Saudi Arabia Ready to Start Pumping More Oil

[Dennis Coyne + 82]

17 minutes ago, William Edwards said:

Because, amazingly enough, they, like you, do not understand the pricing mechanism and, therefore, do not understand that they can, indeed, set the price unilaterally. They blew it in 1985 and have not learned that lesson yet. Like you, and many others, they think that the secret is production control, but so far they have not realized that there is no way to "push" oil into the market, so, in fact they cannot control production except to restrain deliveries.. You have to entice the buyer to pick it up by PRICE! Price is the only operational control that they have at their disposal.

If you think through the steps of a sale of a tanker of oil, paying particular attention to each step in the process, you will realize the validity of my assertions. As a substitute, you might reflect on your own purchase of gasoline for your vehicle. Do you negotiate the price from the service station owner based upon his inventory level? Or do yo pay the price that he posts and YOU decide how much gasoline he delivers. The same sequence applies to cargo purchases.

Saudis can certainly set the price they sell their oil at. Just like a gas station however, they cannot change the "market" price.

I agree sellers set prices, if they sell less than they plan to sell (especially if they sell a product that is perishable like tomatoes) they will adjust their price lower to sell more or higher if they sell out early.

Unwanted inventory build is a signal to a producer to either produce less or to reduce price.

[William Edwards + 708]

1 minute ago, Dennis Coyne said:

Saudis can certainly set the price they sell their oil at. Just like a gas station however, they cannot change the "market" price.

I agree sellers set prices, if they sell less than they plan to sell (especially if they sell a product that is perishable like tomatoes) they will adjust their price lower to sell more or higher if they sell out early.

Unwanted inventory build is a signal to a producer to either produce less or to reduce price.

We are getting closer. I agree with most of what you said except for the inaccurate statement "they cannot change the "market" price". This is the key. The swing producer, the supplier of last resort, actually sets the market price. If you think through this concept successfully, then your understanding of pricing will take a large step forward.

[John Foote + 1,135]

 The Saudi situation is unique. Clearly they can influence pricing, and have. But they have internally politicized their situation beyond market forces. It reminds me of the Hunt Brothers trying to buy up the silver market in the 80s. In the end they failed. But in the run up created competition that didn't exist before, and then realizing it couldn't be bought, sold off quite a bit, dragging things back down. A lot of people made money in the instability. Lot of folks got burned. 

Edited May 21, 2018 by John Foote
mistakenly placed

[New York Investing meetup + 6]

On 5/9/2018 at 1:51 AM, Marina Schwarz said:

"Saudi Arabia “will work with major producers and consumers within and outside OPEC to limit the impact of any supply shortages,” a Saudi energy ministry official said on Wednesday, according to state news agency SPA."

It does my ole heart good to see how the Saudis care about the world's needs. So selfless. So generous. Excuse me while I wipe a tear.

Oh yeah, the Saudis are always looking out for the interests of the West all right. That's probably their motivation for funding terrorists. Personally, I believe everything they say (pardon me while I smirk).

[William Edwards + 708]

3 minutes ago, New York Investing meetup said:

Oh yeah, the Saudis are always looking out for the interests of the West all right. That's probably their motivation for funding terrorists. Personally, I believe everything they say (pardon me while I smirk).

Keep in mind that you do not wish to antagonize them to the point that they decide to get price competitive again.

Edited May 22, 2018 by William Edwards

[John Foote + 1,135]

Oil is a great source of potential energy, and converts to useful energy, but it's not unique. If you want to equate it to horsepower, then you better realize you can get horses out of electrical motors, even steam was a leader for good while. The English had a great energy crises years go, like centuries ago. They cut down most of their forests, then discovered coal worked even better. The 19th century saw an oil shortage, then they started utilizing the oil in the ground instead of whales. There is nothing magic about oil other than embedded interests and infrastructure, and higher prices accelerate the development of alternate technologies, and the development of marginal fields. Take away the futures market, and geopolitics, and things would be far stabler with supply and demand and margins driving the majority of decisions. Last night I went to a speech on energy storage, which is really what oil is great at, energy that can be consumed on demand. But as storing electricity develops, oil will take a fundamental hit, granted decades away for most markets. Gas is the flex electricity provider, and those gas btus are cheaper than oils. That differential shouldn't sustain over the long term and for years they were close to each other. We'll be pulling oil out of the ground for many years, oil is not the magic bullet that saves and drives global economy, it's just a major factor.

