The World's Cheapest Oil Is Already Close to $20 | Hacker News Reader

The World's Cheapest Oil Is Already Close to $20

bloomberg.com

50 pointse15ctr0n60 comments

Call me crazy, but I think there's something else going on here. What if Saudi Arabia is having a fire sale?

There's a ton of science that says that we can only pull up half of our current oil reserves to cap climate change at 3 degrees (2 degrees isn't even feasible)[1][2]. That combined with the political and economic tides starting to shift in favor of renewables/nuclear and electric vehicles[3], peak carbon is starting to look like it will happen around 2020 (only 5 years away)[4].

So, if the world will only pull up half of what it already has in reserves, it's a great strategy for Saudi to drive down price and try to make sure most of that half is from their pool. I'm in renewables, and there's a common question we always ask: will oil die at a high price or a low price? It looks like it's going to be a low price.

[1]: http://www.carbontracker.org/report/wasted-capital-and-stran...

[2]: https://en.wikipedia.org/wiki/Carbon_bubble

[3]: http://www.npr.org/sections/thetwo-way/2015/12/12/459464621/...

[4]: https://www.iea.org/newsroomandevents/pressreleases/2015/jun...

This does not match any of the Saudi press statements on the oil situation. The Saudi position and their motivations have been consistent for months with thousands of articles documenting this. In summary, publicly, they are not reducing oil output because in the previous oil crisis, they cut production and suffered heavily vs those who did not. The private reason they are still pumping is that they intend to bankrupt/destroy the US Shale industry. They've done an excellent job at this. These articles with inside information never mention "climate change" or "renewables" as the reason for the situation.

Unless you can show sources showing the price change is because of climate change, this just a delusional conspiracy theory.

Why would you assume a market actor is being straightforward about their strategy, especially if others being aware of this strategy would put them at a disadvantage? Deception is a competitive strategy!

I never made this assumption.

Hence the "call me crazy" :)

However, I feel like all the chatter about Saudi behavior is short term (<5 years). Where are the articles discussing the 10-30 year outlook? It just seems like the oil industry is blissfully ignoring the whole "stranded assets" problem and focusing on short term strategy.

There are few articles on the 10-30 year outlook because it's been discussed so many times (see peak oil). No one wants to read old news. Anyway, one of the biggest flaws in your theory is how humanity will ween off oil, given the growth of renewables/electric cars. Oil is a finite resource. If there is a non-zero need for it, people will consume it and dip into this finite pool. As the pool depletes, prices will increase. So currently, what is oil used for, and do we expect to use oil in the future?

There are numerous critical uses for oil. Oil derivatives are used to fertilize most of the food on the planet. Oil derivatives used to make almost all clothes sold today. Oil derivatives are used to make tires, shampoo, paint, soap, toothpaste, rubber, glasses, and 10s of thousands of other products. Many industrial solvents, essential for 20th century goods, are oil derivatives https://en.wikipedia.org/wiki/Petrochemical . Here is a partial list of products made from petroleum http://www.ranken-energy.com/products%20from%20petroleum.htm . There are just so many uses for oil. Oil is critical for modern American life. Many experts expect oil based products to be used by humanity for the next thousand years.

Unless there is a drastic change in how oil is produced, petroleum will be consumed until all cost-effective reserves are depleted. The assumption the world "will only pull up half of what it already has in reserves"(!!) is naive.

Aren't those other uses locking up the carbon though?

In the end, these products end up thrown in a landfill or dumped in the environment. Over time, bacteria decompose them and convert some back to carbon dioxide.

It's better to keep the oil in the ground rather than temporarily store it in some petroleum derivative.

Of course, oil is used for many other things, but a whopping 85% of oil is burned[1]. What happens when that 85% decreases? Grow plastic and fertilizer production by 6x to make up for it? As far as growth rate of alternatives, it's a classic underestimation of how exponential growth and disruptive technologies work. New stuff always gets here faster than the incumbents expect.

Have any links to those 10-30 year outlooks from the past few years?

