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Thread: The coming oil Crash

  1. #1
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    The coming oil Crash

    http://www.foreignpolicy.com/article...crash?page=0,1


    I hope this is true


    My mom out in California is elated -- gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world's petro-rulers, who are watching the price of oil -- their life blood -- plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as "devastation" and "severe strain" to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that's the nightmare scenario if you happen to run a petrocracy.

    To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you'll see the problem.

    Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier -- a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears -- $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange.

    With few exceptions, the same goes for the rest of the world's petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.

    Of the major petro-states, only Qatar -- with a requirement of about $58-per-barrel to balance its budget -- appears to have sufficiently disciplined state spending to weather all but the most dire forecasts.

    The biggest uncertainty in the global oil market isn't whether oil prices will drop further -- they seem likely to -- but how long they will stay down. In short, how long, and at what scale, are the petrocracies likely to suffer? This state of affairs is a woeful blow to petro-rulers after nine years of mostly nirvana. The year 2003 started with oil at about $33 a barrel, after which prices went mainly up, peaking in July 2008 at $147 a barrel. They bounced back nicely even after the global financial crisis sent prices plummeting below their 2003 level, to about $31 a barrel in December 2008. When the Arab Spring unfolded, first Libya and then Iran triggered worried looks on trading desks in London and New York, and the price spiked to about $128 a barrel. My mom saw the average price of gas in California rise to $4.36 a gallon. But then the concern of war between Iran and Israel all-but vanished, and prices since have been on a seemingly relentless decline.

    Now, a convergence of forces is weighing on petro-rulers' nerves: Europe's economic crisis; a slowdown in Chinese growth including the demand for oil; a steep decline in U.S. oil consumption with a simultaneous rise in domestic oil production; and a determined effort by petroleum colossus Saudi Arabia to build up global inventories.

    It is perhaps the last data point -- Saudi Arabia's aggressive actions to lower prices by pumping some 10 million barrels a day -- that might seem baffling given Riyadh's economic stake in the oil game. But Verleger, the Colorado-based oil economist, says the Saudi rationale is clear, and linked to the kingdom's traditional long game.

    In an email exchange, Verleger pointed me to an interview he did a few days ago with Kate Mackenzie at the Financial Times. First, he explains, the Saudis are out for blood when it comes to fellow petro-states Russia and Iran, the former for failing to help calm the fury in Syria, and the latter for refusing to go to heel and give up its nuclear ambitions; in both cases, the Saudis think lower prices will produce a more reasonable attitude. In addition, Saudi Arabia is terrified of a current U.S. boom in shale oil; it is hoping that lower prices will render much of the drilling in North Dakota's Bakken Shale and Canada's oil sands uneconomical. Finally, the Saudis are well aware that low oil prices helped to turn around the global economic downturn in 1998 and 1999, and they hope to help accomplish the same now, and perhaps win new affection from the world's leading economies.

    Meanwhile, though, Verleger thinks that oil prices will crash. Markets overshoot when one is trying only to fine-tune them, as the Saudis are, he argues -- which is the basis for his forecasts of $40-a-barrel oil and $2-a-gallon gasoline by November.

    To the degree that such fire-sale prices are long-lived, they could cause mayhem among petro-rulers. While Verleger thinks that the Saudis can maneuver prices back up when they want, the very nature of a crash demonstrates that markets can be uncontrollable. But the Saudis are willing to suffer the consequences, knowing that their own financial reserves (some $700 billion) give them staying power. "The Saudis are able to look at the long term," Phil Flynn, an analyst with Pricing Futures Group, told me.

    Citigroup's Morse thinks that prices can fall further from where they are now, but not as low as Verleger forecasts because, he told me, today's market conditions are different from 2008 -- the decline in demand is not as steep, and inventories are not as large. Morse calculates that Brent can fall into the $70s-per-barrel range and U.S.-traded oil into the $60s-a-barrel range. "There is a good chance Saudi Arabia continues to produce enough to force [a rise in oil inventories]. And there's a good chance, between Europe and China, that demand growth could come to a halt," Morse said. OPEC might respond by reducing production, but its actions would be late. "Add to the scenario no more supply disruptions (or only modest ones) and no military conflict involving Iran," Morse said, "and prices could fall another $20 a barrel fairly easily."

