Oil soars 6 percent as OPEC reaches deal to limit output in November

http://www.reuters.com/article/us-global-oil-idUSKCN11X03E

by uptown • 10 years ago

54 47 10 years ago

jseliger• 10 years ago

Possible corollary: "Tesla stock rises in response."

We may be heading towards a world of permanently low oil prices, as rising prices will cause more people to switch to electrics or plug-in hybrids.

Car buyers exhibit amazingly lemming-like behavior, switching to more fuel-efficient cars as prices rise and switching away from those fuel-efficient cars as prices fall. That process is likely to become more pronounced as electrics become more available and affordable.

maxander• 10 years ago

What kinds of car people use is irrelevant as long as the power grid is predominantly powered by fossil fuels. The number to watch is percentage of "green" power generation, which changes far too slowly to respond to market lurches like this.

yessql2• 10 years ago

Oil is not a big part of electricity generation in most places.

Fjolsvith3• 10 years ago

But when Tesla sells you a BEV, the solar roof array and household battery, and allows you to go "off-grid" with that car, the kind of car you use is relevant.

yessql2• 10 years ago

Yes, we saw people switch to more efficient transport in the US at $4/gallon. I think this is the long term ceiling, where people will switch to at least a plugin hybrid and cover 90% of their driving on electricity.

elsonrodriguez• 10 years ago

That's a pretty great point.

People started trading in their SUVs last time, this time they will be getting something that doesn't need gasoline at all.

I don't think OPEC realizes how dangerous of a game they are playing.

Fjolsvith3• 10 years ago

I wonder if this amount is tied to the cost of a gallon of milk in the consumer's mind?

NikolaeVarius• 10 years ago

I wonder if this will be like the Atlantic City Conference. See how long this lasts before someone breaks the peace.

AnimalMuppet• 10 years ago

My guess: December.

chollida1• 10 years ago

The game theory on this is awesome.

You've got OPEC a collection of countries that don't all like each other, trying to agree to lower their individual production knowing that they can't trust each other.

At the same time this exact group of countries are running deficits and any cut's they make will increase those deficits in the short term. Keep in mind these are countries who can't be described as stable. In many the only thing keeping the government in power is they oil money they sprinkle on their populations.

You've got oil producing countries outside of OPEC who would love to see the price of oil rise so they can expand their production of oil that's more expensive to produce. Keep in mind there is a prominent theory that OPEC flooded the market with cheap oil to drive these countries out of the oil producing business.

You've got world economies that depend on oil, all of which are using cheap oil to prop themselves up to differing degrees. A return to $100/barrel oil would be short term trouble for many 1st world economies.

I love the oil market. I can't figure it out, but I love trying:)

hayksaakian• 10 years ago

all this in mind, it takes a lot of thought to imagine a world not reliant on oil

imagine all the countries that won't have oil money

that has so many implications

strictnein• 10 years ago

"...love to see the price of oil rise so they can expand their production of oil that's more expensive to produce"

Yeah, it's a weird dynamic. For example, the higher the price of oil, the less dependent the US is on the rest of the world. Lots of oil in that $60-$80+ range in and around the US.

Retric2• 10 years ago

The 60-80$ range US Oil only lasts for a few years at US consumption rates, but that's plenty to influence OPEC. The real issue is Expensive Oil has a lot of competition but Cheap Oil does not. Further, it takes years for substitutes to get onto the market. So, OPEC is better off with large price swings than a steady state which causes long term demand to fall off a cliff or uses up their supply at very low prices.

On top of that, politics can make price swings a useful weapon. Cheap Oil makes Russia for example far weaker.

PS: IMO, small scale Russian aggression actually fits as a 'wag the dog' distraction from how bad things are going for them.

CyberDildonics2• 10 years ago

Putting these countries in difficult situations is why the deal with Iran was so valuable.

Fjolsvith3• 10 years ago

Could you elaborate?

akhatri_aus• 10 years ago

The most optimum thing (or one of the optimums) is for them to do, Game Theory wise, is to announce a deal and cheat unofficially! The only way to check this is to see their shipment numbers on the importing side, after the fact.

