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The market is broken because demand is way down, but production isn't being lowered to match. Saudi Arabia intends to keep their production high. The other pr

by axus 7y ago

The market is broken because demand is way down, but production isn't being lowered to match. Saudi Arabia intends to keep their production high. The other producers are losing money but haven't reduced output, because changing output levels is more expensive than taking the loss.

fossuser 7y ago
I think I read they were doing this in part to hurt Russian producers who would not cooperate with OPEC (KSA wanted to reduce production in a coordinated way). As a side effect this hurts American producers too and could drive them out of business. Which would be bad for energy independence and in the end give more price control back to OPEC.
- hackeraccount 7y ago
  I'm unclear how that's supposed to work. Oil goes below $30 for an extended period of time. So long that all the shale producers go bust. So long that no one buys up all those assets but instead just lets them go fallow. After all that time Saudia Arabia now lets the price rise. How much time will it be over $30 before the shale producers start up again? Will it really pay off compared to the amount of time they had to spend with it under $30? And say they keep it _just_ over $30 - just how much over $30 can they go and for how long? It seems like in the long run you'd better be prepared to keep it not much over $30 if you want to keep the shale producers out for good. That the idea of "put them out of business and then double the price" won't really work in a practical manner. I'm failing to think of an example where this did work. Diamonds? I thought that the producers either bought or colluded to create an effective monopoly. That would be like S.A. just buying producers. That doesn't seem practical but who knows -maybe it is.
  - fossuser 7y ago
    I think it’s more a side-effect of the Russia pricing fight than the goal itself. If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.
    - mrscottson 7y ago
      As I understand it, most shale producers have tremendous amounts of debt that they can't service when oil is below $40...investors and shareholders will be holding a useless bag if this continues for much longer.
  - mordymoop 7y ago
    “ How much time will it be over $30 before the shale producers start up again?” I work in this field, and the answer to your question is “instantaneously.” The largest operators will not go out of business because they have sufficient exposure to non-shale assets; they will simply immediately drill the wells they had planned to drill when the crisis hit. Capital will rapidly find its way into the hands of the people with the expertise to drill and complete money-making wells. The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.
    - whatshisface 7y ago
      To add to that, the wells they already have drilled are perfectly happy to sit around until someone goes out to frack them, and the wells they've already fracked are almost perfectly happy to sit around until someone produces them. The only investment that can't survive a year of unfavorable prices is the effort the business development guy put in to making phone calls.
      - IkmoIkmo 7y ago
        To add to that, shale produces apparently hedged hard against price drops and are currently sitting on a big pile of money ready to be deployed.
    - bilbo0s 7y ago
      This guy understands the energy business where oil is concerned. I'd only add that the above is also the reason that the Saudi gambit to put competitors out of business is highly unlikely to work. These competitors will just sit it out until favorable environments come back around. I'm not sure what the Saudis aim to achieve? But to achieve what people are speculating that they want to achieve, they need to have something else up their sleeves. Because a temporary low price barrage alone is not gonna do it. Maybe they are thinking about low prices forever? Not really sure. But they must have some kind of additional plans since they should definitely know everything everyone else in the industry knows.
  - Majromax 7y ago
    > How much time will it be over $30 before the shale producers start up again? I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit. From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.
  - imtringued 7y ago
    >That the idea of "put them out of business and then double the price" won't really work in a practical manner. Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.
ihaveajob 7y ago
I don't know much economics, but one thing I learned is that markets tend to not work as such when the players are few and motivated by other reasons than pricing. Airlines are one such example, depending on the time period, because being so few and dependent on entry barriers such as airport slots and flying licenses, they can easily collude. Oil producers are even more so, being driven by government decisions and geopolitics more than just profit alone. So I wouldn't say that the oil market is broken, as much as it has never really worked as a close-to-ideal market.
ptero 7y ago
This does indicate market inefficiencies, but such tactics -- flooding the market with cheap products to kill competition, then raising prices back -- is pretty common. I have seen it everywhere from cell phone marketing to grocery stores. I have personally seen, twice, Stop and Shop moving in, dropping prices, driving a less-well-funded competitor out, then going back to business as usual. I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
- vikramkr 7y ago
  That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market
  - wernercd 7y ago
    "in a perfect market producers make zero profits" In what world would any company make zero profits in a "perfect" sense? Companies exist to make profit...
    - vikramkr 7y ago
      Perfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
    - Klinky 7y ago
      Even in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
    - savanaly 7y ago
      You're thinking of accounting profit, the person you're replying to was thinking of economic profit. https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp https://www.investopedia.com/ask/answers/033015/what-differe...
eyegor 7y ago
It's not that changing output levels is too expensive, it's that shutting down/starting up is too expensive. The fixed costs are so high that it's far cheaper to produce at a loss (and stockpile if needed) than to shut down.
zozbot234 7y ago
> The market is broken because demand is way down, but production isn't being lowered to match. Given these prices, shale oil and tar sands production is going to shut down at some point. This is good news in a way, because these are among the dirtiest sources of oil in terms of environmental impact. Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered.
- Causality1 7y ago
  Not to mention the strategic advantages of leaving oil in the ground in your own territory. It'll still be there when the middle east runs dry.
  - kyboren 7y ago
    I think the strategic advantage is to drill, baby, drill, and profit from those natural resources as much as possible while we're still in the Oil Age. If the Middle East runs dry it will be a strategic victory for all those countries and a loss for the other countries where high production costs kept the remaining oil in the ground, just sitting there never having generated a penny in profits, with renewables and electrification of transportation an even more imminent threat to the oil market. Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.
    - Causality1 7y ago
      Bit of a win/win though. Either the oil age ends before the ME runs out and we potentially avoid an environmental disaster, or it doesn't, in which case our reserves might prevent a strategic disaster.
- a3n 7y ago
  > Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered. Wait, what? A desert is just as much an ecosystem as a rainforest or a city.
kortilla 7y ago
That’s not a broken market. That’s just standard behavior when a supply cartel falls apart. Eventually those producing at a loss will be forced to stop.
dang 7y ago
(This subthread was originally a child of https://news.ycombinator.com/item?id=22718785 https://news.ycombinator.com/item?id=22718785)

