Showing posts with label Oil Production. Show all posts
Showing posts with label Oil Production. Show all posts

September 24, 2016

News We Never Thought We Hear: ‘Saudi Middle Class Has to Tighten Their Belts'




 




 Mohammed Idrees used to travel to London once or twice a year, but these days the Saudi civil servant is asking his wife and children to cut back on using the family car to save fuel and has installed a solar panel for the kitchen to reduce electricity costs.

For decades, Saudi nationals such as Mr. Idrees enjoyed a cozy lifestyle in the desert kingdom as its rulers spent hundreds of billions of dollars of its oil revenue to subsidize essentials such as fuel, water and electricity.

But a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.

Saudi Arabia heads into next week’s meeting of major oil producers in a tight spot. With a slowing economy and shrinking foreign reserves, the kingdom is coming under pressure to take steps that support the price of oil, as it did this month with an accord it struck with Russia.

The sharp price drop is mainly because of a glut in the market, in part caused by Saudi Arabia itself. The world’s top oil producer continues to pump crude at record levels to defend its market share.

One option to lift prices that could work, some analysts say, is to freeze output at a certain level and exempt Iran from such a deal, given that its push to increase production to pre-sanction levels appears to have stalled in recent months. Saudi Arabia has previously refused to sign any deal that exempts arch-rival Iran.

As its people start feeling the pain, that could change.

The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding.

Those spending cuts are now hitting the Saudi working middle class.

Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.

“Most people are ordering less food or they change their orders to more affordable options,” she said.


To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more non-oil revenue by introducing taxes.

But in response to these moves, inflation more than doubled from last year to about 4% now, crimping consumers even more.
Analysis: Is OPEC All Talk?

The government doesn’t have much choice. Saudi Arabia’s real growth in gross domestic product slowed to 1.5% in the first quarter from the year-earlier period, according to its statistics office, and Capital Economics says data suggest it may have contracted by more than 2% in the second quarter. Much of that slowdown is related to consumer-facing sectors, which have struggled since the start of 2016 as rising inflation has eroded household incomes.

The political stakes for managing this slowdown are high. Saudi Arabia survived the Arab Spring unrest that toppled several autocratic leaders across the region and forced some others to change, largely by offering cash handouts and more government jobs to placate its people. About two thirds of Saudi workers are employed by government related entities.

Besides cushy jobs, such middle-class Saudis also received substantial overtime payments and regular bonuses. At the time of his ascension to the throne early last year, King Salman ordered a hefty bonus payment to government employees.

Such largess is looking like a thing of the past.

Besides cutting state handouts such as subsidized electricity and water, the government also plans to reduce money it spends on public wages to 40% of the budget by 2020 from 45% as part of its ambitious plan to transform the oil-dependent economy. It aims to cut one-fifth of its civil service as well.

Saudis are beginning to speak out about a sense of anxiety about the economy. “I think we are going through a difficult period,” said Emad al-Majed, a Riyadh-based pharmacy technician. “There will be suffering.”

Mr. Majed, who has two children, took a bank loan to purchase an apartment last year, a decision he said made him reconsider his spending habits.

“If you are used to a certain level of spending, how can you be told to limit your expenses and cancel some stuff?” he asked. “It is a good idea, but in practice it will be difficult for so many people.”

Saudi nationals are reluctant to gripe about rising costs, but there is clear discontent, some analysts say. In a region engulfed in political and sectarian strife, Saudi Arabia can ill-afford similar turmoil.

“Discontent so far has been mildly expressed,” said Robin Mills, chief executive at Qamar Energy, a Dubai-based consulting firm. “If the slowdown continues and starts affecting local jobs, that could change.”

For the kingdom’s fiscal position to improve significantly, analysts say oil prices would need to rise to $70 a barrel, up from about $46 now.

Saudi Arabia and the other large producers failed to reach a production-freeze deal in April, but its people are now increasingly jittery over their future. That has made people like Mr. Idrees, the civil servant, more cautious about spending because he sees people like him bearing the brunt of efforts to offset slipping oil revenue.

“I have become more diligent about spending because my view of the future is pessimistic,” he said. “There is a lot of talk about diversifying the economy, but the focus seems to be solely on increasing taxes.”