[Bhimsen Pachawry + 72]

15 hours ago, John Foote said:

Oil is a great source of potential energy, and converts to useful energy, but it's not unique. If you want to equate it to horsepower, then you better realize you can get horses out of electrical motors, even steam was a leader for good while. The English had a great energy crises years go, like centuries ago. They cut down most of their forests, then discovered coal worked even better. The 19th century saw an oil shortage, then they started utilizing the oil in the ground instead of whales. There is nothing magic about oil other than embedded interests and infrastructure, and higher prices accelerate the development of alternate technologies, and the development of marginal fields. Take away the futures market, and geopolitics, and things would be far stabler with supply and demand and margins driving the majority of decisions. Last night I went to a speech on energy storage, which is really what oil is great at, energy that can be consumed on demand. But as storing electricity develops, oil will take a fundamental hit, granted decades away for most markets. Gas is the flex electricity provider, and those gas btus are cheaper than oils. That differential shouldn't sustain over the long term and for years they were close to each other. We'll be pulling oil out of the ground for many years, oil is not the magic bullet that saves and drives global economy, it's just a major factor.

 

Let us look at what is special about oil:

1) Plastics, Pvc, bakelite used in every electrical and electronic items including lights and wiring needs petroleum

2) Sulphur for lead acid battery is from petroleum refining

3) Fertiliser like Phosphate, Potash require petroleum based compounds

4) Pesticide needs petroleum

5) Tractors, trucks and all the goods transportation needs petroleum

6) Aeroplane travel, trains, cars, taxis etc need petroleum

7) Dyes, ink, synthetic fibres like nylon etc need petroleum

8) Paints, shoepolish, varnish, emulsions, veneers, printer ink needs petroleum

9) Medicines require organic compounds from petroleum

10) Satellite launch rockets, missiles need organic compounds from petroleum

 

Without petroleum the mass manufacturing is impossible. The ability to sustain the population of 10 billion will be impossible without petroleum. World has enough for 2-3 billion people without petroleum. But, 10 billion will be a stretch and will compulsorily need mass manufacturing.

[Guillaume Albasini + 851]

Oil is a very usefull commodidy but we are burning a huge amount of oil only to produce energy or moving vehicles. As other solutions are emerging for power generation, heating, and mobility it would be better to preserve the remaining oil for the uses where it is more difficult to find  a substitution.

[Rodent + 1,424]

1 hour ago, Bhimsen Pachawry said:

World has enough for 2-3 billion people without petroleum. But, 10 billion will be a stretch and will compulsorily need mass manufacturing.

Where do these figures come from? Can you elaborate/substantiate?

[Bhimsen Pachawry + 72]

7 hours ago, Rodent said:

Where do these figures come from? Can you elaborate/substantiate?

We had seen famines in 1930-40 when world population was 2+ billion. Also, today's world uses fertilisers and pesticides due to which yield have gone up by 100%. The other components like HYV seeds, water pumps (solar pumps are also feasible) etc increased the yield by 50%, thus taking up the yield to 100%x2x1.5 = 300% of original. So, if the food production will fall to 50% of what it is without fertilisers. So, the food produced today will go down by half. in addition, populaton distribution is skewed with newer lands like Americas and Australia having lower population density whereas Asia, Africa and West Europe have high population density. Lot of food is being shipped every year from USA, Brazil and Australia which in turn are farmed using tractors.

Without oil, tractors won't work, shipping will be difficult and food will have to be grown using bullock cart-plows to till the land and transport the grains. This will make shipping from americas and Australia to food deficit areas in Asia, Arica and Europe a difficult job. So, in addition to the crops yield falling by 50%, additional losses will come due to logistical problems.

