mfioretti: oil price fall*

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  1. For decades, the country’s leadership pursued a consistent political-economic business plan: sell as much oil as possible and use the proceeds to enrich the numerous princes and princesses of the realm; provide lavish social benefits to the rest of the population, thereby averting popular unrest of the “Arab Spring” variety; finance the ultra-conservative Wahhabi clergy so as to ensure its loyalty to the regime; finance like-minded states in the region; and put aside money for those rainy-day periods of low oil prices.

    Saudi leaders have recently come to recognize that this plan is no longer sustainable. In 2016, the Saudi budget has, for the first time in recent memory, moved into deficit territory and the monarchy has had to cut back on both its usual subsidies to and social programs for its people. Unlike the Venezuelans or the Nigerians, the Saudi royals socked away enough money in the country’s sovereign wealth fund to cover deficit spending for at least a couple of years. It is now, however, burning through those funds at a prodigious rate, in part to finance a brutal and futile war in Yemen. At some point, it will have to sharply curtail government spending. Given the youthfulness of the Saudi population -- 70% of its citizens are under 30 -- and its long dependence on government handouts, such moves could, in the view of many analysts, lead to widespread civil unrest.

    Historically, Saudi leaders have been slow to initiate change. But recently, the royal family has defied expectations, taking radical steps to prepare the country for a transition to what’s being termed a post-petroleum economy.
    http://www.tomdispatch.com/post/17614...chael_klare%2C_the_oil_world_in_chaos
    Voting 0
  2. Debt is a key factor in creating an economy that operates using energy.

    A generally overlooked problem of our current system is the fact that we do not receive the benefit of energy products until well after they are used. This is especially the case for energy used to make capital investments, such as buildings, roads, machines, and vehicles. Even education and health care represent energy investments that have benefits long after the investment is made.

    The reason debt (and close substitutes) are needed is because it is necessary to bring forward hoped-for future benefits of energy products to the current period if workers are to be paid. In addition, the use of debt makes it possible to pay for consumer products such as automobiles and houses over a period of years. It also allows factories and other capital goods to be financed over the period they provide their benefits. (See my post Debt: The Key Factor Connecting Energy and the Economy.)

    When debt is used to move forward hoped-for future benefits to the present, oil prices can be higher, as can be the prices of other commodities. In fact, the price of assets in general can be higher. With the higher price of oil, it is possible for businesses to use the hoped-for future benefits of oil to pay current workers. This system works, as long as the price set by this system doesn’t exceed the actual benefit to the economy of the added energy.

    The amount of benefits that oil products provide to the economy is determined by their physical characteristics–for example, how far oil can make a truck move. These benefits can increase a bit over time, with rising efficiency, but in general, physics sets an upper bound to this increase. Thus, the value of oil and other energy products cannot rise without limit.

    Research involving Energy Returned on Energy Investment (EROEI) ratios for fossil fuels is a frequently used approach for evaluating prospective energy substitutes, such as wind turbines and solar panels. Unfortunately, this ratio only tells part of the story. The real problem is declining return on human labor for the system as a whole–that is, falling inflation adjusted wages of non-elite workers. This could also be described as falling EROEI–falling return on human labor. Declining human labor EROEI represents the same problem that fish swimming upstream have, when pursuit of food starts requiring so much energy that further upstream trips are no longer worthwhile.

    If our problem is a shortage of fossil fuels, fossil fuel EROEI analysis is ideal for determining how to best leverage our small remaining fossil fuel supply. For each type of fossil fuel evaluated, the fossil fuel EROEI calculation determines the amount of energy output from a given quantity of fossil fuel inputs. If a decision is made to focus primarily on the energy products with the highest EROEI ratios, then our existing fossil fuel supply can be used as sparingly as possible.