March 17, 2015

Big Oil $$ and Oil Model is Burnt and Why high Prices are Not in The ‘Horizon’


                                                                             
                                                                              

 Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the U.S. and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply — no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock — was deemed untouchable in the mad scramble to increase output and profits.

In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the giant oil companies. Exxon, the largest U.S.-based oil firm, earned an eye-popping $32.6 billion in 2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and Russia’s Rosneft also reaped mammoth profits.

How things have changed in a matter of mere months. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade, to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline. On the other, rapid economic growth in China, India, and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

A “Brave New World” of tough oil                        

No one better captured that moment than David O’Reilly, the chair and CEO of Chevron. “Our industry is at a strategic inflection point, a unique place in our history,” he told a gathering of oil executives that February. “The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal, and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil”: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale. “Increasingly,” O’Reilly insisted, “future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.”

For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter. It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs. “Collectively, we are stepping up to this challenge,” O’Reilly declared. “The industry is making significant investments to build additional capacity for future production.”

On this basis, Chevron, Exxon, Royal Dutch Shell, and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race, an extraordinary saga I described in my book The Race for What’s Left. Some, including Chevron and Shell, started drilling in the deep waters of the Gulf of Mexico; others, including Exxon, commenced operations in the Arctic and eastern Siberia.  Virtually every one of them began exploiting U.S. shale reserves via hydro-fracking.

Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power, and biofuels.

Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the “beyond petroleum” approach. “Some may question whether so much of the [world’s energy] growth needs to come from fossil fuels,” he said in 2009. “But here it is vital that we face up to the harsh reality [of energy availability].” Despite the growing emphasis on renewables, “we still foresee 80 percent of energy coming from fossil fuels in 2030.”

Under Hayward’s leadership, BP largely discontinued its research into alternative forms of energy and reaffirmed its commitment to the production of oil and gas, the tougher the better. Following in the footsteps of other giant firms, BP hustled into the Arctic, the deep water of the Gulf of Mexico, and Canadian tar sands, a particularly carbon-dirty and messy-to-produce form of energy. In its drive to become the leading producer in the Gulf, BP rushed the exploration of a deep offshore field it called Macondo, triggering the Deepwater Horizon blow-out of April 2010 and the devastating oil spill of monumental proportions that followed.

Over the cliff                                                      



By the end of the first decade of this century, Big Oil was united in its embrace of its new production-maximizing, drill-baby-drill approach. It made the necessary investments, perfected new technology for extracting tough oil, and did indeed triumph over the decline of existing, “easy oil” deposits. In those years, it managed to ramp up production in remarkable ways, bringing ever more hard-to-reach oil reservoirs online.

According to the Energy Information Administration (EIA) of the U.S. Department of Energy, world oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the continuing decline of many legacy fields in North America and the Middle East. Claiming that industry investments in new drilling technologies had vanquished the specter of oil scarcity, BP’s latest CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

Demand will continue to rise — that’s undeniable, given expected growth in world income and population — but not at the pace to which Big Oil has become accustomed. Consider this: In 2005, when many of the major investments in unconventional oil were getting under way, the EIA projected that global oil demand would reach 103.2 million barrels per day in 2015; now, it’s lowered that figure for this year to only 93.1 million barrels. Those 10 million “lost” barrels per day in expected consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated demand vanishing, however, prices were bound to collapse.

Current indications suggest that consumption will continue to fall short of expectations in the years to come. In an assessment of future trends released last month, the EIA reported that, thanks to deteriorating global economic conditions, many countries will experience either a slower rate of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for instance, is expected to grow by only 0.3 million barrels per day this year and next — a far cry from the 0.5 million barrel increase it posted in 2011 and 2012 and its 1 million barrel increase in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two years.

And this slowdown in demand is likely to persist well beyond 2016, suggests the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations). While lower gasoline prices may spur increased consumption in the United States and a few other nations, it predicted, most countries will experience no such lift and so “the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade.”

This being the case, the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil, and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

There is, as well, another factor that threatens the well-being of Big Oil: Climate change can no longer be discounted in any future energy business model. The pressures to deal with a phenomenon that could quite literally destroy human civilization are growing.  Although Big Oil has spent massive amounts of money over the years in a campaign to raise doubts about the science of climate change, more and more people globally are starting to worry about its effects — extreme weather patterns, extreme storms, extreme drought, rising sea levels, and the like — and demanding that governments take action to reduce the magnitude of the threat.