Even in Americas and Australia, people are 75% urban and 20% semi-rural and semi-urban who mostly rely on industrial production for employment. only 5% are in agriculture. So, the urban people will have no jobs to buy food. Also, the logistics will make it difficult for food transport from rural to urban areas. Urbanites will have to do a mass exodus from cities and settle in slums in rural areas so that they are close to the source of food. This will complicate things further.

Edited May 24, 2018 by Bhimsen Pachawry

[John Foote + 1,135]

I absolutely believe oil is here for the long run. But there are substitutes on the margins, and if you think you can charge silly money for it, you can gasify coal, etc.. and completely quit using for making electricity, and oil is a huge player for that in some markets. The biggest save from oil today isn’t switching so much as conservation and efficiency. My darn Honda has more power, and far better gas mileage, than my big block Ford 1970 V8. Excessive pricing accelerates switching.

[Guillaume Albasini + 851]

On 24/05/2018 at 8:22 PM, Bhimsen Pachawry said:

Lot of food is being shipped every year from USA, Brazil and Australia which in turn are farmed using tractors.

Without oil, tractors won't work,

... or we will have electric tractors.

https://www.futurefarming.com/Machinery/Articles/2018/1/This-is-the-Fendt-e100-Vario-electric-tractor-4419WP/

[John Foote + 1,135]

Propane tractors have been around for decades. Compressed natural gas would be easy. Oil per BTU can’t exceed gas by too much or it will drive conversions.

[William Edwards + 708]

2 minutes ago, John Foote said:

Propane tractors have been around for decades. Compressed natural gas would be easy. Oil per BTU can’t exceed gas by too much or it will drive conversions.

I might suggest, John, that you include lag time in your assessments. There are still some 30-year old tractors tilling the fields. Conversions may be slow to arrive.

[John Foote + 1,135]

Switching costs are an issue. Many places don’t have access to natural gas at all. But there is the odd person here who thinks sustaining $100+ is a possibility. The compressed gas tractors I saw, literally decades ago, where caused by tax policies making using gas much less than gasoline. The tank mod wasn’t a big deal for a tractor. Seoul Korea used to have propane taxis. So short range, and bombs if hit from behind, but not a big deal to switch from gasoline to gas, and visa versa. Urban van fleets and such could change. 

[Dennis Coyne + 82]

On ‎5‎/‎21‎/‎2018 at 1:34 PM, William Edwards said:

We are getting closer. I agree with most of what you said except for the inaccurate statement "they cannot change the "market" price". This is the key. The swing producer, the supplier of last resort, actually sets the market price. If you think through this concept successfully, then your understanding of pricing will take a large step forward.

William,

Could OPEC choose an oil price of $1/b?  If you think through this you will see the swing producer cannot "set" the price.  Though I agree they can influence the price.  Same exercise can be done for $500/b in today's market in 2017 US$.

The swing producer cannot set prices at any level they choose over the long term, their choices are constrained by World demand and non-OPEC supply .  If they can produce enough to supply the entire market as a monopoly producer, this would be true. 

Do you believe Saudi Arabia can produce 81 Mb/d of C+C?

My main point is your suggestion that they can choose whatever oil price they want.

There is a World demand schedule as well as a World non-OPEC Supply schedule.  These constrain the possible price quantity possibilities that OPEC can choose.

I do agree that within those constraints, as well as the output and revenue constraints of the OPEC producers, that any price that balances the market can be chosen by OPEC.  Currently OPEC's choice is probably in the range of $50 to $115/b they can choose to raise output as much as possible and drive oil prices to $50/b, or they could choose to cut back on output and raise oil prices.

The logical choice would be to keep output where it is and let oil prices continue to rise as that would maximize revenue, or they could even reduce output slightly as Venezuelan and Iranian exports decrease so that oil prices rise even further.  At this point they probably realize that US LTO output is not much of a long term threat and is likely to peak in 2023.  The increases in US TO output will barely meet increased World Demand at $75 to $85/b, OPEC/Russia would be smart to leave their output levels about where they are and maximize their oil revenue.

Edited May 30, 2018 by Dennis Coyne