The reason oil could drop as low as $20 per barrel

Reuters ^ | December 19, 2014 | Anatole Kaletsky

[Svartalfiar]

Makes you wonder, if they can sell it for $50 a barrel now, why couldn’t they 10 years ago?.............

The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

Right there in the excerpt. When OPEC was able to set prices at triple digits, there wasn't enough production elsewhere to really have proper competition. So everyone else pushed prices up to match OPEC pricing. As more and more oil is produced outside of OPEC, the monopoly is less effective and then you get proper supply/demand. SA wants to stop this, so by lowering prices within the monopoly, they're hoping to stall the regional security issues (Iran), while also preventing growth in their market competitors. And they have the savings account to do this for a couple years at least.

[Red Badger]

Won’t that tend to anger other OPEC members?....................

[Svartalfiar]

In our area the marinas, on the fresh water lakes, all sell gasoline with no ethanol. But many of them are not listed at the Pure-Gas web site.

Yup. pure-gas is nice, but they only usually list actual gas stations. Marinas are generally intended to fuel boats, not cars, so they aren't really listed.

[nascarnation]

Go all out, get the 700 hp Hellcat!

[tenger]

Can someone explain what makes the break point for oil $50 for one country, $30 for another, and so on? What are the variables in getting it out of the ground?

If the hole is drilled and producing, is it a matter of just "harvesting" the oil that comes out and shipping it? I am certainly displaying my ignorance with that remark, but I've seen these figures thrown out and just wondered how and why it's so different.

It's certainly making for interesting times. Thanks.

[nascarnation]

I’m pinging Thack on this one because he’s our FR resource.

Some places like Saudi Arabia, you just drill a shallow hole and pump. Other places have to drill miles deep in the ocean.

[thackney]

I don’t agree that Saudi Arabia has plentiful supply of oil that can be pumped at $20 or so.

They spent $17-billion (significant overruns from estimates) on the Manifa project for 900,000 barrels a day low quality oil.

Offshore in shallow waters, they built 27 man-made drilling islands, 13 platforms, and 15 onshore drillsites. The project includes 41 km of causeways and 3 km of bridges designed to maintain natural water flow in Manifa Bay. They have worked for over half a century trying to figure out a way to economically produce this lower value, high sulfur heavy oil with high metal content.

For the curious, I included a bunch of links for info on this project.

http://www.bloomberg.com/news/2013-04-15/saudi-aramco-starts-pumping-from-manifa-oil-field-ahead-of-plan.html

https://www.saudiaramcoworld.com/issue/196006/manifa-oil.field.under.the.sea.htm

http://www.theoildrum.com/node/9056

http://www.oilandgasnewsonline.com/Article/33782/No_plans_to_raise_output_capacity

[vette6387]

“$20 a barrel would take down Iran, Russia, and Venezuela. “

It does not need to go that low, but the faster it declines, the sooner we will see regime change in Russia and Venezuela. Don’t know if that’s possible in Iran. At $60, it’s already below the price point these countries need to survive in the long term. Maduro needs to see if his old job driving a bus is still available. But maybe he will get shot and solve the problem permanently.

[thackney]

Also keep in mind that for most all new oil production, the cost have gone up greatly. Most of the old cheap easy oil is gone.

Many of the shale fields require investment of $6, $8 even $10 million per well. More complicated and powerful rigs are required to drill deeper than before. Horizontal Steerable Mud Motors have been added to reach long laterals into the best producing layers of the field.

The hydraulic fracturing for those wells require far more horsepower than was ever used in tradition wells from a few decades ago. And now some are even fracturing in 20, 30 or more stages.

Offshore production platforms often cost Billions of Dollars. Not only the initial expense but those are far more costly to continue to operate over time.

Also be aware that some of the high break-even numbers given for OPEC, Russia and other nations do not represent the cost to produce oil. Many of those showed how much the oil had to cost to balance their government spending.

[mrsmith]

“they have the savings account to do this for a couple years at least. “

But nations and companies who want to increase production have even more money at hand than Saudi Arabia. Norway’s STATOIL has almost a trillion dollar reserve fund itself.
If Saudi Arabia’s goal is to decrease non-OPEC production then, with this glut decreasing the value of oil assets, they are making it cheaper for competitors to expand and defeat that goal... not smart.
I think SA just doesn’t have a better option than to continue production.

[who knows what evil?]

I paid $2.649 in mid-October; just paid $3.299 today. Certainly doesn’t line up with that chart...go figure.

[SunkenCiv]

Let the bloodlettin’ begin! ;’)

[thackney]

Norway’s STATOIL has almost a trillion dollar reserve fund itself.

Statoil has some significant problems right now, I believe.

Statoil Scuttles Ultra-deepwater Rig Contract; Pays $350mm To Back Away
http://www.freerepublic.com/focus/news/3229630/posts

Statoil Defers Decision on $5.7B Oil Recovery Project
http://www.freerepublic.com/focus/news/3232581/posts

[mrsmith]

Peanuts!
No, seriously, long-term it’s just hiccups.
The sudden price drop has no-doubt temporarily hurt a lot of recent investments in production. But capital like that can wait for the tide to turn.
China, India, and many multinationals are investing in expanded production. The glut is just making it cheaper for them to do so.

[Triple]

supply and demand...

low alternatives and low elasticity of demand - OPEC control enough of the supply to force the inelastic consumers to buy at the higher prices they set. If the buyers still have to buy...the new price is established.

[Radix]

Of course we can blame the Jews. The first real exercising of OPEC clout followed shortly after the 1973 Yom Kippur War.

The strangling of western Economies has been the game ever since.

Too bad for the Market Terrorists that Capitilasm is guided by rules and corrections will always result, though as in this case, slowly at times.

If the new energy sources that are controlled by Israel are valid, we will likely see significant changes internationally in all matters. Unfortunately, the new reality is also fraught with danger as old regimes die hard.

[RS_Rider]

“Makes you wonder, if they can sell it for $50 a barrel now, why couldn’t they 10 years ago?”

Fracking

[sergeantdave]

Always remember this:

Reuters is the last gasp effort of the British fascists to keep alive Goebbel’s propaganda ministry.

[C19fan]

I am no expert but from what I understand there are geological factors and what type of crude. I heard stories the Saudis can pump oil, due to it being what is called a sweet crude and geology, much cheaper than say Venezuela which is known as a heavy crude. To get the oil sands out of Alberta is relatively expensive compared to conventional drilling. But that is not the whole story. For the petro states the income from oil/gas is used to finance their national budgets. So when the oil price drops that will cause their national budgets start to bleed red ink. I heard figures that Venezuela needs perhaps as high as $200 a barrel to finance the Chavezista Socialist Paradise. Putin relies on oil/gas to fund the Russian government so he is going to find it much harder to finance his military build up or fight his was in Ukraine.

[bestintxas]

“If you cannot get the fund to replace reserves and production as time moves forward and you sell what you have, you are going out of business.”

That rationale applies for the oil industry, not for oil companies.

There are plenty of companies who stay in business by buying reserves, not drilling for them.

Also, history proves the cyclic nature of these price swings, so companies that withstand the downside swings knows it can be back to drilling at some time in the future.