What seems to have begun as a sudden turning on of oil faucets in Libya, Nigeria and Iraq just a few months ago, provided the opportunity for the Big Guns of OPEC to begin manipulating things. And they have.
At their critical meeting on Thursday in Austria, OPEC decided to continue producing oil in the usual volume (30 million barrels a day) and let the price of oil do what it will. Which it promptly did, dropping (using the Brent price) $2.80 today, down to $69.78/barrel, which hasn’t been seen in four years.
Saudi Arabia is the major component of OPEC and it’s refusal to curb production until things could settle down is quite significant. Which countries get hit hardestwith this refusal? Well, there’s Russia, for one, with OPEC’s announcement followed closely by the ruble hitting a new low. Another possible outcome of OPEC’s refusal to halt oil flow to the market is decreased possibility of inflation. Already, European investors are looking at the possibility of the European Central Bank advancing a debt purchasing program. We’ll see.
The price a barrel of oil among must be for certain oil-producing countries indicates those which will be hit hardest: Libya ($184), Iran ($131), Algeria ($131), Nigeria ($123) and Venezuela ($118). Saudi Arabia needs $104, but have sufficient assets to ride out a loss for quite some time.
Not only are shares in big oil falling (ExxonMobile down 4.3%, Chevon 5.4% and Halliburton 11.1%), but the shale oil producers—frackers, as we call them—are also at risk. Likewise, Canada’s Alberta tar-sands production. And if you’ve been worrying about the polar bears and other Arctic fauna and flora as the industry has been gearing up to advance into the Far North, take heart that there may at least be a reprieve while this mess sorts itself out.
Much nearer to home, at the Bakken Deposit in ND and MT, two firms are already eyeing downsizing—KKR & Co. paid quite a price in buying up oil and gas acreage in 2011 and is now experiencing a “debt burden”. Another, Samson Resources Corp, is trying to sell its Bakken interests while its bonds are trading at around 70%. And then there’s an old favorite, the Carlyle Group which, along with a couple of others, has also invested in KKR.
Nonetheless, some are saying that the break-even point for many producers in the Bakken, TX and other shale deposits in the US is below $80/barrel. Overall, it seems we lowly consumers will be paying less at the pump. And, who knows, more rational policy-makers might seize upon the opportunity this plunge in oil prices offers, and put together a program of transition from subsidizing oil to encouraging development of alternative energy sources.
OPEC’s Secretary General Abdallah Salem el-Badri is quoted as saying in Vienna yesterday, “We will watch how the market will behave” and “There’s a price decline. That does not mean that we should really rush and do something.” No indication he was munching on popcorn, but he sure was smiling.
Photo by Great Beyond under Creative Commons license