    If our problem isn’t really a shortage of fossil fuels, EROEI is much less helpful. In fact, the EROEI calculation strips out the timing over which the energy return is made, even though this may vary greatly. The delay (and thus needed amount of debt) is likely to be greatest for those energy products where large front-end capital expenditures are r
    https://ourfiniteworld.com/2016/05/12...s-story-what-other-researchers-missed
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  3. Sembra chiaro (ma non voglio influenzare nessuno) che votare Sì andrebbe a vantaggio dell’Italia. Ma restano due temi che comunque, nel caso si voti Sì, è doveroso menzionare. Il primo è squisitamente economico privatistico. Votando Si possono aver luogo due eventi. Il primo è molto semplice: se obblighi le aziende a estrarre più velocemente i loro piani economici saranno sballati. Seconda cosa, da non dimenticare: in pratica scatterà l’obbligo di smantellare le piattaforme non più operative (che a leggere i dati del ministero dello Sviluppo economico sono un discreto numero). Queste piattaforme una volta smantellate non hanno valore commerciale, sono semplicemente obsolete, dei giganteschi rottami. Tutte queste spese saranno ascritte nei bilanci delle società energetiche che si ritroveranno, con la congiuntura del petrolio a prezzi bassi, ad ingoiare un bel boccone amaro. Questo scenario spingerà le aziende energetiche fossili a investire di più in Italia? Non credo.

    L’altra questione è politica. Ho come la percezione che l’attuale governo abbia tentato il colpo gobbo. Con la legge di stabilità si è deciso che era lo Stato a imporre dove come quando (e perché) aprire nuovi siti estrattivi distribuendo licenze. Le royalty in sé invece verranno convogliate, salvo pochi spiccioli, nelle casse centrali, lasciando poco o nulla alle regioni. Non è un caso che questo referendum sia stato promosso dalle Regioni stesse. I governatori regionali (per lo più di area PD) si sono ribellati al loro stesso partito? No, semplicemente si parla di soldi.

    Se io governatore regionale devo farmi rieleggere e mi presento al mio elettore con un piano industriale estrattivo “imposto”, da cui però non porto a casa soldi (non molti almeno) per compensare il “chiamiamolo” fastidio di avere siti complessi sul mio territorio, cosa ne guadagno? Gli elettori, oltre che darmi dell’incapace, non mi voteranno. Una soluzione differente e forse efficace sarebbe stata se si fosse optato per una minor tassazione (che comunque incide) e un più alto tasso di royalty che potevano essere retrocesse alle regioni (auspicando che tali soldi fossero usati a beneficio della collettività locale, si intende). Ma cosi non accade.

    Quindi l’attuale referendum (detto per inciso: è cosa alquanto inusitata che un premier suggerisca di non esercitare il democratico diritto al voto, il presidente della Corte costituzionale ha invitato a farlo, invece) avrà due esiti: vince il Sì (sempre che si raggiunga il quorum) e ci saranno più soldi per lo Stato (magari se si alzassero le royalty non sarebbe male). In compenso si arrabbieranno le compagnie energetiche. Se non si raggiunge il quorum o vince il No il premier si inimicherà comunque una parte del suo elettorato di sinistra (avverso al “padrone capitalista” facilmente identificabile nelle multinazionali energetiche).
    http://www.econopoly.ilsole24ore.com/...lle-si-trivelle-no-facciamo-due-conti
    Voting 0
  4. The system acts as if whenever one pump dispenses the energy products we want, another pump disperses other products we don’t want. Let’s look at three of the big unwanted “co-products.”

    1. Rising debt is an issue because fossil fuels give us things that would never have been possible, in the absence of fossil fuels. For example, thanks to fossil fuels, farmers can have such things as metal plows instead of wooden ones and barbed wire to separate their property from the property of others. Fossil fuels provide many more advanced capabilities as well, including tractors, fertilizer, pesticides, GPS systems to guide tractors, trucks to take food to market, modern roads, and refrigeration.

    The benefits of fossil fuels are immense, but can only be experienced once fossil fuels are in use. Because of this, we have adapted our debt system to be a much greater part of the economy than it ever needed to be, prior to the use of fossil fuels. As the cost of fossil fuel extraction rises, ever more debt is required to place these fossil fuels in use. The Bank for International Settlements tells us that worldwide, between 2006 and 2014, the amount of oil and gas company bonds outstanding increased by an average of 15% per year, while syndicated bank loans to oil and gas companies increased by an average of 13% per year. Taken together, about $3 trillion of these types of loans to the oil and gas companies were outstanding at the end of 2014.

