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biloxifalcon

Falling oil prices will bankrupt the likes of Russia, Saudi Arabia

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I know the headline is there to grab attention, but I thought it's an interesting story nevertheless. What the heck will happen if all of the oil exporting countries have to declare bankruptcy? Right now at midday oil is trading at 26.91 cents a barrell! Whatever happened to the theory that lower oil prices are supposed to stimulate consumer buying and spur economic growth? I am no economist but this doesn't look good.

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What might be the next big financial crisis? A bursting of the bubble in tech stocks that has built up over the last two years? A total collapse in the stock market, beyond the selloff that has already marked the start of 2016? Any of those could happen. But increasingly it looks as if it will be national bankruptcies caused by collapsing oil and commodity prices. 

The International Monetary Fund is discussing a bailout of Azerbaijan, hard hit by tumbling oil prices. Venezuela is out to go bust — again — for the same reason. Ecuador looks about to go the same way. More important countries may follow them — most significantly Russia and Saudi Arabia. Neither of them looks solvent for much longer with commodity prices at these very low levels.

We could soon be back in a full-scale sovereign-debt crisis, except this time it will be commodity exporters that are caught up in the maelstrom rather than peripheral eurozone countries. But just like the eurozone crisis, the losses will soon ripple out to the banking system, and before long there may well have to be series of emergency bailouts.

The key question will be whether that can be used to drive through reforms — because there is not much point in simply bailing out countries that can’t rely on energy exports any more.

The collapse of the oil price  , and of other commodities alongside it, has already dominated the markets all this year. For most of the world, and even most emerging markets, cheaper oil should only boost economic growth. For the oil exporters, however, it is a catastrophe.

The first cracks are starting to appear in Azerbaijan, one of the largest oil exporters among the former Soviet states. It has already opened talks with the IMF about emergency assistance as it burns through the reserves built up during the years when oil was trading at $100 a barrel or more. It has already ripped its way through more than 60% of its reserves, and is discussing a loan package of more than $4 billion.

But Azerbaijan is not the only country that will be in trouble. Venezuela, an economic basket case for years despite its rich natural resources, is in even more trouble than usual. The president has already announced an economic state of emergency, even if that might be not so different from normal life for its long-suffering citizens. Ecuador does not look in much better shape.

Next up, Nigeria. It has already asked for $3.5 billion in loans from the World Bank and the African Development Bank to help it through the squeeze in cash caused by the tumbling price of its oil exports.

What about the two really big oil-driven economies, Saudi Arabia and Russia? Saudi Arabia’s finances have never been famous for their transparency. It has some of the lowest production costs in the world, but it also has huge expenses and virtually no other sources of income.

Even on official figures, the country ran a budget deficit of $100 billion last year, and with the oil price still falling, and despite cuts, this year it unlikely to be much better. That amounts to 15% of gross domestic product, which makes Greece look positively frugal.The Saudis have plenty of assets to fall back on but when you are spending 15% more than you earn every year you burn through a lot of cash very quickly.

Russia’s budget deficit is not as high as that. Finance Ministry projections put it at $20 billion for this year, or around 3% of GDP. But that was based on oil at $40 a barrel, which seems like a distant memory now.

The economy has slipped into recession — the latest figures show it contracting at an annual rate of 3.7% — the ruble  has been in free fall, and the country is burning through its reserves. For all his military meddling, Vladimir Putin has miserably failed to diversify or modernize his economy, and left the country at the mercy of the energy markets (funnily enough, we don’t hear much about how Putin can hold Western Europe to ransom any more by controlling its oil and gas supplies). Nothing good can come from that.

Which countries go bust, and how long it take them to get there, remains to be seen. But one thing we learned from the collapse of 2008, and the euro crisis of 2011, is that a sovereign-debt crisis quickly morphs into a banking crisis. As Greece, Portugal and Ireland tumbled into bankruptcy, the losses rippled out into the banking system.

Falling oil prices will bankrupt the likes of Russia, Saudi Arabia © Provided by MarketWatch Falling oil prices will bankrupt the likes of Russia, Saudi Arabia

That will happen all over again if oil exporters go bust. There are loans to national oil companies, and state-backed construction projects, which could all turn sour very soon. Indeed, one reason why the banks have been hammered in the last few days, with the key index of European banks   down by 30% since the start of the year, is the gradual realization that the banking sector could ultimately face enormous losses from the decline in oil prices.

Only this week, Deutsche Bank  had to put out a statement attempting to reassure investors it was “rock-solid” — but funnily enough they don’t usually find statements like that very reassuring at all.

The world’s resources, especially those of the IMF and World Bank, have already been stretched by the last sovereign-debt crisis. Ireland may be off the medicine, but Greece and Portugal are still in intensive care. Greece doesn’t look like it will be able to stand on its own two feet any time soon.

