While America Debates Rex Tillerson Nomination, Saudis and Russians Join Hands to Raise Oil Prices
At about 10:46 yesterday morning, Andrea Mitchell reported that ExxonMobil CEO Rex Tillerson was expected to be named Donald Trump’s Secretary of State.
Donald Trump is expected to nominate ExxonMobil CEO Rex Tillerson as his secretary of state, two sources close to the transition process told NBC News on Saturday.
The 64-year-old veteran oil executive has no government or diplomatic experience, although he has ties to Russian President Vladimir Putin. The pick would put to rest weeks-long speculation of who would earn the post as the U.S.’s top diplomat, and would place Tillerson fourth in line to the presidency.
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Tillerson, of Wichita Falls, Texas, has already notified his corporate board about taking on the new role, sources told NBC News.
Since then, the chattering class has discussed the Tillerson nomination at length, focusing mostly on his close ties to Vladimir Putin (see this report by Steve Coll, who wrote a book on Exxon’s private empire), not the fact that such a nomination would further demonstrate that Trump plans on reversing any efforts to mitigate the effects of climate change as President. Curiously, Russian hawks turned oil company players Condi Rice and Robert Gates reportedly recommended him. In the face of a potentially problematic confirmation battle, Trump’s campaign has since tried to deflate that trial balloon, suggesting the pick won’t be announced for another few days.
While the chattering class was focusing on Tillerson and on competing stories about why Russia hacked Hillary Clinton’s team, something else was happening: oil states were agreeing to cut production. At first, yesterday morning before Mitchell’s scoop, it was just the Saudi led OPEC states, making good on a plan announced November 30.
But then, yesterday afternoon, something unexpected happened. Russia and other non-OPEC petro-states joined in, and Saudi Arabia claimed it would cut production even further.
Saudi Arabia signaled it’s ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other OPEC countries pledged to curb output next year.
Taken together, the Organization of Petroleum Exporting Countries’s first deal with its rivals since 2001 and the Saudi comments represent a forceful effort by producers to wrest back control of the global oil market, depressed by persistent oversupply and record inventories.
“This is shock and awe by Saudi Arabia,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London. “It shows the commitment of Riyadh to rebalance the market and should end concerns about OPEC delivering the deal.”
Oil prices have surged more than 15 percent since OPEC announced Nov. 30 it will cut production for the first time in eight years, rising this week briefly above $55. The price rise has propelled the shares of energy groups from Exxon Mobil Corp. to shale firms such as Continental Resources Inc.
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[N]on-OPEC countries agreed to reduce production by 558,000 barrels a day, suggesting he had been waiting for the deal before committing to further cuts. The non-OPEC reduction is equal to the anticipated demand growth next year in China and India, according to data from the International Energy Agency.
We’ll see whether these commitments actually take place; such promises have a way of being broken, or at least cheated on.
Nevertheless, this signals that the petro-states — even those that worked to get Trump and his petro-cabinet elected — are finally going to work in concert to raise prices again.
Throughout the election, I kept remembering the Saudis could do such a thing, which would have tanked Obama’s “recovery.” High gas prices in 2008 were already making things difficult for John McCain, even before Wall Street crashed the global economy.
They waited, but even with dirt cheap oil prices, the pro-Saudi candidate lost.
Now prices are likely to go up — maybe not all that much, but consumers won’t be paying $2.50 for gas anymore, which will make their economic malaise all the worse.
Good for the cartel. Stand up to those imperialist Westerners who’ve tried for a century to take control of their oil.
This also means fracking won’t peter out, as it might have done.
True, but fracking might have eventually come back anyway. Alternatively, with low oil prices for a long time, wouldn’t we get even greater instability in the Middle East–economies and countries failing, peoples rising up, wars, refugees, terrorists–anyone want that?
