Today’s crude is hardly cheap by historical standards. Questions rise as oil prices drop

Oil has been on a wild ride this fall, dropping more than 20 percent from levels seen just a few months ago and pushing gasoline prices down for more than two weeks straight.

While Wall Street agonizes over the fallout to the energy sector, Washington is watching to see how the bear market for oil affects international tensions in the Middle East and Eastern Europe, and how much the domestic economy benefits amid worries about a global slowdown.


The global Brent crude benchmark steadied near $86 a barrel on Friday, less than $5 above U.S. WTI crude — a much smaller discount for domestic oil than the $15 difference in January.

But despite the sharp recent decline, today’s crude is hardly cheap by historical standards.

“It’s not $80 oil that is unusual — $100 oil was unusual,” said Edward Chow, a senior fellow in the energy and national security program at the Center for Strategic and International Studies. “The fact that there is a cyclical decline should not surprise anyone. The precise timing always surprises everyone.”

The next flash point for crude may come on Nov. 27, when OPEC members will meet in Vienna, and where Saudi Arabia and its Gulf neighbors may fend off efforts to coax them into a production cut.

Beyond circling that date on their calendars, policymakers should keep their eyes on POLITICO’s five evolving oil-price questions for the next six weeks.

1. How hard-hit is U.S. shale production?

The domestic oil and gas industry can withstand the drop in crude to $80, the International Energy Agency has said, but it not clear how much pain U.S. shale producers could feel if OPEC keeps production levels unchanged, which could push prices even lower.

“I don’t think we’re in a lull right now that’s going to prevent companies from getting financing” for oil and gas projects, Moody’s Analytics senior economist Chris Lafakis said in an interview. “But when we start talking about $70 a barrel, that will present significant challenges.”

Those challenges will prod some producers to cut back before others, causing drilling to ramp down steadily rather that sparking a full-blown collapse in U.S. activity. Oil drilling is not the monolith it’s often perceived to be in politics, and smaller companies that drill riskier wells could become ripe takeover targets for the more established players, even if crude stays a level that keeps production profitable for most.

A few shale-industry experts see possible silver linings in falling prices — as long as they remain in the $80 range.

“Labor, hard hats, drilling rates, all that was going up as quickly as oil prices were going up” when per-barrel prices neared $120, said Bill Kroger, co-chairman of energy litigation at the Baker Botts law firm in Houston.

Now that crude is dipping, Kroger added, firms that once paid top dollar for oilfield services “may get better pricing both on drilling and completion” of wells.

2. How much squirming is it causing Russia, Iran and Venezuela?

Amid the “What, me worry?” attitude of the Saudi oil minister to swooning oil, investors and analysts have repeatedly turned to data that show OPEC’s top producer is well-positioned to endure a sustained drop in prices. But that’s not the case for Russia, Iran and Venezuela, which face significant budgetary pressures from oil prices under $90.

While Saudi Arabia is believed to require around $92-per-barrel Brent oil to break even under its current budget, its coffers are flush with foreign exchange reserves that provide it with valuable insulation in its long-term fiscal foundation.

“This is really a Russia statement,” Deborah Gordon, director of the Carnegie Endowment for International Peace’s energy and climate program, said in an interview of the Saudis’ comfort with cheaper crude.

“It makes Saudi Arabia look like a good partner temporarily,” she added, particularly to energy-hungry, economically anemic nations in Europe and Asia that are becoming increasingly reliant on Middle Eastern oil. “That demand, once the relationship is re-pegged, is something Saudi Arabia might be able to count on later.”

Still, any impact that oil’s fall has on policymakers in Moscow, Tehran and Caracas may emerge only in the subtle kabuki theater of geopolitics, if it is felt at all.

Nikos Tsafos, an oil and gas consultant at Enalytica, said for Iran, Russia and Venezuela, the oil price dive makes matters “progressively worse and limits their options.” But even with oil revenues waning, those countries “can cut a lot of things that aren’t politically sensitive before [they] get to things that are.”

Three days before the next OPEC meeting, incidentally, marks another big day for Iran: the Nov. 24 deadline for talks with the U.S., Russia, China and European nations on winding down its nuclear program.

3. And what about the broader U.S. economy?

A 1-cent decline in the retail price of gasoline for a year amounts to $1.2 billion in savings for U.S. consumers, according to Lafakis. That’s a stimulus for the domestic economy that saw the average price at the pump plummet by 9 cents over the past week to $3.11 a gallon.

“The U.S. is really in the driver’s seat here,” Gordon said.

Citigroup analysts projected a sustained drop in oil prices would act as a $1 trillion-plus stimulus for the global economy should oil prices stay lower, pushing down the cost of other commodities.

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Tsafos agreed that cheaper crude would pay off through lower transportation costs for the shipment of goods, as well as the airline industry, but warned against overstating the “generally overinflated sense of how important energy is” to the broader U.S. manufacturing economy.

But so far, the drop in prices hasn’t seeped into the U.S. midterm campaigns.

“I’m an economist, not a political strategist,” Lafakis said, but given other signs of a recovering economy, “I’m probably as puzzled as you are why it’s not mentioned in political campaigns.”

4. Does the push for crude exports gain or lose steam?

The U.S. oil industry’s emerging priority for 2015 is ending the decades-old ban on crude exports, a move that energy groups say would support even more drilling in North Dakota and Texas. Whether lower prices help that argument for oil exports is very much up for debate.

Jamie Webster, senior global crude director at consultancy giant IHS, said the price drop offers “the potential to correct” the policy put in place after the 1970s oil shock that restricted crude exports but allowed overseas sales of refined products like gasoline and diesel.

And CSIS’s Chow said cheaper gasoline made it easier to argue for an end to crude export curbs.

“Politically speaking,” Chow said, the argument that “‘we have to save it for domestic consumption’ is much stronger” when oil and gasoline are priciest.

But independent energy analyst and oil-rush skeptic Chris Nelder warned that cheaper U.S.-priced oil and smaller discounts to the Brent crude price would shrink profits for exporters.

“It’s tough for anybody to make money exporting crude to a market only fetching $82” a barrel, Nelder said. “When it was $110, I could see that argument.”

5. What happens to the Canadian oil sands?

Canada’s crude has its own benchmark price that is lower than U.S. oil prices, but that discount has narrowed recently since the southern leg of the Keystone XL pipeline has eased a glut of the heavy fuel in the Midwest. Even so, cheaper crude worldwide is not exactly good news for a nation with some of the most expensive production startup costs in the world.

“The reality is, tar sands production doesn’t fit in in a world of moderately priced oil,” said Natural Resources Defense Council international program attorney Anthony Swift, who closely tracks oil sands economics.

But the impact would mostly be felt by companies hoping to develop new oil sands projects, not those already in operation.

The current shipments of 2 million barrels per day are “relatively immune to price changes at this point,” Swift said. The same goes for an estimated 800,000 barrels a day that would flow from projects in the works.

What falling oil prices could do, though, is give a potent argument to the anti-Keystone campaign.

The Obama administration has said it did not believe the pipeline would have a major impact on the climate, since the oil sands would be developed with or without it. But its review of the pipeline said a drop in oil prices below $75 would make shipping the oil by rail uneconomic, giving the pipeline’s rejection a “substantial impact” on future Canadian heavy crude production.

The cheaper oil gets, then, the more loudly Swift and other pipeline critics can argue that a White House veto of Keystone would help prevent growth in oil sands’ development that they fear would have serious climate impacts.

“In today’s oil price environment,” Swift said, the State Department “acknowledges that Keystone fails the president’s climate test.”

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