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I really appreciate this piece as there's a lot of the world of oil I don't understand. One thing I don't understand is, why is it favorable for OPEC not to cu

I really appreciate this piece as there's a lot of the world of oil I don't understand. One thing I don't understand is, why is it favorable for OPEC not to cut supply? Is it they want to crush all non OPEC based producers? Or are their buyers forced to buy at a particular price so they don't care if they keep producing?

birdyrooster 7y ago
I think they see this is their last chance to shake off the light crude people in the US.
- AnthonyMouse 7y ago
  The light crude people in the US are the main reason the US doesn't have a revenue-neutral carbon tax or similar. I kind of doubt they want the implications of them going away -- though everybody else might.
- jsnider3 7y ago
  As an American, I welcome foreign countries to destroy our oil industry. They always support the worst politicians.
fspeech 7y ago
Because individually it does not work. If you cut and oil price does not go up as much as your cut percentage wise you actually lose revenue. And your competitors who don't cut benefit from any price rise. It is not easy to maintain a price cartel.
- 0xddd 7y ago
  Sounds like a great real-world example of a prisoner's dilemma
arthurcolle 7y ago
From my understanding, over the last decade, shale has become a force to be reckoned with in North America (US, Canada). This is seen as a competitive threat to other global energy producers. Saudi Arabia and Russia both have sufficient cash reserves to be able to just dump a glut of crude oil on the market at "fair market value" and exist with the depressed prices and are ok with making no money to basically completely dominate the market once tons of highly levered US upstream and downstream oil producers die off with this ongoing period of non-existent demand.
- chasd00 7y ago
  that's true but the oil is still there and the extraction tech perfected. Maybe the existing players go bankrupt today but when prices come back up someone else will get a loan and turn the wells right back on. Fracking and the other technological breakthroughs have put a price ceiling on oil below which OPEC can afford.
  - arthurcolle 7y ago
    The oil rights are owned by specific companies. You can't just drill wherever you want - these oil/mineral rights are owned and can be resold, but it's not as easy as you describe.
  - s1artibartfast 7y ago
    I think it is more challenging than you expect. This tactic has likely skuttled or delayed any development projects in the works. Future investors will be more cautious if they think the market can drop out at any time
    - nradov 7y ago
      But that's nothing new. Oil prices totally collapsed in 1998 and then rebounded several years later. Investors are aware of that possibility and plan around it.
- duxup 7y ago
  I think that is possible but.... what is the end game? The oil is still there, they ability to extract it exists... so company A goes out of business, but once the countries tire of shooting themselves in the foot and prices rise, Company B will just extract it. At best they spite company A, but didn't change much.... maybe they make a few bucks while company B ramps up. And that all assumes other nations play along... that is not common.
fossuser 7y ago
They did want to cut supply, Russia refused to cooperate in the cut. As a result they increased supply to fight back and hurt Russia’s export. At least that was the story I read a few weeks ago when this went down.
mbreese 7y ago
ArsTechnica / Wired has a good article out about just that question. One reason that isn’t economic (and there are many economic factors a play here too) is that if you stop pumping oil, you can potentially damage the well. This would make it more difficult to reopen the well in the future when the prices improve. This also tends to affect smaller producers with fewer wells and thus more risk of one of them is damaged. (This is related to why haven’t wells shut down in response to the drop in price, as opposed to simply producing less oil from existing wells.) https://arstechnica.com/science/2020/05/heres-why-the-world-is-still-producing-more-oil-than-it-needs/ https://arstechnica.com/science/2020/05/heres-why-the-world-...
- xiphias2 7y ago
  Isn't another solution to just let the oil go into the ground, and stop worrying about destroying earth? I can imagine Trump getting rid of all environmental regulations. How likely is that? (I'm on the environmental regulations side of course, but I'm quite worried that this will be the logical next step).
  - worik 7y ago
    Exactly!
  - csours 7y ago
    Sure but how will that make money for the well operator? I understand what you're saying, but what actual legal/political/economic framework are we talking about?
    - xiphias2 7y ago
      Right now the operators have to pay for the storage as far as I know. The game is not about making money, but at least not losing. That's why I'm afraid that some people would rather make an environmental disaster than to pay for a company to store the oil. But of course I don't know anything about the oil industry.
- lostlogin 7y ago
anthony_doan 7y ago
Oil price is down because SA and Russia have a disagreement. Russia want to produce more barrel. On top of that, the Covid19 happened. Some theorized that SA and Russian pumping more oil was a plan to kill USA's fracking and shale industry. I'm just hoping it'll force us to move toward renewable so we won't be dependent on these countries.
- rckoepke 7y ago
  I don't see this. Saudi Arabia has been producing around 10.5 million barrels per day fairly consistently-ish for the last 5 years. If anything it's a bit lower over the past 12 months vs the 60 month average: https://ycharts.com/indicators/saudi_arabia_crude_oil_production https://ycharts.com/indicators/saudi_arabia_crude_oil_produc... So that theory is right out, imo. Russia has increased production only 7-8% in the last 5 years. https://ycharts.com/indicators/russia_crude_oil_production https://ycharts.com/indicators/russia_crude_oil_production USA has increased production 54% since the beginning of 2016. https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart https://www.macrotrends.net/2562/us-crude-oil-production-his... I'd investigate what you're reading that gave you the impression that Russia and SA increased production drastically in order to tank USA. It's likely the sources are providing misinformation.
  - simonh 7y ago
