Shale producers versus OPEC

[CBradSmith]

I'm curious how a discussion about this might go:


OPEC may or may not attempt to "take out" producers in the United States that can't profitably operate under a certain price point for oil. On the surface, it appears they may be doing that. Is the U.S. "in the right" to subsidize to a certain price point, mitigating the economic damage OPEC may induce?
I'm a free market guy nearly 100% of the time. The reason I ask in this situation is because we've all griped about how "if only" we weren't beholden to the oil producing nations, we then wouldn't forced to be as involved with all the warring and shennanigans from that region.

I'd say some Pros are that if the U.S. were to do this, it may force the region to deal with some of its issues.
Of course, it may make the area that much more unstable.
I would imagine a chunk of the "recovery" has been energy driven. Do we want to shut that down at the margins? Preliminary reports are that consumer spending isn't going to sustain a recovery.

Again, I've got no position on this as I have only given it 5 minutes of passing thought. But at first glance, this seems to be an interesting position in which to be. The U.S. seems to be in a position to subsidize at a price point for domestic producers at the margin, and it would follow that that creates a form of leverage we don't generally possess.

Other considerations would be leverage over Russia.

 

[Marshal Jim Duncan]

No to subsidies. Can't put the genie back in the bottle. Shale isn't going away long term. If they want to produce themselves out so that the U.S. (and Canada) will one day control even a greater percentage of the market ? Knock yourselves out. Which isn't to say there won't be pain in the near to interim if prices stay where they are go much lower. There are some hedge counter parties that are going to be taking a pounding.

 

[squeak]

The smart ones have hedged this risk.
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[aix_xpert]

This is the way the oil industry has always been. The biggest difference this go around vs. the past is that as OPEC increased its supply, the demand (primarily international - aka China and India) also increased, thus mitigating the impact of the increased supply. OPEC nations will always be able to produce oil at a cheaper price point than US and other Western powers, due to the lack of EPA, OSHA, and other government regulations. As to your original question, no. I do not believe that we should implement subsidies simply to maintain a "static" price. If you do, then where do you stop? Do you subsidize (moreso than we already do) the electric car industry, as falling gas prices mean significantly less demand for electric and hybrid vehicles? And then, at what price do you subsidize? Do you subsidize non-US companies drilling in the US (such as BP). Do you subsidize US companies (such as Mobil) who drill (and sell) outside the US? In the end, all subsidies due is distort the real market picture and prevent the market from making improvements that otherwise would occur naturally.

Justin

 

[Colorado_Poke]

No to subsidies.
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[CBradSmith]

I was hoping to prompt more discussion on the pros and cons of the leverage gained from this situation. I agree that subsidies, generally speaking, are a misguided path.

I know oil prices have been cyclical, but has there been a time in the last 60 years when the United States was able to produce on a level sufficient to affect global prices.

In an instance like this, what if (big what if), 10 billion in subsidies applied at the margin on the cost side for smaller producers was able to "buy" you 100 billion in leverage over the region? Basically, what does the cost of production slope look like, and is there a trade off at the margin that affords the U.S. a bunch of leverage for very little buck?

Okay, changing the rules of the thread for the sake of dialogue: subsidies won't happen. But in an alternative world if they did, what is the cost/benefit analysis? IS the cost of production slope such that small subsidies at the margin WOULD buy you a bunch of leverage over hostile countries whose nations are dependent on oil prices being higher? Maybe just the threat of subsidies would be sufficient to ask for some changes.

 

[Marshal Jim Duncan]

Couldn't the Saudis just double down and subsidize there own costs accordingly, by signaling ther willingness to sell at say $10 less/ barrel than the then current going rate, thereby sending prices even further south?

 

[purkey]

I heard the saudis have 3 trillion in reserve to offset any lowering of prices so they can bring the price down to whatever they want it looks like. I don't think they will, but that 3 trillion could sure clean out a lot of pretenders.

 

[shortbus]

Yeah but would it Purkey? As soon as the market demand is back when they pull back on supply the competition gets right back in it.
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[anon_xl72qcu5isp39]

It's not like we have $20 oil.

I suspect the hypothetical benefits occur at a much lower oil price.

What kind of leverage? How would you quantify it?

 

[aix_xpert]

Originally posted by purkey:
I heard the saudis have 3 trillion in reserve to offset any lowering of prices so they can bring the price down to whatever they want it looks like. I don't think they will, but that 3 trillion could sure clean out a lot of pretenders.

In the 90s, the Saudi economy was based on a $15/barrel price. My dad worked for Aramco and I've spent many summers in Dhahran. Not sure what their economy price requirement is, but I guarantee that the price is lower than anything that America could ever drive to.

Justin