Monday, 10 August 2015
Oil collapse - a gift to the West.
There are some rulesabout the oil market which are being tested to production. One if the economics of sunk costs. It is very expensive to get an oil filed discovered, permitted, drilled and flowing. Literally billions of dollars for the larger fields.
Once this money is spent, then it is gone. Once the oil is flowing it is well under $10 a barrel. So if you have spend the money opening a field, it flows forever. Only accountants look at the overall economics. Countries do not budget like this, they work on a current account only formulae, once money is spent it is gone, worry about income for next year, not last year.
So once a large Petro-state has switched on the oil taps they never ever get turned off. The most an OPEC cartel decision can do really is limit the future expenditure on increasing production and hope that current fields run out.
Of course, with Shale in the USA it matters more whether the companies make money, but not so much more, such is the complexity of debt interest and leverage that overlays the industry. Plus the cost of drilling shale have already been absorbed, you may as well pump it.
Thus, despite a moderation in demand and a huge over-supply of crude oil, the world's petro states keep pumping. They need the money, even Saudi Arabia is likeley to have a 20% budget deficit this year. The oil will flow more and more and the price will keep dropping.
Today the price of crude is back under $50, as noted here before this is bad for the Middle East, Russia, Venezuela and Nigeria (and Scotland...). It is good for USA, Europe, China and India.
With Oil below $50 the inflationary pressures in the West are very benign, allowing the recovery from the Financial Crisis to continue. Russia will have a harder time justifying invading Ukraine and there will be less money to be funnelled to ISIS from its, err, 'enemies.'
Harder today to see is the dynamic really changing, demand in China is increasing more slowly and the West keeps investing crazily in renewables just when conventional prices are weakening. Plus the revolution that is LNG is still yet to come to much of the world and LNG prices make oil look like the liquid diamonds.
A new era of low oil prices thanks to ever increasing technologival innovation and desperation on the part of petro states - justhow the West wanted it.