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Comment by molecule | Hacker News Reader

This seems like a non-sequitur. A Saudi crisis due to cheap oil, but cheap oil is a result of increased Saudi oil production, to squash American and other shale extractors…?

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The problem is that during the shale boom and immediately after, technological progress has been such that a lot of the shale infrastructure is not necessary to maintain output for, say, another 10 years or so.

Rigs have gone down by 60-70%, oil production has gone down by ~4%. However even that pathetic 4% is not necessarily the result of rigs closing, as several oil storage facilities are quite literally full. There are a number of reports of oil rigs offering tankers full of crude free to anyone who'll come and get them. I'd bet we're going to find that a lot of crude has gotten dumped somewhere soon. None of that is counted in that statistic that's dropped by 4%.

Here's why : suppose you are a massively indebted oil producer, like all US oil producers are, and prices duck beneath your cost to produce. This does not delay loan repayments and/or interest repayments. What do you do ? Well, there's 2 things you can do:

1) You stop pumping. This stops cashflow and makes your situation obvious beyond any doubt. It also will immediately remove all control over the company by management and shareholders as bankruptcy proceedings begin.

2) You keep pumping. You stop paying suppliers ("delay" paying them is the polite term). You keep cashflow going. You're paying off most of your loans at the moment, because what's dragging you into the red is loan repayments. Bankruptcy proceedings will be delayed. In many cases the banks and your suppliers won't have many alternatives.

And so a lot of these companies are faced with a choice between "death now" and "death soon". In such cases you can bet "death soon" is going to be the more popular choice. That means insolvent companies will keep pumping up crude and selling it until their cashflow gets to the point the whole thing locks up.

Cheap oil is the result of many factors. America and other new production is one of them. Saudi response to that price drop led to further price drops. It's looking more and more like the Saudi plan will end up backfiring, as they can only bankroll the losses for so long.

And of course the losses cause just more oil production, as they turned OPEC into a zero-sum game where nobody trusts anybody else.

No good stopping your production and eating the massive, massive loss when your "partner" will ramp up and get your share.

There is also the whole Syrian thing going.

It would not surprise me if the oil sales have in whole or in part ended up supplying extremist groups.

The Saudis have a history of hiring others to fight their wars for them.

I would say the opposite; the global oil glut also diminishes ISIS's ability to sell oil in the black market.

Quite. But as best i recall the whole thing started before ISIS had control of fields, never mind started selling.

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