Another round of rescues will add a huge amount to the bill. Even so, the money will have to found. The key will be demanding reforms in return. No country in 2016 should be dependent on oil exports alone — any that are, and go bust as a result, will have to find new sources of growth. If they can’t, unlike the peripheral eurozone, perhaps it would be better to let them fail.

 

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So... Thanks Obama?

i wonder why OPEC hasn't slowed down production?  Is this truly to destroy emerging tech?  We really need to start backing renewables with tax payer dollars ( in a balanced way of course)

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Just now, lostone said:

So... Thanks Obama?

i wonder why OPEC hasn't slowed down production?  Is this truly to destroy emerging tech?  We really need to start backing renewables with tax payer dollars ( in a balanced way of course)

 

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So this is a commonly repeated viewpoint, both in this subreddit and in the broader reddit-verse and media. It goes something like

Saudi Arabia is intentionally leaving the oil taps on as a strategy to kill North American shale! Flood the market with cheap oil, drive out those companies by bankrupting them, then go back to the glorious days of high oil prices!

Sometimes you'll see this repeated with Iran as the primary target, because the Saudis and Iranians have very high tension right now. Unfortunately, this analysis is mostly false. It's not 100% wrong - I'm sure the Saudis will be happy if Iran gets hurt, or if North American shale companies go bankrupt. But it's simply not the primary reason why they are pumping.


What is the reason Saudi Arabia is still pumping? Because they can't drive the price down by themselves - they're only 13% of world oil production. If they were to cut production, the price of oil would rise... but not that much. If the price increases by 10-15% but your volume plunges, you just lost a huge amount of money. It makes zero financial sense to cut production by yourself - you do nothing but lose money.

But what about OPEC? If OPEC were to slash production as a group, would that make a difference? Potentially. OPEC controls about 40% of the world's production. This is less than their heyday (more than 50%) but it's still a huge chunk. The problem is that OPEC doesn't work - a cartel only functions if the members trust each other not to cheat. If a cartel has cheaters who continue to pump high volume after agreeing to a production cut, the cartel falls apart. And Saudi Arabia absolutely does not trust the rest of OPEC.

To see why, you have to glance backwards a few decades. In the 1980s the price of oil had slipped heavily, and the Saudis held meetings to push it back up. The Saudis believed that they had OPEC's agreement to limit production, and started to slash their own production. The rest of OPEC didn't stick to it, and continued to pump. The Saudis went forward, undeterred. The cut their own production to a quarter of previous levels... and not much happened. The rest of OPEC didn't cut, and prices didn't rise by that much (certainly not enough to make up for a 75% fall in volume). Saudi Arabia lost a boatload of money, and got pissed. They turned the oil tap back on and flooded the market, and prices dropped like a brick. That moment essentially sealed the end of OPEC.

Since then OPEC has barely functioned. Leading up to the 91 Gulf War, Saddam wanted a production cut to help himself and all members. But the Saudis didn't trust him (or anyone), Iran hated him, and nothing happened. In the mid-90s oil fell to fifteen dollars a barrel before the cartel got its head out of its butt and was able to agree to mild production cuts in 1998.

Even these cuts were unlikely to work for long, or to drive the price of oil very high, but geopolitical factors saved OPEC for a while. In the early 2000's three things happened

  • 9/11
  • Two middle eastern wars
  • Demand from China and India skyrocketed

Without having to have any production cuts at all, the price of oil went through the roof, shattering OPEC's own lofty late-90s goal for what the price should be. It was basically nirvana for oil producing countries. But the deep divisions and mistrust remained. In 2008 the price began to crash as the global recession hit. OPEC held meetings and tried to agree to production cuts to keep prices high. What happened?

On 10 September 2008, one such production dispute occurred when the Saudis reportedly walked out of OPEC negotiating session where the organization voted to reduce production. Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. The New York Times quoted one such anonymous OPEC delegate as saying "Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed."[58]

This is the new reality of OPEC - agreement to cut, followed by backstabbing. This quote is from 2008, before North American shale was really a huge concern in the market. But the Saudis see (out of pure, financial self interest) the best thing as 'pump baby pump'. They don't trust the rest of OPEC - particularly not the basket cases like Venezuela who are almost certain to cheat. There might be some trust among the Arab gulf states, but not among membership at large - too many poorly run governments and untrustworthy strongmen. Remember, this is before shale was on anybody's mind as a major problem.

