On November 27, 2014, as we gathered for Thanksgiving in America, OPEC ministers gathered in Vienna, Austria, to discuss a precipitous 33% fall in crude oil prices in the previous five months.
A decision made there changed the course of the U.S. economy, and set in motion events that will haunt your wallet and mine.
Much of the cartel that day wanted to cut production to raise crude oil prices. After all, OPEC members are a collection of repressive states that need high crude oil prices in order to buy the peace from populations none too keen on dictatorial governments.
And yet, Saudi Arabia, as the most influential member in the group, quashed the effort. The Saudis stood down. They refused to cut production, knowing crude oil prices would crumble — and crumble they did.
It was the first move in what I’ve begun calling the “Oil Games,” which I first wrote to you about on June 11.
These games aren’t being played in a vacuum. They have geopolitical impacts and, ultimately, they will rip through lives here in America. That’s why my team and I will release an investigative video very soon, titled “Oil Games,” in which we will show you how these games threaten to impact your pocketbook, and how certain investors will make a fortune benefiting from what’s to come.
But first, back to Vienna…
The Slide of Crude Oil Prices
It seems counterintuitive that Saudi Arabia would let crude oil prices slide.
The Saudis, in particular, need oil near $100 a barrel just to maintain social spending demands to appease a population that isn’t always friendly to Saudi royalty.
Yet the Saudis also need to protect the Kingdom’s only source of income: oil.
They know that U.S. shale oil is a threat because it reduces American demand for the only product Saudi Arabia produces. Worse, they know that, longer term, America’s push toward alternative and green energy sources — which will naturally percolate through the global economy — means world demand for Saudi oil will also decline.
And diminishing demand is bad, bad news for a repressive monarchy dependent on oil wealth to maintain political power.
By refusing to cut oil production, the Saudis put a bullet in the U.S. shale industry, as witnessed by the loss of more than 100,000 high-paying oil-patch jobs in America, and the increasing number of bankruptcies among shale-oil companies. The Saudis also guaranteed a slowdown in the race toward green energy. After all, why pay the expense of creating and harnessing alternative energy sources when crude oil prices are low?
In essence, the Saudis rightly calculated that it’s far wiser for them to sell oil at $50 a barrel for the next 30 years than it is to sell oil at $100 for only another decade or so.
Such decisions, however, have repercussions that are already apparent, and which I explain in greater detail in my Oil Games video.
The Price of Exploration Cutbacks
Understand that I am not coming at my analysis as an oil neophyte. I began traipsing around the oil patch as a writer in the Dallas bureau of The Wall Street Journal back in the 1990s. I hung out with wildcat drillers, commercial bankers funding mom-and-pop drillers, investment bankers funding larger-scale exploration operations and some of the savviest oil-field investors. Each taught me a different chapter in the story of oil.
One investor, in particular, an old hand in oil investing, explained why the low crude oil prices of the 1990s were about to explode higher — which they did as oil began its historic rise to $140 a barrel.
It all had to do with those low oil prices prompting energy companies to curtail spending on exploration and development. Existing reserves began to naturally peter out, and demand continued to rise, particularly from the newly emerging middle class in developing nations. At that moment, however, energy-production companies did not have a stash of new wells to draw on because they’d not spent heavily in search of replacement reserves.
Fast forward to today … which finds the world on the same path it was in the 1990s.
Already, energy companies have announced they’re cutting more than $100 billion from their exploration budgets — fully a third of what they had intended to spend. That’s setting us up for a supply shock similar to what we saw in the mid-2000s, when the exploration cuts in the late 1990s took hold.
Demand is not waning, despite some misguided media reporting. It’s continuing to grow at about 1% a year, as it has done for decades. And when that demand slams into declining production that’s not being replaced with new reserves … well, our pocketbooks are in for a shock as crude oil prices shoot past $100 a barrel again.
That’s the knock-on effect headed our way in the wake of Saudi Arabia’s decision not to cut production as it had historically done in the face of falling crude oil prices.
But here’s what you really need to know in all of this: Saudi Arabia isn’t the only winner in these Oil Games. There’s another winner already taking a position. I call him “the Assassin.” He has a strategy to profit hugely from what the Saudis have done. I’ll tell you more about him — and your opportunity to shadow his moves — in my next dispatch.
Until then, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker
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