Monday, February 23, 2015

Oil-Drop Pain Spreads to Saudi Arabia’s Energy Behemoth

Amazing how a few years ago there was peak oil and all the news articles justified the price of oil over $100 a barrel, and now the producers are slashing costs because the price of oil has collapsed due to oversupply. Aivars Lode

Aramco looks for cut costs, asking oil-services providers for deals; pushing for a phone-bill discount
By Summer Said and BenoĆ®t Faucon 
Saudi Arabia’s refusal late last year to rein in oil production helped trigger the price crash that has hurt oil-producing countries and publicly listed energy companies alike. And now even the kingdom’s own oil company is feeling the pain.
As a result, state-owned Saudi Aramco is looking for ways to cut costs everywhere, from pushing contractors for better deals on oil-well services to negotiating discounts on its phone and power bills, according to people familiar with the matter.
The company—the world’s largest oil producer—is also considering slashing its future spending on production and exploration by as much as 25%, much like private oil companies, industry sources said. 
“Like everyone else, we’re using the downturn as an opportunity to sharpen our fiscal discipline,” Aramco CEO Khalid Al Falih said in public remarks during the World Economic Forum in Davos in January. “We’re cutting on a few things that we could cut, but we’re as committed as ever to our long-term strategy.”
The measures demonstrate some of the risks the Organization of the Petroleum Exporting Countries took when it decided in November to forsake its traditional role of cutting production to boost prices. The Saudi-backed decision has hurt big, publicly listed companies, such as Royal Dutch Shell PLC and Chevron Corp., but is now ricocheting and hitting national oil companies. 
Not only is revenue to state treasuries falling, but OPEC nation oil companies—like their private counterparts—are making cuts that may make it difficult for them to capitalize when prices begin to rise.
The measures are a departure for Aramco, which had boosted its spending on pumping oil and launched its first efforts at deep-sea production when crude was regularly trading at more than $100 a barrel from 2011 to 2014. The price of Brent crude, the world benchmark, has nearly halved since June, trading around $60 a barrel in London on Thursday.
To be sure, the retrenchment is small scale for Aramco and Gulf oil producers—whose production costs are much lower than for most international rivals—and executives say it won’t threaten output levels in big fields in Saudi Arabia, Kuwait or the United Arab Emirates. The cuts don’t appear to be as deep as those after the mid-1980s price crash, when Aramco and others laid off thousands of workers and cut back production to historically low levels.
Government companies like Aramco and others in the Gulf hold monopolies on the production of their huge crude reserves and don’t have to produce public accountings of their business, so it is difficult to know precisely what they plan to spend and cut or whether they are losing money. 
But oil prices have produced a new cost-consciousness across the Persian Gulf’s state-owned companies.
In December, Aramco was advised by the Saudi government to cut costs, one Saudi official said. Aramco, which usually bases its investment on oil supply and demand, is trying to execute some projects at lower costs, while deferring others until the picture of the oil market is clearer, the official said. 
Aramco executives are considering slashing production and exploration spending to $30 billion a year from $40 billion while oil prices remain low, according to industry sources. 
Aramco has joined oil companies, big and small, in pushing aggressively for discounts from its contractors, seeking rebates from telecommunications providers and power suppliers, for example, according to executives. 
In December, the Saudi oil company summoned oil-services companies including Baker Hughes Inc., Halliburton Co. and Schlumberger Ltd. to its offices in the northeastern city of Al Khobar to ask for discounts of up to 20% on certain services, for instance, well-testing procedures, according to people familiar with the matter. The companies do about $6 billion a year in business with Aramco combined, according to people familiar with the matter. 
Baker Hughes offered a small discount, but Aramco has held out for 20%, according to people familiar with the matter. The two parties are still in talks to find a common ground, but no contracts have been canceled, they said.
Halliburton, Baker Hughes and Schlumberger declined to comment.
In an earnings conference call last month, Baker Hughes Chief Executive Martin Craighead said the company was in discussions with “bigger companies with pretty sophisticated procurement groups” to reduce prices. In an earnings conference call at Schlumberger, CEO Paal Kibsgaard said he expected a reduction in spending in the Middle East.
Also in a conference call, Halliburton Chairman Dave Lesar said he anticipated “headwinds” in the Middle East, though he expected his company to be more resilient than most, notably because of recent contracts in Saudi Arabia.
Aramco has pushed back by a year plans to build a $2 billion clean-fuels plant and put on hold deep-water oil and gas exploration and drilling activities in the Red Sea because their profitability is now in question, said people familiar with the matter. 
Geologists have estimated that Saudi territory in the Red Sea could hold the equivalent of more than a third of the Kingdom’s known oil-and-gas reserves, but these reservoirs are also much more expensive to develop than onshore.
Deep-water projects world-wide typically need $53 a barrel to break even, according to Norwegian energy consultancy Rystad Energy.
Aramco isn’t the only big state oil company seeking to cut costs. 
Suhail bin Mohammed al-Mazroui, the oil minister of the United Arab Emirates, said in January that his country, along with other producers, would squeeze oil contractors’ costs to adapt to lower oil prices.
“We will need the service companies and contractors to understand the cycle [of the oil market],” he said at an energy event in Dubai.
Qatar Petroleum said earlier this year it has shelved a petrochemicals project in the Gulf emirate with partner Shell.
In Oman, a Gulf country with moderate oil reserves and production that isn’t an OPEC member, state company Petroleum Development of Oman postponed in December the award of a $1 billion contract to supply and manage oil-production pumps for seven years, according to people familiar with the matter. The government informed bidders they will have to wait for a year to see how oil prices are evolving before committing to major projects, one Omani official said.
While Aramco is beginning to feel some pain, OPEC doesn’t appear likely to change its strategy of maintaining production before its next meeting in June. The cartel has put a premium on maintaining its customer base, and Saudi Arabia has made tactical price cuts.
This week, PIRA Energy Group, a New York research firm, said Saudi Arabian production was pumping more crude than usual, as much as 10 million barrels a day—close to Aramco’s estimated capacity.

