A few updates on energy. Why I am so optimistic for our future energy supply.
Here are a few recent energy articles of interest.
- Saudi government cuts back wages and benefits for government workers because government revenues are down because government drove down oil prices.
- Tentative deal for OPEC to drop production and why it won’t matter.
- Shale drillers in the U.S. are ready to increase production.
9/27 – Reuters – Saudi chops wage, benefit bill in delicate pursuit of austerity and Bloomberg – Saudi King Cuts Once Untouchable Wage Bill to Save Money – Bonuses for all government employees will be stopped.
For those at “ministerial” level, pay will be cut 20%. After looking at a few articles, I’m not sure how many people are at the “ministerial” level.
Purpose seems to be psychological, specifically to tell the financial world that the government is serious about cutting costs.
9/29 – AP at Bakken.com – AP Explains: What does OPEC’s tentative deal mean for oil? – The OPEC producers agreed that they will in the near future agree to a production cut. No cut in sight but they agreed they need to pull back from maximum production by everyone.
The tentative agreement to reach an agreement would cut back from 33.2M bopd to something in the range of 32.5M or 33M bopd. That would be a cut of 0.2M or 0.7M bopd.
9/29 – Wall Street Journal – Why OPEC’s Prospective Deal May Not Create a Lasting Oil Rally – Article offers several reasons why the conceptual deal might not make any difference. For example:
- The proposed cut (0.2M or 0.7M bopd) isn’t enough to offset the current oversupply
- Track record of producers isn’t very good in terms of complying with agreed upon cuts
- Non-OPEC producers (I see you shale drillers there in North Dakota and Texas!) may (um, perhaps that should read will) increase production quickly if prices move above $50 a barrel.
On that last point……
9/27 – Wall Street Journal – Two Years Into Oil Slump, U.S. Shale Firms Are Ready to Pump More – Total US production has dropped 535K bopd in 2016 compared with 9.4M bopd in 2015. I don’t think that is exactly the collapse OPEC had expected.
Article points out the biggest impact of the Saudi decision to increase production and force prices lower is that a number of extremely large oil projects have been postponed.
Article says over 100 energy producers in the US have gone into bankruptcy, but even while working through Chapter 11 the companies have kept pumping oil.
Some of the companies will be stronger after shedding debt. That means they will be able to take on more debt to fund drilling when prices increase.
On a long-term basis, demand for shale oil will increase, with an overall drop of production world-wide of 5% a year and demand growth of 1.2%.
10/1 – The Million Dollar Way – The “OPEC Freeze?” — All talk – Nothing Changed – Article points out the proposed drop in production is inconsequential.
The decision to increase production to drive down prices was a catastrophic mistake by Saudi Arabia from Mr. Oksol’s prospective. I will quote his explanation of the trillion-dollar goof:
Saudi’s trillion-dollar mistake:
- the downturn in oil prices lasted much longer than Saudi policymakers thought likely in 2014
- the downturn shows no sign of ending
- falling oil revenues are having a huge impact on Saudi Arabia
- Saudi Arabia foreign reserves have declined by 24%, or $182 billion, since August, 2014
- reserves declined by $53 billion in first seven months of 2016 despite big cuts in government spending and attempts to raise non-oil revenues
- Saudi Arabia still has $564 billion in cash reserves and the ability to raise a lot of cash by issuing debt but risks: losing confidence in the riyal’s peg to the US dollar; a flight in capital; and, a run on currency
Burning through a quarter of your foreign reserves in two years and running a deficit of somewhere in the range of 13% of needed income is not a good place to be.