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Business/Finance See other Business/Finance Articles Title: Oil at $40 Possible as Market Transforms From Caracas to Tehran Bloomberg Yahoo finance... Oil's decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union. Russia, the world's largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades. More from Bloomberg.com: Oil at $40 Possible as Market Transforms Caracas to Iran "This is a big shock in Caracas, it's a shock in Tehran, it's a shock in Abuja," Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of oil, told Bloomberg Radio. "There's a change in psychology. There's going to be a higher degree of uncertainty." A world already unsettled by Russian-inspired insurrection in Ukraine to the onslaught of Islamic State in the Middle East is about be roiled further as crude prices plunge. Global energy markets have been upended by an unprecedented North American oil boom brought on by hydraulic fracturing, the process of blasting shale rocks to release oil and gas. More from Bloomberg.com: Swiss Gold Rejection Deals Blow to Investors Hurt by Price Slump Cheap Gasoline Few expected the extent or speed of the U.S. oil resurgence. As wildcatters unlocked new energy supplies, some oil exporters abroad failed to invest in diversifying their economies. Coddled by years of $100 crude, governments instead spent that windfall subsidizing everything from 5 cents-per-gallon gasoline to cheap housing that kept a growing population of underemployed citizens content. Those handouts are now at risk. More from Bloomberg.com: Ohio State Football Player Found in Dumpster With Gun "If the governments aren't able to spend to keep the kids off the streets they will go back to the streets, and we could start to see political disruption and upheaval," said Paul Stevens, distinguished fellow for energy, environment and resources at Chatham House in London, a U.K. policy group. "The majority of members of OPEC need well over $100 a barrel to balance their budgets. If they start cutting expenditure, this is likely to cause problems." Costs as Benchmark Oil has dropped 37 percent this year and, in theory, production can continue to flow until prices fall below the day-to-day costs at existing wells. Stevens said some U.S. shale producers may break even at $40 a barrel or less. The International Energy Agency estimates most drilling in the Bakken formation -- the shale producers that OPEC seeks to drive out of business -- return cash at $42 a barrel. "Right now we're seeing a price shock coming out of the meeting and it will be a couple of weeks until we see where the price really falls," said Yergin. Officials "have to figure out where the new price range is, and that's the drama that's going to play out in the weeks ahead." Brent crude finished last week around $70, and New York oil near $66. Brent is now at its lowest since the financial crisis -- when it bottomed around $36. Not All Suffer To be sure, not all oil producers are suffering. The International Monetary Fund in October assessed the oil price different governments needed to balance their budgets. At one end were Kuwait, Qatar and the United Arab Emirates, which can break even with oil at about $70 a barrel. At the other extreme: Iran needs $136, and Venezuela and Nigeria $120. Russia can manage at $101 a barrel, the IMF said. "Saudi Arabia, U.A.E. and Qatar can live with relatively lower oil prices for a while, but this isn't the case for Iran, Iraq, Nigeria, Venezuela, Algeria and Angola," said Marie-Claire Aoun, director of the energy center at the French Institute for International Relations in Paris. "Strong demographic pressure is feeding their energy and budgetary requirements. The price of crude is paramount for their economies because they have failed to diversify." Brent crude is poised for the biggest annual decline since 2008 after OPEC last week rejected calls for production cuts that would address a global glut. Like this year's decline, oil's crash in the 1980s was brought on by a Saudi-led decision to defend its market share, sending crude to about $12 a barrel. Russia Vulnerable "Russia in particular seems vulnerable," said Allan von Mehren, chief analyst at Danske Banke A/S in Copenhagen. "A big decline in the oil price in 1997-98 was one factor causing pressure that eventually led to Russian default in August 1998." VTB Group, Russia's second-largest bank, OAO Gazprombank, its third-largest lender, and Russian Agricultural Bank are already seeking government aid to replenish capital after sanctions cut them off from international financial markets. Now with sputtering economic growth, they also face a rise in bad loans. Oil and gas provide 68 percent of Russia's exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 31 percent against the dollar since June. This Will Pass While the country's economy minister and some oil executives have warned of tough times ahead, President Vladimir Putin is sanguine, suggesting falling oil won't force him to meet Western demands that he curb his country's interference in Ukraine. "Winter is coming and I am sure the market will come into balance again in the first quarter or toward the middle of next year," he said Nov. 28 in Sochi. Even before the price tumble, Iran's oil exports were already crumbling because of sanctions imposed over its nuclear program. Production is at a 20-year low, exports have fallen by half since early 2012 to 1 million barrels a day, and the rial has plummeted 80 percent on the black market, says the IMF. Lower oil may increase the pain on Iran's population, though it may be insufficient to push its leaders to accept an end to the nuclear program, which they insist is peaceful. ‘Already Losing' "The oil price decline is not a game changer for Iran," said Suzanne Maloney, senior fellow at the Brookings Institution, a Washington-based research