Oct 132014
 October 13, 2014  Posted by at 9:18 pm Finance Tagged with: , , , ,

Edwin Rosskam Service station on Connecticut Ave., Washington DC Sep 1940

It’s easily been longer than I care to remember that I first wrote it was only a matter of time before individual OPEC members would throw out the cartel’s agreements on prices and production, and just produce at full force and capacity, and then some. We may have seen that time arrive.

The underlying reason I first talked about it was two-fold. First: the economic crisis, which could lead to one thing only: less global demand. And second: the fast increasing wealth and population numbers in oil-producing nations which, as initially defined by Jeffrey Brown and Sam Foucher in the Export Land Model, has proven to be a much bigger factor in OPEC economies than people realized.

Hardly anyone, still to this day, talks about the Export Land Model, but birth rates in Arab oil producing nations have been sky-high for many years, and the fact that in a country like Saudi Arabia some 50% of the population is younger than 20 years old, has enormous consequences domestically. Certainly with the King and the rest of the reigning class seriously getting on in age.

A generational clash can be avoided only by pampering the young, and that comes with a big surge in domestic demand for oil. And since for many young people there are no jobs, Saudi Arabia has no industries to speak of, there are many who follow the example of Saudi’s like Osama Bin Laden into extremism.

Wait, first let me point to a nice piece of Fed ‘communication’. There’s been an entire parade of Fed heads paraded in the media lately, and one of the major issued addressed is that the global slowdown, which finally looks to have sunk in all over the place, would cause Yellen et al to be careful with, and postpone if needed, its interest rate hikes. Analysts and ‘experts’ also look to be wholly convinced of this. But then comes vice head Stanley Fisher and says a rate hike wouldn’t hurt anyone anyway:

Fed’s Fischer Says Rate Hike Won’t Damage Global Economy

The Federal Reserve’s eventual rate increase, the first since 2006, will not damage the global economy, Federal Reserve Vice Chairman Stanley Fischer said on Saturday. While there could be “trigger further bouts of volatility” in international markets when the Fed first hikes, “the normalization of our policy should prove manageable for the emerging market economies,” Fischer said in a speech at the IMF’s annual meeting.

[..] Since last year, Fischer said, the Fed has “done everything we can, within limits of forecast uncertainty, to prepare market participants for what lies ahead.” The Fed has been as clear as it can be about the future course of its policy course, and markets understand, Fischer said. “We think, looking at market interest rates, that their understanding of what we intend to do is roughly correct … ”

Any emerging market governments paying attention should feel a shiver of cold air when reading that. Fisher provides the Fed with an alibi here: if, make that when, rate hikes start makes victims, Fisher and Yellen can say they had no idea, that their models clearly stated that would not happen. Don’t count on them waiting.

Then back to OPEC. Like the EU, 54-year old OPEC has lived past its best before date. Predictably, individual members’ interests have started to diverge too much for it to remain a coherent entity. And the divergence widens fast these days.

I’ve hinted before at the long-standing cooperation between the US and Saudi Arabia, and there’s little doubt in my mind that the two are up to something. Washington has it in for Putin, first and foremost. The ‘Ukraine project’ has not brought what was intended.

Russia also still stands behind its only Middle East sphere of influence, Syria, something the Saudis like as little as America (but which Moscow won’t give up and and end up with zero say in the region) . And there’s always Venezuela, OPEC member and very vulnerable to power oil prices. Then there are a dozen other possible ‘targets’ among oil producers that the Saudi/US partnership may want to weaken. Who likes Iran, for one thing?

We’ve known for a while that the Saudis were lowering their prices. Which is something other OPEC members will be plenty upset about. But now we find out they’re also increasing production, and trying to catch EUropean and Asian customers before other fellow members can. That adds a whole extra dimension to the story:

Saudis Make Aggressive Oil Push in Europe

Days after slashing prices in Asia, Saudi Arabia is now making an aggressive push in the European oil market, traders say. The kingdom is taking the unusual step of asking buyers to commit to maximum shipments if they want to get its crude. “The Saudi push is not just in Asia. It’s a global phenomenon,” one oil trader said. “They are using very aggressive tactics” in Europe too, the trader added.

This month, state-owned Saudi Aramco stunned the rest of OPEC by slashing its November prices to defend its market share in Asia’s growing market. The move, setting a price war in the oil-production group, was combined with a boost in the kingdom’s output in September.

But Riyadh is also moving to protect its sales to Europe, a declining market where it is facing rivalry from returning Libyan production. After cutting its November prices there, Saudi Aramco is also asking refiners to commit to full, fixed deliveries in talks to renew contracts for next year, the traders say. [..] “They are threatening buyers” to discontinue sales if they don’t agree with the fixed deliveries, another trader said.

What follows from that is that Saudi Arabia more or less unilaterally decides where oil prices are going. Iran and Iraq have already announced price cuts, and the rest has no choice but to follow, no matter how badly they need higher prices. It’s a kind of musical chairs, and quite a few nations will fall be the wayside. Though not necessarily Russia.

