The Energy Report: Bob, in January you published an article saying that the drop in oil prices could be the "straw that pops the $7-trillion derivative bubble." Can you explain the influence of oil prices on derivatives?
Bob Moriarty: It's not the oil prices that are significant; it's the change in oil prices. If you own an oil field and it costs you $75 to produce a barrel, at $110 a barrel ($110/bbl), you're OK. If oil drops to $45/bbl, you're in serious trouble.
In the shale oil sector, producers were taking out hundreds of billions of dollars in loans to finance shale oil that was costing them about $110/bbl to produce. It looked good on paper, but was a disaster waiting to happen. A lot of people in the shale oil business will soon be going out of business.
This could start World War III. The United States is the biggest oil producer in the world today, and Russia is number two. Russia's economy is based on oil priced at $110/bbl. They are very angry at the U.S. and Saudi Arabia for the games that have been played in oil. Oil at $45/bbl is not sustainable. It could bring down the world's financial system all by itself.
The real cost of energy today is $60 to $70/bbl. In the last piece I did with The Energy Report, I said $75 to $100/bbl oil was the new normal. That's still true. Oil is way below the cost of production, and that's going to hurt a lot of people.
TER: There is speculation the Saudis are doing this to wipe out some of the Russian and deepwater production. Could that be true? [Read more...]