The global oil market is broken, drowning in crude nobody needs
bloomberg.comThe market is broken because demand is way down, but production isn't being lowered to match. Saudi Arabia intends to keep their production high. The other producers are losing money but haven't reduced output, because changing output levels is more expensive than taking the loss.
This does indicate market inefficiencies, but such tactics -- flooding the market with cheap products to kill competition, then raising prices back -- is pretty common. I have seen it everywhere from cell phone marketing to grocery stores. I have personally seen, twice, Stop and Shop moving in, dropping prices, driving a less-well-funded competitor out, then going back to business as usual.
I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
This is exactly why "fair trade" products like coffee and chocolate exist. There is an agreement to have an absolute minimum purchase price to prevent a big corporation from clobbering the competition by taking a loss, then jacking up the price.
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.
> 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.
Did the rideshare companies actually jack up their prices at any point? How would they do that when they're still in competition with each other and the barrier to entry to the market remains low? Any attempt to raise prices would immediately result in more competitors.
That was the whole thing with the taxi medallions. It was a cartel, because that market has very low barriers to entry and the taxi companies didn't want the competition.
Uber didn't make prices artificially low, they just provided competition which stopped them from being artificially high. They're not losing money on rides, they're "losing money" on self-driving car R&D and things like that.
And "fair trade" is a marketing device. People want to feel good about not exploiting people, so companies not exploiting people get to charge a premium for that. That doesn't mean companies who are paying suppliers less don't still exist or offer similar products for lower prices purchased by customers who don't care as much about that.
Neither of these are examples of what you're describing.
Uber rides are subsidized. Uber loses money on each ride. The self-driving R&D is what will presumably save Uber. Their biggest expense (the drivers) will go away.
> Uber loses money on each ride.
How is that even possible? They get a percentage of the fare and their unit cost is only a tiny bit of server utilization.
As far as I have heard, when they enter a market, they pay the driver more than they're getting from the user.
Plus marketing. You think Google let Uber put an advert on every Google Maps search for free?
There's actually a whole article about it on crunchbase: https://news.crunchbase.com/news/understanding-uber-loses-mo...
That's not unit cost. Companies spend money on advertising when they're new because it pays dividends for decades. It's not inherently loss-making, it's just investment that hasn't returned its full yield yet.
It's an investment that the company can't afford to make at the moment. An existing, efficient, and self-sustaining player can be drowned out by a few VCs subsidizing costs and making it impossible to compete for a few years.
The American VC system is disgusting. It allows a few wealthy individuals to choose winners not because they are the best solution, but just because through nefarious tactics they are the last ones standing.
> It's an investment that the company can't afford to make at the moment.
This is nonsense logic and the very reason not to use cash-based accounting for anything serious.
They raised capital, therefore they have the money. Basically all companies start off "losing money" because most investments don't instantaneously produce their full return. How would anybody ever open a factory or a restaurant if they had to be profitable before spending any money on anything that generates profit? You can't use the profit from making widgets to build your first widget factory because you need a widget factory to make widgets.
> They raised capital, therefore they have the money.
Right, and as a result of this, the companies that have capital can always beat out the ones that don't. Who gets to decide which companies get capital? VCs. So that means that it's not the market that decides who wins and loses, it's VCs. Does that sound like the intention of capitalism to you?
Having a better or more efficient idea is meaningless in today's economy. All that matters is how big your warchest is, and how many rich investors you have in your pocket.
> Right, and as a result of this, the companies that have capital can always beat out the ones that don't.
If your idea requires capital to execute and you don't have any then you can't execute it. How do you propose to change that?
> Who gets to decide which companies get capital? VCs. So that means that it's not the market that decides who wins and loses, it's VCs.
Who gets to decide which companies get capital? Venture capitalists. In other words, people with capital are the ones who decide which companies get capital. This is almost tautologically true.
But that is the market. The VCs fund the companies they think have the most promise. If you have a good idea but not capital then you convince some people with capital to fund you so you can execute it. That's what VC is.
What are you proposing as an alternative? One where raising capital is impossible and so you were either born with it or you're stuck working hand to mouth at a McJob forever because your idea takes more funding to execute that you can save in a lifetime as a wage slave?
Taxis haven't gone out of business yet.
Medallians only apply to NYC. Cities have been hit hard (portland, austin). But to be fair, it caused Radio Cab to modernize with an app.
Profitabilty: Here, I did your research for you, not too hard:
https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-...
https://www.latimes.com/business/hiltzik/la-fi-hiltzik-lyft-...
Please take at least one second to google next time?
Fair Trade absolutely has an impact, by your own admission! You are applying the "if you can't fix everything don't bother fixing anything" fallacy. I don't know why certain personality types have to hide behind this when someone is trying to do something good. Do you just hate yourself?
> Taxis haven't gone out of business yet.
So you have no evidence that they'll raise prices and the claim that they would is pure speculation. Which still doesn't explain how they would be able to when they still have to compete with each other and when the barrier to entry is very low such that if they ever did they would quickly get new competitors.
> Profitabilty: Here, I did your research for you, not too hard
Websites explaining why they currently spend more than they take in (answer: long-term investments like R&D and advertising), not how they would lose money on the average ride.
> Fair Trade absolutely has an impact, by your own admission! You are applying the "if you can't fix everything don't bother fixing anything" fallacy.
I never claimed it doesn't do anything. It's just not an example of dumping or anti-competitive behavior. Non-fair trade coffee isn't excluded from the market in any way. The higher price for fair trade coffee doesn't come from market power, it comes from marketing and selling a different product (a specific brand of morality) which is worth more money to some customers.
There is no cartel there. There is nobody stopping anybody new from paying higher wages and marketing their coffee as such, nor from paying lower wages and charging lower prices.
That’s called a cartel. See OPEC.
If that’s all “fair trade” is, that’s an impressive marketing tactic.
It's also called product differentiation. Oil is a commodity, but there are grades of oil and the amount of sulfur varies, so there is "sour" oil, "light" oil, etc. similar to "fair trade" chocolate.
That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market
In a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money.
For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.
Most definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis producing at $10 a barrel that compete with eachother down to marginal cost. Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods.
> Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods.
That's not what "monopoly" means. Monopoly power isn't just a fancier word for market power. Monopoly power is power derived from the fact that nobody else is selling what you're selling.
Note that in this example, the Saudis can't raise the price of oil above $50 / barrel. Setting a price of $60 would send their sales to 0 rather than to whatever the level of demand is at $60. They can't do it because they don't have monopoly power.
(If you expand the example a little, saying that world oil demand exceeds the amount Canada can produce, then you can claim that Saudi Arabia has monopoly power by virtue of being able to sell oil that Canada can't sell. But in the model where Canada can produce any amount of oil at $50 / barrel and Arabia can produce any amount at $20 / barrel, there is no monopoly power anywhere.)
