Quantitative Easing Saudi Style
 

As we all know the decline in the price of oil to roughly $60 a barrel is due to the Saudi decision to keep on pumpin the Bubblin Crude in spite of a decline in world demand for Texas Tea. So as previously stated there are a number of agendas at play in the Saudi decision, including thwarting Iranian, Russian and Fracking Producers ambitions. However the most important is that the Saudi decision is in effect a virtual Quantitative Easing. In that with a decline in energy prices it puts more MONEY back in the pockets of the consumers, which possibly will stimulate the economies of the world.

So the question becomes why is it that the Saudi's would institute a Quantitative Easing program of their own? The answer is that they are afraid that the Global economy would slip in recession in 2015. So what does this Saudi determination mean in relationship to the Federal Reserves and other Central Banks massive provision of liquidity though their QE programs? Here the answer is that all the Central Bankers of the world and all their horses could not put the World Economy back together again. In other words Monetary Policy has failed to restart the world economy.

Here one wonders if the Saudi's consulted with the Worlds Central Bankers before embarking upon their own QE program? If this were the case then it would indicate that the worlds Central Bankers have shot their wad with their QE programs and are in the position of no longer being able to print anymore money for fear of currency implosions and the resulting dislocations.

I think lower fuel prices will eventually trickle down to consumers by way of cheaper shipping cost for food, goods and services. If the prices are still low next Spring, I believe the travel, vacation, and entertainment business will benefit, which will get the dollars flowing, and might create more jobs.
I don't know the real reason for the Saudi QE, unless it would be to run some alternative energy sources out of business, or like you said, to curb the fracking competition. Right now, i'm just enjoying a few extra bucks in my pocket every week, and hope to God that the stock market still acheives new highs for the next few years (401K bonanza).

Interesting perspective Tabs, and make no mistake...lower oil/gas prices trump any QE, tax break, stimulus, etc. by a LONG shot. The cause imo...simple supply/demand and many of the low margin oil speculators have fled the sinking ship. Oil's now much closer to "normal" price levels, and now that they've gotten us used to being bent over the proverbial $100 oil barrel it sure feels good for a change. Whatever the cause....I LIKE it :)

It's simple really. Old School economics... If you can, Destroy your competition.

The Saudis like that the West depends on them for oil.
It's been like that for generations and what they don't want most of all is for their grandchildren to be driving camels again.

But we don't (anymore) and haven't "really" for quite some time...doesn't mean the Saudi's don't impact our prices though imo.

Quantitative easing and the drop in Saudi oil price are two very different things. The former is inflationary (in a normal economy) the other is deflationary (in a normal economy). QE is blatant money-printing which inadvertently and ultimately puts money into the hands of the investment class as is demonstrated by the stock market. Normally, Saudi oil glutting doesn't create more currency but leaves whatever scraps wage-earners have earned to spend elsewhere. However, in this distortd economy, wage-earners are not going to spend that money on consumer goods so much as they are going to try to save it (or pay Obamacare premiums in 2015).

This could lead to signfiicant deflationary pressure triggering even less domestic manufacturing, further reductions in the participation rate and possibly (if this continues through the winter) severe reductions in agriculture output with food shortages.

We shall certainly see.

This. While they are getting less per barrel, they are producing a lot more oil. Most of the competition can't ramp up and down output. They want to kill shale oil. And killing off Russia and other countries that rely on oil for basic functions.

Everyone's favorite socialist country, Norway, will be having a serious decline in revenues...The tiny country is the 8th largest producer of oil.

The problem as I see it with the lower cost of oil is that greed on the part of American business will rear it's ugly head and prices will remain fixed, allowing the corporations to pocket more money, at least in the short term. Case and point, oil prices are falling at a rapid price and that is reflected "at the pump" but the cost of heat fuel remains high as does diesel, essentially the same thing.
Those of us on the bottom rung of the finical ladder will be the last to see any kind of overall benefit.

Rick, usually, there isn't the same demand for Home Heating Fuel as there is this year. But I guarantee that if a refinery can make more money by making diesel, they will try to make as much as they can.

FYI - Diesel is probably higher than it would have been because of the sulfur rules.

If one truly looked at this is geopolitical terms, the Saudi move is good for the west and the non-producing far east & bad for Russia. Other producing nations will suffer as well - the rest of the ME, Canada, Venezuela, Iran & frackers everywhere. Russia - already in a financial bind due to sanctions - will really be in for a hurtin'. The oligarchs just might finally feel the urge to turf Putin over the next year or two.

Ian

Just read where some expect oil to remain at $60/bbl for the next five years...
Imo, what we should be asking ourselves is why it was priced so artificially high for so many years.
My take: Speculators (artificially driving the price up) and corporate profits.
Enjoy the ride over the next few years....

One big difference between lower oil prices and every other "stimulus" program that the government has spent billions on - the lower oil prices will actually put money into the pockets of American consumers. Despite the ridiculous amount of money that the government has infused into the "economy" (i.e. corporate friends), I cannot name a single expense of mine that has dropped. I've always had the belief that putting money into consumers' pockets is the single best way to stimulate the economy. Had they simply cut taxes as opposed to giving billions to their friends, I suspect we would be in a much better place today.

