Posted on 02/07/2016 7:52:26 AM PST by Lorianne
If energy powers the world, then whoever owns that energy must have power over the world. That’s certainly been the case for the last century or two. Ownership of our primary energy source, crude oil, is what made billionaires of John D. Rockefeller, H.L. Hunt, and assorted Middle Eastern kings, emirs, and sheikhs.
Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets.
The ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. The numbers, as you will see below, are almost incomprehensibly big. They are so big, in fact, that many analysts have simply tuned out. The attitude seems to be, “These numbers blow up my models, so I will ignore them.â€
Today we’ll stop dancing around the truth and call the oil collapse what it is: global wealth destruction of epic proportions.
Simple Math, Hard Answers
In mid-2014, crude oil prices were about $100, depending on which grade you wanted to buy. Now prices hover near $30 – roughly a 70% decline in 18 months. That’s well-known, but we usually discuss the price collapse in terms of particular countries or companies: we don’t look at the bigger picture.
(Excerpt) Read more at mauldineconomics.com ...
Never fall in love with an asset. Had a small interest in an East Texas well. At the height of the boom in East Texas, a company approached me on the buyout of my interest. I ran the income numbers and the amount of oil to come online in the next few years. Grabbed the money and ran. Well value fell tremendously with the collapse of oil prices. One of the best decisions I ever made.
One thing for sure. The prices will eventually go back up.
Back to reality.
Oil was overpriced under the belief that supply was declining, fracking in the US showed that to be incorrect. Prices declined to $70/bbl or so, then the Saudis ramped up production to drive US suppliers out of business, and prices have declined further, $30/bbl or less. Once these US suppliers are largely offline, supply will tighten and the price will rise once again. It remains to be seen, how quickly things can ramp back up again in the US, but that should cap the increase and it won’t be over $100. Financial challenges due to prior defaults might hamper that ramping back up again, though.
Rather lengthy but informative as hell.
Well, duh. Same cycle every ten years since 1820 and the author is surprised?
I don’t see it as wealth destruction, but wealth shifting, from the owners of oil to the consumers of oil.
Last Tuesday I bought a half-case of beer. I paid $14 bucks for it and I bet all I could get for the empties is 25 cents. That’s $13.75 up in smoke (or down the drain, depending on how you look at it).
Exactly. It's a zero-sum gain. Where gas/oil companies lost billions in assets, consumers will now have billions more in disposable income. It's going to hit the oil business hard, but spur activity in other sectors, like auto sales, clothing, restaurants, and housing. The price of just about all goods should decline since the costs of their manufacture and transportation have declined with a decrease in energy costs.
So it all washes in the end.
“I paid $14 bucks for it and I bet all I could get for the empties is 25 cents”
Not sure where you live but a quarter for 12 cans is only $0.0208 per can! Usually states pay a nickel a can or sometimes a dime. That’s a $0.60 or $1.20 return on your investment. So cheer up! :)
That $100T is the market’s estimate of the net present value of the reduction in the income stream that would have flowed into energy producers’ pockets if prices had maintained their high levels.
Symmetrically, that’s a conservative estimate of the net present value of the money that consumers will have available to spend on things other than energy. Let the party begin!
No, no, no. It is a good thing, a great thing, a positive benefit for all but the producers. Think of Bastiste and the candlemakers.
Cheaper oil is like light from the sun, an unmitigated benefit. Some side benefits are putting an economic squeeze on Iran, Russia, Venezuela, ... There really is very little downside.
If you don’t have return then you take your cans to the metal recycling. If you get 2 cents per can, you’re doing great.
Good points.
the decline is deliberate. As an attack (sanctioned and encouraged BY Washington’s obola administration) as a way to attack TX, ND, PA, and OK oil producers.
It does hurt ISIS, and they don’t like that, but attacking Putin and TX and OK and ND and ISIS at the same time? What’s not to like, if it also bumps the economy in time for Hillary’s assault on our freedoms before the fall 2016.
I doubt Shell Oil, or toolhouses, or fuel haulers agree.
Yes, the candlemakers hate the sun. But cheap computers put dinosaurs like DEC out of business, but the industry thrives.
Your comparison is not apt. DECs were replaced by PCs. Petro-energy is not being replaced; it’s just becoming more and more plentiful so the price is coming down. That benefits some and hurts others, but ultimately ends as a wash.
Not to completely disagree, but my point was that as the price of energy becomes lower, we will use more of it for things (Ski-Doos, RV’s, etc) that will make us all better off and wealthier. The economy is not static, cheap energy, like cheap smart phones, is an unmitigated blessing. Not all DEC employees found work writing iPhone Apps, there was some dislocation, but the world is a better place with more smart phones and fewer PDP-8.
"Should" and "will" are two different things.
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