Pricing power is a better word that monopoly power in this case then, should have been more precise in wording. They arent price takers is the point. They have price making power and a downward sloping demand curve until 50 bucks a barrel
no, economists and policymakers agree with your usage of monopoly power. monopolies aren't simply a function of number of market participants. semantic digressions like these are non-sequiturs and should be ignored.
> economists and policymakers agree with your usage of monopoly power
Policymakers may; they'll agree with most definitions of a Bad Thing.
Economists have to be more careful. Saying Saudi Arabia has monopoly power in the oil market because it produces oil at a lower cost than other suppliers is crazy. What power they have to manipulate the market doesn't come from what they're already doing -- it comes from what they could do. They have a marginal cost of production which is below the current market price. The fact that their average cost of production is below the current market price is not relevant.
Consider a world where Arabia, Canada, Russia, and Venezuela all produce oil and sell it at the world price of $50 / barrel. In this world, Arabia's strategy is "pump all the oil we can sell at a profit". They have a marginal cost of production of $70 / barrel, above the market price, and an average cost of production of $20 / barrel, well below the market price. They're making money hand over fist.
No one considers them to have monopoly power here. What would it mean? How would they exercise it?
See e.g. The Concept of Monopoly and the Measurement of Monopoly Power ( https://sci-hub.tw/https://link.springer.com/chapter/10.1007... ), which would define Arabia's monopoly power in the hypothetical I've described as, on a scale from 0 to 1, negative 0.4.
But again, profits are determined by average cost, not marginal cost. There is no reason to expect average cost to equal marginal cost.
I agree, and I'm basically trying to appease the hn crowd with the semantics. I didn't think my statement was controversial or incorrect enough to be hit with that many downvotes (I am an econ major - trying to balance layperson definitions with hyper technical ones) but clearly that ended up not being the case.
Marginal cost isn't a useful term if you assume infinites. If you have infinite number producing at the same price you can just say "cost" instead of "marginal cost". Marginal cost is only a useful term if each product has a different cost.
Marginal cost is the amount it costs to produce additional unit of a good, cost overall would include fixed costs. Price is different from cost as well, since that's what people pay, not how much it costs (though in perfect competition price will equal marginal cost - but not the case in monopolies). These are nitpicky technical things but they do give you different answers when you do out the math.
"in a perfect market producers make zero profits"
In what world would any company make zero profits in a "perfect" sense?
Companies exist to make profit...
You're thinking of accounting profit, the person you're replying to was thinking of economic profit.
https://www.investopedia.com/ask/answers/033015/what-differe...
Even in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
Perfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
" In a perfect free market the oil producers make zero profits"
Where does this conclusion come from?
Don't quote me, it is ages since I had my economics book open last time, but if I recall correctly, there is a confusing terminology here. Zero profit means in the context of economice profits that exceed risk adjusted return. That is, even in a perfect market, in the models you are allowed to pay a decent return to your capital, but not more. These extra profits are called almost as confusingly "rents" in economics. That's why "rent-seeking" is considered bad even if it is fine that your landlord collects rents from you. Two different things and one word.
Your answer and the others reinforce why I allways avoided everything with economics in university. The definitions and models are (mostly) just weird.
I would intuitively define a free market, as a (virtual) place, where people can trade freely (goods or labour) without restrictions. And they profit, if they are better off with the trade, than without. The more free the market, the less restrictions.
Why so complicated?
It's actually too oversimplified to be a great model for most things. Extend your intuition to imagine that you have perfect competition where there are infinitely many identical goods all competing to the lowest price either no differentiation, and people will price at zero profit. To extend that to the real world requires more and more complications like the time value of money etc
"Extend your intuition to imagine that you have perfect competition where there are infinitely many identical goods all competing to the lowest price either no differentiation, and people will price at zero profit. "
But this is not reality. I doubt doing abstractions like these are helpful in understanding anything, when the base is so far off.
Yes nobody is denying that these arent reality. They're models, and you get far more sophisticated models after econ 101
Ok. But then we are back at the beginning:
"In a perfect free market the oil producers make zero profits"
where this statement does not make sense, unless you apply weird economic definitions.
Right, never said that was attainable or good. The point is that some people view perfect free markets as the ideal, and this is a move towards that, so people might view the market as getting g fixed rather than being broken.
Basic economics. The problem with basic economics is that all models are wrong and there are not in fact infinitely many perfectly fungible producers of identical commodities in perfect competition with eachother, but under perfect competition, nobody makes economic profits.
From...economics?
Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
Wouldn't you expect the rate of return to approach the risk free interest rate, rather than profit being zero?
Zero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
The risk free interest rate is zero. Heck, by the time you read this, it could go negative!
It already did nominally for a brief moment there
Good point.
"Profit is market inefficiency" Profit is motive to do something.
No profit = no motive.
"perfect efficiency" means "no market" in this definition. It's a make believe process that will literally never happen. Companies that work with perfect efficiency close their doors.
Well, sorta but um no. If no profit includes a situation where everyone involved is paid at least enough that they are willing to do the work, then there is by definition motive to do the work.
These economic models are simplistic to the point of stupidity. But motivation to do the work can be totally priced in to the equations as a cost of doing business. Profit beyond that is what must, in the models, end up at zero to be efficient.
Everyone involved includes those who put forth the capital to start businesses. The profit goes to them eventually via the stock market.
Individuals won't put up millions or billions to start large companies without a reason.
"models" remove human motivations and will never be realistic.
It's why Socialism and Communism are perfect on paper... but fail spectacularly in real life.
Not necessarily the stock market, but yes of course all models are wrong. Some are useful though, including these models. You can see that a pharma company with a government granted monopoly with patent power has high gross margins, while a more undifferentiated retail firm like walmart has far lower gross margins. That understanding can be drawn from using these models to understand how businesses will behave under a set of given assumptions (they want to maximize profit etc)
Yep. Perfect markets dont actually exist in any realistic way, and the US constitution itself deliberately breaks perfect markets by providing for patents.
I don't know much economics, but one thing I learned is that markets tend to not work as such when the players are few and motivated by other reasons than pricing. Airlines are one such example, depending on the time period, because being so few and dependent on entry barriers such as airport slots and flying licenses, they can easily collude. Oil producers are even more so, being driven by government decisions and geopolitics more than just profit alone.
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.
> The market is broken because demand is way down, but production isn't being lowered to match.
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.
Not to mention the strategic advantages of leaving oil in the ground in your own territory. It'll still be there when the middle east runs dry.
I think the strategic advantage is to drill, baby, drill, and profit from those natural resources as much as possible while we're still in the Oil Age. If the Middle East runs dry it will be a strategic victory for all those countries and a loss for the other countries where high production costs kept the remaining oil in the ground, just sitting there never having generated a penny in profits, with renewables and electrification of transportation an even more imminent threat to the oil market.
Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.
Bit of a win/win though. Either the oil age ends before the ME runs out and we potentially avoid an environmental disaster, or it doesn't, in which case our reserves might prevent a strategic disaster.
> 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.
