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Saudis Keep OPEC Production High: Bakken, Keystone XL, Global Economy at Risk?

Saudi Arabia gave a Black Friday gift to the world oil market. The Saudis have persuaded their OPEC partners to sustain OPEC's current oil production rates (30 million barrels per day) rather than cutting production to pull oil prices out of their current slide. The Saudis' main objective is to crush North American producers with low prices and regain market share.

Remember that our country's booming oil production is based on hydraulic fracturing, or fracking. 80% of the fracking fields in the U.S. require oil prices of $80 per barrel or more to remain profitable. Canadian oil firms have been making their budget projections around assumptions of oil hanging around $80 per barrel. Immediately after OPEC's decision, the price for North American oil, West Texas Intermediate, dropped to $69.05.

Venezuelan Foreign Minister Rafael Ramirez confirms the basic profit equation and declares himself a friend of U.S. environmentalists opposed to fracking:

"OPEC is always fighting with the United States because the United States has declared it is always against OPEC... Shale oil is a disaster as a method of production, the fracking. But also it is too expensive. And there we are going to see what will happen with production," he said [Alex Lawler, Amena Bakr and Dmitry Zhdannikov, "Inside OPEC Room, Naimi Declares Price War on U.S. Shale Oil," Reuters via KELO Radio, 2014.11.28].

If you're pumping gasoline into your car, you should be cheering this price war, right? Cheaper oil means cheaper gasoline, which means we can all drive around and buy more stuff, stimulating the economy.

The OPEC price war could save North Dakota from the ills of petro-state chaos and corruption. American drillers aren't going to keep pumping oil at a loss out of patriotism or a love of the view of Minot from the man camps. The Saudis drove Americans out of the oil business in 1986; they could do it again.

The OPEC price war could also make the Keystone XL pipeline disappear. Canadian tar sands oil requires a price of $85 per barrel to make scooping that goop profitable.

For bonus geopolitical excitement, the Russians need $100 per barrel to balance their budget. Vladimir Putin will have a hard time continuing his invasion of Ukraine if low oil prices threaten a repeat of the Soviet collapse. Then again, Putin is not Gorbachev. Faced with economic hard times, rather than retreating, restructuring, and releasing his grip on his neighbors, Putin might lash out, reaching for more land, resources, and power.

But then we get to a strangely familiar and ugly economic scenario. Big banks have made big loans to finance Big Oil in North America. The frackers carry a lot of junk-bond debt. If oil stays low, we could see defaults that could create another financial crisis:

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry....

“A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialised,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report [Andrew Critchlow, "Oil Price Slump to Trigger New US Debt Default Crisis as OPEC Waits," UK Telegraph, 2014.11.14].

Critchlow hears 2007 all over again. Just like bankers underwriting real estaters in a housing bubble pre-2007, bankers are underwriting oilers in an oil bubble based on possibly unsustainable prices. The Saudis are now popping the bubble.

But if the joys of cheap gasoline are crushed by the pain of junk-bond defaults, at least you'll be able to blame Obama right alongside the Saudis:

...This rush to pump more oil in the US has created a dangerous debt bubble in a notoriously volatile segment of corporate credit markets, which could pose a wider systemic risk in the world’s biggest economy. By encouraging ever more drilling in pursuit of lower oil prices, the US Department of Energy has unleashed a potential economic monster and pitched these heavily debt-laden shale oil drilling companies into an impossible battle for market share against some of the world’s most powerful low-cost producers in the Organisation of Petroleum Exporting Countries [Critchlow, 2014.11.14].

The Saudis are dropping our gasoline prices more surely than anything Mike Rounds or Kristi Noem has promised us. OPEC may shut down fracking and Keystone XL more effectively than any spirit camp. But the potential for a financial crisis that could swamp the benefits of cheap gasoline should make us beware Saudis bearing gifts.


  1. Tim 2014.11.29

    Taking any bets on how long it will take republicans to fall into this trap?