    The disagreement between Saudi (representing OPEC) and Russia which lead them to increase production was just a few months ago, so you won’t see it’s consequences in oil production numbers for the last few years. It was widely reported in the media. https://en.m.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil_price_war https://en.m.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil...
    - rckoepke 7y ago
      > which lead them to increase production was just a few months ago https://www.eia.gov/opendata/qb.php?category=1039874&sdid=STEO.COPR_SA.M https://www.eia.gov/opendata/qb.php?category=1039874&sdid=ST... Production for the month of March is published and does not show a significant increase. Again, its likely that the sources you follow are providing misinformation - not just about this, but about other things as well. More generally, I follow oil news quite closely (as I work in the sector, and I have worked in Saudi Arabia specifically). These types of claims are "widely report in the media" constantly every year, although it is interesting that there's a Wikipedia page about this year's events. I personally wouldn't trust that version of events, as it only narrates changes in price without addressing movements of the supply/demand curve. I consider volumes of supply and demand to be more narrative for fungible commodities than statements of price alone. As all these price movements happened after China's enormous quarantine and reduction in road traffic in February, I'd posit that the falling prices are a result of concrete reduced demand, rather than hand-wavey price adjustments. Saudi can't adjust price lower globally single-handedly, the next marginal sales will happen at the market price. This wikipedia article doesn't seem to see that. The only way Saudi can reduce the price for its competitors is by supplying more oil to the global market.
colechristensen 7y ago
Many games are being played by many players. It's a much more complicated prisoner's dilemma. Many of the oil producing countries are nearly entirely reliant on oil sales for their economies and national budgets. Something like, yes, you could optimize month to month prices with high cooperation cutting equitable amounts. But. For some states it's like agreeing to starvation, no matter what they do prices are too low to pay the bills. Many of them only maintain their power because of oil money. And for some, losing money now means they can bankrupt or seriously disrupt their competition meaning they will make more money over a longer period. So if you're starving there's a strong motivation do cheat. Everybody else cuts production, prices go up, and you sell everything you can to take advantage. And remember we're talking about price fixing cartels here. Illegal in much of the world. Opec cuts would mean North American profits, because we obviously don't participate. It is, as the author writes, now much more likely for some of these oil states to fail completely. Revolutions, civil wars, regional wars. States which had leverage over the US because of oil are seeing that evaporate with this oversupply and price crash. And longer term, but not that far out is both some of these countries running out of oil and oil demand worldwide tending much much much lower as oil is phased out as an energy source. These oil countries see the impending permanent decline in oil demand and the immediate future is their chance to extract as much as they can out of their natural resource which each year will become less valuable and less relevant.
rckoepke 7y ago
There are too many producers...OPEC only produces 30% of the global oil supply. The USA has proven that it can ramp up to meet large shortage in global supply very rapidly with fracking. And there are _thousands_ of oil companies in the USA, so it's difficult to collude with all of them. Basically, OPEC needs a situation where they can reduce supply by 10% and get more than 10% increase in price. Otherwise they may increase the price, but still lose revenue overall. Over the past two decades they've tried this many times, but it hasn't worked. Russia and the US always increase production enough in response to keep the rise in prices relatively low. As oil is generally an inelastic commodity, they may be able to reduce their production by something appalling, like 2/3rds reduction. Then they would need, and probably actually get, a global oil price 3 times what it was previously in order to maintain revenue. However, previously that meant an oil price of $180-300/bbl which would in turn cause a global recession and reduce demand. Even if oil is very inelastic, at some point people would stop driving/flying/using energy. So really, there was no longer any way for OPEC to function as a cartel. The US effectively broke the cartel when it succeeded at being the new "swing producer" able to ramp up and down production in <6 months to meet global needs. This was all due to fracking and horizontal drilling. OPEC has been trying to work with Russia to establish a new "OPEC+" that might control enough market, but it's incredibly difficult to keep all players honest. And impossible in a coronavirus market where demand is down so much (no one is flying even with nearly free oil). Lastly, the US is starting to consider joining OPEC+. It's not something I previously thought was possible, because there's not one national petroleum company in the USA to negotiate with, there's thousands or tens of thousands of oil companies to negotiate with (some are just mom+pop oil companies which own two wells on an old plot in Pennsylvania, for example). However, just as we sometimes pay farmers not to farm, or pay dairy farmers not to produce milk, we are considering paying oil companies to leave oil in the ground: https://thehill.com/policy/energy-environment/493187-trump-adminsitation-eyes-paying-oil-companies-to-keep-crude-in-the https://thehill.com/policy/energy-environment/493187-trump-a... This would effectively be the US joining OPEC+ to artificially prop up the price of oil (and thus, subsidize the government budgets of Russia, Iran, Saudi Arabia, and other oil producing nations with American consumer's wallets). It does not seem to be a policy in serious contention, however. I don't expect the USA to follow through on these ideas.
- 7y ago
simonh 7y ago
OPEC did try to strike a deal to reduce oil production earlier this year, but the deal was dependent on agreement with a Russia, the largest non-OPEC producer. However Russia refused to agree, because they want lower prices in order to kill the US shale oil industry. This would have meant that if OPEC had cut production Russia would have benefited hugely. As a result OPEC decided to increase production, to try and force Russia back to the negotiating table. This was all just before the Pandemic hit.