USDA Sees U.S. Farmers Trimming Acreage as Crop Prices Fall

Farmers are likely to trim last year’s record soybean acreage 0.2% to 83.5 million acres, according to acting USDA Acting Chief Economist Robert Johansson, while trimming corn acreage about 1.8% to 89 million acres, he said.
”Lower prices will lead to fewer planted acres,” Mr. Johansson said, estimating that overall U.S. farmland dedicated to the eight major field crops would decline 1.3% to 254.6 million acres. 
Farmers are grappling with sliding commodity prices that follow from back-to-back bumper crops, which are seen building massive grain and oilseed stockpiles. U.S. agricultural exports, meanwhile, are seen declining to $141.5 billion in fiscal 2015, down from last year’s record level, according to Mr. Johansson.
While lower crop prices played into the anticipated decline in overall agricultural export value, Mr. Johansson said, overseas customers are also taking advantage of last year’s massive grain production to build up their own supplies, which has sapped some demand for U.S. crops.
The USDA expects an average price of $3.50 a bushel for corn in the 2015-2016 marketing year, down from $3.65 in 2014-2015. Soybeans’ average per-bushel price is seen falling to $9.00 from $10.20, with wheat down to $5.10 to $6.00, according to Mr. Johansson. 
In response, farmers this year are likely to trim acreage in nearly all major crops, he said. Wheat is likely to be planted on 55.5 million acres, down 2.3% from the 56.8 million acres of the grain planted last year, according to Mr. Johansson. Cotton acreage is likely to fall 12.1% to 9.7 million acres, while rice planting seen being down 1.3% at 2.9 million acres.
Lesser-grown feed grains such as sorghum are where farmers are focusing more acres, planning a 9.1% increase this year to 14 million acres in response to demand from China, Mr. Johansson said. 
“USDA projects that China’s recent increase in sorghum and barley imports—used mainly as a feed—will continue in the future,” he said.
Boosted by cheap grain for feed, U.S. meat production is expected to rise to record levels, according to the USDA. Pork production is seen rising 5.5% to a record 24.09 billion pounds, with broiler production up 3.6% to 39.95 billion pounds. Total meat production will also hit a record of 95.13 billion pounds, Mr. Johansson said.
As hog farmers ramp up production, average hog prices are projected to drop 26.3% to $56 per hundredweight, according to the USDA. Average broiler prices are likely to fall 4.4% to $100.30 per hundredweight while cattle prices are expected to rise 4.8% to an average $162 per hundredweight. 
The forecasts are based on USDA analysis, not on a survey of farmers.

