Drowning Russia in cheap oil is an old trick.

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Saudis want to put Putin out of the oil biz.

As such, gasoline in some parts of the US is currently going for $0.99/gal (0.24€/L, 0.21£/L or 20 Rs/L).

And it's sort of funny/sad that what is called "blacktop" can be had for less than free. Transportation and steamroller not included.

That's another piece of good news. Two countries with a particularly shitty track records are in a lose-lose situation.

So how to fix that broken

Not as a check. Because of the continuous stream of oil money in KSA, it has been possible to grant subsidies on goods or handouts to people. Even not collecting any VAT on good or if so a rather low VAT. When you are losing a lot of your income as a state, you can't really keep that standard up.

I suggest reading this, it's an older article, but the circumstances are the same: https://www.businessinsider.com/saudi-arabian-social-contrac...

A large part of that spat is that Russia still thinks it can drive out the US shale producers whereas Saudi Arabia is done fighting for now. Moscow has a $150 billion warchest whereas Riyadh is bleeding money and risking the biggest IPO in history.

>The goal for the Saudi's is to bring the Russians to the negotiating table

the current oil skirmish is a part of much bigger war - Russia went into Syria and has supported the Shia belt (Hezbollah - Asad - Iraqi Shia government - Iran) against Sunni (ISIS/Saudis) despite having no religious preference between Shia/Sunni in particular to block Saudis from being able to pipeline the stuff to Europe (which is an oil and especially natural gas market critical to Putin's Russia survival, and where Saudis have been trying for example to send oil and LNG tankers to. The LNG is more expensive than pipelined NG while Saudis have a lot of NG, so they need a pipeline to Europe and that would be existential blow to the current Russia economy and its "soft" power (like the threat of turning gas off in winter) power over Europe). In this context i don't see Russia going to negotiate wrt. current skirmish. If anything i think it would go all the way in Stalingrad style, Russian population economical suffering be damned, in hopes of forcing Saudis to come to bigger negotiations in much weaker shape.

Someone (Matt Levine??) on Bloomberg said that "Russia and Saudi Arabia seem to have accepted that periodically bankrupting US fracking operations is a cost of business". Periodically - because US oil extraction is done by many firms in a country with strong bankruptcy law, and after 2 or 3 years SA and RU will stop dumping, prices will rise, and they'll spring right up again (barring some drastic change in world oil consumption.) So it's more like Don'tlose-don'tlose-losetemporarily.

It's only a win after the switch to EVs. Before that you are going to need every drop of that oil.

Will that reduce the availability of Gas causing more dependency on Coal, though?

The US is the worlds largest oil producer

Be careful.

I'm comfortable losing it all.

I know I'm in the blast radius of volatility.

Here's a good breakdown of crude oil usage I found interesting:

https://www.eia.gov/energyexplained/oil-and-petroleum-produc...

Yes, but the article describes the problem of physical storage running out. This affects the price much stronger than some political gamble.

Unless "jobs" stopped being an end goal. Then it would still be nice.

Hm, Sweden used to have huge strategic reserves, somewhere. Wonder if most if those are all destroyed or just empty.

I got this verbally from my uncle, whose day job was to find ways to extract more oil from rocks.

To begin with, the oil is there, stably, at rest. At some point people come along, estimate the layout of the rocks (many km³ and far underground) and drill holes to change the way the pressure works and make as much as possible of the oil flow to a particular location. The geology decides how much that is, modified by the paths of the holes involved, and also by how much water is pumped in, where.

If you now close it quickly, the pressure's going to change somehow and you don't know precisely where and how. The end effect may be that when you reopen, something has changed down there such that instead of extracting 40% of the total oil you can only get 39%. Or such that you have to drill more holes in order to gain back your production velocity, the cost of which is far higher than producing at a loss for a month.

Cannot agree more. But maybe they want to learn.

Are you seriously claiming that, say, the sand of the Sahara (or the ice at the south pole) is as rich as, say, the Amazonian rainforest?

Sure I guess technically anything is an ecosystem, but some clearly support far more life (and variety of life, and sometimes exclusive life) than others. They obviously have different ecological "value".

Also pumping oil in the desert doesn't lead to the local residents being able to set their tap water on fire, you know, the way fracking can.

I think the strategic advantage is to drill, baby, drill, and profit from those natural resources as much as possible while we're still in the Oil Age. If the Middle East runs dry it will be a strategic victory for all those countries and a loss for the other countries where high production costs kept the remaining oil in the ground, just sitting there never having generated a penny in profits, with renewables and electrification of transportation an even more imminent threat to the oil market.

Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.

Saudi Arabia has a much lower break even point: around 20 dollars. Hell even deepwater only costs 80 dollars to break even.

You’re correct.

Selling the futures is the profitable end of the trade. Spot prices for WTI are about $20. That same oil can be sold in May 2021 for 35.53. Part of that difference is cost of carry (storing and insurance), but there is still a profit to be made.

Yes,but maybe you missed my point, it was that "oil consumptiom" needs to go up along with oil prices before it can be taken down by renewables. That is fastest way, the slow way is to wait for disasters to keep happening and hope nations force change.

I think /r/wallstreetbets is the modern version of interactive fiction, or perhaps even the evolution of fireside-storytelling that civilization has had for 10,000 years. "The mammoth was THIS BIG! //extends neanderthal arms for affect//"

It was my understanding that by driving around in a gas guzzler, I am precipitating human extinction, bringing forward the long-awaited day when the ecology of Earth no longer includes humans, which will be “better”.

Where did I go wrong? Was it when I evolved?

Yes, currently the tight oil industry could be in a good shape, because drilling a well is very cheap (about US$ 5 millions), without the trillions of debts it amassed. The problem may unroll like this:

- demand is destroyed by coronavirus - prices go down (maybe as low as $10 a barrel according to some analysts) - existing wells maybe kept pumping, or not - new drilling stops, ditto exploration, etc. - cash flow in tight oil industry falls to about zero - huge debt (trillions) can't be paid back, companies go belly up, banks must be rescued by the Fed...

several scenarii open up from there: would the Fed rescue the oil companies? may the government nationalise the oil industry? What can be the impact on US$? On US debt? financial markets? Who knows, all bets are off at this point.

The crucial moment will be there: in the few months between this moment when the shale oil industry defaults on its debt, and when it's bought back (debt free, therefore in a sane situation), there may be a large gap in production, that could kill world oil demand by sending prices through the ceiling ($100 barrel? $120? $150?) because normal demand can't be fulfilled by conventional production anymore.

Lots of graphs here: https://jancovici.com/en/energy-transition/oil/when-does-the...

I myself have no particular expertise, but I've been following quite closely oil and energy since 2005.

Also, the environmental impact is largely missing from this thread. In states that have lax environmental laws and oilmen at the helm, towns are being destroyed by extraction side-effects. To the extent that these states are OK being polluted will indicate how far this drilling will proceed.

They didn't, and if we go there we definitely have enough carbon to go back to the Pleistocene epoch. Antarctica is believed to contain large coal and oil fields but they have not been thoroughly mapped as they are not economic to reach at the moment.

I recall watching an old 50s documentary on Antarctica when I was bored years ago and they mentioned that there was enough fuel there to satisfy our energy needs for hundreds of years. This was before anyone was very worried about CO2.

True, but tight oil production that was previously though to be impossible to extract economically has more than offset losses in conventional production. Peak oil predictions of decades past presumed this could only happen when oil prices rose so high that alternative energy sources would be competitive. Therefore these reservoirs would remain uneconomic. Instead fracking got really cheap.

Russia has just lost about 20-30% yearly income in these first months just from the oil price war.

Saudis cannot care less because they have about three times of Russia reserves nominally. In fact I suspect about five to seven times that, because Russia reserve structure is basically unknown. Saudis can certainly afford a year or three of having no income.

This is on top of the virus panic (which just cut any remaining tax revenues). Russia, Venezuela, Iran for that matter are done for.

EDIT: Which is why I think the whole OPEC+ deal went to the crapper. Middle East is able to weather this, others - not so much.

While there can be a great deal of pressure pushing the oil up the well, there is also resistance to that flow up a narrow pipe (perhaps 4 inch pipe). The balance of forces can be very close but the momentum can keep the flow going. In some fluids, there can be methyl hydrates (or wax) that can cause problems with maintaining flow. There can also be particles that are moving in the fluid (sand), slowing or stopping the flow can cause these particles to settle, preventing future fluid movements. There is a temperature and pressure gradient which can allow dissolved gas to bubble out the fluid as it ascends the well which can lead to added complexity. And we haven’t yet discussed oil recovery methods like gas/water injection or electrical sub surface pumps. Getting a well restarted after shutdown, may not be possible. I worked with some petroleum engineers, getting the best from your wells can be a very complex simulation problem followed by expensive engineering solution.

