Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Thursday, October 22, 2015

The King is Dead. Long Live the King

The oil world as we have known it is dead.

As the established market price setter, OPEC has reigned supreme internationally since 1960. In that year Saudi Arabia, Iran, Iraq, Venezuela and Kuwait founded the organization - known as the "Founding Members". In 1973, US President Richard Nixon signed an agreement with Saudi Arabia that in exchange for US protection, and arms, the Saudis would accept only US dollars in oil transactions. The other OPEC members then followed suit. All was well in the Kingdom.

Things have changed for three primary reasons. Firstly, China has risen to the point where it is now the second largest consumer of oil in the world. Secondly, the US with its fracking policies has now become the largest producer of oil in the world. Thirdly, Russia has grown to challenge Saudi Arabia's production levels. Three monumental shifts. Essentially the shifts have on the one hand structurally reduced the value of oil, and on the other hand have changed the demand cycle for oil.

Between 1973 and 1980, the US produced roughly an equal amount of oil as that of Saudi Arabia. However, from 1980 to 2009 US production dropped dramatically until the fracking revolution again placed it near Saudi production. At the same time Russia dramatically grew its production of oil just after the collapse of the Soviet Union in the 1990's, to the point that Russia shares top spot with the US, and Saudi.  

Then there were wars. The US and Saudi Arabia covertly and overtly attempted to either control or destroy the oil capabilities of Iran, Iraq and Venezuela (three of OPEC's founding members) by way of military force or revolution. For the most part these actions were successful to one degree or another. However, now all three have gravitated toward Russia and China for their economic well being. In a sense, this is another monumental shift to add to the three above.

That brings us to today. Russia and China have moved to eliminate the US as the controller of world-wide oil wealth. They have created a Eurasian trading community that speaks to the production of oil, and perhaps more importantly the consumption of oil.

In 2015, Russia and China began signing oil supply and purchase agreements that required transactions to be conducted in local currencies - not US dollars. That had the effect of increasing oil production and trading among the Eurasian bloc of countries. It excluded the US, but also Saudi Arabia, from oil market influence. For example, Russia signed agreements with Venezuela to swap Venezuelan oil for Russian consumer goods - not much different than the old Soviet model of international trading. China signed oil supply agreements with Iran. And so it goes.

That left the old King of OPEC, Saudi Arabia, out in the cold. In an attempt to restore its position Saudi Arabia increased production, along with the Americans, The resulting massive price per barrel decline had the effect of driving many countries into recession and/or hyperinflation (Venezuela). But, and it's a big but, the move failed in its objective. The Eurasian community, and its allies, simply turned inward and compensated each other by trading in their own currencies and products.

Hence the recent visits by Saudi royalty to Russia. On the face of it, Saudi is looking for Russian cooperation in Syria - ie: a departure of Russia from the Syria conflict. However, the real reason for the sudden Saudi diplomacy toward Russia is peace overtures in an oil war they have lost. Saudi is now a lonely supplier of oil running out of markets. Worse for them, the US now no longer needs them for supply and or control of OPEC. The new OPEC is in Eurasia. Specifically Russia.

What all this means for the world of oil is that the cartel days are over. The US stands alone as an oil force. Eurasia and allies stand alone as an oil force. Saudi stands alone with Kuwait and Qatar. It means that world oil prices will now be permanently depressed - likely well below where they rest today. It means an end to the boom of the expensive oil exploration and trade that fueled petro economies around the world - my own included. It's a new reality. Oil is no longer King, and it is no longer exclusive. So, while OPEC is dead, a new oil King has been anointed. That King without any doubt whatsoever is Eurasia.  

1 comment:

  1. What about declining reserve, oil peak etc. ? Do you consider it nonsense ? (genuine candid question, no irony there)


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