talkpolitics | Iran, oil, and the game of the big players

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Iran, oil, and the game of the big players

Remember a year ago when the Brent Crude used to be 110 dollars a barrel? Well, now it's half of that, 55 dollars. And the WTI recently even reached 50. Way earlier than Iran had exported even one extra barrel of the black gold.

There'll be a lot of time before Iran starts exporting noticeable quantities of crude oil. First the drilling facilities and pipelines that've been shut down due to the embargo will have to be reopened. The experts estimate that Iran will be able to produce up to half a million barrels of crude daily by the end of 2016. To put this into perspective, OPEC produces 30 million. So don't count on Iran tiling the game any time soon.

There are also some other reasons for the plunging prices. Like increased US production, and decreased Chinese demand. Contrary to expectation, the US production is not diminishing, and has now reached early-70s levels.

The US increased their oil production by 16% last year, 516 million tons. This made America the 3rd largest oil producer in the world, after the Saudis and Russia. But we should note that almost half of this is being produced through the expensive and highly controversial fracking method.

Then, there's China, whose economy is no longer developing as dynamically as anticipated. This is affecting the demand for crude oil, which is also not as strong as previously expected. Let's add the unstable situation in the fast developing BRICS countries (Russia included), and we can see where this decrease in demand is coming from.

Besides, the OPEC has been pursuing a new policy lately. In the past they usd to maintain high prices through controlled low production - way below their technical capabilities. In result, they were able to deliberately maintain high prices, and realise big profit.

But now OPEC is not the hugely influential organisation it used to be in the past, since it's now covering just 40% of global demand with an annual output of 1.7 billion. That doesn't mean the cartel is not playing a significant role in the production and delivery of crude oil. Now the OPEC countries are deliberately extracting more oil in an attempt to push some of their competitors off board - like those pesky frackers.

Yep, the US is the major challenger here. There was a time the Saudis were using volume of production as a tool for manipulating the market and maintaining stable prices. Now they're compelled to produce 10 billion barrels daily, obviously with the purpose of responding to the challenge and bringing the prices down to a point where US and Canadian fracking would go out of business.

Apart from overproduction and low demand, there are some other factors affecting the global crude oil prices. For example, economic growth in the industrialised countries no longer depends so heavily on oil consumption. Countries like Germany, the EU juggernaut, have registered a 2% drop in fuel consumption - mainly because they're using fuels more efficiently now. Granted, that can't be said for all parts of the world - it's mainly valid for the developed countries. But it's not like those don't make up for the bulk of the consumption anyway.

The observers are expecting that demand will increase between 35-50% in the next 20 years. But in the meantime, there's a remarkable phenomenon taking place: increased demand isn't leading to dwindling global reserves - just on the contrary. Oil deposits seem to be increasing every next year, despite the high global daily consumption of 90 million barrels, and contrary to all "peak oil" predictions. This is due to both conventional production in the Atlantic and around the African and South American shores, and new technologies like fracking. Canada is playing a significant role in this respect as well - alongside the US. Canada produces 3 million barrels daily through non-conventional technologies, which are earning an ever more significant place in the global mix. And that process is going to become ever more pronounced with time, despite the countering measures of the big players.

That still won't stop OPEC from their power-play, of course. They still have all the tools to be flexing muscles, until they've made sure the collapsing oil prices have kicked most US fracking companies off board - even the biggest ones. The Saudis and their proxies may've learned the lesson from the 80s, and they won't be decreasing the output any time soon. So, this oil price war is going to continue for a while.

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Although the lower fuel prices might look like good news at first sight, and it's definitely great news for the industries that are heavily dependent on oil and gas, in the larger picture it poses a thread of deflation and stagnation. The markets are already nervous, and in wait for the even lower prices, customers are postponing the bigger purchases. Investment plans are getting delayed, and this brings lower demand as a whole. Which in turn brings lower prices, and thus comes the danger of stagnation. Japan, the world's third largest economy, is a fine example in that respect.