Are you seriously claiming that, say, the sand of the Sahara (or the ice at the south pole) is as rich as, say, the Amazonian rainforest?
Sure I guess technically anything is an ecosystem, but some clearly support far more life (and variety of life, and sometimes exclusive life) than others. They obviously have different ecological "value".
Also pumping oil in the desert doesn't lead to the local residents being able to set their tap water on fire, you know, the way fracking can.
Taken to the extreme, we have the "environmentalists" in Kim Stanley Robinson's "Mars" series.
I think I read they were doing this in part to hurt Russian producers who would not cooperate with OPEC (KSA wanted to reduce production in a coordinated way). As a side effect this hurts American producers too and could drive them out of business.
Which would be bad for energy independence and in the end give more price control back to OPEC.
I'm unclear how that's supposed to work. Oil goes below $30 for an extended period of time. So long that all the shale producers go bust. So long that no one buys up all those assets but instead just lets them go fallow.
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.
“ How much time will it be over $30 before the shale producers start up again?” I work in this field, and the answer to your question is “instantaneously.” The largest operators will not go out of business because they have sufficient exposure to non-shale assets; they will simply immediately drill the wells they had planned to drill when the crisis hit. Capital will rapidly find its way into the hands of the people with the expertise to drill and complete money-making wells.
The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.
To add to that, the wells they already have drilled are perfectly happy to sit around until someone goes out to frack them, and the wells they've already fracked are almost perfectly happy to sit around until someone produces them. The only investment that can't survive a year of unfavorable prices is the effort the business development guy put in to making phone calls.
To add to that, shale produces apparently hedged hard against price drops and are currently sitting on a big pile of money ready to be deployed.
This guy understands the energy business where oil is concerned.
I'd only add that the above is also the reason that the Saudi gambit to put competitors out of business is highly unlikely to work. These competitors will just sit it out until favorable environments come back around. I'm not sure what the Saudis aim to achieve? But to achieve what people are speculating that they want to achieve, they need to have something else up their sleeves. Because a temporary low price barrage alone is not gonna do it.
Maybe they are thinking about low prices forever? Not really sure. But they must have some kind of additional plans since they should definitely know everything everyone else in the industry knows.
They want Russia to come back in line with OPEC. Russian economy depends on oil exports, and the low oil prices might force it back to table. See what happened to Russian currency when price went down.
But they aren't going to achieve that on low prices alone. That's just reality. Coronavirus has placed Russia squarely in the driver's seat here. Saudi production surplus or no surplus is meaningless as Covid is depressing prices in any case. (And will continue to do so for the foreseeable future.)
So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?)
It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)
Thanks for the biological analogy. Do you have other biological metaphors for other industries (or know of source(s))?
Related: Biologically Inspired Design:
> Center for Biologically Inspired Design at Georgia Tech: http://www.cbid.gatech.edu/
Two questions:
— I thought US shale break-even is between $45 and $55, is that correct?
— What's your opinion on how long until the debt starts imploding with the US shale producers?
Cheers, S
“US Shale” is many plays, each play having sweet spots, so breakeven is a range, not a fixed number. Some areas still look okay at $30 but not many.
US shale producers have already started imploding, you can see it in the stock prices and the cessation of drilling.
>That the idea of "put them out of business and then double the price" won't really work in a practical manner.
Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.
> How much time will it be over $30 before the shale producers start up again?
I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit.
From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.
I think it’s more a side-effect of the Russia pricing fight than the goal itself.
If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.
It's not that changing output levels is too expensive, it's that shutting down/starting up is too expensive. The fixed costs are so high that it's far cheaper to produce at a loss (and stockpile if needed) than to shut down.
(This subthread was originally a child of https://news.ycombinator.com/item?id=22718785)
That’s not a broken market. That’s just standard behavior when a supply cartel falls apart. Eventually those producing at a loss will be forced to stop.
I love the different names for various types of oil: sweet, sour, light, etc. As if it was edible.
Description of the names:
https://en.m.wikipedia.org/wiki/Sweet_crude_oil
https://www.thebalance.com/the-basics-of-crude-oil-classific...
I mean in the old days, they did try to distinguish then by tasting them
I thought you were joking but that's actually what the first link says!
"Nineteenth-century prospectors would taste and smell small quantities of oil to determine its quality."
Thanks, TIL.
I'm a truck driver, been in the LA area a few days. It's surprising how large the area looks without oppressive smog and haze, and how sharp and detailed the hills and mountains have become.
For what that's worth.
The city is a bit taller now. Twenty to thirty years ago you could see even further (although only just after rain cleared up the pollution).
It's easy to say "we live in a Just-In-Time Economy", but it's things like this that really demonstrate the implications.
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.
That's mostly because politicians are stupid.
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.
I think that's right. I think most politicians don't care or understand, and the ones that do have a hard time explaining things like this to their constituents.
The US Gov does do this in the case of vaccines because they use 900,000 eggs a day to produce vaccines, that if there wasn't the Gov buying the vaccines, there wouldn't be any production or stock when it was needed. Good article on it: https://www.npr.org/2020/03/13/815307821/planet-money-why-th...
Is there any way to model a supply chain as a control system? Like what you're describing is why PID controllers exist and they do a pretty good job of preventing failure conditions.
People do, but there's too much chaos and too many individual actors making crazy decisions.
PID controllers have a closed system -- the system is gonna do X, Y, or Z, but that's about it. Maybe expand out those options by an order of magnitude, but it's still fairly limited compared to all of the weird clusterfucks that happen in the real world.
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.
If there’s a shortage, new players might enter to fill that gap though. It doesn’t have to lead to concentration in that direction.
Sure, but there will still be an oversupply when demand goes back to normal.
Demand for oil drops, prices fall, stocks pile up, production scales down. There is nothing broken here. This is exactly how a market-based economy works.
There are approximately 7500 crude tankers on planet earth.
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.
Same. What tankers do you own? I’m looking at STNG.
$DHT $FRO
Be careful.
I'm comfortable losing it all.
I know I'm in the blast radius of volatility.
The upside is - damange to the environment aside - oil is a universal currency. Lowing the cost of energy is like printing money and mailing everyone a cheque; without the inflation. (It's also why oil is has been used as an economic weapon). Lowing the cost of energy impacts everyone. It's like being The Fed and lowing interest rates, but better since Joe & Jane Q Public benefit every time they pull up to the pump.
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...
Fracking is also better for carbon emissions and helped price out coal, which is a huge environmental benefit. Nothing is black and white
Yes and no - but perhaps mostly no. Let me explain, please.
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.
Except, the benefit isn't realized if you can't or won't go anywhere.
Serious question: how do I invest in some of those $10 barrels of oil? It seems like a contract to deliver oil at $10 in 2021 is likely to be worth more than by next year.
A contract to deliver oil in 2021 is known as a future [0], you can trade these on the market. The "problem" facing you is that the market also understands that the price of oil is going to go up, a barrel of WTI Light Sweet Crude Oil is $21.84 for delivery this May, but $35.53 for delivery next may [1].