Algeria and Kuwait, for whatever reasons, seem to be lined up with the Saud family against the rest of OPEC:

Oil Bear Market Tests OPEC Unity as Venezuela Seeks Meeting

Oil ministers from Kuwait and Algeria dismissed possible production cuts as crude’s slump to a four-year low prompted Venezuela to call for an emergency meeting of OPEC. [..] Bear markets for Brent and U.S. crude are putting pressure on OPEC’s consensus on output ahead of the group’s scheduled Nov. 27 meeting in Vienna …

OPEC supplies 40% of the world’s oil, and its largest Persian Gulf producers, including Saudi Arabia, Iraq and Iran, are offering deeper discounts to buyers in Asia to maintain market share amid a global glut. “If we had a way to preserve the stability of prices or something that would bring it back to previous levels, we would not hesitate in that,” Kuwait’sAl-Omair said in remarks reported by KUNA yesterday. “There is no room for countries to reduce their production,” he said, without giving details.

Ample supply, helped by surging U.S. and Russian output, pushed Brent crude into a bear market last week. The European benchmark slumped more than 20% from its peak for the year on June 19, meeting a common definition of a bear market. Brent fell on Oct. 10 to its lowest since December 2010.

“This is going to increase pressure for Saudi Arabia to cut output to raise prices …” “They are increasingly giving signs they won’t do it on their own. Saudi Arabia doesn’t want to lose market share in Asia … ”.

OPEC is boosting production as its members fight for market share and seek to meet rising domestic demand. [..] Saudi Arabia, Iran and most recently Iraq all widened the discounts they’ll offer on their main grades sold to Asia next month to the most since at least 2009.

Venezuelan President Nicolas Maduro gave instructions to ask for an extraordinary OPEC meeting, the country’s foreign ministry said in a post on its Twitter account on Oct. 10. “The price of oil is important for our country, and we’ll start actions to stop its fall,” the ministry cited former oil minister Rafael Ramirez as saying.

Crude prices have fallen because of several factors, including U.S. shale production, geopolitics and speculation, Algeria’s Yousfi said yesterday at a news conference in the city of Oran. “We follow with great attention the level of oil prices, but we are very tranquil,” he said. Crude probably won’t fall below $76 to $77 a barrel because that price level represents the highest cost of production in the U.S. and Russia, Al-Omair of Kuwait said. Both countries have abundant supply and are outside the group..

‘There is no room for countries to reduce their production’, says Kuwait. In other words, it’s everybody for themselves. Because supply and demand numbers seem to indicate there’s lots of room to cut production. So that can’t be it. Still, production rises in Saudi Arabia, US, Russia and undoubtedly many other producing nations. What else can they do when prices fall, but try and sell higher volumes to the highest bidder, as demand wanes in a shrinking global economy that’s done blowing bubbles? There’s nothing left but to pump all out and hope for the best.

OPEC Members’ Rift Deepens Amid Falling Oil Prices

A rift between OPEC members deepened over the weekend, as producers in the cartel moved in different directions amid falling oil prices. Venezuela, which has been one of the most outspoken proponents of a production cut by the Organization of the Petroleum Exporting Countries, called over the weekend for an emergency meeting of the group to respond to falling prices. But Kuwait said Sunday that OPEC was unlikely to act to rein in output.

Also on Sunday, Iraq’s State Oil Marketing Company cut the price of Basrah Light crude in November for Asian and European buyers by 65 cents to a discount of $3.15 a barrel below the Oman/Dubai benchmark for Asian customers and $5.40 below the Brent benchmark for European customers…

The moves and countermoves are the latest in a time of particular discord in OPEC. The organization was founded to leverage members collective output to help influence global prices. In recent periods of low prices, Saudi Arabia, OPEC’s top producer and de facto leader has managed to cobble together some level of consensus.

But even modest cooperation between many members has broken down, and Saudi Arabia, in particular, has moved to act on its own. While it cut output earlier this summer, other members didn’t go along. Since then, it has dropped its prices.

Each member has a different tolerance for lower prices. Kuwait, the United Arab Emirates and Saudi Arabia generally don’t need prices quite as high as Iran and Venezuela to keep their budgets in the black.

The 3 easy steps to blow up OPEC are easy indeed. The question may be why now, and why the way it happens. But that it’s happening is clear.

  • Step 1: raise output
  • Step 2: lower prices
  • Step 3: watch member nations’ governments go down like cats in a sack, trying to keep control of their societies.
  • Step 3a: yank up the US dollar

This is not a purely economic issue, it’s political. The US has a large voice in it in the director’s role, and the House of Saud plays the part of the protagonist. This is a major development in world politics, it’s not just some financial market-driven move.

World power relations are being hugely changed on the fly as we’re all watching and trying to figure what to make of all this. One thing’s for sure: the world will never be the same.

Why it happens now is a great question, which is impossible to answer. And that’s fine: it’s enough to try and understand exactly what is going on, let alone why.

But I bet you it has to do with the US and Europe realizing they can no longer keep pretending their economies are growing or recovering or doing fine.

