Oil Falls Below $40 for First Time Since 2009 as Glut Grows | Hacker News Reader

Oil Falls Below $40 for First Time Since 2009 as Glut Grows

bloomberg.com

125 pointshgennaro171 comments

And it will go lower! Canadian crude hit $23/bbl earlier in the week.

North America is close to maxing out storage capacity...possibly within 90 days. We've not been this close to max storage capacity in more than 80 years.

North American crude oil production currently exceeds demand (meaning what we have capacity to refine) by over 1 million barrels a day. All that extra is getting dumped into storage.

And the spread in price between crude oil and gasoline will likely stay large.

The USA can't export crude (by law), but can export refined product (gasoline, diesel, jet fuel, etc).

So there's a finite closed market for crude oil (that's running out of places to store it), but a ready export market for refined product (mostly Central and South America).

Net result: low crude oil prices, high gasoline prices.

There are also some refinery problems in Indiana which is keeping gasoline at a premium when compared to oil.

That primarily impacts Canadian heavy crude exports. The BP Whiting refinery was the primary consumer of Canadian crude.

Few other refineries (other than some on the Gulf coast) are configured to handle the product.

That's why Canadian crude prices are collapsing...and why the price of gasoline in the upper midwest is going up.

The only other option for Canadian crude to pipeline export to the Texas gulf coast. The problem is pipeline capacity (that's why some much Canadian oil goes out by train), but even more critically, the pipelines typically offload at the giant Cushing OK storage center...and Cushing is right at 100% storage capacity. (you can't just pump crude straight into a refinery...there a timing mis-match that has to be dealt with via storage).

The Canadians are about to really get squeezed.

We're already getting squeezed. We officially entered into a recession a while back. Housing prices in Alberta have collapsed. Every other province is about to get squeezed as all the oil patch workers head home and look for jobs. Buying things online sucks, and travelling is a terrible idea. Budget's shot to hell in the middle of an election, which is good if it helps force Harper out.

> Housing prices in Alberta have collapsed.

Sales have collapsed perhaps, but not prices. We shall see if $30 oil can take the wind out of Canadian real estate, I'll believe it when I see it, the confidence level of Canadians when it comes to housing is extremely high.

You're right. Sales are down 30% in Calgary, but prices have only dropped 1.6%. [1] Still, that's compared to a 9% rise for the rest of Canada. [2] I'd still expect them to drop significantly more as laid-off oil workers burn through their savings and find themselves unable to pay their mortgage.

[1] http://www.creb.com/Seller_Resources/Housing_Statistics/ [2] http://public.tableau.com/shared/S48Y522MR?:display_count=no

Actually, not going up 10% a year in Canada pretty much could be considered a collapse!

> I'd still expect them to drop significantly more as laid-off oil workers burn through their savings and find themselves unable to pay their mortgage.

One would think so, but real estate seems to be able to often defy both logic and mathematics.

The Chicago gas prices jumped up 50 cents the day after this hit the news.

I'm skeptical this is a true refinery issue/problem.

Gas prices are about 50 cents more per gallon in Chicago than the rest of the US right now due to this.

Do you think it's bleeding into other regional markets at all?

A bit: http://www.gasbuddy.com/GasPriceMap

> The USA can't export crude (by law)

That's not entirely true; by law, there are all kinds of special permissions (with different rules depending on what oil -- both by origin and type -- you are exporting, to whom, and whether or not the export of crude is matched by an in-exchange import of crude [usually, of a different grade, otherwise this wouldn't make any sense]) required to export crude, but its not quite banned.

This is probably what's driving down the Canadian dollar: http://www.xe.com/currencycharts/?from=USD&to=CAD&view=2Y

So, how long until my 5-figure position in UCO gets back to June levels?

https://www.google.com/finance?cid=14807175

Tough question. 2-3 years...maybe longer.

An awful lot of production capacity has to be sweep out of the North American market (production is actually still going UP!!!).

A lot of small to mid-size operating companies will need to go bankrupt...they're the ones keeping production volumes high. They need the cash to cover interest on the bank notes taken out to drill and frack those wells.

The other wildcard is how quickly Iran can ramp up production. That might be 5-7 years given that their technology base is circa 1979 and will need to be upgraded. But it might happen in as little as 2 years...which would continue to dump crude oil on the world markets.

If Congress would repeal the Carter-era export ban on crude oil, that would go a long way towards re-balancing the North American markets, but that seems to be a low-probability event.

So it could take a while, but eventually it will...it ALWAYS does!

If Congress would repeal the Carter-era export ban on crude oil, that would go a long way towards re-balancing the North American markets, but that seems to be a low-probability event.

Once the tanks are all full, options for producers will include going bankrupt, smuggling, and... oh, yeah, dumping $100k's on lobbying Congress. I anticipate option 3, even though the warming goons and refiners (bedfellows...) will probably fight it tooth and nail.

