I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market.
So I wouldn't say that the oil market is broken, as much as it has never really worked as a close-to-ideal market.
Given these prices, shale oil and tar sands production is going to shut down at some point. This is good news in a way, because these are among the dirtiest sources of oil in terms of environmental impact. Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered.
Wait, what? A desert is just as much an ecosystem as a rainforest or a city.
Which would be bad for energy independence and in the end give more price control back to OPEC.
After all that time Saudia Arabia now lets the price rise. How much time will it be over $30 before the shale producers start up again? Will it really pay off compared to the amount of time they had to spend with it under $30? And say they keep it _just_ over $30 - just how much over $30 can they go and for how long?
It seems like in the long run you'd better be prepared to keep it not much over $30 if you want to keep the shale producers out for good. That the idea of "put them out of business and then double the price" won't really work in a practical manner.
I'm failing to think of an example where this did work. Diamonds? I thought that the producers either bought or colluded to create an effective monopoly. That would be like S.A. just buying producers. That doesn't seem practical but who knows -maybe it is.
Description of the names:
https://en.m.wikipedia.org/wiki/Sweet_crude_oil
https://www.thebalance.com/the-basics-of-crude-oil-classific...
"Nineteenth-century prospectors would taste and smell small quantities of oil to determine its quality."
Thanks, TIL.
For what that's worth.
The supply chain is set up to flow, so when demand drops or spikes up you get a flood or a shortage.
If there's a flood, some companies will go out of business, leaving the survivors with a bigger slice of the pie.
If there's a shortage, companies will respond, and some will over-react and build over-capacity and then fail when the shortage evens out, leaving the survivors with a bigger slice of the pie. I think this may happen with ventilator companies. After this event, there may be an over-supply of ventilators, leading to failure of some companies or lines of business.
This exact scenario has happened before, with masks (I think during SARS? there was an article on HN recently) - companies were ordered to produce more, then the crisis fizzled out and the orders were cancelled, making some companies almost go out of business.
Instead, politicians should simply commit to buying said quantities of widgets, and then respect those commitments regardless of the outcomes (widgets are needed or not at all). It's unfair (and sets a bad precedent) to expect companies to take the loss for public good.
Like, who foresaw COVID? Who foresaw fidget spinners? etc. How do you plan for a central supply system when a news story about kids eating Tide pods drops the demand (increasing the supply) by 20% overnight?
The soviets essentially tried to do this with a communist style-command economy -- and it didn't work well. Maybe modern tech can do it better but it would have to be able to predict the social, political, and logistical challenges enough to outperform the alternatives.
I bought and sold tanker stocks based on the following:
IMO 2020 regulatory retrofits.
Coronavirus
Saudi Russian Oil Price War
Shipyard Shutdowns
My next bet is going to be based on the drawdown in US Oil operations. I'm gambling on $FCG based on the notion that the price of natural gas will go up a bit because the associated gas from oil wells is no longer in play.
Right now, the volatility is a gambler's paradise.
This is the same reason the Obama administration did little to discourage fracking from hockey stick'ing. Given the state of the economy was one of the few tools they had to goose the economy. Essentially, like it or not, selling out Mother Nature for the economy.
https://www.forbes.com/sites/rrapier/2016/01/15/president-ob...
Coal was a fraction of market share. It was on its way out regardless. However, a lower oil price increases consumption across the board. Thus it wouldn't take much increase for oil's aggregate pollution to exceed oil + coal.
Yes maybe on a per kilowatt basis oil is better than coal. But given the usage of oil, that is the scale, the price drop triggered increases in consumption could in fact cover and then exceed the gain from less coal.
[0] https://en.wikipedia.org/wiki/Futures_contract
[1] https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
If the price were to rise in the future, the value of the contract would be much higher than what you bought it at, and someone interested in further trading in the options contract or even buying the actual underlying world more pay the market value of that options contract to you.
I just checked: the current price of a single options contract of crude for 18 Sept at buying price (CALL) of USD 10, is 0.3. So buying a 100 (the minimum), would cost about USD 30. Now, ID between now and September the price of crude were to shoot up, then the market price of this option would likely rise.
Unlike stock, though, Options expire. But unlike stock, you get to buy the rights to buy or sell at a particular price and thus the capital needed is far lesser.
If you can store the oil you can earn a lot of money now. But most people can't store much oil, compared to the volumes that are being pumped out of the ground. And for many of the producers, slowing down production by more than a few per cent is also difficult — once you turn off the tap you don't really know whether the oil is going to start flowing again later. So the effect is a steep price fall.
Wait, really? I'm Googling but can't seem to find anything at all about shutting down oil wells temporarily.
What exactly is the difficulty? Why would "turning off the tap" be a risk -- the pressure oil might be under isn't going to go away, is it? (If it doesn't require pumping.) Is it a risk that materials in the drilled hole harden if not moving? I would have thought the difficulty might be how to effectively cap a well that is under pressure -- is it so difficult that closing a well risks damaging the equipment that it can't be safely opened back up?
