OPEC Production Question

[Kurbski]

I didn't want to hijack the can hauling thread so I will ask here and hopefully somebody will explain.

About OPEC cutting oil production this week or any time for that matter...

Do you honestly think that will stop Iran, Kuwait and Iraq from reducing production?

Is there any way for the Saudis to monitor anyones exports ?

I heard on TV that Hugo Chavez lost a 5 billion line of credit because of our economic downturn.
Not sure if that will really hurt him either. Hopefully somebody smarter than me will explain.

Mexico ( Valero) and Hugo Chavez (Citgo) probably won't comply either because they need the cash.

What about Russian oil? Is their thick hard to refine oil worth worrying about?

[allan5oh]

http://en.wikipedia.org/wiki/Opec#Current_quotas

Venezuela and Iran cannot meet their capacity, Saudi Arabia is the only country that can increase capacity beyond their quota a reasonable amount, and they do sometimes. They generally ignore their quota. Same with Kuwait, but their production isn't much above quota.

In other words, changing the quota up or down really doesn't change a whole lot IMO.

[allan5oh]

Also about Venezuela, since nationalizing much of their industry, they've had serious problems with business investment(go figure!). If oil prices keep sliding, they'll be broke very quickly.

[GMAN]

This country cannot continue to import so much of our oil. High fuel prices have been a major contributor to our current economic situation. If prices continue to slide oil producers will have to increase production to be able to get along and pay their bills. Less demand means fewer dollars for them. I expect them to attempt to raise oil prices. They may succeed. However, by raising prices they will also reduce demand. People are scared and hanging on to their money. OPEC members will have to sell more oil to avoid bankruptcy themselves. We get very little of our oil from the Middle East, but they can impact world prices by controlling output. The problem they have now is that the world is in a depression bordering on a depression. Frankly, I think we are in the early stages of a depression now, but no one wants to admit it with the election looming.

[LightsChromeHorsepower]

Recent changes in the price of oil (up and down) have little or nothing to do with production or supply and demand.

They are almost entirely the result of speculation in the marketplace.

Which, by the way, is a feature of an under-regulated market, not one suffering from too much regulation.

Where's Steve Booth?

[allan5oh]

GMAN increasing domestic production will not have a significant impact on oil prices. High oil prices are here to stay. Many argue that in fact todays oil prices aren't all that high, but 5-10 years ago it was way too cheap.

Increasing domestic production is more about keeping money within the American economy, which is a very good thing. I think if both the US increased production, and Canada increased our oil sands output(already planned, costing 10's of billions) the US could possibly get by with just Mexican, US, and Canadian oil. That would be the best possible scenario.

The money would stay within North America, and it would be very good.

[allan5oh]

Which, by the way, is a feature of an under-regulated market, not one suffering from too much regulation.

Even if the market is regulated(it shouldn't be, business to business transactions should NOT BE REGULATED) it wouldn't make a lick of difference because the oil trading would just move overseas. Or it would change to a derivative.

[allan5oh]

An excellent article just popped into my inbox. Subscription only, so I'll just paste the entire article here:

The Organization of the Petroleum Exporting Countries will meet Oct. 24, a month ahead of schedule, to discuss reducing output levels as oil prices continue to fall. Saudi Arabia, the cartel’s kingpin, will certainly see the utility of halting the oil price drop. However, Riyadh could have something to gain from prolonging low prices for just a little while.
Analysis

Organization of the Petroleum Exporting Countries (OPEC) members will meet a month ahead of schedule Oct. 24 in Vienna to discuss reducing output levels. With the price of crude oil hovering around $70 a barrel (a drop of more than 50 percent in less than three months) and oil traders preparing for a future of $50 per barrel oil, OPEC President Chakib Khelil has hinted already that the group, which controls 40 percent of the world’s oil supply, might cut output by 1 million to 2 million barrels per day (bpd) to halt the slide in price.

Oil is an inelastic commodity. Countries around the world are dependent on crude oil for their transport fuels (mostly gasoline and diesel). Without a cost-effective and viable alternative for transport fuels available on a wide scale, consumers by and large have had to bear the brunt of high oil prices.

