
Oil Falls Below $40 for First Time Since 2009 as Glut Grows - hgennaro
http://www.bloomberg.com/news/articles/2015-08-20/oil-heads-for-longest-weekly-losing-streak-since-1986-amid-glut
======
dwharrison
And it will go lower! Canadian crude hit $23/bbl earlier in the week.

North America is close to maxing out storage capacity...possibly within 90
days. We've not been this close to max storage capacity in more than 80 years.

North American crude oil production currently exceeds demand (meaning what we
have capacity to refine) by over 1 million barrels a day. All that extra is
getting dumped into storage.

And the spread in price between crude oil and gasoline will likely stay large.

The USA can't export crude (by law), but _can_ export refined product
(gasoline, diesel, jet fuel, etc).

So there's a finite closed market for crude oil (that's running out of places
to store it), but a ready export market for refined product (mostly Central
and South America).

Net result: low crude oil prices, high gasoline prices.

~~~
washedup
There are also some refinery problems in Indiana which is keeping gasoline at
a premium when compared to oil.

~~~
dwharrison
That primarily impacts Canadian heavy crude exports. The BP Whiting refinery
was the primary consumer of Canadian crude.

Few other refineries (other than some on the Gulf coast) are configured to
handle the product.

That's why Canadian crude prices are collapsing...and why the price of
gasoline in the upper midwest is going up.

The only other option for Canadian crude to pipeline export to the Texas gulf
coast. The problem is pipeline capacity (that's why some much Canadian oil
goes out by train), but even more critically, the pipelines typically offload
at the giant Cushing OK storage center...and Cushing is right at 100% storage
capacity. (you can't just pump crude straight into a refinery...there a timing
mis-match that has to be dealt with via storage).

The Canadians are about to really get squeezed.

~~~
redthrowaway
We're already getting squeezed. We officially entered into a recession a while
back. Housing prices in Alberta have collapsed. Every other province is about
to get squeezed as all the oil patch workers head home and look for jobs.
Buying things online sucks, and travelling is a terrible idea. Budget's shot
to hell in the middle of an election, which is good if it helps force Harper
out.

~~~
mistermann
> Housing prices in Alberta have collapsed.

Sales have collapsed perhaps, but not prices. We shall see if $30 oil can take
the wind out of Canadian real estate, I'll believe it when I see it, the
confidence level of Canadians when it comes to housing is _extremely_ high.

~~~
redthrowaway
You're right. Sales are down 30% in Calgary, but prices have only dropped
1.6%. [1] Still, that's compared to a 9% rise for the rest of Canada. [2] I'd
still expect them to drop significantly more as laid-off oil workers burn
through their savings and find themselves unable to pay their mortgage.

[1]
[http://www.creb.com/Seller_Resources/Housing_Statistics/](http://www.creb.com/Seller_Resources/Housing_Statistics/)
[2]
[http://public.tableau.com/shared/S48Y522MR?:display_count=no](http://public.tableau.com/shared/S48Y522MR?:display_count=no)

~~~
mistermann
Actually, not going up 10% a year in Canada pretty much could be considered a
collapse!

> I'd still expect them to drop significantly more as laid-off oil workers
> burn through their savings and find themselves unable to pay their mortgage.

One would think so, but real estate seems to be able to often defy both logic
and mathematics.

------
ori_b
This is slightly worrying, because if we want to reduce CO2 emissions, we need
to leave the oil in the ground.

High prices may not be ideal economically, but they do reduce demand for oil,
and increase demand for alternative energy.

~~~
nostromo
Well, counter-intuitivley, consumer gas prices aren't falling nearly as much
if at all.

Personally I think the DOJ should investigate refineries, as none of the seem
particularly eager to compete on price. They're making record profits as the
price of crude collapses while the price of gasoline is flat.

[http://www.latimes.com/business/la-fi-refinery-profits-
recor...](http://www.latimes.com/business/la-fi-refinery-profits-
record-20150731-story.html)

It seems very fishy to me that we have so much crude building up, yet
consumers aren't seeing any real benefit from cheaper gas, cheaper shipping,
or cheaper domestic flights.

