|U.S. Crude (WTI) bellyflopped below
$100 today ...
| ...while Brent Crude (Europe) is selling
at nearly $120 a barrel
This morning Brent crude oil zoomed up to $120 a barrel on ICE, the Inter-Continental Exchange in Europe. At the same time, the cost for WTI futures (West Texas Intermediary) plunged below $100 to $97.30 a barrel in the USA. Oil prices are moving in two directions at the same time because of increasing U.S. oil supplies, technology, and Saudi Arabia's role in the Organization of Oil Producing Countries (OPEC).
This morning the Saudi Arabians announced that they would begin pumping 10 million extra barrels a day to help lower oil prices. The announcement comes on the heels of a failed OPEC meeting on June 8, 2011, where OPEC members couldn't agree on a target price for oil. Analyst Bob van der Valk has called it a "duel in the desert" in the online edition of Wall Street Journal, and predicts the possible dissolution of OPEC.
In a rare moment of OPEC discord, the Saudi Arabians have defied the wishes of their fellow members, Venezuela and Iran, by increasing the production of sour crude. And because it is sour crude, it will benefit benefit the USA at the expense of Europe.
The Saudis are pragmatists. They understand that at $100.00 or more per barrel, the U.S.A., which uses three times as much oil per day as China, will -- and has -- found alternatives to costly OPEC oil. As a general rule, the U.S.A. isn't very poular with OPEC nations. The Iranian government hates us and the government of Venezueala hates and loathes us. Its President, Hugo Chavez, is convinced that George Bush Jr.tried to assassinate him (see brief You-Tube video).
Of course the Saudis aren't exactly in love with us either, but because we are their best customer, they want to make sure we keep using their product. The Saudis understand -- as business people -- that their lock on the world's largest supply of oil is about to end for three good reasons:
REASON 1: The Alberta Tar Sands in Canada can produce oil profitably for less than $60 a barrel.
Alberta Canada has the largest oil reserves in the world after Saudi Arabia, and unlike most of the members OPEC, the Canadians actually like us. They have even built a pipeline to transport cheap Canadian oil into the USA.
REASON 2: At $100 a barrel, it is cheaper to get oil from a stone than from OPEC.
The USA has a several hundred year supply of oil sequestered in a massive deposit of shale known as the Bakken Formation. New technologies - most notably "fracking" can extract oil from stone. Some optimistic Bakken supporters have claimed that much of the oil can be extracted for as little as $50 a barrel. In fact, the region currently produces some oil, and at $100+ a barrel, getting oil from stone is highly profitable (see U.S. Energy Information Agency report).
Unlike oil, natural gas needs minimal refining and tends to be low polluting. It can also be used as a fuel for consumer vehicles.
The only thing standing in the way of U.S. energy independence is cheap oil.
This is why the Saudis are nervous about oil priced above $100 a barrel. A conservative estimate puts North American oil and natural gas supplies at 300% of the reserves controlled by Saudi Arabia. And at $100 a barrel, the Saudis know that OPEC is literally paving the way to energy indepndence for the U.S.A.
The smartest thing OPEC could do right now would be to lower its target oil price to around $50 a barrel. At that price the alternative sources will be crushed under OPEC's boot heel.
Technology could be the ultimate Cartel Crusher
In the 1980s Americans responded to Saudi Arabian and OPEC oil embargoes by using less oil and gasoline. In addition, American refiners figured out how to take foul smelling high-sulpher crude (known as sour crude) and refine it into clean-burning fuel and heating oil. The Europeans don't have refineries that can remove sulpher from oil. What this means is that the oil offered by the Saudis today is useable only in the U.S.A. -- therefore, the release of sour crude is almost a direct subsidy to the U.S. economy.
From foul oil to black gold.
OPEC was virtually destroyed in the 1980s because U.S. refiners figured out how to remove sulfur from cheap sour crude, turning foul oil into black gold. Americans used less oil, purchased fuel efficient cars, built the Alaskan pipeline, and found high-tech ways to refine clean burning fuel out of stinky, sour crude.
And if the price of oil stays high enough for long long enough, we will do it again - even if it means getting oil from a rock. The Saudis "get it." And what the Iranians and Venezueleans don't understand is that by gouging the world's largest oil consumer, they are killing their own best customer ... and ultimately, themselves.