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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

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.
  - woobar 7y ago
    They want Russia to come back in line with OPEC. Russian economy depends on oil exports, and the low oil prices might force it back to table. See what happened to Russian currency when price went down.
    - bilbo0s 7y ago
      But they aren't going to achieve that on low prices alone. That's just reality. Coronavirus has placed Russia squarely in the driver's seat here. Saudi production surplus or no surplus is meaningless as Covid is depressing prices in any case. (And will continue to do so for the foreseeable future.) So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?) It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)
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.

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.
- woobar 7y ago
  They want Russia to come back in line with OPEC. Russian economy depends on oil exports, and the low oil prices might force it back to table. See what happened to Russian currency when price went down.
  - bilbo0s 7y ago
    But they aren't going to achieve that on low prices alone. That's just reality. Coronavirus has placed Russia squarely in the driver's seat here. Saudi production surplus or no surplus is meaningless as Covid is depressing prices in any case. (And will continue to do so for the foreseeable future.) So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?) It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)

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.