MACROVoices Slides: OPEC Can’t Fix The Problem of Low Oil Prices


  • Eric Smith

    Hey Art –

    Many thanks for an excellent interview. I always get so much out of your interviews and they help me coalesce and synthesize important and relevant topics in a coherent and meaningful picture.

    I absolutely agree that oil prices will not get upwards of $70 or higher without a major-major cut (aka due to a NOC disruption, a la Venezuela, etc) and/or burning through storage and/or a crash in the economy. While I think issue #1 is more realistic nowadays, I am not sure issue #2 will happen anytime soon because of issue #3. As you said, it’s the economy, stupid!

    I have been watching what I think is going to pull the price rug out from under the US Production rise that recently started (and make the OPEC price cut look silly) and that is consumer demand for cars and light trucks. In 2015, as prices continued to come down from the early 2014 highs and bounced around in the band of $30 – $60 range, auto sales in the US went bonkers and part of this mania was fueled by, wait for it, SUBPRIME LOANS! Yay! Super low interest rates combined with extended payback periods combined with unscrupulous lending has led to the next subprime bubble that will be bursting this next year – auto loans!

    You have probably seen this article, but here it is:

    Many of these loans have variable rates, just like we had with ARM’s during the housing crisis, and with the increase in personal debt (ala credit cards, also with variable rates) that people have taken on since the GFC, any increase in interest rates will push them over the top and seems to have started to do so.

    Now, besides the fact that we are overdue for an economic recession (thank you Fed!), and besides the fact that incoming President is looking to spend on infrastructure and big-ticket items, even if a small, but double-digit percentage of individuals have their cars repossessed, there are number of negative feedbacks from this event that will crush demand for gasoline and send oil prices crashing just as new production is coming online. Taking that many cars off the road, as well as those people losing their jobs because they can’t get to them, will take the air out of any oil price increase and we will see more oil companies pumping faster just to stay ahead of falling prices to service debt and the price will just go lower and on and on and on. Not sure where this death sprial ends, but it won’t be pretty.

    I am not saying it will play out exactly like this, but when the economy is staring down the barrel of another recession (or possibly the dreaded capital D), I find it hard to see the price of oil staying above $50, let alone getting to the dizzying heights of $70. After that long winded ramble, what I am wondering is how low do you think it will go?

    Certainly, let me know if I my prognostication is off base. Have a relaxing Holiday!



    • Arthur Berman


      Central banks have been focused on getting people to spend money since the Financial Collapse in 2008. The example that you mention is a good example of making things “affordable” to get money moving through debt. Debt was the main cause of the Financial Collapse and the treatment has been more debt. That is obviously not a solution.

      The debt problem, however, began in the 1980s. The lionized Ronald Reagan tricked the limits to growth through debt. High interest rates made the U.S. Treasury bond the reserve asset of the world and the U.S. put growth on a credit card. The rest of the world followed.

      Now, we have tens of trillions of dollars of public, consumer and corporate debt and the limits to growth have not gone away because the root cause was always higher energy costs. In all of the astute discussions about the problem of economic growth post-2008, we never hear a word about energy and not much about debt. The proposals for growth will certainly fail as long as these core issues are ignored.

      All the best,


  • It is really strange. Eagle Ford had “decreased” production by 700 thousand per day ( substantially more than 459 thousand cut promised by Saudis). Bakken has lost 300 thousand per day. And these play’s production continues to fall at 3.5 …4% per month. There was no market reaction. You are right: there are another forces in action. Regards, Simon.

    • Arthur Berman


      I assume that the production declines you mention are from the EIA Drilling Productivity Report. These are unreliable because they aggregate all production in the counties that form what EIA determines is the tight oil play in question.

      My data shows that Eagle Ford has declined by ~475 kbpd and Bakken, by ~250 kbpd since early in 2015. Of the ~ 2000 kbpd that EIA attributes to the Permian basin, only about 1100 kbpd is from the tight oil plays and that represents an increase of ~ 300 kbpd over the same time period.

      Your point, however, is valid.