  2. bret clanton 2014.11.29

    It would be interesting to hear TransCanada quantify the feasibility of KXL at 60$ a barrel during the upcoming PUC hearings....

  3. caheidelberger Post author | 2014.11.29

    Things could get all chicken-and-eggy with the PUC, Bret. The PUC predicated its 2009 approval on increasing US oil demand, declining US production, and and increasing exports. The fracking boom has negated all three of those conditions. If the Saudis succeed in reclaiming market share, they would put those three conditions back in place, and the PUC would have the same economic rationale for supporting Keystone XL. The question then would be whether TransCanada and the Canadian producers would still find the pipeline economically viable.

  4. Tim 2014.11.29

    I wonder if the Saudis are opening a can of worms here they don't want any part of, they are experts at playing US politicians for the idiots they are, but a lot of things have changed since the last time they played games with us. Sure they have the bankroll to hold out through a prolonged period of low prices but their friends and a lot of other, not so friendly, countries don't. Could be a bad deal for the Saudis in the long run.

  5. Bill Fleming 2014.11.29

    All the more reason not to let the market dictate energy policy.

  6. Bill Fleming 2014.11.29

    Here's the break even situation. Most of OPEC isn't in any better break-even situation than we are. Might be smart to just stockpile their stuff and see how long they're willing to take the hit. Cut deals with the rest of the world and run their wells dry. They've been jerking everybody's chain far too long. I wonder what that would cost?

  7. Tim 2014.11.29

    From what I have read some of the Bakken can go as low as 42 a barrel and still be profitable, but the general consensus is 60 a barrel in the Bakken and it goes up from there.

  8. Tim 2014.11.29

    I know one thing, I'm not looking forward to my 401k getting trashed again when another bubble pops, not sure what to do about it though. It's a proven fact the US congresscritters don't have the stones or desire to stand up for my retirement.

  9. Rorschach 2014.11.29

    Could you dumb your blog down a a bit, Cory? You're exceeding the break even IQ of the Republican propaganda cartel.

  10. grudznick 2014.11.29

    These Saudis seem to be crony Capitalists, do they not?

  11. Paul Seamans 2014.11.29

    Cory, the PUC hearings on the KXL will be on the permit as it currently stands and whether TransCanada has fulfilled all the requirements. The need for the pipeline will be contested due to the fact that the US is close to self sufficiency in oil production. To throw the present Saudi situation into the mix would take a lot of supposing from TransCanada's people and they are already trying to limit discovery to a narrower focus than what us intervenors against the KXL feel is fair. The PUC is in the process of defining what will be allowed to be addressed in the hearings, I doubt that the current downward trend of crude oil prices will be part of what will be allowed as evidence.

  12. caheidelberger Post author | 2014.11.29

    Paul, I agree, trying to predict what OPEC will do overcomplicates things. But I will be interested to hear what market data plays a role in the PUC discussions. Do you think market need will have any impact on the PUC's decision?

  13. Richard Schriever 2014.11.29

    Blame Obama for "Drill baby! Drill!"???

    Nice summary Corey.

  14. Richard Schriever 2014.11.29

    Grudz - the Saudis are PURE capitalists - don't give a rat's tail about their "cronies" (neither us or OPEC).

  15. Tim 2014.11.29

    Larry, about a year or so ago I read a post on DKos that somebody said the KXL was just a distraction meant to keep people from focusing on what Canadian Oil really wanted to do, at the time I blew it off because it just seemed too far out in left field, as DKos can be more often than not, do you think the KXL could just be a time and resource consuming distraction?

  16. Paul Seamans 2014.11.29

    Cory, When TransCanada applied for the permit in 2009 the permit request was largely predicated on the need for the pipeline. The present conditions are that the US is close to self sufficiency and I would think that would be allowable as evidence at the hearings to show that the KXL is no longer needed. I would think that allowing what the Saudis have just done would be too speculative to be allowed as evidence. For example we would have to speculate that the Saudis will continue on their present course and that they will be able to force places like the Bakken to cut back on production. In order for evidence to be introduced at the hearings it will, at the minimum, need to pertain what is already in the permit. An example of that is that I don't think that eminent domain is addressed in the permit and I don't know if it will a allowable to bring that up.