[0] https://en.wikipedia.org/wiki/Futures_contract
[1] https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
Just be sure not to let the future contract expire before selling it, otherwise you might end up with a barge full of coal being delivered to your investment firm:
It's called super contango. If you can find a way to store the oil, the market is rewarding you with this arbitrage, but it's getting difficult to find this much storage
Hm, Sweden used to have huge strategic reserves, somewhere. Wonder if most if those are all destroyed or just empty.
Options Trading would be one approach. You don’t need to actually buy the commodity itself, but instead an option contract that permits you to buy the underlying ( stock, commodity ) at a particular rate by a particular date.
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.
The price of those options is not cheap though because everyone else is thinking the same thing.
I think you might be looking at USO if you're seeing a $10 USD call price, or another ETF which doesn't actually match the price of 1 barrel = 1 share. There is no way a $10 call is $0.3 USD when the market price is $20+. It should be a minimum of the price difference between the underlying and the strike price for an in-the-money option.
The $10 barrels are for delivery now, not next year.
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.
> once you turn off the tap you don't really know whether the oil is going to start flowing again later
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.
I got this verbally from my uncle, whose day job was to find ways to extract more oil from rocks.
To begin with, the oil is there, stably, at rest. At some point people come along, estimate the layout of the rocks (many km³ and far underground) and drill holes to change the way the pressure works and make as much as possible of the oil flow to a particular location. The geology decides how much that is, modified by the paths of the holes involved, and also by how much water is pumped in, where.
If you now close it quickly, the pressure's going to change somehow and you don't know precisely where and how. The end effect may be that when you reopen, something has changed down there such that instead of extracting 40% of the total oil you can only get 39%. Or such that you have to drill more holes in order to gain back your production velocity, the cost of which is far higher than producing at a loss for a month.
I know no-one here seriously thinks about buying and storing a barrel in their cave, but it’s still worth saying: Oil is surprisingly very toxic, it contains a lot of uncontrolled compounds with sulfur for example, by definition (The goal of refineries is obviously to separate those compounds).
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
> once you turn off the tap you don't really know whether the oil is going to start flowing again later
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'.
While there can be a great deal of pressure pushing the oil up the well, there is also resistance to that flow up a narrow pipe (perhaps 4 inch pipe). The balance of forces can be very close but the momentum can keep the flow going. In some fluids, there can be methyl hydrates (or wax) that can cause problems with maintaining flow. There can also be particles that are moving in the fluid (sand), slowing or stopping the flow can cause these particles to settle, preventing future fluid movements. There is a temperature and pressure gradient which can allow dissolved gas to bubble out the fluid as it ascends the well which can lead to added complexity. And we haven’t yet discussed oil recovery methods like gas/water injection or electrical sub surface pumps. Getting a well restarted after shutdown, may not be possible. I worked with some petroleum engineers, getting the best from your wells can be a very complex simulation problem followed by expensive engineering solution.
Oh, so it's a matter of the well itself too, not just of its surroundings? TIL.
Yes, and also to agree with Arnt (sibling comment), there can also be effects between neighbouring wells. In some fields, the fluid/gas can move easily (wells will affect each over) in others, there is little ability for movement. The fracking that engineers do attempts to add additional channels for the fluid/gas to move. So trying to turn down one well can lead to other effects. And in changing the situation, there will transients which will decrease over time.
No, it's a matter of the complicated and only partly known geology underground. See other answer.
Another way of looking at it is: You've drilled holes to make the oil flow. There are kilometers of rock on top of the oil layer, pushing down, pushing the oil towards the holes you've drilled. You can close the end of the hole, but you can't make that weight go away. The system is going to find a new equilibrium. The new equilibrium is not one you've tried to optimise for maximum total oil production.
It’s simply not true that you don’t know if the oil will flow again. It will. The subsurface pressure and fluid behavior is well understood.
One of the only scenarios that might lead to wells failing to flow when reopened would in wells that were freshly tracked without flowing back the frack water. In this case the frack water will soak into and damage the clay-like minerals in the rock and damage the permeability of the rock.
And think is why the stock prices of companies that have a bunch of oil tankers has shot up.
also oil storage is probably not covered by your house insurance :)
Why not just buy an OIL ETF when you think it hit the bottom.. for example https://finance.yahoo.com/quote/OIL?p=OIL
This doesn't directly answer your question, and many have replied already, but I thought you might like this:
https://www.bloomberg.com/news/articles/2015-11-03/that-time...
Find a broker, buy some futures.
Actually, if the OP is asking a question like that, they should stay far, far away from the market. It is not a game for newbies.
Cannot agree more. But maybe they want to learn.
That's risky though, it's possible to get ruined by buying futures (or put options for that matter) since it's basically a contract that must be fulfilled at some point in the future. AFAIK normally they function as insurance for buyers and sellers, to create more market stability.
Crude futures are liquid enough that you can almost always sell them before fulfillment date if you do not want to be on the hook for the obligation. They can't be early exercised like options can.
Put options are called options for a reason
You never have to exercise if you don't want to so there's a fixed maximum cost
I'm no expert in this, but my understanding is that futures are a mutual obligation and options are a one-sided obligation. So in case of a put option, it's optional for the other side - in case of a call it's optional for me.
Correct me if I'm wrong, but I assume there is a good reason why banks require additional paperwork from people who want to trade options/futures that must be renewed on a regular base.
I think you're probably thinking about the difference between Writing (or selling) options and buying them
Both call and put options are optional for the option holder to exercise (realistically you only ever exercise if they are in the money, or worth something). You usually don't need any additional paperwork to buy options
Writing options on the other hand has unlimited potential downside. It's much harder to get brokers to allow you to do this. Many will only let you write "covered" options - meaning you also hold the underlying shares, which limits your downside
the article says the futures are still trading high, meaning you probably couldn't make a lot of money buying them right now, likely because traders know the prices are going to come up too.
Am I misunderstanding?
You’re correct.
Selling the futures is the profitable end of the trade. Spot prices for WTI are about $20. That same oil can be sold in May 2021 for 35.53. Part of that difference is cost of carry (storing and insurance), but there is still a profit to be made.
The key is not to invest in oil, but in companies that can store it. There's potential for oil tanker storage companies to shoot up as more people realize this. See this article:
https://adventuresincapitalism.com/2020/03/19/crude-contango...
Given that you're asking this question, USO ETF. The alternative is options trading which is a bit more complicated but, if you're interested, is really fun to learn about.
> USO Fund Description
> 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.
buy a semi trailer for gas and fill it now, sell it in 2021.
I've had the same thought, but counterpoint:
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
If you have to ask how to do this on HN, you're too late. Pricing has already been set by Black-Scholes, and unless you have a seat on the CBOE you're better off going to Vegas.