[1]: http://www.eia.gov/energyexplained/index.cfm?page=oil_home

You should already have those links, because in your grandparent post you're arguing Saudi Arabia's motivations are based on climate change(?) and how we are only going to use "half of our current oil reserves"(?). Those are 10-30 year assumptions, which you can easily source online. You never explain how these are in touch with reality. Until you can justify both you come off as a conspiracy theorist.

> You should already have those links, because in your grandparent post you're arguing...

Hmm, can't seem to find any. My opinions are mostly speculation, and I'm happy to be proven wrong as long as I learn something. Care to help me out with some links so I can read and learn?

If Saudi Arabia keeps up their "fire sale" there is little chance we will reach peak carbon in 2020.

I can't think of why else they would drive down price? (I mean this in the non-rhetorical sense... I'm genuinely curious and haven't read a convincing explanation)

They need the money. Why would it be more complicated than that?

Do they? Please provide source...

http://m.csmonitor.com/World/Global-News/2015/1023/Saudi-Ara...

What source would you want? Everybody needs money even if they have enough. Please stop this "provide source" movement for obvious things.

Expensive war (or military operations whatever you want to call it) in Yemen, plus falling oil price means KSA have issued bonds for the first time in a long time :

http://www.wsj.com/articles/saudi-arabia-issues-bonds-worth-...

So yes, they somehow need some cash.

But they get the money by having a much higher oil price. Saudi needs oil to be $106 a barrel to balance it's budget, up from in the $50s in 2010. You can't pump your way to profit, that's why OPEC operated as a cartel, though recently that seems to have gone out the window.

Saudi pumping the amount it does drives down the price of oil. They have massive amounts of money so can last for a few years running the kind of deficits are now, though not forever. The question is why they are keeping the price artificially low.

> to cap climate change at 3 degrees (2 degrees isn't even feasible)[1][2]

Your [1] just means that to get under 2C we'll leave much of the currently known reserves unburned, which is feasible.

Mostly it is KSA vs Iran/Russia. To some extent, this also kills shale and other alternative oil from North America, but Iran is their main political/military/religious rival in the region, and cheap oil ruins them -- eliminating competition from the US and Canada is just a commercial thing.

It's not really eliminating competition though. The wells are already tapped in the US. They'll just shut them down until it's profitable again, and then start them back up. They've already made the initial investment, now they just have to wait it out.

Missing the lead time aspect.

There's no point in capping tight / shale oil, the production decline half life is only a couple months. The last wells drilled before the price drop are rapidly declining to zilch now. Its a treadmill and you must keep drilling. If you want production in say two years, you start planning the new wells now. We stopped awhile ago. In a very long term sense you're correct, but in a short term sense shale is dead-ish till maybe 2018 even if the Saudis hike the price today. If you're looking for scams and propaganda, in shale they all live in cornucopian fantasy projections of decline rates vs actual historical decline rates, and never the two shall meet. Sure if the decline half life of a shale well was 40 years instead of 4 months, America would be energy independent, yeah. Generally for reports and analysis of shale, the further from geological reports the more comedic and disconnected from reality.

Oil sands aka Canada get killed off a different way. Its very expensive and the extensive financial structuring required to buy all the loot to produce is crazy. The Saudis basically make an example by saying as long as they're the swing producer, they decide when and how badly Canadian oil sands will go bankrupt. Who will run out of cash first, you as a sands producer, or the Saudi Royal Family? There's some talk oil sands have never made a profit and never will, when everythings accounted for, especially predictable Saudi price manipulation. And talk that the EROEI ratio is less than one. Most of it is just talk. But the facts based on that talk are correct that its very marginal, right on the border of being a real energy source like traditional oil or merely a jobs program / bubble scheme like ethanol was. Anyway the leadtime point is its hard to raise money to resurrect a bankrupt financial ecosystem. There are two strategies. One is wait for the Saudis to collapse and no longer be swing producers while hoping the world economy holds together till other sources come on line, the other other is some kind of nationalization of the sands / job program where you can "in your face" to the Saudis that Canada is going to produce half a million barrels a day no matter what the price is manipulated to. Both are kind of unappealing in their own way.