    As the cost of fossil fuels rises, the cost of everything made using fossil fuels tends to rise as well.

    3. A more complex economy is a less obvious co-product of the increasing use of fossil fuels. In a very simple economy, there is little need for big government and big business. If there are businesses, they can be run by a small number of individuals, with little investment in capital goods. A king, together with a handful of appointees, can operate the government if it does not provide much in the way of services such as paved roads, armies, and schools. International trade is not a huge necessity because workers can provide nearly all necessary goods and services with local materials.

    The use of increasing amounts of fossil fuels changes the situation materially. Fossil fuels are what allow us to have metals in quantity–without fossil fuels, we need to cut down forests, use the trees to make charcoal, and use the charcoal to make small quantities of metals.

    Once fossil fuels are available in quantity, they allow the economy to make modern capital goods, such as machines, oil drilling equipment, hydraulic dump trucks, farming equipment, and airplanes. Businesses need to be much larger to produce and own such equipment. International trade becomes much more important, because a much broader array of materials is needed to make and operate these devices. Education becomes ever more important, as devices become increasingly complex. Governments become larger, to deal with the additional services they now need to provide.

    f an increasing share of the output of the economy is funneled into management pay, expenditures for capital goods, and other expenditures associated with an increasingly complex economy (including higher taxes, and more dividend and interest payments), less of the output of the economy is available for “ordinary” laborers–including those without advanced training or supervisory responsibilities.

    As a result, pay for these workers is likely to fall relative to the rising cost of living. Some would-be workers may drop out of the labor force, because the benefits of working are too low compared to other costs, such as childcare and transportation costs. Ultimately, the low wages of these workers can be expected to start causing problems for the economic system as a whole, because these workers can no longer afford the output of the system. These workers reduce their purchases of houses and cars, both of which are produced using fossil fuels and other commodities.

    Ultimately, the prices of commodities fall below their cost of production. This happens because there are so many of these ordinary laborers, and the lack of good wages for these workers tends to slow the “demand” side of the economic growth loop. This is the problem that we are now experiencing.


    The Two Pumps Are Really Energy and Entropy

    Unlike the markings on the pump (gasoline and ethanol), the two pumps of our system are energy consumption and entropy. When we think we are getting energy consumption, we really get various forms of entropy as well.

    The first pump, rising energy consumption, seems to be what makes the world economy grow.

    The second pump in Figure 3 is Entropy Production. Entropy is a measure of the disorder associated with the extraction and consumption of fossil fuels and other energy products. Entropy can be thought of as a loss of information. Once energy products are burned, we have a portion of GDP in the place of the energy products that have been consumed. This is why there is a high correlation between energy consumption and GDP. As energy products are burned, we also have an increasing pile of debt, increasing pollution (that our sinks become less and less able to handle), and increasing wealth disparity.
    https://ourfiniteworld.com/2016/03/17...m-is-reaching-limits-in-a-strange-way
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  5. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that's become a thing of the past.

    One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008.
    Gushing IOUs

    Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9 percent higher than a 25-year low hit on Jan. 20.

    Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years' worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

    It's unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5 percent of the total assets of all the world's publicly traded banks. That doesn't seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1 percent of listed banks' assets at the end of 2007.
    http://www.bloomberg.com/gadfly/artic...ve-built-a-3-6-trillion-debt-mountain
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  6. Within a few years the current low prices may be just a memory, as society struggles with escalating prices that do not readily produce a resulting demand response. If David Hughes is correct in his assessment that the shale oil plays will peak quickly and rapidly decline in production due to fast depletion rates and limited “sweet spots” v » , there may be actual declines in production well into a period of rising prices. The result may be an economic recession that reduces demand just as the new supply start to come on stream, producing another price overshoot to the downside. The impact of such price volatility, repeated oil business failures (as well as individual career failures), and the resulting investment losses and bad load write-offs, will reduce even more the readiness to finance new oil investments. If the recession had a significant impact upon the financial system (e.g. bank failures), the ability to finance new oil investments may be even more constrained. I will cover the possibility of an oil industry/financial system positive feedback loop in a future post.
    http://www.humanitystest.com/the-hog-cycle-and-oil-prices
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  7. In 2013 the growing production curve intersects with the declining import curve at around 7.5 mb/d i.e. a production/import ratio 50:50. Since then production grew another 2 mb/d but has peaked in April 2015 because of low oil prices which hit the shale oil industry. Imports did not continue to decline but remained basically flat.

