Oil prices

Saudi Arabia's Attempt to Kill Off U.S. Fracking Could Kill Off Some Unsavory Regimes Too


Peoples Daily

Over the Thanksgiving holiday, the Organization of Petroleum Exporting Countries (OPEC) decided not to cut back on oil production, thus letting crude prices continue to fall. As a result of the U.S. the shale oil boom and weaker global economic growth, oil prices have dropped by nearly 40 percent this year. Earlier today, the West Texas Intermediate fell briefly below $65 per barrel.

U.S. oil production has risen from about 5 million barrels per day in 2005 to nearly 8 million today. More supply combined with faltering demand has predictably resulted in lower prices. Saudi Arabia produces oil much more cheaply than do American oil companies that use the higher cost fracking to coax crude out of the ground. The Saudis are attempting to push the price oil below the cost of fracking, and thus drive U.S. domestic oil producers out of the market. (Lower oil prices are intended to bankrupt Canadian oil sands producers too.)

However, another side effect of low petroleum prices is the possible destabilization of petro-states like Russia, Venezuela, and Iran. In an article that suggests that the price of oil could fall as low as $40 per barrel, Bloomberg News rounds up the the effects of low prices on various unsavory regimes:

Oil and gas provide 68 percent of Russia's exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 35 percent against the dollar since June…

Even before the price tumble, Iran's oil exports were already crumbling because of sanctions imposed over its nuclear program. Production is at a 20-year low, exports have fallen by half since early 2012 to 1 million barrels a day, and the rial has plummeted 80 percent on the black market, says the IMF.

Lower oil may increase the pain on Iran's population, though it may be insufficient to push its leaders to accept an end to the nuclear program, which they insist is peaceful. …

Venezuelan Rioting: The country was paralyzed by deadly riots earlier this year after police repressed protests about spiraling inflation, shortages of consumer goods and worsening crime.

"The dire state of the economy is likely to trigger renewed social unrest, while it seems that the government is running out of hard currency," Capital Economics, a London research firm, wrote in a Nov. 28 report.

Declining oil may force the government to take steps to avoid a default including devaluing the currency, cutting imports, raising domestic energy prices and cutting subsidies shipments to poorer countries in the region, according to Francisco Rodriguez, an economist at Bank of America Merrill Lynch.

"Though all these entail difficult choices, default is not an appealing alternative," he said. "Were Venezuela to default, bondholders would almost surely move to attach the country's refineries and oil shipments abroad."

The current situation in the oil markets looks like yet another boom-bust-boom-bust cycle in which low prices lead to low exploration, production, and technology investments that, in turn, leads to high prices and higher levels of technology investments, again resulting in more production and lower prices, and so forth.

In the meantime, enjoy the cheaper fuel and relish the fiscal pain of global bad actors.

NEXT: Did Silver Soar?

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  1. I have a feeling that as far as King Abdullah is concerned, taking the piss out of Iran is a much more important consideration than eliminating fracking.

    This measure will limit the Shia ability to fight off incursions by ISIS – who despite an official stance of disavowal, have tacit support by the religiously devout members of the ruling gulf arab families.

    1. I’m curious whether this is your personal conspiracy theory, a falsifiable hypothesis or actually a fact.

      OPEC has every incentive to drive oil’s price right into their sweet spot, where nobody else can compete.

      1. The Saudis are always in conflict with Iran for regional influence, and vice versa. I think they see this as a chance to strike a strong economic blow against a tottering Iran that’s spending a lot of money supporting Shia proxies in the area.

        1. We’re talking about the same Iran, right?

          And Saudi Arabia?

          I mean, they’re both OPEC members.

          1. OPEC is about as unified as the average college football conference – slightly unified against outsiders/in the common interest, but the members are ready to stab each other to death the moment nobody is looking.

            1. Hell, Saddam Hussein stated reasons for invading Iran and Kuwait included their flouting of the production limits they had agreed to in OPEC meetings.

      2. “OPEC has every incentive to drive oil’s price right into their sweet spot, where nobody else can compete.”

        They’ve done the exact same thing to prior attempts to increase domestic energy production here.

        1. With great success, is the only thing I’d add.

        2. And then we never drilled or fracked again!

      3. I’m curious whether this is your personal conspiracy theory, a falsifiable hypothesis or actually a fact

        My statement as to King Abdullah’s state of mind is speculation. ISIS being supported by religiously devout gulf arabs is fact, as is the fact that ISIS is at war against the Iranian backed Shiites and Allawites.

        The Sunni/Shiite war has been going on for centuries, and I think is more important to the House of Saud than the market-share held by a bunch of infidels a third of the way around the world.

      4. More like common sense. If OPEC loves low oil prices so much, why didn’t they create them sooner?

        Seems like an obvious trade by Obama: “Help us crush Putin and ISIS with cheap oil, and we’ll let North Dakota starve. It’s a red state anyway. And I’ll block the pipeline.”