I don’t think low oil prices had anything to do with GWB’s Iraq
liberation, Israel’s unending determination to make Iran into a decrepit Palestinian type state. Control of oil has been driving force. And as you say with fracking coming back, all the more reason to go Green AFAIC.Price goes up, provides incentives for more production, then price goes down. Rinse, repeat. Unless some producers break hard with this cycle.
Or unless consumers break hard their demand. Increased price would do it given flat wages which are likely to remain so (or worse) under DJT.
Some piece in the fossil fuel puzzle is missing. Petro states are still acting as if consumers will simply continue to guzzle away, which might have been the case 15 years ago but not now. There’s something driving irrational behavior. What is it?
I’m not sure I understand your comment about petro states acting irrationally. At least some of them are starting to try to build a non-oil based economy. Other than doing that and pumping oil, what else can they do that’s more “rational”?
They’re trying to cut supply and raise prices simultaneously. This will work for a bit, but the price increase will eventually encourage additional production. Tacking on subsidies to support fracking, increasing prices, won’t work for long because other new, cheaper streams will find a way into the market (and new streams are cheaper than the end of old ones).
We don’t know where Iran is as far as production level — will they agree with cuts or will they ramp up output? Why should they give in to production cuts when U.S. is increasing production through fracking and Bakken shale?
Haven’t even added Canada which agreed to expand its Kinder Morgan pipeline to accommodate increased production.
As I commented yesterday in another thread, Saudi is trying to move past oil, but it’s not happening quickly, will be at least two years before they could rely on sovereign wealth fund income, and even that will depend on sale of their oil company’s stock and on other investments doing well (which may be dependent on steady-to-improving economic conditions). If other countries’ oil output is increasing, Aramco becomes less valuable, pushing out the date by which KSA is a non-dependent state.
What’s irrational:
— A few petro-states act as if ALL oil producers are acting uniformly on price and production levels — they are not;
— Same petro-states act as if consumption will remain stable or increase — it hasn’t and won’t;
— Same petro-states also act as if alternatives to oil itself aren’t becoming cheaper — they are, looking at cost per watt for solar and wind, for example;
— And these petro-states also act as if the public won’t be motivated to continue to seek alternatives because of climate change, in spite of U.S.’ potential effort to throttle research and reporting on climate.
There’s something missing in this picture to spawn this much irrational behavior.
It’s not just that they want to punish Trump? And Putin is happy to play along so long as sanctions are lifted and Assad stays in place?
There’s one other angle they could be using, but it’s not directly connected to fossil fuels. Frankly, they could have used it last week with the bullshit Boeing tweet, playing both into and out of the stock’s price up and down.
Theoretically, they know right now which companies and countries are exposed to increasing amounts of risk and they know which stocks to play (hello, Goldman Sachs hedge fund team) and they can go into dark pools, wait for the rest of the market to poke around and then jump on the orders as they are placed in response to risks they trigger.
How do they trigger? Well, what would set off a buy/sell of Petroleo Brasileiro SA Petrobras (ADR, NYSE:PBR)? Set DJT off so he flaps his gums on Twitter? Leak documents about another elected official with ties to PBR? There are a number of ways they could do this and use either their control over a big chunk of the market or DJT’s hot headed tweeting.
I may be struggling with this because I’m looking for rationality. But if we’re dealing with folks who think like criminals, they don’t act rationally. They take advantage of the rationality of legitimate market participants. And I’m afraid I’m not much of a crook.
Even if cheating does not occur (does anyone believe that Iran, Venezuela, Iraq, Mexico, Brazil are not going to want to sell more oil to support their collapsing economies?) it is doubtful that the oil price can rise very far, for very long before our own economy collapses again. Gail Tverborg puts it this way:
Can the Price of Oil Rise above $50 per Barrel?
