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The problem is that they're all pressed for money, and have no cause to trust their fellow members in adhering to a production cut. Also there is no way to prevent now powerful non-OPEC constituencies such as shale producers, frackers and oil-sands producers from ramping up if prices edge up even a little.
Correct, this has all been a war of market-share. OPEC dislikes both Russia and North Dakota. So it attacked their ability to produce at a profit by driving global prices down. They can't be disappointed by the results.
Correct, this has all been a war of market-share. OPEC dislikes both Russia and North Dakota. So it attacked their ability to produce at a profit by driving global prices down. They can't be disappointed by the results.
No one fights over market share in a sold-out market such as prevailed in 1973 or late 1978. Thus a small cut results in prices skyrocketing. The dynamic is different in a saturated market, where those beign asked to cut fear that others will make up any small shortfall. In September 1973 many oil wells and refineries were actually producing above rated capacity. In 1979 there was the sudden loss of Iranian output, which had the same effect as the minuscule production cuts of fall 1973.
The U.S. reaction was somewhat panicky as you point out but the "panic" was not uniform. Lines really only happened in the Los Angeles area in late April and early to mid-May and in the New York area from late May to mid-July. What really caused the problems were badly screwed up allocations based on earlier period sales. Rather than using just either 1972 or 1978 sales, a complex and shifting series of formulas were applied. And price control complexities played a role as well. During the period between the shortgages many stations, not surprisingly were limited by the market rather than price controls in what they could charge. For example a station might have a theoretical maximum price of 62.3 for regular leaded (still existed then) but because of the market they charged 61.9 or simply rounded down to the nearest ".9." Until mid-July stations were allowed to recover their "bank" the difference between the maximum legal price and the price they charged. Thus stations that were on highways or other noncompetitive locations had small or no banks since they almost always charged what they were allowed under price controls. Stations in competitive areas often had huge "banks." So for a while those stations could actually recover the banks. Thus sometimes normal "price war" areas were charging $1.299 a gallon and nearby highway stations were stuck at 90.2. That was actually a situation that happened during early July 1979 in my area. Crazy distortions like that created weird station hours and lines.
From OPEC's point of view, the intended targets were struck amidships. This has all been a great short-term success for them. How it might work out going forward will be another story. One that is as yet unwritten.
From OPEC's point of view, the intended targets were struck amidships. This has all been a great short-term success for them. How it might work out going forward will be another story. One that is as yet unwritten.
I think we saw that when prices approached 1972 levels in real terms recently. Even now the announcement of cuts for January has given a fillip to the market; one that I expect will wash out when the reality hits that the cuts were rhetorical only.
From OPEC's point of view, the intended targets were struck amidships. This has all been a great short-term success for them. How it might work out going forward will be another story. One that is as yet unwritten.
According to my brother-in-law who works in the oil and gas industry in Pennsylvania, OPEC's strategy had some unintended consequences. He claims that the gas industry was not very competitive ten years ago and that any "pack of morons" could make money. The tough market has resulted in a much more competitive industry and a series of consolidations that booted the inefficient drillers from contention. The "new" gas industry uses more automation, satellite imagery, GPS linked drones, supercomputer simulations, and all sorts of scientific and financial models that optimize the use of time and capital. In other words, OPEC was trying to discourage investment in the US domestic energy industry, but unintentionally catalyzed the technological modernization of the sector. For a few months early this year he was really worried about his job security due to financial cuts, but now he is getting all kinds of offers and bonuses due to his expertise being in demand. He works with GIS and computer modeling.
Except that input costs, such as labor and land drop in a lower-price environment. Fracking will continue to be profitable at $50/bbl and possibly lower.
Breakeven prices in most counties in the Bakken are below $20. They are below $15 in most of Texas.
This fact is why OPEC got together just now. It doesn't mean they won't cheat on the freezes/cuts, but they know that they have lost, the game is over, and US producers aren't even playing with them any more.
OPEC-driven technological improvements in drilling have changed the industry to just another form of mining where they know where the oil is and how much it will cost to get it.
Breakeven prices in most counties in the Bakken are below $20. They are below $15 in most of Texas.....OPEC-driven technological improvements in drilling have changed the industry to just another form of mining where they know where the oil is and how much it will cost to get it.
I didn't realize it was that bad for OPEC. They really locked the barn door after the horses escaped.
Quote:
Originally Posted by IDtheftV
This fact is why OPEC got together just now. It doesn't mean they won't cheat on the freezes/cuts, but they know that they have lost, the game is over, and US producers aren't even playing with them any more.
They already got their benefit, now and back in September when they announced the talks. The prices spurted on the announcements and the extra funds are gravy for the producers even though the prices won't hold.
In other words, OPEC was trying to discourage investment in the US domestic energy industry, but unintentionally catalyzed the technological modernization of the sector.
As its name would suggest, OPEC is concerned with global petroleum markets. Incidental effects of their actions on markets for natural gas, hydro-electric, wind, or solar power would be of secondary interest to them at best. Their intent in promoting such significant drops in oil prices was to wound Russia and Nortn Dakota. Mission accomplished.
Quote:
Originally Posted by Chemistry_Guy
For a few months early this year he was really worried about his job security due to financial cuts, but now he is getting all kinds of offers and bonuses due to his expertise being in demand. He works with GIS and computer modeling.
Employment markets for GIS-competent professionals have been strong across many fields and applications.