Friday, January 23, 2015

EU Believes Apple, Fiat Tax Deals Broke Rules

BRUSSELS—European Union regulators explained why they think tax deals granted to Apple Inc. in Ireland and Fiat SpA in Luxembourg constituted illegal state support—the next stage of an investigation that could result in the companies paying huge sums in extra taxes to the governments concerned.
In documents released Tuesday, the EU laid out the reasoning behind its decision to open formal tax investigations in June. While the probes are in their early stages, a final ruling against the tax deals could result in back taxes being owed by Apple, Fiat, Starbucks Corp. and potentially other companies.
The announcements are likely to set off alarms for a swath of multinationals and funds operating in Europe, particularly those that, like Fiat, arrange their financing and treasury operations through Luxembourg, experts said. 
"Taxpayers across Europe will be reviewing their affairs carefully in the light of this development to make sure they are robust to challenge," said Neal Todd, a partner with Berwin Leighton Paisner LLP in London.
In a hard-hitting letter to the Irish government published Tuesday, the European Commission, the 28-member bloc's central antitrust authority, said it had reached the "preliminary view" that tax deals struck with Apple in Ireland in 1991 and 2007 constituted state aid. 
"The commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple," the letter said.
A spokesman for Apple said the company had "received no selective treatment from Irish officials over the years," and that its tax payments "in Ireland and around the world have increased tenfold" since 2007. "We're subject to the same tax laws as the countless other companies who do business in Ireland," the spokesman said.
At issue are the tax rulings, or so-called comfort letters, sent by governments to multinationals to give clarity on how a specific tax will be calculated. These would be illegal if they gave selective advantages to some companies.
The commission said it had specific doubts—based on an analysis of exchanges between representatives of Apple and the Irish tax authorities—about the methods used to calculate taxes payable by two of Apple's subsidiaries in Ireland: Apple Operations Europe and Apple Sales International.
AOE manufactures personal computers and provides other services to Apple subsidiaries in Europe, the Middle East and Africa, and ASI procures finished Apple products from third-party manufacturers and sells them to overseas distributors.
In its letter, the commission said the costs attributed to AOE appear to have been "reverse engineered" to arrive at a specific taxable income. The regulator also says that excerpts from conversations between Apple and the Irish authorities indicate the reduction of Apple's tax rate after a certain threshold "would have been motivated by employment considerations."
Apple employs more than 4,000 people in Cork, Ireland, where all its Irish subsidiaries are based.
The Cupertino, Calif.-based company paid less than €20 million ($25.4 million) in taxes in Ireland for each of the years 2010-2012 through the two Irish subsidiaries that the commission has focused on, according to the commission's letter.
Apple set aside about $12 billion for U.S. federal and state income taxes in fiscal 2013, on sales of $62.7 billion in the Americas, according to a filing with the U.S. Securities and Exchange Commission. The company, which doesn't break down revenue by country, set aside just $1.1 billion for foreign income taxes over the same period, on sales outside the Americas of about $88 billion. It reported foreign pretax earnings of $30.5 billion that fiscal year. 
Apple could be asked to pay up to $200 million in back taxes, said Heather Self, a tax partner at Pinsent Masons LLP in London. She said the company could also agree to pay a smaller amount to settle—or pay nothing if Ireland offers a robust defense.
The commission doesn't fine countries for providing illegal state aid.
An Irish government spokesman referred to previous comments saying Ireland was "confident that there is no breach of state-aid rules" in the Apple case.
In a parallel development, the commission also published its letter to Luxembourg's government on Tuesday, saying it had reached the "preliminary" conclusion that a tax decision concerning Fiat amounted to state support for the car maker, and the regulator had "doubts" about the deal's conformity with EU law.
That investigation is potentially more significant than the Irish probe due to the large number of funds and other companies that are based in Luxembourg and could be affected by future investigations, experts said. The EU's probe has also spread to Inc. 's operations in Luxembourg and other companies operating there, according to a person familiar with the matter.
The EU's state-aid rules are meant to prevent governments from offering sweetheart tax or subsidy deals to companies that distort competition inside the bloc.
The EU has also said that it was seeking information from the governments of Belgium and the U.K. in separate tax enquiries. The EU said the documents requested from the U.K. related to its overseas territory of Gibraltar.