With demand steadily rising from Asian giants China and India over the past five years, oil-producing countries have barely been able to keep up in supplying the markets. There was very limited spare capacity in the world market until the recent global drop in demand. Even Saudi Arabia’s approximate spare capacity of 1 million bpd is questionable, given that the Saudis have not brought this oil online in more than 20 years. Moreover, it has been four decades since high-quality, easy-to-extract light and sweet crude was widely available. Now, heavy sour oils are found in deeper, more remote spots of the world where transport is expensive and the technological cost of extraction is dependent on keeping the price of oil high.

When high demand and narrow production margins combine, the geopolitical premium becomes all the more important. Without much room for error in supplying the markets, things like Nigerian militants blowing up oil platforms, Israel threatening war against Iran and Russia invading the northern Caucasus can quite easily send prices through the roof, as the world has seen so far in 2008.

But inelasticity can work both ways. With the world’s three major economic centers — the United States, Europe and Asia — suffering recessions of varying intensities more or less at the same time, the global demand for oil is already beginning to drop rapidly. Extra oil in a market where global demand is on an inevitable decline will lead the price of oil to collapse.

OPEC members like Iran and Venezuela, whose politically precarious regimes have the most to lose from seeing oil prices collapse, have long been clamoring for a reduction in output to keep prices high. In fact, these countries have a reputation in OPEC for working around the cartel’s rules by maintaining their output levels when other members cut production, thereby allowing them to maximize profits from higher oil prices.

But Iran and Venezuela are not the ones making the big decisions in OPEC. Any drop in OPEC output will be determined by the group’s kingpin: Saudi Arabia. As the world’s largest oil producer, Saudi Arabia is the only OPEC member with any real leeway to make cuts in oil production that would have a meaningful impact on the price of crude.

While Saudi Arabia has enjoyed the benefits of making more than $1 billion a day from record-high oil prices, it knows the danger of exacerbating a global economic crisis that could bring back days of financial blight, like the 1980s, when the Saudis were plunged into debt. Riyadh also recognizes the political opportunities presented by a price collapse in the oil markets — namely, the ability to drive out competitors in the energy market. With cash reserves in the range of $1 trillion, the Saudis have a cushion they can use if they decide to politicize OPEC’s actions in their favor. They have done this before, when they collaborated with Washington to kick the legs out from under the Soviet Union in the 1980s, and when they delayed cutting oil output during the Asian economic crisis of the 1990s to gain an edge over their energy rivals.

As of yet, there is no indication from Riyadh that the Saudis are planning to resist a meaningful cut in output to sustain the price of oil and weaken their main competitors. But the following countries have the most at stake as Riyadh plots its next steps in the lead-up to the Oct. 24 OPEC meeting:

* Venezuela: Venezuela broke the back of the 1973 Arab oil embargo by filling the gaps with an increase in its own oil production — something that Saudi Arabia remembers well. But beyond retribution, the Saudis would not mind seeing Venezuela devolve further into political chaos by setting its oil production back a few more years. (Venezuela is already producing at well below its reported levels, as shake-ups in the energy industry have crippled output.) Venezuelan state-owned energy company Petroleos de Venezuela is already suffering from mismanagement and financial strain brought on by President Hugo Chavez’s need for lavish oil subsidies to keep his population and allies content. Since Venezuela’s low-quality crude is not easy to produce, it requires some of the most advanced technology in the world — something Venezuela is sorely lacking under the Chavez reg ime. Chavez’s hold on power is highly dependent on maintaining a healthy inflow of oil revenues. An oil price collapse could very easily knock the wind out of the regime and spark enough instability to keep Venezuelan oil production at a nonthreatening level for other OPEC members, while potentially taking care of an irritant in Saudi ally Washington’s back yard.

* Mexico: Mexico’s oil production is rapidly declining due to falling production in the country’s massive but aging Cantarell field. Political resistance has tied the government’s hands in legislating much-needed reforms for Mexico’s failing energy industry to encourage private investment that could resurrect declining output. With oil revenues making up approximately 49 percent of the country’s budget in the first eight months of 2008, the stability of Mexico’s energy market is a major factor in the government’s ability to hold the country together at a time when drug cartels are threatening the state’s core security. Mexico is already in a pressure cooker. With a further collapse in the price of oil, its energy industry will be more or less finished.

