Why Are Oil Prices Falling?

Saturday, November 15, 2014

"Oil prices need to stay above $85 a barrel in order for new fracking investment to be worthwhile," says anchorwoman Trish Regan.

Today's Brent Crude is $77.74 a barrel.

In USA Today, Regan writes, "Despite increasing tensions in the Middle East, the nationwide average for a gallon of gas stands below $3 for the first time in four years — a roughly 20% drop from June levels. And OPEC, the oil-producing group that controls an estimated 40% of world supply and aims to keep oil prices as high as it can, seems to be just fine with that."

The question is: Why?

Because that's what monopolies do when begin to face competition: Drop the price and try to put the competition out of business. Oil analysts seemed surprised last December when Saudi Arabia elected to keep their oil production at a high level even when new oil from Iran, Libya, and the U.S. were flooding the market.

But the most likely, rational reason to maintain high production is to drop the global price of oil. Saudi Arabia's oil is very cheap to produce — it's the cheapest in the world. It costs them less than $5 a barrel to produce. So even with lower prices, they're still making money. That isn't the case with the fastest-growing oil producer (and therefore biggest competitive threat), the USA.

"At a recent oil industry event in London," writes Regan, "OPEC's Secretary-general Abdullah al-Badri told reporters, 'If prices stay at $85, we will see a lot of investment going out of the market. About 65% of the producers, they have high costs. Not OPEC.'"

They're looking at the long term. If they hold prices low for awhile, maybe U.S. production will crash. Then they can go back to gouging the world in peace.

Regan concludes with an acknowledgement that lower oil prices are great for the economy, but we should "maintain investment in all forms of alternative energy."

That doesn't go far enough. We don't merely need "alternative energy," we need something more specific: Competition in the fuel market. Not weak competition, but vigorous, robust competition, which can only happen if individual cars can burn multiple fuels. It would not be difficult to accomplish and it would cost very little. But it would shield us permanently against OPEC's monopolistic manipulations.


Oil Prices Are Dropping. So What?

Wednesday, November 12, 2014

In Politico Magazine, Gal Luft had this to say about our currently dropping oil prices:

Ten years ago, when oil prices were under $40 a barrel, the idea of $80 oil considered “cheap” would have sounded inconceivable. But let’s not be mistaken: Oil is not cheap even at its new level. It costs the Saudis and their OPEC partners under $5 to produce a barrel so their profit margins are orders of magnitude higher than in any other commodity. In fact, on an energy-equivalent basis the new “cheap” oil is still four times more expensive than coal and natural gas.

While the other fossils compete with each other — as well as with nuclear, solar, hydro and wind power — over market share in the electricity generation sector, oil faces no competition in the sector that matters most for the global economy: transportation. This monopolistic position has allowed OPEC, a cartel that today produces fewer barrels than it did 40 years ago despite controlling more than three-quarters of the world’s conventional reserves, to hike the price gradually in order to meet its member regimes’ budgetary needs. And those needs are only going to rise.

Advice to Washington: Don’t get too comfortable with the new price level, as it is not reflective of a new era of cheap oil but merely a remission in the global economy’s worst affliction: oil’s virtual monopoly over transportation fuels. While OPEC, for tactical reasons, might keep its production level intact over the next few months, it is not likely to do so for very long. Most of its members need higher prices to balance their budgets: Saudi Arabia needs $95 per barrel; Venezuela $120; Iran $140. For these countries, the only possible course of action to avoid economic collapse is to cut production in order to offset the rising supply of North American oil. In other words: higher prices, again. Sinking into complacency and veering off the worthy goal of opening the transportation sector to fuel competition would sow the seeds for a painful oil shock down the road.

Gal Luft is co-director of the Institute for the Analysis of Global Security and senior adviser to the U.S. Energy Security Council.


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