Fire district consolidation

See my blog from June 8, 2011 about conversation I had with a city councilor where I talked about consolidation of services as the costs did not make sense and that is what happened in Australia in the 90's. Aivars Lode

Tuesday’s election results were historic for taxpayers who have clamored for more than a decade to consolidate Collier County’s empire of separate fire districts.
In each of four fire districts with a say in mergers, voters supported consolidating by percentages ranging from 61 percent to 70 percent.
Mergers passed to combine East Naples and Golden Gate fire districts and to blend North Naples and Big Corkscrew fire districts. This creates opportunities to trim administrative costs while adding frontline personnel and quick response equipment.
Taxpayers will save by not needing a new fire administration building in East Naples, projected to cost $5 million or more, because the merged district can use Golden Gate’s new headquarters. In the northern part of the county, the merger prevents separate districts from having to build two stations not far from one another on opposite sides of the boundary.
Benefits in North Naples-Big Corkscrew include reducing the number of chiefs, cutting costs, and redirecting the savings into front-line personnel and equipment. The merger is projected to save taxpayers $2.3 million in the first five years.
More than two-thirds of voters in a 2010 straw ballot supported the idea that independent fire districts in Collier County and other districts operated by county government should merge. Tuesday’s results are a welcome call to end fire district fiefdoms in Collier County.

Regulators fine global banks $4.3 billion in currency investigation

I identified this back in July of 2012, and now fines are being levied. Aivars Lode