        Because destabilizing bad regimes always turns out so well in the end.

    2. “”This measure will limit the Shia ability to fight off incursions by ISIS“”

      …who also rely in oil revenues.

      “The lootings, ransoms and extortion that go toward funding ISIS’s day-to-day operations provide a steady cash flow, al-Nujaifi says. But “this is nothing compared to what oil trafficking provides.” Indeed, it is the energy assets seized by ISIS that are believed to be the jewel in its crown?and the engine of its mighty war machine.

      Which means this is also ISIS’s greatest point of vulnerability.”

      Nice try though

      1. Came here to say this.

  2. Anyone know the cost point of oil/diesel when meat, eggs, and milk get cheaper? That’s what I’d like to see happen.

    1. The transportation costs are only a fraction of the price you pay. Contrary to popular opinion, when money gets weaker food costs more of it.

      1. Eh. Shit. I was hoping that the EPA not issuing new Ethanol standards, the lessening of the US drought and this would combine to take 25% off the cost of food as well. Thus “strengthening” my dollar, even as the Treasury and Fed try to burn up the bearings on the printing presses.

        1. Well, if you can convince the fed to start burning money instead of printing it, you *might* get 25%; however, to get 25% back we’d have to default on our debt.

        2. I was hoping that the EPA not issuing new Ethanol standards

          Did they keep the old ones? Are they still requiring we burn dirty food?

          1. It is my understanding that the guidance they provided was for people to stick to the previous rule until a new one was in place. I have no hope that Congress will help here. I was kind of hoping that the EPA would be partisan and try to fuck the incoming Congress by dropping the ethanol blending requirement and blaming the Republicans. Thus far, that remains a fantasy.

            1. Until that mandate goes away, I don’t see the price of food falling much. It affects damn near everything we eat.

              Right after that was mandated, the price of the dog food I buy went from $29 for a 40 lb bag, to $50 for a 30 lb bag.

              But hey, at least it’s green…er…wait.

              1. Solyent Green might be a cheaper ingredient than beef tailings right now.

              2. Right after that was mandated, the price of the dog food I buy went from $29 for a 40 lb bag, to $50 for a 30 lb bag.

                Yeah. Cat food is like $30 for a 10 lb bag (that isn’t the corn meal shit).

                Fucking compounded costs.

                1. Government could fuck up a wet dream! ABSOLUTELY NOTHING good came from that mandate on any level (unless you’re big farm).

                  1. That is one of the many reasons I can’t wait for NatGas fuelled cars to become mainstream.

                    1. CNG conversions are relatively cheap, but the fuel costs just as much as fucking gasoline by the time you account for energy efficiency.

                      I’ll give you one guess as to how that happened. And no, it wasn’t Hitler.

                    2. Was it Hitler? Oh, wait, you said I couldn’t guess that….damn.

                  2. (unless you’re big farm).

                    which writes campaign contribution checks.

                2. Tasty, yummy cat.

              3. At that point, dog is starting to look mighty tasty.

          2. Well they didn’t increase the mandated amount of ethanol required, and in government-speak that’s a decrease, right?

      2. Transportation costs are only part of it. There’s the use in production. Also fertilizer (natural gas + electricity).

  3. Venezuela is absolutely dependent on $120 per barrel oil. They will be the first to tank. It’ll be a violent little affair, I imagine.

    1. Good. I feel bad for the people of that country, but any more destruction of commie/socialist outposts because they steal rather than produce and trade freely is fine by me. Short term disaster/civil war may be best for the long term health and prosperity of Venezuelans.

      1. I feel bad for the people of that country

        Didn’t they vote Chavez (and socialism) back in?

        My “feel bad” only extends to the opposition.

        1. My “give a fuck” doesn’t go very far to start with. When you vote for a socialist? It doesn’t even wake up that morning.

        2. There is some evidence that Chavez avoided recall through fraud.

          Basically, crunching the stats in the recall election, Chavez’s supporters somehow kept a percentage of opponents ballots from being tallied, that percentage varying from district to district.

          1. That’s just a Venezuelan right wing meme.

          2. I’ve been reading about how Napoleon and the Bonapartists did similar things. As well as buying the mayors (who recorded the illiterates’ votes for them), they systematically eliminated the “nay” votes in both plebicites to ridiculousness. 3 million “ayes” and 6000 “nays” for his advance to Emperor. You’d think they could allow a solid quarter of the country to be “nay”, but that’s too dangerous once you start a dictatorship.

        3. Even the opposition is suspect; they have done a bad job and should have left the country or resorted to armed insurrection.

          1. You are awfully brave with their lives, families and fortunes.

            1. It’s what they should have done regardless.

            2. Everybody loves an armchair revolutionary.

      2. Short term disaster/civil war may be best for the long term health and prosperity of Venezuelans.

        Or, more likely, things will get worse.