Europe has already adopted plans to lower carbon emissions by 20 percent from 1990 levels by 2020 and to achieve even greater reductions in the following decades. China, while still increasing its reliance on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and to increase renewable energy sources to 20 percent of total energy use by then. In the United States, increasingly stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average of 54.5 miles per gallon, reducing U.S. oil demand by 2.2 million barrels per day. (Of course, the Republican-controlled Congress — heavily subsidized by Big Oil — will do everything it can to eradicate curbs on fossil fuel consumption.)

Still, however inadequate the response to the dangers of climate change thus far, the issue is on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. “It is a different world than it was the last time we saw an oil-price plunge,” said IEA Executive Director Maria van der Hoeven in February, referring to the 2008 economic meltdown. “Emerging economies, notably China, have entered less oil-intensive stages of development … On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.”

The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams. As van der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very foundations on which Big Oil’s production-maximizing strategy rested. The oil giants will either have to adapt to new circumstances, while scaling back their operations, or face takeover challenges from more nimble and aggressive firms.


January 8, 2015

Looks like Oil is going to do Putin in this Year

                                                                             


Oil prices are the big story for 2015,” said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.” 

Photographer: Daniel Acker/Bloomberg
Travis Simmons, a driver for Yo-Mac Transport, stores a filling hose after delivering... Read More

Weak Prices 

Brent crude, the international benchmark, fell as low as $49.66 a barrel today, dropping below $50 for first time since 2009. Prices dropped 48 percent in 2014 after three years of the highest average prices in history. West Texas Intermediate, the U.S. benchmark, plunged to as low as $46.83 today, about a 56 percent decline from its June high. 
“We see prices remaining weak for the whole of the first half” of 2015, said Gareth Lewis-Davies, an analyst at BNP Paribas in London. 
If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop. 
“Where prices bottom will be based on an emotional decision,” Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.” 
The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40, while Russia would contract 2.5 percent over the same period, according to an Oxford Economics Ltd.’s December analysis of 45 national economies. 

Photographer: Andrew Burton/Getty Images
U.S. shale oil production.

Inflation Outlook 

Among advanced economies, Hong Kong is the biggest winner, while Saudi Arabia, Russia and the United Arab Emirates fare the worst, according to Oxford Economics. 
One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York. 
Kasman and his team are already predicting global inflation to reach 1.5 percent in the first half of this year, while sustained weakness in oil suggest a decline to 1 percent, they said. 

Negative Inflation 

The euro area would probably witness negative inflation, while rates in the U.S., U.K. and Japan also would weaken to about 0.5 percent. For what it calls price stability, the Federal Reserve’s inflation target is 2 percent. Emerging-market inflation would also fade although lower currencies and policies aimed at slowing the effects on retail prices may limit the fall. 
As for growth, a long-lasting price of $60 would add 0.5 percentage point to global gross domestic product, they estimate. 
Even as cheaper fuel stimulates the global economy, it could aggravate political tension by squeezing government revenue and social benefits, Citigroup Inc. analysts said in a Jan. 5 report. 
Either way, previously unthinkable events now look more likely. Byron Wien, a Blackstone Group LP vice chairman, predicting that Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear program. 

Iran Losses 

Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad
President Hassan Rouhani, elected on a pledge of prosperity to be achieved by ending Iran’s global isolation, is facing a falling stock market and weakening currency. Iranian officials are warning of spending and investment cuts in next year’s budget, which will be based on $72-a-barrel crude. Even that forecast is proving too optimistic. 
“Iran will stumble along with less growth and development,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech in Blacksburg, Virginia, who specializes in Iran’s economy. “The oil price fall is not reason enough for Iran to compromise.” 
The Russian economy may shrink 4.7 percent this year if oil averages $60 a barrel under a “stress scenario,” the central bank said in December. The plunge in crude prices prompted a selloff in the ruble with the Russian currency falling to a record low against the dollar last month and tumbling 46 percent last year, its worst performance since 1998, when Russia defaulted on local debt. 