by axus 7y ago

fossuser 7y ago

I think I read they were doing this in part to hurt Russian producers who would not cooperate with OPEC (KSA wanted to reduce production in a coordinated way). As a side effect this hurts American producers too and could drive them out of business. Which would be bad for energy independence and in the end give more price control back to OPEC.

hackeraccount 7y ago
I'm unclear how that's supposed to work. Oil goes below $30 for an extended period of time. So long that all the shale producers go bust. So long that no one buys up all those assets but instead just lets them go fallow. After all that time Saudia Arabia now lets the price rise. How much time will it be over $30 before the shale producers start up again? Will it really pay off compared to the amount of time they had to spend with it under $30? And say they keep it _just_ over $30 - just how much over $30 can they go and for how long? It seems like in the long run you'd better be prepared to keep it not much over $30 if you want to keep the shale producers out for good. That the idea of "put them out of business and then double the price" won't really work in a practical manner. I'm failing to think of an example where this did work. Diamonds? I thought that the producers either bought or colluded to create an effective monopoly. That would be like S.A. just buying producers. That doesn't seem practical but who knows -maybe it is.
- fossuser 7y ago
  I think it’s more a side-effect of the Russia pricing fight than the goal itself. If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.
  - mrscottson 7y ago
    As I understand it, most shale producers have tremendous amounts of debt that they can't service when oil is below $40...investors and shareholders will be holding a useless bag if this continues for much longer.
- mordymoop 7y ago
  “ How much time will it be over $30 before the shale producers start up again?” I work in this field, and the answer to your question is “instantaneously.” The largest operators will not go out of business because they have sufficient exposure to non-shale assets; they will simply immediately drill the wells they had planned to drill when the crisis hit. Capital will rapidly find its way into the hands of the people with the expertise to drill and complete money-making wells. The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.
  - whatshisface 7y ago
    To add to that, the wells they already have drilled are perfectly happy to sit around until someone goes out to frack them, and the wells they've already fracked are almost perfectly happy to sit around until someone produces them. The only investment that can't survive a year of unfavorable prices is the effort the business development guy put in to making phone calls.
    - IkmoIkmo 7y ago
      To add to that, shale produces apparently hedged hard against price drops and are currently sitting on a big pile of money ready to be deployed.
  - bilbo0s 7y ago
    This guy understands the energy business where oil is concerned. I'd only add that the above is also the reason that the Saudi gambit to put competitors out of business is highly unlikely to work. These competitors will just sit it out until favorable environments come back around. I'm not sure what the Saudis aim to achieve? But to achieve what people are speculating that they want to achieve, they need to have something else up their sleeves. Because a temporary low price barrage alone is not gonna do it. Maybe they are thinking about low prices forever? Not really sure. But they must have some kind of additional plans since they should definitely know everything everyone else in the industry knows.
- Majromax 7y ago
  > How much time will it be over $30 before the shale producers start up again? I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit. From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.
- imtringued 7y ago
  >That the idea of "put them out of business and then double the price" won't really work in a practical manner. Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.