As its name would suggest, OPEC is concerned with global petroleum markets. Incidental effects of their actions on markets for natural gas, hydro-electric, wind, or solar power would be of secondary interest to them at best.
Absolutely true. That is another reason that their narrow-focus on what they are doing has made what they are doing even more irrelevant. OPEC is irrelevant.
Bottom line-old - They were created to maximize the price of petroleum.
Bottom line-new - Their only power is to minimize the price. - - Fail.
Quote:
Originally Posted by Pub-911
Their intent in promoting such significant drops in oil prices was to wound Russia and Nortn Dakota. Mission accomplished.
No. "Mission accomplished" would be to cause capacity to implode and all the players to go and play elsewhere.
In ND, there are thousands ( not a typo - thousands ) of wells that can be turned on ( drilled and put on hold ) as soon as the producers can sell forward in the futures markets at a price they want. ND ( some of the Bakken is in MT, BTW ) production went down from about 1.1 Mbd to 900kbd. How is that mission accomplished?
In TX, OPEC is staring down the gaping maw of much much more reserves and production.
OPEC's inability to focus on stuff like natural gas has ignored its use as a transportation fuel. Many barrels of oil will not need to be imported due to the changeover of heavy trucks and even passenger cars to this much cleaner and much much cheaper fuel.
The janitorial staff that takes care of the Vienna, Austria headquarters meeting rooms of OPEC must really be busy keeping supplies of vinegar around to clean the urine stains from the seats where the oil ministers sit during their meetings.
In the long run, OPEC is not going away. Who knows how much shale oil lies under the sands over there? Unfortunately for them, as energy supplies diversify to gas, solar, wind, electric, nuclear, better fuel economy, etc. petroleum will become less important and OPEC more irrelevant.
Note that I DELIBERATELY put "electricity" and "fuel economy" as oil substitutes. I wasn't being sloppy.
Absolutely true. That is another reason that their narrow-focus on what they are doing has made what they are doing even more irrelevant. OPEC is irrelevant.
Bottom line-old - They were created to maximize the price of petroleum.
Bottom line-new - Their only power is to minimize the price. - - Fail.No. "Mission accomplished" would be to cause capacity to implode and all the players to go and play elsewhere.
**************
In ND, there are thousands ( not a typo - thousands ) of wells that can be turned on ( drilled and put on hold ) as soon as the producers can sell forward in the futures markets at a price they want. ND ( some of the Bakken is in MT, BTW ) production went down from about 1.1 Mbd to 900kbd. How is that mission accomplished?
In TX, OPEC is staring down the gaping maw of much much more reserves and production.
OPEC's inability to focus on stuff like natural gas has ignored its use as a transportation fuel. Many barrels of oil will not need to be imported due to the changeover of heavy trucks and even passenger cars to this much cleaner and much much cheaper fuel.
The janitorial staff that takes care of the Vienna, Austria headquarters meeting rooms of OPEC must really be busy keeping supplies of vinegar around to clean the urine stains from the seats where the oil ministers sit during their meetings.
Excellent post which I'm going to rep.
Many peole were impressed back in 1973 and 1974 when costumed ministers gathered gravely in Vienna and the price seened to jump, and availability at any price seemed to change with their pronouncements. In most cases they were making a virtue out of necessity. Starting around midway through 1972 (you read that right, not 1973 or 1974) the petroleum market became extremely tight. That summer there were actually a few spot shortages and major oil companies stopped subsidizing the ability of their retailers to match competitors' prices. Later in 1972 they reduced supplies to independent retailers.
Around the end of April, if I recall correctly April 21, 1973 the oil companies ceased promotional advertising and the giveaways of stamps, glasses and bowls. The next month the companies began limiting their stations to year-earlier sales levels and in some cases to allocation fractions of around 90% of year earlier levels. Since independents had little gasoline to sell, there was actually a small gasoline shortage that spring and summer. During this period, not surprisingly, crude oil prices began to rise. =In the U.S. retail prices didn't increase as much because of the continuation of Phase II wage and price controls after the January 11, 1973 end of those controls on the rest of the economy. Oil prorducers and refiners were operating at somewhat over rated capacity.
The October 1973 Yom Kippur War served as a pretext to announce major production cuts and price increases. This culminated, by December, in an overall quadrupling of crude prices. At that time OPEC announced a rescinding of some of their cuts. This was dressed up in conciliatory language. In the real world it probably reflected cheating on obeying the cuts. Sound familiar?
In March 1974 the embargo was ended and further production increases were announced. The long lines at the gas pumps magically disappeared. Prices jumped sharply and then by August 1974 began settling back, in some cases to under $0.50 per gallon. Crude prices declined also but not "officially." This again was cheating. By mid-1978 the nominal $12 per barrel (about the same as 1974) was about $9.16 in 1974 dollars, using the deflator (link) that Pub-911 likes. The economy, which has been in deep recession in 1974-5 was by now rolling. Iran's revolution then did cause a real and deep overall production cut. Not surprisingly prices surged to around $40 per barrel over 1979-80.
Both the 1973-4 and 1979-80 runup were accompanied by a Rube Goldberg price control and allocation mechanism in the U.S. When those were disbanded by Reagan within 10 days of his taking office, the prices began dropping. Crude went under $10 a barrel in 1986 and then again in 1998-9. Importantly neither were recession years. Even the recent $52 per barrel is equal to under $12 per barrel in 1972 dollars and $13.74 in 1974 dollars. So we are under the prices achieved in 1974 and well under 1979-80 levels.
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