birdyrooster 7y ago

I think they see this is their last chance to shake off the light crude people in the US.

AnthonyMouse 7y ago
The light crude people in the US are the main reason the US doesn't have a revenue-neutral carbon tax or similar. I kind of doubt they want the implications of them going away -- though everybody else might.
jsnider3 7y ago
As an American, I welcome foreign countries to destroy our oil industry. They always support the worst politicians.

fspeech 7y ago

Because individually it does not work. If you cut and oil price does not go up as much as your cut percentage wise you actually lose revenue. And your competitors who don't cut benefit from any price rise. It is not easy to maintain a price cartel.

0xddd 7y ago
Sounds like a great real-world example of a prisoner's dilemma

arthurcolle 7y ago

From my understanding, over the last decade, shale has become a force to be reckoned with in North America (US, Canada). This is seen as a competitive threat to other global energy producers. Saudi Arabia and Russia both have sufficient cash reserves to be able to just dump a glut of crude oil on the market at "fair market value" and exist with the depressed prices and are ok with making no money to basically completely dominate the market once tons of highly levered US upstream and downstream oil producers die off with this ongoing period of non-existent demand.

chasd00 7y ago
that's true but the oil is still there and the extraction tech perfected. Maybe the existing players go bankrupt today but when prices come back up someone else will get a loan and turn the wells right back on. Fracking and the other technological breakthroughs have put a price ceiling on oil below which OPEC can afford.
- arthurcolle 7y ago
  The oil rights are owned by specific companies. You can't just drill wherever you want - these oil/mineral rights are owned and can be resold, but it's not as easy as you describe.
- s1artibartfast 7y ago
  I think it is more challenging than you expect. This tactic has likely skuttled or delayed any development projects in the works. Future investors will be more cautious if they think the market can drop out at any time
  - nradov 7y ago
    But that's nothing new. Oil prices totally collapsed in 1998 and then rebounded several years later. Investors are aware of that possibility and plan around it.
duxup 7y ago
I think that is possible but.... what is the end game? The oil is still there, they ability to extract it exists... so company A goes out of business, but once the countries tire of shooting themselves in the foot and prices rise, Company B will just extract it. At best they spite company A, but didn't change much.... maybe they make a few bucks while company B ramps up. And that all assumes other nations play along... that is not common.

