Could Low Oil Prices Bring on the End-Time Scenario? - www.khouse.org
We live in a world run on oil.
While some governments are trying to force the market to alternative forms of energy, "picking winners and losers", alternative forms of energy will not be able to replace hydrocarbon forms of energy for the next 30 years.
This makes oil a valuable commodity for the foreseeable future.
Peak Oil
Where commodities are needed and there is a finite supply, there lies economic and political power. What we are seeing in the oil markets now is a contest for both.
The oil boom experienced in the United States today with oil produced by "fracking", combined with the large supply of shale oil from Alberta, Canada on the market is threatening the economies of the OPEC oil producing states.
Oil rich states like Saudi Arabia, Kuwait, Venezuela, and the other OPEC (Organization of Oil Producing States) countries are experiencing a threat to their power because of the recent drop in oil prices. In less than a year, oil had fallen from roughly 110 dollars a barrel to about $47.
For the above countries, a drop in oil prices means less revenue coming into state coffers. This means there is less money available for their social programs. (Fewer government handouts equals an unhappy populace.) Countries that derive their main source of revenue from oil are generally authoritarian and corrupt in their structure and thus need to "bribe" their populations with free programs to buy their silence. (These countries are suffering from what is called the "oil curse".)
To support their internal programs, Russia bases its national budget on oil priced at 100 dollars per barrel. Venezuela needs oil to be about 110 dollars per barrel.
These oil producing countries see the drop in oil prices as a direct threat. They will go to great lengths to assure their national survival.
It is against this backdrop that the oil markets are operating.
Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won't curb output to halt the biggest drop in crude since 2008.
Qatar's estimate for the global oversupply is among the biggest of any producing country. These countries actually want - and are achieving - further price declines as part of an attempt to hasten cutbacks by U.S. and Canadian oil producers.
Oil Prices
"The faster you bring the price down, the quicker you will have a response from U.S. production - that is the expectation and the hope," said Jamie Webster, an analyst at consultants IHS Inc. in Washington. "I cannot recall a time when several members were actively pushing the price down in both word and deed."
Holding Out
U.S. crude production totaled 9.13 million barrels a day last week, up about 1 million barrels from a year ago and 49,000 from the OPEC meeting in November. Horizontal drilling and hydraulic fracturing in underground shale rock have boosted output by 66 percent over the past five years. Exports, still limited by law, reached a record 502,000 barrels a day in November, according to the Energy Information Administration.
The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63 percent of their exports.
The price decline will cost all 12 OPEC members a total of $257 billion in lost revenue this year, according to the EIA (U.S. Energy Information Agency). Venezuela has a 93 percent chance of defaulting on its debt over the next five years, according to CMA, a data provider owned by McGraw Hill Financial Inc.
Maintain Course
OPEC won't reverse course even if oil prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said. The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.
The group will stand by its decision not to cut output even if prices fall and wait at least three months before considering an emergency meeting, U.A.E. Energy Minister Suhail Al-Mazrouei said Dec. 14. He said clearing the surplus may take years, Abu Dhabi-based newspaper The National reported Jan. 6.
OPEC has no plans to meet before its next scheduled conference in June, Kuwaiti Oil Minister Ali al-Omair said on Dec. 16. Prices will recover in the second half as oil producers with the highest costs are compelled to scale back operations, he said.
"Swift Fall"
It wouldn't be the first time U.S. drillers are caught up in an OPEC battle for market share. In 1986, Saudi Arabia opened its taps and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world's oil market.
"It seems in their interest to have a swift fall rather than a slow, grinding fall," said Miswin Mahesh, an analyst at Barclays in London. "A swift drop in prices would bring more changes to non-OPEC supply," while a more gradual decline would let companies in other oil nations "merge and become more efficient."
Undermine Prices
Saudi Arabian oil ministers sought to undermine prices in the 1980s and 1990s with their public comments, according to Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. The tactic was used to pressure other OPEC members into agreeing to quota changes, she said.
There are signs that OPEC's approach is starting to work. Rigs targeting oil in the U.S. declined for the sixth time in seven weeks, by 17 to 1,482 last week, Baker Hughes Inc. said on its website on Jan. 5. There will be a serious decline in U.S. shale oil investment in 2015, Fatih Birol, chief economist of the International Energy Agency in Paris, said on Dec. 22.
"Some OPEC countries, most specifically Gulf states, obviously think that it's best to get unpleasant things over and done with," according to Eugen Weinberg, head of commodities research at Frankfurt's Commerzbank AG. "The recent wordings showed they are still firm about this strategy."
Global Misery
Any uncertainty in oil pricing makes people unhappy. Producers are unhappy because they cannot be sure how much oil to produce or how many production platforms to keep online. Refiners and petrochemical plants are not happy because they are not sure how much they will pay for their raw material and thus how much revenue they can bank on. The users of the end users of these products are unhappy because they too, are not sure how much they will pay for their raw material. Generally, product pricing will change before the raw material prices. That means that, in a downward oil pricing market, they are selling a low priced product made from the higher priced oil bought before the drop in prices. Ironically, refiners and petrochemical manufacturers, called downstream producers, cannot raise their prices immediately when prices increase because most consumers are savvy enough to realize that those products were made with low priced raw materials.
Many times, it is a lose-lose proposition for them.
Countries that are caught in uncertain markets tend to adjust their internal and foreign policies to meet this market situation. For example, the last time there was a drop in oil prices; Venezuela blamed the capitalist West, particularly the United States, for their economic woes and also started incursions into their neighboring countries to take their populace's minds off of their economic woes. One of the reasons Argentina invaded the British-owned Falkland Islands was to take their population's mind off their internal economic troubles.
Russia is now facing this situation. Their oil revenues were cut and product exports reduced by economic sanctions imposed by the West due to their conquest of Crimea and Ukraine. The country is also facing a ticking time bomb. Their oil, their main source of revenue has a finite life, estimated to be ten to fifteen years. This means that their oil will soon run out. They cannot stop current production because of their immediate financial needs, so they are selling their oil for less than they could in the future. The absolute number of rubles they can get from their oil over time is reduced. Every barrel they sell now is one less barrel they can sell at a higher price in the future.
With their reserves depleting, Russia is looking for other sources of oil to fatten their coffers. Syria and Iraq has large reserves that could help assure their economic survival.
Another particularly appealing place is off the coast of Israel. The oil and gas fields of Tamar and Leviathan could give their reserves a big boost. Russia now has a lease on a major naval base in Syria not far from these fields. The base being positioned where it is will also make it much easier to protect these fields if they were seized.
Whether Magog will look south to these fields as a source of spoil that is predicted in Ezekiel 38 is a very provocative theory and something worth watching.
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