* Canada: The Canadians supply more than 21 percent of U.S. crude imports from fields in the northern and Rocky Mountain regions. But Canada has much more energy potential that it wants to exploit from the resource-rich Alberta province, where oil sands, a type of crude that is so viscous and mixed with solid material that it needs to be strip-mined and then processed into conventional crude oil, are concentrated. The costs and risks of developing oil sands are massive, and any major drop in the price of oil has the real potential to halt development of oil sands and shale technology in Canada. This dilemma is not unique to Canada; oil that requires offshore deepwater drilling in places like Brazil and Angola, or ice technology in places like Russia’s Sakhalin, demands mammoth funds from oil companies and government budgets that rely on high oil prices. In the case of a price collapse, much of this technological development could freeze.

* Iran: Though Iran is OPEC’s second-largest oil producer, it not faring nearly as well as its Saudi neighbor. The Iranian oil economy suffers from decades of mismanagement, neglect and lack of investment. To compound matters, Iran has to import massive amounts of gasoline to cope with its deficient refining capacity. Add to that soaring inflation, a decline in non-oil exports and a political leadership that is more concerned about handing out subsidies to buy support in upcoming elections than addressing the core deficiencies of the economy, and the Iranians have every reason to resist an oil price collapse. The Saudis, on the other hand, would very much like to see their historical rival economically hamstrung. From the Saudi view, applying more pressure on Tehran could make the Iranians more amenable to making key concessions in talks with the United States over Iraq.

* Russia: The Russians are in a much more comfortable position than the other major energy-producing states. Russian oil production levels are on the decline, but with approximately half of its energy revenue coming from natural gas exports (for which the Russians can almost exclusively dictate prices regardless of the surrounding economic environment), Russia has considerable immunity from a major price drop. But the Saudis are more concerned about Russia in the long run, and they could see the utility in keeping Russia boxed in to some extent by draining its oil income.

For OPEC to effectively halt the oil price drop, the cartel will have to agree to a cut in output of at least 2 million bpd. The Saudis have a number of political and economic opportunities at hand, however, that could lead them to draw out this price drop a bit further. In any case, some light will be shed on Riyadh’s thinking when OPEC convenes in Vienna.

[LightsChromeHorsepower]

Even if the market is regulated(it shouldn't be, business to business transactions should NOT BE REGULATED) it wouldn't make a lick of difference because the oil trading would just move overseas. Or it would change to a derivative.

Please explain; In what way is trading derivatives a "business to business" transaction.

It you want constant bubble & burst cycles, just leave the markets unregulated. Just don't complain about them either.

Where's Steve Booth? I really don't want to get sucked in to all the moronic debates on this board, I just need a shot of Steve.

[allan5oh]

Please explain; In what way is trading derivatives a "business to business" transaction.

I think you misunderstood what I meant. It would change to a derivative to avoid regulation.

It you want constant bubble & burst cycles, just leave the markets unregulated. Just don't complain about them either.

Regulation does not "fix" this. Sometimes it makes it worse.

[BigDiesel]

Where's Steve Booth?

I just need a shot of Steve.

I am sure you do........

[Orangetxguy]

GMAN increasing domestic production will not have a significant impact on oil prices. High oil prices are here to stay. Many argue that in fact todays oil prices aren't all that high, but 5-10 years ago it was way too cheap.

Increasing domestic production is more about keeping money within the American economy, which is a very good thing. I think if both the US increased production, and Canada increased our oil sands output(already planned, costing 10's of billions) the US could possibly get by with just Mexican, US, and Canadian oil. That would be the best possible scenario.

The money would stay within North America, and it would be very good.

This is a post I agree with you on Allan. North America's problem though, is BP, Shell, Total, and Citgo are all foreign companies, and all are major producers on the North American continent. Their profit goes overseas...which hurts all three countries.

[Orangetxguy]

I didn't want to hijack the can hauling thread so I will ask here and hopefully somebody will explain.

About OPEC cutting oil production this week or any time for that matter...

Do you honestly think that will stop Iran, Kuwait and Iraq from reducing production?

Is there any way for the Saudis to monitor anyones exports ?