Energy usually isn't a trigger of deflation, which is why those who measure such things usually produce an inflation index that excludes energy and food. After all, you will certainly put off buying a house and maybe a car if you know they'll be cheaper in a year, you won't put off filling up your tank or buying food for dinner.

This isn't about postponing the filling of your tank. The connection between fuel prices and virtually all aspects of the economy is systematic, not incidental, and often indirect, and rather counter-intuitive - from food industries to heavy industry, to utility services, even to real estate, virtually all industries are affected in one way or another. Falling fuel prices impact the macroeconomic situation in a very tangible way:

"...For producers, cheaper prices mean either less profits or even losses, which leads to a slower national economic expansion. In other words, right now oil supplies are outstripping demand and causing commodity prices to fall. At the point in time they would dip below the point to where producers could profit, they most likely stop digging — and stop hiring, or even start firing. That’s economics 101. But, in keeping with the scholastic parallels here, the economic and political curves won’t immediately intersect." (source (http://www.forbes.com/sites/kensilverstein/2015/01/09/falling-oil-prices-impact-economy-and-the-keystone-pipeline/))

And,

"While there are clear cost savings for American drivers, the situation is likely to put pressure on the country’s thriving shale oil market — part of the recent U.S. “energy boom.” As The Economist explains in its December 2014 report, “The New Economics of Oil: Sheikhs vs. Shale,” U.S. fracking and energy firms could eventually see investment dry up in the short-term if oil prices remains this low. And lower prices for fossil fuels may well postpone the hard decisions needed for the country to transition to a more energy-efficient economy and to help reduce greenhouse-gas emissions and mitigate climate change." (source (http://journalistsresource.org/studies/environment/energy/gas-prices-effects-health-driving-economics-policy))

And,

"The bottom line is that the sizable decline in the price of oil since June 2014 is unambiguously negative for the Canadian economy. ... The energy price decline will reduce aggregate income. Indeed, even though real GDP grew by 2.4% in the fourth quarter of 2014, the real incomes of Canadians contracted. This occurred because the world price of an important export product declined. And that means a loss of purchasing power for Canadians." (source (http://business.financialpost.com/news/economy/low-oil-to-have-both-positive-and-negative-effects-on-canadian-economy-ottawa-told))

Energy usually isn't a trigger of deflation

Really? Then all these guys must be wrong and you must be right:

"The most immediate impact of the fall in oil prices is to increase real incomes of everyone in Europe. However, the lower oil prices have also exacerbated the potential danger that Europe could experience deflation, which would inhibit economic activity by encouraging people to postpone spending, and it would also increase the real burden of debt." (source (http://www.irishtimes.com/business/energy-and-resources/low-oil-prices-will-have-knock-on-effects-of-deflation-and-environmental-harm-1.2097153))

"Lower energy prices should stick around, boosting growth and risky assets like stocks but increasing the risks of deflation. ... On balance, lower oil prices are a boon, though a boon with small-probability but perhaps high-impact risks." (source (http://www.reuters.com/article/2014/11/25/us-markets-saft-idUSKCN0J90BL20141125))

"Investors are worried about deflation, too, as evidenced in this week's volatile financial markets, as the Dow Jones Industrial Average tumbled as much as 239 points Tuesday after dropping 350 points in afternoon trading Monday. ... For most consumers, it doesn’t make intuitive sense that economists should fret sliding prices, but deflation can lead to a stagnating economy. The simple explanation: In a deflationary environment, consumers resist making large purchases of just about everything in anticipation that prices will continue dropping and lead to better deals are ahead. The result is a broad slowdown of economic activity. Further, deflation makes it more difficult to pay off debt, something American consumers and many U.S. employers have a great deal of." (source (http://www.ibtimes.com/oil-prices-2015-why-economists-fear-nightmare-deflation-1775218))

I could go on if necessary.

Of course, lower oil prices are bad for oil producers, as many articles in your first response supports. Yes, you can of course find a lot of links, that's because those who write for business and investment journals want to talk about deflation.

