By Karl Arnold Belser
20 August 2015

I have large share holdings in several oil companies like British Petroleum, Chevron, Conocophillips, Royal Dutch Shell and Total Fina. I like these shares because they have a high dividend yield. I have a cumulative loss in these positions because the price of oil has fallen to below $40 a barrel. I am continuing to hold these shares, even though they might go lower. 

Oil is necessary for the operation of the current world economy for two major reasons. It is a source of energy and secondly it is a physical material from which many products such as plastics, synthetic rubber and lubricants are made.

One of the driving forces in the lower price for oil is the use of wind, solar and nuclear power as  competition to oil fired power plants..
Another driving force is the advent of hydraulic fracturing (fracking), which is a method to mine under ground gas and oil dispersed within rock formations. fracking is producing a significant amount of oil, but at a relatively high price per barrel. Fracking is also not controlled by the OPEC cartel, and has basically broken the OPEC monopoly which has caused prices to fall because of competition.

The demand side is also weak. LED light and hybrid cars are significantly reducing the demand for oil products as a fuel.  Oil will not be completely displaced as a fuel because for example electricity is not going to help airplanes fly.  In addition the Chinese economy is on the verge of depression, which in turn willl mean that Chinese demand will slow.

On the other hand, oil is the key ingredient in low cost products made out of plastic. Ultimately 3D printing of plastic parts will be a significant part of the economy.

The  observation is that  oil companies are not going out of business any time soon even though they might be less profitable.

That said, why doesn't OPEC control their pumping of oil in order to raise oil prices and maximize the total amount of money they get for their resources. The Saudis admit that they have huge monetary reserves in their sovereign wealth funds. So, they could afford the pump less and let oil prices rise.

One explanation for OPECs behavior is that they want to make fracking unprofitable. This would be a purely business competition argument and not a political one. If this in fact were the case, the attempt has backfired because low oil prices have weeded out unprofitable drilling and caused innovations that have made fracking cheaper and more efficient.

My conclusion is that the Saudis are apparently holding the price of oil low for political reasons.

An initial political reason might be that low oil prices are hurting some of our political adversaries such as Russia. It is true that Russia and other countries like venezuela have been hurt, but the lower Ruble exchange rate has lessened the amount of  the
oil price drop in Rubles. I doubt that the Saudis are cooperating in some hidden fachon with the united States to hurt Russia

One might argue that low oil prices hurt the insurgent Islamic states in the Middle East. This is somewhat thru. However, much of the funding for the Islamic insurgencies is coming from Saudi Arabia, and the saudis have a lot of money.
It is really not affecting the middle east Islamic states because they are effectively being funded by the Saudis.

Once one realizes that Saudi Arabia might not be such a good friend to the US, then one becomes aware of the conflict between Iran and the Saudis. The US is negotiating a nuclear arms agreement with Iran, and this agreement will directly impact Saudi Arabia. The agreement will allow Iran to dump its oil on an already oversupplied market. One might conjecture that the Saudis want to minimize the amount of money that Iran gets for their oil. Even more extreme, the Saudis may expect the oil price to drop into the $20 range. In this case they might be trying to get what they can before the oil price totally collapses.

I think that the nuclear agreement with Iran will happen. It is a good step to allow the Iran people to adjust to the release of sanctions. If they violate the agreement then the US can take whatever military action is needed to curb their atomic weapon ambitions. Ithink the leaders in Iran know that the US can take them out, probably with nuclear weapons, and I think that they will try to keep the agreement that they make.

Am I  a fool to deny this very ominous circumstance.? I am a long term investor. I know that things may get much worse from here, and I am willing to wait the current situation out. As I said earlier, the oil companies are not going out of business any time soon.
Last updated August 21, 2015
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