EconAir

  To an economist, the word “cost” implicitly has the word “opportunity” in front of it.  Not knowing the difference between accounting cost and opportunity cost can lead to some serious pricing mistakes and misallocation of resources. Saudi Arabia is one of the world’s three large crude oil producers, pumping over 10 million barrels per day. (A barrel is 42 gallons.) About 2.5 million barrels per day are refined for domestic consumption. Consumption of domestic oil has been rising rapidly. Saudi Arabia is the world’s most inefficient   user   of oil. The country subsidizes the price of gasoline and electricity. It has the world’s highest oil consumption per capita. Besides fuel, oil is used to generate electricity and desalinize water. It has been common for families to leave their air conditioning on even when going on vacation. Some offices are so cold that employees wear sweaters.   Prices to consumers are low because of low crude oil production costs and th...

Saudi Oil Minister BACKGROUND INFORMATION Oil is measured in barrels. A barrel is 42 gallons. Total global daily production is around 96-97 million barrels/day. Saudi Arabia, Russia and the United States all produce around 10 million barrels a day.   With their allies, these three countries account for close to 40% of global production. Because of the improved technology of shale oil production, U.S. output has gone up almost 5 million barrels/day since 2008. Currently, total global production is greater than total demand by somewhere between one and three million barrels/day. There are record amounts of oil in storage. A small percentage increase of supply over demand has led to a large decrease in price. In the fall of 2014, a barrel of oil cost about $100/barrel.   Last month the price fell to around $30/barrel.   Since then, it has rallied to around $40/barrel. THE ECONOMICS AND GEOPOLITICS OF OIL The economies of seven...

Saudi Arabia Oil Minister U.S. Oil Production E nergy prices could go up at the same time that energy production could continue to decrease, although not as much as simple supply/demand forecasts would expect (see prior post).   Crude oil prices would have to rise from current $35/barrel level to at least $50/barrel to stabilize production and over $60/barrel to start increasing production.   Similar percent increases would be needed for natural gas. For most shale oil and natural gas producers, virtually all operating revenue is now going to debt payments.   After hedges come off, the number of bankruptcies and “distressed debt” will accelerate in second quarter of 2016.   The companies can continue production but bondholders, lenders and stockholders will suffer even larger losses.   This trend has already started in the junk bond market and the fall of public oil companies’ stock prices. Why Saudi Arabia Misjudged U.S. Oil Production ...

Saudi Oil Minister Introduction: The Fall in Oil Prices in 2015 Crude oil prices temporarily rose because Saudi Arabia signaled that it would cooperate with OPEC and non-OPEC producers to “stabilize” oil prices.   Nothing specific was mentioned.   At the current price and for political reasons, it is unlikely Saudi Arabia and its Persian Gulf allies will cut production or negotiate joint production cuts with other large producers.   The comments are probably an indication that Saudi Arabia might be part of a global reduction in crude oil production if prices go much lower and the political situation in Syria changes. Until recently, Saudi Arabia was seeing the results it wanted.   Some are economic, having to do with the current and future price and production of oil.   The economic targets were shale production in the U.S and tar sands production in Canada.   The geopolitical targets were Iran and Russia.   But unexpected economic and...