ihaveajob 7y ago

I don't know much economics, but one thing I learned is that markets tend to not work as such when the players are few and motivated by other reasons than pricing. Airlines are one such example, depending on the time period, because being so few and dependent on entry barriers such as airport slots and flying licenses, they can easily collude. Oil producers are even more so, being driven by government decisions and geopolitics more than just profit alone. So I wouldn't say that the oil market is broken, as much as it has never really worked as a close-to-ideal market.

ptero 7y ago

This does indicate market inefficiencies, but such tactics -- flooding the market with cheap products to kill competition, then raising prices back -- is pretty common. I have seen it everywhere from cell phone marketing to grocery stores. I have personally seen, twice, Stop and Shop moving in, dropping prices, driving a less-well-funded competitor out, then going back to business as usual. I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.

vikramkr 7y ago
That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market
- wernercd 7y ago
  "in a perfect market producers make zero profits" In what world would any company make zero profits in a "perfect" sense? Companies exist to make profit...
  - vikramkr 7y ago
    Perfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
  - Klinky 7y ago
    Even in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
  - savanaly 7y ago
    You're thinking of accounting profit, the person you're replying to was thinking of economic profit. https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp https://www.investopedia.com/ask/answers/033015/what-differe...

eyegor 7y ago

It's not that changing output levels is too expensive, it's that shutting down/starting up is too expensive. The fixed costs are so high that it's far cheaper to produce at a loss (and stockpile if needed) than to shut down.

zozbot234 7y ago

> The market is broken because demand is way down, but production isn't being lowered to match. Given these prices, shale oil and tar sands production is going to shut down at some point. This is good news in a way, because these are among the dirtiest sources of oil in terms of environmental impact. Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered.

Causality1 7y ago
Not to mention the strategic advantages of leaving oil in the ground in your own territory. It'll still be there when the middle east runs dry.
- kyboren 7y ago
  I think the strategic advantage is to drill, baby, drill, and profit from those natural resources as much as possible while we're still in the Oil Age. If the Middle East runs dry it will be a strategic victory for all those countries and a loss for the other countries where high production costs kept the remaining oil in the ground, just sitting there never having generated a penny in profits, with renewables and electrification of transportation an even more imminent threat to the oil market. Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.
  - Causality1 7y ago
    Bit of a win/win though. Either the oil age ends before the ME runs out and we potentially avoid an environmental disaster, or it doesn't, in which case our reserves might prevent a strategic disaster.
a3n 7y ago
> Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered. Wait, what? A desert is just as much an ecosystem as a rainforest or a city.

kortilla 7y ago

That’s not a broken market. That’s just standard behavior when a supply cartel falls apart. Eventually those producing at a loss will be forced to stop.

dang 7y ago

(This subthread was originally a child of https://news.ycombinator.com/item?id=22718785 https://news.ycombinator.com/item?id=22718785)