~~~
ams6110
Refining capacity doesn't increase because of a drop in crude oil prices. If
supply of gasoline cannot be increased, prices will not fall even if the raw
crude price falls.

The EPA has been hostile to refinery expansion or new refinery construction.

~~~
sliverstorm
Capacity doesn't increase, but costs do decrease as the cost of raw materials
drops.

Now, obviously price is only partly determined by cost.

~~~
pm90
That's kinda the whole point. There is nothing for refineries to gain by
reducing the price of gas because...nobody is going to sell gas at a lower
price and take over the market because...the EPA does not allow one to build
refineries.

Free markets y'all.

~~~
OniBait
So much this. Price is driven by supply and demand. Not the cost of materials.

~~~
brianwawok
But price changes supply, no?

Some oil is $1 a barrel to pump. It will always be worth pumping.

Some oil is $50 a barrel to pump. It is only worth it when oil price is
greater than $50 a barrel.

------
zkhalique
I wonder why so many people are only looking at the economic side of this

DO THEY NOT REALIZE THE IMPLICATIONS FOR THE ENVIRONMENT AND HOW WE USE FOSSIL
FUELS?

We burn (no pun intended) through resources as fast as we want until there are
none left. And then what?

~~~
Frozenlock
> And then what?

And then the price of the scarce resource will go up, pushing us towards
alternative energy sources. And as time passes, we should have more efficient
ways of harnessing those.

~~~
pyre
This line of logic says that it is impossible for us to come to any sort of
"cliff" where we are unable to smoothly transition from one energy source to
another (where the possible ensuing resource wars could prevent us from _ever_
harnessing those alternative sources). It's basically a "nothing bad can
happen because _ECONOMICS_!" answer.

~~~
dragonwriter
It does, and to do so it presumes that there will always be some readily
available alternatives with smooth supply curves, and neglects transition
costs.

~~~
douche
I've seen it referred to as the Adam's Law of Slow Moving Disasters

[http://blog.dilbert.com/post/102964934001/fact-checking-
adam...](http://blog.dilbert.com/post/102964934001/fact-checking-adams-law-of-
slow-moving-disasters)

------
throwaway12309
One one hand, I'm a bit worried as I know various folks that are dependent on
the oil industry and this will probably mean more layoffs/companies closing,
on the other hand, I'm really happy to see this (helps many economies as well
as ordinary folks) and it seems some of the changes from oil to other sources
of energy are finally showing some results (I hope)

~~~
wvenable
OPEC is trying to destroy the American shale businesses by making them
unprofitable. There was huge investment in shale based on higher oil prices
and if they can't recoup that investment OPEC stands to keep their monopoly.

~~~
saryant
OPEC is no longer a coordinated entity. For decades OPEC's member nations
waged economic war on each other by cutting prices to increase marketshare, in
violation of OPEC quotas. The Saudis acted as the swing producer, lowering
their output to keep crude prices near the OPEC target. Last year the Saudis
abandoned that roll and admitted that OPEC had become a a free-for-all.

~~~
WalterBright
Cartels are always unstable. It's why they seek forcible enforcement methods.

------
ryanmarsh
Cheap natural gas also can mean cheap electricity, in case anyone was
wondering about the effect this might have on companies such as Tesla. Natural
gas produces more electricity in the U.S. than anything else, including coal
(by a tiny margin).

~~~
mikeash
I don't think this matters much for companies like Tesla. Electricity is
already extremely cheap for a car. The average cost of electricity in the US
is about 12.5 cents/kWh, which works out to 3.75 cents/mile for a Tesla.
That's cheaper than a Prius at $2/gallon, despite being a substantially larger
and heavier car. If you can get in on time-of-use rates and charge overnight
when demand is low, it can be nearly free.

