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Don't get used to it. The low oil prices are a result of the Saudis not reducing production and continuing full steam ahead regardless of profitability in order

Don't get used to it. The low oil prices are a result of the Saudis not reducing production and continuing full steam ahead regardless of profitability in order to drive other producers and sources such as North American fracking out of business. Most mom and pop oil companies have already been bought or have gone bankrupt as they were not profitable under $50/barrel. Supermajors will begin to go bankrupt and survival mode at $20-25/barrel. As soon as we see supermajors going under the Saudis will roll back their production in order skyrocket prices. It takes AT LEAST 18-24 months to get new wells and unconventional sites online and that's if the entire ecosystem is operational.

oilthrowaway 11y ago
Sounds like a bad time to invest in an energy ETF, which I've been planning to do (Vanguard VDE). Where can you publicly determine the barrel price that the supermajors will bust at?
norea-armozel 11y ago
Do the Saudis have enough cash on tap to out last the big firms? I have to wonder if they're willing to play chicken for much longer.
- simonh 11y ago
  What are they going to do? Reduce production? They'd have to slash it to the bone to materially affect oil prices right now and the benefits of any rise would be realized by the other producers. Their reduced sales would offset any price rise. OPEC just doesn't control enough production capacity to dictate to the market any more. All the producers have become so dependent on oil revenue their response to falling prices has been to increase production as much as possible. They can't afford to cut production and thus cut their revenues without massively exacerbating the damage to their economies.
  - norea-armozel 11y ago
    Do you think this is part of a larger plan to get as much cash before they switch over to some other industry? I know they've been working on solar and other renewables, but are they investing in any firms outside of Saudi Arabia in that regard? I mean building a few solar plants is not much compared to say owning a specific share of a solar panel producer or its equivalent.
    - ambicapter 11y ago
      How are they going to 'switch over to some other industry'? They can't just turn on the scientist brigade the way you turn on an oil well.
      - norea-armozel 11y ago
        That's why I'm asking. Are they planning ahead or just playing financial chicken?
        simonh 11y ago
        They've all been sinking money into sovereign wealth funds, and Dubai has been spending big on expanding it's airlines, promoting its airport as a global hub and developing a tourist industry. They're attempting to diversify their economies but whether or not any of that turns out to be sustainable without massive subsidies from oil profits is dubious.
- crdoconnor 11y ago
  They've got about 5 years of cash left. They can play chicken for a while yet. They're better capitalized than almost every oil producer in America for sure. Even once prices go back up again the memory of all of the bankruptcies is still going to linger on and drive up the cost of capital. I doubt as many investors going to be willing to go all in on a second round of chicken with the Saudis.
simonh 11y ago
Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors. Meanwhile Iraq, Iran and others are ramping up production right now. We're going to see further oil price fluctuations over the coming decades for sure, but I don't think we'll ever see $100+ per barrel oil again.
- crdoconnor 11y ago
  >Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors. Oil that can't be pumped profitably at < $80 / bbl isn't going to be magically become profitable when a better capitalized investor steps in.
  - xixi77 11y ago
    No; but it will be pumped as soon as it hits 80 again, preventing price from going up from there. Although 50 is probably a better number.
  - the4aces 11y ago
    A lot of the cost comes from CAPEX at the front end of the life cycle of the well. There are a lot of wells out there that can produce a marginal barrel of oil for <$20. Once the companies get recapitalized or go through bankruptcy that is the new cost that will need to be looked at.
  - AnimalMuppet 11y ago
    No, but it means that the Saudis can't raise prices much past $80/bbl. And I'm not sure that $80 is the right number for a lot of the fracking wells - the number that I seem to recall is $50. (I freely admit that I'm working from vague memory here, and could easily be wrong...)
- shiftpgdn 11y ago
  You're not technically wrong but think about the entire oil and gas production ecosystem. A supermajor outsources the vast majority of their work to services firms. The seismic is shot by one company, analyzed by another. A land company then obtains the rights to do the drilling on behalf of an oil company. Then the drilling is performed by another company who had all of their tools made by about 20 different companies. Once raw crude is out of the ground/rocks/whatever another company trucks or ships it to a storage facility run by yet another company. It is then refined (usually by a supermajor) and distributed. Think about what will happen when 98% of the companies have gone bust. How quickly will you get the tools and more importantly people back into the industry once the Saudis have run the price of oil up to $300/barrel?
swalsh 11y ago
The conspiracy side of me wonders if this move was completely of the Saudis engineering. Imagine if you're on the Obama administration, you're having problems with Putin, and you're looking to gain a legacy with major climate legislation. If I was Obama circa several months ago, i'd send Kerry over to the Saudis, i'd say "I intend to do everything I can to reduce carbon emissions, people want me to do it, and it needs to be done. There's maybe 20 or 30 real good years left. Who owns those years is up for grabs, but you're in the best position. Here's how we can solve both of our problems."
int0x80 11y ago
Then it should be a good time to buy oil stocks?
unabridged 11y ago
I used to think this also, that they would eventually turn down production and raise prices. But now I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable.
- at-fates-hands 11y ago
  >> I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable. They've been talking about the regime imploding for practically 30 years now. Robert Baer predicted the collapse of the regime over a decade ago: http://www.theatlantic.com/magazine/archive/2003/05/the-fall-of-the-house-of-saud/304215/ http://www.theatlantic.com/magazine/archive/2003/05/the-fall...
  - unabridged 11y ago
    >They've been talking about the regime imploding for practically 30 years now. With what's happened in Northern Africa in the last few years and real elections next door in Iraq (and probably Syria within the next couple years) the Saudi people have to be on the brink. Saudi Arabia already has a defense budget the size of Russia's just to keep the country peaceful.
anthonybsd 11y ago
> were not profitable under $50/barrel. It's important to distinguish marginal cost vs profitability. A company can be operating at a loss for years (if not decades) as long as marginal cost of the product doesn't exceed their marginal revenue. To bring this in the context of oil prices: cost of extraction of conventional oil is around $3-5 dollars. This is how much it costs to operate a well with some minimum maintenance. However, this dismisses the cost of development of the well, i.e. of R&D. If you count that in you get closer to $15-$30 depending on the oil field. Higher for offshore, and higher for shale still. Cost of extraction for fracking is around $15 a barrel, but the R&D costs are much higher, to the tune of $40-60 total. Companies can sustain sunk R&D costs for a long time as long as they are maintaining healthy marginal profit. They will naturally not invest into new fields but that cushion can take years to have effect on the prices.
jstalin 11y ago
Russia has also been increasing production and Iran's oil is just waiting to hit the market...