“I am doubtful that the price of oil can rise very high, for very long. Our oil price problem is part of a much larger problem–a slowing economy with low prices for a large number of commodities, including oil. The price of oil can perhaps briefly rise as high as $75 per barrel, but such a high price cannot hold for very long. Rising oil prices tend to lead to recession for oil importing countries, and recessions tend to bring commodity prices back down. The world clearly could not support a price of $100 per barrel before the crash in prices in mid-2014. Once we understand the reason for our low-price problem–diminishing returns and the economy’s tie to the use of energy–it is clear that there is no way out of the problem over the longer term.” See the entire article for a complete explanation. https://ourfiniteworld.com/2016/10/11/why-energy-prices-are-ultimately-headed-lower-what-the-imf-missed/
Or, see http://cassandralegacy.blogspot.it/2016/07/some-reflections-on-twilight-of-oil-age.html (all 3 parts). The central banks and OPEC can temporarily influence oil prices only to see people in the Global Industrialized World get poorer and demand fall further. As someone heavily involved in the anti-fracking battles in Colorado and elsewhere, I understand the Red Queen Syndrome and how it can drive frackers to drill faster even though they are losing money hand over fist. The central banks can fill the supply financing hole for a while longer with cheap capital, but they can’t do anything to fill the demand hole with cheap capital. People are at peak debt and higher stock prices don’t do anything for them. Austerity is here now, and higher oil prices will only make it worse.
Venezuela and Brazil, in particular, have enormous potential to rock the market. VZ is just plain desperate for cash and cannot increase prices internally. BRA’s politics have become too unstable to support higher prices internally, must raise cash to pay for services to maintain what stability there is.
Mexico…oy. As much as DJT has trash-talked about them, they could likewise dump oil just to piss off the U.S. and any country aligned with them.
I heard a discussion that this is–to some extent–an admission of defeat about fracking. The Saudis had apparently been trying to kill fracking by keeping the price low which because of production costs would make fracking a bad investment. But with increased technologies the cost of fracking has gone down and the Saudis have decided both that they cannot keep their own economy going at the low prices and that they would rather have a lot of people investing in fracking to disperse economic power than let a few large corporations develop.
They only had about a two-year window of cash from late 2014 to crash fracking — and here we are, at the end of that two years. Technology has not made fracking more economically viable; rather, the industry was betting the farm on getting pipeline in which would reduce variability in distribution costs. Price of oil goes up, so does their cost to truck the oil, right? And they’ve already sunk cash into pipe which is sitting in a yard someplace costing them tax dollars.
Two things will cause fracking to crater: increased supply by non-compliant countries, and/or alternative energy combined with electric vehicles. If Americans could focus on the latter, non-compliant countries would panic and dump oil into the market. At least this is my take, YMMV.
Yeah, Venezuela is Mad Max right now. I can’t imagine what it’s like trying to survive there. They’ve got to have revenues or the country will fall completely into anarchy. If the neocons start to push for regime change in Iran again and for reimposition of sanctions Iran will break the OPEC deal in a heartbeat.
Rayne, thanks for the detailed explanation. But yikes, this is all over the place. Anyone willing to lay down a fiver on his/her opinion as to where things will be a year from now? I didn’t think so. As such, what can/should the US do, with any certainty as to its result?
The tectonic plates are shifting. Saudi Arabia feels badly let down by the CIA and the CIA feels badly let down by the American electorate. There are reports of Qatar falling out of love, again, with Riyadh. And then there is Turkey.
Things just aren’t going to plan in Syria-if they were Russia’s support for Assad and Saudi support for Al Qaeda might have made this Saudi Russian agreement difficult. Then there are signs of a rapprochement between Russia and Japan- Abe would give a lot for the kuril islands- while Trump seems intent on tearing up the Iran deal and driving Iran and Russia closer together.
And the other thing is that maintaining a properly functioning Foreign Affairs ministry is a lot cheaper than the pentagon. There are ways of playing Chess which don’t involve kicking the table over.
Incidentally where are all those voices protesting against Comey’s ‘coup’ before the election, now that the CIA is laying the ground for one post election?