My comment was just one example, lets say for the sake of argument that manufacturing and shipping cost lower because of the lower price of oil, then the over all price of a widget will be lower. If said widget costs $10 to produce, market and distribute before the cost was lowered and the manufacturer mad a net profit of two dollars and after the new, lower price has an final cost of $8 then they stand to double the profit by keeping the price fixed.
The cost of our widgets won't drop in price since the market has already adjusted to a price of $10, increasing their profit and keeping the cost to the consumer the same.
Sure we are saving a few dollars a week on our fill ups, and I do enjoy that, but I really don't see much in a way of overall effect to pricing of goods or services.
Yes I am thinking an a very narrow state of mind but I almost have to, I am not in a position to be free with my limited funds, and have to look at how this directly effects me, and to be honest it really doesn't. I am only saving about five dollars a week and my wife about the same, that doesn't even cover a cheap dinner out for her and I.

It's a conspiracy to put Tesla out of business

Saudi is a influence and not the reason oil prices are down. Oil is a world traded and used commodity and is influenced by many factors and not just one. like fracking in the US which has produced a cheap fuel alternative to oil for electric power here cutting demand in oil. The economic slump in Europe has caused a huge loss of oil demand there. I am sure a lot of oil future traders in the past made some bad decisions to lower the price now. Banks are involved, China's involved and has surpassed the US as the largest importer of oil and has an influence that certainly should not be ignored.
Saudi is almost regulated to a bit player in oil prices. Definitely not in control and is easily eclipsed by these other factors.

Well into tinfoil hat area with this note....and the chances of $60/bbl oil for 5 years is the square root of dick-all.

Considering cost of production outside of ME, natural price is likely in the $85-$90 range. In the event that oil prices were to stay at $60 as you suggest, we are just setting up another bust/boom cycle as investment will drop off radically at $60 for any length of time.

Also will cause repercussions due to impact on some pretty unstable and unsavory regimes. Cornered rats do the darndest things...

Dennis

The Saudis are selling cheap oil to make fracking* unprofitable.
After companies give up on fracking8, oil prices will go back up.

*and other alternatives

Not unless they have a Benz 3 point on their azzes...Saudi have lots of Western corporations in their portfolio..

Corporations passing on savings to consumers?
Not in Canada, no way; bring on the windfall profits.

Need an example? Premium fuel - still 5 bucks a U.S. gallon, here.

Yep Puty ain't goin no where...the Russians are used to adversity..the old saying is that the Russians don't get going until the going gets tough.

And why...just why would I sell a product at $4 per unit when the market will bear $5?

There is zero question that every refiner/distributor will exploit the overhang as long as they can as they know that their upstreams are going to get whacked right on the gentlemen's bits and making hay while the sun shines sounds like just plain good business.

It will take someone to blink in the Mexican standoff that is downstream retailing before we see prices slide and with Imperial being the dominant player and price setter, that is not likely going to be proportionate to the reduction in crude prices.

Also keep in mind that there is a lot of product in the system, there is lag before the "cheap stuff" shows up, and that is only for those players who are actually buying spot as opposed to long term contracts or their own internal production.

Dennis

Really? The Saudis are going to take a financial hit and undersell oil to the whole world to try and making fracking in the US unprofitable? Really?? There is no way the Saudis have the money, leverage to do that if they wanted to.

Yeah, ol' Schicklegruber got them ticked off some time ago, their willingness to suffer privation and throw bodies at the Germans was absolutely ISIS-like albeit with different ideology.

My chats with Russians earlier this year convinced me that they are not only in it for the long haul, but they are in it to restore the Rodina to greatness, even if and perhaps especially if it means humbling the West.

I think that Obama and the Saudi's are playing with thermonuclear fire, this will knock the knees off of US energy independence (or at least independence from ME and other nasty countries), it feels like we are having the junior team take on the pro's and I don't like our chances right now.

I have, of late, thanked God for the US military capabilities even though my dependence on them causes me a great deal of personal angst, without them, Puty would be doing the nasty to the Baltics, Ukraine and likely dicking around in the ME. He won't do that right now as, while he treats your POTUS justifiably with disdain, he respects your military capability a great deal.

Hang in there Tabs, I hear more on this forum singing in the choir....perhaps indicative of a broader understanding of what is really happening out there.

Dennis

We know who the Saudis are in bed with, and it is no coincidence that the Russians were just shut out on a major pipeline to Western Europe. Killing a lot of bird here with this stone.

Yeah... actually they do, and can. It costs the Saudi's around $10 to pump a barrel of oil. Their capacity is about 12.5million bpd. Total world demand for oil is around 89mbpd, of which OPEC oil makes up around 30%.

If the member states of OPEC desire to do this, why do you think they could not?

Nov 27 2014 - During meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC members that OPEC had to combat the US fracking boom.

If OPEC cut output to raise the price of oil, it would lose market share, he argued.

The way to win would be to allow overproduction to depress prices to the point where they would destroy the profitability of North American producers. And the the US would have to cut production, rather than OPEC.

