Conspiracy theories spike as crude oil prices slump

Any steep fall in crude prices have inspired stories of imagined alliances and breakups; the current slump is no different

Every time the price of crude oil breaches a crucial mark, a new set of conspiracy theories hit the market. With crude oil falling below the $70 marks after OPEC decided not to cut production, more such stories are making the rounds.

The most popular one doing the rounds is that Saudi Arabia is targeting US shale oil production by preventing them from entering the market. A diagonally opposite story in the market is that the US and Saudi Arabia have teamed up to keep oil prices low in order to hit Russia and Iran, both of whom need higher oil prices to balance their budgets. The latest is that recent advances by the Islamic State of Iraq and Syria (ISIS) is forcing the Saudis to co-operate with the Americans to keep oil prices low as the terrorist organization is using oil money to fund its wars. This last theory even finds a mention in the research report of a renowned international broker.

Oil prices have always attracted story tellers in the market, especially when prices crack. In the ’80s, Saudis were blamed for conspiring with the Americans to bring down oil prices in order to spoil Russia’s adventure in Afghanistan.

Being the largest producer, Saudi Arabia generally gets blamed for any price correction, possibly because of what happened in the mid-’80s. In the first half of 1986, Saudi Arabia broke ranks with its OPEC partners and flooded the market with oil, sending prices crashing from $23.29 in December 1985 to $9.85 by July 1986.

In the present situation, it is clear that OPEC’s role and influence in the oil market has been diminished. The cartel has lost its relevance.  Even if the OPEC had decided in their recent meeting to cut oil production collectively, the impact, as the Saudis argued, would have been short-lived since there are more non-OPEC producers in the market waiting to grab market share. American companies would have happily filled the void created by OPEC. In fact, many feel that given OPEC members track record in oil production, one of their own members would have supplied the incremental oil.

The question now is how low can oil go? The general sentiment in the market is that at $70 per barrel shale oil production in the USA becomes unviable.

Canadian billionaire Murray Edwards, chairman of Canadian Nature Resource says here that prices can go down to $30-$40 per barrel but it might not stay at those levels for long. The better question, says Edward, is where does it stabilize, and that $70-$75 area is probably not a bad place to stabilize for a period of time until you get more balance in term of growth in demand and some supply response.

Moreover, $70 will not have as big an impact on USA shale oil production. The chart provided by Citigroup here shows the breakeven oil prices of every drilling project in the world. More than 80% of shale oil production in the USA can survive oil prices of around $70.

An article in Foreign Policy says that ConocoPhillips has among the lowest break-even prices in the industry at about $40 a barrel. Their higher-cost rivals can survive with oil prices in the mid-$60s range. The article goes on to say that technological advances have lowered the cost of drilling each well. Costs have fallen 50% in two years and could keep falling another 15% by 2016. At the same time, producers are now squeezing out more oil than they used to.

Even if any of the conspiracy theories is true, facts show that the oil price war is far from over. On the contrary, it has brought the OPEC and non-OPEC players to an eyeball-to-eyeball confrontation. What is certain, though, is that low prices may not attract new investment in shale oil and sand oil.

A column in Business Standard points out that oil sector needs investment of $900 billion every year to meet the 2030 demand. Further, shale oil production in USA is expected to see a sharp decline from 2020 onwards. If the shale gas producers are not investing now, then they will not be able to meet future demand.

Here is one more conspiracy theory: perhaps the Saudis have convinced the OPEC nations that better times lie ahead for them.