Last time oil dropped so abruptly the Soviet Union fell apart. I wonder what will happen this time.

Maybe the Middle East falls apart.

Venezuela is the canary this time.

Russia is still looking very vulnerable in that respect. Rosneft's heavy debt burden combined with high inflation in Russia (probably 15% for 2015) is hammering their ability to invest in expanding capacity. Reduced investment also means costs of production are on an upward trend. Then add in the Saudi's moves to increase market share in Northern Europe and it's not looking too good.

Do you think Russia is going to break before Venezuela? I would not ever want to bet against how stoic the Russians can be.

The socialst government of Venezuela already 'broke' and was voted out in favor of conservatives, due to various reasons, one of them that the socialists could no longer pay for everything with petro dollars.

What more would you assume "break" means for Venezuela?

Russia's government is still in place.

We will see what all the voting amounts too in practice in Venezuela. Even if it does mean a change in government and policy there is not much they can do given their financial situation.

I don't know what Russia 'Breaking' looks like. Is it Putin getting replaced? Is it a Russian Maidan? A Russian default? Things are going to get worse, that's for sure, but talk about economies 'collapsing' or being 'destroyed' are always superlative.

I have no idea how it can be sustainable, the low prices have frozen all investment on new fields/fracking/exploration, and when we will have a production slump in a few years, it will be followed by a sharp rise, that will be really painful.

That is the Saudi plan - knock out the frackers and renewables then jack up the price. Let's hope they don't succeed. They are racking up a lot of debt right now trying to keep a lid on their population problems so they might find their ability to borrow breaks first.

Completely agree, to be honest their current strategy is probably the right way to go but that's just because the alternative strategies are even worse. The problem with knocking out fracking is that the frackers can ramp production back up again fairly quickly. Also because the frackers aren't a state run operation and aren't a systemic risk to the Us economy, if the current fracking companies go bust the damage is contained to those companies shareholders. In fact that's largely already happened. Other companies and investors will just move in, take over their operations at a market adjusted discount, and be ready to start producing again when the conditions are right. This will likely put a much lower long term cap on the oil price than we've seen in the past.

The history of the airline industry would suggest you are right. A long term low oil price is not very compatible with intent of the Paris accord though.

According to a friend who works in politics & energy, the general consensus is that almost all oil will eventually be used. The real battle is over coal, and wether the world will manage to leave some of it in the ground.

Oils ain't oils these days. Fracking and oil sands have broken down the division between what is oil and what is not. God help us if we get close to burning even half the coal.

Sounds like fracking companies are very agile. And assuming technology continue to improves fracking will continue to get cheaper. Which means we may never see oil in their 50 - 60s again.

I wonder if it would also make sense to build a massive Oil Reserve now and store as much as possible at the low price.

massive Oil Reserve now and store as much as possible

It's called "the ground".

Seriously, the virtues of having a policy of "fracking, but not yet" are really under-discussed. Oil is not a crop that will rot in the field if left unpicked.

"Oil is not a crop that will rot in the field if left unpicked."

Kind of. You can almost draw contour lines of "your economy must be this healthy at this time to pull this much oil out of the ground at this contour line five years later". That can turn into an optimism vs pessimism thing very quickly. Also note that we're not talking about attitudes toward the american economy in that most of our resources have been drained and burned... After you burn the easy oil you go after the less stable suppliers. Will the Saudi Royal Family still be in power in a decade, for example? Is Iraq a stable oil supplier and if so how much longer? And so on.

Oil drilling expertise is globally mobile. If the oil is there and economically extractable, companies will supply the capital and equipment to get it out.

The interesting thing about the US is that it has run out of cheap oil, but was becoming self-sufficient in more expensive fracked oil (plus Canadian tar sands).

The middle east has a colossal delayed-Malthus problem in that some countries have populations that are entirely economically dependent on oil+gas revenue. Yemen would be fine if it had enough oil; as it is, it's running out of water and the civil war will continue until enough people are dead or fled that it's sustainable again.