Really curious here if you have the answers! The fact that oil wells can't be slowed down is definitely one of the most surprising economic facts I've learned in a long time.
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
You mean it can actually physically stop if the flow from the ground is blocked for a while? Can you expand if possible.
Edit: I understand it comes out of the ground quite hot (I've heard of 200 C) and if it flows into cool pipes and stays still maybe it would 'congeal'.
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
Am I misunderstanding?
https://adventuresincapitalism.com/2020/03/19/crude-contango...
> USO holds near-month NYMEX futures contracts on WTI crude oil.
Without looking any deeper I don't think this is what OP is looking for. They want to bet that oil delivered a year from now is under-priced today, while buying this ETF is betting that oil delivered a month from now is under-priced today (and holding this ETF is repeatedly renewing that bet). It's a completely different thing.
gasoline degrades with a shelf life measured in weeks-months-years, depending on grade and preservative measures
Depending on the curve of the pandemic, 2021 may be too early. The way the US govt is responding, it may drag out much longer
We have to drastically cut down oil use, let's not pretend that the pre-corona oil consumption was tolerable, much less desireable.
Now would be a good opportunity make internaltional agreements to cap oil consumption and extraction to its current level in shutdown, and when the shutdown starts to get rolled back, the shock will be smaller as rising demand and price mechanisms reconcile how the remaining lower oil supply gets used.
Really what they should do right now is take the opportunity to put in place a carbon tax. That would raise current prices back to previous prices, but it would also suppress demand even after the pandemic passes, so that the wholesale price stays low. You'd essentially have the tax getting paid by Russia and Saudi Arabia because demand would never return to a level that would absorb the supply glut.
Who would want to be the governor seen as increasing taxes at the beginning of economic troubles? In general any kind of tax increase at the moment is going to fall flat.
I think it would be incredible for the US do push towards renewables and cut oil consumption, but sometimes you have to accept the world as it is, and not how you want it to be.
We’re going to need to bounce back as much as we can, which means increased oil consumption.
It might mean coal gets knocked back, however!
Just saw a coal train going to the coal export terminal by my house that looked mostly empty.
Already, coal is down to just 22% of US electricity as of the end of January. It’s possible it could fall below nuclear power by the end of the year.
Price is a good way to reduce consumption, but price spikes are not.
My opinion is, the focus should be on switching consumption to renewables one large milestone at a time. For example, diesel would be produced less and used more enough for a renewable alternative engine and fuel supply chain for cruise ships to make economic sense, then within a few years all cruise ships will be on renewable. Fossil fuel is not the enemy, fossio fuel dependency is.
You can make similar economic arguments for more public electric transport for example (what people pay in tax is miniscule to what they pay for gas every year).
This will increase pollution and energy demands in the coming months at a higher level than before the crisis.
Well, from what I've read. I am a total idiot in these matters.
You first have to give the corporate world a gift before you take it away. Similarly to how the corporate world treats consumers.
I think that it's possibly efficient because it burns one clock cycle of a respondent's thoughts, and lets them remember the human.
Same goes for most other industries. This isn't a situation where you just wake up one day and it's over. It's not a war where you just make up and get back to work. This virus is out there, and most experts say even if you were already infected, you will only become temporarily immune (similar to flu).
So until you see a vaccine develop, coronavirus is not going away by any stretch. It will continue to cause problems in the medium term.
Of course oil is a problem but a tax or cap and trade system would make more sense to address it.
Taxes and cap-and-trade systems are indeed the mechanisms of how current international agreements try to attempt CO2 emissions, they're a fine way to implement it.
However shale oil requires constant drilling because production rises then falls very quickly (18 months to 2 years). With low oil prices, drilling will dry out and oil will dry out soon, too. Plus total oil production (conventional + non conventional) will probably peak anyway in the next decade (see WEO 2018, once again), and this may be quickened by the coming lack of investment due to low oil prices.
What could happen? With low demand and low price, the non conventional oil industry is deemed to go bankrupt, and the US banks will have to part with trillions of debt. That won't be pretty. Until this industry is rescued and starts pumping again, there could be a severe crunch of oil production, initiating an oil shock and a huge recession, sometimes in the coming next few years.
You seem to interpret this as a problem. However, I've read many times that it's basically a solution, because what it means is that production is responsive to demand in a far shorter timeframe than conventional oil. On top of that, supposedly you can drill a well and not complete it until a price war is over.
So I'm not sure why you think "non conventional oil industry is [doomed] to go bankrupt" when not only do people in the industry say it is relatively easy and cheap to put resources on hold, but obviously the sources of conventional cheap oil tried their best to kill the newcomers and failed, only a few years ago. According to both theory and recent history, your prediction doesn't make sense to me.
However, I have no experience whatsoever in the industry, so maybe you have some expertise?
What they got wrong was the overall estimate of how much of this stuff there is to be extracted. The easy oil is indeed being used up, but as you invest more and more energy (EROEI decreases) the amount of oil available actually increases. Look at how much tar sands, oil shale, offshore, and heavy crude there is, but all that requires more energy to get.
