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I found this part really interesting: "For dozens of oil producers, the plunge in oil prices is devastating. No major oil producer can balance its budget at pri

I found this part really interesting: "For dozens of oil producers, the plunge in oil prices is devastating. No major oil producer can balance its budget at prices below $40; according to the International Monetary Fund, with the exception of Qatar, every country in the Middle East requires at least $60, with Algeria at $157 and Iran at a whopping $390. The average Brent price of oil over the past month has been a hair above $20." It's fascinating the cost of extracting oil is so high in Iran in particular, a country that is under constant sanction by the US. I wonder how much of the cost is due to the sanctions and disturbance in trade (ie Iran cannot import key technologies), and how much of it is because Iran's oil deposits is just "harder" to drill.

mbreese 6y ago
> the cost of extracting oil is so high in Iran I think you might be reading that wrong. It isn’t that the cost of extracting the oil is so high, but that the budgets of these countries depends on the price of oil being high. When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. These numbers aren’t related to the cost of extraction (which is a different issue but is also variable between different regions).
- xiaolingxiao 6y ago
  Ah, so does this mean Iran is particularly dependent on oil to finance itself?
  - rckoepke 6y ago
    Indeed: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) 79% of their exports is unrefined crude oil. While exports are not always the whole story, in this case it is extremely relevant. If Iran's economy was 99% domestic and 1% trade, (essentially autarkic) then it wouldn't really matter at all what the price of oil is, as Iran makes everything it needs for itself, whether that be automobiles, medical equipment, financial services, concrete, etc. However, Iran is not autarkic and trade is about 50% of its GDP. In order to complete international trade it requires foreign currency. At the start of the year, Iran had $85B in foreign reserves, according to FRED anyways. It was expected to lose $15B this year, but that was supposed to be while exporting $30B of crude oil. If that $30B is now only $10B, then Iran could lose $35B of foreign reserves this year. They can reduce domestic spending (potentially lowering quality of life for citizens), or they can spin up domestic industry to replace imports, or they can figure out how to increase the $$ value of their exports (potentially by refining the crude oil into higher value products, for example). If they don't do anything, and the trend continues in a straight line, they'd run out of foreign reserves within 3 years. At that point, it would be very difficult for them to buy any of the imports they need and they'd face a venezuela-style situation where citizens would find it impossible to get whatever goods used to be imported. For Iran, this is food, cars, durable goods & machinery, electronics, and textiles: https://atlas.cid.harvard.edu/explore?country=107&product=undefined&year=2017&tradeDirection=import&productClass=HS&target=Product&partner=undefined&startYear=undefined https://atlas.cid.harvard.edu/explore?country=107&product=un...
    - redis_mlc 6y ago
      All oil and gas exporters become dependant on that revenue. It's human nature to spend it all.
      - opo 6y ago
        People can choose to do that, or they can choose to save and invest the money. Norway's oil fund is around 1 trillion dollars. >...The Government Pension Fund Global, also known as the Oil Fund, was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector. It has over US$1 trillion in assets, including 1.4% of global stocks and shares, making it the world’s largest sovereign wealth fund. https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
        sadfklsjlkjwt 6y ago
        An increasing proportion of Norwegian spending is already covered by the revenues from the Oil Fund. This crisis has seen a near perfect storm of massive increase in welfare spending, massive fall in the value or the Oil Fund's assets and massive decrease in the price of oil (and hence the input for the Oil Fund). It will be very interesting to see what happens with the fund in the next 10-20 years. EDIT: To be clear I am glad the fund exists. It has been and is a much better way of using the natural resource bonus. However, I strongly suspect that Norway will use the entire fund cushioning the transition away from being an oil producer.
        jacobush 6y ago
        Not a bad use.
        teknopaul 6y ago
        Countries under sanctions, obviously, cannot choose what to spend their money on. If you impose sanctions you are essentially government planning another country. I agree with the article's principal point that this is very likey to go horribly wrong somewhere soon. Prevention is better than cure. Even from a purely selfish viewpoint.
- sandworm101 6y ago
  >> When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. And there is another angle to these numbers. They are the prices based on recent exports of oil. Iran isn't a silly country that requires $300 oil to break even. Their oil exports have dropped in recent years. That drop (sanctions) is a separate factor than oil price. If oil exports a halved, the break-even price doubles. But if oil prices climbed Iran would probably find a way to export more oil, decreasing its break even price to something more reasonable.
rckoepke 6y ago
Iran's oil is not expensive to extract. These aren't marginal break-even prices on each barrel of oil...rather they're how much their current oil production would have to be sold for in order to balance their national budget, which includes defense and healthcare and whatnot. 79% of Iran's exports are unrefined crude oil: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) Countries typically "go bankrupt" in a practical sense (with very noticeable real-world effects on the local citizens) when their foreign reserves run out.
- bsanr2 6y ago
  But is their ability to produce or sell refined vs unrefined oil effected by the sanctions? Maybe not directly; maybe in how they're able to access funding for infrastructure, for example?
  - rckoepke 6y ago
    Partially. The USA offers some of the best technology for extracting and refining oil, but no US citizens or companies can offer their expertise to Iran. However, most oil companies are international and have headquarters in multiple countries - so quite a few large oilfield service companies can do business with Iran as long as they don't cheat the system to provide USA-based services. Schlumberger, a French/Texas/Dutch/UK company, earned themselves the largest international sanctions fine ever for skirting the rules. It wasn't illegal for them to work with Iran, even though they are headquartered in Houston, TX. However, they used US-based personnel and assets and now are barred from doing any business with Iran as part of the penalties. So Iran does find it difficult to get some of the latest technological advantages. That said, their geology doesn't demand super high tech solutions to extract oil. And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. The details of the sanctions have changed a lot over the past 10 years. Between 2013 and 2016, sanctions were globally supported and it was extremely difficult for Iran to sell its oil. Now it's just a few countries embargoing Iran, so Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices.
texasbigdata 6y ago
Many basins or producers in the US don't "work" below $32 either.
- Scoundreller 6y ago
  But what happens when your opex and capex crater? How much cheaper is a drilling rig now vs. 12 months ago? How about an electrician?
  - bladegash 6y ago
    I don’t know this for certain, but I have a feeling much of the price of extraction comes from accrued debt. Most of these companies - especially the smaller ones with less liquidity - probably financed significant portions of their operating expenses.
    - Scoundreller 6y ago
      I agree. There’ll be a lot of bankruptcies and burned investors, but could be plenty of ongoing production after that all gets wiped out in a chapter 7/11.
alextheparrot 6y ago
I had a similar question about this quote, so I did a bit of research and wrote a separate comment [1]. Most of the change in Iran seems to be as a result of US sanctions significantly cutting the amount of product exported. They were in the $60-70 a barrel range prior to these sanctions, like most of the Middle East. I actually think this piece is awful, as it leads us to believe things like "Iran doesn't have the expertise" or "Iran has harder to access supplies". In reality, Iran just needs to export oil in a world without restrictive sanctions to reach parity with the rest of the region. [1] https://news.ycombinator.com/item?id=23056651 https://news.ycombinator.com/item?id=23056651
0x8BADF00D 6y ago
Mexico was smart to lock in puts above $40 a barrel.
nl 6y ago
> the cost of extracting oil is so high in Iran in particular I don't think this is the case. I think it's "balance the country's budget", not the break even point in oil. Wikipedia has a 2016 table of extraction costs, which shows Iran is only marginally more expensive to extract than Saudi Arabia: https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_of_production https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_...
TheOtherHobbes 6y ago
This is dramatic, but from on POV it's also overplayed, because virtually every national economy is in the same straits now. Massive government deficit spending everywhere has been keeping furloughed and damaged economies ticking over in the hope that they can somehow be brought back to life in the near future. From another POV the world was on a mad debt-fuelled spending spree, and a lot of the spending was either useless or downright destructive. Oil is in the middle of that. An oil economy has been an obvious strategic stupidity since the oil shocks of the 70s. But instead of switching to renewables as soon as possible, there was a political decision to double down on instability and to protect the supply - and also provide "social" spending on militarism - with expensive resource wars. The world has basically been run like a frat party for the last sixty years or so. Now it's waking up to find the house is on fire, the rent is due, and the landlord is waiting outside with some "friends" to have a quiet word.
- ThomPete 6y ago
  there is a reason we havent switched to renewables and that is that they are unreliable.
  - disgruntledphd2 6y ago
    Only without larger grids and smaller capacities. In general, generating electricity as close to where you need it is a better idea (because of loss from transmission). They are not completely reliable for backup, which I think is an under-appreciated point, but nuclear can provide any backup necessary (which i suspect wouldn't be as large as you might think).
    - ThomPete 6y ago
      point is that they need backup from either nuclear, coal, oil or gas to be reliable, but the very people who want more renewable is normally against nuclear. Wind and solar is less than 1% of the worlds energy consumption and not expected to be more than 3-4% in 2030 exactly because its not reliable and the more renewable you build the more expensive it becomes as it need one of those or multiple backup sources mentioned above to be reliable.

mbreese 6y ago

> the cost of extracting oil is so high in Iran I think you might be reading that wrong. It isn’t that the cost of extracting the oil is so high, but that the budgets of these countries depends on the price of oil being high. When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. These numbers aren’t related to the cost of extraction (which is a different issue but is also variable between different regions).

xiaolingxiao 6y ago
Ah, so does this mean Iran is particularly dependent on oil to finance itself?
- rckoepke 6y ago
  Indeed: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) 79% of their exports is unrefined crude oil. While exports are not always the whole story, in this case it is extremely relevant. If Iran's economy was 99% domestic and 1% trade, (essentially autarkic) then it wouldn't really matter at all what the price of oil is, as Iran makes everything it needs for itself, whether that be automobiles, medical equipment, financial services, concrete, etc. However, Iran is not autarkic and trade is about 50% of its GDP. In order to complete international trade it requires foreign currency. At the start of the year, Iran had $85B in foreign reserves, according to FRED anyways. It was expected to lose $15B this year, but that was supposed to be while exporting $30B of crude oil. If that $30B is now only $10B, then Iran could lose $35B of foreign reserves this year. They can reduce domestic spending (potentially lowering quality of life for citizens), or they can spin up domestic industry to replace imports, or they can figure out how to increase the $$ value of their exports (potentially by refining the crude oil into higher value products, for example). If they don't do anything, and the trend continues in a straight line, they'd run out of foreign reserves within 3 years. At that point, it would be very difficult for them to buy any of the imports they need and they'd face a venezuela-style situation where citizens would find it impossible to get whatever goods used to be imported. For Iran, this is food, cars, durable goods & machinery, electronics, and textiles: https://atlas.cid.harvard.edu/explore?country=107&product=undefined&year=2017&tradeDirection=import&productClass=HS&target=Product&partner=undefined&startYear=undefined https://atlas.cid.harvard.edu/explore?country=107&product=un...
  - redis_mlc 6y ago
    All oil and gas exporters become dependant on that revenue. It's human nature to spend it all.
    - opo 6y ago
      People can choose to do that, or they can choose to save and invest the money. Norway's oil fund is around 1 trillion dollars. >...The Government Pension Fund Global, also known as the Oil Fund, was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector. It has over US$1 trillion in assets, including 1.4% of global stocks and shares, making it the world’s largest sovereign wealth fund. https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Norway https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
      - sadfklsjlkjwt 6y ago
        An increasing proportion of Norwegian spending is already covered by the revenues from the Oil Fund. This crisis has seen a near perfect storm of massive increase in welfare spending, massive fall in the value or the Oil Fund's assets and massive decrease in the price of oil (and hence the input for the Oil Fund). It will be very interesting to see what happens with the fund in the next 10-20 years. EDIT: To be clear I am glad the fund exists. It has been and is a much better way of using the natural resource bonus. However, I strongly suspect that Norway will use the entire fund cushioning the transition away from being an oil producer.
        jacobush 6y ago
        Not a bad use.
        teknopaul 6y ago
        Countries under sanctions, obviously, cannot choose what to spend their money on. If you impose sanctions you are essentially government planning another country. I agree with the article's principal point that this is very likey to go horribly wrong somewhere soon. Prevention is better than cure. Even from a purely selfish viewpoint.
sandworm101 6y ago
>> When the price drops, they can no longer cover their entire budget and will need to borrow or reduce their spending. And there is another angle to these numbers. They are the prices based on recent exports of oil. Iran isn't a silly country that requires $300 oil to break even. Their oil exports have dropped in recent years. That drop (sanctions) is a separate factor than oil price. If oil exports a halved, the break-even price doubles. But if oil prices climbed Iran would probably find a way to export more oil, decreasing its break even price to something more reasonable.

rckoepke 6y ago

Iran's oil is not expensive to extract. These aren't marginal break-even prices on each barrel of oil...rather they're how much their current oil production would have to be sold for in order to balance their national budget, which includes defense and healthcare and whatnot. 79% of Iran's exports are unrefined crude oil: https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_Iran_Exports_Treemap_2017.svg https://commons.wikimedia.org/wiki/File:Islamic_Republic_of_... (edited to 2017) Countries typically "go bankrupt" in a practical sense (with very noticeable real-world effects on the local citizens) when their foreign reserves run out.

