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Douglas Grandt

Deb Fischer can be an American MVP
February 1, 2015 at 9:09 PM
Michelle Weber (Sen. Deb Fischer)

Dear Michelle,
When we met January 27, I had not yet seen the following poignant analysis by Elias Hinckley.
Please read it carefully as it has implications for how ExxonMobil and other U.S. oil production
and refining operations may respond as prices plummet. This is their Super Bowl for survival.
Again, my question to the CEOs and Boards of Directors is whether they will decide to close their
doors as operations become unprofitable. Will they renege on us like Super Bowl ticket brokers?
We the People need to compel them to continue operations all the way down to the last refinery,
and not to go out of business prematurely, unexpectedly to act in the public interest.
I ask Deb Fischer to call for a special committee to investigate oil company business plans and
compel them to commit that their plans and decisions will be transparent to the public.
Very best regards,
Doug Grandt

Historic moment: Saudi Arabia sees End of Oil Age

coming and opens valves on the carbon bubble

January 22, 2015 by Elias Hinckley 18 Comments |

Most analysts believe Saudi Arabia refuses to cut production because it wants
to shake out its higher-cost competitors or because it wants to punish Iran and
Russia. There may be some truth in those theories, writes Elias Hinckley,
strategic advisor and head of the energy practice with international law firm
Sullivan and Worcester, but they miss the deeper motivation of the Saudis.
Saudi Arabia, he says, sees the end of the Oil Age on the horizon and
understands that a great deal of global fossil fuel reserves will have to stay
underground to avoid catastrophic global warming. Thats why it has opened
the valves on the carbon asset bubble.
Saudi Arabias decision not to cut oil production, despite crashing prices,
marks the beginning of an incredibly important change. There are near-term
and obvious implications for oil markets and global economies. More important
is the acknowledgement, demonstrated by the action of worlds most important
oil producer, of the beginning of the end of the most prosperous period in
human history the age of oil.
In 2000, Sheikh Ahmed Zaki Yamani, former oil minister of Saudi Arabia, gave
an interview in which he said:
Thirty years from now there will be a huge amount of oil and no buyers. Oil
will be left in the ground. The Stone Age came to an end, not because we had
a lack of stones, and the oil age will come to an end not because we have a
lack of oil.
Fourteen years later, while Americans were eating or sleeping off their
Thanksgiving meals, the twelve members of the Organization of the Petroleum
Exporting Countries (OPEC) failed to reach an agreement to cut production
below the 30 million barrel per day target that was set in 2011. This followed
strenuous lobbying efforts by some of largest oil producing non-OPEC nations
in the weeks leading up to the meeting. This group even went so far as to
make the highly unusual offer of agreeing to their own production cuts.
The ramifications of this decision across the globe, not just in energy markets,
but politically, are already having consequences for the global landscape. Lost
in the effort to understand the vast implications is an even more important
signal sent by Saudi Arabia, the owner of more than 16% of the worlds proved
oil reserves, about its view of the future of fossil fuels.
Since its formal creation in 1960 the members of OPEC, and specifically Saudi

Since its formal creation in 1960 the members of OPEC, and specifically Saudi
Arabia (and in reality the Kingdoms control over global oil markets is much
larger than that 16% of reserves implies as its more than 260 billion barrels are
among the easiest and cheapest to extract and before enhanced recovery
techniques accounted for a much larger share of global reserves) have used
excess oil production capacity to influence crude prices. The primary role of
OPEC has been to support price stability. There are notable exceptions like
the 1973-1974 oil embargo and a period of excess supply that undermined
prices and crippled the Soviet Union in the 1980s (though whether this was a
defined strategy or serendipity remains in some question), but at its core the
role of OPEC has been to control oil prices. As recent events show, OPECs
role as the controller of crude oil pricing is coming to an abrupt end.