They've cheated before..

The benefits come from the market expectation of lower output, immediately gaining higher revenue.

joezydeco• 10 years ago

The US producers have promised they would turn fracking back on if oil crossed above the mid-40s. Canada will also be back online as the wildfires have burned out.

http://www.cnbc.com/2016/02/29/us-shales-message-for-opec-ab...

jdhawk• 10 years ago

These prices need to show some resiliency before any producer is going to throw serious cash towards more production. There is a pretty large lag time to build back all the services and bring new wells "online", 6-12 months?. Producers need to be confident that those prices will maintain at $45+ before you'll see any major activity.

_FKS_2• 10 years ago

Smoke & mirrors. Art Berman has shown that none of the Tight&Shale producers are/has been profitable. They are largely there because of credit/debt (which of course can't grow for ever)

"Tight oil companies outspend cash flow by an average of 120%: spend $2.20 for every dollar earned from operating activities." "Tight oil company debt-to-cash from operating activities ratio averages 3.3: would take more than 3 years to pay down debt if all cash flow was used."

Please see: http://www.artberman.com/wp-content/uploads/The-Shale-Revolu...

emp_zealoth• 10 years ago

Does it really matter if you can just print more money? As in borrow indefinitely at tiny tiny rates?

ArkyBeagle2• 10 years ago

I have seen (unsupported) estimates for the quantity of zero-coupon debt that's most likely just evaporated since 2014 in the Eagle Ford shale alone run in the low trillions - maybe one, two or four or something.

Meanwhile: http://fortune.com/2015/12/10/oil-zombies-debt/

One thing to consider ( although it's pretty different ) - the 1980s oil crash was in around 1983; the S&L bailout (FIRREA) was in 1989. Six years' latency.

jorblumesea• 10 years ago

Is it possible that oil prices will never be that high again due to renewables? Part of me feels like the games OPEC members are playing will be to their long term detriment. Renewable cost is only going down year after year, really the oil states have a limited time to extract as much money as possible before alt energy kicks into high gear. By the time they're done fighting with each other it may be too late to get the money that they are banking on.

Also bets on whether any member countries actually follow this?

_FKS_2• 10 years ago

Renewables depend on oil. You can't make renewables with renewables energy, because their overall EROI is insufficient to both maintain the current standard of life, and make them. The other issue is mobility, oil has the best volume/energy content ratio of all energy sources we know (except uranium). Renewables can only make electricity and you need about 10x the same battery volume (and weight) to move a vehicle, compared to oil. Unfourtunately for all of us, fosil fuels are here to stay for a while, until they run out. Or until the economy crashes. Or until climate change kicks in real bad.

danmaz74• 10 years ago

Renewables can only make electricity

If renewable energy becomes abundant/cheap enough, you can convert electricity into hydrogen or other high energy density chemicals.

icebraining• 10 years ago

Renewables depend on oil. You can't make renewables with renewables energy, because their overall EROI is insufficient to both maintain the current standard of life, and make them.

Currently, sure, but in the long term? How so?

The other issue is mobility, oil has the best volume/energy content ratio of all energy sources we know (except uranium).

"Sustainable fuel for the transportation sector": https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1821126/

philipkglass• 10 years ago

I'd say say that transport electrification is going to be more directly responsible for reducing oil demand. It's very important to the climate that electric vehicles get charged with low-emissions sources, but the petrostates are equally in trouble whether people are driving EVs charged with wind power or coal power.

It's hard to tell when electrification is going to kick into high gear. Projections for numbers of EVs sold ten years from now vary widely. I'll say that if oil did go back over $100/barrel that would provide an incredible tail wind for PHEV and BEV adoption in the US. Cars last 20+ years but buyers are oddly sensitive to recent pump prices.

sokoloff• 10 years ago

I don't expect my 2015 LEAF to be on the road in 2035. The current generation of battery electrics do not have 20 year battery packs, and I don't know that it will be worthwhile to re-battery the car twice to get to the 20 year mark with good range and the way the battery tech is improving. (I'd probably rather buy a new BEV 8 years from now, even though I'm normally the guy who buys a 6-10 year old car and drives it 6-10 years.)