IMHO It is still doubtful that this will help Fracking much. While new technology has changed the numbers on fracking, the basic calculus has not. Fracked wells take almost as long to drill as real wells but produce much less and last much shorter (5 years vs. 20). Even when times were good most of the “profitable” fracking companies were highly leveraged because they needed a constant influx of cash. The rate of return is just not there.
Yes increased pipeline approval will change some of those costs further but it will also enhance the advantage of traditional wells and still depress the costs by bringing cheaper oil like the tar sands online. The cost savings will in turn be eaten up by the increased cost of public opposition that even a compliant EPA cannot fully hide.
Speaking of oil … When I go to the store and buy a new T-shirt that is made in China, I have supported at least the following “energy-using” activities: growing cotton; picking it; transporting it to a mill; running the mill to make cotton fiber and then cotton fabric; running a shop that makes the shirt itself; transporting the shirt to a port and packing it on a ship with lots of other shirts; transporting the ship to a US port; unloading the ship, including getting longshoremen back and forth to work in cars; transporting the boxes of shirts to a warehouse; running the warehouse and it[s workers’ cars;
transporting the shirts to a retail store; running the store including using energy and getting its workers back and forth from home; me driving to the store and then driving home with my shirt; transporting my old T-shirt to a
landfill; and burying the old shirt in the landfill.
Good result? Anyone ever calculate the energy-cost of a T-shirt? Is the world a better place now that I have my new T-shirt? Maybe so—I have supported a lot of jobs, helped to keep [whoever the logo is] afloat. Should we instead put those people out of work, to save energy? Or instead, put them to work growing food for the billions who are hungry today? (How do you do that–close the malls and send the workers out into the fields?) Or maybe we should not have so many people in the first place (population control)? Are any of these actions “rational”, or even feasible? If not, then a good New Year’s resolution might be to cut back on my T-shirt purchases—at the least.
While the economic costs of fracking petroleum out of tar-sands (peats reduced to hydrocarbon state), the environmental costs have not been reduced. Problem One: Precipitating petroleum content from tar-sand requires heating, for which steam is used, which condenses to water, carrying hydrocarbon fractions with it, into water tables. Don’t make no never-mind how efficiently the heating and reducing be done. Problem Two: Peating produces C4H (aka methane); peating produces methane under pressure, which expands as it escapes, which refrigerates, making permafrost around and in and over tar-sands. Heating tar-sands to precipitate petroleum thaws and allows release of C4H, only some of which is captured and burned (oxidized, reducing the four Cs to CO2). Thus, fracking releases huge volumes of gas-form carbon into the atmosphere. Whether one believes in the political-science called “Climate-Science” and its “Greenhouse-Gasses” and “Global-Warming” dogmas or not, atmospheric carbonation is an inevitable and direct cause-to-effect natural and human-activity product. “Climate-Science” “solutions” will either have no effect (carbon-credits and carbon taxes, which are financial instruments, not environmental ones), or exacerbate the problem (using “renewables”, meaning cutting and burning existing carbon-converters and planting new, small, fractionally as effective “new” ones).
For these fracking is going to damage fresh water supplies, if let carry forward, which will elicit more Standing Rock eruptions and disruptions, which cost a lot, more than financially, and if not given dispensations from “carbon-offseting” costs (buying “carbon credits” or paying tax for all the C4H carbon poured into the atmosphere) are going to be bankrupting.
Standing Rock made the points of these realities to the traditional, less environmentally damaging petroleum and natural gas (C4H) extraction technologies (yes, even with Exxon Valdes and BP Gulf spills). These old tech operators see fracker competition going onto the dust-heap, even if the frackers don’t yet. Thus, OPEC and others are today calculating their marketings with fracking factored out. If they are not right, and especially if the Chruch of Climate Science sells its Exacerbation Gospel, the day when the human population that is left, that can afford it, will be buying both bottled water and bottled oxygen, to pretend their world is still ‘normal’ will be coming sooner, instead of later.