Worst roller coaster ever

If you’re the kind of person who pays attention to oil prices, then first of all I share your pain and alienation, but second of all, you may have noticed that it’s been doing a lot of rising and falling lately around a midpoint of about $48-$49/barrel. We seem to be in the middle of another fall, as oil is back down around $50/barrel after almost hitting $52/barrel just a couple of days ago.

The reason for the recent climb in price is that OPEC and Russia reached a deal on November 30 to cut production for the next six months in order to increase prices. This was something of a minor miracle, first because OPEC managed to get non-member Russia to commit to a 300,000 barrels per day reduction on top of OPEC’s planned 1.2 million bpd cut, and second because OPEC itself managed to coalesce around a deal to cut production. Past attempts at cutting back were quashed by the same Saudi-Iran rivalry that dominates everything else about Middle Eastern politics lately, with the Saudis unwilling to cut production and risk losing market share to Iran and Iran unwilling to cut production at a time when nuclear deal-related sanctions relief finally allowed it to increase production for the first time in years. But I guess the decline in price has gotten critical enough to bridge even the unbridgeable Persian Gulf divide.

So with those cuts at least promised, if not yet implemented, why are prices back on the decline again? Well, there’s something about US crude inventories being down that I guess suggests that American demand is down, but the real issue is that, given a couple of days to think it over, the market doesn’t actually think the cuts are going to mean that much. Oil production globally is very high, with Russia and OPEC both reporting record output last month. Cutting back from that high a level of output probably doesn’t mean as much for prices as it would if OPEC and Russia were already producing at something more like historic norms. OPEC is also already hedging its 1.2 million bpd claims, saying that it will accept “natural declines” in production from some countries rather than insisting that they all actively reduce production. This seems a little waffle-y to me.

Finally, even with Russia’s 300,000 bpd cuts, OPEC members say they’re hoping to generate an additional 300,000 bpd worth of cuts from other non-member states. And that might be challenging, because as cuts go into effect and prices, at least according to my freshman economics class, start to rise, shale oil extraction in the United States becomes more viable than it currently is. If prices go up, more shale oil theoretically gets extracted here, which adds to the market supply and brings prices back down again. Some shale operations will cease being viable at the lower prices, so they’ll stop, which means US production will decline, prices will go back up, and the shale operations become viable again. Lather, rinse, repeat. And adding to this up and down cycle is the fact that OPEC nations may decide to ramp up production again precisely to drive US shale operations back out of business. This is apparently why the OPEC-Russia cuts are limited, for now, to the next six months, in order to discourage American producers from coming back online only to have oil prices drop again six months from now.

The solution to the market’s volatility would be for US shale producers to just bite the bullet and stay offline even when prices rise. But these are Virtuous Capitalists we’re talking about, who don’t give a shit about starving people in Venezuela or instability in the Middle East when there’s profit to be made, so good luck with that. And it goes without saying that we’d all be better off if everybody just gave up burning oil altogether, but if you think the Trump administration is going to push anti-fossil fuel policies for the next four years, then I’d like to talk to you about some exciting new real estate opportunities that I think would just be perfect for you.

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