Oil Shock Streaks Across Globe From Moscow to Tehran to Caracas. Ready for $40?
Since Gas is already at $65 and some change it isn't really that surprising to think of gas going to $40 a barrel or less either. In fact, I predicted this recently in another comment I made on another article and said I thought that Saudi Arabia would take it to $30 to $39 so shale oil producers in the U.S. and around the world no longer could take shale oil at a profit because they need at least $40 to $70 a barrel to make shale oil profitable.
Also, in the 1980s when Saudi Arabia and Opec decided to defend their market share then oil fell to $12 a barrel in that price fight. So, maybe it could go as low as $12 to $15 dollars a barrel now too by January or February?
Dec. 1 (Bloomberg) –- In today’s “Bart Chart,” Bloomberg’s Mark Barton
takes a look at Brent Crude prices since the beginning of 2014 on
“Countdown.” (Source: Bloomberg)
Oil’s decline is proving to be the worst since the collapse of the
financial system in 2008 and threatening to have the same global impact
of falling prices three decades ago that led to the Mexican debt crisis
and the end of the Soviet Union. Russia,
the world’s largest producer, can no longer rely on the same oil
revenues to rescue an economy suffering from European and U.S.
sanctions. Iran, also reeling from similar sanctions, will need to
reduce subsidies that have partly insulated its growing population.
Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by
failing political and economic policies, also rank among the biggest
losers from the decision by the Organization of Petroleum Exporting
Countries last week to let the force of the market determine what some
experts say will be the first free-fall in decades.
“This is a
big shock in Caracas, it’s a shock in Tehran, it’s a shock in Abuja,”
Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS
Inc. and author of a Pulitzer Prize-winning history of oil, told
Bloomberg Radio. “There’s a change in psychology. There’s going to be a
higher degree of uncertainty.”
A world already unsettled by Russian-inspired insurrection in
Ukraine to the onslaught of Islamic State in the Middle East is about be
roiled further as crude prices plunge. Global energy markets have been
upended by an unprecedented North American oil boom brought on by
hydraulic fracturing, the process of blasting shale rocks to release oil
and gas.
Photographer: Susana Gonzalez/Bloomberg
Gas is flared from a tower on an oil drilling rig operated by Petroleos Mexicans in the... Read More
Cheap Gasoline
Few expected the extent or speed of
the U.S. oil resurgence. As wildcatters unlocked new energy supplies,
some oil exporters abroad failed to invest in diversifying their
economies. Coddled by years of $100 crude, governments instead spent
that windfall subsidizing everything from 5 cents-per-gallon gasoline to
cheap housing that kept a growing population of underemployed citizens
content.
Those handouts are now at risk.
“If
the governments aren’t able to spend to keep the kids off the streets
they will go back to the streets, and we could start to see political
disruption and upheaval,” said Paul Stevens, distinguished fellow for
energy, environment and resources at Chatham House in London, a U.K.
policy group. “The majority of members of OPEC need well over $100 a
barrel to balance their budgets. If they start cutting expenditure, this
is likely to cause problems.”
Photographer: John Moore/AP Photo
An official of the Saudi oil company at a rig near Howta, Saudi Arabia.
Costs as Benchmark
Oil has dropped 38 percent this
year and, in theory, production can continue to flow until prices fall
below the day-to-day costs at existing wells. Stevens said some U.S.
shale producers may break even at $40 a barrel or less. The
International Energy Agency estimates most drilling in the Bakken
formation -- the shale producers that OPEC seeks to drive out of
business -- return cash at $42 a barrel.
Canadian Natural
Resources Ltd. Chairman Murray Edwards said crude may sink as low as $30
a barrel before rebounding to stabilize at $70 to $75 a barrel, the
Financial Post reported.
“Right now we’re seeing a price shock
coming out of the meeting and it will be a couple of weeks until we see
where the price really falls,” said Yergin. Officials “have to figure
out where the new price range is, and that’s the drama that’s going to
play out in the weeks ahead.”
Brent crude was down $1.40 at $68.75 as of 9:14 a.m. in London, while New York oil lost $1.47 to $64.68. Brent is now at its lowest since the financial crisis -- when it bottomed around $36.
Not All Suffer
To
be sure, not all oil producers are suffering. The International
Monetary Fund in October assessed the oil price different governments
needed to balance their budgets. At one end were Kuwait,
Qatar and the United Arab Emirates, which can break even with oil at
about $70 a barrel. At the other extreme: Iran needs $136, and Venezuela
and Nigeria $120. Russia can manage at $101 a barrel, the IMF said.
“Saudi Arabia, U.A.E. and Qatar can live with relatively lower oil prices for a while, but this isn’t the case for Iran, Iraq, Nigeria, Venezuela, Algeria and Angola,”
said Marie-Claire Aoun, director of the energy center at the French
Institute for International Relations in Paris. “Strong demographic
pressure is feeding their energy and budgetary requirements. The price
of crude is paramount for their economies because they have failed to
diversify.”
Brent crude is poised for the biggest annual decline
since 2008 after OPEC last week rejected calls for production cuts that
would address a global glut.
Like this year’s decline, oil’s
crash in the 1980s was brought on by a Saudi-led decision to defend its
market share, sending crude to about $12 a barrel.
