Kazakhstan Prepares For $40 Oil, Gary Schilling Says "Oil Going To $20"

"People should not be worried," explained Kazakhstan President Nursultan Nazarbayev in a TV address over the weekend, "we have a plan in place if oil prices are $40 per barrel." Kazakhstan, the second largest ex-Soviet oil producer after Russia, explains "there are reserves which could support people, preventing living conditions from worsening." However, if A. Gary Schilling's reality check of $20 oil being possible comes to fruition, as he explains, what matters are marginal costs - the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf... We wonder who has a plan for that?

The Kazakh President says "don't worry", as Reuters reports...

Kazakhstan, the second largest ex-Soviet oil producer after Russia, has plans in place should global oil prices fall as low as $40 per barrel, President Nursultan Nazarbayev told local TV channels.

"Kazakh people should not be worried. We have a plan if oil price are $70, $60, $50, $40 per barrel," he said, according to a transcript published on his website www.akorda.kz.

"There are reserves which could support people, preventing living conditions from worsening," he said, without providing any details.

Kazakhstan's National Fund, which collects oil revenues, stood at $76.8 billion at the end of November. Separately, the central bank's net gold and foreign exchange reserves stood at $27.9 billion.

Nazarbayev has also urged the Kazakh people not to worry about the slide in Russia's rouble currency, which has lost some 45 percent of its value versus the dollar this year.

But A Gary Schilling is less sure... (via Bloomberg View)

When the U.S. Federal Reserve ended its quantitative-easing program in October, it also ended the primary driver of U.S. stocks during the past six years. So long as the central bank kept flooding the markets with money, investors had little reason to worry about a broader economy limping along at 2 percent real growth.

Now investors face more volatile markets and securities that no longer move in lock-step. At the same time, investors must cope with slower growth in China, minuscule growth in the euro area and negative growth in Japan.

Such widespread sluggish demand -- along with ample supplies of oil and most everything else -- is the reason commodity prices are falling. They have been since early 2011, but many people failed to notice until recently, when crude oil prices nosedived.

Normally, less demand and a supply glut would lead the Organization of Petroleum Exporting Countries, beginning with Saudi Arabia, to cut production. As the de facto cartel leader, the Saudis would often reduce output to prevent supply increases from driving down prices.

Of course, this also cost the Saudis market share and encouraged cheating by OPEC members. Saudi leaders must grind their teeth over the last decade's unchanged demand for OPEC oil, while all the global growth has been among non-OPEC suppliers, principally in North America.

That may explain why, while Americans were enjoying their Thanksgiving turkeys, OPEC surprised the world. Pressed by the Saudis and other rich Persian Gulf producers, it refused to cut output despite a 38 percent drop in the price of Brent crude, the global benchmark, since June.

OPEC, in effect, is challenging other producers to a game of chicken. Sure, the wealthier producers need almost $100 a barrel to finance bloated budgets. But they also have huge cash reserves, which they figure will outlast the cheaters and the U.S. shale-oil producers when prices are low.

The Saudis also seized the opportunity to damage their opponents, especially Iran and what they see as Iran-dominated Iraq, in the Syria conflict. They also want to help allies Egypt and Pakistan reduce expensive energy subsidies as prices fall.

Then there’s Russia, another Saudi opponent in Syria, with its dependence on oil exports to finance imports and 42 percent of government outlays. With the ruble collapsing, the Russian central bank let the currency float in November after blowing through $75 billion to support it. Then the central bank tried to stop the free fall by raising interest rates by 6.5 percentage points to 17 percent on Dec. 15.

Still, the Russian currency is floundering, along with the economy. Consumer prices in Russia rose 9.1 percent in November from a year earlier. The economy will be in recession next year, the website of the Russian economy ministry acknowledged for a few hours on Dec. 2, before the posting was deleted.

Venezuela is also suffering. The government needs $125-a-barrel oil to cover its spending, of which 65 percent depends on oil exports. Its crude production is down a third since 2000. With inflation raging, the bolivar officially sells for 6.29 a dollar, but for 180 on the black market.

In Nigeria, where oil and natural gas account for 80 percent of government revenue and almost all its exports, the naira has fallen 11 percent versus the greenback so far this year.

How low can oil prices go? In the current price war, the global market price needed to support government budgets isn't really the main issue. Nor are the total costs for exploration, drilling and transportation.

What matters are marginal costs -- the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf, and about the same for U.S. shale-oil producers. The estimated $50 to $69 a barrel break-even point for most new U.S. shale-oil production is less relevant. 

Developing countries that depend on commodity exports for hard currencies to service foreign debt will produce and export even at prices below their marginal cost. Until some major producer chickens out and cuts production, oil prices should remain low. They could decline a lot more than the 50 percent drop so far.