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What We Read Today 24 December 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

Shale and the Falling Price of Oil (Joe Nocera, The New York Times)  The last time the price of oil went to extremes (2008) Saudi Arabia tried to lead production changes to dampen the swings.  Nobidy followed and oil shot up to $147 and then crashed to less than $40.  In the current boom and bust the Saudis are taking a different tack to avoid being seen as an "emperor with no clothes".  Nocera says that the Saudis do not fear competition from shale oil; shale produces a different type of oil (light tight oil vs. middle eastern heavy oil).  (Note:  Other producers also have heavy oil, Venezuela and Russia for example, although Russia is believed to have major light oil reserves as well.)  Nocera says that the Saudi's real targets are Iraq and Iran.  More articles below on the current oil wars.

Why Saudis Decided Not to Prop Up Oil (Jay Solomon and Summer Said, The Wall Street Journal)  Repeated from discussion 'behind the wall (premium content) yesterday.  The authors have a diametrically opposed view compared to Joe Nocera in the previous article.  They argue that the target for the Saudi price war is only North American fracking production and that Russia, Iran, Venezuela and others who are suffering economic distress are merely collateral damage.  But what if the American fracking technology is evolving to a $40 or even lower profit point for production.  Could the Saudis actually lose the price war they so confidently started?  More on oil 'behind the wall' (premium content) The conclusion of this rather long article:

There remains a risk prices don’t quickly recover. Some in the Saudi media have criticized Mr. Naimi for a policy they say could be disastrous for the kingdom’s economy. Riyadh depends on oil for 90% of its budget.

All OPEC and non-OPEC officials are in a state of shock,” said Muhammad al-Sabban, a former adviser to Mr. Naimi, adding that a “ ‘wait and see’ is their only option.”

Understanding Tight Oil (Canadian Society for Unconventional Resources)  This is a great summary of the recovery locations and processes for tight oil in North America (upper left corner in graphic below) but conventional "sweet" crude (like the U.S. benchmark WTI - West Texas Intermediate) produced by "old fashioned" vertical drilling is largely ignored, as are the "heavy oils" in North America (and the rest of the world as well).

oil-north-america-types-csur-2014 


Fed Caused Oil Crash, Stocks Next and Gold to Shine (CNBC, YouTube)  Peter Schiff on CNBC 16 December 2014.  Scott Nations appears on the following video and says "Peter, I give you credit if for nothing else for being consistent."     

schiff-gold-cnbc-2014-dec-16


Articles about events, conflicts and disease around the world

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Crude oil rallies over 1% but remains vulnerable (Investing.com)  After prices dropped $1.87 or 3.27% on Monday to settle at $55.26, New York Merchantile exchange prices for February crude delivery rebounded by $0.93 or 1.67% to $56.19 Tuesday afternoon.  Overnight into Wednesday early am the price firmed a little further.

Click for latest live chart at Investing.com.
oil-ny-fut-feb-2014-dec-24


Oil prices likely to rebound in second half of 2015: Reuters poll (Koustav Samanta and Vijaykumar Vedala, Reuters)  Enjoy low gasoline prices while they last - a year from now they may be higher again.  A recent monthly survey of oil analysts by Reuters indicated crude oil prices are likely to bottom out in the first half of 2015, when a possible slowdown in U.S. shale production sets in to counter a supply glut exacerbated by OPEC's decision not to cut output.


Will U.S. Win or Lose From the Oil Price Plunge? (Gil Weinreich, ThinkAdvisor)  Certainly people buying gasoline are winners, with prices having declined for 88 consecutive days, the longest such stretch in history, according to The Wall Street Journal, beating even the crash of oil prices in The Great Recession.  According to Weinreich, the IMF says each 10% decline in the price of oil is worth 0.2% to 0.4% in global GDP growth over two years.  (Of course the lower price must hold for two years.)  The booming U.S. oil patch is expected to cool substantially if prices hold under $65.  Weinreich says that The Economist estimates that us oil sector investment could decline by 20% in 2015 and growth slow to 10% from the torrid pace of the last couple of years.  So there will be winners and losers if oil stays at low levels for more than a few months.  A respite for consumers will become more like a permanent raise (or tax cut as Treasury Secretary Jake Lew is reported to have said).   And a slowdown in new drilling could become a longer-term retrenchment for the oil patch.  This article is U.S. centered.  For a global perspective see next several articles.


