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The Big Freeze
Oil’s Price Collapse Is Quickly Draining Petrostate Coffers

The petrostates assembling in Doha to discuss a potential output freeze two days from now aren’t coming together in a show of solidarity or out of some sense of duty towards one another, but rather as an act of desperation. Bloomberg ran the numbers, and found that the oil price collapse has collectively cost the 18 countries involved in this meeting nearly one third of a trillion dollars:

The 18 nations set to gather in Doha on Sunday to discuss a production freeze have spent $315 billion of their foreign-exchange reserves — about a fifth of their total — since the oil slump started in November 2014, according to data compiled by Bloomberg. In the last three months of 2015, reserves fell nearly $54 billion, the largest quarterly drop since the crisis started. […]

Saudi Arabia accounts for nearly half of the decline in foreign-exchange reserves among oil producers, with $138 billion — or 23 percent of its total — followed by Russia, Algeria, Libya and Nigeria. In the final three months of last year, Saudi Arabia burned through $38.1 billion, the biggest quarterly reduction in data going back to 1962. […]

“We expect 2016 to be yet another painful year for most of the oil states,” said Abhishek Deshpande, oil analyst at Natixis SA in London.

$315 billion is an enormous sum, and it represents the cost of OPEC’s Saudi-led plan not to cut production at any point during oil’s period of sliding prices these past 22 months. Until this February, this seemed like a price Saudi Arabia was willing to pay—though it’s been paying it dearly. Now, though, the Saudis are finally looking to coordinate production with other petrostates, spurred on by the speed at which their rainy day fund is being depleted.

And with Riyadh ready to play ball, there’s not much more in the way of a deal to limit output…except for Tehran, which is looking to boost its own production to the levels it was posting before Western sanctions were enacted. Iran is one of many reasons why this Doha meeting looks unlikely to produce the sort of price rebound those 18 assembled nations really want, but Bloomberg’s data give us a better idea of why these petrostates are finally trying something.

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  • Pete

    How soon before there’s political instability, do you suppose?

    • Craig Austin

      There is no such thing as political stability in any Aeab state, except for tne ISIL Caliphate. . The Gulf Monarchies, are a constant powder keg, the negotiations between the Imans and royalty are always one step from civilnwar.

  • Jacksonian_Libertarian

    $315 Billion isn’t the real number, this is just the fall in reserves, and doesn’t account for borrowing. Quick and dirty back of the envelop calculation gives, a loss of a drop from $100/barrel to $40/barrel = -$60/barrel x OPEC production 30 million barrels per day = -$1.8 Billion per day x 365 days/year = -$657 Billion/year and this is just OPEC, not Russia and others.

  • Andrew Allison

    Yawn! Surely there’s something about which everything hasn’t already been said to talk about.

  • They presume that the sales volume would have been the same at the higher price. Their ‘problem’ is demand. If you aren’t working you drive much less, who knew? Simultaneously domestic production has risen due to new techniques (that are not all that new and can be applied to other fields, new or existing). The Saudis are trying to scupper that newish state of affairs by crushing the revenues of these high-price producers. Even if successful that attack will only destroy the current companies (and possibly their bankers). The specialized machinery already exists. If it is not running it is mothballed. Let one operator declare bankruptcy and another will pick up his kit at a steep discount and carry on. The age of cheap, plentiful oil is STILL upon us, fellow babies, and the only reason it ever stopped was political.

    • Robert

      You put your finger directly on OPEC’s, hence the Saudis problem. This seven year “recession” is far deeper in the less advanced countries. As the price of oil rises third world demand is likely to drop. Third world demand had been rising until the “recession” and was only held up by Saudi pricing this brings the situating higher fuel prices lower economic activity. Since most of the cost of “fracked” oil is upfront, it will become profitable quite quickly. In short the root of OPEC’s problem is outside of oil economics. Further fracking blunts their lance and being a single product producer there is nothing they can do about it.

  • Nevis07

    “the oil price collapse has collectively cost the 18 countries involved in this meeting nearly one third of a trillion dollars”

    my bleedin’ heart…

  • AD1980

    I’m confused and hoping maybe someone can help here… what about US Fracking? I was under the impression that fracking was putting a ceiling on prices. So if OPEC cuts production, fracking picks up the slack and prices change very little. Is that not expected?