We’ve landed in the next phase of what arguably started in 2007, but what you could place back many years before that, an economic system based on the fantasy that is debt driven growth, inflated by a factor of a trillion, give or take a few zeros.

That system is in the process of dying. And the people who have tried to make you believe, and succeeded, that it would all be fine in the end, are now jockeying for position in the aftermath of the demise of a world built on debt.

And they are the same people who built that world, profited from it to an insane degree, and want to use those profits to hang on to power in a world that will be dramatically different from the one they called the shots in. And that doesn’t bode well; it tells us violent clashes will be on the horizon.

Home Forums How To Blow Up OPEC In 3 Easy Steps

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    Edwin Rosskam Service station on Connecticut Ave., Washington DC Sep 1940 It’s easily been longer than I care to remember that I first wrote it was on
    [See the full post at: How To Blow Up OPEC In 3 Easy Steps]


    The Saudi king is all but dead and who is making the decisions is obscure. It’s hard to say if the rather tattered Saudi US partnership is all that strong in any case. Even if it is they don’t really know what they are doing. For every possible plus the oil price drop carries are an equal amount of negatives. As in plus for consumers vs disaster in the fracking and dilbit land. Then there is deflation of assets values which puts pressure on the vulnerable financial markets.

    Not that our great strategic thinkers think in the very largest terms but burning as much oil as possible now only makes the future worse, and that worse future closer. That’s a pretty high price to pay for kicking Vlad the Impailer, as I think he is referred to now. It is hard to conceive that our great thinkers are on board with it all. Whatever any of them think they are doing you can figure it’s the wrong thing.

    I keep coming back to the decrepit monarchy. Osama didn’t have the balls, the means, or his heart in bringing it down. The new generation does. At least the first two anyway.


    Could be the Fed’s rate hike jawboning has been intended to cause a “Lock rates in now, while they are still cheap” spending spurt. What with housing flattening and spending going south again.

    Why they would blow up the remnants of what artificial Econ activity remains at this point, along with their own “Balance sheet” is hard to figure.

    Of course, in the end, a fully nationalized economic system is doomed anyway. And we still haven’t gone through the Neo New Deal and cash for cars, houses, old shoes and broken down TV’s yet. Shovel ready on steroids is still in the wings.

    But, who knows, maybe they read this and got religion ‘er sumpin’ ?


    Oh, not to mention War in a couple dozen more places like Nigeria, Iran and Ferguson.


    It is a mistake to say Saudi Arabia is just the “Royal” family. The Saud clan do all the dirty work of international relations with the Infidel, OPEC, finance, armaments, etc. But the Wahhab clan run all the religious side – they are the Keepers of the Holy Shrines (Mecca and Medina), run the Hajj, issue fatwas, and run the madrassas from which emerge the Sharia judges and lawyers and jihadists.

    It is the Wahhabs that created ISIS, and the Sauds are scared of them, because ISIS (aka the Caliphate) can never rest until they control all the Holy Shrines. The Saud-Wahhab alliance is MUCH stronger than the Saud-US alliance, and the Sauds are rapidly losing room to manoeuvre.

    I’m sure the Sauds understand that price cuts will hurt all producers, but their real target is likely to be whoever is increasing their expensive output – the US. Why should Saudi Arabia continue to act as the swing producer, when the US continues to overproduce?

    John Day

    Here is the best fit I’ve seen for the high transmission rate of Ebola virus in medical settings where there is good contact isolation, but not respiratory isolation.
    It does not rely on blaming the nurse.
    In the last 3 days of life the exponential growth of Ebola virus in people oozing blood from every opening has created trillions of little virions, which are small enough to be easily airborne under the right conditions.

    John Day

    A wildcard in all this oil glut talk is war. Wars run on oil, and they can consume excess capacity in short order. Matter of fact, they consume ALL excess manufacturing and industrial capacity, as well as solidify allegiance to political power in the process. This is why war is vital to the continuance of the State power structure.

    Book it!

    As for OPEC, it will go the way of all cartels eventually. Certainly, in time of war, it will yield to western “national interests.”


    Rapier hits the nail right on the head in mentioning how the nosediving price of oil could negatively affect the fracking bubble. Here’s the thing about the fracking bubble, though: The real money isn’t being made in the production of oil but rather the finance-ponzi erected on the structure of trading land-leases for fracking. This means that bubble is a lot more vulnerable to being popped than most people realize, and the popping will be a lot uglier than nastier than almost anyone realizes. It could take down the whole US economy with it. You would think the geniuses at the NSA, the CIA, and the Department of State would realize this, but we’ve become such a nation of suckers and yahoos that they probably believe all that horseradish about fracking being an energy independence miracle. If only they had any idea just how quickly oil-shale formations stop being highly productive, not to mention how lousy shale oil’s EROEI is compared to conventional oil!

    And I suspect the reason for the impending rate hike is the same as their reason for ending QEverlasting: Such financial gimmickry can’t be continued forever without serious consequences of one kind or another asserting themselves, and they’ve probably read their tea-leaves and see such consequences on the horizon.

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