I imagine the parent hopes you are wrong. The tracking error in a double or triple ETF is significant over that time horizon.

Why is there an export ban on crude oil?

The 70s oil embargo

That's the problem with oil and gold. No dividends. So you sit on it for a couple of years, earning nothing. Still, oil is a finite resource and is very sensitive to world events, war, etc.

What are the main companies that produce crude oil storage?

This is slightly worrying, because if we want to reduce CO2 emissions, we need to leave the oil in the ground.

High prices may not be ideal economically, but they do reduce demand for oil, and increase demand for alternative energy.

Well, counter-intuitivley, consumer gas prices aren't falling nearly as much if at all.

Personally I think the DOJ should investigate refineries, as none of the seem particularly eager to compete on price. They're making record profits as the price of crude collapses while the price of gasoline is flat.

http://www.latimes.com/business/la-fi-refinery-profits-recor...

It seems very fishy to me that we have so much crude building up, yet consumers aren't seeing any real benefit from cheaper gas, cheaper shipping, or cheaper domestic flights.

Refining capacity doesn't increase because of a drop in crude oil prices. If supply of gasoline cannot be increased, prices will not fall even if the raw crude price falls.

The EPA has been hostile to refinery expansion or new refinery construction.

Capacity doesn't increase, but costs do decrease as the cost of raw materials drops.

Now, obviously price is only partly determined by cost.

That's kinda the whole point. There is nothing for refineries to gain by reducing the price of gas because...nobody is going to sell gas at a lower price and take over the market because...the EPA does not allow one to build refineries.

Free markets y'all.

>the EPA does not allow one to build refineries

Two refineries have opened in the US this year:

http://www.eia.gov/tools/faqs/faq.cfm?id=29&t=6

Free markets don't account for negative externalities so they have to be regulated y'all. In any case, gasoline prices do move so there must be some market forces at work, but it's a mystery at least to me. I'd love to read an explanation.

So much this. Price is driven by supply and demand. Not the cost of materials.

But price changes supply, no?

Some oil is $1 a barrel to pump. It will always be worth pumping.

Some oil is $50 a barrel to pump. It is only worth it when oil price is greater than $50 a barrel.

This is more of a lack of competition issue. A lot of gas suppliers have regional contractors that basically have a lock on entire regions and their prices. There is no incentive to reduce price.

Also, since we can not export crude, but can export distillates, we can sell gas to other countries, increasing demand to some extent.

Many refineries were closed by oil companies with the intention to reduce supply and raise prices. Now there is a glut of crude, and they don't have the capacity to take advantage of the low crude cost / high refined product cost. https://books.google.ca/books?id=74brGsoymBoC&pg=PA35&lpg=PA...

Recently they have also been deferring maintenance to keep capacity of their refineries as high as possible and now failures are causing major shutdowns.

Airfare isn't falling because the domestic airlines a) have a triopoly and b) have learned not to compete on marketshare, so capacity isn't increasing as much. The big 3 have become much more disciplined when it comes to revenue management.

Actually airfare prices have fallen recently.

http://www.nbcnews.com/business/travel/airline-fares-record-...

> Airline fares recorded their steepest monthly decline in 20 years, falling 5.6 percent last month, according to the Bureau of Labor Statistics.

There is a refinery problem in Indiana which is why gasoline is staying elevated even thought crude is falling. If anything happens along a refinement chain, there is a disconnect between market prices. The full affect is on the Chicago area, not sure how it is affecting other regional markets.

Prices haven't dropped elsewhere like they should, you know that.

> consumer gas prices aren't falling nearly as much if at all.

Consumer gas is a very small portion of energy use. Just a very visible one.

Consumer gas is an inelastic demand--they've got people by the neck.

People had forty years to figure out, "Shit, what happens if gas gets expensive", and they did the wrong thing. Let'em pay.

It's an interesting question. How many people have made choices that at least somewhat accounted for uncertainty in oil prices? You can't see the retirees who stayed in their suburban home instead of moving to rural Wyoming (I don't mean that there are tens of millions matching that description, I mean there are things that are really hard to measure).

This is why the idea that the free market will solve global warming doesn't stand up. We need to leave a huge amount of oil in the ground, it's in the financial interest of oil producers to make sure that doesn't happen, and the price of extraction is low enough that many of them can sell it dirt cheap to ensure it all goes. Indeed, I've seen arguments that the Saudis are driving down the price in part because they've noticed renewables are about to undercut them and want to make sure that doesn't happen.

> This is why the idea that the free market will solve global warming doesn't stand up...

Regardless of your suggested approach to solve global warming, I suggest you reconsider your reasoning. There's a limit as to how much oil companies can extract and remain profitable. To that point, oil storage utilization is at a historic high with new investments at a historic low.

>This is why the idea that the free market will solve global warming doesn't stand up.

The idea that there's such a thing as a 'free market' at all doesn't stand up. It's a mythical beast.

