Oil prices are responding to supply and demand, not OPEC | Hacker News Reader

Oil prices are responding to supply and demand, not OPEC

economist.com

46 pointswojer20 comments

That's like say someone didn't kick you in the face, physics kicked you in the face!

Of course it's supply and demand, and OPEC is manipulating the market by oversupplying the market and driving every other player out of business. On the surface, it seems like they're doing everyone a favor by driving the price down, but as soon as other players exit, they'll raise it up sky high as the monopoly supplier.

This is a classic strategy that is now outlawed in the U.S. because of what Standard Oil / Rocketfeller did in the 19th century. OPEC is getting away with it because there's no international law that forbids predatory pricing.

Don't let the Saudis fool you. Oil accounts for 80% of their GDP and the low price is completely unsustainable for them. They have no intention of keeping the price low forever, just long enough to burn other producers.

> Of course it's supply and demand, and OPEC is manipulating the market by oversupplying the market

I don't think that is true. OPEC production hasn't been greater than how it was in Apr 2012 or Apr 2008 [1]

Non-OPEC production on the other hand... well ... [2]

[1] http://oilprice.com/Energy/Crude-Oil/OPEC-Production-By-The-...

[2] http://peakoilbarrel.com/non-opec-charts/

OPEC Pumps at Three-Year High Despite Oil Glut

http://www.wsj.com/articles/opec-pumps-at-three-year-high-de...

Relevant paragraph: "But in the current downward price spiral, the group has kept pumping, a move aimed at protecting market share, instead of prices. The strategy comes as a flood of new oil—including U.S. shale output and new OPEC production—hits at a time when demand forecasts remain cloudy. The result has been market oversupply, and sharply falling prices."

Why should the OPEC stop pumping? Why is it expected that the OPEC has to regulate prices?

Lifting prices, the cost of bringing oil to the surface, are much higher in the US than in the most important OPEC producers. Regulating the price by limiting supply would benefit non OPEC, high lifting cost producers the most. This are different times, now OPEC is letting the market, governed by supply and demand set the prices.

The expectation before was that non OPEC countries would produce as much as they could and OPEC would supply the leftover demand. It was called "The Call on OPEC" that was back when the US was a net importer. Now the US producers more oil than what it imports. Heck, is producing more oil than Saudi Arabia!

This article explain quite well how the call on OPEC used to work and why it is crazy in today's environment:

http://blogs.platts.com/2015/01/02/opec-call-price-collapse/

Edit: excuse my English, is not m my native language and this was written on a phone.

The USA are still a net importer of oil, and OPEC are called upon to manage the price of oil because they put themselves in that position by doing so repeatedly since 1973.

Is it? http://www.energy.gov/maps/us-crude-oil-production-surpasses...

The OPEC was able to put itself in that position due to limited worldwide supply. That has changed. Its no longer rational nor convenient for them be a supplier of the spare demand in an environment where doing so would keep prices high and encourage investment in oil production capacity outside OPEC, thus further eroding spare demand and market share.

The grandparent post said:

   The USA are still a net importer of oil

that is still true. What the graph you linked to tells you is that the USA is now producing more than 50% of its total consumption. It still imports the rest.

You need to sum both entries on your graph to get the total. E.g. here's a quote from another govt agency:

   In 2014, the United States consumed a total
   of 6.97 billion barrels of petroleum products,
   an average of about 19.11 million barrels per day.

http://www.eia.gov/tools/faqs/faq.cfm?id=33&t=6

True, and under current regulations the US will always be a net importer, since oil exports are forbidden.

For the US government, it doesn't matter particularly if OPEC keeps the level of supply up or not; low oil prices may cause the local oil production to stall but they also dramatically help all other branches of the US economy. If supply goes down and prices up, the exports will just resume again.

Saudi Arabia and other OPEC members however need high prices, they are not just a mere luxury to them. They may have $10 lifting costs but they have overextended their state budget by relying on oil profits to the point where they need a $80+ price to just maintain the status quo. They have no meaningful other economy.

Absolutely.