I heard on TV that Hugo Chavez lost a 5 billion line of credit because of our economic downturn.
Not sure if that will really hurt him either. Hopefully somebody smarter than me will explain.

Mexico ( Valero) and Hugo Chavez (Citgo) probably won't comply either because they need the cash.

What about Russian oil? Is their thick hard to refine oil worth worrying about?

Keith....Valero is not a "True" Oil Company. It is a Refining and Marketing company, based in San Antonio. Valero does not produce any of its oil, it buys it all on the market.

The Mexican Oil company is PEMEX. Very big company with lot's of Gulf of Mexico production.

[GMAN]

GMAN increasing domestic production will not have a significant impact on oil prices. High oil prices are here to stay. Many argue that in fact todays oil prices aren't all that high, but 5-10 years ago it was way too cheap.

Increasing domestic production is more about keeping money within the American economy, which is a very good thing. I think if both the US increased production, and Canada increased our oil sands output(already planned, costing 10's of billions) the US could possibly get by with just Mexican, US, and Canadian oil. That would be the best possible scenario.

The money would stay within North America, and it would be very good.

I think increasing our drilling domestically could lower prices. The main reason is because OPEC would like to keep prices below what it would cost us to become more self sufficient. I recall a few years ago when oil was around $25/barrel. The U.S. was talking about pulling oil from shale and the cost threshhold along with the cost of efficiently producing alternatives using ethanol, etc., Prices dropped just below the cost of producing these other alternatives and extracting from shale. This worked for several years. They would go beyond the threshhold and when the talk started prices ebbed just below that figure.

I do agree that much of the reasoning for drilling domestically has a lot to do with keeping money within North America. It is in our interests to keep our money closer to home. Canada and Mexico are two of our largest trading partners. It would be much better to keep that money within this hemisphere.

I also agree with Stan about ownership of most of the major oil companies being foreign owned. Prices escalated dramatically once these oil companies were allowed to merge with foreign oil companies. They don't have any loyalty to U.S. interests. Something so vital to U.S. security should not be controlled by foreign entities. Congress has been asleep at the wheel. They should never have allowed these companies to merge.

[mike3fan]

We get very little of our oil from the Middle East, but they can impact world prices by controlling output.

Imports of crude oil for 2007 per thousand barrels.

OPEC nations: 1,966,559
Non OPEC: 1,694,845

seems like that is a little more than "very little".

http://tonto.eia.doe.gov/dnav/pet/pe...im0_mbbl_a.htm

[mike3fan]

these are pretty interesting

[mike3fan]

Congress has been asleep at the wheel. They should never have allowed these companies to merge.

Americans elected a oil man form an oil family that has close ties to some of the biggest players from the largest oil producing countries in the world are then upset because the oil companies get their way?

[LightsChromeHorsepower]

I think you misunderstood what I meant. It would change to a derivative to avoid regulation.

What would change to a derivative to avoid regulation? Do you understand what a derivative is? (Quick now, don't go Googleing it to get a superficial explanation) And, what's wrong with derivatives anyway?


Regulation does not "fix" this. Sometimes it makes it worse.

Show me any economic textbook that states that regulation increases volatility. You will find lots of studies purporting to show that increased regulation does not decrease volatility. I'll wager that virtually all of them were funded by organization seeking to profit from volatility.

I would love to see us totally deregulate all markets in the U.S. Wihin 3 years 2/3 of the people advocating such a course would be penniless and I would have moved to Canada.

I hear they have a ptretty sensible immigration policy up there.

[allan5oh]

This is a post I agree with you on Allan. North America's problem though, is BP, Shell, Total, and Citgo are all foreign companies, and all are major producers on the North American continent. Their profit goes overseas...which hurts all three countries.

They may be foreign companies, but there is a lot of Americans invested in these companies. You also have to consider these same companies re-invest their money in america, keeping the money here.

[allan5oh]

Show me any economic textbook that states that regulation increases volatility. You will find lots of studies purporting to show that increased regulation does not decrease volatility. I'll wager that virtually all of them were funded by organization seeking to profit from volatility.

It depends on the type of regulation. Many people right now are pointing at regulations put in during the Clinton administration that forced banks to lend to people with less then perfect credit. I forget the name of the regulation.