I think it could, but we have to account for the externalized costs. And, we're pretty bad at that. Lots of people's paychecks depend on stuff not getting more expensive.

The other way to look at this is that if the price is able to find equilibrium at a low enough point, it will not be economically feasible to extract certain types of oil from the ground (e.g. tarsands). The real question is how much of an effect low prices will have on demand.

Yes, but that's temporary. As demand exceeds supply again (because we're running out of oil) then the prices rise and suddenly all these unconventional oil projects become feasible again.

The only way to keep that oil in the ground is to eliminate the market for oil at profitable extraction prices through very cheap energy alternatives.

It's very difficult to solve the problem through regulation because you need all the countries making up a sizable portion of demand to regulate together. The incentive will be strong for individual countries to defy global pressure to do so, because cheaper energy means more economic growth. So far we've seen very little in the way of effective regulation and I'm not optimistic for a change, the incentives for short-term-minded politicians are in the other direction.

It's a very easy problem to solve through regulation. Just tax carbon emissions.

The hard thing about it is not scuppering economic growth (plenty of ways to achieve that), but keeping a lid on lobbying and bribes by the carbon industry until their political back is broken and renewables can take over.

When you can get all of the world's major economic powers to agree on that, then you can say it's easy. In principle it's easy, but in reality good luck!

Australia managed to do it without the agreement of other countries. It wasn't any bullshit about competitiveness that caused the repeal either. It was pressure from the coal industry.

Yes any country could do it alone, but all it does is slightly reduce global demand, Australia being a fairly small country population-wise likely didn't make a dent. All other things being equal it doesn't leave fossil fuels in the ground, just increases the amount of time before we extract them. That does buy time for the human race to find a lasting solution.

The current drop in prices seems to mostly be a price war between the Saudis and new producers in the US. It's probably not sustainable long term.

But, if increased crude production in the US has lowered the long-term equilibrium price, the US could increase fuel taxes to discourage increased consumption.

The only downside to this is that it'd be a very regressive tax increase.

>The current drop in prices seems to mostly be a price war between the Saudis and new producers in the US. It's probably not sustainable long term.

In the medium term renewables will take over. It no longer makes sense to build an oil fired power station any more. In a few more years it will probably be cheaper to drive electric (it already is if you just count the energy cost).

We might still continue making plastics and fertilizer from oil, but even for them the oil is substitutable. At that point we'll probably be more worried about the supply of other commodities and oil will be no more important to us than copper or iron ore.

Whether this is bad from the environmental standpoint depends on why the price is low. The price may be low because demand is off.

US oil production increased considerably over the past few years, then the Saudis deliberately increased production to drive down the high prices that had in part enabled the increased US production.

"Saudi Arabia has maintained a high level of oil production despite the slump in crude oil prices, arguing it needs to protect its market share in an economy in flux because of the glut of U.S. oil."

http://www.upi.com/Business_News/Energy-Resources/2015/07/13...

Demand had been increasing since the bottom of the great recession. This started last June with the dollar lifting off (pushing commodities down and crashing emerging markets), and the Saudis deciding to try to retain market share and crush the booming US oil production. So now, despite $40-$60 oil, the Saudis are producing the most oil they ever have. US oil companies have managed to constantly reduce the cost of their oil, with frackers getting it down to $40 to $50 / barrel, the US will produce almost a million barrels per day more than in 2014 despite the price drop. On top of all of that, the market is front running both Iran bringing its oil online again, and the Fed raising interest rates and sending the dollar higher.

"After mid-2014, the lion’s share of the decline in oil prices has been caused by negative oil-specific demand shocks and, to a lesser extent, by negative aggregate demand shocks. In contrast, the role of the oil supply (understood as the current physical availability of crude oil) has been small."

https://research.stlouisfed.org/publications/es/article/1034...

I am not sure if we could conclude that the demand is off. I believe that the traders who were controlling the inventories have finally closed their trades and walked away while they are ahead. Oil of course is a geopolitical commodity and a slide in prices usually helps developing countries that need oil to just keep the machinery running. Alternative sources are still not as accessible as one would like. All in all, I seem to think that this trend is not going to bode well for all the tax subsidies for solar panels in the US and will only delay discussions on climate change.

In fact it's low because supply is increased. Saudi was annoyed by North American innovation, and sought to dissuade private investors from financing any more of it. Private investors do wish that the price were higher, but it turns out that exploration and production costs are now low enough for North American production to be profitable still. For the most part, despotic regimes who control various national oilfields are suffering in the current market. Either Saudi don't care which of their competitors go out of business, or they have other reasons to keep production high over the medium term.

It is a race to the bottom in oil to fend off the development of new oil, but that will still happen once imported oil becomes more scarce.

The problem is that capitalism rapes externalities.