What are their alternatives though? If they limit supply to keep artificially high prices they will still get a diminished accumulated income due to market share erosion. They will also encourage investment in oil producing capacity outside OPEC, risking further market share erosion.

If they let supply and demand set the price it will eventually drive high OPEX producers out of business, somewhat mitigating their losses in market share and with the possibility for them to recover some of their lost income. It's a matter of high OPEX products going out of business before they run out of cash reserves

But how would they prevent other producers from re-entering the market once the price rises again? Capital requirements are not a huge barrier to entry when you're competing against governments.

By crippling other competing governments - especially Iran, Russia, and Brazil, all of whom are struggling now - and trying to drive competing energy technologies out of the market.

The problem is that Saudi wealth isn't infinite, and as a petro-feudal patronage state with a lot of internal stresses it's not obvious the Saudis can afford to see things through to the end.

Lets hope the House of Saud burns up its sovereign funds before they do permanent macroeconomic damage.

> they'll raise it up sky high as the monopoly supplier.

No, they won't. There are still multiple producers, and still lots of reserves, and still lots of shale oil sites waiting to be reopened as soon as the price goes up enough. And don't forget, all that "manipulation by OPEC" was actually increased production by the US:

https://marketrealist.imgix.net/uploads/2015/10/US-crude-oil...

And the production didn't really slow down because of the price collapse, it only forced the small players to freeze their operations:

http://pbs.twimg.com/media/B-3swI7UcAAlnEd.png

As is, there's a pretty hard limit on how high the price can go.

> Only rarely, says Jason Bordoff, director of Columbia University’s Centre on Global Energy Policy, has the oil market behaved like a normal market, more subject to the laws of supply and demand than to the whims of a cartel. Now is one of them.

We've forgotten what the oil market was like before Standard Oil. First off, cars didn't exist, uses for oil were limited to small-ish industrial products like lubricants, and for lamps. There certainly wasn't anything like today's power infrastructure, internal-combustion engines had yet to be invented.

Oil producers were an unruly lot responding mostly to immediate financial needs rather than long-term business planning. Oil was a niche product with vast differences in quality among refiners. Only the affluent could really afford to regularly light their lamps at night.

Rockefeller changed all that, virtually overnight. He wrangled the impossible-to-deal-with oilmen and standardized the refining process, something that had to happen before it was possible to invent the automobile. Standard Oil, more than any other person or company, created the world we live in. Without Rockefeller, cars wouldn't have been possible. Oil power plants wouldn't have been possible. Without oil, we'd still be using coal.

Cartels stabilize violent markets and allow industries to mature and build on top of a stable status quo. Eventually civilization moves in, and brings regulation and massive capital infusion. That's obviously better than the cartel, but don't mistake things, cartels are vastly better than the states of affairs they grow out of.

Not the diamond cartel

> One big question is how quickly frackers would ramp up production again if oil prices rise.

What would Nash say about this?

a) Stable: Saudis: production high, prices low. US: shale not developed. (OPEC: no "cheating," production adjusts to price.)

b) Unstable: SA: low supply. OPEC: cheating. US: shale.

c) Unstable: SA: whiplash production and hopefully prices to continually scare US producers out of market. OPEC members desiring predictable revenues revolt / periodic shortfalls make cheating rampant. US: prep work / tech developments for quick spin-up shale projects. Or, big tanks: Massive arbitrage opportunities emerge for futures and warehousing, cutting against SA's ability to control prices.

Good article, but I think there's reason to believe SA (or really, US shale) has put a ceiling on oil that isn't going to budge for a while.

(OTOH, oil price forecasting has historically ranked highly among foolish human endeavors... )

Sigh. The clowns at The Economist are probably once again signalling the bottom. I still remember their classic drivel from 1999:

   Yet here is a thought: $10 might
   actually be too optimistic.
   We may be heading for $5.

http://www.economist.com/node/188181

Have they ever apologized for that? I notice that they didn't bother linking to their earlier article.

Incredibly misleading graph with one line moving 6% and the other line moving 60% but the axis pruned to make it look like there is a relationship.

If you believe that, I have an Alzheimer's cure to sell you.

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