So we reach the current day - prices have dropped because of slowing demand in China, and increased shale production in North America (just to list a few primary reasons). There are a lot of countries desperate to cut production. But the Saudis have publicly proclaimed that "We don't care if prices crash to 20 dollars a barrel". That number isn't an accident - that matches history - the last time OPEC actually cut was in 1998 when prices hit 15 dollars a barrel. $15 in 1998 is roughly $21.80 in 2015. Things have to get incredibly, incredibly bad for OPEC to actually band together. And 20 dollars a barrel is where the Saudis probably stop making money - their production costs are estimated somewhere between 10-20 dollars a barrel (estimates vary). The simple truth is that Saudi Arabia can make plenty of money right now because their production costs are so low, and they don't want to lose volume or market share. They don't trust OPEC to keep with a cut because of their historical experience and the bad governance in many of their partners. So they keep pumping because there's nothing else to do.

As I stated in the beginning, I'm sure they are happy about some of the side-effects of this strategy. The Saudis would love to hurt shale producers, even if it would only be a temporary hit to them. They're definitely happy Iran is feeling the hurt of low oil prices, because Saudi Arabia is basically in a proxy war (or two) with Iran. The Saudis are also more than happy to hurt Russia, who is financing Assad (whom they oppose). This is all true, but it's mostly secondary side-effects. The primary reason for low oil prices today is the 1980's era OPEC cheating - The Saudis have played this game before and gotten burned. Until things reach their breakeven point of about 15-20 dollars per barrel, Saudi Arabia isn't budging.

As an aside, the entire 'drive shale out of business' model wouldn't really make a lot of sense anyways. Shale is a flexible (well, flexible for O&G) type of production that can start/stop fairly quickly. If the price goes back up, shale production revs back up and the price drops again after just a short interlude. The big American O&G companies are also advancing technology in this area incredibly fast, and the cost to produce is dropping. Even bankruptcy wouldn't really be a problem - even if all the shale companies went under, the US and Canada are financially advanced. Some company or financier would always be there to buy up the bankrupted assets and quickly revive the dead company in the event of high prices.

Sources

https://openlibrary.org/books/OL7604415M/The_End_of_Oil

https://www.eia.gov/finance/markets/supply-opec.cfm

https://en.wikipedia.org/wiki/Price_of_oil

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

https://en.wikipedia.org/wiki/OPEC#1980s_oil_glut

http://www.businessinsider.com/r-saudis-naimi-says-opec-will-not-cut-output-however-far-oil-falls-mees-2014-12

https://www.reddit.com/r/geopolitics/comments/3wrnqz/refuting_a_common_misconception_is_saudi_arabia/

TL:DR; Everyone in OPEC/SaudiArabia are backstabbers who do not trust other nations enough to slow down production. 

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12 minutes ago, Free Radical said:

Between dropping my Jeep and picking up a Civic and this, I'm saving nearly 150 a month in gas right now. It's a beautiful thing. 

Yeah my mileage checks from work go a lot farther with my Accord than they did with my truck.  My truck would have been cheaper to maintain at these gas prices, but still nowhere near as good as with the Accord.

JDaveG likes this

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Seems like the perfect time to invest heavily in alternative energy sources

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We're not spending the money, we're paying down debt and saving. I know that's what I'm doing, paying off as much crap as I can.

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Where Consumers Are Spending Savings

The long, gradual decline of gas prices since the second half of 2014 means drivers are unmoved by additional dips, said DeHaan.

“People have gotten used to it and don’t notice it," DeHaan said. "They either pocket it or save it, and very few are spending it.”

The average household saved $660 in 2015 from lower fuel prices and is predicted to save $300 this year, said Hess. Gasoline consumption rose slightly in 2015 by 3% from the previous year after a trend of flat to declining in recent years. The amount of consumption from drivers so far this year has declined and can be attributed to the inclement and frigid weather, he said.

When prices dropped in previous years, consumers spent their extra disposable income on goods and services, but this time around, the majority of consumers are using the extra money to pay down debt, said Weinstein.

“In fact, household balance sheets are in their best shape since before the Great Recession,” he said. “Lower fuel costs, combined with cheap financing also propelled new car and light truck sales to record levels last year.”

Retail sales are projected to increase by 3.1%, eclipsing the ten-year average of 2.7%, excluding sales of cars and at restaurants and gas stations, according to the National Retail Federation. Lower unemployment and gas prices coupled with higher wages are giving consumers “more discretionary income to save, pay down debt and spend on travel, eating out and personal services,” said Jack Kleinhenz, chief economist of the NRF, a Washington, D.C-based retail trade association.

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Tesla Beats Suit Over $6.5B Stock Drop After Battery Fires

By Beth Winegarner

Law360, San Francisco (September 26, 2014, 7:34 PM ET) -- A California federal judge on Friday axed a proposed class action accusing Tesla Motors Inc. of causing a $6.5 billion drop in its market value by lying about its electric cars' safety, saying he didn't see any evidence that Tesla’s statements after three battery fires were false.
U.S. District Court Judge Charles Breyer dismissed the case without giving the plaintiffs another chance to amend their claims, saying he wasn't convinced that Tesla's claims that its cars are safer than gasoline-powered vehicles are false. Indeed, after three drivers walked away from collisions in which their car batteries caught fire, it appeared those claims were correct, Judge Breyer said.