Even if you are not against the killing of an individual animal for food, for instance, the capability of doing so drives an increase in demand which drives an increase in supply -- billions of animals raised for the sole purpose of being killed for food. And then we try to do it more efficiently, at less cost, in factory farms. And economics drives us to this.

Similarly, the supply of oil will drive down prices and now result in newfound uses for it, we WILL use it up until none is left. And it's all in the atmosphere.

Same with elephant tusks in Africa being poached.

Same with overfishing.

Capitalism may be just too efficient... the name of the game is to increase money velocity through the system ... so without inflation, we will actually go even faster and eventually turn all the resources into garbage.

Oh and the greatest demand expansion of all... human population growth. The more people the faster we pollute. It's unsustainable. But all we can talk about are the cents each person is saving at the gas pump... really people?

The real "problem" with Capitalism is that the effects of the trade-offs being made are either not felt directly by the perpetrators or the feedback loop is too long that you end up in a "slowly boiling frog" situation.

If the person that reaps all of the money for a particular business makes enough money off of the venture that they can insulate themselves from the consequences, that is a failure of Capitalism. For example, someone lives in a community that depends on a particular waterway. They make a bunch of money by skimping on correct disposal of toxic waste, instead dumping it into the waterway. Once they've "made it," they take the money and leave the area. They are no longer feeling the effects of their actions, instead they are forcing them onto others. This is the legacy of Capitalism.

A supporter of capitalism would say the problem there is the lack of capitalism - someone should have owned the waterway, so that they'd have an incentive to sue if there was someone dumping stuff.

That would need changes to laws. A real supporter of capitalism would say the government should be owned by a king or group of shareholders who could put those kind of laws into place and defund the care of the disabled, etc.

There are legion ways to mitigate expelled CO2. But probably the cheapest is just to leave it in the ground.

"There are legion ways to mitigate expelled CO2."

Could you please elaborate on this assumption?

One way is to use the self-replicating, solar-powered, biotech carbon sequestration product known informally as "trees."

ways to sequester CO2? Plants/Trees, Freezing/compressing air, catalysts that react with CO2, and this: https://en.wikipedia.org/wiki/Carbon_dioxide_removal

Leaving it in the ground with today's technologies is very expensive in terms of opportunity cost. You can leave it in the ground, but people don't want to pay $5 per gallon for gasoline. The climate models don't show high costs to warming for at least s few decades.

It's also an opportunity. It costs energy to make alternative energy sources. So build them now while prices are low (I.e. don't send the Middle East lots of cash).

Then reduce demand for hydrocarbons by simply producing lots of alternative energy.

The other alternative is wait for prices to be high, which increases demand for alternative energy exactly when it's the most expensive to manufacture.

A smart company will build and stockpile, then sell when prices are high. A smart consumer (with deep pockets and lots of patience) will do the same.

Building and stockpiling solar panels would certainly be disastrous.

The solution is a 10x better energy source. And it's only going to happen if smart people get focused on it. Fluctuations in the price of oil affect funding, etc, but the people working on the problem are a bigger issue.

Elon Musk is doing his best to drive down the price of batteries and solar power. What will you work on? Baseload power probably needs nuclear. There are a number of nuclear energy startups right now.

We already know how to build nuke plants to replace coal. Fear-mongering over exceptional incidents at first and second generation sites like Chernobyl, Three-mile Island and Fukushima, and the extreme regulatory restrictions and NIMBYism are the problem there, not anything technical or economic.

Hell, you've got Germany closing perfectly good clean nuclear plants, that have to be replaced with new coal-burning plants, due to misguided environmental activism.

Innovative nuclear may be well priced out of the market at this rate but research (Gen IV, fusion) is going very fast nowadays and will only go faster with eDesign and cloud computing.

We need to keep oil in the ground but also massively reduce our meat consumption. I think animal agriculture accounts for something like 50% of all greenhouse gasses, whereas the burning of fossil fuels accounts for less than 20%.

I wonder why so many people are only looking at the economic side of this

DO THEY NOT REALIZE THE IMPLICATIONS FOR THE ENVIRONMENT AND HOW WE USE FOSSIL FUELS?

We burn (no pun intended) through resources as fast as we want until there are none left. And then what?

Pretty clear the majority of people don't care. So just hope that when the music stops, you're already dead.

As much as life extension technology is going to cause tremendous social conflict, it would certainly give people a better perspective on these things.

Living roughly eighty years on average does frame things very narrowly. The Koch brothers, for example, aren't stuck with the legacy of their policies, they only care about making their mark. If they were stuck living with the consequences they might think differently.

And hope your children are dead too, and also your grandchildren.

Bringing children into the world where you expect that as the future seems a little irresponsible.

That escalated quickly.

> And then what?

And then the price of the scarce resource will go up, pushing us towards alternative energy sources. And as time passes, we should have more efficient ways of harnessing those.