oilthrowaway 11y ago

Sounds like a bad time to invest in an energy ETF, which I've been planning to do (Vanguard VDE). Where can you publicly determine the barrel price that the supermajors will bust at?

norea-armozel 11y ago

Do the Saudis have enough cash on tap to out last the big firms? I have to wonder if they're willing to play chicken for much longer.

simonh 11y ago
What are they going to do? Reduce production? They'd have to slash it to the bone to materially affect oil prices right now and the benefits of any rise would be realized by the other producers. Their reduced sales would offset any price rise. OPEC just doesn't control enough production capacity to dictate to the market any more. All the producers have become so dependent on oil revenue their response to falling prices has been to increase production as much as possible. They can't afford to cut production and thus cut their revenues without massively exacerbating the damage to their economies.
- norea-armozel 11y ago
  Do you think this is part of a larger plan to get as much cash before they switch over to some other industry? I know they've been working on solar and other renewables, but are they investing in any firms outside of Saudi Arabia in that regard? I mean building a few solar plants is not much compared to say owning a specific share of a solar panel producer or its equivalent.
  - ambicapter 11y ago
    How are they going to 'switch over to some other industry'? They can't just turn on the scientist brigade the way you turn on an oil well.
    - norea-armozel 11y ago
      That's why I'm asking. Are they planning ahead or just playing financial chicken?
      - simonh 11y ago
        They've all been sinking money into sovereign wealth funds, and Dubai has been spending big on expanding it's airlines, promoting its airport as a global hub and developing a tourist industry. They're attempting to diversify their economies but whether or not any of that turns out to be sustainable without massive subsidies from oil profits is dubious.
crdoconnor 11y ago
They've got about 5 years of cash left. They can play chicken for a while yet. They're better capitalized than almost every oil producer in America for sure. Even once prices go back up again the memory of all of the bankruptcies is still going to linger on and drive up the cost of capital. I doubt as many investors going to be willing to go all in on a second round of chicken with the Saudis.