    • Nevis07

      Hi AD1980. It is true that US fracking has built something of a ceiling on oil prices because of the technology’s ability to effectively be turned ‘on’ and ‘off’ for very little cost. However, the breakeven price of operating those fracked wells is still generally higher than that of the traditional wells in much of the ME and other OPEC and petrostate countries. The average breakeven price point for US fracked well is probably somewhere around $50-60 per barrel, while some ME countries well are breakeven in the single digit region – like $4 a barrel or something close to that.

      The difference being described above is that these petrostate countries are still bleeding funds not because they aren’t making money on a per barrel basis, but because they’re national budgets are based on prices much higher than they currently are. Many states like Saudi Arabia set their national budgets based on a breakeven point of $4 a barrel, while prices were at $110/barrel. So they had a balanced budget at $110/barrel, but when prices fell, they started running massive national deficits. Meanwhile, prices are still below what is profitable for US frackers to turn on more wells. However, there’s still a surplus of oil on the market because demand has fallen and nobody wants to cut back production because basically, all of the oil producers in the world from the US to Saudi Arabia, are trying to outlast their competition so that they don’t lose market share when the market finally stabilizes.

      • frisco kid

        Good observations Nevis07. I would like to add that while the average break even point for fracking is around $50 to $60 per barrel, a lot of fracked wells are profitable at $30 to $40 per barrel. Plus the thousands of already fracked wells are going to keep pumping. Right now oil companies are drilling wells but not fracking them until prices rise. Those could come online in a matter of weeks.

        Then figure all the offshore wells that were funded when oil was $100+ and are just now coming online. They aren’t profitable from a return-on-investment basis but current oil prices make them profitable to produce oil.

        OPEC can cut back on production but between the cheaters and the availability of shale oil there isn’t much it can do to raise the price of oil in the near future.

        • Nevis07

          correct. what you describe regarding the existing fracked wells is the so called fracklog.

          And let’s also not forget that Iran is increasing production back to pre-sanction levels – rather the opposite of cutting back production.

  • Nina Sage

    Post 9/11, the United States, should own Saudi Arabia. If Islamic terrorism failed to cease, all holy sites would be destroyed, and oil confiscated. It’s time for hardball with the barbarians.

  • NP1

    if Saudi managed to destroy the oil production system of other petro states, it would still destroy itself, because the global oil market is an integrated industrial production/consumption system.

    Pushing Saudi oil back to $100 and beyond might just feed the Saudi delusion that every government would come with their empty barrels to be refilled, but the reality is of course, that the industrial world has already driven itself well past the affordability barrier, even at $30/40 barrel.

    The Saudis have never grasped the basic economy of oil: we built our sophisticated energy guzzling infrastructure on an oil production platform that returned 100:1 on investment. Now even the best wells return only about 20:1. That means we are striving to sustain a civilisation built onf cheap oil, using expensive oil.
    So if by some chance Saudi drove other producers out of business, they would not see other nations lining up with their begging barrels to buy at $100 and above, because the global industrial coil consumers would have been put out of business.

    And without global consumers, the black stuff under Saudi deserts will revert to the useless nuisance it was 200 years ago.
    With no oil revenue, the Saudi theocracy will collapse back into the sands whence it came, along with their towers of fantasy.

    They are of course in a state of denial about this–to admit it would cause chaos sooner rather than later. So they encourage their unemployable young men to demand more, and keep them placated (for now) with handouts. But of course there is no more

    Which is why I wrote the book, the End of More:

    in an attempt to show where we’re headed. It offers no solutions, because frankly I don’t think there are any.

  • Forbes

    OPEC’s shortfall has amounted to $315 billion over 22 months? Imagine if Obama’s debt-fueled deficits has been so small, the federal debt burden would’ve only climbed by $1.2 trillion… We should be so lucky.

    • Tom

      It should be mentioned that all the members of OPEC combined have a GDP of less than 3.5 trillion. But yes, the numbers for America are bad.

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