  17. Bill Fleming 2014.11.29

    Grudz, the Saudi cronies are Al Qaeda, ISIL, Hamas, etc. that's what you meant, right?

  18. Les 2014.11.29

    """". The Saudis' main objective is to crush North American producers with low prices and regain market share.""" One word for your thought Cory. BS. This exact scenario happened in the mid 80's and it did crush the early Bakken or Williston Basin oil. However the main objective was then as it is now, to pull the only real power play on Russia we have and had. It worked then and it will work again at a great cost to our oil independence only very lightly balanced by very temporary economic gains.

  19. grudznick 2014.11.29

    I don't think that's what I meant, Mr. Fleming. But I can tell when you have that look that sometimes you know me better than I know myself.

  20. John 2014.11.29

    Excellent summation, Cory. Consider the thoughts following as addendum to your analysis. But first, it's less correct to blame the Saudi's and more correct to blame ourselves for: a) our past faith in the Saudis and our whole passé and irrelevant Middle East policy (more from Bacevich, below); and b) our blind faith in boom-bust mineral extraction as opposed to planned, phased mineral extraction as practiced by those evil Norwegians.

    Consider, first, the wisdom of the Norwegians, shepherded by an accidental immigrant from Iraq. Initially Norway allowed itself to circle the drain of Dutch Disease (much as is the case of present ND, WY, and TX) - but thanks to Farouk al-Kasim Norway jerked itself from that raw capitalist impending disaster. Norway instead dictated mineral leases, production, and more importantly, funding the Nation's needs into perpetuity. One would think the Sons of Norway living in ND would learn from their old country example, but ND's eyes cloud from the cataract$ of raw discovery capitalism. The point: if the US had an energy policy (other than raw discovery capitalism) then the US would be less subject to the whipsaws of supply and demand. WY has thousands of abandoned gas wells to plug least they pollute the waters from last decade’s coalbed gas boom – because the state refused to plan; soon perhaps ND will hundreds of orphan fast-depleting oil wells, again because of a refusal to regulate. (the vast experience is that states are politically incapable of regulating the mineral extraction industry). In the meantime enjoy the low gas prices for 18-30 months, and the bankruptcies that will accompany them.

    Second, the Saudi’s are not our ally by any definition of the word. Only one who believes in Santa Claus or the Tooth Fairy would think otherwise. Unfortunately most in the policy apparatus in DC and their true believers out here retain beliefs defying the “reality based community.” The entire US Middle East policy needs a redo.


  21. Mike Verchio 2014.11.29

    Why not subsidize N.D. oil like we do corn & keep on pumping .

  22. caheidelberger Post author | 2014.11.29

    Bill's link above on break-even prices for OPEC is remarkable. Apparently the Saudis are losing money, too. Only Qatar and Kuwait are still beating break-even. It sounds like the Saudis are challenging the US producers to see who can hold their hand over the flame the longest.

    I think about the long-term policy John recommends on Norway's example, and it strikes me that we have a stirring example of market failure here. OPEC itself isn't exactly a paragon of free-markte principles, but it seems we have a system that cannot guarantee a steady supply of energy at steady prices.

  23. Tim 2014.11.29

    After a year of low prices, maybe even so low people start going broke in ND, watch them start screaming for help and subsidies from the government and abandon the free market BS they preach now.

    Mike, we should have cut oil subsidies when we had the chance. Corn should lose theirs too.

  24. caheidelberger Post author | 2014.11.29

    Rep. Verchio, if my conservative spidey-sense is tingling properly, you're making a point about the impropriety of subsidies. I would agree that subsidies for corn could be as ill-advised as subsidies for shale oil. Do we need to prop up the price of corn syrup, or would government intervention in the marketplace do more good by supporting local fruit and vegetable production? Do we need to prop up the price of oil to keep fracking profitable, or would government intervention do more good by supporting cleaner energy and conservation?