No, it's a matter of the complicated and only partly known geology underground. See other answer.

Another way of looking at it is: You've drilled holes to make the oil flow. There are kilometers of rock on top of the oil layer, pushing down, pushing the oil towards the holes you've drilled. You can close the end of the hole, but you can't make that weight go away. The system is going to find a new equilibrium. The new equilibrium is not one you've tried to optimise for maximum total oil production.

It’s simply not true that you don’t know if the oil will flow again. It will. The subsurface pressure and fluid behavior is well understood.

One of the only scenarios that might lead to wells failing to flow when reopened would in wells that were freshly tracked without flowing back the frack water. In this case the frack water will soak into and damage the clay-like minerals in the rock and damage the permeability of the rock.

One of the best ways to do a carbon tax is to pay the revenues back as a dividend. States aren't allowed to print money, so you could reasonably have a bunch of blue states right now say that they're going to start paying dividends to people to help them out because they have to stay home, and hey let's fund it with a gas tax -- which people don't mind nearly as much right now because they're staying home anyway.

And then if it happens to still exist two years from now, it's already the status quo.

Citation for “most experts.” Most actual virus experts I’ve seen say the opposite: the virus is mutating slowly (at least in the spike protein, which is the part the immune system responds to) and the “reinfection” measurements are likely measuring residual virus genetic material, not necessarily true reinfection.

@trvrb on Twitter. And this other guy, with this thread: https://mobile.twitter.com/PeterKolchinsky/status/1244029896...

(Which doesn’t mean I disagree with your overall point that this won’t be an instant-bounceback.)

I work in the travel industry (in a weird IT/social media guy position) and the consensus seems to be that people will get back to traveling but in their own country.

“Public” tourism industry is going to be okay (and aren't too worry about it for better or worse) but OTA and traditional tour operators are bleeding and some will eventually die.

Small local actors too but they will be replaced (or back after a year of unemployment, with loans from bailout banks).

In that case also invest in beachfront properties in northern russia and Antarctica. The weather there will be awesome

> See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market.

Did the rideshare companies actually jack up their prices at any point? How would they do that when they're still in competition with each other and the barrier to entry to the market remains low? Any attempt to raise prices would immediately result in more competitors.

That was the whole thing with the taxi medallions. It was a cartel, because that market has very low barriers to entry and the taxi companies didn't want the competition.

Uber didn't make prices artificially low, they just provided competition which stopped them from being artificially high. They're not losing money on rides, they're "losing money" on self-driving car R&D and things like that.

And "fair trade" is a marketing device. People want to feel good about not exploiting people, so companies not exploiting people get to charge a premium for that. That doesn't mean companies who are paying suppliers less don't still exist or offer similar products for lower prices purchased by customers who don't care as much about that.

Neither of these are examples of what you're describing.

That’s called a cartel. See OPEC.

If that’s all “fair trade” is, that’s an impressive marketing tactic.

Crude futures are liquid enough that you can almost always sell them before fulfillment date if you do not want to be on the hook for the obligation. They can't be early exercised like options can.

Put options are called options for a reason

You never have to exercise if you don't want to so there's a fixed maximum cost

Who would that be?

Obviously oil has a fixed supply... there is by definition only a finite amount of it, given that we live on a spheroid with a finite volume out of which to extract it. Supply doesn't grow with demand, as that would imply new oil is somehow being created with demand and that, given infinite demand, there would also be infinite supply.

What does grow with demand is technological innovation and effort, and while we were not as close to the actual limit as we assumed with "peak oil", that doesn't mean the limit itself was fictional.

“ How much time will it be over $30 before the shale producers start up again?” I work in this field, and the answer to your question is “instantaneously.” The largest operators will not go out of business because they have sufficient exposure to non-shale assets; they will simply immediately drill the wells they had planned to drill when the crisis hit. Capital will rapidly find its way into the hands of the people with the expertise to drill and complete money-making wells.

The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.

>That the idea of "put them out of business and then double the price" won't really work in a practical manner.

Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.

> How much time will it be over $30 before the shale producers start up again?

I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit.

From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.

I think it’s more a side-effect of the Russia pricing fight than the goal itself.

If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.

>At some point oil will become economically and technologically infeasible and alternatives will win out

And it will, but I fail to see how this defeats my statement.