organization, who specializes on Iran. "The Iranians were already losing so many billions of dollars because of the sanctions that the oil price decline is just icing on the cake." While oil's decline wrenches oil-rich nations that squandered the profits from recent high prices, the world economy overall may benefit. The Organization for Economic Cooperation and Development estimates a $20 drop in price adds 0.4 percentage point to growth of its members after two years. By knocking down inflation by 0.5 point over the same period, cheaper oil could also persuade central banks to either keep interest rates low or even add stimulus. Energy accounts for 10 percent to 12 percent of consumer spending in European countries such as France and Germany, HSBC Holdings Plc said. Nigerian Woes As developed oil-importing nations benefit, some of the world's poorest suffer. Nigeria's authorities, which rely on oil for 75 percent of government revenue, have tightened monetary policy, devalued the naira and plan to cut public spending by 6 percent next year. Oil and gas account for 35 percent of Nigeria's economic output and 90 percent of its exports, according to OPEC. "The current drop in oil prices poses stark challenges for Nigeria's external and fiscal accounts and puts heavy pressure on the exchange rate," Oliver Masetti, an economist at Deutsche Bank AG, said in a report this month. "If oil prices remain at their current lows, Nigeria will face tough choices." Even before oil's rout, Venezuela was teetering. The nation is running a budget deficit of 16 percent of gross domestic product, partly because much of its declining oil production is sold domestically at subsidized prices. Oil is 95 percent of exports and 25 percent of GDP, OPEC says. "Venezuela already qualifies for fiscal chaos," Yergin said. Venezuelan Rioting The country was paralyzed by deadly riots earlier this year after police repressed protests about spiraling inflation, shortages of consumer goods and worsening crime. "The dire state of the economy is likely to trigger renewed social unrest, while it seems that the government is running out of hard currency," Capital Economics, a London research firm, wrote in a Nov. 28 report. Declining oil may force the government to take steps to avoid a default including devaluing the currency, cutting imports, raising domestic energy prices and cutting subsidies shipments to poorer countries in the region, according to Francisco Rodriguez, an economist at Bank of America Merrill Lynch. "Though all these entail difficult choices, default is not an appealing alternative," he said. "Were Venezuela to default, bondholders would almost surely move to attach the country's refineries and oil shipments abroad." China Bailout? In an address on state television Nov. 28, President Nicolas Maduro said Venezuela would maintain social spending while pledging to form a commission to identify unnecessary spending to cut. He also said he was sending the economy minister to China to discuss development projects. Mexico shows how an oil nation can build new industries and avoid relying on one commodity. Falling crude demand and prices in the early 1980s helped send the nation into a debt crisis. Oil's share of Mexico's exports fell to 13 percent in 2013 from 38 percent in 1990, even as total exports more than quadrupled. Electronics and cars now account for a greater share of the country's shipments. Though oil still accounts for 32 percent of government revenue, the Mexican government has based its 2015 budget on an average price of $79 a barrel. Related reading: Oil Seen in New Era as OPEC Won't Yield to U.S. Shale Oil Bust of 1986 Reminds U.S. Drillers of Price War Risk OPEC Refusal Means Oil Industry's Weakest Producers Left Behind To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Timothy Coulter, Ken Fireman Related Stories Iran Wary of Oil ‘Shock Therapy’ as OPEC Vies for Market Bloomberg Easy Days at OPEC Are Over, Veteran Says; You Need Russia, Norway, Mexico Bloomberg New Era of Cheap Oil Tilts Geopolitical Power Toward U.S. Bloomberg OPEC Easy-Decision Days Seen Over by Former Qatari Oil Minister Bloomberg OPEC Gusher to Hit Weakest Players, From Wildcatters to Iran Bloomberg Poster Comment: David C What OPEC seems to have miscalculated is that the US can weather low prices far longer than most members of OPEC. Plus once the flood gates are open it's hard to get them closed. OPEC states than need cash have to pump more oil in the face of declining prices not less, which makes the price go down even further. Basically, OPEC has now lost control of pricing and the market will set the true price of oil based on demand and supply. That is a good thing for consumers, but a bad thing geopolitically. It will lead to more unrest and conflict. Regardless on the consequences, that genie is out of the bottle and can't be put back in without some major magic. Warhawke Oil price is based on proven reserves which means oil that can be obtained through existing technology. Oil from shale has been known for a long time but the means to retrieve it at a price that could compete hasn't been there until now. If OPEC hadn't driven or allowed prices to go so high they wouldn't be in this situation because it wouldn't have been affordable to extract from shale. If $40 a barrel is the floor for selling oil from shale then the price won't stop falling until the supply balances out with the demand. In other words, if demand does not grow oil prices will fall to where supply and demand balance out. It would be nice if that price was around $50. 