Oil and Gas Prices Are Manipulated Once Again … Stay Tuned
By Staff News & Analysis - December 24, 2014

OPEC will not cut output even at $20 a barrel … OPEC will not cut oil production even if the price drops to $20 a barrel and it is unfair to expect the cartel to reduce output if non-members do not, Saudi Arabia said. "Whether it goes down to $20 a barrel, $40, $50, $60, it is irrelevant," the kingdom's Oil Minister Ali al-Naimi said in an interview with the Middle East Economic Survey (MEES), an industry weekly. In unusually detailed comments, Naimi defended a decision by the Organization of the Petroleum Exporting Countries, whose lead producer is Saudi Arabia, last month to maintain a production ceiling of 30 million barrels per day. – Daily Mail

Dominant Social Theme: Nothing that is happening to oil is surprising.

Free-Market Analysis: For years we had arguments with "peak oilers" who maintained that the world was running out of oil.

Of course, they always objected to this simplified version of their arguments. Peak oilers liked to clothe their arguments in intricate statistics. The only people who use more obscure rhetoric than peak oilers are global warmists.

Thankfully, peak oiler rhetoric and warmist rhetoric don't seem to be quite so common or obnoxious as they used to be. This is rough justice. Nothing much that the warmists have predicted has come true, and peak oilers face a similar situation.

We remember, for instance, that snow was to have melted off the Alps by now. And Saudi Arabia was running out of oil …

Of course, oil is a most powerful energy source and subject to numerous political and economic influences – and also manipulated scarcities at regular intervals. We're fairly sure, in fact, that the price will go back up again, if only because some other modern sources of oil will shut down.

But not now. Not yet …

Here's how Wikipedia describes the peak oil theory:

Peak oil, an event based on M. King Hubbert's theory, is the point in time when the maximum rate of extraction of petroleum is reached, after which the rate of production is expected to enter terminal decline.

Peak oil theory is based on the observed rise, peak, (sometimes rapid) fall, and depletion of aggregate production rate in oil fields over time. Mostly due to the development of new production techniques and the exploitation of unconventional supplies, Hubbert's original predictions for world production proved premature.

Peak oil is often confused with oil depletion; peak oil is the point of maximum production, while depletion refers to a period of falling reserves and supply.

Notice how Wikipedia slips in the explanation of why Hubbert's theories proved "premature." The relevant phrase is, "Mostly due to the development of new production techniques and the exploitation of unconventional supplies …"

Ain't that the truth! … A free-market argument boiled down to the essentials. It is always the market with "new production techniques" and "unconventional supplies" that confounds predictions of scarcity.

In this case, Hubbert's predictions of gloom and doom were no doubt exacerbated by his own determination to see his 1930s technocratic movement flourish. Hubbert believed that only qualified people could run the world – technocrats with superior knowledge about a given field.

Peak oil was Hubbert's contribution. Since Hubbert and a handful of other Platonists were smarter than the rest of us, they could see farther as well. Hubbert provided some of the most far-seeing predictions of all, or so he advertised, with his peak oil perceptions.

But now – at least for the moment – everything has changed. Oil has asserted its fundamental nature as one of capitalism's most disingenuous commodities.

Here's more:

OPEC said it would not cut oil production even if the price drops to $20 a barrel, a decision that has sent global crude prices tumbling

The decision sent global crude prices tumbling, worsening a price drop that has seen them fall by around 50 percent since June. Slower demand growth and a stronger dollar have also contributed to the slump. Saudi Arabia has traditionally acted to balance demand and supply in the global oil market because it is the only country with substantial spare production capacity, according to the International Monetary Fund.

The kingdom pumps about 9.6 million barrels per day but Naimi said it is "crooked logic" to expect his country to cut and then lose business to other major producers outside OPEC. The increasingly competitive global oil market has seen daily United States output rise by more than 40 percent since 2006, but at a production cost which can be three or four times that of extracting Middle Eastern oil.

"Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce?" Naimi asked during the interview conducted with MEES on Sunday. "If I reduce, what happens to my market share? The price will go up and the Russians, the Brazilians, US shale oil producers will take my share."

This last graf sums up the kind of market arguments we have made in the past. The invisible hand of competition is one of the organizers of the oil market, as it is of any market. To believe that the Saudis were just going to sit idly by while their market share of the world's oil eroded was probably a naïve assumption.

But there is another issue admittedly that free markets have to struggle with – and that's the apparently massive scale of market manipulation when it comes to commodities and other important 21st century goods and services.

For instance, the US apparently wants to take down the Russian economy and has put pressure on the Saudis to lower oil prices, which hurt a foundational element of the Russian economy.

The Saudis themselves are probably content to lower prices because it damages the market for oil fracking, which has shown – as we predicted in the past – that oil is available pretty much anywhere.

The Saud family and US strategists have similar interests regarding oil currently. In the longer term, however, interests will decouple once again. This could produce far higher oil prices, as Naimi seems to suggest in the article.

When it comes to the oil business, nothing much is what it seems – and there are almost always other potential considerations. In the long term, we figure oil and gas prices will move back up, if only because the West needs such supplies. Europe especially is dependent on Russian oil.

After Thoughts

Oil, in other words, will continue to be a key ingredient of modern society … at an array of prices. But there will continue to be plenty of intrigue regarding its availability and supply.

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