Russian Production 

“The risk is that, as a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook,” said Holger Schmieding, Berenberg Bank’s London-based chief economist. However, “the massive blow to Russia’s economic capabilities should –- over time –- make it less likely that Russia will wage another war.” 
Russian oil production rose to a post-Soviet record last month, showing how pumping of the nation’s biggest source of revenue has so far been unaffected by U.S. and European sanctions or a price collapse. The nation increased output to 10.667 million barrels a day, according to preliminary data from the Energy Ministry on Jan. 2. That compares with global consumption of 93.3 million barrels a day, based on the International Energy Agency’s estimate for 2015. 
Venezuela, which relies on oil for 95 percent of its export revenue, risks insolvency, Jefferies LLC said in a Jan. 6 note. The cost of insuring the country’s five-year debt has tripled since July, Citigroup said. President Nicolas Maduro is visiting China to discuss financing and expects to travel to other OPEC nations to work out a pricing strategy. 

Confounding Investors 

The U.S., still a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84, the Oxford Economics study found. The boost to consumers could be offset by oil companies’ scaling back investments, according to Kate Moore, chief investment strategist at JPMorgan Private Bank. Producers are cutting spending by 20 percent to 40 percent, according to Fadel Gheit, an analyst at Oppenheimer & Co. 
The mixed picture is confounding investors. The Standard & Poor’s 500 Index of U.S. equities fell 1.9 percent on Jan. 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing. 
While cheaper oil helps consumers, business spending has a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in the S&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp. 
Bets on high energy prices have mashed share prices of companies such as Ford Motor Co., Tesla Motors Inc. and Boeing Co. 

Redistributes Income 

Fifth Third Bancorp (FITB), one of the regional lenders that tried to chase the fracking boom, is down 12 percent since June 20. 
Caterpillar Inc., Joy Global Inc., Allegheny Technologies Inc., Dover Corp., Jacobs Engineering Group and Quanta Services Inc. are all down more than 20 percent since oil peaked at almost $108. 
Despite those losses, Morgan Stanley last month concluded cheaper fuel is a net benefit for the U.S. economy
“Any massive redistribution of income can raise political tensions,” Schmieding of Berenberg Bank said in the Jan. 6 report. “But, net/net, strengthening the U.S., Europe, Japan, China and India, while weakening Russia, Iran, Saudi Arabia and Venezuela, is likely to make the world a safer place in the end.” 
Brent traded at $50.88 a barrel and WTI at $48.03 as of 12:03 p.m. London time. 
To contact the reporters on this story: Isaac Arnsdorf in New York at iarnsdorf@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editors responsible for this story: Bob Ivry at bivry@bloomberg.net Bruce Stanley, Rachel Graham

November 26, 2014

Russia is loosing from sanction and cheaper oil up to $140 billion a year



A man fills a tank of his car at the fuel station of Russian state oil firm Rosneft in St. Petersburg, October 18, 2012. REUTERS/Alexander Demianchuk

A man fills a tank of his car at the fuel station of Russian state oil firm Rosneft in St. Petersburg, October 18, 2012.  

  Lower oil prices and Western financial sanctions imposed over the Ukraine crisis will cost Russia around $130-140 billion (83-89 billion pounds) a year - equivalent to around 7 percent of its economy - Finance Minister Anton Siluanov said on Monday.
His comments are the latest acknowledgement by Russian policymakers that sanctions restricting borrowing abroad by major Russian companies are imposing heavy economic costs. But in Siluanov's view, the fall in oil prices is the bigger worry.
"We're losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent," he told a news conference.
"The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources."
Official forecasts suggest Russia's gross domestic product is likely to be around $1.9-2.0 trillion this year, at average exchange rates.
Siluanov's estimate of the cost of lower oil prices is in line with analysts' rule of thumb that each $1 fall in the oil price lops around $3 billion off export earnings. The oil price has slumped from nearly $115 per barrel in June to around $80 now.
Oil and gas account for around two-thirds of Russia's exports, making the balance of payments highly vulnerable to oil price falls. 
Natalia Orlova, chief economist at Alfa Bank, said the $90-100 billion estimate did not take into account the effect of the weakness of the rouble, partly caused by the fall in the oil price, which would help to compensate the loss by boosting exports and curtailing imports.
The rouble has lost 25 percent of its value against the dollar since June, and Orlova said the net impact of lower oil prices on the economy would be around $40 billion.
But when it comes to the cost of sanctions, Siluanov's estimate of $40 billion may be conservative, based on the direct cost to companies unable to borrow abroad rather than the overall impact on investor behaviour.
Other analysts have arrived at gloomier estimates, taking into account the indirect cost of sanctions and overall East-West tensions linked to Ukraine.
In its latest monetary strategy, the central bank forecast that net capital outflow this year would be $128 billion, more than double the $61 billion seen in 2013, as a result of "the events in Ukraine and the introduction of sanctions".
Last week, influential former finance minister Alexei Kudrin said the impact of "formal and informal" sanctions on the rouble - and by implication the wider economy - was comparable to the impact of lower oil prices, and that foreign investor confidence would take seven to 10 years to recover. 
(Reporting by Elena Fabrichnaya; Writing by Jason Bush and Alexander Winning; Editing by Kevin Liffey)

