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Levi: Relaxing U.S. oil exports might not make sense

Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations, shared his thoughts last week on the U.S. ban on oil exports, saying on API’s Marketplace program that with global prices so low, it might not make sense for American drillers to increase production.

“I don’t think anyone knows what the price of oil will be in a year,” he said. “The big news in the oil markets is not just lower prices — it’s the return of volatility, and volatility works in both directions. … In the worst case, relaxing the ban doesn’t do anything.”

The story on the Marketplace website, by Dan Weissman, leads with the Government Accountability Office report stating that relaxing the 40-year-old export ban could lower domestic gasoline prices. Some experts disagree with that prediction, and in an event, the GAO report was written more than a month ago, before oil prices began to fall sharply on their own.

Breaking Energy’s Jared Anderson added:

“US producers might not want to sell into a bear market, as a sustained period of low oil prices would hurt their profitability and could put the brakes on US oil output growth. So changing the policy on exports might not alter physical balances and the price signals they send.”

Investor: If oil drops to $70, ‘bye, bye fracking’

Other analysts and experts have been more circumspect about what will happen to U.S. shale-oil drilling operations is the price of crude continues to drop, from the current level of $80 a barrel. But bond investor Jeffrey Gundlach is more blunt:

“I think it’s going to $70 and if it does, it’s bye, bye fracking. Goodbye all of the great job creation from fracking because fracking becomes too expensive if you can buy oil at $70 a barrel,” Gundlach said on Wednesday at ETF.com’s Inside Fixed Income Conference.

Read the whole story on CNN Money.

(Photo credit: CNBC)

James Bond, low oil prices, the Russians and OPEC

Calling Miss Moneypenny…we need you to get to James Bond quickly. Urgently! According to respected sources, there is a conspiracy in place on the part of the U.S. government and the West to both foster the increased production of shale gas and to drive down demand for gasoline in order to decrease Middle Eastern and Russian oil prices to levels well below production and distribution costs. The effort is aimed at breaking up OPEC, keeping the Saudis in line regarding present levels of production and hurting Russia until it comes to its senses concerning Ukraine. Can you put me in touch with Bond? He could be helpful in determining whether there is manipulation of the market? He’s just the best!

Paranoia has set in on the part of some in the media. The “glut” of oil on the market and low demand has made new drilling an “iffy” thing. The production costs of oil per barrel have not kept pace with revenue from sales. Prices at the pump for gasoline have decreased significantly.

How can we explain the phenomena, except by the presence of manipulation? Indeed, it’s enlightening to see (assumedly) planned, tough, provocative statements from so-called experts that often make headlines followed by weak “No it cannot be true” statements by the same experts to protect their credentials. Being bipolar is, in these instances, seemingly a characteristic.

Thanks to CNBC, here are some summary comments.

Patrick Legland, head of global research at Société Générale, recently said that it was an interesting coincidence that the two events — a drop in oil prices and lower demand — suggests that the U.S. could be deliberately manipulating the market to hurt Russia. Is it lower demand or is the U.S. clearly maneuvering? Legland goes on to indicate lack of in-depth knowledge. Timothy Ash, head of emerging markets research at Standard Bank suggested the U.S. would obviously deny any accusations of manipulation and there is no evidence to suggest that this is the case. “It’s very had to prove. I have heard such suggestions before. It is clearly useful for the West as it adds pressure on Russia” (and, I would add, on OPEC).

Oh, there is more, Jim Rickerts, managing director at Tangent, in a courageous and clear-cut example of ambiguity, stated that manipulation is plausible, although we have no evidence.

Clearly, the manipulation assertions, even though there is little evidence, sell more papers, build a bigger audience for cable news and provide fodder for Twitter and politicians. To the tune of “Politics and Polka,” sing with me, “apparent correlation is not causation, correlation is not causation.”

Oil prices are on a downward spiral, while production and distribution costs are going up in the U.S. and much of the West. It is implausible that the government is behind these trends. Consumer demand is down, even with lower prices at the pump, because of the economy. The government has relatively few tools, except the public and private bully pulpit in the short term, to leverage prices. The current boom in oil shale and resulting surpluses result from decisions made by an extended group of people often years ago — for example, oil companies who recognized that the era of easy-to-drill and cheap oil was coming to an end, speculators who led the market in trumping the benefits in investing long in oil shale and waiting for assumed value to catch up, consumers who seemed to be on a high concerning use of gasoline and technological breakthroughs that made oil from shale seem more amendable to cost benefit calculations.

While there are examples of government manipulating prices of goods (e.g., price controls), most have led to unpredictable and often negative results. The U.S. government, whether controlled by Republicans or Democrats, has not shown itself adept at price setting and manipulation. Nor is it good at keeping things secret — something necessary if it engaged in international manipulation. The New York Times would already have a leaked copy of the strategy and unsigned emails would have been given to the Washington Post. Public discussion of the strategy probably would risk sometimes fake, sometimes real approbation-depending who gets hurt or will get hurt. The U.S. would face copycats, as they have in the past, like the Saudis and OPEC and, maybe someday, Russia. They would say, “well, if the U.S. can do it, why can’t we?” The U.S. would calmly respond, No we are not manipulating oil markets. You give us too much credit and assume to many skills. Also, remember, the U.S and the oil companies believe in free markets. Don’t they? Well maybe, but clearly, not all the time with respect to the government and almost none of the time with respect to the oil companies? (Try getting replacement fuels at the pump of an oil-company franchised “gas” station.)