        1. Why? The new regime could hardly be worse. Nicaragua was better off for the Contras.

          1. The new regime could hardly be worse.

            It could become southern North Korea. So, yes, still plenty of room left to get worse.

            1. Venezuelans are way too in touch with the rest of the world for that to happen. Maybe if they somehow end up having a long civil war or something.

    2. The ruling party is showing signs of fracturing. The guy in charge of the Chavista-dominated Congress is Diasdado Cabello and he is a lot tighter with the army than Maduro. That faction is more nationalist and is unhappy with the handouts to other countries. He sounds like Venezuelan Frank Underwood.

      1. Diasdado Cabello

        Heh, just think, with a name like that, 400 years ago this guy would have been a daring conquistador. Now he’s just another crummy tin-pot commie. How far the Spanish have fallen…

      2. Diosdado Cabello expected to be Chavez’ heir and it’s obvious he hates Maduro, who is rumored to be Colombian. So yeah.

    3. It will at least be entertaining watching Maduro blame it on those capitalist Saudis.

  4. We could stop using our military to support oil production and transport in the middle east so they have to finance such things themselves? So they would keep their price higher, perhaps high enough to allow us to continue our domestic production apace.

    1. But that would make too much sense. No politician could advocate doing something downright logical.

    2. Goddamit, Bones. You’re a doctor, not a political philosopher! But in the words of a prophet: The spice must flow!

      1. The spice must flow!

        Sorry, but the spice has been banned.

        /modern day earth born politician

    3. Or we could use up all of their resources and hold on to ours as long as we can.

      1. I like this aspect of the matter.

  5. I blame greedy speculators for the drop in prices.

    1. I laughed out loud.

      Holy shit I’m a nerd.

    2. It’s another Doctor’s Plot!

  6. Are people really complaining about lower energy costs?

    1. Yeah, the Krugmans of the world see high energy costs as a good thing. Rather than, you know, mis-allocated resources.

      1. It kind of punctures peak oil theory. And makes alternative energy way more expensive, relatively. So yeah, proglodytes want expensive oil. Oh well, they can always advocate higher taxes on it.

        1. Which is exactly what will happen if consumer gas prices keep dropping. You see savings; they see their money being hoarded by the wealthy.

      2. Hey, low cost oil is obviously a bad thing since people spending less on energy means reduced GDP

    2. Yup, harder to justify cramming people into urban holding areas, er, cities, in the name of energy efficiency, etc.

      Let the proles have their mobility and they do stupid things like live where they want, own land, etc.

      1. Nitpicking here… doesn’t owning land sorta work against mobility since you have to look after it?

        1. Owning land is more free than being tied to it like serfs.

        2. I can afford land in suburbia/exurbia – not in Chicago.

    3. I know someone that thinks gas should be $10 a gallon – teh save the environment or somesuch blather.

      1. Tell him to go pay $10/gallon then, if he really believes it. I’m sure the cashier will have absolutely no problem taking his money.

    4. I actually read an article that briefly mentioned that economists might be concerned with the disinflationary impact of lower energy costs.

      1. That’s because they don’t understand how deflation works. Not all deflation is bad.

    5. Well, I work in the industry, so yes.

      The joke goes: “At $5 a gallon, I wouldn’t be able to afford gas. At $2 a gallon, I wouldn’t be able to afford it either because I’d be out of a job.”

  7. OT: Remember that average in London is beaten with the ugly stick in the New World.

    1. Yikes! Now Ima have nightmares.

    2. now we know why the *Brits drink so much.

      UK, English, etc whateavER!

      1. United Kingdomner? UKer? UKling?

      2. I think Brits is accurate in this case. English, Scottish and Welsh all have pretty strong drinking cultures.

          1. That sounds like a club…that I would join.

    3. But they have big tits. I think I read somewhere that English women on average have the largest breasts.

    4. The results of National Health.

  8. The saddest part about this?

    OPEC would probably be better off just selling at current market value.

    Fucking mercantilist neanderthals. They truly deserve to be wiped off the map.

  9. Then why am I not paying less at the pump? Or maybe I am. I never really pay attention to those things.

    1. A fair chunk per gallon is taxes. The overall price has gone down some lately. It is still too damn high, like the rent.

    2. Its kinda sad that a 20% drop in fuel prices only nets me $9.00/week in savings. And it is still nearly 300% more than I paid when I started driving 20 years ago.

      1. But, doesn’t that just mean energy/fuel takes up a small part of your disposable income – and that’s a good thing?

        1. Oh yeah. I’m still better off than about 7 billion other people.

    3. I obviously don’t know any geographical factors that may or may not affect what you actually pay, but gas has dropped from ~4.0 to ~2.7x here, for the cheap shit.

      Granted, that’s from July (peak season?) to December.