October 18, 2014

$3 Dollars A Gallon! Thank You Sheiks?


                                                                         

When $3-a-gallon gas prices come our way, we have the Saudis to thank.
Oil prices are plunging these days — in fact, they hit a four-year low this week — and it’s thanks in no small part to Saudi inaction, a new strategy of doing nothing. For anyone who follows the big oil biz, the reason isn’t entirely surprising: Saudi Arabia has lost its once-infamous grip on oil prices. But now, the white flag is really out. And the result? Today, those $3 prices have already arrived in 30 percent of U.S. gas stations. 
For nearly three decades, Saudi Arabia has been the “swing producer” as the biggest player in the OPEC oil cartel. When oil markets had too much supply, the Saudis cut back production — currently at 9.73 million barrels per day — and exports. When oil markets were running dry, they would swing the other way and boost output. But “quite clearly, they don’t seem to be swinging now,” Antoine Halff, head of the International Energy Agency’s oil market research, tells OZY. Instead, they’re just keeping the flow steady like almost every other oil producer. 
It’s been decades since Saudi Arabia used oil as a weapon, as the nation did in the 1970s to drive up prices. Or when, as in 1986, it flooded the market and drove oil down to giveaway prices under $10 a barrel, delivering a blow to high-cost producers in the North Sea and Texas. 
“The old pricing system buckled under the pressure.”
But the Saudis may be revisiting history — though this time it’s more like farce than tragedy.
Let’s face it: OPEC’s not much of a cartel anymore. Saudi Arabia lost its distinction as the world’s biggest oil producer to Russia in 2009. Then the U.S. shale revolution knocked the Saudis back to third place. Today, the U.S. is the world’s biggest oil and gas producer. But Saudi Arabia is still the world’s biggest exporter, and until last year, it looked like it was happy to continue playing the role of swing producer.
“Libya went down in 2011, and Saudi increased production,” points out Francisco Blanch, commodity and derivatives strategist at Bank of America Merrill Lynch. But after a cycle in which the Saudis decreased and then increased production as Libyan exports went up and down, they’ve kept production up in the face of the latest surge of Libyan output. “So I think there’s a clear change in policy on the Saudi front,” he says.
So what game are they playing? “I don’t think it’s very mysterious,” says Daniel Yergin, Pulitzer Prize-winning author of The Quest: Energy, Security, and the Remaking of the Modern World. “The old pricing system buckled under the pressure,” he says, noting that the Saudis are “reacting to the situation, rather than fomenting it,” in a bid to retain market share.
So what’s changed? U.S. oil production is up 70 percent from 2008, and net imports as a share of consumption have dropped from 60 to less than 30 percent. In the past year alone, global oil production rose by 2.8 million barrels a day to 93.8 million barrels per day in September.

Meanwhile, the global economy is suffering a slowdown — everywhere from the eurozone to Brazil, from China to South Africa. The IEA this week lowered its forecast for 2014 global demand to 92.4 million barrels per day. That’s an excess of supply over demand, which means storage tanks are filling up — and prices have nowhere to go but down. They slid briefly to just less than $80 a barrel for Texas crude this week.
As it turns out, the Saudis might just like it that way. That’s because they don’t want to sacrifice long-term market share by subsidizing high-cost U.S. shale production. To avoid this, they’ll probably sit tight and wait for production to go down elsewhere before making a move. “They’re changing their strategy. They’re very much changing their pricing ambitions across their markets,” Halff says.
With prices in the low $80 range, projects planned when oil was over $100 a barrel start to look unattractive. If investors pull out of U.S. production, it means less long-term competition for Saudi oil. Or, as Halff believes, the Saudis may just be willing to forgo the U.S. and push exports toward Asia instead. “Crude producers are fighting for market share in the one growth market — Asia,” Halff says.