Okay, Miss Moneypenny, I changed my mind. We don’t need James Bond nor do we want to pay for the Bond girls. (Besides, the last Bond looked like President Putin when his shirt was unbuttoned and Sean Connery is on Medicare.) What we need is prayer and penitence for the experts for travailing in rumors. It is not terribly helpful when trying to sort out complicated issues related to oil prices and demand. If the government is somehow manipulating the market, many, even very pro-market advocates, will give it credit for a strategy that, should it be successful, might limit Russia’s desires concerning Ukraine and OPEC’s efforts at price fixing in the past. While the word has an evil sound, perhaps legitimately, manipulation would likely be judged better than war. But before credit is offered, look at the data and well-reviewed studies. Don’t fret, there is very little evidence that government manipulation has occurred in the recent past or is occurring at the present time.

NYT editorial: Keep up search for energy alternatives

The New York Times editorial board has a reasonable take on the falling price of oil, enumerating several winners and losers.

Low prices, obviously, are good for consumers. But they’re bad for countries that don’t have diverse economies, and for people promoting alternative forms of transportation fuel.

“It’s bad for the environment because cheaper oil means fewer incentives to develop alternative and less carbon-intensive sources of energy,” the editorial states.

“… it is imperative that the United States and all other beneficiaries resist the temptation to use what could be a fleeting drop in prices to slow the search for alternative sources of energy. The planet, alas, does not have the resilience of oil prices.”

How would lifting oil-export ban affect gas prices? GAO weighs in

The U.S. Government Accountability Office released a new report saying that lifting the nation’s nearly 40-year-old ban on oil exports would reduce gas prices for Americans.

The ban was put in place after the oil shortages of the 1970s. But critics of the ban say the ramped-up production in the U.S. of light sweet crude could lead to a glut, keeping prices artificially low.

As The Wall Street Journal notes, “export advocates note that most of the country’s gasoline prices are derived from global markets and sending out U.S. crude would ultimately lower prices at home.”

The nonpartisan GAO stated that repealing the ban on exports would “likely increase domestic crude oil prices but decrease consumer fuel prices.”

The public might not be convinced. A Reuters-Ipsos poll earlier this month found that Americans are split about 50-50 on whether to repeal the ban. The chief concern is that prices would rise, not fall, if drillers were allowed to export crude to higher-priced foreign markets.

U.S. refiners, which purchase domestic oil at a cheaper cost, have opposed lifting the ban.

The GAO added that lifting the export ban “could pose risks to groundwater quality, increase greenhouse gas emissions and increase the risk of spills from transportation.”

Bloomberg has cool graphic showing shale-oil break-even points

With the global plunge in oil prices comes concern that many U.S. companies that drill in tight-oil shale formations might be hurt, since it’s more expensive to extract that oil and their profit margins are smaller.

But Bloomberg has a helpful chart showing that “most regions continue to be profitable below $80, including the Bakken and Eagle Ford formations, two of the most important sources. Much of the Eagle Ford play would still be profitable with $50 oil.”

Oil futures up for second straight day

Has the precipitous slide in oil prices ended? For a couple days, at least. As The Wall Street Journal reported Friday, oil futures gained for a second straight day.

Here’s a (possibly prescient) quote from an analyst about where prices are going:

“I think we have seen a peak in downside momentum,” Citigroup Inc. analyst Tim Evans said. “We have probably seen a peak in the fear of demand weakness and the fear that OPEC may just stand back and let it drop. At this point I think the feel of panic over that possibility has probably eased.”

NYT: Some Saudis say kingdom needs to cut production

The New York Times has an instructive story about the tenuous situation Saudi Arabia is in as oil-producing nations deal with the sudden, precipitous drop in global crude prices. The kingdom so far seems to be willing to ride out the price drop. But other influencers inside and outside the country say it needs to cut production to prop up prices.

“This week, the billionaire investor Prince Alwaleed bin Talal released an open letter to the Saudi oil minister, Ali al-Naimi, criticizing him for saying that lower oil prices were no cause for alarm,” the story says. “In the letter, Prince Alwaleed called the price drop a ‘catastrophe that cannot go unmentioned’ and suggested it could harm the kingdom’s budget.”

(Photo: Saudi oil minister Ali al-Naimi. Credit: Shutterstock)

Analyst doubts low oil prices will hamper U.S. production

Whenever a petroleum analyst writes a sentence that begins: “I can still recall when prices collapsed in 1986 …” you know he’s seen just about everything in the global oil market. Michael Lynch has some sage words for those who are predicting slashed U.S. production (and accompanying job losses) owing to the rapidly falling price of crude oil.

Writing in Forbes, Lynch opines (emphasis added):

“Various arguments are being made now about how expensive oil has become to produce and the manner in which this will support prices, but this is much more valid in the long-term. … It is hard to imagine that a multi-billion dollar deepwater platform would be abandoned because of a six-month price drop.

“Other factors will prevent a decline in production from lower oil prices. Companies with contracts renting rigs won’t just cancel them, laying off employees is a near-last resort, and leases must often be drilled in a certain period to hold them. Abandoning wells also has a cost, and oil price drops that are thought to be brief won’t cause many companies to do that.”