Monday, December 1, 2014

Saudi Arabia opens a trap door on oil prices

It's time for me to make good on two promises.  First, I concluded Tales of two trailers by telling my readers to "stay tuned for a new Nablopomo theme and a post about this weekend's oil news.  The gas price rollercoaster is set for another drop."  Second, I made a prediction to close Gas bounces off the floor.
The neighborhood price should be no lower than $2.75.  That's where I expect all the stations should be within a week, possibly even by next Monday, when the opportunity presented by Thanksgiving travel will be over.  As for $2.65, that might just be the low for the year.  Don't expect to see limbo kitty again until prices fall to within a dime of that price.
The corner station was at $2.75 yesterday after passing through $2.77 on its way down.  That may not be a four-year low for the neighborhood, but it is the lowest the corner station has been since the beginning of this blog.  It's also within a dime of the low price of $2.65, so limbo kitty has returned.

Prices are likely to go even lower.  Follow over the jump to read why, as well as how this price drop is setting up the trigger for the next recession.

First, the local and national average prices from Gas Buddy continue to fall.  The national average has resumed its decline and is now at $2.76, while the Detroit average has fallen through $2.80 on its way to $2.79.  That means that the next stop for regular gas in the neighborhood is $2.69.  That could happen this week.

Second, crude oil dropped like a rock over the holiday weekend.  Reuters has more in U.S. crude down 10 percent post-OPEC, Brent breaks below $70.
U.S. crude tumbled 10 percent in its biggest one-day drop in more than five years on Friday, and benchmark Brent broke below $70 a barrel, as OPEC's decision not to cut output sent oil traders and analysts scurrying to find a new trading floor.

"I see little reason to buy oil now. I think people are either going to drive it down further or just let the market collapse," said Tariq Zahir, managing member at Tyche Capital Advisors in Hollow Way, New York.

U.S. West Texas Intermediate (WTI) light crude (WTI) settled down $7.54 at $66.15 a barrel, and fell further post-settlement, reaching a four-year low of $65.69. The last time the market lost 10 percent in a day was in March 2009.

North Sea Brent finished down $2.43, or 3.3 percent, at $70.15. It fell to as low as $69.78 on the day, a bottom since May 2010. Brent also finished down 18 percent for November for a fifth straight month of declines, or the longest losing streak since the 2008-2009 financial crisis.
Oil-Price.Net shows WTI falling 11.40% and Brent dropping 10.83%.  The site also lists the RBOB spot price as $1.90.  With wholesale prices like that, I would not be surprised if the local price at the pump goes as low as $2.59.

As for how this sets up the next recession, I told Kunstler's readers how that was going to happen in a comment to The Instability Express.
rckruger: I imagine that the Shale Oil story in the US is going to go bye bye at these current low prices. If it cost $80 a barrel to produce the stuff, there is no money to be made selling it at $75 a barrel.

Me: At which point, the shale oil producers go out of business, the supply drops, and the price shoots up, which is exactly what the Saudis and others in OPEC want it to do.  Should the price for oil rise from $75/barrel to $115/barrel in twelve months, that would be a 50% increase in one year, which is one of the two conditions for recessions in the U.S. since domestic oil production peaked in 1971; the other is the U.S. spending more than 4% of its GDP on oil.  Thank James Hamilton of the University of California, San Diego, for figuring those two out.  There may be a financial panic, but that alone won't cause the next round of contraction.  Sucking the money out of consumers' wallets and into their gas tanks will.

That's the pattern that Richard Heinberg of the Post Carbon Institute described in "The End of Suburbia," which I showed to my students last week, of high prices causing a series of longer and deeper recessions, and that's what I expect will happen next.  At that point, if some semblance of business as usual persists, the price will crash and then rise again, prompting the next set of suckers to get the capital to drill for tight oil, the supply will go up, and the price will fall again.  Lather, rinse, repeat.  Of course, if the capital dries up and stays that way, the oil stays in the ground.
Now that the price is at $66, the price only has to rise to $100 in a twelve-month period for that mechanism to work.  That's not an unreasonable increase in prices.  I'll be keeping my eye open for that.  I'll also mention it to my students this week, as the relationship between energy prices and the economy is on the final exam.

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