    4. You’re paying much less at the pump.

    5. There was an EconTalk podcast (I think with Mike Munger) that discussed why gas prices rise quickly but fall slowly.

      1. Refining oil is not an instant process, for one thing.

    6. I know I’m paying less at the pump – two cars that run premium does that to you.

      It’s not greatly cheaper than before but every bit helps.

    7. Varies geographically somewhat, but I’m paying close to a dollar less than I was this summer.

  10. Having oil reserves and nationalizing them is one way that socialists can avoid the problem of running out of other people’s money. Few things are better for freedom and the world at large than lower oil prices. Anyone who cares about freedom should always support anything that will lower the price of oil. High oil prices do nothing but prop up various socialist regimes fortunate enough to have oil reserves.

    1. Having oil reserves and nationalizing them is one way that socialists can avoid the problem of running out of other people’s money.

      I agree with your premise that there’s not much better for all of humanity than low energy prices; however, I take issue with this. It’s impossible to avoid running out of OPM, it’s merely a delay.

      1. Yes. That is true. It delays it. Venezuela and Iran are good examples of that. Two things happen. First, they inevitably fuck up the oil industry and the nation literally becomes too stupid to pump its own oil. Production in Venezuela and Iran are both way below what they should be thanks to socialists being the most incompetent, corrupt and stupid people on earth. Second, there is never enough of other people’s money. Not even if you have oil.

        It always ends in misery and bankruptcy. Oil just delays that end and in some cases for a very long time.

    2. IIRC, the only reason the Swedish welfare state has lasted as long as it has is because of massive oil revenues. I’m sure there’s other examples as well.

      1. Sweden’s welfare state hasn’t lasted so long. It isn’t quite what it once was. The difference between Sweden and some place like Venezuela is that the Swedish socialists were smarter and somehow managed to reform their system.

        Also Sweden is a small homogenous country full of very hard working people who were willing to support the system. Sweden should be one of the richest places on earth. Instead it has a standard of living lower than Mississippi. Sweden is that rare country that is rich enough that the price of socialism is a fair standard of living instead of abject poverty.

      2. You are thinking of the Norwegians.

        The swedes actually are far more free-markety than most americans realize.

  11. The reality is there has been no change in rig count. While too soon to have reasonably expected much reduction to US drilling activity, supply growth would still be robust at current drilling level. If OPEC/Saudis truly looking for US pain price point (US is the only viable supply threat), they will be focused on capex and activity (rig count). No OPEC cut means lower prices sustain for a little while, creating better environment for demand growth and also pokes Russia in the eye.

    Venezuela is collateral damage to this; OPEC will protect the mideast first.

    1. Above not authored by me, but I share the sentiment. As someone in the industry, the big losers in this are Venzuela, Iran and Nigeria. Our model has Russia/North Sea production down 400-500mbopd through 2015. As demand picks up in Q1 2016 should be good time to buy back in.

    2. Venezuela also has shit oil; the only place that can refine it is in the US. So this means their prices have to come in even lower than the relatively clean mideast oil.

  12. I read an article the other day that said the fracking break even was $50-55 a barrel. So there is a bit to go before it all falls apart.

    1. And fracking keeps getting cheaper, every day.

      1. Keep this in mind. Once the drillers have drilled the holes and set up the fancy injection gear – they have every incentive to keep cutting the costs. If the Saudis had gone on this bender 5 years ago, they could have stopped the frackers before they started. Now the frackers have tons of investments and sunk costs and ARE paying lots of bright young engineers to improve productivity and cut costs — or they lose everything.

    2. What anon said. Also, it just means they stop fracking until the price goes back over $55. I will take $55 oil.

    3. Some fracking is like that, especially in Texas. Bakken capex is getting killed right now, in particular. Getting liquids out is expensive.

    4. If the well is productive, can’t they cap it, then walk away and wait for the Saudis to decrease production?

      This assumes they negotiate the lease terms for some long-term delay.

      1. Not usually. Generally you lose the lease if a well is no longer producing in paying quantities. You can shutdown for a short time but usually not for as long as it will take for the Saudis to resume.

      2. I’d wager (due to various contracts/leases/etc) that most companies lose less money producing at a loss (up to a certain point) than stopping production. Just because a company isn’t making money selling the oil at *current* market prices doesn’t mean they can’t dump it in a silo and sit on it until market conditions are more favorable. Plus, they’re paying to drill anyways, and laying off that many people randomly has got to hurt their unemployment insurance premiums.

        I haven’t looked it up at all, and it’s completely anecdotal.

  13. Is there any economic theory for a market stuck in a “phase change” loop? That is, with all the shale oil online, the supply is too large to sustain prices where shale oil is profitable, but with shale oil offline supply the supply is too small to keep prices below where shale oil is profitable.

    What’s the expected endstate of such a market?

    1. As above, you assume that the company is forced to sell their oil for market value rather than speculate that the price may increase at some point in the future.