This line of logic says that it is impossible for us to come to any sort of "cliff" where we are unable to smoothly transition from one energy source to another (where the possible ensuing resource wars could prevent us from ever harnessing those alternative sources). It's basically a "nothing bad can happen because ECONOMICS!" answer.

It does, and to do so it presumes that there will always be some readily available alternatives with smooth supply curves, and neglects transition costs.

I've seen it referred to as the Adam's Law of Slow Moving Disasters

http://blog.dilbert.com/post/102964934001/fact-checking-adam...

It also ignores the output (garbage, buildup of entropy that destroys ecosystems)

Scarce resource might be clean air and land in a place that doesnt hit 120f daily.

By that time we might have already destroyed an ecosystem. It's not just resources coming in, but the entropy that comes out of doing useful work with them. Whether pollution, or great pacific garbage patch, or overfishing, etc.

The invisible hand of the market hasn't been very great at solving externality problems. Neither has government, as an institution. What we should be doing is investing more in initiatives like the Virgin Earth Challenge to stave off collapse. But when it comes to overfishing, and other things ... I'm not sure we can do that.

The best we can advocate is using condoms...

Overpopulation isn't a problem. It's human desire for luxury, as is meat, as is 5 AC components for each room of your house. Problem is that the whole world cannot live as an average citizen of USA (when it comes to energy use, not the health care and the bad bits) but the whole world, when it realizes, wants exactly that.

Production of beef and lamb makes about 15% of greenhouse gases, not mentioning transport of it, or dairy. Lot of greenhouse gases are produced for energy use, heating, AC and similar.

Problem is that we aren't really burning that much oil for our own personal transportation. We're burning oil on places where efficiency isn't a goal. Feeding a mammal to harvest meat or milk isn't efficient. We humans like meat, we support the industry and it keeps producing and transporting.

Maybe giving up on a car once a week, or something similar is easy, but most of your burning comes through heating, AC, meat and dairy, and then transport. Transport is efficient, it's product of engineers.

Mammals are product of evolution, they are not efficient in their production of meat and dairy.

One will burn less much more if one changes the diet, not means of transportation.

transportation usage accounts for over 93%(!) of crude oil usage, and about 40% of overall greenhouse gas production.

You are including industrial transportation into these numbers, when realistically, these numbers should be included in the accompanying industry. Personal transportation has a much lower footprint.

http://www.wri.org/sites/default/files/world_greenhouse_gas_...

A huge world war, and then the survivors become farmers until the heat death of the universe

One one hand, I'm a bit worried as I know various folks that are dependent on the oil industry and this will probably mean more layoffs/companies closing, on the other hand, I'm really happy to see this (helps many economies as well as ordinary folks) and it seems some of the changes from oil to other sources of energy are finally showing some results (I hope)

>I'm really happy to see this (helps many economies as well as ordinary folks)

it is like decreasing price of cigarettes (or vodka in Russia). Does "help" in a short term.

>and it seems some of the changes from oil to other sources of energy are finally showing some results (I hope)

Lower oil prices make investment into other sources less attractive unfortunately.

OPEC is trying to destroy the American shale businesses by making them unprofitable. There was huge investment in shale based on higher oil prices and if they can't recoup that investment OPEC stands to keep their monopoly.

That isn't going to happen. Fracking isn't going away, it's a technology. The Saudis are openly acknowledging their misjudgement of the situation at this point. The fracking technology shift is permanent, so long as regulations don't stop it. And it's going to spread across the globe with a little bit of time. What has been done in Texas, can be done in Mexico, for example.

If Pioneer or Apache implode, then Exxon will scoop them up at a big discount, and when oil rises back to $50+ or higher, Exxon starts the production back up. These wells are incredibly inexpensive now, they know where the oil is, and they're producing three times more oil per well than they were a few years ago.

Texas oil is now down to $10 to $20 / barrel cost wise, and the Bakken is down to closer to $40. The Saudis need $100 oil to balance their budget, they're currently vaporizing their reserves to play this game of chicken. Estimates are those reserves will be exhausted by the end of the decade if oil doesn't return to $80+.

OPEC is no longer a coordinated entity. For decades OPEC's member nations waged economic war on each other by cutting prices to increase marketshare, in violation of OPEC quotas. The Saudis acted as the swing producer, lowering their output to keep crude prices near the OPEC target. Last year the Saudis abandoned that roll and admitted that OPEC had become a a free-for-all.

Cartels are always unstable. It's why they seek forcible enforcement methods.

Well, not all of OPEC, but the Saudi intent is to destroy the US shale business. While doing so, they seem to be hitting Russia and South America pretty damn hard. This is worrying since shale can go lower than Russia and Venezuela ($34 - $50 is the bottom depending on area of the balkans). Canada oil sands is higher since the oil is of lower quality.

You're kidding right? This is a move by oil capital to use the market to squash competitors in the short term, undermine their investments, and ensure a relative monopoly in the long term.