Here's a paper from the ECB (http://www.ecb.europa.eu/pub/pdf/other/mb201406_focus05.en.pdf), the folks who are actually responsible for keeping inflation in check while avoiding deflation rather than just writing about it. Their stuff is of course a lot harder to find, but I'd put far more faith in what they're saying. They use historical examples and such. It's only five pages and has pictures, I'd recommend it.

There are also a lot of articles which really take Mario Draghi's comments out of context. When someone asked him earlier this year if he saw that deflation was more of a risk this year than last, he agreed it was but that the risk was still minor. The first part of his response is what made the headlines. Vitor Constancio made a fairly clear statement (http://finance.yahoo.com/news/europe-not-risk-full-blown-deflation-ecbs-constancio-143552547--business.html) about what would trigger deflation in the EU. The Fed is even less concerned about deflation.

Dropping energy prices don't create the feedback mechanisms that cause deflation. Yes, they certainly affect prices across the board, mostly in food but in many other areas. However, the drop in oil prices don't create an expectation of future oil prices in the same way that drops in wages or asset prices do. People who earn less will spend less, triggering further downward pressure on rates. Dropping asset prices will trigger less demand by investors for those assets, further driving down prices. Lower fuel prices will increase higher demand for fuel and also put more disposable income in people's pockets, neither of which depress the economy.

Yes, you can of course find a lot of links, that's because those who write for business and investment journals want to talk about deflation.

Well, the topic here is deflation, no?

Yes, they certainly affect prices across the board

Thank you.

However, the drop in oil prices don't create an expectation of future oil prices in the same way that drops in wages or asset prices do

No one has argued here that oil prices affect expectations MORE than wages or asset prices. And we're not talking about asset prices, we're talking about oil prices. That's distraction. I smell fallacy here.

They use historical examples and such. It's only five pages and has pictures, I'd recommend it.

Right. Your patronizing has been duly noted. Is there any other wisdom you'd like to generously deign upon me?

Sorry, I didn't mean to be patronizing. The paper is a bit long and I was making a silly joke about it which didn't come across very well.

The US increased their oil production by 16% last year, 516 million tons. This made America the 3rd largest oil producer in the world, after the Saudis and Russia.

I don't know how the metrics are determined (such as yearly cycle dates versus monthly, etc) but I was pretty surprised to have recently read that the United States actually is the world's largest producer of oil. That's according to the International Energy Agency (IEA). This news struck me as ironic, because when President Obama was running in 2008, and 2012, his Republicans opponents were making some outrageous predictions based on Obama's environmental and energy policies*: Newt Gingrich predicted an Obama 2nd term would lead to gas prices of $10.00 dollars a gallon. And Senator Mike Lee (R- Utah) addressed the Senate, “predicted that if Obama was reelected gas would cost $5.45 per gallon by the start 2015. Lee said that gas prices would rise 5 cents for every month Obama was in office, ultimately reaching $6.60 per gallon.” Today's gas price are around $2.25 per gallon, according to Gas Buddy. (http://then.gasbuddy.com/GB_Price_List.aspx)

http://www.bloomberg.com/news/articles/2014-07-04/u-s-seen-as-biggest-oil-producer-after-overtaking-saudi

http://www.cheatsheet.com/business/the-u-s-is-now-the-worlds-top-oil-producer.html/?a=viewall

http://www.politifact.com/truth-o-meter/statements/2015/jan/04/amy-klobuchar/klobuchar-says-us-worlds-no-1-oil-producer/

there are other links that write about this

While in the short term, it's great economic news, it seems to me, the impact on global warming is going to be detrimental. Cheap oil = lower prices = increased usage. And with so much cheap oil, I wonder about the economic incentives for research and development for solar power, and alternative energy. (speaking of cheap oil, just a few minutes ago, CNBC reported (http://www.cnbc.com/2015/08/04/us-crude-edges-towards-46-eyes-on-inventory-data.html)Oil settles at $45.15 a barrel, slumping to new low)