Come on now reddit wallstreetbets is up there with Vegas now for gamblers looking for a fix
I think /r/wallstreetbets is the modern version of interactive fiction, or perhaps even the evolution of fireside-storytelling that civilization has had for 10,000 years. "The mammoth was THIS BIG! //extends neanderthal arms for affect//"
Instead of directly trading oil barrel options or futures, I'd suggest picking a long etf tracker. It's much lower risk to achieve the same goal.
Markets are broken when oil usage develops towards sustainable levels?
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.
> Now would be a good opportunity make internaltional agreements to cap oil consumption and extraction to its current level in shutdown
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.
Right now national politics is so broken and the Republicans are so against any kind of carbon tax it's impossible. Individual states could probably slip in an increase in gas taxes while gas prices are low, but it's unlikely...
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.
One of the best ways to do a carbon tax is to pay the revenues back as a dividend. States aren't allowed to print money, so you could reasonably have a bunch of blue states right now say that they're going to start paying dividends to people to help them out because they have to stay home, and hey let's fund it with a gas tax -- which people don't mind nearly as much right now because they're staying home anyway.
And then if it happens to still exist two years from now, it's already the status quo.
The battery taxes won't be far off.
I think most people forget that the American oil industry is one of the largest in the world, i.e. it employs a ton of middle and upper class labor. For that reason, it makes this a political issue. For instance, just one aspect of oil that is huge in the US is Shale production, which is not profitable at the current WTI price per barrel. What does that mean? Well, hundreds of thousands of people, or more likely millions, would permanently lose their jobs in the US, which is why this is politically untenable.
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.
I suspect battery storage will over time start to undercut shale production after prices rise again. So I'm thinking maybe shale is dead anyway. Good thing, since it is so dirty. Open to opposing points of view, though.. I don't know that much about this so would be glad to be educated.
Also just want to borrow your phrasing to say I think it would be incredible for all those shale oil folks to keep pulling in those paychecks, but sometimes you have to accept the world as it is, and not how you want it to be.
Oil jobs are not the only things these people can do. There is an argument to be made that renewables, like solar, actually would increase employment - especially of middle class labor.
So if someone is in their late 30's or 40's, having made an entire career in oil industry, with a family and mortgage - your proposal to them is to make their jobs obsolete and that they should seek a career in an at-best tangentially related field like solar?
Look, I get that climate change is one of the most important problems we are facing. But if we want to devise a solution, it has to pass the "political viability" test. Else, you are only inviting a radicalized electorate.
Example: "yellow vests" in France, which is supposed to be a rich society with plenty of resources to withstand the shock from rearranging an oil-based economy, with people supportive of generous social safety nets. If France can't get a gas tax passed without fierce nationwide protests, forget about making oil jobs redundant in Texas, let alone in developing countries like Nigeria or Kazakhstan.
Sure, but nobody wants to be the guy to go up to hundreds of thousands of people and tell them that they're fired. The skills needed to work in an oil production company aren't the same as solar.
> I think most people forget that the American oil industry is one of the largest in the world
You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply.
So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most of the demand because most of the people with oil jobs aren't in those constituencies. And the people who gain jobs from replacing them would be -- solar installations are inherently local. So would everyone receiving the dividend, even though part of it would be paid for by suppliers.
And it's really the same in Europe -- Eastern Europe has most of the supply but Western Europe has most of the demand. And China and India have negligible oil production per capita.
Texans can buy as many pickup trucks as they like, but if you stamp out 80% of the world demand like that, nobody is going to buy their oil. And once the jobs are already gone and the industry isn't interested in making ICE cars just for Texas and Russia and Saudi Arabia, there won't even be that.
California is about 8% of US production. Which accounts for close to half the states consumption. 197 vs 424 million barrels.
Thought of mine is as the number of electric cars increases California's oil imports will drop eventually to near zero.
California could probably get a carbon tax passed. Especially if it's on the consumption side and not the production side, because the demand reduction would only be from California but the impact to producers would be spread across producers everywhere in the world and not hit the California producers especially hard.
You could also just pay them off to shut up with some tax credits or something when it's a closer fight like that. It's not ideal, but destroying California's oil demand has the same outcome climate-wise whether some of the money goes to local oil producers or not. You basically tax the world oil production market to the tune of $1, of which California is less than a percent of, then give the local producers two cents out of the dollar, which is more than twice what they lost and should make them very happy.
In theory that could even work in a state like Texas -- pass a carbon tax and give some of the money to the local oil producers as compensation for the correspondingly slightly lower wholesale global oil prices, so that they have to sell their oil outside the state and for a lower price but still come out ahead with the tax credit. But then you get a lower dividend for everybody else, in proportion to how many local oil producers there are that you have to pay off, and it's not exactly a popular proposition there to begin with, so the hope of getting that through in Texas still seems pretty slim.
California is going for a more direct route which using cap and trade funds to pay for buy backs and down payment support for electric vehicles. That's being handled through the California Air Resource Boards.
I tend to dislike consumer carbon taxes because I feel it tends to punish people for decisions they made previously. Like a old fart who bought the last car he's ever going to own in 2005. Which results in political blowback. See the yellow vests in France.
> I tend to dislike consumer carbon taxes because I feel it tends to punish people for decisions they made previously. Like a old fart who bought the last car he's ever going to own in 2005.
This is what the dividend is for. If you bought a Toyota Camry in 2005 and now you're paying more for gas but receiving a dividend, the dividend is more than the higher gas prices -- some of the tax gets paid by oil producers (since lower demand lowers prices) but all of it goes to individuals, and some of it gets paid by carbon emissions by corporation, but once again all of it goes to individuals.
The people who would get screwed are the people who just bought a 12 MPG SUV rather than buying one fifteen years ago, expecting to keep it for a long time, because their carbon footprint is enough above average for enough time that it could exceed the dividend. But why should we have any sympathy for this behavior? The writing has been on the wall for a long time here. You bought a high-MPG gasoline-powered car in 2005 when viable electric cars weren't really available, you're fine. You buy a low-MPG one in 2020, you can't claim you didn't see this coming.
Ah, the good old employment argument for destroying the planet. We are so wise and far sighted if we let this happen...
It would be make more economic sense to pay these people to stay home and do nothing!
Sure - but would it make political sense to pay home to sit and do nothing? If so, can you point us to some locality where this has been accomplished?
try being poor
I want to agree with you, but I don’t think people have yet realized the depth of the depression we’ll be in even when the peak has passed.
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.
Even if you drive a BEV or take public transit and bike, a lot of the things you buy are delivered by fossil fueled vehicles (semi trucks). A flood is often followed by a spike in price as supplier companies fail.
Price is a good way to reduce consumption, but price spikes are not.
I disagree, the pre-corona energy usage was desirable since it was a result of healthy economic activiy. What is not desirable is how most of it was fossil fuel. To replace fossil, you need renewables to be cheaper or to compete with oil, this means oil should be used more but produces less so it costs more than renewables(which was the pre-corona trend).
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).