    Contrary to general belief, and mis-information by the media the US is far away from being “energy independent” in terms of crude oil imports. Maybe some may find the above analysis statistical hair-splitting but the narrative of US energy independence has shaped public opinion to such an extent that prudence has given way to complacency. There is a danger that wrong geo-strategic views are formed, especially in the context of evolving and worsening conflicts in the Middle East.
    http://crudeoilpeak.info/the-myth-of-us-self-sufficiency-in-crude-oil
    Tags: , , by M. Fioretti (2016-01-26)
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  8. My own pick might be a story that passed largely unnoticed in our American world. Sitting atop some of the planet's great oil reserves and getting 73% of their revenues from oil sales (income that dropped by 23% last year), the Saudi royals just hiked the domestic price of gas at the pump by 40%. Though it still remains dirt cheap by global standards, that act -- which is like charging for salt water in the middle of the ocean -- is an indication that something startling is going on. And note that, in the years to come, that kingdom's rulers are planning to cut back on similar subsidies for “electricity, water, diesel, and kerosene.” In other words, the world’s largest oil producer and a country of striking wealth (and foreign reserves) no longer feels comfortable giving away gas to its own population, even though this is part of a bargain it struck long ago for peace in the kingdom.

    And the reason for this has little to do with Iran or Syria or Yemen or Iraq or the Islamic State. The problem is far more basic, as TomDispatch’s resident energy expert Michael Klare points out today. It’s the price of oil, which in the last 18 months has dropped through the floor. In a sense, the oil business -- with its constellation of giant energy firms, until recently among the most profitable companies in history, and its energy-producing states, until recently riding high -- may prove to be the natural-resource equivalent of a failed state, and, as Klare makes clear, the changing economics of oil will transform the political face of the planet. So keep your eye on Saudi Arabia. Things there could get ugly indeed.

    As of this moment, however, Brent crude is selling at $33 per barrel, one-third of its price 18 months ago and way below the break-even price for most unconventional “tough oil” endeavors. Worse yet, in one scenario recently offered by the International Energy Agency (IEA), prices might not again reach the $50 to $60 range until the 2020s, or make it back to $85 until 2040. Think of this as the energy equivalent of a monster earthquake -- a pricequake -- that will doom not just many “tough oil” projects now underway but some of the over-extended companies (and governments) that own them.

    Brent prices rose to stratospheric levels, reaching a record $143 per barrel in July 2008. With the failure of Lehman Brothers on September 15th of that year and the ensuing global economic meltdown, demand for oil evaporated, driving prices down to $34 that December.

    With factories idle and millions unemployed, most analysts assumed that prices would remain low for some time to come. So imagine the surprise in the oil business when, in October 2009, Brent crude rose to $77 per barrel. Barely more than two years later, in February 2011, it again crossed the $100 threshold, where it generally remained until June 2014.

    Several factors account for this price recovery, none more important than what was happening in China, where the authorities decided to stimulate the economy by investing heavily in infrastructure, especially roads, bridges, and highways. Add in soaring automobile ownership among that country’s urban middle class and the result was a sharp increase in energy demand.

    in early 2014, when the price pendulum suddenly began swinging in the other direction, as production from unconventional fields in the U.S. and Canada began to make its presence felt in a big way. Domestic U.S. crude production, which had dropped from 7.5 million barrels per day in January 1990 to a mere 5.5 million barrels in January 2010, suddenly headed upwards, reaching a stunning 9.6 million barrels in July 2015. Virtually all the added oil came from newly exploited shale formations in North Dakota and Texas.