I wouldn't bet on Saudi Arabia avoiding a civil war in the next 20 years.

Why would you want to frack it ( Let it stays in the ground and frack when you like ), when the option of buying from others is much cheaper?

And to prevent fracking ever continues in large volume again, the only way is oil price becomes unsustainable for frackers.

Which is why I said Oil may never reach their 50s again.

Isn't it another thing they are trying to sell as much as they possibly can? Let's assume in 2030 we could cut our oil demand by half, then if they have more inventory then wouldn't it be the best thing to sell as fast as possible?

Frackers are limited in resources because every drill and money they spend on frackers gets them very little oil compared to Saudi who has lots more to go for.

The oil consumption has been steadily increasing for years. For transportation, there is no alternative. Even if Tesla is making headline every day, this is really a marginal contribution that is really meaningless (at least now) in the grand scheme of things. In the best case, it could plateau in 2030 but it won't be cut by half. (Unless someone invent a compact fusion energy device next year)

An alternative for transportation is actually starting to happen: self-driving vehicles. Recharging times don't matter when you have a fleet of self-driving electric Uber cars that can phase vehicles in and out of service automatically[1]. Plus, with fleets, you replace normal oil-consuming vehicles at a 2-to-1 rate. It's looking like peak oil will happen sooner than you think.

[1]: http://www.govtech.com/fs/perspectives/Ubers-Plan-for-Self-D...

Could just be a trend, but walkable neighborhoods are on the rise in the US. Their residents use less oil.

There are about 1 billion vehicles in the world, we are producing roughly 50 millions a year. I am skeptical than, in as soon as 15 years, self driving fleet will have that a massive impact. In some area of the world, like SF and some major city, sure, but as a global trend I am not so optimistic.

At some point it will run out.

> Let's hope they don't succeed.

I'm no fan of Saudis — but if they don't succeed, we'll have a country with a lot of young males, who are used to social welfare that can't be continued, right in the center of Middle East, with stockpiles of different weapons.

That's not a situation I would really "hope" for.

Well I don't think any problem like this is made better by leaving it until tomorrow. The Saudi's have to join the 21st century at some point and the sooner the better.

The alternative is worse. The US and China produce more CO2, but SA is certainly an enabler of vast environmental damage. They also fund fundamentalist Wahabiism throughout the world, which is not only destructive to the environment but to secular governments and people throughout the globe.

Given the current negatives of the Kingdom i have come to believe that destabilizing it over the long term is probably better for humanity, even if there is some tangential regional (or even local) effects.

ISIS complicates this analysis.

I feel for the average Saudi person, but as a government I have as much desire to see it continue as I do North Korea.

I'm sceptical that this is Saudi's plan. Is the investment really worth it? fracking is highly automated and the cost is going down. Fracking is strategic for many governments, so subsidy is very likely.

I don't remember exact numbers, but cost of drilling in Saudi Arabia is 2$, cost in Syberia is 30$.

I don't think the cost is quite that low in Saudi Arabia, but they are definantly the lowest cost producer. Their only hope is to drive out the higher cost producers and then increase prices - it is monopoly 101.

We can't afford to have that production rise (or current level of oil production). We will have to leave most oil in the ground to mitigate climate change.

It's nothing more than a market share grab. They're simply bullying competitors out of the market. They have deep pockets and it's an ideal time to strike. So they take a calculated loss for the next 2 even 3 years and they gain more market share.... the costs will rise again and so will their payoff.

What does ISIS charge? I can't imagine they're in a position to charge much. Then again, I know nothing.

I also know nothing, but think that avoiding taxes might let you sell oil cheap and still make money, as would simply seizing the means of production rather than investing money in them that needs to be recouped.

There is a Planet Money podcast about the financials of ISIS. They did talk about how the oil is exported, but I don't remember if it included a specific price point.

http://www.npr.org/sections/money/2015/12/04/458524627/episo...

They never mentioned a pr. barrel price, but they did say the experts where surprised at how little money they where making given how much oil they where selling.

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