Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

About those dropping oil prices and OPEC’s decision to let them fall – 4

OPEC decided on November 27 to maintain production levels. That means they won’t try to increase crude oil prices.

One of the many articles I’ve read (don’t remember which one; too lazy to look for it) said the pricing decisions by OPEC are about geopolitics, not economics. Keep that in mind as you read headlines.

They have declared a price war.  As the old saying goes, be careful what you wish for.

By the way, even if OPEC can shut down a lot of the marginal producers, the oil not drilled will still be there, ready to be drilled as soon as prices rise.

Here is another bunch of articles on point.

11/28 – Wall Street Journal editorial – New Oil Order – OPEC decided on Thursday, 10/27 to maintain production. That will allow crude prices to stay where they are or even drop.

OPEC has lost a huge portion of its pricing power – that means they can’t force us consumers to pay whatever they want. This is a good thing.

OPEC knows that the booming US shale oil revolution will threaten their high prices and high volume. Thus,

One way to read the OPEC decision is therefore as a price war to shake marginal U.S. producers from the market.

I don’t think that is such a smart idea, because…

Much of such proven areas as the Bakken Shale in North Dakota can remain profitable even at $50 a barrel, by most estimates. The Eagle Ford Shale in Texas also has a relatively low break-even.

I’m not sure it is wise to start a price war with someone (Bakken and Eagle Ford drillers) who have a lower cost structure than you.

In the meantime, we get to enjoy the impact of a price war on governments such as Russia and all the OPEC countries whose national budgets are based on moving lots of oil and doing so at a price from $70 to $100 a barrel. Russia needs $100 to balance their budget (didn’t keep the WSJ article showing breakeven points and can’t find it after a moment of searching).

Any pain felt in the Bakken or Eagle Ford fields will be a small fraction of the pain felt in the finance ministries of Russia and every OPEC country.

For saving lots of money, perhaps around $2,000 a year per household, American consumers can thank the free market in general and petroprenuers in particular:

All of these benefits are flowing from a U.S. oil boom that government didn’t predict and had almost nothing to do with. The political class has force-fed subsidies to renewable energy with little economic benefit. The new oil order is a reminder that markets and American ingenuity are better economic pillars than all the schemes of government planners.

11/28 – the American Interest – OPEC Sets Up U.S. Shale Showdown – By maintaining current production levels, OPEC will try to shake out shale producers:

OPEC is playing a game of chicken with American shale producers, betting on the fact that the price of oil will squeeze out U.S. competition which has contributed to a global oversupply as fracking has unlocked large new reserves of crude.

I think a bet against innovation is unwise.

The article’s graph shows the price of oil compared to the breakeven points of several governments. How would $72 oil feel if you were sitting on these breakevens?

  • $140 – Iran
  • $122 – Venezuela
  • $100 – Russia
  • $ 93 – Saudi Arabia
  • $ 75 – USA (not sure what that refers to)
  • $ 50-60 – breakeven I’ve read for vast majority of wells in North Dakota

If I were a betting man, I’d put my money down on the petropreneurs in the U.S.

11/25 – Bloomberg News – At OPEC Meeting, Saudi Arabia Stares Down Texas and North Dakota – Expectation of writer is that in the OPEC meetings, on what we call Thanksgiving Day in the U.S., Saudi Arabia will not cut production. Bigger than their concern over the hurt of fellow cartel members is the danger posed by shale gas in Bakken, Eagle Ford, and Permian Basin.

Saudi Arabia is betting that prices dropping far enough will shut down the shale gas revolution.

Good luck with that.

11/26 – Eagle Ford Shale – IHS: U.S. Shale Growth Still Strong, Despite Lower Oil Prices Article brings together a couple of estimates of breakeven for shale plays. One suggests about 80% of possible drilling next year would be profitable at $70 for West Texas Intermediate.

Another comment suggests the breakeven point varies between $50 and $69 for that 80%.

Of more significance is that psychology comes into play well before oil actually drops to breakeven. I’m guessing that caution and worry would enter the planning decisions a long time before actually hitting breakeven.

11/22 – Million Dollar Way – Giving Away Their Oil for $75 – Brings together several articles. For several months China has been buying record amounts of oil and adding to their strategic reserve. Where to store? Some comments hint that old oil tankers otherwise headed to the scrap yard are headed to China to provide near-shore storage capacity for that strategic reserve.

Closing observation:

And as long as Saudi is willing to give their only resource away, China is willing to buy it with all their American dollars. What we are seeing is a transfer of oil under the desert sand into Chinese tankers. It will be interesting to see how long Saudi likes this arrangement.

From decisions on 11/27, it seems Saudi Arabia is okay with that.

Oh, by the way, looks like we are in an oil glut. So I’m wondering….What Peak Oil?

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