Friday, January 16, 2015

"OPEC" is Done, and We are Really Going to Miss Them

"OPEC", the former cartel come trade association, has died and Americans have whooped up a cheer. Me thinks this was a case of "be careful what you wish for, you may just get it" (OPEC - Organization of Petroleum Exporting Countries)

OPEC died a long, long time ago. Saudi Arabia has been "OPEC", or should I say operating in the stead of what was once the cartel that helped control Oil prices for the world economy? That, too.
But Saudi Arabia has resigned as the world's "swing producer" for oil. For those not familiar with the term, the "swing producer" has a great deal of control over a commodity's price because it is able to increase world supply when prices get "too high" and cut world supply when prices get "too low".

Well, they quit. And the new "swing producer" is the American domestic oil production industry!

(Hurray for the Red, White, and Blue! Huuurrrraaay for the Re ed, Why I Ite and Bluu uuu...)

Here's the thing: It is quite easy, as a practical matter, for a totalitarian government that has complete control over the production, storage, and sale of its commodity to increase or decrease the supply of that commodity on a moment's notice. It is impossible for a free market system to do so. IMPOSSIBLE.

So, instead of having a compliant dictatorship willing to oblige a super power in exchange for military protection in control of the price of Oil we now have the free market in "control" - which means there is no control. People I speak to (and the articles I read) seem to think that Oil has been volatile. Well, sort of. I think we people are confusing "volatile" with paying more than we would like. Sugar is volatile. Copper is volatile. On Wall Street we call Natural Gas "the widow maker" (at Bear Stearns it was inartfully referred to as the "career ruiner"). Oil prices, for the most part (but with a couple of frightening exceptions) are rather tame by comparison.

I think that that is over. The American domestic Exploration & Production ("E&P") industry is going to make for an awful "swing producer" (I think we will see $25 Oil and $250 Oil over the next decade, and I don't think it will be something to cheer about). You see, Oil companies' budgeting for Cap Ex (capital expenditures) is infinitely easier with reliably high prices - and that reliability was created by totalitarian Saudi Arabia. The Oil & Gas industry is the most capitally intensive industry in the world. Nothing else even comes close. It is is mindbogglingly capital intensive. How will a "free market" apportion capital as both a consumer and "swing producer"? Not very well, comparatively.  I think we are really, really going to miss OPEC (Saudi Arabia). And, no, I don't think that they will be able to reclaim that position in the future (at least not for very long). The damage has been done.

And there is an even bigger issue on the horizon.

North America is within a decade, and it could be just a few years, away from being "energy independent". Really Oil independent (North America is already coal, uranium, Nat Gas independent). Once those tankers stop running back and forth across the oceans Oil will trade much the way Natural Gas does now.

Natural Gas is a domestic market, and Oil is an international market. Oil trades within several dollars a barrel all over the world, call it 5 or 10%. Natural Gas in Europe trades several hundred percent higher than in North America. Why? Because, as the industry gleefully points out, there is no "infrastructure" to move Nat Gas from North America to Europe, and by infrastructure, the industry means Nat Gas handling facilities at the ports and the vessels (tankers) fitted for Nat Gas transport.

But isn't America almost Oil independent? Haven't import volumes declined by 7 or 8 million barrels a day in only 6 years? You bet they have. If imports continue to decline, what will we need with Oil import infrastructure (you know, tankers and port handling facilities)? Won't that make Oil a domestic market rather than an international market? Of course. Why wouldn't Oil trade in a similar fashion to Natural Gas in North America? It is not readily apparent to me why it would not (but I am all ears if anybody wants to comment below).

Now, for any other nation this outcome would actually be very supportive of the national currency. In the case of the world's reserve currency where the currency got that way because of Oil... well, I need to noodle that some more. A lot more. Because once the U.S. is Oil independent it would seem to me that on the other side of the " = " is the rest of the world is US$ independent. (But again I am all ears on this issue.)

So, here it is: totalitarian Saudi Arabia is out as the "swing producer" for the most important commodity for the world economy and free market America is up at bat. So far, the new "swing producer" has cut Cap Ex by 50% or so. Either Oil rises in price to reverse that or the new "swing producer" will be swinging a limp noodle.

Meanwhile, the old swing producer and their neighbors have increased their rig count by nearly 50%.