That' not what OP said. "oil consumption" not "energy consumption". But yes pretty much anyone with half a brain and no vested interested in fossil fuels agrees that fossil fuels need to be ran down ASAP and replaced with renewables. I'd imagine with optimized solar and next generation nuclear we could get a lot closer to "unrestricted" energy.
Yes,but maybe you missed my point, it was that "oil consumptiom" needs to go up along with oil prices before it can be taken down by renewables. That is fastest way, the slow way is to wait for disasters to keep happening and hope nations force change.
From what I read (analysts and decision makers) that's not what's going to happen. Money is injected and more will be to salvage industries and make up the loss (by increasing production after the crisis (or before the end)).
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.
These things are often counter intuitive. We should subsidize pollution and at the same time tax it. This allows us to strategically put an accounting framework in place that will allow us to later turn the knob to increase the taxes.
You first have to give the corporate world a gift before you take it away. Similarly to how the corporate world treats consumers.
You're not an idiot at all, you're just preemptively deflecting ad hominem responses.
I think that it's possibly efficient because it burns one clock cycle of a respondent's thoughts, and lets them remember the human.
Government and industry will want demand to ramp back up, but it's doubtful that will be supported by consumers. I don't think you're going to see an instant rush back to international travel.
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.
Citation for “most experts.” Most actual virus experts I’ve seen say the opposite: the virus is mutating slowly (at least in the spike protein, which is the part the immune system responds to) and the “reinfection” measurements are likely measuring residual virus genetic material, not necessarily true reinfection.
@trvrb on Twitter. And this other guy, with this thread: https://mobile.twitter.com/PeterKolchinsky/status/1244029896...
(Which doesn’t mean I disagree with your overall point that this won’t be an instant-bounceback.)
I'm not suggesting that people will become quickly reinfected, I'm saying that their immunity will be temporary, such as one or several "infection seasons".
I work in the travel industry (in a weird IT/social media guy position) and the consensus seems to be that people will get back to traveling but in their own country.
“Public” tourism industry is going to be okay (and aren't too worry about it for better or worse) but OTA and traditional tour operators are bleeding and some will eventually die.
Small local actors too but they will be replaced (or back after a year of unemployment, with loans from bailout banks).
I hate to disagree but the free market is often a great guide to tell us how much we need of something. The USSR tried telling industries how much to produce each year and we can agree that didn’t turn out well.
Of course oil is a problem but a tax or cap and trade system would make more sense to address it.
Oil doesn't operate in a free market, not even a "mixed economy"-style regulated market. The majority of oil production is managed by a cartel.
In economics there is a wide consensus that the free market is a lousy guide when it comes to incorporating externalities like accelerating climate change causing millions of unnecessary deaths vs perceived need to drive around in gas guzzlers.
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.
It was my understanding that by driving around in a gas guzzler, I am precipitating human extinction, bringing forward the long-awaited day when the ecology of Earth no longer includes humans, which will be “better”.
Where did I go wrong? Was it when I evolved?
You can't have a free market when there is a monopolistic producer
Who would that be?
OPEC et al. Oil is a classic cartel controlled industry.
I figured that would be the response, and the current price drops proves that the be wrong as the it is not just falling demand that is causing the price collapse, not that started long before COVID, it is a price war between 2 (of many) large suppliers,
This idea that OPEC controls everything in oil is simply false
This!!! This seems like great news to me.
What happened to "Peak Oil"? Was there some assumption in those projections that proved to be wrong?
Peak Oil (conventional) happened in 2008 (see World Energy Outlook 2018 from the IEA). Tight oil came to the rescue. Tight oil and shale oil industries are all built on a huge amount of debt and never were cash-positive in the past 12 years. That's the part that wasn't anticipated.
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.
"However shale oil requires constant drilling because production rises then falls very quickly"
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?
Yes, currently the tight oil industry could be in a good shape, because drilling a well is very cheap (about US$ 5 millions), without the trillions of debts it amassed. The problem may unroll like this:
- demand is destroyed by coronavirus - prices go down (maybe as low as $10 a barrel according to some analysts) - existing wells maybe kept pumping, or not - new drilling stops, ditto exploration, etc. - cash flow in tight oil industry falls to about zero - huge debt (trillions) can't be paid back, companies go belly up, banks must be rescued by the Fed...
several scenarii open up from there: would the Fed rescue the oil companies? may the government nationalise the oil industry? What can be the impact on US$? On US debt? financial markets? Who knows, all bets are off at this point.
The crucial moment will be there: in the few months between this moment when the shale oil industry defaults on its debt, and when it's bought back (debt free, therefore in a sane situation), there may be a large gap in production, that could kill world oil demand by sending prices through the ceiling ($100 barrel? $120? $150?) because normal demand can't be fulfilled by conventional production anymore.
Lots of graphs here: https://jancovici.com/en/energy-transition/oil/when-does-the...
I myself have no particular expertise, but I've been following quite closely oil and energy since 2005.
Also, the environmental impact is largely missing from this thread. In states that have lax environmental laws and oilmen at the helm, towns are being destroyed by extraction side-effects. To the extent that these states are OK being polluted will indicate how far this drilling will proceed.
For reference: World Energy Outlook 2018 https://www.iea.org/reports/world-energy-outlook-2018
I think there is/was validity to the concept of EROEI: energy return on energy invested. The EROEI of oil has decreased over time.
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.
I also wonder if the peak oil computations included oil discoveries as the arctic melts.
They didn't, and if we go there we definitely have enough carbon to go back to the Pleistocene epoch. Antarctica is believed to contain large coal and oil fields but they have not been thoroughly mapped as they are not economic to reach at the moment.
I recall watching an old 50s documentary on Antarctica when I was bored years ago and they mentioned that there was enough fuel there to satisfy our energy needs for hundreds of years. This was before anyone was very worried about CO2.
My impression is that there are vast amounts of oil at increasing levels of extraction cost. As cheap oil is used up, the price rises and it becomes financially viable to extract more expensive reserves. Eventually, the remaining oil may be so costly to extract that renewable energy will be cheaper, but it seems unlikely that we will ever extract the last drop of fossil fuels.
(Ignoring all the other reasons for cost fluctuations.)
Renewables are already cheaper - solar in the US is the cheapest form of energy in the world. The remaining challenges are improving batteries for storing it, and continued panel efficiency to reduce the amount of space needed for generating solar power.
Not to mention if Methane Hydrate comes online - endless natural gas for the price of a drill and pipeline.
In that case also invest in beachfront properties in northern russia and Antarctica. The weather there will be awesome
Do so then, because Japan is already tapping it. Estimated 6X the energy there, than all the oil reserves we ever discovered. Seems inevitable.
You'd need a matching property in the southern hemisphere for the dark winters.
"Peak Oil" was the idea that the demand for oil would exceed the supply we are able to access. Yet we keep finding more and increasing our ability to access more thanks to technological progress.
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...