      The key, I believe, it that overall U.S. crude oil production decreased ~ 1000 kbpd from April 2015 through September 2016 but has increased ~190 kbpd over the last 2 months. Higher oil prices will only exacerbate the increases especially if prices remain above $50 per barrel or higher. I doubt this is likely but we must carefully watch if WTI breaks through the $52 per barrel resistance that has been a hard ceiling since the Spring of 2015. So far, it has held. If that resistance level is broken, prices could move toward $60 as the mainstream predicts.

      All the best,


  • Hello Art

    Thanks for your analysis which I always find very helpful. One thing in the last slide leaves me a little frustrated though. This is the note on the break even graph that “IMF OPEC estimates include revenue to balance fiscal budgets”. Presumably this is not the case for US tight oil sources. Is the bar chart then really comparing like with like? The message put by yourself and others is that fracking is a “retirement party” for the oil industry because it is expensive to extract compared to conventional oil and the economy cannot afford it. Point taken – but in a bar chart like this it looks as if it is now the cheapest source – until one realises that this is because it doesn’t pay any or much tax.

    • Arthur Berman


      Companies have overhead and interest expenses. Countries have overhead and interest expenses. It’s the closest thing there is to comparing likes. How fair would it be to burden companies with all of their fixed and variable costs but only to burden companies with lifting costs? That is how it has always been done. If all Saudi Arabia had to cope with were lifting costs, they wouldn’t care if oil were $10/barrel.

      All the best,


  • Art

    You have completely lost me there. I don’t understand your response at all. I have never heard of state expenditure described as or compared to corporate overheads nor interest on corporate borrowings compared to interest on state borrowings. I’m bewildered by your remarks.


  • Art. A few others in the UK share my confusion about that bar chart. One colleague sent me an email which said:

    “The bar chart as it stands does appear to show how much cheaper tar sands and fracking is as a technique than plain old conventional! If I were in the industry, this is the one I’d be sending round as PR…”

    Indeed, these are my thoughts too. That could be partly a reflection of the depletion dynamic in conventional oil that has now gone so far that it is more expensive to extract than unconventional – however, with the “break even price” for OPEC including this fiscal element it is difficult to say how far OPEC break even includes the “need” of “oil states” for a revenue stream to cover their military and other expenditures that will keep their elite in power. The whole thing is very confusing to me at least….

    If “oil states” have “overheads” like military and welfare expenditure to keep their elite in power and buy off the discontent of their populations then these fiscal expenditures can be described as a sort of “overhead” I suppose. If their countries were to go into political turmoil then that would not help oil production. In that sense state provided “costs of production” – or “necessary calls on the oil revenue” will vary between countries – and that maybe what is being included here in the IMF approach. IF that is what is involved here it would be clearer for it to be made rather more explicit.

    The global average break even price can then be considered a figure that reflects not only such influences as geology, technology, debt and depletion but also an oil price that would make long run political stability more likely.

    • Arthur Berman


      Several thoughtful people have expressed similar concerns about that break-even chart since I first published it several months ago in a post on the Permian basin.

      My take is that oil companies have all kinds of costs related to doing business including ordinary overhead, interest expense and executive compensation stock and derivative programs. These are not notionally different from the fiscal expenses of OPEC countries.

      You may disagree but these costs are deemed necessary to keep those states “in business.” To represent OPEC lifting costs vs. tight oil play corporate costs strikes me as a great distortion and, although full fiscal cost may also be a distortion, it is really the only alternative that I know how to apply since I don’t have access to any intermediate measure other than what IMF has deduced.

      How we apportion that is another problem but just looking at the average price of oil in constant 2016 dollars, it is difficult to argue that OPEC’s real costs are something like $10 per barrel when decadal averages over the period of the graph below were never lower than $23 per barrel.

      That is like Pioneer Natural Resources claiming that their Permian production costs are $2.25 per barrel (as their CEO claimed a few months ago) when their break-even costs by my calculations are at least $50-55 per barrel.

      I understand that oil can be a very profitable commodity but I find it difficult to maintain that its true costs to anyone have ever been substantially less than the lowest real monthly oil price ($16.72 per barrel in December 1998) since 1950.

      Thanks for your comments,


  • Thanks Art – that clarifies the issues for me – or makes clearer why getting clarity is difficult. I did not mean to throw doubt on your general point about the oil industry as a whole facing break even costs above the price that they can get for the oil. When interest rates start to rise it will, I think, get rather nasty…

  • Bill Rodgers

    Looking forward to reading article.

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