For those who aren’t sure …
OPEC – Organization of the Petroleum Exporting Countries
OPEC is an organization that produces a third of the world’s oil. They are a sort of club consisting of powerful oil producing countries such as Saudi Arabia, Venezuela and Iran .. They produce so much oil that they are able to control the prices of petroleum products for the rest of us. Everything these oil producers do, is calculated in barrels of oil .. and right now, December 2014, a barrel of oil is selling for roughly $67… a few months back, that same barrel was selling at $100.
Something to consider is that whenever a company makes something, be it toys, cookware, automobiles, food or oil, there is always a cost to making that something. So in business, if you make something, you must be able to sell that something at a higher price than the cost it took to make it. Make sense ? For example, it cost me $2 dollar to make a wooden statue I carve myself from wood I collected myself. I turn around an sell that statue for $4 .. I make a profit of $2. However, if no one wants to buy my statue for more than $1.50, then I have a problem don’t I .. It will cost me .50 cents to make and sell statues .. I’ll go broke in no time !!
So how much does it cost to produce a barrel of oil? Well it varies depending where and how the oil is being produced. In Saudi Arabia, it costs around $30 per barrel .. in Canada it costs around $75 .. the Arctic around $80 .. the U.S. can do it for around $60. Clearly, the Saudis have an advantage ! Since the price of selling oil is universal on our planet, that means that certain countries make more profit than others depending on their cost of production.
So why is the price of oil dropping these days ? Why is gas so cheap right now ? Feels pretty good ? of course it does .. like a temporary tax break 🙂 Well, in the past couple of years, the United States has been investing/borrowing money in order to drill and produce oil .. if I am not mistaken, most of this oil production is in the form of hydraulic fracturing or “fracking” which is a very expensive method of getting oil. Nevertheless, the US is going through a boom with this fracking business .. producing mass quantities of oil each day.. adding to the world supply. Again, if I am not mistaken, the US is approaching OPEC production levels.
A good thing right ? Producing oil close to home ! creating jobs ! Well, it appears that all of this extra oil in the market has caused the price per barrel of oil to fall. When there is a surplus of something, the price is always cheaper … the price is higher when the item is rare. This translates to excellent for us regular folks .. everything gets cheaper when oil is inexpensive. All products are carted around in oil consuming vehicles .. houses and apartment buildings are often heated using oil products .. Airlines burn crazy amounts of fuel to travel us around the world. Food is often harvested and transported using oil consuming machinery. Oil makes the world go round.
So where is the bad in all of this ?? Well, that depends on who you are .. to me, I see no bad .. low oil prices are where it’s at .. for everyone. But in this world of continuous competition and growth to appease share holders in companies, low oil prices are not a good thing. Especially for all the American business people that borrowed loads of money to start a drilling company in the past couple of years. These companies on running on borrowed money and not only have to worry about selling at a profit, but also selling to be able to make their loan payments. These falling oil prices will surely sink a few companies .. and the longer the prices remain low, the more companies that will go bankrupt.
The Americans pushed hard to become relevant players in the oil business. Now, their participation in the oil business has caused the prices the drop and has put themselves in financial jeopardy on the backs of all the loans they needed to get started .. They aren’t able to sell the oil they are producing at a high enough price to make the money needed to pay their bills. And again, all because of their very participation in the oil market.
So are the Americans doing about it ? It’s very interesting .. The US is making requests to OPEC … The Americans are requesting that OPEC slow down oil production so that the price can go back up. Knowing what you know, does this not seem a bit .. odd ? “Please OPEC, stop doing what you have been doing for many many years so that we ( the Americans ) can prosper in the domain you have been dominating… Please step aside and allow us to become the leaders of oil.” Perhaps not in those exact words, but that is the gist of it .. I don’t know about you, but that just blows my mind… the nerve !! Especially when we consider all that we know about US interference in the affairs of the middle east .. the wars, the coups, the spying, the meddling, the bribing … now they expect to OPEC to take a pay cut so that they can have a piece of the pie ..
OPEC had a large meeting of the minds last week to discuss this very issue .. and guess what they decided ? Not to change a damn thing. Business as usual. I don’t think that middle east oil producers are full of debt .. I don’t think they have huge bills to pay .. I don’t think they care much about losing a few dollars for even a few years. They are sitting on loads of oil .. that world will need for many many years to come. They are sitting on loads of money .. and political systems that probably don’t cost as much to run as our western “allies” .. They are able to spend money on frivolous projects like air conditioned ski resorts in the middle of the scorching desert.. think about it .. do they honestly care about US startup oil companies ? Do they care how this will affect the global economy ? They live in a vacuum ..
I for one, am happy to see a victory for the Arabs .. I personally don’t enjoy being at their mercy for the gasoline I buy, but that is part of my own decision to drive a car. And I am at the mercy of so many other price gouging situations from the U.S. and Canada .. it’s part of economic life. And if right now, the big wigs in the US are having some troubles making that extra billion, I have no problem with it.