By Kirstin Ridley, Joshua Franklin and Aruna Viswanatha
LONDON/ZURICH/NEW YORK (Reuters) - Regulators fined six major banks a total of $4.3 billion for failing to stop traders from trying to manipulate the foreign exchange market, following a yearlong global investigation. 
HSBC Holdings Plc, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co, Citigroup Inc, UBS AG and Bank of America Corp all faced penalties resulting from the inquiry, which has put the largely unregulated $5-trillion-a-day market on a tighter leash, accelerated the push to automate trading and ensnared the Bank of England.
Authorities accused dealers of sharing confidential information about client orders and coordinating trades to boost their own profits. The foreign exchange benchmark they allegedly manipulated is used by asset managers and corporate treasurers to value their holdings.
Dealers used code names to identify clients without naming them and swapped information in online chatrooms with pseudonyms such as "the players", “the 3 musketeers” and “1 team, 1 dream." Those who were not involved were belittled, and traders used obscene language to congratulate themselves on quick profits made from their scams, authorities said.
Wednesday's fines bring total penalties for benchmark manipulation to more than $10 billion over two years. Britain's Financial Conduct Authority levied the biggest penalty in the history of the City of London, $1.77 billion, against five of the lenders.
"Today's record fines mark the gravity of the failings we found, and firms need to take responsibility for putting it right," FCA Chief Executive Officer Martin Wheatley said. 
He said bank managers needed to keep a closer eye on their traders rather than leaving it to compliance departments, which make sure employees follow the rules.
The investigation already has triggered major changes to the market. Banks have suspended or fired more than 30 traders, clamped down on chatrooms and boosted their use of automated trading. World leaders are expected to sign off on regulatory changes to benchmarks this weekend at the G20 summit in Brisbane, Australia.
In the United States, which has typically been more aggressive on enforcement than other jurisdictions, the Department of Justice, Federal Reserve and New York's financial regulator are still probing banks over foreign exchange trading. 
Regulators said the misconduct at the banks ran from 2008 until October 2013, more than a year after U.S. and British authorities started punishing banks for rigging the London interbank offered rate (Libor), an interest rate benchmark. 
The foreign exchange probe has wrapped up faster than that investigation did, and Wednesday's fines reflected cooperation from the banks. Britain's FCA said the five banks in its action received a 30 percent discount on the fines for settling early.
The U.S. Commodity Futures Trading Commission ordered the same five banks to pay an extra $1.48 billion. Swiss regulator FINMA also ordered UBS, the country's biggest bank, to pay 134 million francs ($139 million) and cap dealers' bonuses over misconduct in foreign exchange and precious metals trading.
The U.S. Office of the Comptroller of the Currency fined the U.S. lenders a total of $950 million. It was the only authority to penalize Bank of America.
Wednesday's settlement, said it had pulled out of talks with the FCA and the CFTC to try to seek "a more general co-ordinated settlement" with other regulators that are investigating its activities.
The FCA said its enforcement activities were focused on those five plus Barclays, signaling it would not fine Deutsche Bank AG. 
The CFTC declined to comment on whether it was looking at other banks.
Britain's Serious Fraud Office is conducting a criminal investigation, and disgruntled customers can still pursue civil litigation.
RBS, which is 80 percent owned by the British government, received client complaints about foreign exchange trading as far back as 2010. The bank said it regretted not responding more quickly. 
The other banks were similarly apologetic.
The currency inquiry struck at the heart of the British establishment and the City of London, the global hub for foreign exchange dealing.
The Bank of England said on Wednesday that its chief foreign exchange dealer, Martin Mallet, had not alerted his bosses that traders were sharing information.
The British central bank, whose governor, Mark Carney, is leading global regulatory efforts to reform financial benchmarks, has dismissed Mallet but said he had not done anything illegal or improper.
It also said it had scrapped regular meetings with London-based chief currency dealers, a sign the BOE wants to put a distance between it and the banks after the scandal.
Shares of banks involved in the settlement were down slightly Wednesday afternoon. Bank of America dipped 0.2 percent, JPMorgan fell 1.6 percent, and Citi was 0.6 percent lower.
RBS was down 1 percent, HSBC was down 0.3 percent, and UBS was down 0.1 percent in after-hours trading.
(1 US dollar = 0.9630 Swiss franc)
(Additional reporting by Steve Slater, Huw Jones, Jamie McGeever, Clare Hutchison and Matt Scuffham in London and Katharina Bart in Zurich; Writing by Carmel Crimmins and Emily Stephenson; Editing by Alexander Smith, Anna Willard, David Stamp and Lisa Von Ahn)

