December 30, 2014

$60 oil looks locked in for next year — consequences both good and bad

First, Saudi Arabia has planned for oil to trade from the upper $50s to the low $60s next year. (And, in case it's not clear, when I talk about "$60 ... locked in," I'm talking about a range. Details of my guesstimates near the bottom.)

Yes, that means a budget deficit for the government, but "only" about 15 percent, which is still a bit less than the current US deficit, and easily handled by the Saudis.

Second, the Saudis are OK with the price going even lower. It's probably true that Russia and Iran are their main targets, but per this story, US fracking may be in their gunsights as well.

That said, I doubt that oil prices take a sustained drop below $55, but, it's certainly possible they flirt with $50/bbl for the next few months, with them continuing to slide now.

Effect? While it may be good overall globally, it will have fallout otherwise.

Russia is probably headed not just for recession, but a near-depression recession. Given today's Russian political news, more unrest is possible, as is harsher crackdown by Vlad the Impaler Putin.

Venezuela is likely headed in the same direction financially. Possibly a milder version of the same political results.

Not sure how this might affect religious tensions in Nigeria.

I'm sure that it won't be fantastic for Mexico.

And, domestically? Texas may also face some sort of recession even as Tricky Ricky Perry, with his exit, dodges the consequences of his alleged "miracle" collapsing.

Given that Gov. Greg Strangeabbott appealed John Dietz's Texas school finance ruling, weaker oil revenues could be a signal for him to side with wingnuts in the Texas Lege and slash at schools and other portions of the state budget.

The Texas state revenue stream faces a bit of a double whammy here, per the Dallas Morning News. First, state production taxes are based on the per-barrel price, which has of course nose-dived. Second, if less is being produced, of course, there's less to tax. That means the idea of giving TxDOT extra money out of the Rainy Day Fund (rather than something sensical like mandate 100 percent of state gas tax money go to transportation, then raise TAXES! elsewhere as needed), roads could get hamstrung again. (Cue up the toll roads Batsignal.)

That said, it's ridiculous that the state gas tax, which is a per-gallon rate, not a price-based rate, hasn't been changed since 1991.

Oil just has to stay at around the $60 for a couple more months to put significant crimps on US fracking for another six months after that. (I disagree with the SMU prof in the Snooze piece who expects oil to bottom out in another month or two and hit $75 relatively quickly thereafter.)

I wouldn't be surprised if it's at $65 or a touch higher by midsummer, but, it could slump back to near $60 again by September 2015.

It should be noted that tar sands oil will likely NOT be greatly affected at current prices; it would probably take sustained prices of $45 or so for that to happen. Therefore, with a new Congress about to enter into office, President Obama will have to face Keystone XL issues once again.

Meanwhile, even with the budgetary challenges, Saudi Arabia itself is likely among the net winners, primarily for all these geo-petro-political reasons.

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