“Now May Be A Time To Panic” For US Shale Oil

Shale oil has an almost horizontal cost curve around $80 … a whopping 11,000 kbls/day are available as long as Brent is above $85, which is a clear “red line” for all OPEC producers. At a price below low $80’s production starts to become uneconomic, and below high-$70’s the total US Shale Oil production should shrink by about two-thirds … that implies a risk of a lot of bankruptcies and unemployment in the oil patch but a more stable pricing environment for the Saudis, and any producers who can remain profitable at that price range

How Libya Sunk The Oil Frackers’ Stocks

With tepid growth in worldwide oil demand expected this year and next, and with Libya and Iraq both in desperate need of cash due to the unfortunate circumstances the countries find themselves in, the questions now are:

  1. Who will blink first? Russia? Saudi Arabia? Iran? Or the US?
  2. Are the US and Saudi Arabia in a pact to drive oil prices lower to punish Putin and Russia, as well as the Iranians?
  3. Ironically, will the domestic shale frackers, who have almost single-handedly pulled the US out of recession, have to cut back on production first, despite the fact that the US is still importing oil?
  4. If so, at what price will American oil frackers cut back cap-ex and production?

Question #4 is key, and I believe it is the question Saudi Arabia wants to know the answer to.

Note, oil prices had no problem staying above $100 in Q2, when Libyan production was only 228,000 bpd. Yet, by September, Libyan production had grown by a massive half million bpd (see below), basically flooding a market that was already trying to figure out what to do with over 1 million bpd of Nigerian light-sweet. Saudi Arabia has refused to cut production and give up market share, and Iraq and Libya need the oil revenue, so down we go.

(click to enlarge)

It is clear Libya has played a pivotal role in the current oil price collapse: unexpected, quick and massive changes in oil production. For those wondering when oil prices will rise again, please note that despite rumors that Libyan oil production is closing in on 1 million bpd, remember – Libya was producing 1.45 million bpd before the civil unrest hit. That means it could conceivably add another ~400,000 bpd of supply to market over the coming months. In other words, somebody is going to have to cut production, or we could see much lower oil prices for quite some time to come. Years, in fact.

Now I’m not saying Libya alone has caused the price drop in oil prices – there are obviously many factors involved. However, I believe the rapid near-step function moves in Libyan production – first off-line, and then back on-line – was the single biggest contributor to the sharp move down in oil prices.


via How Libya Sunk The Oil Frackers’ Stocks, Plus The Conoco Story – ConocoPhillips NYSE:COP | Seeking Alpha.

Reserve Currency Status: exorbitant privilege or burden?

“If a country takes steps to expand its trade surplus, it is also taking steps to expand its net export of savings – these are one and the same thing.”

The fact is that if foreign central banks buy trillions of dollars of US government bonds, except in the very unlikely case that there just happen to be trillions of dollars of productive American investments whose backers were unable to proceed only because American financial markets were unable to provide capital at reasonable prices, then either the US savings rates had to drop because a speculative investment boom unleashed a debt-funded consumption boom (i.e. household consumption rose faster than household income) or the US savings rate had to drop because of a rise in American unemployment. There is no other plausible outcome possible. Americans cannot wholly, and sometimes even partly, determine the American savings rate.

This mistaken belief that American savings are wholly a function of American household preferences arises because most economists – and, it seems, policymakers – can only imagine American households as autonomous economic units, and are seemingly incapable of imaging them as units within a system in which there are certain inflexible constraints. The same is true about households elsewhere. Because flexible exchange rates prevent Europe from running massive surpluses, German capital exports to countries like Spain created the same constraints, meaning that Spanish households too faced the choice only of speculative investment booms, consumption booms, and unemployment.


The fact that both Spain and the US experienced first booms in consumption and speculative investment and then steep rises in unemployment is just a requirement of the arithmetic, and has nothing to do with local cultural vice finally succumbing to the cultural virtue of foreigners. Rather than try to understand how systems constrain choice, economists and bankers, most of them quite wealthy, preferred to lecture and wag their fingers at ineluctably stupid middle- and working-class households.

As US policymakers take steps to extend free trade through various bilateral and multi-lateral agreements, it is important both that the exorbitant burden is addressed before it becomes much more destabilizing but it is also important that the exorbitant burden not become an argument against free trade. To argue in favor of constraining unlimited purchases of US or other government bonds is not the same as arguing that the US or other countries should not engage in international trade, as many commentators have bizarrely clamed.

via Are we starting to see why its really the exorbitant “burden” | Michael Pettis’ CHINA FINANCIAL MARKETS.

Building Islands in the South China Sea?

China “is building substantial new islands on five different reefs.” Wingfield-Hayes notes that no one is certain what China plans to do with the new islands. The Philippine government has expressed concerns that one, Johnson South Reef, will be the home to a new South China Sea airbase. However, it’s equally possible that China plans to install civilian populations on the new islands to bolster its sovereignty claims. China, the Philippines, and Vietnam all maintain small civilian outposts in the South China Sea as a way of legitimizing their claims (and deterring military actions by other claimants).

It’s also possible that building the “islands” is an end unto itself. Under the U.N. Convention on the Law of the Sea, submerged features (such as shoals) cannot be claimed by any party. The Philippines’ request for arbitration on the South China Sea disputes is in part based on this fact; Manila requested clarification as to whether or not China (or any other state) can claim submerged or partially-submerged features under UNCLOS.

In addition, Part VII of UNCLOS specifies that “Rocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf.” Under this provision, even if China were to gain control over the Spratlys, its control would be limited to the 12 nautical mile territorial waters, without an accompanying exclusive economic zone.

If, however, China can create “islands” on top of previously submerged features and create conditions for these new islands to “sustain human habitation,” then China would have strongly bolstered its claims to the South China Sea. This is exactly what the Philippines objects to. In an interview for the BBC report, Department of Foreign Affairs spokesman Charles Jose called China’s claims in the South China Sea “outrageous,” “excessive,” and “without basis under international law.” He also accused China of trying to change the status quo to strengthen its claims before the arbitration court hands down its ruling on the Philippines’ case.

via Why Is China Building Islands in the South China Sea? | The Diplomat.


“Be Content with what you have; rejoice in the way things are. When you realize there is nothing lacking, the whole world belongs to you.” - Lao Tzu

“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.” - Antoine de Saint-Exupe

“Everything should be made as simple as possible, but not simpler.” - Albert Einstein

“Fear less, hope more; eat less, chew more; whine less, breathe more; talk less, say more; love more, and all good things will be yours.” - Swedish proverb

“Simplicity, simplicity, simplicity! I say let your affairs be as one, two, three and to a hundred or a thousand. We are happy in proportion to the things we can do without.” - Henry David Thoreau

“The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.” - Socrates

“A good traveller has no fixed plans, and is not intent on arriving.” -Lao Tzu

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” - Will Rogers

via » quotes :mnmlist.

Five things wrong with Canada

A former Wall Street trader says there are five challenges facing Canada’s economy:

  1. A series of policy errors made by the Bank of Canada after the financial crisis.
  2. Home prices in Canada have risen even more dramatically than in the U.S.
  3. Current consumer debt levels rival those in the U.S. eight years ago.
  4. The loonie is overvalued based on interest rate differentials.
  5. Canadian bank stocks are highly overvalued.

Jared Dillian, editor of The Daily DirtNap and author of Street Freak: Money and Madness at Lehman Brothers joins BNN to share his thoughts on Canada’s housing market, debt levels and the BOC.

via BNN Video