How Low is Too Low?Leave a comment
January 6, 2015 by JImbo
Just to put into perspective just how low the oil prices are right now:
What surprised me is the SHARP drop off.
The best answer I can see for why is the following graphs:
This is what happened.We kept pumping more and more oil to become energy independent.OPEC (Organization of Petroleum Exporting Countries) led by Saudi Arabia jacked up their production to outproduce us.
That is reason one and two for the gas prices. More production from the USA and more production from OPEC.
Reason three is that OTHER non-OPEC countries such as Brazil jacked theirs up too because prices were falling. Who wants to be left behind after all?
Then, reason four. All that extra oil wasn’t just coming out of the global market. It was coming out of the US market. In spite of (NOT because of… remember the stalled Keystone pipeline?) ever more government regulation, US oil producers have made good on their promise to make us energy independent.
For most intents and purposes, we ARE now mostly energy independent. We import a small amount of oil, but we don’t have to. We in fact export “sweet” crude (that requires less refining) and then import “sour” crude from other countries in order to refine it since we have more refineries than many other places do. We don’t import that extra bit because we NEED to. We do it because it MAKES US MORE MONEY THAT WAY.
We have the option to pump oil or not. OPEC countries generally don’t. Their economies can’t balance without oil. It’s impossible. They have nothing else to export.
Most of OPEC can’t survive long-term without oil over $100 a barrel. That’s over TWICE what it currently is going for. So, they are essentially pulling a “Wal Mart” strategy.
They are hoping to push prices SO low (temporarily) that the United States companies give up and we stop producing our own here at home. Then, once we get out of the market they will slash production and raise prices.
It’s a risky strategy. It depends on US oil producers going out of business before the OPEC countries do. Granted, we DO have a choice. Oil is not a huge export of ours comparatively.
We export oil, but it’s not ALL we export. We export lots of other stuff too. So, we CAN stop exporting oil and live on other exports.
Unfortunately, the other countries CANNOT. Not a single one of the other countries in OPEC have a significant export other than oil. They HAVE to live on oil. They simply go broke otherwise.
Hence, it’s risky. They are hoping they can live on the money they have stashed in Swiss bank accounts (750 billion for Saudi Arabia alone according to some reports), and wait it out. If we DON’T stop, then they will simply not have enough money to pay for all their mansions and cars and huge militaries.
Or free food and subsidized cooking/heating oil.
If you think the riots and violence are bad over there now, imagine what it’ll be like when they have NO money. Not just a few poor people without money. NO ONE HAS ANY MONEY. Once the Saudis are without their 3/4 of a trillion dollars of cash…they are BROKE.
The countries on the right side of the graph have even LESS. Do you really think Iran has any reserves saved up? Algeria? Nigeria? Iraq?
Not a coincidence those countries are in civil wars as it is. They can’t pay their troops. ISIS has taken half of Iraq’s oil too. How long will they last when they have no money to pay any of their troops to fight ISIS?
What happens in the future? Well, I’m gonna guess that our politicians will freak out and try to limit or derail our production for several reasons.
1- Cheap gas prices means “alternative” fuel development will slow down. Who needs more fuel efficient cars or more solar panels if oil/gas/natural gas is cheap? Expect shrill cries for higher gasoline taxes among other “fixes” to this “problem.”
2- They are scared of terrorists and cyberattacks on our infrastructure to stop our production. Not an unlikely concern actually. If your whole country ran on oil and someone threatened your control over the oil supply, wouldn’t you strike them? Many attribute Japan’s attacking of the United States at Pearl Harbor directly to wanting to eliminate economic competition with their markets from the United States.
3- They are scared as hell that if those OPEC countries collapse it will mean violence and war around the globe. It’s already happening in Iraq and Libya, much of it over oil. Just look at the havoc caused by the 1973 oil embargo, or the Iran-Iraq War of the 1980s.
The only problem is… war and chaos hurts economies and cause recessions/depressions… which further decrease production and demand for oil. THAT reduces prices too! We could see a death spiral for many OPEC countries if that happens.
Low prices lead to war and violence, which destroys the countries who were hurt by the low oil prices. Saudi Arabia and Iran hate each other for example. If Saudi Arabia keeps pumping oil (they have big reserves and need lower prices to “break even”, then what does Iran do? Will they feel compelled to blow up Saudi oil tankers and oil wells?
Our military is war gaming that as we speak. It’s a very real possibility. And then what… Iraq is attacked. Qatar. Bahrain.
On the other hand, if we keep pumping oil (and get the Keystone pipeline online) we could REPLACE that lost capacity at a good price for countries (like Japan, China and most of Europe) who depend on that Middle Eastern oil.
Only time will tell.
I wouldn’t put anything past people who are desperate enough however. In either case we need to keep our energy independence. Giving in will not make us safer. It will make us weaker.
To quote Sarah Palin: