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Goodbye OPEC?

by coldwarrior ( 106 Comments › )
Filed under Economy, Energy, Islamists, Middle East, Open thread at August 6th, 2015 - 4:06 am

It appears that the oil ticks have over-played their hand. Showing the lesson once again, never play poker with cowboys.


Please read the entire article, there are many salient points in it that are worth your time.

(FYI: there will be a debate thread for later)


Saudi Arabia may go broke before the US oil industry buckles

It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. “Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon,” said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country’s fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. “We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years,” he said.

Standard & Poor’s lowered its outlook to “negative” in February. “We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

“We were lucky before because the oil price recovered in time. But we can’t count on that again,” he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers – and the solar industry – to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices – far from clear – they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while – as it did in the mid-1980s – but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.

A Good Start, Make Him Veto It!

by coldwarrior ( 184 Comments › )
Filed under Economy, Energy, Open thread, Politics at February 24th, 2015 - 7:00 am

Get the Democrats ON RECORD!

Congressional Republican leaders are expected to send President Obama legislation authorizing construction of the Keystone XL pipeline on Tuesday, The Hill reports.

While the bill passed Congress more than a week ago, Republican leaders delayed sending it to the White House in order to prevent Obama from carrying out his veto threat while Congress was out of town.

Senate Majority Leader Mitch McConnell, House Speaker John Boehner and many other Republicans have urged Obama to reconsider his promise to veto the bill, pointing to estimates that it could create as many as 40,000 jobs.

Some members of Obama’s own party have indicated that they too think his veto threats are a mistake. Defying the president, 28 Democrat House members on Jan. 9 voted in favor of passage of legislation authorizing the Keystone pipeline which passed by a 266 to 153 vote.

One day before that vote, three top leaders of the moderate Blue Dog Coalition of House Democrats sent a letter to President Obama urging him not to veto the pipeline legislation.

“The Blue Dog Coalition stands ready to work with you and Congressional leaders to provide stringent oversight of construction and operation of the Keystone XL Pipeline, but we cannot miss this opportunity to create good paying jobs and put America on the path to be less reliant on oil from our foes,” wrote Democrat Reps. Kurt Schrader of Oregon, Jim Cooper of Tennessee and Jim Costa of California.

Support from Democrats was not strictly limited to the center of the party, as progressives such as Assistant Leader James E. Clyburn of South Carolina and Sheila Jackson Lee of Texas joined Republicans in voting for Keystone.

The legislation passed the Senate by a vote of 62-36 on Jan. 29, with nine Democrats crossing party lines to support the project.

In arguing for delay, the administration has said that congressional action would undercut the ongoing process underway for the transnational pipeline which is being overseen by the State Department.

Saturday Lecture Series: Vector Autoregression and Oil

by coldwarrior ( 38 Comments › )
Filed under Academia, Economy, Energy, Open thread, saturday lecture series at February 14th, 2015 - 7:00 am

Good Morning, All! Welcome to the Blogmocracy’s Applied and Experimental Econometric Modeling Lab and wood-fired pizza joint. Today we will discuss Vector Autoregression and it’s uses.

Vector Autoregression (VAR) is a very powerful prediction system used in the Voodou of Econometrics. You will need to have your entrails and chicken parts in good working working order and a proper Hounfour at the ready to attempt the VAR.


First you need an Autoregression model. In AR the output variable depends on its own previous values. It is a time series model that can attempts to predict the variable (prices) by their value before when a ‘shock’ occurred. So, if Demand changed and changed the price, demand is the shock that changes the price. Any change in that varible of ‘demand’ can then be predicted for the future in levels of shock by price of the good.

The notation AR(p) refers to the autoregressive model of order p. The AR(p) model is written

 X_t = c + \sum_{i=1}^p \varphi_i X_{t-i}+ \varepsilon_t .\,

where \varphi_1, \ldots, \varphi_p are parameters, c is a constant, and the random variable \varepsilon_t is white noise.

At this point it is appropriate to throw the chicken bones on the floor and divine what you will happen to your neighbor next time he parks in your spot…that spot that you shoveled all of the global warming from…

VARs allow multiple evolving variables such as demand, supply, and any other thing that can and has happened that effected what you are studying. how does supply and demand effect the price of oil? A look into the past allows predictability into the future.

A VAR model describes the evolution of a set of k variables (called endogenous variables) over the same sample period (t = 1, …, T) as a linear function of only their past values. The variables are collected in a k × 1 vector yt, which has as the i th element, yi,t, the time t observation of the i th variable. For example, if the i th variable is GDP, then yi,t is the value of GDP at time t.

A p-th order VAR, denoted VAR(p), is

y_t = c + A_1 y_{t-1} + A_2 y_{t-2} + \cdots + A_p y_{t-p} + e_t, \,

where the l-periods back observation yt−l is called the l-th lag of y, c is a k × 1 vector of constants (intercepts), Ai is a time-invariant k × k matrix and et is a k × 1 vector of error terms satisfying

  1. \mathrm{E}(e_t) = 0\, — every error term has mean zero;
  2. \mathrm{E}(e_t e_t') = \Omega\, — the contemporaneous covariance matrix of error terms is Ω (a k × k positive-semidefinite matrix);
  3. \mathrm{E}(e_t e_{t-k}') = 0\, for any non-zero k — there is no correlation across time; in particular, no serial correlation in individual error terms.[1]

A pth-order VAR is also called a VAR with p lags. The process of choosing the maximum lag p in the VAR model requires special attention because inference is dependent on correctness of the selected lag order.[2][3]

You may now go to your Vodouisant and light the candle and pray to Simbi to intervene for you to Bondye, then pull out your CJ Voodoo doll and bind his fingers so he can’t get to his Cheetos.  See, Voodou and Econometrics are easy and fun!

So, we can attempt to predict the future by what has happened in the past by showing the relationship that variables have had on the thing that we want to study.


Goldman: Here’s Why Oil Crashed—and Why Lower Prices Are Here to Stay

Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.

Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off. Goldman was able to quantify these effects.

The Culprit Is in Blue

Goldman’s model is simple on its face, looking at just two variables over time: the price of oil and the value of U.S. stocks (as measured by the S&P 500). The idea is that the stock market is a pretty good indicator of economic demand. So when stocks move in tandem with oil prices, demand is in the driver’s seat. When the price of oil moves in the opposite direction of stocks, the shock is coming from supply.

It’s a bit more complicated than that—for the statistically inclined, Goldman uses a “vector autoregression with sign restrictions”—but you get the idea. In the following chart, they split apart the effects of demand shocks (left) from supply shocks (right).

Demand & Supply

The chart on the left shows what you might expect: strong demand leading up to a precipitous decline during the recession beginning in late 2008. The supply chart on the right shows a shock of undersupply in late 2007, leading to years of relatively steady supply expectations. Oversupply shocks picked up, beginning in 2012, as U.S. shale-oil production exceeded expectations, culminating in a piercing shock of oversupply last year that sent markets reeling.

The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”


If your predictions are then confounded, you may send Uncle Gunnysack out to take care of that uncooperative neighbor. Have a great Saturday!


Mars Presents: From The New American: Obama Hides Executive Abuses by Calling Decrees “Memoranda”

by Mars ( 170 Comments › )
Filed under Barack Obama, Blogmocracy, Communism, Corruption, Cult of Obama, Debt, Democratic Party, Energy, Fascism, government, Guest Post, Immigration, Liberal Fascism, Marxism, Politics, Progressives, Regulation at January 7th, 2015 - 8:00 am

While everyone is watching and tracking his executive orders Obama is throwing out decrees left and right through Presidential Memorandas.

Despite promising repeatedly on the campaign trail to rein in George W. Bush’s executive-branch usurpations of power, Obama has been spewing a particular type of unconstitutional decree at a rate unprecedented in U.S. history. While the Obama administration has indeed unleashed a full-throated attack on the Constitution using “executive orders,” even more of his decrees have come in the form of so-called “presidential memoranda” — an almost identical type of executive action that he has used more than any previous U.S. president, according to a review published this week by USA Today.

Since taking office, Obama has issues 198 decrees via memoranda — that is 33 percent more than Bush, the runner up for the record, issued in eight years — along with 195 executive orders. Among other policy areas, Obama’s memoranda edicts have been used to set policy on gun control, immigration, labor, and much more. Just this week, Obama issued another memoranda decree purporting to declare Bristol Bay in Alaska off limits to oil and gas exploration — locking up vast quantities of American wealth and resources using his now-infamous and brazenly unconstitutional “pen and phone.”

“Like executive orders, presidential memoranda don’t require action by Congress,” reported USA Today as part of its investigation into Obama’s decrees. “They have the same force of law as executive orders and often have consequences just as far-reaching. And some of the most significant actions of the Obama presidency have come not by executive order but by presidential memoranda.” However, despite the newspaper’s obvious confusion on constitutional matters — only Congress can make law, not the White House — the review raises a number of important issues.

For instance, as the paper implies, Obama has been using deception to conceal his radical — imperial or dictatorial, according to many lawmakers — machinations purporting to change policy and law by fiat. “The truth is, even with all the actions I’ve taken this year, I’m issuing executive orders at the lowest rate in more than 100 years,” Obama claimed in a speech last July, without mentioning that he has issued more “memoranda” than any American president in history. “So it’s not clear how it is that Republicans didn’t seem to mind when President Bush took more executive actions than I did.”