There’s been much speculation in recent weeks about geopolitical reasons the Saudis may want to keep prices down, ranging from targeting the Islamic State group’s oil profits to boosting President Obama’s political capital. It certainly doesn’t hurt that low oil prices hurt its enemy Iran, or Russia, while helping a weak global economy. But likely these factors are taking a back seat to Saudi Arabia’s primary interest: ensuring long-term income by establishing market share and discouraging high-cost production. 
“There’s a tendency to think they are sitting there controlling all the levers, but they aren’t.”
“There are other steps the Saudis could take to curtail ISIS funding if it really wanted to,” says Graham Stock, head of emerging markets and sovereign research at London’s BlueBay Asset Management.
Yergin agrees: “There’s a tendency to think they are sitting there controlling all the levers, but they aren’t.”
So much for conspiracy theories. 
How low can it go? Blanch thinks the market will hit the floor soon, around $85 a barrel — the point where he thinks Saudis can fund government spending. Others, like Halff, think the Saudis might withstand going as low as $80. They both agree, however, that the lower prices could stick around for a few years.
That’s sure to upset OPEC countries, like Venezuela, that are already complaining about low prices. Many cartel members struggle to break even when prices drop below $100 a barrel, much less at current rates.
But few believe Saudi Arabia’s going to come out swinging at production anytime soon. Doing nothing just looks good. 


Author
Steven Butler & Tracy Moran


  OZY - 

October 17, 2014

Oil Prices Falling, who is winning and who is loosing?


                                                                                   


 Oil wells near McKittrick, Calif., one of the places where hydraulic fracturing, or fracking, is on the rise. The U.S. became the world's largest oil producer this year, surpassing Saudi Arabia and pumping some 11 million barrels a day.

With oil around $85 a barrel and tumbling to its lowest levels in several years, here’s the upside: Gasoline prices are down, the U.S. is feeling less dependent on foreign crude, 
and serious economic pressure is growing on oil producers such as Iran and Russia.
Here's the downside: The low demand for oil reflects a fragile global economy that's vulnerable to additional shocks, like falling stock markets around the world.
Oil is still a uniquely influential commodity. Whenever prices move sharply 
in either direction, they unleash ripples around the globe that are both
 economic and political.
"We've had a three-year period of very stable oil prices," Michael Levi of the Council on Foreign Relations told NPR's All Things Considered. "Three years is a long time. People were starting to believe that this was permanent. And they were wrong. So the big news is that volatility is back, that big swings are what we should expect."
With the prices down around 25 percent since hitting $112 a barrel in June, 
here's a roundup of the impact worldwide:
Political Turmoil, Falling Prices: Something strange is happening. 
Three key oil producers (Iraq, Libya and Nigeria) are mired in domestic turbulence,
 and Iran's oil exports have been dramatically reduced by international sanctions.
In years past, trouble in these countries might have instigated panic in the oil market,
 driving up prices dramatically. But today, there's plenty of oil to go around for several reasons. Production in the United States is surging, Saudi Arabia and other OPEC
 countries have continued to pump at high levels, and overall global demand is weak.
While these conditions may not last, they do reflect what's been the steady loss of clout among big oil producers, particularly those in the Middle East.
The U.S. is producing more of its own oil and is buying the remainder from a wide
 range of mostly stable countries. The leading foreign supplier is Canada. Middle
 Eastern nations account for just three of the top 10 exporters to the U.S., and they 
account for around 10 percent of U.S. oil needs.  Russia And Iran: From the U.S. perspective, one of the benefits of falling oil prices is the pressure they place on 
Russia and Iran. Both countries are heavily dependent on oil exports at high prices.
 They face the double whammy of Western sanctions that are also biting.
Russia needs an oil price of $100 a barrel and Iran needs around $130 a barrel to 
balance their budgets, according to The Economist.
The financial hurt these countries are facing could have political implications.
Russia is at odds with the West over its annexation of Crimea and its ongoing role in Ukraine's turmoil. Russian President Vladimir Putin has consistently opted for 
confrontation, but the price for that position is getting steeper. Putin pushed back 
against a request for higher government spending this week, citing reduced government revenue from energy production.
"You know that energy prices have fallen as well as for some of our other traditional products," Putin said. "Due to that, would we not, on the contrary, reconsider the budget toward reducing some spending?"
Iran, meanwhile, is negotiating on its nuclear program with the international community 
and is also waging a proxy war with Saudi Arabia for power and influence throughout the Middle East.
This is one likely reason the Saudis have been willing to pump oil at high levels even 
though that's contributing to low prices. The Saudis publicly cite a business motive, 
saying they want to maintain their current share of the oil market. But the Saudis 
are also well aware that low prices mean less money for archival Iran. 
U.S. Production: Despite soft demand, U.S. oil production is rising again this year due primarily to hydraulic fracturing, or fracking. The U.S., which became the world's largest natural gas producer in 2010, is now the world's largest oil producer this year, surpassing Saudi Arabia this year and pumping around 11 million barrels a day.
The average U.S. gas price is $3.17 a gallon this week, down around 15 percent since 
June, according to GasBuddy.com. The lower price at the pump effectively serves as a stimulus for consumers that can encourage increased spending to stimulate the economy.
“It's quite possible that Christmas shopping will be much better this year because
 consumers will be spending less for gasoline,” economist Philip Verleger told 
NPR's Morning Edition.
While lower energy prices benefit most of the country, they could deliver a blow to oil-producing states like Texas, Oklahoma and North Dakota. If prices go down and stay 
down for an extended period, energy companies could cut back on production and investment.
 The Global Economy: Lower gas prices are a small consolation if accompanied by a sluggish world economy, and that's what many economists are forecasting. In Europe and Asia, most of the major economies have low or slow growth compared with recent years.
China and India, which were gulping down imported oil as their economies raced ahead, have both seen slowdowns. The lower oil prices will help keep their manufacturing and transportation costs down, but that alone is not enough if the rest of the world is less interested in buying their exports.
Of course, oil prices could reverse direction swiftly and dramatically, as they have many times in the past. Small shifts in world oil production, currently around 92 million barrels a day, often lead to major swings in prices. If, for example, Saudi Arabia chose to cut production, or the fighting in Iraq shut down its oil fields, prices could head north in 