bsanr2 6y ago
But is their ability to produce or sell refined vs unrefined oil effected by the sanctions? Maybe not directly; maybe in how they're able to access funding for infrastructure, for example?
- rckoepke 6y ago
  Partially. The USA offers some of the best technology for extracting and refining oil, but no US citizens or companies can offer their expertise to Iran. However, most oil companies are international and have headquarters in multiple countries - so quite a few large oilfield service companies can do business with Iran as long as they don't cheat the system to provide USA-based services. Schlumberger, a French/Texas/Dutch/UK company, earned themselves the largest international sanctions fine ever for skirting the rules. It wasn't illegal for them to work with Iran, even though they are headquartered in Houston, TX. However, they used US-based personnel and assets and now are barred from doing any business with Iran as part of the penalties. So Iran does find it difficult to get some of the latest technological advantages. That said, their geology doesn't demand super high tech solutions to extract oil. And they could be using 1960's technology to refine their oil into higher value products but they simply aren't, for reasons I don't understand. The details of the sanctions have changed a lot over the past 10 years. Between 2013 and 2016, sanctions were globally supported and it was extremely difficult for Iran to sell its oil. Now it's just a few countries embargoing Iran, so Iran seems to be able to sell nearly as much as it wants, presumably at near-market prices.

texasbigdata 6y ago

Many basins or producers in the US don't "work" below $32 either.

Scoundreller 6y ago
But what happens when your opex and capex crater? How much cheaper is a drilling rig now vs. 12 months ago? How about an electrician?
- bladegash 6y ago
  I don’t know this for certain, but I have a feeling much of the price of extraction comes from accrued debt. Most of these companies - especially the smaller ones with less liquidity - probably financed significant portions of their operating expenses.
  - Scoundreller 6y ago
    I agree. There’ll be a lot of bankruptcies and burned investors, but could be plenty of ongoing production after that all gets wiped out in a chapter 7/11.

alextheparrot 6y ago

I had a similar question about this quote, so I did a bit of research and wrote a separate comment [1]. Most of the change in Iran seems to be as a result of US sanctions significantly cutting the amount of product exported. They were in the $60-70 a barrel range prior to these sanctions, like most of the Middle East. I actually think this piece is awful, as it leads us to believe things like "Iran doesn't have the expertise" or "Iran has harder to access supplies". In reality, Iran just needs to export oil in a world without restrictive sanctions to reach parity with the rest of the region. [1] https://news.ycombinator.com/item?id=23056651 https://news.ycombinator.com/item?id=23056651

0x8BADF00D 6y ago

Mexico was smart to lock in puts above $40 a barrel.

nl 6y ago

> the cost of extracting oil is so high in Iran in particular I don't think this is the case. I think it's "balance the country's budget", not the break even point in oil. Wikipedia has a 2016 table of extraction costs, which shows Iran is only marginally more expensive to extract than Saudi Arabia: https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_of_production https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_...

TheOtherHobbes 6y ago

This is dramatic, but from on POV it's also overplayed, because virtually every national economy is in the same straits now. Massive government deficit spending everywhere has been keeping furloughed and damaged economies ticking over in the hope that they can somehow be brought back to life in the near future. From another POV the world was on a mad debt-fuelled spending spree, and a lot of the spending was either useless or downright destructive. Oil is in the middle of that. An oil economy has been an obvious strategic stupidity since the oil shocks of the 70s. But instead of switching to renewables as soon as possible, there was a political decision to double down on instability and to protect the supply - and also provide "social" spending on militarism - with expensive resource wars. The world has basically been run like a frat party for the last sixty years or so. Now it's waking up to find the house is on fire, the rent is due, and the landlord is waiting outside with some "friends" to have a quiet word.

ThomPete 6y ago
there is a reason we havent switched to renewables and that is that they are unreliable.
- disgruntledphd2 6y ago
  Only without larger grids and smaller capacities. In general, generating electricity as close to where you need it is a better idea (because of loss from transmission). They are not completely reliable for backup, which I think is an under-appreciated point, but nuclear can provide any backup necessary (which i suspect wouldn't be as large as you might think).
  - ThomPete 6y ago
    point is that they need backup from either nuclear, coal, oil or gas to be reliable, but the very people who want more renewable is normally against nuclear. Wind and solar is less than 1% of the worlds energy consumption and not expected to be more than 3-4% in 2030 exactly because its not reliable and the more renewable you build the more expensive it becomes as it need one of those or multiple backup sources mentioned above to be reliable.