No, it's a mistake - oil most certainly does not have anything like a fixed supply that is going to run out.
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.
Obviously oil has a fixed supply... there is by definition only a finite amount of it, given that we live on a spheroid with a finite volume out of which to extract it. Supply doesn't grow with demand, as that would imply new oil is somehow being created with demand and that, given infinite demand, there would also be infinite supply.
What does grow with demand is technological innovation and effort, and while we were not as close to the actual limit as we assumed with "peak oil", that doesn't mean the limit itself was fictional.
Given high enough price, we can extract oil from carbon in the air, at least as long as the sun keeps shining.
Tech, innovation - they are just the other words for "infinite supply".
Yes, it is not physically infinite. But it is effectively.
As long as someone is willing to pay for it, it will be provided. And even cheaply - look, what's 1970's $12/barrel in nowadays dollars? $50? $100?
We are so nowhere near running out of oil, that the whole possibility is best ignored.
>As long as someone is willing to pay for it, it will be provided. And even cheaply
This is only true until it isn't. At some point oil will become economically and technologically infeasible and alternatives will win out, because no one wants the million-dollar a barrel oil economy that results when we have to resort to mining Titan for it.
>At some point oil will become economically and technologically infeasible and alternatives will win out
And it will, but I fail to see how this defeats my statement.
Oil will become obsolete not because its price will rise, but only because the alternatives will finally become cheaper.
Which is not the case as of now.
Extracting oil from shale reservoirs was though to be too difficult and expensive to ever really flood the market like this. Turns out it wasn't.
It is too difficult and expensive for this. Most of them are taking a loss at this price.
True, but tight oil production that was previously though to be impossible to extract economically has more than offset losses in conventional production. Peak oil predictions of decades past presumed this could only happen when oil prices rose so high that alternative energy sources would be competitive. Therefore these reservoirs would remain uneconomic. Instead fracking got really cheap.
Peak oil is the moment in history where people have the most oil available.
It came, and past. Production is down from the peak, and down from last month too.
Turns out the world has loads of oil, and is still discovering more, and even more natural gas, coal and so on. We’re not running out anytime soon, which is actually a problem.
Nope, discoveries worldwide peaked 4 decades ago. Production follows discoveries with a 4 to 5 decades delay. For scale, we need to find out about a new Saudi Arabia every year. We simply don't.
I've read we're right at the peak with shale. If we continue normal usage/production sans the effects of covid-19, we would've hit the drop off (for shale) of the Hubbard curve some time before 2025.
source: https://www.bloomberg.com/news/articles/2019-10-14/peak-shal...
A near-instantaneous drop in global demand almost 50 years later?
I love it. All the hysteria about peak oil from 15-20 years ago never happened and now we have a bunch of hand wavy explanations as to why. People just can’t admit it was BS and a lot of us bought into it.
Keeping oil prices low punishes not only Russia but Iran and Venezuela, so that could be a major reason why the Saudis are flooding the market.
Saudi arabia still need a barrel price of 80$ to keep their budget balanced. They have also mostly eaten through their reserves and are economically 100% oil dependant. Yeah it costs them only 2-3$ to get the oil from the ground but Saudi Arabia is basically just a huge welfare state and a kleptocracy for it's ridiculous number of princes and royal family members.
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.
Saudi couldn't care less about Venezuela and Iran isn't even supposed to be in international oil markets (sanctions).
Despite Canada's dollar doing terribly, gas stations are selling it for $0.64/Litre where I live.
I haven't seen it this low in maybe 20 years.
That's because Canadian oil is way cheaper than the 2 benchmark crude grades right now! Western Canadian Select is at 7.2$ a barrel compared to 21$/barrel for the WTI. In fact, the oil itself is probably worth 0 (or less) since some sand oil producers are literally paying to get rid of their crude.
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.
It allegedly hit $0.99/gal somewhere in the U.S. midwest. Driving through Oklahoma last week, I saw it as low as $1.28/gal.
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.
The oil isn't just magically coming from some unstoppable font.
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...
I find it odd that the article does not mention the oil price war between Saudi Arabia and Russia.
https://www.reuters.com/article/us-opec-oil-policies-idUSKBN...
The 'oil price war' was 3 weeks ago. Things are changing fast these days.
It’s not like that’s suddenly over now. But on top of that, demand is even lower, because fewer people are flying and driving around.
Here's a good breakdown of crude oil usage I found interesting:
https://www.eia.gov/energyexplained/oil-and-petroleum-produc...
Yes, but the article describes the problem of physical storage running out. This affects the price much stronger than some political gamble.
is the price war the reason, the consequence or the accelerator of the current market?
The price war was unintentionally started just as demand began to be wholesale destroyed by the response to the COVID pandemic. Supply was reduced, but demand was reduced even more by a halting of the global economy.
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.
Saudi Arabia has a much lower break even point: around 20 dollars. Hell even deepwater only costs 80 dollars to break even.
For production, not supporting their generous benefits to their citizens. They’re going to burn up their state reserves on the gravy train.
IMHO the coronavirus scare was the catalyst that sparked the price war.
It’s the consequence of the slowdown in demand.
The idea of supertankers storing 100 million barrels of oil at sea is an environmental catastrophe waiting to happen, especially if the boat is old, as is sometimes the case. https://www.reuters.com/article/us-asia-oil-storage/in-lates...
I know this is the wrong attitude but with no ties to the oil industry that I am aware of I personally am enjoying watching the market crash and my cost of gas go way down. However my understanding of the economy is poor. Does this negatively effect the average joe or mainly oil producers?
It depends on the region, but the energy sector is one of the major global employers, and one of the best and biggest sources of quality blue collar jobs (with benefits etc) when energy prices are high. That’s one of the reasons oil and gas is so politically favored.
The oil crash is contributing to the stock market crash, and thus to the overall economy being down, potentially meaning layoffs for the average joe. Plus this might cause smaller producers to go bankrupt, meaning that prices could rise even higher in the future. Of course that’s only true if we continue to use oil, which we need to divest from as a species.
What if the price of advertising or SAS apps was forcibly cut by 70% or more?
Great for consumers. Not so good for Google and SAS companies and thus their employees.
(but I'm not crying for oil either).
Saudi Arabia, our ally, is working hard to completely destroy the U.S. Shale Oil industry, as well as the Russian Oil industry, and every other oil producing country in the world.
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.
Yes, but the Saudis reportedly need to charge ~$80/barrel to balance their budget - and oil is their only source of income.
I am really not sure what game the Saudis are playing.
It's an irony that in 1960 we believed oil would be extinct on 2000.
Turns out we are drowning in them in 2000+20.
So, I have not yet seen any informed analysis of how this is impacting the solar panel and wind turbine industries. I assume it would be bad, but I don't know how bad. If anyone has knowledge of that, feel free to chime in.
It's not crude "nobody needs". It's just storage being too expensive to expand infinitely. If it weren't, it'd be a great opportunity to stock up, because the need will be there for decades.
