The reason oil could drop as low as $20 per barrel

The reason oil could drop as low as $20 per barrel

By Anatole Kaletsky
December 19, 2014
  • An oil pump jack pumps oil in a field near Calgary

How low can it go — and how long will it last? The 50 percent slump in oil prices raises both those questions and while nobody can confidently answer the first question (I will try to in a moment), the second is pretty easy.

Low oil prices will last long enough for one of two events to happen. The first possibility, the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump. The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

Whichever outcome finally puts a floor under prices, we can be confident that the process will take a long time to unfold. It is inconceivable that just a few months of falling prices will be enough time for the Saudis to either break the Iranian-Russian axis or reverse the growth of shale oil production in the United States. It is equally inconceivable that the oil market could quickly transition from OPEC domination to a normal competitive one. The many bullish oil investors who still expect prices to rebound quickly to their pre-slump trading range are likely to be disappointed. The best that oil bulls can hope for is that a new, and substantially lower, trading range may be established as the multi-year battles over Middle East dominance and oil-market share play out.

The key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range. The history of inflation-adjusted oil prices, deflated by the U.S. Consumer Price Index, offers some intriguing hints. The 40 years since OPEC first flexed its muscles in 1974 can be divided into three distinct periods. From 1974 to 1985, West Texas Intermediate, the U.S. benchmark, fluctuated between $48 and $120 in today’s money. From 1986 to 2004, the price ranged from $21 to $48 (apart from two brief aberrations during the 1998 Russian crisis and the 1991 war in Iraq). And from 2005 until this year, oil has again traded in its 1974 to 1985 range of roughly $50 to $120, apart from two very brief spikes in the 2008-09 financial crisis.

What makes these three periods significant is that the trading range of the past 10 years was very similar to the 1974-85 first decade of OPEC domination, but the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985 and the shift from monopolistic to competitive pricing for the next 20 years, followed by the restoration of monopoly pricing in 2005 as OPEC took advantage of surging Chinese demand.

In view of this history, the demarcation line between the monopolistic and competitive regimes at a little below $50 a barrel seems a reasonable estimate of where one boundary of the new long-term trading range might end up. But will $50 be a floor or a ceiling for the oil price in the years ahead?

There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis. In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.

On the other hand, there are also good arguments for OPEC-monopoly pricing of $50 to $120 to be re-established once markets test the bottom of this range. OPEC members have a strong interest in preventing a return to competitive pricing and could learn to function again as an effective cartel. Although price-fixing becomes more difficult as U.S. producers increase market share, OPEC could try to impose pricing “discipline” if it can knock out many U.S. shale producers next year. The macro-economic impact of low oil prices on global growth could help this effort by boosting economic activity and energy demand.

So which of these arguments will prove right: The bearish case for a $20 to $50 trading-range based on competitive market pricing? Or the bullish one for $50 to $120 based on resumed OPEC dominance?

Ask me again once the price of oil has fallen to $50 – and stayed there for a year or so.

DEMOCRATS BLOCK KEYSTONE PIPELINE

Democrats Block Keystone Bill, Landrieu’s Plea Rejected

(TOM PENNINGTON/Getty Images)

November 18, 2014 The Senate narrowly rejected legislation on Tuesday that would have authorized construction of the Keystone XL pipeline, dealing a bitter blow to politically imperiled Louisiana Democrat Mary Landrieu less than a month before her Dec. 6 runoff election.

The vote was 59-41 on the legislation, which easily passed the House last week.

The fate of the heavily lobbied bill, which required 60 votes to pass, was uncertain until final votes were counted. And ultimately, despite the senator’s assurances to the contrary, Landrieu was not able to garner the votes needed for passage.

Going into the vote, Landrieu knew she had 59 Senators supporting her motion, but it was never clear where she’d get number 60. Democratic Majority Whip Dick Durbin was seen as one of Landrieu’s last options, but he voted no on the bill.

The bill has become intertwined with the political struggles of the Louisiana Democrat as she faces an uphill battle in her bid for reelection against GOP challenger Rep. Bill Cassidy.