17-1 [Astro Gremlin] Excellent point, if oil can be extracted at $40 or $50, the price might stay there. I don't think it can, but the Saudis seem determined to find out what the bottom price is and possibly drive the competition out of business. More like a vacation since the oil isn't going anywhere. [fred] Articles I've read say that shale production needs to be at $80.00 or higher. I don't see a bright future for shale due to costs and pollution. [David] @fred, there is a lot of correct information available about the cost of producing any oil, including shale oil. The cost of shale oil depends on its location and not all oil producing areas are the same. There are many factors. The important point is that as the price drops, some producers can't afford to produce. $75 seems to be the top of the major producing areas and $42 is near the bottom. Steve What the Saudi's do not understand is there has been constant development in the US to make shale cheaper to produce. I have heard some drillers could afford to go as low as the mid $30 range, and that's based on reports that I have heard from people I know in Texas. Sure the Saudi's will deny that US Shale drillers will be able to stay in business, and the Saudi's have not upgraded their oil production systems to make their oil production costs any cheaper. For every 10 barrels of oil that is exported from Saudi Arabia, at least 5 more are kept for domestic consumption. Why? Saudi Arabia has not diversified their economy like Mexico and Norway have done in the last several decades. Russia has done nothing to diversify their economy yet they have a very talented and educated work force that could have made their economy the epitome of international economics 41-2 Ken We have been EXPORTING more oil than we import for over 3 years now. The speculators and commodity traders are the ones making the money. Congress has allowed ALL oil from the USA to be sold FIRST on the world market and then it is bought back that world prices for refinement. That was the true cause of the 1970's oil problem. 7-3 Pat-One @Ken - It is time to drop the "poor me" attitude. If the extraction process costs $40 per barrel, where do you think the $40 is going. How about the guys working the oil patch, guys who build pipelines, drive trucks and operate heavy machinery. How about the manufacturers of drill rigs, pipe, pumps and machines. The money is spent for goods, materials and equipment and that benefits hundreds of thousands of people in America. The oil traders have their roles to play as well and they deserve to be making a buck for their efforts. If you think they are making too much, start competing with them and drive their prices down, unless you don't have their capabilities, in which case you should stop complaining about how much money they make. 5 DouglasL I have heard some drillers could afford to go as low as the mid $30 range, and that's based on reports that I have heard from people I know in Texas. I wonder if the outfits in North Dakota paying truckers $100,000 a year can go to $30 a barrel -2 Purge One of my friends is a higher up in BP. He says anything below $80 and BP is losing money. They get a lot of oil from the oil sands. I am guessing that costs more to extract. JohnExisting wells can operate at low cost, but the problem with shale oil is that you are constantly drilling new wells, because they go dry fairly rapidly. In the short term, existing wells may turn a profit at $42/bbl, but over the long term, as new wells are hit and miss, low global market prices will not sustain shale oil. owassobob OPEC continues to produce in order to lower prices makes no sense financial sense. Half of OPECS membership will be ruined financially along with several other countries, if oil drops below $40 and stays there for any period of time. U S producers are not stupid. They can stop pumping any time they want on wells that don't cover cost and keep pumping on those that do. Look for Russia to take some type of military action against Saudi oil fields if this continues.4-2 Ryan Wow, not an econ major were you? So if the US producers stop pumping, what happens to supply? It dries up. What happens to prices in that case? Wait for it..........they rise. And how long does it take to get a shuttered well back on line? Many months. This is exactly what the Saudis are trying to do here. Lower prices pushes the US producers out of business. Higher prices actually makes them pump MORE, which is what is giving us this collapse we are seeing now.3 [owassobob] Wow, not in the oil business are you? You start pumping again as soon as the prices go up. The pumps on most wells don't have to be capped to stop producing, simply turned off like your kitchen light. @owassobob and Ryan, The problem is not so much at the well, but in the employment of personnel and the plans for future drilling. Have you seen the stock value of well drillers? They are tanking. Check out majors like Halliburton and Shlumberger. It takes time to plan and drill and bring producing wells on line. The first thing many producers do is to stop spending on future drilling and concentrate on lowering cost of existing production. Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest Begin Trace Mode for Comment # 1.
#1. To: Tatarewicz (#0)
You can have oil at a dollar a barrel, and guess what? They will still charge you $3.00 a gallon for gasoline. Right now it is at what? $3.05 again? We have been stripmined of our wealth by the powers that be, between high fuel, and utility costs, as well as high mortgage and rent. Not to mention food prices have skyrocketed over the last 6 years under this administration. When you slaughter an animal, you bleed it white, and then process it. We have seen a death by a thousand cuts in this country, and as the American citizen is being bled white, our nation will be cut apart soon. When Obama told corporate America that they will get $3000.00 to hire an illegal alien, over an American Citizen, that was the end of this country for the citizens who pay that bastard's bills.
There are no replies to Comment # 1. End Trace Mode for Comment # 1.
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