OIL: The Saudi/Russia Feud Unraveled

In the midst of the Coronavirus panic, Saudi Arabia and Russia decided to defy OPEC and refuse to abide by their demand that output be curtailed as a consequence of tanking demand in China.   The media has varied responses speculating on the reasoning behind the feud; some claim it is between the two countries, others believe it is a strategy to tank the US shale output, and others think it is a purposeful attempt to tank the global economy.

And in the trajectory of ‘follow the money’ who would gain from this sudden denouncement of OPEC?

Currently, Venezuela, an initial signatory to the OPEC agreement has virtually zero output given it’s economy is in the Socialist twalette.   Iran’s output has suffered from sanctions and now the coronavirus.   Syria is being destroyed once again, this time by Turkey.  Other countries are being massacred by Al Shabaab, and still others are simply changing course toward renewable energy.

There are 14 countries that comprise OPEC;  Algeria, Saudi Arabia, Kuwait, UAE, Nigeria, Venezuela, Conga, Libya, Iran, Iraq, Gabon, Angola and Guinea – former members include; Ecuador, Indonesia and Qatar. Former members and others have already begun the shift to renewable energy sources.   The top five countries producing oil include; US, Saudi Arabia, Russia, Canada and China, only one of which is subject to OPEC.   Thus when OPEC demands member countries reduce output, the member hit the hardest is Saudi Arabia, while its competitors can ramp up production because they are not members of OPEC.

In essence OPEC has outlived its usefulness and will likely become obsolete in the near future. Weeding out the weak means eliminating smaller companies through price deflation as they haven’t the means to absorb the losses.   Both the Saudi’s and Russia claim they can hold a $25 per barrel price…   which is highly skeptical, but will play out nonetheless.   The consensus is that these countries want the price of oil to be aligned as a basic market flux like every other commodity in the world.   Price fixing thru creative shortages and creative oversupplies manufactured by OPEC are being purged.   The short term will see reactionary destabilization. But longer term, the five power houses will survive.

Oil output will be consolidated among the few, and renewables will enjoy the new future as Black Gold.

Currently the top renewable sources include: solar, wind, hydroelectric, hydrogen, geothermal and biomass.   Within those sources, wind has recently been found to be costly and a landfill nightmare given the turbines are made from plastics (oil) and steel.   Solar is specific to location.   Hydroelectric utilizes precious water supplies that are dwindling.   Biomass is attempting to diversify from it’s wood source, but its future looks a bit rickety given the destruction of valuable forests.

Geothermal requires extensive drilling given it is found in the earth’s core, thus hydrogen would seem to have the most potential and given it is found in abundance – the opportunity plays equally to all.

There is no naturally occurring pure hydrogen and thus it must be extracted from its source. Hydrogen is typically produced through oxidation of methane or coal gasification and burns clean.  But future methodologies are likely a massive science effort.

Still, it appears the many, including the Greens, are oblivious to all the other uses of oil outside of fuel.   There are literally hundreds of products made from petroleum including; cosmetics, dresses, vitamin capsules, tires, nail polish, upholstery, shoe polish, panty hose, deodorant, purses, denture adhesives, artificial limbs, anesthetics, refrigerators, guitar strings, shoes, lipstick, house paint…   the list is exhaustive

Out of every 42 gallon barrel of oil, 22.6 gallons are used in the production of products other than gasoline!   That would account for 54% of all oil…   Oil isn’t going to go away. But cheaper oil will trickle down the end price of all these products for consumers.  That may be actual goal as it would then make the costs more competitive against China.

It is the Bigger Picture.  

While every Industrial Revolution comes with gains – it also comes with pains.   Pains for the obsolete.   But ultimately, those pains are absorbed and new technology is the mainstay.   The horse shoeing market certainly isn’t what it was a couple of centuries ago…  People adapt, evolve and learn.

And thus, it could be that the entire Saudi Arabia/Russia feud is actually nothing more than a shift, a shift that was a necessary evolution with absolutely no demonizing intent at all.

