I am pasting in an op-ed in today's WSJ that will umbrella my blog on the strategic nature of the world's most traded commodity; Oil! Read the last paragraph slowly, please!
Nov. 28, 2014 6:59 p.m. ET
America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly $116 in June.
Not too many years ago the Organization of Petroleum Exporting Countries might have cut production to maintain higher prices. The cartel’s countries have long sought to keep prices high at a level consistent with a growing global economy, not least to keep the revenue flowing into government coffers. Rogue states such as Venezuela and Iran desperately need the cash flow.
But the cartel has lost much of its pricing power thanks in part to the revival in U.S. oil production. Horizontal drilling and hydraulic fracturing—business innovations done mainly on private land—have pushed U.S. oil output to its highest level since the 1980s.
The Energy Information Administration says U.S. production reached more than nine million barrels a day this year and is expected to keep climbing. OPEC is afraid that demand for its crude will keep falling as U.S. supply continues to grow and more of it makes its way to the global market as American export barriers fall.
One way to read the OPEC decision is therefore as a price war to shake marginal U.S. producers from the market. The U.S. shale boom and high global oil prices have encouraged new areas of production with widely varying break-even price levels. Much of such proven areas as the Bakken Shale in North Dakota can remain profitable even at $50 a barrel, by most estimates. The Eagle Ford Shale in Texas also has a relatively low break-even. But newer areas with higher exploration and development costs could suffer if prices keep falling.
That’s how markets are supposed to work, with supply and demand rather than a cartel of dictatorships setting prices. A lower oil price will mean pain for some U.S. producers, and it is showing up in lower share prices for energy companies.
But no boom lasts forever, and lower prices will discipline American drillers to focus their investments on the most promising areas and innovate further to reduce costs. A shake-out might have long-term benefits if it doesn’t go too far.
Meanwhile, lower oil prices are an unmitigated boon to American consumers. The average gasoline price per gallon in the U.S. fell to $2.79 on Friday, down 50 cents from a year ago. That’s a big difference to the average family filling up the SUV each week, especially wage earners who haven’t had an increase in their standard of living during this entire economic expansion. Consumers who feel less pinched might open their checkbooks for non-energy purchases.
Lower prices will also add to the economic pressure on some of the world’s worst dictators, notably Vladimir Putin . Russia doesn’t belong to OPEC but it has benefited to the extent that the cartel’s production controls have kept prices high. Already under pressure from EU and U.S. sanctions, Mr. Putin’s ability to buy domestic political support will decline along with oil prices.
All of these benefits are flowing from a U.S. oil boom that government didn’t predict and had almost nothing to do with. The political class has force-fed subsidies to renewable energy with little economic benefit. The new oil order is a reminder that markets and American ingenuity are better economic pillars than all the schemes of government planners.
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Oil is like tires; nobody wants to talk about it and have nothing to do with it until you need it; the is a classic analogy of what is defined as a "commodity" plus keep in mind that a commodity is something that in and of itself add little value but add it to a more sophisticated platform, like tires, oil, bearings, etc, to a car, then the value of the commodity heads north quickly on price. As I have watched the current Administration do all it can to kill the Keystone Pipeline project, pour hundreds of billions of dollars into artificial forms of energy potential to basically no avail while at the same time attacking the means of extracting oil is absurd to me. But then, there are other absurdities I will choose to step over on this blog about Oil.
The world, I learned yesterday, produces 64,000,000, that is nearly a 100 million automobiles globally each year with China being the largest market for automobiles. Let that massive number sink in for a minute. Our global population is roughly at 7 billion and will surpass 9 billion in twenty years. Think about the strategic implications just in the auto industry hanging in the balance of the discussion of Oil.
Oil has been far too long a weapon used against the United States from the brilliance, NOT, of our initiative to create OPEC in the last 1970s; that is right, We the US drove that organization into existence. As as the Embargo of 1973 led to rationing, gas lines, riots, I remember oh so well, now the table is turned, finally. Gasoline in this nation is still far too expensive given the rules of Supply and Demand but keep in mind that the greater portion of gasoline price has nothing to do with Supply and Demand but rather taxes by every level of government on each gallon pumped. It is far worse, the taxation per gallon, in Europe so you can know.
But my point today is that sanctions, whining, decrees, hopes, military exercises, etc are all part of a facade to cause a nation to change its sinister ways such as Russia and recolonization of the Empire but the price of oil will do it for you. I read recently that Russia is losing roughly $200 billion per day in Gross Domestic Project due to the low cost of crude oil on global markets. Add to that the black market selling of oil by ISIL in Euro and not dollars and you have yet another body slam at Mother Russia. Thus Oil is a geostrategic weapon more powerful than a B52 if properly targeted and used. But this Administration seems clueless but trying to kill any semblance of increasing oil production as well as coal production in this nation. I find that sad and, well, STUPID, frankly but then go back up and read the red print from the op-ed.
We need oil and given the oil hungry emerging nations and the mature oil-based nations doing bad things, we need an ever increasing flow of oil production to combat strategically these rogue states and warlords. Hitting people in the pocketbook is much tougher than a bullet to the brain for there is a whole nation hanging in the balance via a hit to the national checkbook. .
I am more convinced that at the core of Mr. Obama is that he is a great speaker, intellectually solid but has fallen into the trap of surrounding himself with too many telling him what a great job he is doing and if they do not feed that, Hagel for latest instance, they will be shown the door. It is amazing to me, not really, that it seems nobody will step up to the plate to replace Hagel; SECDEF four under Obama; a new first for American Presidents.
Oil is a weapon; how it is used and to whom it is used on determines the real value of the weapon. It appears we are getting this one right in spite of Mr. Obama and his team; term used loosely I wish to add.