 Senate Democratic leaders, after long preventing votes on Keystone, last week agreed to a floor showdown at the behest of Landrieu, a co-sponsor of the pro-Keystone legislation, who is seeking to show that she can deliver on pro-oil policies in a state where the petroleum industry is a big part of the economy.
mock

But Capitol Hill Republicans, while unanimously backing the pipeline, have sought to prevent Landrieu from gaining political traction from the unexpected lame-duck Keystone fight. The latest House Keystone bill that passed last week was sponsored by Landrieu’s foe Cassidy.

Landrieu insisted she could secure 60 votes needed to pass the legislation with a filibuster-proof majority in the Senate as late as Tuesday morning. But despite the willingness of Senate leadership to allow a vote on the bill, Landrieu was not able to persuade enough Democrats to side with her in a vote to approve the pipeline.

The White House did not issue a formal veto threat on the project, but the president hinted in the days leading up to the vote that he would veto the legislation.

White House Spokesman Josh Earnest said Tuesday: “It certainly is a piece of legislation that the president doesn’t support.”

Legislation green-lighting the oil sands project is certain to come to Obama’s desk next year, however, when Republicans take the reins in the Senate. Soon-to-be Senate Majority Leader Mitch McConnell has pledged to move swiftly to authorize the pipeline.

TransCanada Corp.’s project would carry hundreds of thousands of barrels of oil each day from oil sands projects in Alberta, Canada, to refineries along the Gulf Coast. It would also carry oil from the booming Bakken formation in North Dakota.

Keystone is a big priority for Republicans and industry groups that have lobbied aggressively in favor of the pipeline. But it’s a political headache for Obama, and for Democrats in general, who are divided over the project.

Many labor unions back Keystone, but environmentalists–another pillar of Obama’s political base–bitterly oppose it and have mounted an aggressive campaign in recent years that has included numerous protests.

The Obama administration has spent six years weighing the project, and the president has repeatedly said in recent days that he wants to let the review play out. The president has also made critical comments about the project on his recent trip to Asia, buoying environmentalists.

“I have to constantly push back against this idea that somehow the Keystone pipeline is either this massive jobs bill for the United States, or is somehow lowering gas prices,” he told reporters in Myanmar four days ago.

Landrieu

Obama has also said that he will not approve Keystone unless he’s certain that building the project would not significantly increase carbon emissions.

Republicans, who have said the project is an economic win that will boost U.S. energy security, used the debate to increase political pressure on the White House over Keystone.

“I say to President Obama, time is up, and the excuses have run out. It is time for you, Mr. President, to make a decision,” said Sen. John Barrasso, a Wyoming Republican who is part of the GOP leadership team, during the floor debate Tuesday. Republican Sen. John Thune, who is also in leadership, noted that the pipeline has bipartisan support in Congress, and he said the Keystone opponents are “members of the far-left wing of the Democratic party.”

Environmentalists and Democrats against the project argue that Keystone will worsen global warming by serving as a catalyst for rapid expansion of carbon-intensive oil sands production in Canada.

“To protect the planet from catastrophic global warming, we need to leave four-fifths of the identified conventional fossil-fuel reserves in the ground,” said Sen. Jeff Merkley, an Oregon Democrat, ahead of the vote. “But building the Keystone pipeline would open the faucet to rapid exploitation of a massive new unconventional reserve–that is, the tar sands–making it much less likely for human civilization to succeed in meeting that carbon budget that is so important to our future economic and environmental world.”

pro-pipeline.jpg_full_600

But a major State Department environmental analysis published in January generally rebutted claims that the pipeline is a linchpin for growing oil-sands production.

It concluded that construction of Keystone–one of several new oil-sands pipelines that companies are proposing–is unlikely to affect the rate of oil-sands expansion. That’s because growing use of railways to move oil can pick up the slack, even though moving oil by rail is more expensive.

However, State’s analysis also predicts that if no new pipelines are built to handle expanded oil-sands production, oil prices remaining in the $65-$75 per barrel range could curtail production, but the study calls this unlikely. Oil prices have been falling for months, and West Texas Intermediate crude oil is currently trading at around $75 per barrel.