fossuser 7y ago

They did want to cut supply, Russia refused to cooperate in the cut. As a result they increased supply to fight back and hurt Russia’s export. At least that was the story I read a few weeks ago when this went down.

mbreese 7y ago

ArsTechnica / Wired has a good article out about just that question. One reason that isn’t economic (and there are many economic factors a play here too) is that if you stop pumping oil, you can potentially damage the well. This would make it more difficult to reopen the well in the future when the prices improve. This also tends to affect smaller producers with fewer wells and thus more risk of one of them is damaged. (This is related to why haven’t wells shut down in response to the drop in price, as opposed to simply producing less oil from existing wells.) https://arstechnica.com/science/2020/05/heres-why-the-world-is-still-producing-more-oil-than-it-needs/ https://arstechnica.com/science/2020/05/heres-why-the-world-...

xiphias2 7y ago
Isn't another solution to just let the oil go into the ground, and stop worrying about destroying earth? I can imagine Trump getting rid of all environmental regulations. How likely is that? (I'm on the environmental regulations side of course, but I'm quite worried that this will be the logical next step).
- worik 7y ago
  Exactly!
- csours 7y ago
  Sure but how will that make money for the well operator? I understand what you're saying, but what actual legal/political/economic framework are we talking about?
  - xiphias2 7y ago
    Right now the operators have to pay for the storage as far as I know. The game is not about making money, but at least not losing. That's why I'm afraid that some people would rather make an environmental disaster than to pay for a company to store the oil. But of course I don't know anything about the oil industry.
lostlogin 7y ago

anthony_doan 7y ago

Oil price is down because SA and Russia have a disagreement. Russia want to produce more barrel. On top of that, the Covid19 happened. Some theorized that SA and Russian pumping more oil was a plan to kill USA's fracking and shale industry. I'm just hoping it'll force us to move toward renewable so we won't be dependent on these countries.

rckoepke 7y ago
I don't see this. Saudi Arabia has been producing around 10.5 million barrels per day fairly consistently-ish for the last 5 years. If anything it's a bit lower over the past 12 months vs the 60 month average: https://ycharts.com/indicators/saudi_arabia_crude_oil_production https://ycharts.com/indicators/saudi_arabia_crude_oil_produc... So that theory is right out, imo. Russia has increased production only 7-8% in the last 5 years. https://ycharts.com/indicators/russia_crude_oil_production https://ycharts.com/indicators/russia_crude_oil_production USA has increased production 54% since the beginning of 2016. https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart https://www.macrotrends.net/2562/us-crude-oil-production-his... I'd investigate what you're reading that gave you the impression that Russia and SA increased production drastically in order to tank USA. It's likely the sources are providing misinformation.
- simonh 7y ago
  The disagreement between Saudi (representing OPEC) and Russia which lead them to increase production was just a few months ago, so you won’t see it’s consequences in oil production numbers for the last few years. It was widely reported in the media. https://en.m.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil_price_war https://en.m.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil...
  - rckoepke 7y ago
    > which lead them to increase production was just a few months ago https://www.eia.gov/opendata/qb.php?category=1039874&sdid=STEO.COPR_SA.M https://www.eia.gov/opendata/qb.php?category=1039874&sdid=ST... Production for the month of March is published and does not show a significant increase. Again, its likely that the sources you follow are providing misinformation - not just about this, but about other things as well. More generally, I follow oil news quite closely (as I work in the sector, and I have worked in Saudi Arabia specifically). These types of claims are "widely report in the media" constantly every year, although it is interesting that there's a Wikipedia page about this year's events. I personally wouldn't trust that version of events, as it only narrates changes in price without addressing movements of the supply/demand curve. I consider volumes of supply and demand to be more narrative for fungible commodities than statements of price alone. As all these price movements happened after China's enormous quarantine and reduction in road traffic in February, I'd posit that the falling prices are a result of concrete reduced demand, rather than hand-wavey price adjustments. Saudi can't adjust price lower globally single-handedly, the next marginal sales will happen at the market price. This wikipedia article doesn't seem to see that. The only way Saudi can reduce the price for its competitors is by supplying more oil to the global market.