    Low oil prices can have serious social impacts simply because, with less free cash, people tend to start more closely scrutinizing their surroundings -- and when they become unhappy with what they see, they start looking for a scapegoat. The conditions that led to the string of Arab Spring ousters were not so much the lack of democracy as widespread public dissatisfaction with personal economic prospects. Analysts see similar vulnerabilities for the rulers of Iran, Russia, and Venezuela; when Venezuelan President Hugo Chávez can no longer milk the state oil company for public payouts, for instance, his political support could be in jeopardy.

    Not everyone thinks the times will be so brutal for petro-rulers. Neil Beveridge of Bernstein Research told me that conditions may push down prices as low as around $90 a barrel, but no more than that. And the Energy Information Administration (EIA) on Monday estimated oil prices in the second half of 2012 at $95 a barrel.

    The latter would be a heart-in-your throat, 10 percent plunge from the EIA's previous forecast. But it would be nowhere near the cliff that brings cold chills to the world's petro-rulers. As for my mom, either of these outcomes will make her merrier cruising the 405.
    Last edited by Buster; 06-29-2012 at 10:03 PM. Reason: link

  2. #2
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    Can someone please sell me one of these barrels?

    Keep hearing about them, whilst getting slammed by gallons.

    Barrel gas stations, please.

    -

  3. #3
    Quote Originally Posted by Buster View Post
    I hope this is true
    Why is that? Cheap Oil, as we all know, only leads to more dependence on that cheap oil.

    Our President has stated he feels Oil should be far more expensive, not cheaper, in order to push green-conversion and fiscal parity between oil-based and green-based energy generation.

    Do you disagree with the President?

  4. #4
    I don't buy it but I'd be ecstatic if it happens. Most of the oil producing countries are bad guys. Anything that brings them down is a good thing.

  5. #5
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    I'm amused at the tone of this article. I'm supposed to feel bad that I wont have to pay nearly $4.00 for a gallon of gas.

    I suppose the abundance of green technology and tree-hugging nerds here in teh US is helping to bring prices down.

    It doesn't surprise me that this president or any president/representative would want Americans to pay more for fuel. I suspect the green lobbyists are exceptionally supportive towards "campaign funding."

  6. #6
    Quote Originally Posted by Warfish View Post
    Why is that? Cheap Oil, as we all know, only leads to more dependence on that cheap oil.

    Our President has stated he feels Oil should be far more expensive, not cheaper, in order to push green-conversion and fiscal parity between oil-based and green-based energy generation.

    Do you disagree with the President?
    Forget the article..but I read recently the way things are going with all the new ways to get oil in the US we should be totally off of foreign oil by 2035.

    Also do you have the actual quote from Obama that he wants more expensive oil?I don't remember him making that comment

  7. #7
    Quote Originally Posted by IHATEDOLPHINS View Post
    Forget the article..but I read recently the way things are going with all the new ways to get oil in the US we should be totally off of foreign oil by 2035.

    Also do you have the actual quote from Obama that he wants more expensive oil?I don't remember him making that comment
    At hand? No, I don't bookmark every quote I hear on the radio for future use here.

    But I've heard the audio played over the air a few hundred times, him and others in his admin. discussing oil and oil price desires. Look for them if you like, don't if you don't, I'm not here to convince you one way or the other.

    I'm sure there are people who never heard Obama say the Mandate absolutely was not in any form a tax too. Doesn't mean he didn't say just that.

  8. #8
    Quote Originally Posted by IHATEDOLPHINS View Post
    Forget the article..but I read recently the way things are going with all the new ways to get oil in the US we should be totally off of foreign oil by 2035.

    Also do you have the actual quote from Obama that he wants more expensive oil?I don't remember him making that comment
    i have posted the video of the statement here in the past. its on youtube if you care to google it. His exact words were that energy prices would "necessarily" go up in order to implement the green energy agenda.

