Oil prices will remain low after OPEC, uh, I mean after Saudi decision. 2 of 2

Image courtesy of DollarPhotoClub.com
Image courtesy of DollarPhotoClub.com

Previously discussed the decision by OPEC on 12/4/15 to maintain production. That will keep prices low and sustain the worldwide glut of oil. Also mentioned my opinion that OPEC is now the front for Saudi Arabia.

12/2 – Million Dollar Way – OPEC’s Pyrrhic victory – Post pointed me to the following two articles. The MDW post includes quotes of key paragraphs from both articles.

Pyrrhic victory?

11/30 – John Kemp at Reuters at Rigzone – OPEC Risks Pyrrhic Victory With Oil Policy – Article starts by explaining how King Pyrrhus won a big victory over the Romans but lost a huge number of men leaving him no reserves and also costing him most of his generals. The Romans merely advanced a few more legions and were ready to go again. King Pyrrhus? Not so. The two victories emptied his army.

Join with me as I learn more about that phrase. Wikipedia quotes Plutarch, who explains:

The armies separated; and, it is said, Pyrrhus replied to one that gave him joy of his victory that one other such victory would utterly undo him. For he had lost a great part of the forces he brought with him, and almost all his particular friends and principal commanders; there were no others there to make recruits, and he found the confederates in Italy backward. On the other hand, as from a fountain continually flowing out of the city, the Roman camp was quickly and plentifully filled up with fresh men, not at all abating in courage for the loss they sustained, but even from their very anger gaining new force and resolution to go on with the war.

Article raises the possibility that OPEC maintaining production levels and sustaining a very low price could turn out to be a massive Pyrrhic victory for them.

How so?

All the OPEC producers are draining their foreign reserves, especially Saudi Arabia.

At the same time production is ready to increase from the US shale fields as soon as prices go up.

Burn rate in Saudi Arabia

Article by Mr. Kemp gives some numbers for the Saudi foreign reserves. High point was $737B in 7/14, with drop to $654B in 9/15.

That is an $83B drop in 14 months.

With the $10B excess spending rate mentioned in the earlier Wall Street Journal article,  that suggests the Saudi reserve will be burned up in 65 months. That would be five and a half years.

Article says almost all of the OPEC members will burn through their reserves in under five years. Article cites IMF data for that assertion.

Employment isn’t dropping

12/2 – Prof. David Flynn at Say Anything Blog – Oil Slow Down May Not Be Hurting North Dakota Employment As Much As You Think – The professor from the University of North Dakota points to economic statistics indicating employment in the core Bakken counties has leveled off, not dropped. Even with that, employment is more than twice what it was five years ago. The first graph he shows looks somewhat like oil production – an almost straight line up starting in 2010 with a couple of breaks and now showing something that looks like a plateau.

Year-over-year changes in employment have been positive during 2015 even though it is a slowing rate.

Definitely not an utter collapse.

Basically the employment data is showing a slowing increase.

That has an impact on the oversupply of man camps and the city of Williston’s decision to close all those facilities, but I’m not quite clever enough to figure out the interconnection and won’t spend any more time sorting through that idea.

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