I'm glad to be out of the oil/gas industry. Got laid off from one of the largest energy services companies back in January, after more than twelve years. Got another sysadmin gig, and I've never been happier.

Cheap natural gas also can mean cheap electricity, in case anyone was wondering about the effect this might have on companies such as Tesla. Natural gas produces more electricity in the U.S. than anything else, including coal (by a tiny margin).

I don't think this matters much for companies like Tesla. Electricity is already extremely cheap for a car. The average cost of electricity in the US is about 12.5 cents/kWh, which works out to 3.75 cents/mile for a Tesla. That's cheaper than a Prius at $2/gallon, despite being a substantially larger and heavier car. If you can get in on time-of-use rates and charge overnight when demand is low, it can be nearly free.

High gas prices can be good for Tesla, but lower electricity prices won't move the needle for most people.

More importantly, natural gas often decides the price of electricity in areas where it is only a small fraction of electricity production.

Google "Location Based Marginal Pricing"

Coal still produces more electricity than natural gas. There was one month recently when Mat gas produced more electricity but that was an anomaly. In a few years however, nat gas will dominate.

The capital cost for the saudis is $15 and they are okay pushing it to $20.

One paradoxical fact about the drop in oil prices is there is a uptick in investment in renewable !

The market for renewable is not only folks who care about prices but also people who are worried about emission and self-sufficiency ( this is more to do with countries )

So a drop in oil prices is leading to greater investment in solar and wind which I do not think the saudis expected !

Another interesting analysis is the fact that the boom and bust cycle in oil is getting much shorter. Economists are not exactly sure why that is happening.

One think to worry about is this deflation might bifurcate and cause another recession. Only time will tell.

Saudi Arabia is a country, not a company. Oil is used to pay for everything, and they need oil to be around $106 to balance their budget.

http://graphics.wsj.com/lists/opec-meeting

If oil fell to $20 for any significant amount of time, there would be serious political strife in Saudi Arabia.

Was wondering about the impact of lifting US Oil exports and ran across some interesting research:

http://www.aspeninstitute.org/sites/default/files/content/up...

http://www.wsj.com/articles/u-s-approves-limited-crude-oil-t...

Hopefully this trend will continue as we move away from oil for many types of energy generation. And for those that low oil prices should reinforce car use - in many American cities, it's not the price of oil that is the limit, it's the amount of space for the cars that is the limit. And where space isn't a limit, out in farm country, low oil prices help tremendously, since transport is much less elastic than it is in cities.

Lower oil prices seem to be driving the major US indices lower lately.

Why is that? Lower energy expenses seems like a good thing for businesses.

Neither is the cause or effect of the other, they both share a common cause. Viz. worries about China's economy slowing down.

Or at least the above is conventional wisdom. No one really knows for sure.

Not an expert, but I've been read that demand for oil is typically used as a leading indicator for economic growth. Seems like the global economy is slumping, and as a result doesn't need as much energy (oil)

Ah, so in that case it wouldn't be causal, just a correlation.

It is causal, but in the reverse direction.

> Lower oil prices seem to be driving the major US indices lower lately.

Potentially, because the oil companies are components of the major indices?

Or, potentially, because the oil prices aren't dragging down the US indices, oil prices and US indices are both down because of supply/demand factors which reflect expectations of slowdowns in various markets, and increased uncertainty in the energy sector, both of which are immediate, if not durable, negatives for investors.

There are a lot of oil companies in these indices, lower demand for oil (and a host of other commodities!) spells trouble for general export demand, etc. In general China's bubble is bursting and everyone is scared to see what happens.

If nothing else, there are oil producers in those indices, too...

So now that it is down and will go up to $120 again soon, how do I invest in it?

USO https://www.google.com/finance?cid=705740

You never want to hold commodity ETFs like USO overnight due to beta decay. http://www.etf.com/sections/blog/5362-uso-oil-usl.html

You're better off setting up an options account and buying futures.

It probably won't ever go back to $120. What we're seeing is the dynamics of energy deflation. The world economy simply cannot function with the price of oil much above $75. When it crosses that threshold the economy slows and sputters, credit contracts, and nobody can afford oil, thus driving the price down. The wrinkle is that the cost of producing oil is forever edging upward. Most oil cannot be brought to market with prices lower than about $75. 20th century style economic growth was fun, but it's over now.

http://www.economic-undertow.com/

So to cater to OP's comment, if it needs to get to $75, how does he/she invest.

Physical USD cash. There's going to be a lot of deflation as huge defaults, including national defaults, sweep the land.

I don't think you understand the dynamics. Oil will stay down and much less will be pumped. Without cheap abundant oil you don't get enough credit circulating in the economy that people can afford higher prices. There is no more cheap abundant oil. The higher cost drillers will simply go bankrupt and all that expensive oil will stay in the ground forever because nobody can afford it.