Wednesday, January 14, 2015

Dollar’s Updraft Taxes CFOs

An unexpected surge by the U.S. dollar is causing headaches for finance chiefs.
Not only did the currency’s strength weigh on year-end earnings, but it is clouding this year’s outlook, complicating corporate borrowing and pension accounting. It is even shaking CFOs’ belief the Federal Reserve will raise interest rates in 2015.
As the dollar rises, it lowers the value of revenue companies take in overseas and makes U.S. exports costlier and less competitive. Both factors can have a big impact on corporate results. The S&P 500 companies, for example, rely on foreign markets for over 45% of their sales.
In last year’s third quarter, North American and European companies recorded $8 billion in currency losses, according to FiREapps, which advises companies on managing currency risk.
Since then, the dollar has continued to rise. The WSJ Dollar Index has climbed more than 7.5%, hitting a roughly 11½-year high this month. The index tracks the dollar against a basket of 16 currencies, including the euro, the Japanese yen and the British pound.
The dollar’s surge has been driven by expectations that the Fed will raise U.S. short-term interest in the coming months, as well as a flight to safety as economies in Europe and Asia falter.
To protect against currency fluctuations, many companies hedge their bets with contracts that lock-in exchange rates. Some of their foreign units also make their goods or buy supplies abroad to avoid importing parts from the U.S. The stronger dollar makes those imports costlier. 
But those strategies offer only limited protection.
On Jan. 20 International Business Machines Corp. will report a blow to year-end earnings because its hedges didn’t provide enough cover, said finance chief Martin Schroeter during a conference call with analysts on Oct. 20. In addition, IBM’s management has thrown out its forecast for the year. 
IBM had said it would chalk up adjusted profit of $20 a share in 2015, but it plans to lower its projection this month. “We have some real macro headwinds in the form of a strong dollar,” Mr. Schroeter said.
Oracle Corp. last month told investors that its revenue would have risen 7% in the quarter ended Nov. 30 had the dollar’s value been stable. Instead, the software company reported half that growth.
Oracle co-CEO Safra Catz said the currency effect was double what she expected three months earlier. She added that the strengthening dollar would reduce Oracle’s profits in the current quarter by about four cents a share, and that the currency’s “unusually high volatility” made even that figure iffy.
The rapidly declining value of the ruble, meanwhile, has made it difficult for Apple Inc. to set prices in Russia, prompting the gadget giant to halt online sales of its products there. Currency fluctuations also led Apple to raise its prices for app downloads in Canada, the European Union and Russia, a step it has rarely taken. General Motors Co. stopped delivering vehicles to its Russian dealers. 
Apple CFO Luca Maestri warned investors in October that the rising dollar was “becoming a significant headwind” in the fiscal first quarter ended in December. The company is slated to report quarterly earnings on Jan. 27.The dollar’s movement is making it riskier for American companies to borrow money in foreign markets.
Verizon Communications Inc. sold $5.4 billion of bonds in Europe last year, but the telecom company would think twice about doing something like that again soon, said CFO Fran Shammo.
That’s because Verizon swaps the foreign debt into dollars via contracts with banks, which take on the risk of exchange-rate changes. But, if the dollar value of that foreign debt falls too far, the company might have to put up cash as collateral under the terms of those contracts.
“That’s real cash,” said Mr. Shammo. “So we have to manage the risk and not just raise as much as we want outside the U.S.”
Of course, the strong dollar can be a boon for some businesses. Networking-gear maker Ciena Corp. , for example, saved $15.4 million on research and development costs in Canada last year because of the weaker Canadian dollar.
Demand for the dollar also has helped drive down U.S. interest rates. Worried about Europe’s economy and emerging markets, investors have snapped up dollars to buy U.S. Treasury notes. That’s pushed yields on the 10-year Treasury note below 2%, which has seldom occurred since the summer of 2013.
Corporate-bond yields fell to an average of 3.02% last week, down from 3.27% this time last year, according to Barclays PLC.
Although falling yields make it cheaper for companies to borrow, they are playing havoc with corporate pension plans.
Declining interest rates more than doubled pension deficits to $343 billion at the 40% of the Fortune 1000 companies that have defined-benefit pension plans and December year-ends, according to consulting firm Towers Watson.
“We might have a growing gap in pension funding,” if rates drop, said Carol Roberts, CFO of International Paper Co. The paper and packaging company’s pension plan had a $2.2 billion funding deficit at the end of 2013.
International Paper also been taking accounting losses from a Russian joint venture, which reports finances in rubles that must reflect current exchange rates. It recorded a $70 million accounting loss during the third quarter.
“In the world we live in today,” Ms. Roberts said, “we just expect volatility.”
Corrections & Amplifications
IBM Chief Financial Officer Martin Schroeter said during an Oct. 20 conference call with analysts that the company’s earnings would take a hit from the stronger dollar. An earlier version of this article failed to note when Mr. Schroeter spoke. 
—Maxwell Murphy and Shira Ovide contributed to this article.