a hurry, according to analysts.

Greg Myre is the international editor of NPR.org. You can follow him @gregmyre1.

How falling oil prices could crush Russia's economy

 At the start of 2014, oil prices were already below the break-even point for Iran, Venezuela, Nigeria, and Iraq. But now, as prices sink below $90 per barrel, they're falling below the break-even point for Libya, Russia, and Saudi Arabia.
Below is more detail on three key countries: Russia, Iran, and Saudi Arabia. At the moment, it's looking like Russia's economy could be in serious trouble, Iran's is in flux — and Saudi Arabia seems far more sanguine about the situation.


Vladimir Putin has his work cut out for him. (Maxim Shipenkov/AFP/Getty Images)
Vladimir Putin has his work cut out for him. (Maxim Shipenkov/AFP/Getty Images)
Russia's situation is getting most of the attention these days. The country was already suffering from weak growth — on pace to expand just 0.4 percent in 2014. That was partly due to the ongoing Ukrainian crisis (Ukraine's economy is tightly intertwined with Russia's) and partly due to Western sanctions.
Now the plunge in global oil prices is putting even further strain on the nation's economy. Oil revenues account for roughly 45 percent of Russia's budget, and the government's spending plans for 2015 had assumedthat prices would stay in the $100-per-barrel range. If oil continues to sink below that, the country will either have to draw down from its $74 billion foreign-exchange reserves or cut back on planned spending — something that Russian President Vladimir Putin suggested was possible on Tuesday.
The economic impact could be deeper still: As Brookings Institution economist Clifford Gaddy explains, Russia's oil and gas industry helps prop up the nation's ailing economy in all sorts of informal ways. For instance, oil companies face pressure to purchase machinery from Russian factories that support jobs in key areas around the country — even if those factories aren't the most efficient out there. It's a system that has been semi-directed by Putin's government and has been crucial to maintaining stability.
Now that system will come under heavy pressure if prices keep falling.
"It's not hard to figure out how falling oil prices will affect Russia's formal budget," Gaddy says. "What's much more difficult is to figure out how falling prices will affect that informal system." In a crunch like this, the Russian government could struggle to figure out how to make sure that oil and gas wealth still gets distributed around the country.
The crash in oil prices in the 1980s famously battered the Soviet Union and helped contribute to its ultimate collapse in 1991. Gaddy points out that Putin has spent a lot of time studying that previous episode — and has likely prepared for another price crash. Whether he can deal with it successfully, however, is another question.
In the meantime, the Los Angeles Times recently took a look at the foreign policy ramifications of plunging oil prices: "The economic pressure isn't expected to change Putin's aggressive efforts to retain strong influence over Ukraine, which he considers nonnegotiable." But, the Times noted, it's "causing strains in [Putin's] relations with the Russian elite and business establishment, two pillars of his political support."