      1. I’m not assuming anything beyond the fact that the law of supply assumes a continuous supply curve.

        There seems to be a discontinutity in the supply curve here, and I don’t know what theory says happens in that situation.

    2. The guys producing shale oil will only produce what they can profitably sell, and so the whole supply will never come online at once.

      I don’t think ‘phase change loops’ -so called – are actually possible in economic activity.

      1. They assume a zero-sum game, and hence can’t.

      2. Without the government being involved via price controls and rationing, the market tends to damp to a price rather than oscillate between two states. That isn’t to say that people don’t get predictions of supply and demand wildly wrong to intensely painful results.

      3. Looking around in google:

        1.) They are possible; the standard response is to handwave it away by assuming that if their are enough distinct suppliers, it will be unlikely to happen in practice.
        2.) It’s generally agreed that if it does happen that it results in a market with no equilibrium state.
        3.) Depending on the particular school of economic you follow, there may by a pseudoequilibrium state, but there is disagreement about whether there is one or what it would look like if there was one.

        1. So… give a real world example.

          If it’s a possibility, it should have happened at some point.

          1. Oil?

            There are a lot of other factors involved there, so it’s hard to say if that is really an accurate description of oil prices. And I’d expect a more chaotic oscillation rather than alternation between a few states.

          2. Two possible examples (according to papers again):

            1. Post 2007 labor supply may have become discontinuous due the extension of long term unemployment benefits
            2. There may be supply discontinuities in the credit market due to various central bank monetary policies

    3. Technology is developed to make shale oil extraction cheaper.

      Not joking or making light. The oil companies spent until about 2000 assuming that they had to be profitable at $35/bbl. A lesson that got beaten into them in the early 80s. I don’t know now what their new “clearing price” is, but I can tell you that they’ll figure out a way to get costs down as the market tightens.

      1. When I left Iraq at the very end of 2008, the Iraqis needed oil at $50-55 to make good money, with the state of their infrastructure, etc.

        I imagine western oil outfits are a little more efficient and such.

    4. Some of the shale producers go out of business. There assets are sold to other shale companies who find the “right” point on the supply curve to stay in business and make money. The same thing is theoretically possible in lots of industries. Coke and Pepsi combined could flood the market with so many soft drinks that the price would plummet to below the cost of production. They don’t because people who are successful in business generally are good at predicting what customers want and how much they want.

    5. Roughly $80 bucks a barrel(west Texas crude). In my opinion that seems to be the steady state condition that it returns to despite all manor of manipulation.

    6. The nature of the supply and demand for oil makes it a boom and bust commodity. The demand for oil is over the short term price inelastic. Oil is an essential product for modern life. You can’t just stop using it like you can a luxury product. On a personal level, you don’t sell your car and buy a smaller one or move closer to work the day after gas hit $4 a gallon but you will if it stays there long enough. For this reason, tt takes several years for the world demand for oil to adjust to higher prices.

      Supply for oil is also inelastic in the short term. There is some excess supply in the form of wells that have been shut down, but not a huge amount. Once the price starts going up, it takes a while to go and find and exploit new reserves. So the supply of oil doesn’t immediately respond to a price increase.

      Put these two things together and you see why the price of oil is so prone to boom and bust. Once prices start rising, demand being inelastic in the short run doesn’t drop. Meanwhile, supply doesn’t rise that much either. So when prices go up, they really go up as neither demand nor supply is able to quickly adjust to the rising price.

      Eventually, demand does adjust and starts to fall and this happens right about the same time supply adjusts and starts to increase in response to the higher prices. When this happens, the bottom drops out of the market and the price spirals just like it shot up.

      1. Also, the infrastructure cost of getting more oil into a useful form is huge. If all the refineries are running flat out, it doesn’t matter how much more oil you bring out of the ground. And once you commit to building a refinery, you’re talking about a billion dollars or more in capital outlays that needs to be refit every 8-10 years. Same with transportation. Net, companies have to make $150M/year above their current cost to invest in the infrastructure of downstream. That’s a big chunk of change if put $1B into building a huge new refinery in 2015 and have it (or one of your older facilities) sit idles in 2016.

    7. In Alberta and I assume a lot of fracking hotspots, labour costs are out of hand. Therefore, the drop in labour demand from this oil price decline may actually be very good for operations that are profitable at lower prices they can control labour.

  14. the rial has plummeted 80 percent on the black market

    I think you meant the FREE market.

    Now I need to look into how to short Rubles and Rials.


    1. Machete futures?…

      Too soon?

  15. Really, this is just terrible. Obama must do something to keep his promise that energy prices necessarily skyrocket. He should just ban oil now with his magical pen and phone.

  16. It only gets better with Maryland opening up to fracking.

    1. How in the world did the mighty proglotards of this deep blue state allow such a horror? First a Republican governor and now this? The apocalypse is nigh.

