Something very interesting has been developing around the globe the last couple of weeks. I have been watching it closely because depending on who is right or who is wrong we maybe setting ourselves up once again for a perfect economic storm of epic proportions.
The price of oil has been steadily dropping for weeks. Sure it goes down and then back up again but overall it has dropped some $20.00 or more per barrel in slightly over a month. Despite the fact that the lower gas prices are making more low information sheeple very happy this is not necessarily a good sign.
Basically I have read two schools of thought on the issue. The folks over at Zero hedge seem to be more of the opinion that Obummer, Kerry and company have made a deal with the Saudi's to lower the overall oil prices and put the economic squeeze on Russia. Ignoring the fact that it also puts current tight oil plays into the red since it is estimated those plays require a minimum of $85.00 a barrel oil just to break even.
The general theory is that Saudi Arabia and the US feel they have enough wealth to play this loss game for up to a few years which the Russian's do not. This move will severely cripple the Russian economy and may in fact lead to greater level of hostility between the US and Russia.
Another downside if this theory is correct is that while Saudi output is generally so intertwined with it's government it will not effect their short or long term production as it is all taken in stride but N. American tight oil plays become problematic. The US government can give em more tax breaks or whatever and no currently producing plays will close but if a loss goes on too long it will stop new wells from coming on line until the price goes up once again.
The second major theory I been seeing is that the Saudi's are doing it on their own in an attempt to kill off N. American tight oil production and send a message to Russia at the same time. If this theory is true than things may play out much like the first scenario except perhaps there won't be any increase in US Russian hostility. As with the first scenario however N. American tight oil plays take it in the shorts.
I am inclined to go along with the first scenario as ringing more true myself. Especially with Putin's recent rant against the US and Dollar hegemony.
How this effects us as Homesteaders/Preppers/Sustainers is that now maybe the time to seriously think about stocking up on some deep fuel storage. Treat it and hold it in reserve because the end result in either scenario is a quick snap back in prices to possibly much higher levels.
My guess is that regardless of the particulars of the end result we are nearing the edge of another step down soon and I suggest we plan accordingly.
Keep Prepping Everyone!!!!
My $.02. Saudi Arabia can afford to depress oil supplies for at least three years with their current cash holdings, and have no negative impact on their economy. They are squeezing the fracking business in the US, and oil sands since they both require about $100 a barrel to both break even. It's about pricing power, which SA can't afford to lose. SA did this in the 80s to exert their pricing power then too.
ReplyDeleteThe desert region is in a very fragile political place, and Al Saud wants to make sure that the world knows of his/their country's importance. The King also knows that stable oil prices makes for better economies for both parties, remember the 70s oil price shocks that created a decade of stagflation?
The lower prices will help the US economy gather some steam, since the QE isn't producing the miracle cure that it was toted as being able to create...
K - Well that is the second theory more or less and a lot of very smart people besides yourself adhere to it. You maybe right. The only thing I see is that in the end it won't help the US economy at all. Sure lower oil prices will give it a boost but it will also disrupt new tight oil expansion and ultimately that will cost us far more than we gain in the short term. A very large percentage of the numbers they have been touting for the so called recovery have come from tight oil production.
DeleteAt least that is my theory for what it's worth anyway.
One of the bright spots here in Arkansas has been the Fayetteville shale oil fields, and the fracking for nat gas. A lot of blue collar types are able to make a decent living here working for the oil companies. You are very correct on the short term play that it will give a small bump to our economy by freeing up cash for consumers to spend, but it doesn't address the underlying problem that America doesn't really produce anything anymore.
DeleteOur economy is third rate, and we are selling our resources for the income. Our most recent major exports were scrap metal to China and fuel for refined fuel for the world. Gasoline and LNG mainly.
K - Exactly. I think Gail over at Our Finite World summed up the danger with tight oil plays and this price drop. What happens is the current wells or whatever in play will continue even if it is at a loss because it would be more of a loss if they stopped. New wells or plays however will not be started until the price goes back up. If the lower rates last long enough it will be hard to get investors back into tight oil plays once they have been burned by it.
DeleteAt least that was the understanding I had on the matter.
http://www.cnbc.com/id/102114056
ReplyDeleteFor your info via SB/JWR
Mike
Thanks for the link. I caught the part where the Saudi's say they are happy with oil prices below 90 bucks a barrel.
DeleteHow do you think the price of a gallon of gas will affect the up coming elections?
ReplyDeleteSpinnersaw - Well it does alleviate some the general anger. 90% of the sheeple out there only care about what effects them directly at the time and around here with all the SUV's a big trucks even a marginal decrease at the pump makes people happy for a while. Not sure it will be enough to make people vote for Femocrats but it may make them happy enough to just not vote at all.
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