Russia Vulnerable
“Russia
in particular seems vulnerable,” said Allan von Mehren, chief analyst
at Danske Banke A/S in Copenhagen. “A big decline in the oil price in
1997-98 was one factor causing pressure that eventually led to Russian
default in August 1998.”
VTB Group, Russia’s second-largest
bank, OAO Gazprombank, its third-largest lender, and Russian
Agricultural Bank are already seeking government aid to replenish
capital after sanctions cut them off from international financial
markets. Now with sputtering economic growth, they also face a rise in
bad loans.
Oil and gas provide 68 percent of Russia’s exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves
this year, equal to 4.5 percent of its economy, as it tried to prevent
the ruble from tumbling after Western countries imposed sanctions to
punish Russian meddling in Ukraine. The ruble is down 35 percent against
the dollar since June.
This Will Pass
While the
country’s economy minister and some oil executives have warned of tough
times ahead, President Vladimir Putin is sanguine, suggesting falling
oil won’t force him to meet Western demands that he curb his country’s
interference in Ukraine.
“Winter is coming and I am sure the
market will come into balance again in the first quarter or toward the
middle of next year,” he said Nov. 28 in Sochi.
Even before the
price tumble, Iran’s oil exports were already crumbling because of
sanctions imposed over its nuclear program. Production is at a 20-year
low, exports have fallen by half since early 2012 to 1 million barrels a
day, and the rial has plummeted 80 percent on the black market, says
the IMF.
Lower oil may increase the pain on Iran’s population,
though it may be insufficient to push its leaders to accept an end to
the nuclear program, which they insist is peaceful.
‘Already Losing’
“The
oil price decline is not a game changer for Iran,” said Suzanne
Maloney, senior fellow at the Brookings Institution, a Washington-based
research organization, who specializes on Iran. “The Iranians were
already losing so many billions of dollars because of the sanctions that
the oil price decline is just icing on the cake.”
While oil’s
decline wrenches oil-rich nations that squandered the profits from
recent high prices, the world economy overall may benefit. The
Organization for Economic Cooperation and Development estimates a $20
drop in price adds 0.4 percentage point to growth of its members after
two years. By knocking down inflation by 0.5 point over the same period,
cheaper oil could also persuade central banks to either keep interest
rates low or even add stimulus.
Energy accounts for 10 percent to 12 percent of consumer spending in European countries such as France and Germany, HSBC Holdings Plc said.
Nigerian Woes
As
developed oil-importing nations benefit, some of the world’s poorest
suffer. Nigeria’s authorities, which rely on oil for 75 percent of
government revenue, have tightened monetary policy, devalued the naira
and plan to cut public spending by 6 percent next year. Oil and gas
account for 35 percent of Nigeria’s economic output and 90 percent of
its exports, according to OPEC.
“The current drop in oil prices
poses stark challenges for Nigeria’s external and fiscal accounts and
puts heavy pressure on the exchange rate,” Oliver Masetti, an economist
at Deutsche Bank AG, said in a report this month. “If oil prices remain
at their current lows, Nigeria will face tough choices.”
Even before oil’s rout, Venezuela was teetering.
The
nation is running a budget deficit of 16 percent of gross domestic
product, partly because much of its declining oil production is sold
domestically at subsidized prices. Oil is 95 percent of exports and 25
percent of GDP, OPEC says.
“Venezuela already qualifies for fiscal chaos,” Yergin said.
Venezuelan Rioting
The
country was paralyzed by deadly riots earlier this year after police
repressed protests about spiraling inflation, shortages of consumer
goods and worsening crime.
“The dire state of the economy is
likely to trigger renewed social unrest, while it seems that the
government is running out of hard currency,” Capital Economics, a London
research firm, wrote in a Nov. 28 report.
Declining oil may
force the government to take steps to avoid a default including
devaluing the currency, cutting imports, raising domestic energy prices
and cutting subsidies shipments to poorer countries in the region,
according to Francisco Rodriguez, an economist at Bank of America
Merrill Lynch.
“Though all these entail difficult choices,
default is not an appealing alternative,” he said. “Were Venezuela to
default, bondholders would almost surely move to attach the country’s
refineries and oil shipments abroad.” China Bailout?
In
an address on state television Nov. 28, President Nicolas Maduro said
Venezuela would maintain social spending while pledging to form a
commission to identify unnecessary spending to cut. He also said he was
sending the economy minister to China to discuss development projects. Mexico
shows how an oil nation can build new industries and avoid relying on
one commodity. Falling crude demand and prices in the early 1980s helped
send the nation into a debt crisis.
Oil’s share of Mexico’s
exports fell to 13 percent in 2013 from 38 percent in 1990, even as
total exports more than quadrupled. Electronics and cars now account for
a greater share of the country’s shipments. Though oil still accounts
for 32 percent of government revenue, the Mexican government has based
its 2015 budget on an average price of $79 a barrel.
Related
reading: Oil Seen in New Era as OPEC Won’t Yield to U.S. Shale Oil Bust
of 1986 Reminds U.S. Drillers of Price War Risk OPEC Refusal Means Oil
Industry’s Weakest Producers Left Behind
To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Timothy Coulter, Ken Fireman
end quote from: Oil Shock Streaks Across Globe From Moscow to Tehran to Caracas. Ready for $40?
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