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January 09, 2015

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Do you think they intend to let the global economy buoy oil prices when it's ready to go up? Or decide to pull oil off the shelf in some secret or public agreement with other producers/consumers after a while?

Could you rephrase? I'm not sure I understand the question.

Yeah, I kind of thought that wasn't clear.

I think perhaps a better question, for pretty much what I was getting at...

Is there a reasonably possible scenario where Saudi Arabia unilaterally takes oil production offline?

Gotcha! That's clear.

If prices stay low even after U.S. production starts to decline, then the Saudis will cut. Similarly, if demand shows signs that the secular decline in consumption has reversed itself then Saudi will cut. Third, if non-OPEC producers agree to go along, then Saudi will cut.

More long-term, if in the future oil prices decline sharply (but without the worrying long-term trends of U.S. tight oil and potential substitutes) then Saudi will cut. If the current slump goes on for two years and then newly-inaugurated President Bush signs a reformed Clean Air Act, then watch for Saudi Arabia to revert to form.

The Saudis have stated that $75 per barrel is their sweet spot. I believe them simply because that is a logical price --- high enough to earn massive rents, low enough to keep out the competition and discourage substitution.

http://www.telegraph.co.uk/finance/newsbysector/energy/5387261/Fair-price-for-oil-is-75-80-a-barrel-says-King-Abdullah-of-Saudi-Arabia.html

So what's your spot judgment on how successful the KSA will be at kneecapping a lot of the development of "green energy" that we've seen over the last decade or so?

Not very.

Most of the headline stuff is used to generate electricity; the price of oil isn't relevant. And the new CAFE standards will be impossible to change outside an act of Congress, although a Republican president could slow implementation. (See this link for the new rules: http://www.epa.gov/otaq/climate/documents/420f12051.pdf.)

Where it will hit is in the below-the-radar stuff: switching heating systems, mandates for energy efficiency, that sort of thing. For example, now that I'm a homeowner, I really understand just how goddamned hard it is to insulate your home ... even if the investment would be NPV positive. Far better a mandate that sends a government official around to tell me what I need to do and makes me pay for it. We don't use fuel oil in our house (thank the Lord) but the places that do are less likely to switch. And attempts to push standards on freight transport are now dead in the water.

But that's small beans, I think. Green energy has other problems, none of which are caused by low oil prices.

Relevant to your last comment, our apartment building just switched the boiler to natural gas from heating oil last year. I bet the management company is kicking themselves now, although I am much happier as the fuel truck is noisy and no longer makes visits to our place.

You have yourself remarked on the effectiveness of the heating system.

Fascinating, thank you! I appreciate the comments about it not being about tight oil yet still related to "predatory pricing" in general. I suppose we'll have an interesting test as to whether predatory pricing works at all (though we'll have difficulty picturing the counterfactual).

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