High gas prices can be good for Tesla, but lower electricity prices won't move
the needle for most people.

------
1971genocide
The capital cost for the saudis is $15 and they are okay pushing it to $20.

One paradoxical fact about the drop in oil prices is there is a uptick in
investment in renewable !

The market for renewable is not only folks who care about prices but also
people who are worried about emission and self-sufficiency ( this is more to
do with countries )

So a drop in oil prices is leading to greater investment in solar and wind
which I do not think the saudis expected !

Another interesting analysis is the fact that the boom and bust cycle in oil
is getting much shorter. Economists are not exactly sure why that is
happening.

One think to worry about is this deflation might bifurcate and cause another
recession. Only time will tell.

~~~
nostromo
Saudi Arabia is a country, not a company. Oil is used to pay for everything,
and they need oil to be around $106 to balance their budget.

[http://graphics.wsj.com/lists/opec-
meeting](http://graphics.wsj.com/lists/opec-meeting)

If oil fell to $20 for any significant amount of time, there would be serious
political strife in Saudi Arabia.

------
irln
Was wondering about the impact of lifting US Oil exports and ran across some
interesting research:

[http://www.aspeninstitute.org/sites/default/files/content/up...](http://www.aspeninstitute.org/sites/default/files/content/upload/FINAL_Lifting_Crude_Oil_Export_Ban_0.pdf)

[http://www.wsj.com/articles/u-s-approves-limited-crude-
oil-t...](http://www.wsj.com/articles/u-s-approves-limited-crude-oil-trade-to-
mexico-1439570613)

------
ChuckFrank
Hopefully this trend will continue as we move away from oil for many types of
energy generation. And for those that low oil prices should reinforce car use
- in many American cities, it's not the price of oil that is the limit, it's
the amount of space for the cars that is the limit. And where space isn't a
limit, out in farm country, low oil prices help tremendously, since transport
is much less elastic than it is in cities.

------
bkjelden
Lower oil prices seem to be driving the major US indices lower lately.

Why is that? Lower energy expenses seems like a _good_ thing for businesses.

~~~
JTon
Not an expert, but I've been read that demand for oil is typically used as a
leading indicator for economic growth. Seems like the global economy is
slumping, and as a result doesn't need as much energy (oil)

~~~
bkjelden
Ah, so in that case it wouldn't be causal, just a correlation.

~~~
marcosdumay
It is causal, but in the reverse direction.

------
esaym
So now that it is down and will go up to $120 again soon, how do I invest in
it?

~~~
beamatronic
USO
[https://www.google.com/finance?cid=705740](https://www.google.com/finance?cid=705740)

~~~
cowkingdeluxe
You never want to hold commodity ETFs like USO overnight due to beta decay.
[http://www.etf.com/sections/blog/5362-uso-oil-
usl.html](http://www.etf.com/sections/blog/5362-uso-oil-usl.html)

You're better off setting up an options account and buying futures.

------
ryanmarsh
> ... OPEC members are planning to boost production

In 2012 Saudi had a $2.3 trillion USD gross operating surplus in crude
petroleum and natural gas. They can afford to play this game (market share)
for really long time.

~~~
adventured
No they can't. They can play the game for about three more years, max. And
that's at the risk of destabilizing their kingdom. They're currently issuing
debt [1] for the first time in a decade or more, trying to slow the erosion
[2] of their $670 billion of reserves. As of today they've lost 10% of their
financial reserves in one year, and that's going to get a lot worse as the new
lower average price of oil sets in across 2015 and 2016. At a $40 to $50 oil
price average for 2016, they'll lose upwards of 20% of their reserves next
year. A few years of that, and the anxiety will be great in the house of Saud.

I'm not sure where you're getting $2.3 trillion for anything. Their entire GDP
is $750 billion.

[1] [http://www.reuters.com/article/2015/07/10/saudi-bond-
idUSL8N...](http://www.reuters.com/article/2015/07/10/saudi-bond-
idUSL8N0ZQ03F20150710)

[2] [http://www.bloomberg.com/news/articles/2015-06-28/saudi-
fore...](http://www.bloomberg.com/news/articles/2015-06-28/saudi-foreign-
reserves-drop-for-fourth-month-to-672-billion)

