Here’s How Much the Oil Price Fall Is Hurting OPEC
This article comes from my favorite, and the most level headed liberal I read, Walter Russell Mead. Still it is crazy.
"The collapse in global oil prices is hurting producers around the world, but no one has had it worse than the petrostates of OPEC, whose national budgets rely so heavily on revenues generated by crude production. The numbers back this up, too: OPEC’s net oil export revenues fell $349 billion in 2015 to its lowest level in more than a decade. The EIA reports:
Members of the Organization of the Petroleum Exporting Countries (OPEC) earned $404 billion in net oil export revenue in 2015, according to U.S. Energy Information Administration (EIA) estimates. These earnings represent a 46% decline from $753 billion earned in 2014. Although these net export earnings include Iran’s revenues, the net export revenue is not adjusted for possible price discounts that Iran may have offered its customers between late 2011 and January 2016, when nuclear-related sanctions targeting Iran’s oil sales were in place. […]
OPEC members’ 2015 net oil export revenue was at the lowest level since 2004, with significant implications for the fiscal condition of member countries that rely heavily on oil sales to fund social programs and to import other goods and services. In inflation-adjusted terms, OPEC net oil export revenue totaled $606 per person in 2015, down 83% from the 1980 level of $3,500 per person."
Ok, oil prices have collapsed, and the petrostates have been hard hit, as their revenues have been cut in about half. Boo hoo. But why do we care? They made huge windfalls of revenues for years when prices were absurdly high, now they are reasonably lower, too bad. This is how the commodities market works. They are not limited to the commodities market, they have the ability to take all that excess revenue, and build, a real thriving economy. But instead they built welfare states to keep a large number of ne'er do well pikers from having to actually leave the house, and work for a living. Again, fine, but this has consequences.
"During all of this, OPEC has done nothing to cut into the oversupply that precipitated the price collapse, choosing instead to endure the pain in lost revenue while fighting for a share of the increasingly crowded market."
This just misunderstands what is happening in the Islamic world. There is a huge existential battle going on between the Shia, and the Sunni/Wahhabi/Salafi.This is mostly a proxy battle between Iran, and the House of Saud fought in other countries, mostly in Africa, but also in the peninsula/Yemen. Both of these nations need money to fight this battle, and for both, oil provides the basic revenue. Iran has an actual economy, and with the release of sanctions has an increase in oil moneys, while Saud only has oil, as it has no real economy. Saud is threatening to build an economy, but this is an empty threat, since no Saudis will actually deign to work, or have the educational qualifications to work, they are madrassa trained, not educated. So, unless the job is rocking back and forth mumbling koranic versus, no jobs. Here is the wacky thing, the kingdom has laws requiring firms hire Saudis, and the businesses do, but these people are terrible workers, and these hirings drag down these businesses making them uncompetitive. The only workable model is one where Saudi builds an economy completely with foreign workers, which is sufficiently profitable to allow the Saudis to say home and not work. This is crazy, but ultimately true.
These states are not going to cut production even if they agreed to do so, instead they will cheat, they need the money to win the battle.
"But whether or not producers agree to cap their output in Algeria next month may be beside the point. A global glut got the market to where it is today, and merely stopping further increases in production won’t cut away at the underlying problem: supply is outstripping demand. In the meantime, petrostates around the world—OPEC members and non-members alike—are going to continue to lose hundreds of billions of dollars in lost budget revenue."
Face palm! This is a good thing, but it is stated like it is bad. These are mostly ugly human rights abusing tyrannies, so exactly why is this bad? We exist in a neo-Cold War mentality where we seem to believe that stability is preferable to all else. It is not. There is no road to republic, and that is what these nations need, outside of overthrowing the tyrannies, and working towards republic. This will likely be messy, but waiting only means it happens later, not that it will be easier, more likely to occur, or occur without pain.
Fortunately, the US shale producers stand ready for oil prices to bump up where they will increase production, capture the higher profits, and ensure the price does not rise high enough to allow these hell hole tyrannies to regain their footing.
Most of the Middle East oil tyrannies have small fiscal reserves to weather a low oil price storm.
One chart that shows which countries could run out of money in 5 years
Notice only the first three on this chart have the ability to weather the low oil prices for any length of time.
In the end, the problem is not just a supply problem but both a supply, and demand problem. And with the world's economy in slow motion there is little reason to believe the demand side of the equation will right itself soon. In addition, the current state of the industrial "greenweenies" means that there will continue to be pressure to move passenger vehicles to electric, and non-liquid fuels. This means that fuels like natural gas in America, which is both less carbon "polluting" and cheap will likely become more common for fleet vehicles. Also, the self drive car revolution is knocking, and this revolution looks to be moving the US vehicle fleet to a much more fuel efficient mode. After all, if a computer is driving no one cares much if the vehicle has a 400 cu.in. hemi under the hood. An anemic 3 cylinder fuel sipper will do just fine, as long as the trip cost is right.
Unless the oil price issue resolves in the favor of the oil tyrannies soon, and well before 2021, it would appear that the demand side of the equation will begin to erode at an increasing rate.
Also, the Uberization of self drive cars is likely the only thing which can save the always a bridesmaid, never a bride - electric car. These could be used in cities for low pollution operation (yes, I realize that if you go back to the source they pollute as much as or more than liquid fuel vehicle), easy recharging without human assistance, and parking in robotic garage. The price would be higher but cities are both full of crazy people, wealthy people, and are more likely to require fleets have significant percentages of electric vehicles.
Then there is the entire shift in commuting likely to happen with new share ride vehicles which are likely to replace transit outside of a few very large cities like New York. You schedule a commute ride for the year, for a set amount per ride, door to door, and then if necessary reconfirm/change the time as needed on your smart phone. A computer algorithm constantly calculates the rides, and makes sure the system runs smoothly. You may have other passengers, but the trip time is guaranteed within certain parameters, costs are low, and it is very convenient.
All of these things will lower our costs, and reduce transportation fuel use.
Same kind of thing will happen for long haul trucking, and it seems likely that these new truck will be smaller designed to operate at optimal fuel efficiency with a slightly smaller, standardized load. We won't need huge trucks since there will be no drivers. Today trucking is optimized for human drive vehicles, and attempts to haul as much as possible because human drivers are expensive. It will pay to optimize for fuel, aerodynamics, and weight once there is no driver. This will reduce fuel use.
I do not see the low price of oil rising in the near term, or the long term. While geopolitics, wars, refinery fires all could alter the result of this analysis, those are unpredictable events. So far they have caused very limited changes in oil price. Today, the oil price changes are driven by a large group of oil bulls who seem to believe that the price of oil must soon ramp back up to the $100 bbl range. So, they bet on even the most whimsical promise of higher price.
There is apparently no cure for irrational belief.
I have no way to understand why all of the oil articles I read today seem to believe it would be better if oil were more expensive. It would not. It would only enrich the oil tyrannies, at the expense of the average person.