Pump Up the (Overproduced)Volume

S. Artesian

1.  Having survived the near-death experience of the 2007-2009 contraction, and then the weakest and slowest recovery of the post-WW2 era, and then having escaped unscathed (almost)  from the 2016 profit recession by the skin of other people’s teeth, the US bourgeoisie celebrated 2017 and into 2018 like it was 1999 all over again– 1999 being the year that OPEC stepped in and “righted” the ship after oil prices had touched the $10 per barrel mark.

History doesn’t exactly repeat itself but sometimes it does feel, act, read like an amnesiac’s description of deja vu: “This would all seem vaguely familiar if I could remember anything.”

No, it doesn’t repeat itself, but every so often, history gets stuck.  The bourgeoisie after all are pretty much old dogs without any new tricks.  There comes that point when the capitalist cycle seems more like a turning disease.  Accumulation is realized in the moments when and where nostalgia, amnesia, and bovine spongiform encephalopathy connect.

So for 45 years the bourgeoisie have used the production and the price of oil as the tip of the spear in transferring wealth up the daisy chain and through the gate of their gated communities.  Drill, baby, drill?  Turn, mad cow, turn.

2.  In 1973, the first OPEC price spike, along with the overthrow of the Allende government,  gave notice that workers living standards, organizations, and wages,  in both advanced and developing countries were obstacles to the reconfiguration of wealth.  In 1979, the second OPEC spike became the double dip recession, which led to the sovereign debt crisis and,  with the ensuing overproduction of oil brought the former Soviet Union to ground.

The housing market in the US also collapsed, and with it, the Savings and Loan industry which got us to the recession of 1990 and, of course, the first invasion of Iraq, which pushed the price of oil up to, praise the lord, $40 per barrel, leading to even more overproduction and the collapse of oil prices, the 1999 intervention, another recession in 2001, and when the price of oil fell to $20, the second invasion of Iraq, pass the ammunition.

From there, we get to the price blowout of 2008, the ensuing collapse, recovery through 2014, and here we are.  History doesn’t repeat itself, but we do when we’re dealing with capitalist cycles.  If OPEC didn’t exist, the US bourgeoisie would have had to invent it.  OPEC did exist and the US bourgeoisie have reinvented it several times.

3.  You remember 2015, don’t you?  The oil industry sure does.  The US Energy Information Agency publishes, quarterly and annually, its Financial Review of the Global Oil and Natural Gas Industry and 2015 was not a good year for the industry.  Oil prices were down 46% from the 2014 mark.  This decline, the result of overproduction that was fed by US fracking operations and the Saudi reluctance to institute production quotas, led to asset write downs and the first decline in proven reserves since 2008.  “Proven reserves” is an economic characterization, not a geological one.  The category of proven reserves is applied to oil that can be extracted profitably  with current technology, at current prices.

Total production of  liquids (as opposed to gas) in 2015 increased 6.4% over the 2014 level.  Lifting costs, the direct costs of extracting a barrel of oil fell by 1/3 or $6 to $12 a barrel.  Capital spending declined by about 30% from the previous year.  Money calls the tunes here, hence what overproduction evokes more than anything is more overproduction as the energy corporations sought to capture cash flow despite the undermining of price involved in these very attempts.

The following year, 2016, wasn’t a better year for the industry, as Brent crude prices sank another 16% from the previous year.  Although rig counts remained depressed, capital spending again fell,  and production actually declined by 1.5%, producers pushed through rationalizations of the production process that reduced lifting costs to their lowest levels in more than a decade.  Capital costs per barrel declined to approximately $15 per barrel, bringing market prices into close correspondence with production costs.  Overproduction is the awful moment, for capitalism, when values and prices do truly coincide.

OPEC, led by the Saudis, had thought it could “outlast” the US shale producers through a prolonged price decline, given the lower average costs of production for the largest OPEC producers.  OPEC had not accounted for the ability of US capital markets to a)support the shale producers through debt refunding  b) require efficiencies of the producers c)to access the very dollars that OPEC had earned and stored using US Treasury instruments, recycling those dollars into the capital markets supporting those shale producers.

OPEC had to retreat, particularly when the embargo was lifted on Iranian output, and Iraqi output climbed to 4.7 million barrels per day in December 2016.  Then the steel drums beating production changed the beat to quotas and reductions in order to restore “order” to the markets.

4.  The quotas established by OPEC and Russia have removed approximately 1.85 million barrels per day from supplies.   Third-quarter 2017 cash flow for the producers was 10% higher than the previous year, and the markets, in 2017 celebrated the return to $50, then $60 per barrel oil, looking forward to $70 and $80 per barrel.  US production in the Permian Basin, however, has swamped the pipeline and transportation capabilities, leading to steep discounts on the price of West Texas Intermediate oil.

Keeping the price of oil at a level capable of supporting an average rate of profit is a never-ending problem for the producers when production itself devalues the entire matrix of valorization.  Despite, or rather because, the net property, plant, and equipment of oil producers in the US amounts to 22% of the net PPE in all of manufacturing, and despite, or rather because, oil worker production hours are only 1% of the total production hours for manufacturing, the industry accounts for 12% of the cost of all materials used in production in US manufacturing, 10% of capital spending, yet its average rate of return on investment is less than half that of manufacturing as a whole.   “Instability,”  “threats to supplies,” “quotas” “embargoes” are expressions of the need  to make that half whole.  Keep that in mind when the Iran embargo is reimposed, and US banks cut off the financing of the European companies pumping oil in Iran.

It’s sound and fury all right, but it signifies more than nothing, even if it is an embargo tale told and reimposed by an idiot.

May 21, 2018

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