      1. Yeah I’ve been meaning to ask you about this. How did Horgan win? IT’S MARYLAND. This just doesn’t happen. Are the liberal gentry going out like in The Happening?

        1. Hogan won in Baltimore City, if the figures that I saw are correct. When a Republican wins in Baltimore City, it’s time to be on the lookout for dogs and cats sleeping together, frogs leaving the water, and swarms of locusts.

          I think it’s like this. Most people are pissed as hell at the democrats over Obamacare turning their healthcare policies into something we pay for but can’t use because of sky high deductibles, and all of the other shit they’ve piled onto the middle class. And the happy do nothings with their free healthcare and Obama phones, didn’t bother to get off of their lazy asses and vote.

          1. The midterms had just over 36% turnout so yeah really low. Is that really enough to wholly explain GOP taking over governorships in Illinois and Maryland? I hope fracking changes Maryland politics. Shakes things up.

            1. It’s hard to be optimistic if you live here. Democrats have kept so many poor, hopeless, and dependent for so long, they don’t know anything else. All democrats have to do is successfully rally the proletariat with some fake issue. They just got lazy and failed to do it this last round.

              1. Maybe Horgan and fracking can alter that.

  17. I think it was Bloomberg a couple of years ago that ran a long piece on the economics of oil production in response to the question of why oil prices were still so high in the midst of a worldwide recession. They declared that the US had better prepare for the inevitable $5 per gallon gas because that’s what was coming and gas prices would never again fall below $3 per gallon – the economics said so.

    The problem with their analysis is that they seemed to believe that there is a “fair” price for oil – cost of production plus a reasonable profit – when the whole idea of a “fair” price was buried by Adam Smith about 250 years ago. Like anything else, oil prices are “whatever the hell people are wiling to pay” which means you go bankrupt (like GM) if people don’t want to buy what you’re selling at the price you’re willing to sell it. OPEC (and really mostly Saudi Arabia) is willing to restrict supply and forego profits to keep prices high just the same as Uncle Sam is willing to force you to pay for GM vehicles whether you buy them or not, but screwing with the free market is always a matter of telling people they are wrong and/or stupid to want what they want and it’s expensive to maintain an unfree market.

    So I don’t know that I would put a lot of stock in anything Bloomberg puts out as economic analysis, oil prices are set more by guys with guns than most products other than ethanol and GM cars so the textbook definitions of how markets work gets a little hinky.

    1. They declared that the US had better prepare for the inevitable $5 per gallon gas because that’s what was coming and gas prices would never again fall below $3 per gallon – the economics said so.

      The economics being, of course, a $3/gallon federal tax that watermelons would love to impose on petrol.

      1. People say a lot of shit. Remember when there was going to be a permanent Republican majority? And then a permanent Democrat majority? Also, I wasn’t going to see snow in my adult life, or something.

  18. OT: Prepare for a cost increase in the real essentials.

    A total of 2,580 six-bottle cases of Jameson Whiskey, six-bottle cases of Bombay Sapphire Gin and six-bottle cases of Jack Daniels Whiskey were robbed from the large warehouse in the Parkwest Industrial Estate, Ballyfermot, Dublin.

    1. I support the death penalty in this case.

  19. http://www.nbcnews.com/busines…..ps-n259116

    Barbarity and looting in Venezuela’s future.

    Even the commies at the Guardian are kicking them.


    “Many of these countries have failed to diversify their economies. They are welfare states, dependent on high-cost oil without any other real manufacturing, industry or even tourism and now the oil bubble has burst,” he said.

    Gheit says oil producers have been blind to consuming nations reducing their energy intensity and even more importantly that US shale is turning the supply map upside down. “They have failed to see that fracking is like a virus and it’s going to proliferate and it will eventually spread even to Russia and Saudi Arabia.”

    1. Let’s hope they hang Maduro from a pole in the center of Caracus. From what I’ve seen though, it’s more likely that the mobs loot and destroy businesses. I’m not too sure that a country can really recover from that level of communism. Look at Russia and Cuba. Is there really any hope for them? The people have been taught so much stupid that they don’t know anything else.

      1. Russia’s societal problems predate communism and are really the reason the USSR happened. Russia has always been a festering dangerous infection on the ass of human history.

        1. If MMO gaming sites are any reflection on Russians, then it’s pretty bad. They’re almost always the group that cannot get along with anyone else. Hacking, cheating, and backstabbing is their typical modus operandi.

          No, I’m not collectivizing Russians. But it does seem that a lot of them are more than a little unhinged, including their leader.

          1. They sound worse than Brazilians-HUE HUE HUE

        2. This book is a bit dated by now but it goes over that a lot.

          1. Highly recommended. It’s also funny that Smith, as a NYT reporter, links a fair amount of behaviors to “Russian-ness” when they are just the result of living in a communist society.

