground
doesn't make too much sense to me (compared to, say, price of potatoes)

~~~
stonemetal
Yes, a barrel of oil brought up by fracking costs around $62 (Canadian oil
sands cost $74) per barrel(according to NPR below). Though that is total cost,
marginal cost of pumping after you drill and frack the well is around $35.

Oil demand tends to be fairly inelastic. Almost all of oil pricing is supply
driven. OPEC decides on a target price and produces to meet that price. The
current price has happened because Saudi usually stops producing to keep
prices stable and high, and for now they just haven't slowed down at all.
Either they need money badly enough that they will take any profit at all or
they are using oil prices as a weapon.

[http://www.npr.org/2014/11/04/361204786/falling-oil-
prices-m...](http://www.npr.org/2014/11/04/361204786/falling-oil-prices-make-
fracking-less-lucrative)

~~~
andys627
I don't understand the "they need the money argument". They were producing 9
million barrels per day and that achieved a price of $100 per barrel... now
they are producing 10.5 million barrels per day and price is <$30 per barrel.

~~~
simonz05
If the future outlook for oil prices are lower than what they sell at today —
it makes sense to produce as much as you can today.

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sambeau
It's worth pointing out that this is still before Iran comes online. Once that
happens (possibly in a few days) prices could fall further.

~~~
cdnsteve
There's also major political tensions with the Saudi's and Iran. Some have
predicted that if a war were to break out oil would rush back to $100 per
barrel. Also, Iran must first past nuclear inspections before they are able to
lift the ban.

~~~
jerf
Which is pretty scary; that gives some already volatile countries _massive_
incentives to have a war. Humans are good enough at coming up with reasons on
their own without paying them to do it.

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mrfusion
Would this be a good time for countries to build up strategic oil reserves?