But in a world where a producer sees the end of its market on

the horizon, then every barrel sold at a profit is more valuable
than a barrel that will never be sold

In acting as global swing producer, OPEC has relied heavily on Saudi Arabia,
which can influence global prices by increasing or decreasing production to
expand or reduce available global supply. Saudi Arabia can do this not only
because it controls an enormous portion of global reserves and production
capacity, but does so with crude oil that is stunningly inexpensive to produce
compared to the current global market. A change, however, has occurred in
Saudi Arabias fundamental strategic approach to the global oil market. And
this new approach to refuse to curtail production to support global prices
not only undermines OPECs pricing power, but also removes a vital subsidy for
global oil producers provided by the Saudis longtime commitment to price

Understanding Why
The widely held conventional theory is that the Saudis want to shake the weak
production out of the market. This strategy would undermine the economic
viability of a meaningful amount of global production. The theory assumes that
this can be done in some kind of orderly bring-down of prices where the Saudis
can find an ideal price below the production cost of this marginal oil production
but still high enough to maintain significant profits for the Kingdom while this
market correction plays out. The assumption is that following the correction
there will be a return to business as usual along with higher prices, but with
Saudi Arabia commanding a relatively larger share of that market. An
alternative rationale is that Saudi Arabia is fighting an economic war with oil; a
strategy designed to economically and in turn politically cripple rival producers
Iran and Russia because the governments of these countries that depend on

Iran and Russia because the governments of these countries that depend on
oil exports cannot withstand sustained low prices and will be significantly
While there may be some truth to both of these theories, the real motivation
lies somewhere closer to Sheikh Yamanis 2000 prediction. Saudi Arabia has
embarked on an absolute quest for dominant market share in the global oil
market. The near-term cost of grabbing that market share is immense, with
the Saudis sacrificing potentially hundreds of billions of dollars if low prices
persist. In a world of endless consumption, this risk would be hard to justify
merely in exchange for a temporary expansion of global market share the
current lost revenue would take years to recover with a marginally higher share
of global supply.
But in a world where a producer sees the end of its market on the horizon, then
every barrel sold at a profit is more valuable than a barrel that will never be
sold. Current Saudi oil minister Ali al-Naimi had this to say about production
cuts in late December: it is not in the interest of OPEC to cut their production
whatever the price is, adding that even if prices fell to $20 it is irrelevant.
Implied, if not explicitly stated, is that Saudi Arabia wants its oil out of the
ground, regardless of how thin its profit margin per barrel becomes.
Saudi Arabia is seeing a new and massively changing energy landscape. The
U.S. and China have agreed to bilateral carbon reduction targets. 2014 is now
officially the hottest year recorded in human history, a record set almost
impossibly without the presence of El Nino. And on January 7 a report
released in Nature lays bare the fossil fuel climate change equation by
concluding that to achieve anything better than a 50/50 shot at keeping global
warming under 2 degrees centigrade (the most widely accepted threshold for
avoiding catastrophic climate change) 82% of fossil reserves must remain in
the ground. That report puts hard numbers on the percentages of fossil fuels
that must stay in the ground and calls for 38% of proven Mideast oil reserves
to never to be pumped from the ground. That 38% represents some 260 billion
barrels of oil worth tens of trillions of dollars much of that not held in Saudi

Saudi Arabia no longer needs OPEC. Global action on carbon

dioxide emissions is gaining global acceptance and
technological advances are creating foreseeable and viable
alternatives to the worlds oil dependence