I do agree that people all but throwing away large SUVs when gas hit the mid $4 range was mystifying to me. I work with and hang around generally smart people and I saw people trading in 2-3 year old cars for brand-new fuel efficient cars.

eatmyshorts• 10 years ago

There are a couple of dynamics at play. In the long term (10+ year range), I believe you are correct, that renewables will begin to have a significant effect on oil prices as natural gas power plants are shut down and replaced with solar and wind (oil is used primarily for transportation, not energy production; natural gas is replacing coal as the primary fossil fuel used for generating electricity as natural gas prices remain lower than coal for extended periods). For the short term, though, I think fracking has a bigger impact on prices.

Traditionally, oil prices had a long-term boom-bust cycle that lasted about 30 years...15 years of boom followed by 15 years of bust. This has been going on since the dawn of the oil industry, and is largely systemic: business cycles tend to be around 15 years, as in it takes about 10-15 years to go from discovery to production (gather data, drill exploration wells, drill production wells and production infrastructure). I'm not sure of any other industry with so long of a systemic business cycle.

Now, however, fracking has changed the game. So far, since "tight gas" is so new, we're able to use fracking in oil fields that have already been developed, to extract gas and oil from areas we knew it was at before, but thought it was too hard to extract (the term for where fracking is used--"tight" refers to the permeability of the rock...traditional oil comes from sources measured in the 10s of darcies...fracking is often employed in areas with <0.001 darcies, like shale rock). This means that production facilities, like pipelines and whatnot, are already in place. Furthermore, the discovery process is shortened, as these are already fields with known reserves, just in areas that we could not extract from efficiently before. Now, with fracking, we can. This means the investment cycle has been reduced from 10-15 years to 1-2 years.

With the old business cycle, new technology typically would be invented any time prices got high enough--generally following a business cycle where all of the "easy" oil has been found and extracted. New technology allows new fields to be produced "easily", causing a surplus of oil and a crash in oil prices. This continues until all the "easy" oil has been found, and the cycle continues. This cycle goes all the way back to the 1860s (whale blubber -> oil wells -> oil wells with pumps -> basic geology (drilling under hills) -> 2D seismic -> 3D seismic -> deep-sea/sub-salt -> fracking; pretty much follows a 20-30 year cycle). The concept of "peak oil" isn't new--people have been worried about peak oil since the mid-1800s.

Analysts aren't sure if the new reality we're in has fundamentally changed the markets. I say it hasn't--the cycles will return after all of this new "easy" oil, in the form of shale gas/tight gas, has been exploited. But we're only somewhere about 2-5 years into a 15-year bust cycle, if you ask me. I would expect prices to hover in the $40-$50 range for the remainder of this bust cycle, with a few rare exceptions (wars, disasters, etc). After that, I think you'll see prices return to the $100+ level (in 2016 terms--since the 1860s, prices have cycled pretty consistently between $10 and $100 for a barrel of oil, in 2016 terms) until the next technological revolution in oil exploration and production occurs. But it does mean less volatility in prices as business cycles shorten--at least for the remainder of this bust cycle. Maybe peak oil will become a reality right as demand for oil drops, making the next round of technology advances unnecessary.

spsgtn• 10 years ago

Energy markets are a bit complicated. Wind energy has a localized value that depends on local supply and demand supported by the associated transmission line. In any case, the price of any energy resource is based on what technology is "on the margin", i.e. what is the cheapest form of energy available at a specific time to satisfy demand. It turns out that US natural gas prices are driving all the renewable energy economics due to their current historically low price. Arguably, oil prices have less of an influence on renewables than the cost of natural gas.

nicholas73• 10 years ago

I explained the game theory behind the oil markets, and predicted OPEC would reach a deal, in this article from March:

http://seekingalpha.com/article/3960625-prisoners-dilemma-oi...

Oil soars 6 percent as OPEC reaches deal to limit output in November

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