Iran's economy was rebounding — before the price drop

iran economy
Iranians shop for Noruz, the Persian New Year, at a market in Tehran on 19 March 2014. (Atta Kenare/AFP/Getty Images)
Iran's economy had recently started to rebound after years of recession (due in part to heavy Western sanctions). The International Monetary Fund had been projecting that the country was on track to grow 1.5 percent this year and 2.3 percent next year.
But that was before oil prices started to drop — a potentially precarious situation.
One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. And if oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back fuel subsidies for its citizens (always an unpopular move, at least in the short term).
The Times also noted that the oil plunge could alter Iran's foreign-policy stance: "The new economic strain also undercuts Tehran's strategy for dealing with world powers in talks over Iran's nuclear program. Iran's economic resurgence had enabled Iranian officials to claim they could get by even if the talks collapsed without providing further relief from tough international sanctions."
Those ongoing negotiations are a wild card here. The United States, EU, and Iran are trying to hammer out a deal on the latter's nuclear program before a deadline in late November. If there actually is a deal — and if the the US and Europe offer some sort of sanctions relief — that could help bolster Iran's economy. Though it could also push oil prices down further as Iranian oil comes back to the global market.

Saudi Arabia, meanwhile, seems more optimistic

saudi oil minister
Saudi oil minister Ali Al-Naimi attends the Gulf Cooperation Council (GCC) oil ministers meeting in Kuwait city on September 11, 2014. (Yasser Al-Zayyat/AFP/Getty Images)
Meanwhile, oil prices have now dropped below Saudi Arabia's break-even point — around $93 per barrel. But, so far, many the country's leaders sound a little more confident that they can survive the hit.
In theory, Saudi Arabia could respond by trying to cut back on its own oil production in order to prop up global prices. (The country is such a massive oil producer that it has a lot of sway here.) But for the time being, the Saudis are signaling that they're prepared for low prices — possibly even a year or two with oil at $80 per barrel.
One possible reason is that Saudi Arabia has learned its lesson from the mid-1980s — a time when global oil prices were plummeting and the kingdom tried to cut back on domestic production in the hopes that other OPEC nations would follow. No one else joined in, global oil prices kept declining anyway and Saudi Arabia suffered massive budget deficits as a result. So, this time, they appear more reluctant to cut back drastically.
And there's another angle here: Officials in Saudi Arabia have signaled that lower prices (say, $80 per barrel or lower) could make some shale-oil producers in the United States unprofitable and force the US to cut back on production. Saudi Arabia would be fine with that, since its oil tends to be cheaper to produce than most shale oil projects in the United States. That US cutback, in turn, could help stabilize prices.
One question is how far Saudi Arabia can let prices fall without incurring too much domestic pain. In September, the International Monetary Fund warned that Saudi Arabia would run a deficit of roughly 1.4 percent in 2015 — not least since the country has been ramping up big infrastructure projects and doling out foreign aid around the Middle East of late. That shortfall would force the country to start drawing down its massive foreign-exchange reserves.
So far, Saudi Arabia seems prepared to wait it out. According to the Financial Times, even if oil prices stayed at $80 per barrel for a year, the country would only need to draw down about $10 or $20 billion of its $750 billion in foreign-exchange reserves. Still, a few observers are worried about the longer run. On Tuesday, Saudi prince  al-Waleed bin Talal published an open letter to the country's oil minister warning that "our country faces the danger of continuing to depend almost entirely on oil."

Further reading

Here's an overview of why global oil prices are plummeting — a combination of weaker demand in places like China and a boom in production in the United States and Libya.
Here's a look at which US states get hurt by a fall in prices. Wyoming, Oklahoma, and North Dakota are the most reliant on drilling and top the list. Oil producing states that re more diversified — like California — don’t get pinched nearly as sharply.
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