But it seems too, that dropping prices is going to impact a lot of the new drilling methods that are the source for the new (shale) oil; if the prices drop too low, the profitability is lost, and well, incentive goes bye-bye and the new oil doesn't get to market. And as has been written here in previous posts, with the constantly dropping prices, President Putin (http://www.cnbc.com/2015/07/16/russian-and-its-oil-are-likely-to-be-losers-in-iran-deal.html) has to be worried too. But in a CNBC report ("Russia and its oil are likely to be losers in Iran deal"), sees a mixed bag in terms of the Iran deal and its impact on Russia, as the Iranian oil starts to flow to European markets

But others say they believe Russian President Vladimir Putin when he hails the [Iranian] deal as a positive step for the Middle East, which he has done publicly. Alexander Kliment, director of Russia and emerging market research at Eurasia Group, told CNBC that if the Russians seriously wanted to scuttle an Iran deal, they had plenty of chances to do so. "The short-term oil price drop, if and when it materializes, will hit Russia, but for the Kremlin, that's a manageable price to pay in order to avoid a nuclear arms race in the Middle East or a U.S./Israeli strike on Iran, both of which have always been far worse options from the Russian perspective," Kliment said.

The fracking boom has changed the balance of powers in the world of energetics. Saudi Arabia is trying various tricks against the US in their attempt to cut the fracking euphoria in its cradle, and this is bound to cause trouble on the trade markets.

But, but, what happened to peak oil?

It is obvious - low oil prices, weak Russia, strong usd. It should be noted, that the previous Saud king supported so much the US, that declared it would be no problem for if the price was 20-40. Very close friendship...

How does the strong dollar help US exports?

Now for the US is more important to weaken Russia. sanctions+low prices=crisis in Russia.

I'd wager the bottom-line for the US, just like for anyone else, is to make profit, rather than hurting competitors.

Assuming that the entire US economy revolves around Russia's fate, sounds too tinfoil-hatt-y.

May be... but we can see now their confrontation. Saudi Arabia exports much oil, but it's authorities said, that even dropped price (20$) would be ok.. Export much more than the US does.

And? What's your point?

I mean, that weak oil sometimes is not a problem for the exporter country.

That goes without saying. In fact, that's the point I've been making throughout most of this post. Saudi Arabia is manipulating crude oil output and driving the prices down, in order to undermine the emerging competition from fracking companies in North America. They've figured it's better to temporarily sacrifice profit for the sake of removing a potentially dangerous rival while they still have a chance.

Contrary to what most Russian state media might be trying to convince you, this has nothing to do with Russia.

"to temporarily sacrifice profit for the sake of removing a potentially dangerous rival while they still have a chance" - Yes, it's real true!

See? We agree on something! :)

Exactly!

Saudi Arabia has stated their intent was to drive the frackers out of business, after all, they're the ones who are disrupting the price of oil. The Saudis also got burned last time when they reduced production only to see their fellow OPEC members grab their market share. I'm sure they don't mind that Iran is suffering, but I doubt they really care much about Russia. This hasn't been a very effective strategy, the frackers have reduced their costs dramatically, but it's certainly not friendly. It'll probably drive Venezuela out of business before most frackers, but I guess that'll work as well.

Wile the Texas oilmen who are behind fracking and the increase in US production might not have much love for Russia, I can assure you that they would much rather have higher oil prices and thus profits than to support Pres. Obama in some foreign policy endeavor. Anyone who thinks their decisions are motivated by anything other than making money is simply wrong. All in all, as conspiracy theories go, this one isn't that good.

Here's my theory, oil continues to be cyclical. This is why Russia and Saudi Arabia, and almost all big oil producers saved up a bunch of money, because they knew a day like this would come. Just like it always has before. No conspiracy, not really anyone's fault, just the way the oil business has always been and likely always will be.

I agree, that can be no conspiracy. Now the current Saudi king less supports the USA. Possible, that reducing price can be the way for monopoly of Arabia...

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Iran, oil, and the game of the big players

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Who needs weak oil?

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