Oil Crash: Don’t Believe the Happy Clatter (Pam Martens and Russ Martens, Wall Street on Parade)  The Martens say that everybody is missing the point:  There is a commodity collapse underway which is similar to the start of the one that led into the heart of The Great Recession.  (Note: Two different scales for the two vertical axes.  In 2014 the decline for the last six months is as much as for the first three months in 2008.)

ppi-indust-commodities-2008-and-2014


Billionaire Harold Hamm Slashes 2015 Drilling On Low Oil Prices (Christopher Hellman, Forbes)  The billionaire of North Dakota shale, Harold Hamm, CEO of Continental Resources, has slashed planned capex expenditures for 2015 from $5.2 billion to $2.7 billion.  Even with that cut, Hamm says Continental will increase production by about 20% to 220,000 barrels per day by the end of 2015.  All this is in spite of some shale oil now selling in the $40s from the Bakken shale.  See also next article.


Oil CEO: I Have No Idea What Oil Prices Will Do (The Motley Fool)  Some shale oil fields will still be profitable below $40 a barrel.  Bill Thomas of EOG Resources, Inc.  (NYSE: EOG) told analysts recently that he had no idea where oil prices would go but that it was unlikely they would go low enough to shut down his company.

eog-low-cost-shale-oil


Natural Gas Glut Isn’t Deterring Southwestern Energy (Clifford Krauss, The New York Times)  Interesting article about a natural gas company that isn't pulling back in the face of the natural gas glut and gfalling prices.  One noteworthy quote from the article (refers to Steven Meuller, CEO of Southwestern Energy):

Mr. Mueller argues that natural gas has a bright future, given that it is increasingly replacing coal for utilities. He says the day will come when foreign manufacturers will see the low price of American natural gas as so attractive that they will move their plants en masse to the United States, building a huge new market.

Mueller's vision sounds like a reverse flow of manufacturing from Asia (where energy is expensive) back to North America (where energy is cheap).  That is a real possibility.  See China vs. the U.S.: It's Just as Cheap to Make Goods in the USA (Harold L. Sirkin, Bloomberg Businessweek).


If Subsidies Fall with Oil Revenues, Arab Unrest May Rise (H.A. Hellyer, Brookings Institution, The New York Times)  Throughout must of the Arab world and elsewhere in the middle east and Asia government subsidies for domestic energy consumption are being phased out as oil prices fall.  In addition, citizens of Saudi Arabia and other Arab countries receive government income support from oil revenues, which are declining.  These cutbacks may produce extensive social unrest.  This is one of five essays debating How Cheaper Oil Is Shaping the World.


Forex - EUR/USD drops to fresh 2-year lows on strong U.S. data (Investing.com)

Click for latest real time charts at Investing.com.
eurusd-2014-dec-23

But the euro was showing strength in another regard, but that also has weaked remarkably in the past couple of weeks.  Walter Kurtz provides (The Daily Shot email) the following chart, which he says has resulted from Russia implementing "informal" capital controls requiring exporters to convert euro and dollar payments back into rubles.

eurrub-late-2014


Women College Graduates Getting Pay Crushed (Walter Kurtz, The Daily Shot email, nor url)  Recent male college graduates are making nearly as much as the did in the late 1990s.  But women have seen pay decline by approximately 15%.  Note:  Wages are adjusted for inflation.

college-grads-pay-25-years


Other Economics and Business Items of Note and Miscellanea

New York’s Benjamin Lawsky Forces Resignation of CEO of Mortgage Servicer Ocwen Over Wrongful Foreclosures, Shoddy Records and Systems (Yves Smith, Naked Capitalism)  The usual comprehensive research from NC.  There are wolves on Main Street, too.

The tough must get going in Singapore’s new economics – Devadas Krishnadas (The Malaysian Insider)

Most US States Are Seeing Jobs Growth, But New Unemployment Numbers Don’t Tell The Whole Story (Macro Insider)

US-Cuba thaw could mean growing market for Illinois crops, agriculture, farm leaders say (Fox Business)

At least 60 journalists killed in 2014, almost half in the Middle East (Personal Liberty)

Capital Economics: Don’t panic about November home sales (Housing Wire)  "Analyst says existing home sales will rebound, but others differ."

Health-Care Spending Gives Boost to U.S. Growth (The Wall Street Journal)

Social Security: Delay Benefits at the Expense of Personal Savings? (AAII Journal)

7 fun board games that will make you smarter about economics (Vox)


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