In one of the incidents described in the complaint, a driver in Mexico sped his Tesla above 100 miles per hour, crashed through a concrete barricade, struck a tree and walked away unscathed, Judge Breyer recounted. In two other incidents, road debris triggered battery fires, but both drivers were unharmed, he said.

“Tesla said this car was found to be one of the safest developed, and that seems to be the case,” the judge said. “I'm at a total loss to see the basis for this suit.”

Plaintiffs' attorney Matthew Tuccillo of Pomerantz LLP argued that Tesla CEO Elon Musk claimed that during the Tesla test period, there were no fires. However, an extensive fire broke out at Tesla's factory in California, requiring 23 first responders; one witness described the conflagration as “violent,” Tucillo said.

The plaintiffs don't know whether that same battery is the one now sold in Tesla's Model S cars, he said. The company was in a “frenzy to get this car out,” and may have cut corners getting it to market, Tucillo argued.

Tesla's attorney, David Siegel of Irell & Manella, said that blaze was intentionally set by Tesla in order to test the risk of battery fires. The company started the fire in the center of the battery pack, “where it was most likely to cause damage, to make sure we made a safe car,” he argued.

To claim that Musk said there had been no fires “borders on dishonest,” Siegel argued, noting that Musk discussed the three collision-based fires with the press, and that there had been no spontaneous battery fires in Tesla's cars.

“It doesn't mean it can't happen. We've disclosed that it can, but it hasn't,” he said.

After the fires, Tesla made changes to its vehicles, increasing the clearance between the undercarriage and the road and adding heat shielding, Siegel said.

“They were easy fixes. Had we realized the risk of these fires prior to the class period, we would have fixed them. That's not consistent with securities fraud,” he argued, saying the plaintiffs' pleadings don't meet the requirements for scienter. Additionally, Musk purchased more shares in Tesla leading up to the Model S launch, despite knowing about the battery fire risk, Siegel said.

Judge Breyer said he wasn't ready to get into scienter, given that he still didn't see any false statements. “I'm dismissing this without leave to amend,” he said.

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Russia is now suggesting that a "world war" could happen if the U.S. and Arab countries send ground troops to Syria. The Russian economy is failing miserably as oil prices continue to fall. I have no idea why they are so set on Syria's government remaining to the point of hinting at world war.

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15 minutes ago, SpongeDad said:

Russia is now suggesting that a "world war" could happen if the U.S. and Arab countries send ground troops to Syria. The Russian economy is failing miserably as oil prices continue to fall. I have no idea why they are so set on Syria's government remaining to the point of hinting at world war.

if they wanna be destroyed so be it.

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26 minutes ago, SpongeDad said:

Russia is now suggesting that a "world war" could happen if the U.S. and Arab countries send ground troops to Syria. The Russian economy is failing miserably as oil prices continue to fall. I have no idea why they are so set on Syria's government remaining to the point of hinting at world war.

 

10 minutes ago, Jimsmusic™ said:

if they wanna be destroyed so be it.

Not what the thread is about, BUT what will happen if the low price of oil causes their economy to fail?

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4 minutes ago, WhenFalconsWin said:

 

It looks good but...you can polish a turd and it's still a turd.  

Why is that a turd?  Do you mean that Teslas suck?

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Low oil prices are not much of a threat to Saudi Arabia.  This is essentially a price war to run emerging oil production out of the market.

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2 minutes ago, Flip Flop said:

Low oil prices are not much of a threat to Saudi Arabia.  This is essentially a price war to run emerging oil production out of the market.

By emerging, you mean what the US is getting out of the shale?

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4 minutes ago, biloxifalcon said:

By emerging, you mean what the US is getting out of the shale?

Yep.  Also Canada's oil sands.  Add in the decreased demand from China and you get very low oil prices.  Saudia Arabia produces oil at such a low cost that they can drive the price way down and maintain market share.

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1 minute ago, Flip Flop said:

Yep.  Also Canada's oil sands.  Add in the decreased demand from China and you get very low oil prices.  Saudia Arabia produces oil at such a low cost that they can drive the price way down and maintain market share.

Ok, but I've been hearing that one of the major reasons for the downturn in oil is that China's demand has decreased because of their economic slowdown.

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Just now, biloxifalcon said:

Ok, but I've been hearing that one of the major reasons for the downturn in oil is that China's demand has decreased because of their economic slowdown.

Yes, that is definitely a big factor.  Saudi Arabia could cut production, but that would cost them market share.  Essentially they are the big guy in the oil market using their surplus to keep the little guys from gaining market share.  Competition is good for the consumer.

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