OIL – Black Gold looking more like Silver

In the midst of troops deploying to Syria, an escalating war that appears to be headed to engulf the entire Middle East, terrorism, ISIS, and Global Warming…. what has been happening to OIL?

Black gold?

Well, it’s looking more like silver than gold at $40 a barrel and steadily declining.

Normally, when there is war and strife and unrest in the Middle East, oil prices rise in response to a possible shortage. Yet, this time, oil continues to decline. Why is now different?

The are multiple reasons but a few headlines are most noteworthy: OPEC and the Saudi Production.  The Saudis depend on oil for their revenue and the lower oil falls, the more they need to sell to make up for the difference in price.   So, what to do?  They step up production. Sound obvious?

In actuality, the Saudis are hurting, their economy is in a freefall, they operate a 20% budget deficit, their reserves are steadily depleting, and their stock index is generating severe losses. But what are they doing to mitigate?  Not a lot.  They continue to pump more oil, to saturate the market, because it’s all they have. Asking them to stop would be asking them to commit suicide. The petrol industry accounts for 90-95% of ALL their revenue. So if they are already operating at a 20% deficit, how can they possibly absorb ‘more’?

The only way they can pull themselves out of this black spiral is to continue production, raise production and make massive changes in their reliance on oil as their main revenue source, ie Diversify.

But they have another problem – upwards of 90% of their private sector workers are foreign born, only 30-40% of working age Saudis are employed, the government subsidizes the rest. A significant drain on wealth.  But their own citizens don’t have the expertise to manage and run the oil markets, they haven’t the education.   Foreigners spend money, adding to the economy.  But the unemployed suck it back dry.

Not exactly a business model for sustained wealth.

What is their secondary market? Petrochemicals. Petrochemicals are used in the manufacture of plastics and synthetics as well as fertilizers. Monsanto owns it’s own petrochemical plant, Sterling Chemical. And with the land grabs in Africa – fertilizers, GMO’s and petrochemicals will flourish. South Africa is now the 8th largest producer of GMO’s in the world, including maize, soy and cotton.

But with hardline pressure by Monsanto and Syngenta, GMO production has increased dramatically adding Tanzania, Kenya, Uganda, Malawi, Mali, Zimbabwe, Nigeria and Ghana – all on the African Land Grab list.

Saudi Arabia is the third largest investor/holder of land grab in Africa, second is UAE and first is US.  A win-win is the profitability of future agriculture using petrochemical fertilizers…

And while the Paris Climate Summit proposes lowering C02 emissions and toxic gasses, petrochemical pollution and GMO fertilizer pollution rage on.

Petrochemicals are THE MAIN SOURCE of Industrial air pollution. The Industrial Sector is considered the largest source of China’s smog. But the largest producers include: Basf of Germany, DOW of USA, Exxon of USA, Lyondellbasell of Netherlands, INEOS of the UK, Saudi Basic of Saudi Arabia, Formosa of Taiwan, Sumitomo of Japan, and DuPont of USA.  But these represent only the top tiers in an industry that was burgeoning with over 3000 plants worldwide but has also felt the profit bump of falling oil prices.  But while plastic and synthetic production has fallen, fertilizers expand.

And while OPEC countries continue to produce oil, further saturating the markets, other countries have pulled back, their profit margins having long ago been divested. As in the tale of the Tortoise and the Hare, running as fast as you can to the finish line doesn’t necessarily mean you win. But the Saudis have little debt, and can continue to ride the wave plodding like the tortoise, waiting for the fallout from production in other countries to peak before they plug the lid and rapidly push the pricing to potentially extraordinary levels. In the meantime, those countries that closed up shop won’t have the time to retool and will get hit hard.

But the game is not for the faint of heart. The breakeven price of production for Saudi Arabia and Russia is the same at $105, Qatar, Kuwait and UAE is $80, Iran is $130, Libya, Bahrain and Yemen is above $140, while some shale producers in the US report a breakeven as low as $24 in North Dakota.

It is not a game of chess.  Or even Tactics.  Time is the game.  Who can hold out the longest.

And, Time will tell…