We would eventually run out of oil to be had at a reasonable energy (and thus economic) cost, but after that if we still needed it we could get it by converting coal. That assumes we decide we don't need the ice caps, or the coastal cities.
We probably have enough carbon to destroy the world.
(Ignoring all the other reasons for cost fluctuations.)
But mostly, "Peak Oil" fears were ginned up by a press who love to promote tales of doom and destruction. Those trumpeting the threat of "Peak Oil" demanded broad governmental and social intervention to avoid what was assured to be a massive economic disaster. There were assertions that those denying the threat of "Peak Oil" were the Neville Chamberlains of their time or villagers refusing to vacate under the imminent threat of volcanic eruption.
No mistake - oil has a fixed supply. It will run out. But it turns out that won't happen for some time.
https://www.forbes.com/sites/michaellynch/2018/06/29/what-ev...
The supply grows alongside with the price people are willing to pay for it. As you yourself pointed out.
Nowadays the demand falls, the prices fall, this would be followed by a fall in production. But whatever happens oil will be available at an affordable price because world just doesn't work without it. If oil gets too pricey, reserarch into digging up more oil more cheaply will be funded. As it happened with shale. And it will end up in one more oil price crisis same as the one we're witnessing. And the one after it.
It came, and past. Production is down from the peak, and down from last month too.
source: https://www.bloomberg.com/news/articles/2019-10-14/peak-shal...
Russia has more flexibility imo and can cope a lot better with low oil prices, but Iran will probably see an even bigger economic collapse since they were already selling at a steep discount to offset trade sanctions.
Venezuela was also selling at really low prices and couldn't even afford to keep It's oil infrastructure from collapsing at 50$/barrel so I have no idea how they will avoid total economic destruction soon. Maduro won't be able to pay off the army for long now
So they are all going to be badly hurt, I don't see how saudi arabia can afford prices these low for long. They can't do like they did in the past and just drive everyone else from the market by crashing prices at will.
I haven't seen it this low in maybe 20 years.
It's hard to sell even sweet oils right now, so heavy blends that have little access to international markets like the Western Select are especially hurt by this enormous supply glut.
I don't exactly have much sympathy for the fossil fuel industry, but like it or not they're deeply entangled with our economy, and these prices indicate a lot of upheaval.
They're going to have to bite the bullet and shut some wells. They say as much at the bottom of the article. It's not like we haven't had oil downturns before...
https://www.reuters.com/article/us-opec-oil-policies-idUSKBN...
Saudia Arabia was trying to bring Russia in line with OPEC+ price targets, but Russia has enough state cash reserves and a much lower state budget break even point (~$40/barrel vs Saudi Arabia's ~$80/barrel), so here we are.
Great for consumers. Not so good for Google and SAS companies and thus their employees.
(but I'm not crying for oil either).
The cost to produce oil in Saudi Arabia is about $6 a barrel and they are taking this opportunity to undermine everything. Only Iraq is close in cost to produce oil as the Saudi's, and the U.S. has worked to make sure that Iraq is not a threat to the Saudi's.
I am really not sure what game the Saudis are playing.
Turns out we are drowning in them in 2000+20.
The saudis are losing money doing this (they have to eat into their reserves to fund the country). Russia at least has other industries, however small it may be.
Our entire culture and urban physical infrastructure is built around a certain level of oil consumption. The current situation is temporary, the real solution is to replace the source of energy of fossil fuels. We are projected to have green energy be 30% of all energy consumption by 2024 with much of this effort lead by China.
The extreme central control and lack of freedoms that the western world hates so much is exactly what makes China so effective at protecting themselves against COVID-19 and saving the world from an energy crisis. We value freedom but the cost is too high.
Chrome users can install this directly as an unpacked extension.
For Firefox users, there's an xpi hidden in the releases tab.
As such, gasoline in some parts of the US is currently going for $0.99/gal (0.24€/L, 0.21£/L or 20 Rs/L).
And it's sort of funny/sad that what is called "blacktop" can be had for less than free. Transportation and steamroller not included.
We detached this subthread from https://news.ycombinator.com/item?id=22718650.
Damage to US shale is unintended and the Saudi's know it will be very temporary. The US companies have a near endless supply of capital, especially now with the federal government being on a spending spree. The shale fields can be easily turned off and on. Loans can be restructured and renegotiated. The last time the Saudi's tried to aim their efforts at the US it ACTUALLY caused the US shale oil companies to consolidate, innovate and they brought their production costs down significantly! The US oil industry is extremely resilient.
The goal for the Saudi's is to bring the Russians to the negotiating table and get them to agree to a meaningful cut in oil production, nothing less than 1 million bpd. They've basically said this. Their strategy is completely aimed at the Russians. The Saudi's are filling EVERY port and transfer station in the world with their cheap crude. The Russians transport all their oil in pipelines. If demand drops for Russian oil, they will be forced to turn off their wells because their pipelines can't handle extra oil, and the Russians have no where to store the extra. The Russians don't want to turn off their oil wells because its dangerous, it usually takes them offline for a long time, and they're expensive to get started again.
Cheap oil is better for billions of people in India, China, and Africa