The demand will rise again once this virus is done with.
Remember that the initial fall in oil price was a supply shock (Saudi Arabia upping production) that was only exacerbated by lack of demand. If demand comes back it won’t push oil back into the 50s/60s.
But what's the saudis' end game? Are they really gonna try to starve out russia, and cause them to capitulate? Game of chicken till one country bankrupts?
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.
Russia has just lost about 20-30% yearly income in these first months just from the oil price war.
Saudis cannot care less because they have about three times of Russia reserves nominally. In fact I suspect about five to seven times that, because Russia reserve structure is basically unknown. Saudis can certainly afford a year or three of having no income.
This is on top of the virus panic (which just cut any remaining tax revenues). Russia, Venezuela, Iran for that matter are done for.
EDIT: Which is why I think the whole OPEC+ deal went to the crapper. Middle East is able to weather this, others - not so much.
I hope this doesn't mean war. I have a feeling Russia will take out capacity by force if it becomes an existential threat.
No it does not. There is no one in Russia able to execute such a decision. There were some people in 2008 maybe, but that was almost 12 years ago.
Arguably there isn't anyone like this in the rest of the world either, but I digress.
Wouldn’t it be nice if it didn’t, though. Large numbers of people working from home, cruise and airlines running fewer routes, people staying local instead of traveling so much, more local farming and manufacturing so less money spent on shipping....
Would be nice.... hordes of people on roads in metro areas driving their 3ton chunks of metal, one person per chunk is just obnoxious unbelievable waste, and all to mostly sit and write emails and chitchat a bit at “work”.
Not just nice, but necessary, to avoid megadeaths from unchecked global warming.
It wouldn't be too nice if you lose your job in the process.
Unless "jobs" stopped being an end goal. Then it would still be nice.
i hope it doesnt go back to the same levels. So many people are learning to work remotely, i hope they stick to it. i dont know what that means for overall energy usage but it seems it will be cleaner
It will go back to the same level. Nobody likes the situation right now and once the threat of death and disease disappears people will begin to behave as they once did.
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.
I guess storage producers stocks are soyrocketing
Or, to shift perspective, we are also in a class-war position of a general strike.
This is great news!
Drowning Russia in cheap oil is an old trick.
How to bypass free article limit?
Two ways in Bloomberg. Either search in debug mode and disable two displays that are what is disabling them or simply disable Javascript on their page. It will be limited in functionality but you can read the article.
Delete the associated cookies - or nuke everything in your browser cache.
https://github.com/nextgens/anti-paywall
Chrome users can install this directly as an unpacked extension.
For Firefox users, there's an xpi hidden in the releases tab.
Saudis want to put Putin out of the oil biz.
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.
That's another piece of good news. Two countries with a particularly shitty track records are in a lose-lose situation.
Please don't post shallow flamebait like this to HN. It has noticeably degrading effects on discussion, and the last thing we need here are political or nationalistic flamewars.
We detached this subthread from https://news.ycombinator.com/item?id=22718650.
Unfortunately the goal is to drive out US Shale ...
No. This is a nice benefit but this war just isn't about shale like the 2012 flooding was. This conflict originated from a spat between Russia and Saudi Arabia and will end when they settle their differences.
A large part of that spat is that Russia still thinks it can drive out the US shale producers whereas Saudi Arabia is done fighting for now. Moscow has a $150 billion warchest whereas Riyadh is bleeding money and risking the biggest IPO in history.
It's way more complex than that. This is completely between the Saudi's and Russians. US shale is just a unintended consequence (tho temporarily good for them.)
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.
>The goal for the Saudi's is to bring the Russians to the negotiating table
the current oil skirmish is a part of much bigger war - Russia went into Syria and has supported the Shia belt (Hezbollah - Asad - Iraqi Shia government - Iran) against Sunni (ISIS/Saudis) despite having no religious preference between Shia/Sunni in particular to block Saudis from being able to pipeline the stuff to Europe (which is an oil and especially natural gas market critical to Putin's Russia survival, and where Saudis have been trying for example to send oil and LNG tankers to. The LNG is more expensive than pipelined NG while Saudis have a lot of NG, so they need a pipeline to Europe and that would be existential blow to the current Russia economy and its "soft" power (like the threat of turning gas off in winter) power over Europe). In this context i don't see Russia going to negotiate wrt. current skirmish. If anything i think it would go all the way in Stalingrad style, Russian population economical suffering be damned, in hopes of forcing Saudis to come to bigger negotiations in much weaker shape.
So fracking stops in the US. Win-win-win?
Someone (Matt Levine??) on Bloomberg said that "Russia and Saudi Arabia seem to have accepted that periodically bankrupting US fracking operations is a cost of business". Periodically - because US oil extraction is done by many firms in a country with strong bankruptcy law, and after 2 or 3 years SA and RU will stop dumping, prices will rise, and they'll spring right up again (barring some drastic change in world oil consumption.) So it's more like Don'tlose-don'tlose-losetemporarily.
It's only a win after the switch to EVs. Before that you are going to need every drop of that oil.
> Before that you are going to need every drop of that oil.
No, you’re not. You want to fundamentally damage oil production economics to make oil as expensive as possible, to speed the uptake of EVs.
Cheap oil slows down the electrification of transportation. We don’t want cheap oil. We want this price war to cause a spike in oil prices causing pain to oil consumers.
Will that reduce the availability of Gas causing more dependency on Coal, though?
I believe it's more to bankrupt Alberta's oil sands. US shale is barely a competitor on a global scale.
The US is the worlds largest oil producer
Sure but that statistic is always measured as oil + natural gas + additives + other hydrocarbons. If you can find a source for crude oil extraction, not production, the US would almost certainly not be #1.
Recently the US has been far in the lead for even crude production. Here is a source where you can see the break downs by type for every country from from 1973 to 2018[1]. Data from the US Energy Information Administration. Download the .csv file for easier browsing.
The totals for just crude, not including petroleum liquids, for 2018 are:
US : 16.8 Mb/d
Saudi Arabia: 12.4 Mb/d
Russia: 11.4 Mb/d
[1]https://www.eia.gov/international/data/world/petroleum-and-o...
I think you missed a decade or so of development in the US energy industry.
What's the difference between extraction and production and why does it matter here?
Are the commenters who replied wrong? If so, can you explain why?
Yes, citizens of those countries becoming poorer because you disagree with the politics of their leaders is good news.
But far more people have a better life because the oil cartel isn't United anymore.
Cheap oil is better for billions of people in India, China, and Africa
That money didn't go to the citizens anyway.
Not as a check. Because of the continuous stream of oil money in KSA, it has been possible to grant subsidies on goods or handouts to people. Even not collecting any VAT on good or if so a rather low VAT. When you are losing a lot of your income as a state, you can't really keep that standard up.
I suggest reading this, it's an older article, but the circumstances are the same: https://www.businessinsider.com/saudi-arabian-social-contrac...
So how to fix that broken