Sunday, January 11, 2015

How Crude Oil’s Global Collapse Unfolded

So much for the notion of peak oil, which was popular a few years ago. Aivars Lode
By Russell Gold
Since the 1970s, Nigeria has sent a steady stream of high-quality crude oil to North American refineries. As recently as 2010, tankers delivered a million barrels a day.
Then came the U.S. energy boom. By July of this year, oil imports from Nigeria had fallen to zero.
Displaced by surging U.S. oil production, millions of barrels of Nigerian crude now head to India, Indonesia and China. But Middle Eastern nations are trying to entice the same buyers. This has set up a battle for market share that could reshape the Organization of the Petroleum Exporting Countries and fundamentally change the global market for oil.
On Friday, crude prices dropped to their lowest level in five years after the International Energy Agency cut its forecast for global oil demand for the fifth time in six months. That signaled to investors that the world economy would struggle in the coming year, sending the Dow Jones Industrial Average tumbling by 315.51 points, or 1.8%, to 17280.83. That’s the Dow’s biggest weekly percentage loss in three years.
Since June, the IEA has cut its demand forecast for 2015 by 800,000 barrels, while it says U.S. oil output will rise next year by 1.3 million barrels a day.
The drop in global oil prices from over $110 a barrel to under $62 on Friday has been portrayed as a showdown between Saudi Arabia and the U.S., two of the world’s biggest oil producers. But the reality is more complex, involving Libyan rebels and Indonesian cabdrivers as well as Texas roughnecks and Middle Eastern oil ministers. It reflects both the surging supply of crude and the crumbling demand for oil.
And the oil-price plunge may not end soon. Bank of America Merrill Lynch says U.S. oil prices could drop to $50 in 2015.
The roots of the price collapse go back to 2008 near Cotulla, Texas, a tiny town between San Antonio and the Mexican border. This was where the first well was drilled into the Eagle Ford Shale. At the time, the U.S. pumped about 4.7 million barrels a day of crude oil.
In 2009 and 2010, the global economy improved, demand for oil increased and crude prices rose, creating a large incentive to find new supplies. In Cotulla and elsewhere, U.S. drillers answered the call. “There was, for lack of a better term, an arms race for oil, and we found a ton of oil,” says Dean Hazelcorn, an oil trader at Coquest in Dallas.
Today, two hundred drilling rigs blanket South Texas, steering metal bits deep underground into the rock. Once drilled and hydraulically fractured, these wells yield large volumes ofhigh-quality oil; at the moment, the U.S. is producing 8.9 million barrels a day, thanks to the Eagle Ford and other new oil fields.
Americans aren’t pumping more gasoline or otherwise using up all that new crude, and under U.S. laws dating back to the 1970s, it has been almost impossible to export.
As a result, American refineries snapped up inexpensive crude from Texas and North Dakota, using it to replace oil from Nigeria, Algeria, Angola and Brazil, and almost every other oil-producing nation except Canada.
OPEC sent the U.S. 180.6 million barrels in August 2008, a month before the first Eagle Ford well; in September 2014, it shipped about half that, 87 million barrels. That is about 100 fewer tankers of crude arriving in U.S. ports. They went elsewhere.
For a long time, it seemed like the world’s growing appetite for oil would soak up all the displaced crude. By 2011 prices began to hover between $90 and $100 a barrel and mostly stayed in that range.
But earlier this year, another trend began to come into focus, catching Wall Street energy analysts and other market watchers by surprise. In March, many analysts predicted global demand for crude oil would grow by 1.4 million barrels a day in 2014, to 92.7 million barrels a day. 
That prediction proved wildly optimistic.
