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Opecology Or The Art Of Saying Nothing

Commodities / Crude Oil Dec 06, 2014 - 03:15 PM GMT

By: Andrew_McKillop

Commodities

The Threat of $57 Oil
The recent head of the World Petroleum Council, Renato Bertani speaking from Houston in interview with Russia Today TV, December 1st,  was set an increasingly ridiculous set of questions by the energetic if dumb interviewer lady in the Moscow bureau. She asked him if Peak Oil was true and if ISIS or ISIL was pricing its stolen oil (she said $30 a barrel) at the “right price”? Would oil get really cheap before it disappeared (not cheap after it disappeared)? Is fracking sustainable and are US producers lying when they say $57 a barrel is a price they can live with? Will hydrogen-fueled cars wipe out world oil demand? Would global warming terrify us so much we woke up one day and totally renounced oil? How will OPEC stabilize and control the market and set the right oil price for everybody (she didn't suggest we ask Goldman Sachs how they do it). Time for a sucker's rally!


Mr Bertani hit back. He told viewers that world reserves of oil, according to his WPC now stand at 1740 billion barrels – quite a lot more than they stood at in 1974 (and in 2010) but producing it all would need prices to get back up to the Goldman Sachs and IEA nice price of 100-plus dollars a barrel. Over on Aljazeera TV (another TV channel owned by an oil exporter country) the same Opecolgy farce is also running several times a day, sometimes including in-studio comment from an old aquaintance of mine, Dr Mamdouh Saleh. Wearing a bow tie these days, he says the oil price crash is basically due to Saudi Arabia wanting to drive US shale oil producers out of business by applying Say's Law.

The same way the Saudis drove high cost North Sea oil producers out of business in 1986 and destroyed Iran's will to fight Iraq in the 1980-88 war? Or did the Saudis want to destroy the Red Army's will to fight Saudi-financed and CIA-armed Taliban and other jihadis in the Soviet Afghan war?   In any case the USSR lost their war and quit Kabul faster than the USA (9 years versus 13) and from the late-1980s neither Opec nor KSA nor Russia pushed oil prices back to previous highs very fast. They stayed sweet and low for around 15 years after their 67% crash in 6 months during 1986-1987

Opec and Energy Economics
During the RT interview of the WPC's Bertani time was found to ask him about the Sykes-Picot carve up of Turkish Ottoman oil rich colonies, not only in the Arabian peninsula, and how he feels about renewable energy and driverless cars – but not one single question was asked about the price of oil energy compared with any other major fuel!. US natural gas producers, as we know, scrape along on a diet of corporate debt and hope that prices, one day, might get as high as $25 for a barrel equivalent of gas energy. World coal prices are flat, and have been flat at around $30 for a barrel equivalent since 2010, and before 2010. US coal producers, in some cases, are selling thir coal at much less than $20 for a barrel equivalent of coal energy. Is oil overpriced?

Only an idiot answers no.

To be sure, on his state visit to Turkey, December 1st. Vladimir Putin said that from January 1, 2015 Gazprom's supplies to Turkey which will be ramped up from the present 27 billion cubic metres a year, to around 38 bcm a year in the short term, will be priced 6% lower and a similar price cut could follow quite shortly after that. Russian gas will be delivered at a barrel equivalent price below the EU28 average oil-equivalent price around $60, but Putin and Gazprom are shifting towards “price taker status” for gas (as well as oil), simply due to world gas reserves and supply increasing at a really impressive rate. Worldwide financial blowback from this Gas Bubble includes an increasing list of now financially risky and uncertain LNG (liquefied gas) projects in several major regions, including Russia. To be sure, Gazprom would have to cut its prices a long way to reach the effective and real price paid by the Kiev government of western Ukraine for the years of siphoned or unpaid gas it has taken, or stolen, but Gazprom pricing to paying customers by Spring 2015 may show a serious reappraisal by Russia of what constitutes a rational gas price in current and emerging resource, supply and market conditions. Under any hypothesis it will be lower.

As is well known to readers of my articles on the subject, the renewable energy finance driven boom-bust through about 2006-2012 leaves the world with massive solar PV and windmill manufacturing capacities relentlessly driving down unit prices – and a rapid growing world stock of part-used but financially obsolete equipment. Even in the event of a surprising and low-credibility bounce of world economic growth back to a long-term average close to 3.75% a year, this is unlikely to produce a major uptick in world energy demand -  one hopeful argument used by some Opecologists (and by Opec itself) to claim that oil prices will be back in triple digit dollar prices “within a year or two”.

The long-term drift downward of oil's share in world energy, now 30-year-long, ,cannot be divorced and separated from oil overpricing on th fantasy basis there is no relation between oil energy prices – and the price from any other source. For producers, and the whole value chain or pyramid supported by ,overpriced oil – including Goldman Sach's oil trading division, for example – it was nice while high priced oil was as normal and natural as dirt cheap gas and coal. It made market betting on higher oil prices so much easier, saving computer time and manpower! To be sure, we now hear the mantra that The Markets Will Decide to explain the oil price slump, the same way that market manipulators and price fixers kept the oil price ridiculously high, for years, using the exact same mantra. Why and how “oil will bounce back” remains to be explained – although the talking heads on TV cab give us the ISIL-scenario of these youth psychopaths taking over Saudi Arabia and jacking up prices, like Saudi Arabia did in 1973-74 with its so-called Arab oil shock. Keep dreaming!.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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