  9. #9
    Quote Originally Posted by Warfish View Post
    At hand? No, I don't bookmark every quote I hear on the radio for future use here.

    But I've heard the audio played over the air a few hundred times, him and others in his admin. discussing oil and oil price desires. Look for them if you like, don't if you don't, I'm not here to convince you one way or the other.

    I'm sure there are people who never heard Obama say the Mandate absolutely was not in any form a tax too. Doesn't mean he didn't say just that.


    Saw his quote on this.It was part of a conversation when gas had it 4 bucks in 2008.Didn't take from the whole conversation that he wanted gas to shoot up to Europe levels
    Last edited by IHATEDOLPHINS; 07-01-2012 at 09:06 AM.

  10. #10
    Quote Originally Posted by IHATEDOLPHINS View Post
    Forget the article..but I read recently the way things are going with all the new ways to get oil in the US we should be totally off of foreign oil by 2035.

    Also do you have the actual quote from Obama that he wants more expensive oil?I don't remember him making that comment

    Energy Secretary Chu said he wanted prices like Europe - $8+. IO am sure at the prodding of obama.

    Obama said he wanted the price off ELECTRICITY to skyrocket.

  11. #11
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    Quote Originally Posted by palmetto defender View Post
    Energy Secretary Chu said he wanted prices like Europe - $8+. IO am sure at the prodding of obama.

    Obama said he wanted the price off ELECTRICITY to skyrocket.
    It's crazy the stuff politicians say, isn't it?

    Romney said that he encouraged a tax penalty for people who didn't buy health insurance.

    He must be thrilled at the SCOTUS's ruling

  12. #12
    Quote Originally Posted by PlumberKhan View Post
    It's crazy the stuff politicians say, isn't it?

    Romney said that he encouraged a tax penalty for people who didn't buy health insurance.

    He must be thrilled at the SCOTUS's ruling

    But the people of Mass wanted it. They like to be abused up there. The Kennedys, Barney Frank, Gerry Studds and a host of other outstanding people. Romney accomodated them.
    They love socialist concepts and embraced the healthcare inssurance program.

  13. #13
    Quote Originally Posted by palmetto defender View Post
    But the people of Mass wanted it. They like to be abused up there. The Kennedys, Barney Frank, Gerry Studds and a host of other outstanding people. Romney accomodated them.
    They love socialist concepts and embraced the healthcare inssurance program.
    Your theory is Romney did it just to win?

  14. #14
    Quote Originally Posted by cr726 View Post
    Your theory is Romney did it just to win?
    Romney did what his constituents wanted... Isn't that what all politicians should be doing?

  15. #15
    Quote Originally Posted by AlwaysGreenAlwaysWhite View Post
    Romney did what his constituents wanted... Isn't that what all politicians should be doing?

    They should. Except power hungry egotists like Obama. It's all about him being a dictator. "By Executive Order".

  16. #16
    Quote Originally Posted by AlwaysGreenAlwaysWhite View Post
    Romney did what his constituents wanted... Isn't that what all politicians should be doing?
    So he allowed the people to vote for it?

  17. #17
    Quote Originally Posted by palmetto defender View Post
    They should. Except power hungry egotists like Obama. It's all about him being a dictator. "By Executive Order".
    Yup Obama is the first president to use executive orders.

  18. #18
    Quote Originally Posted by cr726 View Post
    So he allowed the people to vote for it?
    Dense...

  19. #19
    Quote Originally Posted by AlwaysGreenAlwaysWhite View Post
    Dense...
    Romney implementing Romneycare is somehow different than Obama and the way he has implemented Obamacare?

  20. #20
    Quote Originally Posted by cr726 View Post
    Romney implementing Romneycare is somehow different than Obama and the way he has implemented Obamacare?
    Yes.

    State vs, Federal.

    It's informative as to thinking that many (D) do not understand that difference.

    Although in fairness, I don't blame (D) for that. The Sovreignty of the States and the Limitation via Enumeration of Federal power has been so weakened and changed over the age that the original intent/agreement/understanding of State vs. Federal is generally lost it the current time.
    Last edited by Warfish; 07-02-2012 at 11:28 AM.

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