Comment by jillesvangurp | Hacker News Reader

Comment by jillesvangurp | Hacker News Reader

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The elephant in the room is that the current crisis has revealed how dependent some producers are on high prices for oil. Basically the current crisis is a double crisis of first Russia deciding to stop voluntarily limiting their oil production to keep the prices artificially high so the US producers don't go bankrupt. And then the demand collapsed due to the lockdown. So over supply and demand collapse happened nearly at the same time.

What this means for producers in the US, that are increasingly relying on more expensive sources of oil is that Russia can collapse the prices to below their break even point any time they want. Same for the Saudi's. That used to be the nuclear option when Opec controlled the prices. This is also where the word oligarchy comes from. Once oligarchies stop fixing prices they are suddenly competing for cost per barrel. And the simple truth is that when it comes to fracking, the cost is too high.

What that means in turn is that oil related investments suddenly got a lot more risky than they already were. All the easy sources have long been invested in and the remaining sources are increasingly difficult to exploit. Institutional investors have already been divesting away from oil for a few years. Price fluctuations like we've seen in the past decade ranging from negative to above 100$ per barrel means it's a highly risky investment as you simply can't know if you get back your money.

So, shutting down right now may get a permanent nature for a lot of companies as they'll have a hard time getting investors to back bringing their plants online. The longer this lasts, the worse it gets. I expect a lot of recent investments to be written off completely. Also things like the Keystone pipeline are probably dead in the water as it is debatable whether the thing will ever be profitable.

IMHO that's actually good news and will force people to look at alternative technologies and accelerate the agenda on e.g. switching to electrical vehicles, battery technology, alternative energy etc.

Every producer is dependent on high prices of their product, whether they sell oil or apples. It is just property of some products that it takes time to scale production up after it was scaled down. It is also difficult to scale production of apples, because, you know, once you shut it down it takes multiple years to grow them again, but this does not imply any particular problem with the producer.

Now, when it comes to setting up the prices, which would normally be called anti-competitive, the rules do not apply when you are large and important enough. We also kind of grandfathered in the situation, it's been running for over half a century now.

If these were coalition of almost anything else, there would definitely be an outcry.

People do need to be reminded that the way the world works is whole lot different from idealistic notions. The rules we set are not and cannot be objective, they are just an optimization from constant blundering through reality.

The problem with oil is, that the costs of production are very different across many countries. While in Saudi Arabia they make a profit at $10/barrel, many other locations require 30-50$/barrel to be profitable.

The Saudi royal family can make a profit at $10/barrel for a few years, then they lose control of the country and the oil because they had to stop most of the bribes (social services, etc) they were paying the population to continue to go along with the regime. (The Russian government is in a similar situation to some extent.) But yeah, someone in Saudi will continue to sell the oil, maybe after a few months or a few years of chaos, even if they can only get $10/barrel.

I don't see that as a problem. You use what you have. As a country you have some resources and you need to learn make best use of them. Norway is producing gas at a very substantial cost, yet it was able to save a huge amount of money and current situation is largely a speedbump rather than catastrophe.

It seems the problem is not with the costs of production but rather maturity of the country that wields the power over the resource, whether it understands that a) they are largely dependant on it, b) it is not given that tomorrow the prices will be the same, c) it will run out some day and d) it is easy to spend money now but actually you have to be frugal to save them for when it runs out.

Noraway's costs are actually about middle of the road. Higher than middle east, N. Africa , S. America but much lower than N. America and the rest of Europe. This is impressive when you account for their environmental standards and relatively challenging locations.

Their huge savings is the combination of saving but also very high cost of living & taxation. The state provides a lot but also places high taxes on everything.

I live in Alberta where we have relatively low taxes and no oil savings. We've been boom/bust for our entire existence, but one huge difference - we've subsidized huge parts of the entire country during those good times. Those transfer payments add up to an incredible amount of money.

This is also where the word oligarchy comes from

Im pretty sure the word oligarchy existed before humans relied on petroleum.

it comes from greek ὀλιγαρχία [0]: from ὀλίγος (olígos), meaning 'few', and ἄρχω (arkho), meaning 'to rule or to command')[1]

[0] https://en.wiktionary.org/wiki/%E1%BD%80%CE%BB%CE%B9%CE%B3%C... [1] https://en.wikipedia.org/wiki/Oligarchy

Maybe it should have spelled "oiligarchy"?

I'm pretty sure jillesvangurp is referencing the OPEC cartel here, that they are the oligarchies, and the behavior they have is where the word comes from. Not that the word oligarchy comes from something around oil.

Could also be that I'm reading it too favorably, but I guess that's better than the opposite.

I interpreted that to mean "this is effectively an oligarchy", not a claim of recent etymology.

I think perhaps you meant oligopoly, not oligarchy. The former refers to markets that are controlled by a small group of producers while the later refers to governments controlled by a small group of elites.

Or perhaps "oiligarchy" which is apparently pun slang term used by some groups

This is how the economics of all resource extraction works, not just oil. As prices rise and fall the economic viability of extracting a particular resource pocket changes. It's all in equilibrium and prices typically don't move as much as oil has in the last three months because market forces and people generally don't want to shoot themselves in the foot. The long term economics of Russia and KSA crashing the price so they get a monopoly doesn't make sense, doing so minimizes their profit if done over the long term since capital costs per barrel are fixed. Resource investments are multi-decade, the overall effect of this is going to be a blip in the grand scheme of things rather than an end to the industry.

> This is also where the word oligarchy comes from.

The word has been in use for 500 years. According to the Oxford dictionary it derives from the Greek oligarkhia, from oligoi "few" and arkhein "to rule":

https://www.lexico.com/definition/oligarchy

> Once oligarchies stop fixing prices they are suddenly competing for cost per barrel. And the simple truth is that when it comes to fracking, the cost is too high.

On the other hand I can imagine the US government subsidize at least part of their fracking/shale oil capacity - access to oil is a national security question.

The US does subsidize domestic oil production.

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