colechristensen 7y ago

Many games are being played by many players. It's a much more complicated prisoner's dilemma. Many of the oil producing countries are nearly entirely reliant on oil sales for their economies and national budgets. Something like, yes, you could optimize month to month prices with high cooperation cutting equitable amounts. But. For some states it's like agreeing to starvation, no matter what they do prices are too low to pay the bills. Many of them only maintain their power because of oil money. And for some, losing money now means they can bankrupt or seriously disrupt their competition meaning they will make more money over a longer period. So if you're starving there's a strong motivation do cheat. Everybody else cuts production, prices go up, and you sell everything you can to take advantage. And remember we're talking about price fixing cartels here. Illegal in much of the world. Opec cuts would mean North American profits, because we obviously don't participate. It is, as the author writes, now much more likely for some of these oil states to fail completely. Revolutions, civil wars, regional wars. States which had leverage over the US because of oil are seeing that evaporate with this oversupply and price crash. And longer term, but not that far out is both some of these countries running out of oil and oil demand worldwide tending much much much lower as oil is phased out as an energy source. These oil countries see the impending permanent decline in oil demand and the immediate future is their chance to extract as much as they can out of their natural resource which each year will become less valuable and less relevant.

rckoepke 7y ago

There are too many producers...OPEC only produces 30% of the global oil supply. The USA has proven that it can ramp up to meet large shortage in global supply very rapidly with fracking. And there are _thousands_ of oil companies in the USA, so it's difficult to collude with all of them. Basically, OPEC needs a situation where they can reduce supply by 10% and get more than 10% increase in price. Otherwise they may increase the price, but still lose revenue overall. Over the past two decades they've tried this many times, but it hasn't worked. Russia and the US always increase production enough in response to keep the rise in prices relatively low. As oil is generally an inelastic commodity, they may be able to reduce their production by something appalling, like 2/3rds reduction. Then they would need, and probably actually get, a global oil price 3 times what it was previously in order to maintain revenue. However, previously that meant an oil price of $180-300/bbl which would in turn cause a global recession and reduce demand. Even if oil is very inelastic, at some point people would stop driving/flying/using energy. So really, there was no longer any way for OPEC to function as a cartel. The US effectively broke the cartel when it succeeded at being the new "swing producer" able to ramp up and down production in <6 months to meet global needs. This was all due to fracking and horizontal drilling. OPEC has been trying to work with Russia to establish a new "OPEC+" that might control enough market, but it's incredibly difficult to keep all players honest. And impossible in a coronavirus market where demand is down so much (no one is flying even with nearly free oil). Lastly, the US is starting to consider joining OPEC+. It's not something I previously thought was possible, because there's not one national petroleum company in the USA to negotiate with, there's thousands or tens of thousands of oil companies to negotiate with (some are just mom+pop oil companies which own two wells on an old plot in Pennsylvania, for example). However, just as we sometimes pay farmers not to farm, or pay dairy farmers not to produce milk, we are considering paying oil companies to leave oil in the ground: https://thehill.com/policy/energy-environment/493187-trump-adminsitation-eyes-paying-oil-companies-to-keep-crude-in-the https://thehill.com/policy/energy-environment/493187-trump-a... This would effectively be the US joining OPEC+ to artificially prop up the price of oil (and thus, subsidize the government budgets of Russia, Iran, Saudi Arabia, and other oil producing nations with American consumer's wallets). It does not seem to be a policy in serious contention, however. I don't expect the USA to follow through on these ideas.

7y ago

simonh 7y ago

OPEC did try to strike a deal to reduce oil production earlier this year, but the deal was dependent on agreement with a Russia, the largest non-OPEC producer. However Russia refused to agree, because they want lower prices in order to kill the US shale oil industry. This would have meant that if OPEC had cut production Russia would have benefited hugely. As a result OPEC decided to increase production, to try and force Russia back to the negotiating table. This was all just before the Pandemic hit.