  25. Jana 2014.11.29

    When the PUC grants KXL a new permit, I would hope that the PUC would protect South Dakotans and family farms by getting the exact same tax and environmental protections that other states on the pipeline path are getting.

    I'm guessing that our legislators are lobbying for that as well.

    Mike Rounds gave the state away in the last go around. I hope our current governor and legislature understand that we have the same, if not more, bargaining power than the other states that this pipeline will travel through.

    So who is it you represent PUC, Governor D, state legislators, GOP...South Dakotans? Family farmers?

    Or does earning your conservative merit badge mean you have to place a foreign oil company ahead of the people who pay your ideological and intellectually lazy butts.

  26. Paul Seamans 2014.11.29

    While I agree that subsidies to grain farmers can seem high, and to the general public unneeded, the governments main reason for these subsidies is not out of concern for the farmer. The governments main concern is that the US have a cheap supply of food. The US has never gone hungry as some other countries have and pity the party in power if this ever does happen.

  27. mike from iowa 2014.11.29
  28. Tim 2014.11.29

    Paul, we have a lot of people going hungry in this country now, and at least one current party has no problem with that.

  29. Douglas Wiken 2014.11.29

    "The need for the pipeline will be contested due to the fact that the US is close to self sufficiency in oil production."

    The pipeline has never had any thing to do with US sufficiency or shortages. It has always been to supply China and reduce surplus in Midwest and to drive up US fuel prices.

  30. Francis Schaffer 2014.11.29

    What will be the effect on vlad?

  31. Tim 2014.11.29

    His economy collapses and he goes to war, of course that may happen anyway.

  32. larry kurtz 2014.11.29

    Tim, remember the secret Cheney energy task force? The Kochs own the tar sands leases.

    "On the long list of corporations that poured lobbying money into the Energy Policy Act of 2005, the infamous Koch Industries stands out. They too had something to gain in pushing for the refinery equipment tax break, which was among the many provisions they spent nearly $1.58 million lobbying for."

  33. Deb Geelsdottir 2014.11.29

    There is one part of all this that I like: $2.65 regular gasoline to fill my car today, for a total of $30.

  34. Tim 2014.11.29

    I knew the Koch's owned the tar sands, corporate welfare they collect is much more than I thought, unbelievable. The damage done to this country on several fronts by Cheney, Bush and their cronies may never be totally calculated.

  35. Deb Geelsdottir 2014.11.29

    Putin is getting scary. He's flying over Finland's air space, ignoring national boundaries, and of course, invading Ukraine. He is dangerous and scary. A basket case of compensation... perhaps for certain physical attributes.

  36. Francis Schaffer 2014.11.29

    Deb, so you think Putin drives a red sports car too?!!?

  37. Deb Geelsdottir 2014.11.29

    Hahahahahahahaha! Without question, Francis, without question.

  38. Moses 2014.11.29

    C.H. you got to quit schooling these guys you make them look bad.

  39. mike from iowa 2014.11.30

    Where ever do you think Putin got the idea he could invade w/o reason and just simply ignore the rules of international laws? Dumbass dubya looked in his eyes and saw Putin's soul and gave him a clean bill of health.

  40. barry freed 2014.11.30

    The Saudis, like us, have Crony Statism, the opposite of Capitalism. The Prince and the Governor (including Lawmakers and local leaders) use Government power to extract taxes and win contracts for service, thereby enriching and serving themselves and those they favor without competition; while using that same power to subdue those they do not favor.
    There is nothing Capitalistic about it.

  41. leslie 2014.11.30

    Kochs also will benefit by refining the their tar/heavy oil/oil sands after it is mined by Canadians and shipped by Canadians in a KXL pipeline south, correct?

  42. jerry 2014.11.30

    I hope the Saudi's are successful in their efforts to shut down the facking and kill the XL. Makes sense to me Hooray for them! North Dakota can now take the money they have made and clean up the mess those rascals have left them. Business as usual with the oil companies, they will just be showered with more subsidies to offset those pesky Saudi's.

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