    In mid-2014, these and other factors came together to produce a perfect storm of price suppression. At that time, many analysts believed that the Saudis and their allies in the Organization of the Petroleum Exporting Countries (OPEC) would, as in the past, respond by reining in production to bolster prices. However, on November 27, 2014 -- Thanksgiving Day -- OPEC confounded those expectations, voting to maintain the output quotas of its member states. The next day, the price of crude plunged by $4 and the rest is history.

    Aside from the continuing economic slowdown in China and the surge of output in North America, the most significant factor in the unpromising oil outlook, which now extends bleakly into 2016 and beyond, is the steadfast Saudi resistance to any proposals to curtail their production or OPEC’s.

    Many reasons have been given for the Saudis’ resistance to production cutbacks, including a desire to punish Iran and Russia for their support of the Assad regime in Syria.

    In the view of many industry analysts, the Saudis see themselves as better positioned than their rivals for weathering a long-term price decline because of their lower costs of production and their large cushion of foreign reserves. The most likely explanation, though, and the one advanced by the Saudis themselves is that they are seeking to maintain a price environment in which U.S. shale producers and other tough-oil operators will be driven out of the market.

    Only three developments could conceivably alter the present low-price environment for oil: a Middle Eastern war that took out one or more of the major energy suppliers; a Saudi decision to constrain production in order to boost prices; or an unexpected global surge in demand.
    http://www.tomdispatch.com/blog/17608...e%2C_the_look_of_a_badly_oiled_planet
    Voting 0
  9. el giorno in cui il petrolio è calato per la prima volta dal 2003 sotto i 30 dollari al barile, si è diffusa la notizia che la Russia ha deciso di tagliare la spesa pubblica del 10% perché gli introiti dalla vendita di idrocarburi stanno calando a picco. Lo hanno rivelato due fonti dell’esecutivo a Reuters. I tagli escluderanno diversi capitoli di spesa, tra cui le pensioni dei dipendenti pubblici. Secondo il piano, che è stato approvato in una riunione presieduta dal primo ministro Dmitri Medvedev a dicembre, le amministrazioni hanno tempo fino al 15 gennaio per presentare le proposte su dove intervenire con le sforbiciate, ha riferito una delle fonti. I risparmi complessivi dovrebbero essere pari a 700 milioni di rubli, circa 9,16 miliardi di dollari. I conti pubblici di Mosca sono fortemente sotto pressione in quanto il budget 2016 è stato studiato su un prezzo di 50 dollari al barile.
    http://www.ilfattoquotidiano.it/2016/...rollo-del-prezzo-del-petrolio/2369758
    Tags: , by M. Fioretti (2016-01-12)
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  10. "If Western investors are to be interested in Aramco they are going to want all sorts of details and reassurances about the way the company will run, its growth prospects and dividend policies. Will the Saudi government be willing to provide these and relinquish control?" Gheit pondered.

    Moreover, the financial analyst recalled, "the company may have huge oil reserves but look at what happened when Petrobras (the Brazilian state oil group) was privatized. There was a total lack of understanding of free markets and the stock dived in value."

    In this aerial photo made from a helicopter, the Abraj Al-Bait Towers with the four-faced clocks stands over the holy Kaaba, as Muslims encircle it inside the Grand Mosque, during the annual pilgrimage known as the hajj, in the Muslim holy city of Mecca, Saudi Arabia,

    For his part, Investor's Business Daily contributor Bill Peters noted that with the "shares of global oil majors like Exxon Mobil, Chevron, Royal Dutch Shell, Total and BP" getting thrashed "since crude prices sank in 2014," the question which should be on investors' minds is "Would Aramco shares be any better?"

    Echoing Gheit, Peters noted that given that "Saudi Aramco provides little information on finances or other measures of performance…any IP would come amid major strains for Saudi Arabia and the oil market overall."
    http://sputniknews.com/business/20160...tent=aybb&utm_campaign=URL_shortening
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