All of these threats to oil use are occurring against a backdrop where the
acceleration of costs-effective alternative technologies expands the potential of
viable alternatives to our current fossil fuel-based energy economy. Yamanis
prediction no longer seems a fantasy where no one outside of science fiction
writers could envision an alternative to the age of oil, but rather a stunningly
prescient analysis of the future risk to the value the largest oil reserve on the
planet by a man who once managed that reserve.
Saudi Arabia no longer needs OPEC. Global action on carbon dioxide
emissions is gaining global acceptance and technological advances are
creating foreseeable and viable alternatives to the worlds oil dependence.
Saudi Arabia has come to the stark realization, as Yamani foretold, that it is a
race to produce, regardless of price, so that it will not be leaving its oil in the
ground. The Kingdom has effectively open the valve on the carbon asset
bubble and jumped to be the first to start the race to the end of the age of
hydrocarbons by playing its one great advantage a cost of production so low
that it can sell its crude faster and hoping not to find itself at the end of the age
of oil holding vast worthless unburnable reserves.
The end of the age of oil, of course, remains many years off (and almost
certainly well beyond Yamanis timeline of 2030), but to Saudi Arabia, that end
is clearly not so far away that the owner of the largest, most accessible crude
resource is willing to continue to subsidize higher prices for other producers at
the risk of leaving its own oil untapped one day in the future.

Collateral Fallout
Much has been made of the catastrophic economic consequences to Russia,
Iran, Venezuela and other oil exporting nations caused by these low oil prices,
as well as, the profound damage to their economies and impending political
turmoil. Meanwhile in the U.S., there has been endless analysis of the impact
(or lack of impact) on the nations resurgent oil production and speculation
about the price at which U.S. production will begin to decline.
Less well documented is the impact on access to capital for drilling operations
(and given the disastrous economics of North American coal, perhaps fossil
fuel extraction broadly). Drilling for oil requires huge amounts of capital with a
significant appetite for risk, as both production uncertainty and market volatility
can undermine the value of investments. In the current production boom,
market volatility was wildly underpriced. When combined with pent up appetite
for yield due to persistently low interest rates, capital, including tremendous
amounts of high-yield debt, has flooded into oil companies. As low crude
prices persist there will be substantial losses by investors. This will cause
volatility in crude oil markets to be re-priced, and access to low cost capital will

volatility in crude oil markets to be re-priced, and access to low cost capital will
disappear for all but a select group of oil production investments.

There is a much much bigger story unfolding: the carbon

asset bubble is deflating

OPEC will continue to meet and hold itself out as a cartel that can control the
oil markets, but that time has passed. The cartel was dependent upon Saudi
Arabia to use its outsized swing position to control spare capacity in the
market. With the Saudis no longer interested in that role, the influence of the
cartel is gone. It would be no surprise at all to see Saudi Arabia actually
increase production (though how much additional output is readily available is
unclear) as prices stabilize and begin to climb later this year because excess
capacity will be shed from the market and global economic growth will
The direct oil markets impact and the geopolitical fallout will likely be the
defining headlines of 2015, but there is a much much bigger story unfolding:
the carbon asset bubble is deflating. The value of effectively every asset class
on Earth is influenced by the assumption that a fossil fuel-based economy will
persist for so long that any potential for future change to asset values can be
ignored. That assumption is wrong. The global industrial economy operates
on an assumption of available and relatively inexpensive energy, either in the
form of electricity or liquid fuels. If the form, availability of, or cost of, those
energy sources changes it will fundamentally change the cost to use and
produce virtually every other asset on Earth. And that will necessarily change
the value of every one of those assets. There will be both positive and negative
impacts, and understanding this change, in both scope and speed, will provide
insight on one of the largest wealth shifts ever experienced.
The owner of the most valuable fossil fuel reserve on Earth just started
discounting for a future without fossil fuels. While they would never state this
reasoning publicly, their actions speak on their behalf. And that changes

Editors Note
This article was first published on Energy Trends Insider and is republished
here with permission from the author.

Elias Hinckley (@eliashinckley) is a strategic advisor on energy finance and

energy policy to investors, energy companies and governments. He is an
energy and tax partner with the law firm Sullivan and Worcester where he
helps his clients solve the challenges of a changing energy landscape by using
his understanding of energy policy, regulation, and markets to quickly and
creatively assemble successful energy deals.