        3. And you’re full of shit.

        4. Nothing says “Ass of Human History” like Tolstoy, Doesteshky, Tchaikovsky or any of the other great accomplishments of the Russian 19th Century.

          Is there any part of history you don’t misunderstand?

          1. And Mendelev and Rand. I am aware there are some great Russians but the whole of Russian history-from the Russian Empire to today-is retrograde and dysfunctional. Russia turned to feudalism as Europe was leaving it. The Russian Empire-well before communism-caused a lot of repression and suffering. “Russia” has to be broken up.

            1. To mangle a line from Goethe: “I have often felt a bitter sorrow at the thought of the Russian people, which is so estimable in the individual and so wretched in the generality.”

          2. To be fair, reading Tolstoy tends to confirm Cyto’s statement rather than refute it. Tolstoy is a magnificent writer – the culture he describes is pretty corrupt.

          3. Since the fall of the Novgorod Republic Russia’s had very little in terms of ‘optimistic’ political reform. The Golden Horde effectively sealed off most of the country’s trade routes from the beginnings of the Enlightenment, and Muscovy’s rise guaranteed that despotic regimes would be the norm. They didn’t have major reforms until Peter the Great, and even then the result was a feudal system that would make the French blush (at around the same time that the French were completely altering their society). Russia has been historically ‘behind’ the rest of Europe for a long time. There’s a reason why Lenin started his ‘New Economic Policy’ of ‘state capitalism’ in the 1920s; even he thought Russian society was so backwards that Marxism was impossible until they developed a more towards a ‘capitalist’ system.

    2. Venezuela recently took some of the ‘off-budget” money from a Chinese loan and put it in their reserves. Markets liked it. They burned through a quarter of that money in a week.

      You know what would be awesome? If the Eurotards would stop being so backwards and stupid and start fracking. I just hope their economic malaise pushes them to do that.

      1. Poland would….I don’t know about the rest of them.

    3. They have failed to see that fracking is like a virus

      If fracking is a virus, it must be one of those mutualist symbiotic viruses.

  20. Actually, I can see the following happening.

    Gas prices fall 40 cents a gallon and state legislatures around the country convene at midnight on Christmas Eve to raise gas taxes 40 cents and hope that no one will notice.

    Whatever benefit is to be had out of cheaper energy prices, politicians will fuck it up so that no one benefits from it outside of them and their favored cronies.

    1. I’d rather see State gas taxes (user fees) go up 40 cents and it actually be spent on maintaining and repairing highway infrastructure, than have Congress pass some humonguous Transportation infrastructure bill and see half of it frittered away on non-highway boondoggles like choo-choos.

      1. I don’t want to pay more for gas, but if any tax increase is less bad, that is probably the one, especially in states where it can only be spent on highways. It’s generally not indexed to inflation, so it’s got to go up or be replaced by some other source of funding for the roads. In the current political reality, I think I like gas tax better than more tolls.

        1. Maryland recently passed a 6 cents pre gallon tax and you had better be careful driving here that you don’t hit a wheel breaking pothole. The roads are not better now, they’re worse. But I’m sure some fat politicians are driving SUVs now with super shock absorbers and off road tires so that they don’t fall victim themselves.

          1. Expecting the taxes to be wisely spent is another matter. But as long as governments build roads, the money comes from somewhere.
            Here in NH, there was actually a court decision a few years ago that forbid any of the gas tax money on anything but roads and related infrastructure (I think someone wanted to spend it on some rail project to connect to Boston). And the state roads and interstates are mostly in pretty decent shape. So it isn’t always completely fucked up.

  21. Oil prices being (much) cheaper at the margin, thus driving some formerly marginally profitable producers to abandon extraction in response to prices, is not “killing off fracking”.

    1. Also, fracing for gas and fracing for oil uses the same equipment. Any company in the top 10 would probably just move a crew from Texas to Pennsylvania (or something like that).

  22. In my oil fantasies, Russia destabilizes and experiences regime change, ushering in a liberal era of free markets and massively expanded oil and gas output that along with lower and lower cost fracking breaks OPEC completely.

    1. Fusion will put OPEC into the dust bin of history. But that’s probably 20-50 years in the future.

      1. Integral Molten Salt Reactors might do it sooner.


        Lockhead Martin’s fusion reactor, if what they say is accurate, should be even sooner than 20 years.

        1. We’ll see. I’m hopeful for large scale usage in 20-30 years.

        2. LM isn’t giving off huge waves of credibility.

    2. OPEC is a net positive in that it keeps some otherwise volatile countries under control. It also provides an effective legal framework for companies to come in and produce the product. Oil prices would go nuts and the oil market would be alot less free if OPEC collapsed and the inevitable wars started.

      1. This is so much nonsense I don’t even know where to begin. “Volatile” Iran and Saudi Arabia certainly aren’t under *our* control and that’s the only control I’m interested in. They continue to fund anti-American violence.