With Saudi Arabia’s overwhelming power within OPEC, Naimi's argument won against objections from desperate members, such as Venezuela, Iran, and Algeria, which wanted a production cut to push prices back up.

“Naimi spoke about market share rivalry with the United States, and those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” a source told Reuters to make sure the message got out.

Asked if this was a response to rising US production, OPEC Secretary General Abdullah al-Badri essentially confirmed OPEC had entered the oil war against the American shale revolution.

Reports I have read say that oil will need to drop to around $40 or $50 / bbl to achieve these results. I'm not sure if OPEC members are willing to go that low. Venezuela is already having economic problems that will only get worse as oil prices fall.

I agree. If there is any target here, it is Putin's Russia. In the budget he just released, he priced oil at $100, so he is gradually getting cornered.

"A joke currently doing the rounds is revealing about the Russian economy's financial difficulties.

Mr Putin, the rouble and oil are all heading for 63. The president will turn 63 next October, oil is already trading at close to $63 per barrel, and the rouble - currently at 53 to the dollar - is very likely to slide to 63 next year.

The triple-63 reality is grim. The rouble has lost 40% of its value so far this year, inflation is at 9%, stock prices are back to mid-2009 levels, and net capital outflow is likely to reach a record 6% of GDP this year." Source: BBC

Ian

While I do enjoy the extra in my wallet at this time, it frightens me knowing that the time could be ripe for governments to hike the gas tax to cover infrastructure maintenance and other projects.

Saw as low as $2.19.9 today.

Wow lot of wrong in this thread....

It will be hard to spend the money when your company goes under and you loose your job. Short term gain, long term loss.
And yes the Saudis ARE in complete control of the decline of the price right now :rolleyes:

The Russians for the Saudi's have to be an after thought. Iran, Fracking and world economy are more their concern and not in that order.

The Russians in the Great Patriotic War liked to use Convict Battalions as minefield cleaners.. Ahhh hey Comrades run across that field and those of you that survive that, there is a German bullet waiting for you on the other side.

Or a fav of theirs was to line up a division of 20,000 men give them a rifle and 5 rounds, then say charge. when they were killed the next line of 20,000 would pick up the rifles and use the 5 rounds that they were given, and so on until there were no more Germans. And that was how Russia won WW2. A million here a million there, whats the dif??

So when Kerry or Obama talk about sanctions working on the Russians you think what a joke these guys are. You see Kerry and Bama think the Russians are like us and that they care.

My first thought exactly - I guarantee our "leaders" in Washingtoon and in state capitals around the country are thinking "hey, the people have a little bit of extra discretionary income now - time to seize it, ramp up spending and buy more votes!"

Yes, it really does work that way, sadly.

Western Canada Heavy Crude is already at $43 a barrel (Tar sands Oil) Yet it has been given that production costs are $51 a barrel. Imperial Oil has increased output and is stuffing it thru the existing pipeline to Oklahoma. What it all means I have no idea.

Means they are vertically integrated and their net profitability from extraction to pump is at least cash positive.

Profitability is so difficult to measure once you get the cost of the asset, taxation and so forth included.

Whilst oil sands bitumen is in the $50's for cost, their cash profitability is below that....not sure where exactly.

Plus, if they stopped pumping and their was no gas at Imperial stations, what do you think that the population would do? Not to speak of their fixed costs being enormous....

Dennis

I asked an energy investor guy and this is his outlook. He may be right or wrong, who knows, but the thought process is the thing to pay attention to.

Maybe oil goes to $40 or $30.
Most shale producers hedged oil at $90 so they are fine well into next year.
They have a backlog of wells drilled but not finished.
They produce from existing wells and finish the backlog, don't drill new ones.
Existing shale wells see production drop 60-70 pct per year.
Around mid 2015, US production starts to fall.
With no or few new shale wells drilled in the preceding year, production decline will continue for rest of 2015
Oil financial markets anticipate this and start driving up oil futures and price before mid 2015
If Saudi pulls back production around that time oil price really rips higher
Maybe see oil rip from $40 to $90 in a few months
Oil users will start hedging $30-40-50 oil. Who hedges now will have a big advantage in 2016. Think what LUV did with hedging before.
Exploration companies probably see huge falls in business between now and 2016
Putin probably thinks this is all a conspiracy between Saudi and US.
Russia will try to start middle east unrest to drive oil price up.
Hand missiles out like candy, bonus for firing some, extra bonus for firing them into Saudi facilities, Suez, anywhere that threatens global oil flow
Saudis should be buying Patriot systems as fast as they can
US should be deploying littoral navy to ME
Oil and energy stocks are in the hands of traders working on technicals not fundamentals.
Trading driven by breaking levels not by any fundamental valuation
He's virtually zero the energy sector and ready to buy buy buy on oil breaking up through certain levels.

Again, this might be right or bullcrap. This is not investment advice!

But thought would be interesting for you all to see the "thought" process of "investors".

We're already starting to feel it in real estate prices.

Suck it all dry and turn them back to Bedouin camel farmers.

Agree. As to short term gains? Unfortunately that seems to be the American way now, the only concern is pleasing Wall Street with the next quarterly report.

Nope The Puty Kat don't see it that way...