Oil will become obsolete not because its price will rise, but only because the alternatives will finally become cheaper.

Which is not the case as of now.

But they aren't going to achieve that on low prices alone. That's just reality. Coronavirus has placed Russia squarely in the driver's seat here. Saudi production surplus or no surplus is meaningless as Covid is depressing prices in any case. (And will continue to do so for the foreseeable future.)

So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?)

It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)

I suspect battery storage will over time start to undercut shale production after prices rise again. So I'm thinking maybe shale is dead anyway. Good thing, since it is so dirty. Open to opposing points of view, though.. I don't know that much about this so would be glad to be educated.

Also just want to borrow your phrasing to say I think it would be incredible for all those shale oil folks to keep pulling in those paychecks, but sometimes you have to accept the world as it is, and not how you want it to be.

Oil jobs are not the only things these people can do. There is an argument to be made that renewables, like solar, actually would increase employment - especially of middle class labor.

> I think most people forget that the American oil industry is one of the largest in the world

You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply.

So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most of the demand because most of the people with oil jobs aren't in those constituencies. And the people who gain jobs from replacing them would be -- solar installations are inherently local. So would everyone receiving the dividend, even though part of it would be paid for by suppliers.

And it's really the same in Europe -- Eastern Europe has most of the supply but Western Europe has most of the demand. And China and India have negligible oil production per capita.

Texans can buy as many pickup trucks as they like, but if you stamp out 80% of the world demand like that, nobody is going to buy their oil. And once the jobs are already gone and the industry isn't interested in making ICE cars just for Texas and Russia and Saudi Arabia, there won't even be that.

Ah, the good old employment argument for destroying the planet. We are so wise and far sighted if we let this happen...

It would be make more economic sense to pay these people to stay home and do nothing!

In a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money.

For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.

"in a perfect market producers make zero profits"

In what world would any company make zero profits in a "perfect" sense?

Companies exist to make profit...

" In a perfect free market the oil producers make zero profits"

Where does this conclusion come from?

As far as I have heard, when they enter a market, they pay the driver more than they're getting from the user.

Plus marketing. You think Google let Uber put an advert on every Google Maps search for free?

There's actually a whole article about it on crunchbase: https://news.crunchbase.com/news/understanding-uber-loses-mo...

Marginal cost is the amount it costs to produce additional unit of a good, cost overall would include fixed costs. Price is different from cost as well, since that's what people pay, not how much it costs (though in perfect competition price will equal marginal cost - but not the case in monopolies). These are nitpicky technical things but they do give you different answers when you do out the math.

California is going for a more direct route which using cap and trade funds to pay for buy backs and down payment support for electric vehicles. That's being handled through the California Air Resource Boards.

I tend to dislike consumer carbon taxes because I feel it tends to punish people for decisions they made previously. Like a old fart who bought the last car he's ever going to own in 2005. Which results in political blowback. See the yellow vests in France.

Zero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.

The risk free interest rate is zero. Heck, by the time you read this, it could go negative!

Pricing power is a better word that monopoly power in this case then, should have been more precise in wording. They arent price takers is the point. They have price making power and a downward sloping demand curve until 50 bucks a barrel

Well, sorta but um no. If no profit includes a situation where everyone involved is paid at least enough that they are willing to do the work, then there is by definition motive to do the work.

These economic models are simplistic to the point of stupidity. But motivation to do the work can be totally priced in to the equations as a cost of doing business. Profit beyond that is what must, in the models, end up at zero to be efficient.

Yep. Perfect markets dont actually exist in any realistic way, and the US constitution itself deliberately breaks perfect markets by providing for patents.

> It's an investment that the company can't afford to make at the moment.

This is nonsense logic and the very reason not to use cash-based accounting for anything serious.

They raised capital, therefore they have the money. Basically all companies start off "losing money" because most investments don't instantaneously produce their full return. How would anybody ever open a factory or a restaurant if they had to be profitable before spending any money on anything that generates profit? You can't use the profit from making widgets to build your first widget factory because you need a widget factory to make widgets.

It's actually too oversimplified to be a great model for most things. Extend your intuition to imagine that you have perfect competition where there are infinitely many identical goods all competing to the lowest price either no differentiation, and people will price at zero profit. To extend that to the real world requires more and more complications like the time value of money etc

Ok. But then we are back at the beginning:

"In a perfect free market the oil producers make zero profits"

where this statement does not make sense, unless you apply weird economic definitions.