        The ‘effective legal framework’ is mass nationalization.

        Without OPEC, the regimes most inclined to war would be destroyed as oil prices ‘go nuts’ in a purely downward direction.

        1. You realize that the oil industry is nationalized and that there isn’t individual ownership of minerals almost everywhere outside the US? We are past the point of working in a free market system.

          The “effective legal framework” is allowing contracts to be governed by US or UK law rather than the batshit Saudi system. OPEC can also threaten troublemakers much more effectively by threatening to decrease their quotas.

          Production would be lower without OPEC because most of the producing countries would block international (esp US) companies from partnering with the national companies. Also much more political risk operating in the emirates or the kingdom without OPEC’s strong arm to protect you if the local governments decide to go rogue. Mexico’s industry is a shit show because of this.

          1. Meixco’s industry just underwent massive pro-market reform, which throws your entire point in the trash. Yes, we are in a non-free market and OPEC is a big reason why.

            1. Yeah, the media reported it as a “massive pro-market reform” but we haven’t seen that in practice yet. Not sure how it affects my point, either, since even if it works out to be “pro-market” Mexico is effectively adopting the OPEC model of PEMEX partnering with a third party for production.

    3. Where’s SugarFree to comment on your “oil fantasies” when we need him?

      1. Be very careful of what you wish for…

  23. All I know is that I enjoyed spending less than $3 per gallon last weekend.

    1. I enjoyed spending $2.40 per gallon here in Austin.

      1. $2.70ish in Iowa. So, I bought a new SUV to celebrate.

        1. I have my monocle polishers to sit in my 3 giant SUVs to make sure they keep running all night, in case they have to get more gas.

  24. Oh, and CAFE standards forcing car manufacturers to make production changes that drive up car prices to meet arbitrary MPG goals, despite those changes costing more than the expected value of fuel savings — in effect, the government telling buyers and manufacturers to ignore price signals shouting loud and clear “don’t do that” — that might have something to do with the free fall in oil prices, too.

    1. No. CAFE standards just reduce the marginal price of driving a mile and thus make doing it more attractive and more in demand. CAFE standards are, as counter intuitive as it sounds, a boon to oil consumption.

      1. Well, in any case, they are stupid.

        It’s always surprised me how many fewer stupid regulations on new vehicles there are in Europe. Though the EU is working hard to rectify that. Of course with their fuel prices, it is a lot easier to get people to buy small, economical cars.

  25. I’m not so sure that the Saudis were entirely motivated by a desire to stop the U.S. oil fracking.

    Most of the rest of the OPEC members as well as non OPEC members such as Russia wanted a production cut – but they wanted it all to be done by the Saudis alone.

    The rest of them wanted the Saudis to take all of the hit so that that they could benefit from it.

    It is understandable that the Saudis wouldn’t go along with that.

  26. Off topic:


    As part of a response to the police shooting in Ferguson, Mo., the Obama administration called for new rules Monday on federal money that local law enforcement agencies use to buy equipment, including military items.

    A new report did not explicitly call for a ban on the use of military equipment by police but did recommend that equipment financed by federal money have “a legitimate civilian law enforcement purpose.”

    Let us count the ways the administration will fuck this up.

    1. Sad and telling that they need to explicitly recommend that. And even then it’s only a recommendation, which means it will simply be laughed at.

      1. Sad and telling it took six years for the country’s “second black president” to actually care about police abuse of poor and minority people.

        1. You mean to pretend that he cares?

          1. He does seem unusually uninterested in any personal sense in what would be viewed as traditional black issues. Except to the extent that they have an immediate political effect. I find that quite odd.

            1. Obama was raised by white people. He has the correct skin tone, but is totally ignorant of the “black experience” in this country. He married the wookie to learn about black people. So it’s not odd at all. He doesn’t care about black people because he wasn’t raised as one.

              1. Two black presidents in, and we still haven’t had a real black president. How about a Republican one? Maybe they can do it right. President Sowell?

              2. Obama is a white guy who just happened to have a black father.

                And the same people who call me racist for saying that will call someone like Clarence Thomas, who undeniably lived the full American black experience an “Uncle Tom”.

    2. http://www.latimes.com/nation/…..story.html

      Obama seeks $263 million for training, body cameras for local police

      So which wealthy friends/donors of Obama are cashing in now?

    3. And what does it have to do with the shooting? The shooting involved a regular handgun and police car as far as I know.
      How about as a response to Sheriff Joe accidentally burning down innocent people’s houses? Or any of the other clear cases of out of control police using inappropriate equipment to terrify and kill people?

  27. my neighbor’s step-sister makes $62 an hour on the internet . She has been fired for seven months but last month her paycheck was $20988 just working on the internet for a few hours. visit this site….
    ????? http://www.netjob70.com

  28. I love it-fracking will destroy all our enemies-then we can kiss Saudi Arabia off too.

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