Posted on 12/01/2014 3:18:44 PM PST by ckilmer
Saudi Arabia, Kuwait, and United Arab Emirates—the only OPEC members financially solvent enough to afford temporarily reducing crude oil production—are believed to have refused to cut output on November 27, 2014 to push oil prices down to $68 a barrel in hopes of killing the U.S. oil boom.
But unlike traditional oil wells that lose future production capability if temporarily shut down, U.S. shale oil wells have the flexibility to close and then reopen without a long-term loss of production capability.
From an annual low of $1.21 a barrel in 1970 to an annual high of $108.90 in 2012, OPEC, through member restricted production quotas, has tried to parasitically bleed its customers to the fullest extent. But each time the cartel dramatically forced up prices, its own members would ship more than their quota, and worldwide exploration and production would surge. A resulting massive surplus would then cause prices to crash.
Although the current price may seem shockingly low, it is substantially higher than the average of $32.75 a barrel average since OPEC first jacked-up prices in 1973.
For thirty years the international price for crude oil took a rollercoaster ride, but prices remained stable over time. Crude oil averaged $20 a barrel from 1974-1983; $21 from 1984-1993; and $22 from 1994-2003.
But uniquely over the ten years from 2004-2013, prices moved up and stayed up. Despite a 2008 interim price swing up to a high of $127.59 in June then down to a low $41.00 in December, crude oil averaged $76 a barrel for the decade, more than three times the prior thirty-year average.
The last decade of consistently high crude oil prices caused expected U.S. demand to fall by 4 million barrels a day (mb/d); while incentivizing U.S. oil production to grow by 5 mb/d. There currently is a 2.5 million mb/d worldwide surplus of crude oil. Despite prices falling 30% since June, global production grew to a new high last month of 94.2 mb/d.
The American energy boom has primarily been funded with high interest rate junk bonds. Although the U.S. energy exploration and development represents less than 2% of American jobs, it consumes 7% of business capital spending each year. Energy now accounts for over 12% of the $2 trillion junk bond market.
OPEC may hope oil prices below $65 a barrel will kill the profitability of North American shale fracking and bankrupt the industry. Low prices may cause some reductions in future drilling and bankrupt a number of highly leveraged companies. But horizontal shale oil production is extraordinarily flexible compared to traditional vertical flow wells.
Temporarily closing down production at a vertical oil well usually results in substantial "stoppage of the pores of the oil-bearing rock." This reduces “bottomhole pressure” that force oil up through the well tube to the surface and limits the future production capability of the well. But since U.S. horizontal drilling injects water and solvents to free oil from shale and creates its own pressure to push oil up through a cement-lined casing to the surface, shale oil wells can be closed and reopened with virtually no future production capability lost.
OPEC members Venezuela, Algeria, Libya, Nigeria, and Ecuador cannot wait out the recent price drop. The stability of their regimes is directly tied to the in-flow of dollars from oil exports. Facing potential revolutionary pressures as cash shrinks, smaller OPEC members will be forced to over-produce quotas and drive oil prices even lower.
For the forty years after the 1973 oil embargo, the OPEC cartel predatorily bled the economies of its customers. But OPEC’s greedy strategy over the last decade created incentives that powered the U.S. shale oil production boom. OPEC is now facing an epic structural shift in pricing power where production cut-backs to force prices up will only further incentivize more American production.
Uh-oh...get ready for an executive order from the Muslim-in-chief.
There are a number of links in the paragraphs below—(that you can find above—or linked to above from the original article) that give fuller details of the assertions this writer is making.
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But unlike traditional oil wells that lose future production capability if temporarily shut down, U.S. shale oil wells have the flexibility to close and then reopen without a long-term loss of production capability.
Temporarily closing down production at a vertical oil well usually results in substantial “stoppage of the pores of the oil-bearing rock.” This reduces “bottomhole pressure” that force oil up through the well tube to the surface and limits the future production capability of the well. But since U.S. horizontal drilling injects water and solvents to free oil from shale and creates its own pressure to push oil up through a cement-lined casing to the surface, shale oil wells can be closed and reopened with virtually no future production capability lost.
A lot of factors are involved here. Wait and see and hope for the best.
Sure, the oil will be there. But the interest payments on the money used to get the oil out of the ground doesn’t stop. Whether there is money coming in or not, the payments are due.
THAT is the thing that concerns me about the US oil boom.
I agree with you. Then there’s the employees.
No shale oil producer in the U.S. is closing any wells to be opened later.
Lots of frackers will go bankrupt during the Bust phase of this oil Boom, but whoever gets the wells in bankruptcy court will keep them flowing.