~~~
jfoutz
They could also cut social programs. Scaling back the subsidies for face
throwing acid might buy them some time.

~~~
saryant
And that's how the House of Saud will finally fall.

------
varelse
And yet gas is still over $3 a gallon. Funny that...

~~~
droffel
Well, gasoline production consumes oil, which means that the price should
theoretically lag behind oil's price for a period of time at least equal to
the time it takes to go from crude to a final product.

In addition, most gas stations will buy gasoline futures a few months out to
stabilize their costs, and when oil price falls, the cost of the underlying
gas purchased is still at the negotiated futures contract price. So it makes
sense that the price wouldn't fall in tandem with crude prices.

~~~
jsprogrammer
>In addition, most gas stations will buy gasoline futures a few months out to
stabilize their costs, and when oil price falls, the cost of the underlying
gas purchased is still at the negotiated futures contract price. So it makes
sense that the price wouldn't fall in tandem with crude prices.

Only if the gas station is speculating and trying to arbitrage the market.
Otherwise, they would reduce the price to reflect the updated price of the
underlying futures.

------
lexcorvus
I remember ten years ago when worrying about Peak Oil was all the rage. You
don't hear too much about that nowadays…

~~~
TillE
It's obviously a matter of when, not if. It's difficult to put an exact
estimate on when oil scarcity will become a true crisis, but we can all agree
that it's a non-renewable resource which will not be around forever.

~~~
lexcorvus
_It 's obviously a matter of when, not if_

It was just as obvious a hundred years ago that horse manure piling up in city
streets was just going to keep getting worse.

 _we can all agree that it 's a non-renewable resource which will not be
around forever_

True but irrelevant. The oil supply is finite only in physical terms, not in
economic terms. It is possible to extract an unbounded amount of value from a
bounded resource. All you need is an increasing price, which happens
automatically as supplies decrease, and which provides an incentive for
substitution. I'd happily take a wager that humanity will transition off
petroleum long before we "run out" of oil.

~~~
jfoutz
In some sense, peak oil happened. All of the easily accessible, abundant oil
has been used up. Now you need a higher level of technology to extract oil.
Because that's more expensive to produce than the easy stuff, renewables are
catching up.

The stuff really is more challenging to produce, you need much more
understanding and higher quality tools. Fortunately we're enjoying the
compound interest of computers, software, material science and a million other
fields that make difficult things simpler.

I won't take your transition bet, but i would bet if we had to extract oil
using only technology older than 2000, we'd be pretty screwed.

------
elektromekatron
This could screw Russia. They have lost a hell of a lot of revenue already on
this. I do wonder if that is the point.

~~~
lingben
Not just Russia but every single nation that has a major part of their economy
in oil production: Venezuela, Iran, Saudi Arabia, Norway, Canada, etc.

Although to be fair, Northern Europeans manage their oil extremely well. Their
'rainy day' fund is now in the trillions.

[http://graphics.wsj.com/oil-producers-break-even-
prices/](http://graphics.wsj.com/oil-producers-break-even-prices/)

~~~
crdoconnor
There's going to be carnage in the financial markets when the oil producing
nations' start selling off their assets in order to pay for necessities.

Saudi has already started issuing bonds. Once they start selling off their
trillion dollar sovereign wealth fund the ripple effect will be felt on asset
prices all around the world. It has the potential to cause a self-reinforcing
feedback loop as well.

------
ck2
I know! Let's drill in the arctic and ruin that too

at $40 it will certainly be worth all that lack of profit

(this is exactly what shell is trying to do right now with Obama's permission)