simonh 11y ago

Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors. Meanwhile Iraq, Iran and others are ramping up production right now. We're going to see further oil price fluctuations over the coming decades for sure, but I don't think we'll ever see $100+ per barrel oil again.

crdoconnor 11y ago
>Oil producers going bankrupt isn't going to magically make their assets and production capacity disappear. It will just get bought up by better capitalized investors. Oil that can't be pumped profitably at < $80 / bbl isn't going to be magically become profitable when a better capitalized investor steps in.
- xixi77 11y ago
  No; but it will be pumped as soon as it hits 80 again, preventing price from going up from there. Although 50 is probably a better number.
- the4aces 11y ago
  A lot of the cost comes from CAPEX at the front end of the life cycle of the well. There are a lot of wells out there that can produce a marginal barrel of oil for <$20. Once the companies get recapitalized or go through bankruptcy that is the new cost that will need to be looked at.
- AnimalMuppet 11y ago
  No, but it means that the Saudis can't raise prices much past $80/bbl. And I'm not sure that $80 is the right number for a lot of the fracking wells - the number that I seem to recall is $50. (I freely admit that I'm working from vague memory here, and could easily be wrong...)
shiftpgdn 11y ago
You're not technically wrong but think about the entire oil and gas production ecosystem. A supermajor outsources the vast majority of their work to services firms. The seismic is shot by one company, analyzed by another. A land company then obtains the rights to do the drilling on behalf of an oil company. Then the drilling is performed by another company who had all of their tools made by about 20 different companies. Once raw crude is out of the ground/rocks/whatever another company trucks or ships it to a storage facility run by yet another company. It is then refined (usually by a supermajor) and distributed. Think about what will happen when 98% of the companies have gone bust. How quickly will you get the tools and more importantly people back into the industry once the Saudis have run the price of oil up to $300/barrel?

swalsh 11y ago

The conspiracy side of me wonders if this move was completely of the Saudis engineering. Imagine if you're on the Obama administration, you're having problems with Putin, and you're looking to gain a legacy with major climate legislation. If I was Obama circa several months ago, i'd send Kerry over to the Saudis, i'd say "I intend to do everything I can to reduce carbon emissions, people want me to do it, and it needs to be done. There's maybe 20 or 30 real good years left. Who owns those years is up for grabs, but you're in the best position. Here's how we can solve both of our problems."

int0x80 11y ago

Then it should be a good time to buy oil stocks?

unabridged 11y ago

I used to think this also, that they would eventually turn down production and raise prices. But now I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable.

at-fates-hands 11y ago
>> I believe the Saudis are in a race to cash out everything they can before either their regime is toppled or battery technology makes oil less desirable. They've been talking about the regime imploding for practically 30 years now. Robert Baer predicted the collapse of the regime over a decade ago: http://www.theatlantic.com/magazine/archive/2003/05/the-fall-of-the-house-of-saud/304215/ http://www.theatlantic.com/magazine/archive/2003/05/the-fall...
- unabridged 11y ago
  >They've been talking about the regime imploding for practically 30 years now. With what's happened in Northern Africa in the last few years and real elections next door in Iraq (and probably Syria within the next couple years) the Saudi people have to be on the brink. Saudi Arabia already has a defense budget the size of Russia's just to keep the country peaceful.

anthonybsd 11y ago

> were not profitable under $50/barrel. It's important to distinguish marginal cost vs profitability. A company can be operating at a loss for years (if not decades) as long as marginal cost of the product doesn't exceed their marginal revenue. To bring this in the context of oil prices: cost of extraction of conventional oil is around $3-5 dollars. This is how much it costs to operate a well with some minimum maintenance. However, this dismisses the cost of development of the well, i.e. of R&D. If you count that in you get closer to $15-$30 depending on the oil field. Higher for offshore, and higher for shale still. Cost of extraction for fracking is around $15 a barrel, but the R&D costs are much higher, to the tune of $40-60 total. Companies can sustain sunk R&D costs for a long time as long as they are maintaining healthy marginal profit. They will naturally not invest into new fields but that cushion can take years to have effect on the prices.

jstalin 11y ago

Russia has also been increasing production and Iran's oil is just waiting to hit the market...