I have no idea what to make of that in this environment... other than to say that if that is true there had better be a serious increase in production in 6 to 9 months from that effort, because if that is not forthcoming... and they did indeed put those rigs to use... and have no increased production to show for it... given the data... the Oil markets and the world economy won't know whether to sh#! or wind their wrist watch.




8 comments:

PioneerPreppy said...

Correct me if I am wrong here because I am going on second hand data and cannot even remember the source but I was under the impression that even with all the various tight oil plays etc. N. America had still only increased the overall supply by a few percentage points and was still a long way from oil independence.

That was also taking into account the continual down trend in domestic usage too. Eventually if the use continues to fall the whole house of cards comes down anyway.

Greg T. Jeffers said...

PP:

Here is the link to the EIA data on domestic production and imports:

http://www.eia.gov/petroleum/supply/weekly/pdf/table1.pdf

Imports fell from nearly 13 mbpd to a 5 handle - 5.x mbpd.

Domestic production increased 4.5 to 5 mbpd, and ethanol increased 900k bpd.

But of that 5.x million imports into the U.S., half came from Canada & Mexico.

Please keep in mind I was talking about North America (US, Canada, Mexico).

Rest of World ex-North America is down 2.5 mbpd since June 2010. North America is +4.5 mbpd.

"IF" those trends hold, NA is Oil independent in short order.

At some point thereafter Crude Oil would trade much like Nat Gas does - wildly.

Or at least I think so... I reserve the right to be wrong!

Anonymous said...

I was under the impression that Mexico would be a net importer very soon. Haven't seen any updated numbers lately though. Spoke with my brother up near Youngstown ,Ohio,looks like if the down ward in oil prices continues, the oil pipe builders are up the creek, and soon. No more ads for the big frack boom either. Seems they are planning to wrap it up in expansion at least. Peace

Greg T. Jeffers said...

Dear Anon:

My sense of it all is that this merely a very rough but typical cycle.

I would bet on higher prices far sooner than the "many years of low prices" crowd.

Everybody seems to agree that prices will be low for an extended period. I have never seen a market in the commodity space where "
everybody" was right. Ever.

Maybe this will be the first... stranger things have happened... but I am a betting man, and I am betting against that.

Anonymous said...

Oil prices will diverge if oil cannot be easily traded across the oceans. We certainly have seen that with natural gas and why is that? Natural gas is very bulky and even with liquification, the liquification plants, the ships, and regasification plants cost $$$, are difficult to site in the US due to safety fears,and so on.

Oil, meanwhile has plentiful ports, pumps simply, and there are lots of ships that can move the stuff.

I guess the question becomes one of asking just how long all those oil terminals and crude carriers remain available for use/lease when the demand isn't there for their day to day use? That is, if all that crude shipping infrastructure goes away, then sure, oil starts to diverge, but how much arbitrage opportunity will continue to exist across the continents? Will it be enough to maintain some decent percentage of the present crude shipment infrastructure?

Stephen B.

Anonymous said...

oil would continue to track world prices. When the prices diverged, tankers would move to fix the difference (how markets work). You don't need a constant high traffic of incoming oil, just the threat of it. That's how markets work. For that matter, even if the US became a big net exporter, the price in the US would still be world price. [I'm ignoring small differences of a couple percent for shipping differentials around the world.]

Now, the export restriction does have an impact on the price achieved here (basically making this place a contained market). It depresses the price of light crude because we have more than we can efficiently use (and the world has less than it can efficiently use). But trade barriers create these sorts of things. It's even more extreme for condensate (ultralight oil) than for WTI (light oil). Condensate in Asia gets about $5 more than light sweet. But in the US, condensate gets as $5-10 less than WTI. The problem occurs because US refineries are more complicated and work better (in terms of the value delivered) on "difficult" heavy sour crude. Whereas a lot of the world, especially Asia has more primitive, simple refineries that work better with the "easy" light crude.

For natural gas, there will ALWAYS be big differences in price because it costs a lot of money to compress and cool gas and ship it in special pressure vessel, cooled container ships. Unless you can build a pipeline across the ocean. Even the expensive facilities for shipping take a long time to get built and don't exist yet. But even after they get built, a big differential will remain.

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