Today, global oil production is 94.2 million barrels per day while oil demand is only 92.4 millions barrels per day. The surplus will eventually become too large to store above ground.
The Boom phase of the shale/fracking revolution is over. Oil always comes in Boom/Bust cycles and this time is no different.
Frackers will lay low, but existing production will barely taper off in the U.S.
As for the Middle-East, the current global oil production surplus is pretty much entirely due to 0bama and Europe relaxing the global oil embargo against Iran.
That surplus is almost all Iranian oil now on the open market...because 0bama and the Euroweenies want an Iranian nuclear deal.
For their part, the Persians are smart enough to keep talking so as to keep their oil flowing. Sales at low prices are better than no sales at all.
I think States should pass these laws for independent review of police shootings. It is insanely unprofessional for police departments to investigate police departments.
I am 100% pro cop. Good cops far outweigh bad cops and we owe good cops the highest gratitude and respect. Bad cops endanger good cops as we can see with the race-baiting mobs making up demands in Ferguson. Shooting pets is really getting the public worked up...sadly, even more than the unjust shootings of human beings.
American policing, which respects human life and our constitutional rights, must return w/o tipping over into endangering police officers who risk their precious lives every day to protect us. The standards of high character (from a Western cultural point of view) must be high when hiring and promoting cops.
I like the idea of police officers wearing cams, outside review of police violence and reform of forfeiture laws. The money should NOT go to police activity because there is a conflict of interest from politicians and police chiefs. Maybe the money should go into a State rainy day fund and it should also be reviewed by an outside committee.
Forgive me. I posted the above comment to the wrong article.
Ping
Well, Sir, I agree with you in principle re your comment but with a big BUT.
Probably a majority of experts agree by now that the deposits, bonds, loans, stimulus packages, welfare and medical spending bubble is near popping!
When that happens, the holders of all those bonds and loans will not be getting any interest payments or anything else. Ask GM Stockholders and Stockton, California bond holders and on and on.
No kidding.
At least then I won’t have to bother paying my credit card bills. I would be way down on their list to go after.
Umm, this maketh no sense.
At the point you have a producing fracked well, haven’t you already sunk 95% of the total lifetime cost of operation? Or something like that?
So how does shutting down flow temporarily help you financially?
Let’s see. I’ve already incurred (almost) all my costs, with the investment made with borrowed money. The return on my investment has now dropped below what I had anticipated when I borrowed that money. I now have a cash flow deficit.
The solution to my problem is to shut down the well and reduce my income to zero while my repayment obligations continue one.
That will solve this week’s cashflow problem!
Wait, what???
THAT is the thing that concerns me about the US oil boom.That's why highly leveraged companies will probably not survive. Nevertheless, the shale-oil wells they created with their capital do not disappear. The investment principal is not lost. The well is not lost. Smart companies - and smart creditors - will restructure their debt to ride it out. The ones that can't will sell to larger, less-leveraged companies and pay off the debt (or as much as possible) that cannot be restructured.
Let's say you borrow $500,000 to purchase land and build a house with the intent of renting it for income. If you put 10-20% down, then you are betting at the end of the building process you will have a house and land that will appraise for $550,000 - $600,000. If you get to the end of the building process and the rental market has shifted out from under you to the tune of 30%, and the house now will command $2,400 per month instead of $3,600 per month, you have a clear choice ahead of you.
Let's say your monthly interest payment is $3,000. If you think the market will recover sooner than you run out of cash to make up the difference between your interest payment each month and the amount of cash it is producing for you ($3,000 - $2,400 = $600), you will hang on to it. If you cannot afford that, you will either try to restructure the loan. If you can't restructure, you sell at the market rate of the house - say $420,000 and pay off as much of the principal you can afford.
The house, as long as it doesn't burn, has some value. People will continue to live there, because even if the bank forecloses on you it turns around and sells it for market value to the next guy with capital.
But the analogy of debt and interest is probably half right. Usually on such speculative ventures, and oil well drilling is highly speculative, you don't finance your operations with debt. The creditors know it is speculative and will charge too high interest rates (much, much higher than interest rates for a house). I would imagine that unless an Exxon or BP is financing it with their own cash, that the smaller guys are financing by selling shares of stock. In that case, the shareholders take a valuation hit, but the company remains solvent and able to continue operations at whatever the price is. The shareholders in a position to take a long view will keep their shares, the ones that cannot will sell at the discount. But the good news is that a functional oil well, just like a functioning house, is always worth something, no?
What a damned mess.
http://www.npr.org/2012/04/11/150444802/where-does-america-get-oil-you-may-be-surprised
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that article is two years old. The african oil has already been pushed out of the US market by american oil.
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