Sunday, January 31, 2016

Cheap Oil is Expensive

In January, while I was enjoying a sustained retreat from all things business, a rather large international event occurred.


Yes, the price of oil which has been as high as 140.00 dollars a barrel eight years ago, had gone from 90 to 100 dollars a barrel 18 months ago, to the mid forties in late December.  It rallied back into the sixty dollar range last spring, but headed back to the forties within a few months.

Then this January, it went to $27.00.

Now, for those of you who don't care the least about the price of crude oil except for how it affects your pocket book at the gas station, this post is not really for you.  No, this post is for those of you out there who care about the cost of energy because you know that cheap oil makes electric cars less desirable.  Cheap oil tricks car and truck buyers into buying big trucks and inefficient cars.  And if oil is cheap because there is more supply than demand, then the odds that there is also going to be more natural gas is likely.  And that has happened too.

And so, in a few months after oil prices collapsed  natural gas prices in the US went from $4.50 to $2.00/ MCF and even below.  Cheap natural gas is good for electric rates here in Texas, but it makes new solar and wind additions a little less appealing, especially if you think these super low decade record breaking prices will continue well beyond the near future.


Well, of course that's not what is happening.  If you read the trades and the other financial rags, you are told that the Saudi's are in a market share war with the American frackers.  And that might well be true.  American oil production has gone from 5 million barrels a day in 2010 to 9.6 million BPD in 2015, a truly impressive increase in domestic production.  And of course, most of this comes from horizontal drilling in the various shale plays.

In just five years, the Americans had caught up with Saudi oil production.  Americans imports of oil began to go down.  (but not by 4.5 million)

And so what did the Saudi's do?

They increased their production by 1 million barrels a day.  They traded protecting the price of oil for protecting their market share.

 Here is the story from Oil

Conventional Wisdom
"Conventional wisdom has it that the Saudis are focused primarily on crushing the U.S. shale industry. In this view, the Saudis blame the U.S. for the supply-demand imbalance that began to make itself felt in 2014. U.S. production data seems to support this. Between 2009 and 2014, U.S. crude and NGLs output increased nearly 4 million barrels per day, while Saudi Arabia’s increased only 1.64 million barrels per day, Canada’s 1.06 million, Iraq’s 0.9 million, and Russia’s 0.7 million (Saudi data doesn’t include NGLs).

In addition, the Saudis, among many others, believed that U.S. shale would be the most vulnerable to Saudi strategy, given relatively high production costs compared to Saudi production costs and shale’s rapid decline rates and the need therefore repeatedly to reinvest in new wells to maintain output."

But in the last 18 months, despite idled rigs by the hundreds and layed off employees by the hundred thousands, American production has continued to grow.

Until about six months ago.

Starting last September, production leveled off.  And now American crude oil production has fallen about 500,000 barrels a day back down to 9.1  million barrels  a day.

Now understand,  the total global market for oil is not quite 100 million barrels a day.  (96)  And it's generally understood that the oil market is over supplied by about 2 million barrels a day.  Now, even a fifth grader with an above C average in math knows that 9 million times 100 dollars is more that 10 million at 30.00 dollars.

It's almost $600 million more...a day.

This chart below shows American imports.


And it shows that Saudi imports with the US have remained about the same at 1 to 1.4 million barrels a day.  And it shows that even though American production has grown by 4.6 million barrels a day, our imports have only gone down by less than 2 million.

There are lots of other things that make this oil price collapse even more interesting.

One is the strength of the dollar.  Since oil is only traded in dollars,  a stronger dollar means that a big part of the drop in oil prices is actually a strong dollar.

Another is the huge deal made by Congress in December which traded continued renewable energy tax credits for the end on the ban on US crude oil exports.  This will effectively reduce the difference in price between West Texas crude and the higher international bench mark Brent oil. 

Another big consideration is the Russians.  Putin is hurting from the Saudi's actions.  And the Ruple is in the toilet. Are they sending a signal to him? And to their Allies?

Do they want a a cease fire in Syria?  And an agreement in Yemen?

And WHO are THEY?

Cheap Oil is Expensive


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