America is now the world's swing producer, because our drillers are more sensitive to market pressure than the sovereign producers of OPEC or Russia. If supply becomes tight, American producers can very quickly ramp up production and then shut it in again when demand falls. There's also no reason to believe that further technological innovation won't further reduce the costs of American production, especially in tight oil. Nobody thought that was even possible 15 years ago, today everyone in the country has an opinion on fracking.

Domestic producers have already shown tremendous resiliency in the face of the current glut—the smart ones have learned to cut costs in the same way the Seven Sisters did during previous oil crises. The fortress balance sheets of the majors will also shield the industry and allow continued R&D investment.

Furthermore, America's mature capital markets will ensure that capital is available to the new industry of independent producers driving the surge in domestic production. They can quickly respond to market signals and demand rises and falls.

Higher cost drillers will go bankrupt, the smart ones will survive and buy up the assets of the fallen.

American producers are bankrupt. The fields are worth pennies on the dollar. Wake up. It's over.

And the remaining producers and service providers will buy the others for pennies and bide their time. Halliburton bought Baker Hughes. Weatherford cut costs and will be fine.

The resiliency of the American energy industry should not be underestimated.

Demand and supply have both increased during the price decline:

https://www.iea.org/oilmarketreport/omrpublic/

That suggests that supply has increased more than demand.

This is temporary. The fracking operations are in the process of going belly up, but pumping like mad in the meantime.

Demand going up is not sputtering, it is contrary to your theory. It seems likely that fracking is more viable at $40 than you think.

> ... OPEC members are planning to boost production

In 2012 Saudi had a $2.3 trillion USD gross operating surplus in crude petroleum and natural gas. They can afford to play this game (market share) for really long time.

No they can't. They can play the game for about three more years, max. And that's at the risk of destabilizing their kingdom. They're currently issuing debt [1] for the first time in a decade or more, trying to slow the erosion [2] of their $670 billion of reserves. As of today they've lost 10% of their financial reserves in one year, and that's going to get a lot worse as the new lower average price of oil sets in across 2015 and 2016. At a $40 to $50 oil price average for 2016, they'll lose upwards of 20% of their reserves next year. A few years of that, and the anxiety will be great in the house of Saud.

I'm not sure where you're getting $2.3 trillion for anything. Their entire GDP is $750 billion.

[1] http://www.reuters.com/article/2015/07/10/saudi-bond-idUSL8N...

[2] http://www.bloomberg.com/news/articles/2015-06-28/saudi-fore...

They could also cut social programs. Scaling back the subsidies for face throwing acid might buy them some time.

And that's how the House of Saud will finally fall.

And yet gas is still over $3 a gallon. Funny that...

Thing is, most people in the States still have day jobs that they commute to. Demand for gas hasn't really gone anywhere.

Meanwhile, for the first time in... Forever, diesel is cheaper then gasoline. [1]

[1] http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_a.htm

For a long time, diesel was cheaper than gasoline. It's only been the last 10-15 years that diesel has been more expensive.

Indeed, here's a breifing paper for the UK House of Commons that discusses the price relationships:

http://www.parliament.uk/briefing-papers/SN04712.pdf

Basically demand is the driver of prices, with diesel engines becoming more popular year-on-year but the refineries unable / unwilling to commit more production to diesel because that leaves them with a surplus of less-desirable products from the refining process, too.

The result is that the UK imports diesel and exports petrol.

Well, gasoline production consumes oil, which means that the price should theoretically lag behind oil's price for a period of time at least equal to the time it takes to go from crude to a final product.

In addition, most gas stations will buy gasoline futures a few months out to stabilize their costs, and when oil price falls, the cost of the underlying gas purchased is still at the negotiated futures contract price. So it makes sense that the price wouldn't fall in tandem with crude prices.

>In addition, most gas stations will buy gasoline futures a few months out to stabilize their costs, and when oil price falls, the cost of the underlying gas purchased is still at the negotiated futures contract price. So it makes sense that the price wouldn't fall in tandem with crude prices.

Only if the gas station is speculating and trying to arbitrage the market. Otherwise, they would reduce the price to reflect the updated price of the underlying futures.

The fact that they are hedged doesn't change much unless they are all hedged. If some of them aren't hedged, they will drive the price down, forcing the other stations to sell their inventory at a loss.

At least in the U.S. - there have been some refinery outages as well most of the country is still on summer mix, so the supply of gas is more constrained.

MN had a refinery problem so depending on your area of the country, barrel price might not be a determining factor. Diesel in ND is cheaper than gas.

Now, if we could standardize on one gas formula for the entire US, things might go better.

Summer is peak demand for gasoline and puts refiners near peak production. Any unscheduled offline time can keep prices high. A refinery in Indiana sent Midwest prices going up, for example.

If the refinery production is the limiting factor, oil could be free and it might not lower gas prices in the short term.

The BP refinery outage here in Indiana is causing a major crimp in gasoline supplies.

The US can export refined crude products but not crude itself, so there's more potential demand for refined products like gasoline.

