Saudi Shenanigans Threaten the World's Long-Term Oil Supply

In keeping the price low the Saudis are threatening 1 trillion worth of future oil projects

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The big story today, though, was a quite historic very rare plummet in a major currency as the Russian Ruble plunged -12%.

For a major currency this was a BIG move. Who knows what sorts of trouble such a near-collapse will bring to the highly-interconnected world markets, or even if Putin will consider this assault on the ruble to be an act of economic war, but there are certain to be consequences.

Russian stocks are now down nearly 50% from just 6 months ago...a major collapse by any modern standard.

To the extent that OPEC is playing games with the price of oil we must begin to worry that Russia (and Venezuela and Iran....) will view these actions quite unfavorably and do something forceful in response.

For now, I have no idea exactly what is motivating Saudi Arabia, particularly in driving oil prices so low. But I'm confident the reason is not economic in nature. Consider that the world oil markets are perhaps oversupplied by a million barrels per day. OPEC exports 30 mbd. What if they cut 1.5 mbd?

Then the world would be undersupplied and the price of oil would rapidly rise.

For OPEC to pretend that they are happy with 30 mbd (x) $60 which equals $1.8 billion vs. 28.5 mbd (x) $90 which equals $2.6 billion is just silly. 

So whatever OPEC is up to, it's not straightforward economics. It's something else. Perhaps it's to drive a few oil companies out of business and is just cutthroat business, but I seriously doubt that's the major driver here.

Instead, the most likely reason is geopolitical in nature. And the tip of the spear is aimed right at Russia. Call me crazy, but I think it's just an insane policy that's being conducted.

Meanwhile, as we wrote earlier, this is setting us up for some very big disappointments later on because the world will be seriously under-supplied with oil in the future unless current projects are undertaken.

But the news there gets more and more dire with every passing day:

Oil price fall threatens $1tn of projects

Dec 15, 2014

Almost $1tn of spending on future oil projects is at risk after a brutal plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned.

Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade — or 8 per cent of current global oil demand.

The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects — the lifeblood of future petrol supplies, heating fuels and chemicals.

Goldman has examined 400 oil and gasfields around the world, many of which are still awaiting a final investment decision. Its analysis, based on a $70 oil price, shows that fields representing 2.3m b/d of output by 2020 and awaiting a green light have now become uneconomic. That figure rises to 7.5m b/d of production by 2025.

The analysis excludes US shale.


The shortfalls are even worse than advertised, as those just count up the new production that will go missing.

Also going missing, irrespective of the price of oil, is a very conservative 4% per year of existing production from currently producing fields. If those are producing 76 mbd then the amount that goes missing each year is 76M (x) 4% = 3 mbd/yr.

That is, each year another 3 million barrels per day of production goes missing and has to be replaced. Some think that decline rates are closer to 5% or even 6% making things that much worse.

Without the oil companies of the world finding and bringing on line another 3 mbd (or possibly even 4 or 5 mbd)  each year the world's supply of oil will shrink.

Right now those future projects are being scrapped left and right. I certainly hope that the Saudis and the Obama team have somebody from the oil business explaining all this to them.

When the Saudis proudly say that they have a war chest of $750 billion stocked up to weather this storm, what they means to say is they have $750 billion parked in the US equity market and US Treasury paper.

Good luck calling that a 'war chest' if deflation comes along and rips the whole pile to papery shreds.

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