The Energy Department’s statistical arm this month estimated that oil will average $78 per barrel in 2015, which is well below its previous forecast.

Republicans had better have a plan and act on that plan or they will end up worse than the Democrats.

 repub leaders copy

Republicans had better have a plan and act on that plan or they will end up worse than the Democrats.

By Mario Murillo

Dear Republican leadership,

The inevitable disaster of last Tuesday was long overdue for the White House of Cards.  Obama was kept on life support by his race, a cadre of Network news anchors, Ivy League socialists, corrupt unions, and idealistic youth.  Most, with the exception of a pathetic patch of lefties, have abandoned Barrack Obama.

But let’s be clear about one thing: The tidal wave of rejection of Obama is not a ringing endorsement of the Republican Party. Many who voted against Obama’s cohorts did so because they are only slightly less angry with Republicans.

Having won control of Congress, the GOP must now put forward a clear program to create jobs and govern reasonably, lest it give Democrats the upper hand for the 2016 presidential election…and do many other very bad things to you.

rand-paul

Here are the clear and present dangers for Republicans:

A. Your firewall is gone. You had the great luxury of Obama’s mind numbing failure. Now you have the car keys and they are looking to you for action. You had a pass and could focus on attacking Obama’s agenda without having one of your own.   It’s time for ideas not campaign rhetoric.

Of course Obama will veto everything but that does not matter.  You had better be busy sending an unending steam of bills that are designed to create jobs and make us safe.

B. Your words will come back to haunt you. For years you have said to the democrats, “why didn’t you get something done when you controlled the House and the Senate?” Every word will boomerang on you if you repeat the inaction of the Democratic Party.  If you dawdle and wrangle you will see a litany of campaign ads that will quote everything you said against Washington incompetence and gridlock.

C.The American public will not wait to vote you out. Their anger has been awakened and it will take them less time to turn on you than it did to turn on Democrats. We have given you the opportunity to govern and you must get to it!  If not, you will lose seats as fast as you gained them and you will lose the presidential election of 2016.

Here is what you must do immediately:

1. Send Obama a bill to completely repeal Obamacare. Yeah, I’ve heard all of the excuses: We cannot repeal the Affordable Care Act, because it lacks enough votes in the Senate to override a presidential veto; it is impossible to roll back the clock, because the old insurance plans are gone, and many individuals now depend on the ACA’s previsions, no matter how costly those may be….blah, blah, blah.

 But wait, America hates Obamacare.  Surely the nation that landed on the moon can do better than Obamacare…at least that what millions of Americans think and they are looking to you to do it.

I repeat…for the sake of your survival, send a bill to the President to repeal Obamacare and come up with a plan to save the best medical care in the world.   If that doesn’t work then  keep sending him smaller bills that target the most onerous parts of the Affordable Care Act:  junk the employer mandate, make insurance plans compete with each other to lower premiums, and benchmark the prices charged for medical devices. Just do it!

republican-senator-joni-ernst

2.Get the Keystone Pipeline up and running! When Democrats oppose energy independence they look like sandaled hippies banging their foreheads against wind chimes as they saunter out of a head shop.

Obama has no cover for his job killing environmental terrorism.  We have the technology to protect the earth and America’s future.   Get the pipeline bill passed!   The votes are there to overcome a veto because many Democratic Congressmen will be in jeopardy at home if they vote no on the pipeline.

3.Secure the border.  Support for Obama among Latinos has dropped by nearly 20 points.  You would be shocked how many Latinos want a secure border.  Given their culture, conservatism is the natural home for Latinos.  Now is the time for common sense.  Before we talk about legalizing anyone we must stop the flow of criminals, disease and terrorists into the United States.

4. Finish the investigations on Benghazi and the IRS.  These remain high crimes against the American people and the victims deserve justice.  Get to the bottom of it and punish the guilty.

Benghazi Massacre Blog copy

We can all think of a hundred more things that Republicans should do but these 4 are burning within me.  There you have it…a solemn warning.  You begged and fought for a chance to serve America.  Here’s your chance.  Take it, run with it, or there will be the infernal regions to pay for it.