Same thing here in Portugal, when the price rises the excuses are the oil price, but then the opposite never happens.

Contracts. That'll change.

Also it tends to increase in price in summer.

2.30 here. Feels like 1999.

1999? Where did you live back then? I remember gas spiking to $1.99 on 9/11. $2.30 would have made our eyes water.

Where is "here"?

Probably the South. Lower taxes and close to refineries.

Roughly the same in NH. Maine and Massachusetts are higher, due to higher taxes, but we're talking nickels and dimes.

Connecticut

I remember ten years ago when worrying about Peak Oil was all the rage. You don't hear too much about that nowadays…

It's obviously a matter of when, not if. It's difficult to put an exact estimate on when oil scarcity will become a true crisis, but we can all agree that it's a non-renewable resource which will not be around forever.

It's obviously a matter of when, not if

It was just as obvious a hundred years ago that horse manure piling up in city streets was just going to keep getting worse.

we can all agree that it's a non-renewable resource which will not be around forever

True but irrelevant. The oil supply is finite only in physical terms, not in economic terms. It is possible to extract an unbounded amount of value from a bounded resource. All you need is an increasing price, which happens automatically as supplies decrease, and which provides an incentive for substitution. I'd happily take a wager that humanity will transition off petroleum long before we "run out" of oil.

In some sense, peak oil happened. All of the easily accessible, abundant oil has been used up. Now you need a higher level of technology to extract oil. Because that's more expensive to produce than the easy stuff, renewables are catching up.

The stuff really is more challenging to produce, you need much more understanding and higher quality tools. Fortunately we're enjoying the compound interest of computers, software, material science and a million other fields that make difficult things simpler.

I won't take your transition bet, but i would bet if we had to extract oil using only technology older than 2000, we'd be pretty screwed.

Here's what I found out about the use of the term "Peak Oil". https://planiverse.wordpress.com/2015/08/14/peak-oil-peak/

You do. Oil sands delayed peak oil a bit, but it's still there.

Not only oil sands, but shale oil, deepwater oil, etc.

It's more a misunderstanding of economics.

Conventional "stick a tube in the ground" oil may well have peaked or may peak soon, but there's more oil around than that.

It's also not entirely clear that peak oil would mean "oil prices will always go up." If anything, it could lead to successive rounds of demand destruction. I think the most likely scenario would be a "sawtooth wave" price on the way down the peak as rising costs lead to substitution (gas, EVs) and demand destruction (recessions, people moving closer to where they work) which in turn causes price declines. The ultimate demand destruction would be large-scale investment in public transit, which has to some extent been spurred by crazy gas prices.

All the assumptions underlying the "Peak Oil" theory have been invalided by new technology.

Eventually we'll get there, but not this century...and possibly never if non-petroleum energy sources are developed between now and the end of the century.

Remember, petroleum was the answer to the "Peak Oil" problem of the 1840's & 50's.

We were running out of whale oil...and the solution wasn't more efficient ways to hunt and kill whales (though that did extend the life of the industry by a couple of decades). The solution was an entirely new energy source.

Petroleum will undergo the same transition...and the new recovery technology has bought the world a few additional decades to find that solution...

"Peak Oil" just says we stop mining as much oil with a certain graph shape, not that the world ends. Transitioning to a new energy source is compatible and preferable.

>not that the world ends

Lexcorvus and I apparently have similar memories, because my recollection is that all the articles discussing peak oil had a mandatory section predicting the eminent demise of Western Civilization (and quite a large percentage were giddy at the notion).

IIRC, the fearmongering was based on the idea that the world's consumption of oil was continuously increasing. Thus, if supply stopped increasing Bad Things would happen because it would put the brakes on society.

That's just journalism being journalism. Plus, it was harder to see what could replace a significant fraction of oil before solar and battery prices dropped so much, and uncertainty and lack-of-planning is worth some worry.

This could screw Russia. They have lost a hell of a lot of revenue already on this. I do wonder if that is the point.

Not just Russia but every single nation that has a major part of their economy in oil production: Venezuela, Iran, Saudi Arabia, Norway, Canada, etc.

Although to be fair, Northern Europeans manage their oil extremely well. Their 'rainy day' fund is now in the trillions.

http://graphics.wsj.com/oil-producers-break-even-prices/

There's going to be carnage in the financial markets when the oil producing nations' start selling off their assets in order to pay for necessities.

Saudi has already started issuing bonds. Once they start selling off their trillion dollar sovereign wealth fund the ripple effect will be felt on asset prices all around the world. It has the potential to cause a self-reinforcing feedback loop as well.

The interesting one is going to be Venezuela. They can’t be far off financial collapse.

I know! Let's drill in the arctic and ruin that too

at $40 it will certainly be worth all that lack of profit

(this is exactly what shell is trying to do right now with Obama's permission)

Reply on news.ycombinator.com