Other leading Democrats have made similarly deceptive arguments to dupe “stupid” voters, as ObamaCare’s Gruber put it. Aside from the fact that previous abuses by Republicans do not legitimize or excuse current abuses, the oft-heard claim that Obama has issued fewer “executive order” decrees than other presidents is more a matter of semantics than substance. “There’s been a lot of discussion about executive orders in his presidency, and of course by sheer numbers he’s had fewer than other presidents,” Andrew Rudalevige, a presidency scholar at Bowdoin College, told USA Today.

“So the White House and its defenders can say, ‘He can’t be abusing his executive authority; he’s hardly using any orders,” Rudalevige continued. “But if you look at these other vehicles, he has been aggressive in his use of executive power.” Indeed, as The New American has documented extensively, Obama has been purporting to rule by executive fiat on everything from gun rights and the “climate” to immigration, education, national security, foreign relations, and health.

However, according to constitutional experts and even the president himself (before he took office), none of the “law”-making by presidential decree is actually legitimate. According to the U.S. Constitution, which created the federal government and granted it a few limited powers, only Congress has the power to make laws — assuming they are constitutional. The president’s job, by contrast, involves merely enforcing the laws passed by Congress and signed by the president, not making them up while hiding behind patently bogus claims of imagined “executive authority.”

Obama, of course, understands that well — or at least he claimed to less than seven years ago. “I taught constitutional law for ten years,” then-Senator Obama told gullible voters in 2008 amid his first run for the presidency. “I take the Constitution very seriously. The biggest problems that were facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all, and that’s what I intend to reverse when I’m President of the United States of America.”

Except rather than reversing the illegitimate usurpation of unconstitutional power, Obama expanded it by leaps and bounds — to the point where his administration openly creates pseudo-“law” and pseudo-“treaties,” and then mocks Congress about it. Among the “memoranda” used by Obama thus far was the purported creation of the MyRA “savings” scheme, a widely ridiculed and criticized unconstitutional plot that analysts said would be used to extract more wealth from Americans under the guise of “helping” them. Even Congress does not have the authority to create such a program — much less the administration.

Obama, though, regularly brags about his lawless pseudo-lawmaking. “One of the things that I’ll be emphasizing in this meeting is the fact that we are not just going to be waiting for a legislation [sic] in order to make sure that we’re providing Americans the kind of help that they need,” Obama announced at the beginning of the year, right before his first cabinet meeting. “I’ve got a pen and I’ve got a phone — and I can use that pen to sign executive orders and take executive actions and administrative actions that move the ball forward.”

Shortly after that, in his State of the Union speech to Congress, he brazenly told the American people’s elected representatives that he would ignore them if they did not promptly submit to his demands. “America does not stand still — and neither will I,” Obama threatened before lawmakers stood up and applauded the outlandish behavior. “So wherever and whenever I can take steps without legislation to expand opportunity for more American families, that’s what I’m going to do.” Many lawmakers were furious, blasting Obama as a “socialistic dictator,” calling for his impeachment, and more, and the public was horrified, but the rule-by-decree continued.

Indeed, unlike his false campaign promises, Obama did indeed make good on his threats to continue ignoring Congress and the Constitution to rule by unconstitutional decree. Behaving more like a Third World dictatorship than a U.S. presidential administration, the White House even trotted out senior officials to tell the press that even the American people’s elected representatives would be unable to stop the usurpations and abuses. In addition to the “executive orders” and “presidential memoranda,” which the administration itself considers to be essentially the same, Obama has also unleashed dozens of so-called “presidential policy directives.”

Of course, there can be some legitimate functions for executive orders — outlining the manner in which the administration plans to faithfully execute the constitutional laws passed by Congress, for example. However, purporting to make and change law — or even contradict existing federal law, such as Obama’s radical amnesty-by-decree scheme supposedly preventing the enforcement of immigration law — are certainly not among those legitimate functions.

The solution to the imperial decrees and pretended acts of legislation from the White House is simple: Congress must refuse to fund it. However, despite being elected on a wave of popular outrage against the Obama administration’s usurpations of power, lawmakers on both sides of the aisle recently voted to fund virtually all of the White House’s illegal decrees through next September. The only way to put a stop to the scheming will be for an educated American electorate to hold their elected representatives accountable to the oath they swore, with a hand on the Bible, to uphold the U.S. Constitution.

Alex Newman is a correspondent for The New American, covering economics, education, politics, and more. Follow him on Twitter @ALEXNEWMAN_JOU. He can be reached at