Vikas Dwivedi, energy strategist with Macquarie Research, says a widespread deceleration of global economic growth sapped some demand. At the same time, several Asian currencies weakened against the U.S. dollar.
The cost of filling up a gas tank in Indonesia, Thailand, India and Malaysia rose, just as these countries were phasing out fuel subsidies. In Jakarta and Mumbai, drivers cut back.
“The fact that supply growth was strong shouldn’t have taken anybody by surprise,” Mr. Dwivedi says. But demand for oil “just fell off a cliff. And bear markets are fed by negative surprises.”
Rising supply and falling demand both put downward pressure on prices. Throughout the summer, however, fears of violence in Iraq kept oil prices high as traders worried Islamic State fighters could cut the countrys oil output.
Then two events tipped the market. In late June, The Wall Street Journal reported the U.S. government had given permission for the first exports of U.S. oil in a generation. While the ruling was limited in scope, the market saw it as the first crack in a long-standing ban on crude exports. Not only was the U.S. importing fewer barrels of oil, it could soon begin exporting some, too. This news jolted oil markets; prices began to edge down from their summer peaks.
On July 1, Libyan rebels agreed to open Es Sider and Ras Lanuf, two key oil-export terminals that had been closed for a year. Libyan oil sailed across the Mediterranean Sea into Europe. Already displaced from the U.S. Gulf Coast and eastern Canada, Nigerian oil was soon replaced in Europe, too. Increasingly, shipments of Nigerian crude headed toward China.
Oil prices began to decline. By the end of July, a barrel of U.S. crude fell below $100. In early September, the IEA, a Paris-based energy watchdog, noted there had been a “pronounced slowdown in demand growth.” A month later, oil prices fell below $90 a barrel.
By the middle of September, Petroleum Intelligence Weekly, a widely read industry newsletter, said both sides of the Atlantic Ocean were “awash in oil.” Nigeria, it declared, “needs to find new customers for its light, sweet crude streams in Asia.”
Saudi Arabia didn't want Nigeria to develop long-term relationships with refinery buyers in Asia. In late September, the kingdom decided to shore up its hold on them by, effectively, holding a sale. The Saudis cut their official crude price in Asia by $1 a barrel; within a week, Iran and Kuwait did the same.
Two weeks later, the IEA again lowered its full-year projection of demand growth by 200,000 barrels a day to a meager annual increase of 700,000 barrels, nearly half of what it expected at the beginning of the year. Oil prices fell nearly $4 a barrel on the news.
At this point, the oil market appeared to be in free fall. Of the 23 trading days in October, the price of crude fell by more than $1 on eight days. It rose by $1 on one day. Traders’ attention turned to OPEC, which has traditionally played the role of market stabilizer by cutting production when prices fall and raising production when prices rise. Many OPEC members, reliant on the cash oil brings in to pay for generous social programs, didn’t want to cut.
Saudi Arabia’s powerful oil minister, Ali al-Naimi, was silent for weeks. The country had been burned in the past when it cut its oil output, only to see other countries continue to pump—and steal its customers.
And it was already feeling competition, says Abudi Zein, chief operating officer of ClipperData, a New York firm that tracks global crude movement. Colombia, which historically has sent most of its oil to the U.S., is finding its biggest buyer this year is China, a critical market for OPEC, he said.
“For the Saudis, Asia is their growth market,” Mr. Zein says. “The Nigerians and Colombians are being kicked out of their natural markets in North America. Saudi had to do something.”
At its regular meeting in Vienna in late November, the cartel kept production unchanged. U.S. and European oil prices fell another $7 per barrel.
On Wednesday, Mr. al-Naimi, the Saudi Arabian oil minister, was asked whether OPEC would soon act to cut exports. “Why should we cut production?” he asked. “Why?”