ANOTHER OIL CRISIS?
NO, JUST ANOTHER AMERICAN POLITICAL MOVE TO PROTECT SAUDI AND OPEC INTERESTS!
This will be the 800th article I have posted on this blog and one that is extremely important. Anyone who denies history repeats itself has never worked in the petroleum industry. After spending 27 years in the aerospace industry I made a career change in 1978 and accepted an executive position with Otis Engineering that was a major part of the Halliburton Corporation. I spent my last sixteen years working in the petroleum industry. Am I an expert? No. But I did learn enough and know what to read and how to express myself professionally. My conservative views were developed over my 84 years as a freedom loving American. I challenge you to prove me wrong with verifiable facts.
I would be remiss to omit that the reason I made this career change. Our US Department of the Interior imposed a new regulation on the petroleum industry that was similar to the regulations developed by the NRC several years before. The exploration and production operations in the oil industry were baffled along with every company that designed and manufactured surface and sub-surface safety valves used in US offshore waters. Unlike the NRC program that covered all equipment used in a power plant this regulation was only required on two of the hundreds of devices used to drill and produce oil and gas. If all devices like the blowout preventer had been included the BP accident may have been avoidable. Another unusual feature of the regulation, it was not required on any onshore wells, government lands included. My 27 years work with government regulations and a new Masters Degree were a valuable asset during this period.
I missed the 1973 oil crisis but when the second man-made crisis erupted in 1983 I chose to try my lifelong dream to start my own company. I suppose I should thank OPEC and our government for creating this crisis. This allowed me to successfully end my work career by exceeding the achievement of every goal I had set for myself as a young man.
When will the American voters get enough of these government sponsored events that stop or critically cripple the American petroleum industry to create jobs and threaten OPEC’s manipulation of oil prices. Every time they force the American companies to stop drilling, it only helps OPEC eventually. After they cripple our petroleum industry, it is obvious it will take years to get it revived at costs that are just wasted to help the Arabs.
I suppose that crippling the petroleum industry to make foreign and American bankers richer is better than starting political wars to achieve the same purposes is better, but why do either? I have lived through so many political wars and energy crises to make the rich richer and the politicians more powerful that make me sick.
Do you realize that until the government and OPEC started this last crisis what the oil industry had accomplished? U.S. oil production increased from 5.6 million barrels a day in 2010, to a current rate of 9.3 million barrels a day. The government and OPEC tried to kill this boom by scaring people with propaganda about the dangers of fracking.
Until the Arabs got greedy and artificially increased the price of crude above $100 a barrel, fracking was not an option due to costs. We have known about the shale oil deposits in America for a long time but producing it was estimated to be at least $50 a barrel as far back as the 1980’s when I was with Halliburton. Until late last year and this latest crisis, it was obvious that US oil output would keep rising in 1 million barrel-plus annual leaps for years to come.
The recent drop in oil prices poses another major challenge to oil producers. Wall Street analysts, politicians and even some industry experts claim the setback will be brief and minor. Just history repeating itself with man-made crises again.
Shale oil production is totally unlike oil production in any other part of the world. In conventional wells, whether in the Middle East, the Gulf of Mexico or the North Sea. When prices drop, however, almost all conventional wells keep pumping. That’s because the variable cost of lifting the crude is still far lower than the prices it fetches on the world market.
I just read a quote that explains this. “What drives the business is the marginal cost, not the total cost,” says Ronald Ripple, a finance and energy business professor at the University of Tulsa. “Even at low prices, the production is still contributing something to cover the upfront investment.” The average person has no idea what the risk and investment can be to drill and produce oil.
As a result, the global supply of oil is what economists call “inelastic.” Even if prices crater, the oil majors and sheiks keep pumping more or less the same quantities. They’ll only stop when prices drop below the variable cost—and for most wells, they seldom sink that far.
Another determinant of oil prices, now, is demand. Oil consumption in the U.S. has fallen by over 8% since 2010, and the shrinkage in Europe even greater. Reports indicate that China and India oil usage has not accelerated anywhere near what had been forecasted. The drop in oil prices from over $100 in May to $48 has not caused a major or even minor drop in overall production.
Unlike conventional production, shale wells have an extremely short life. To produce a constant or increasing revenue, producers must constantly drill new wells, since their existing wells span a mere half-life by industry standards. I have read that shale oil production is more like mining than conventional oil production. Mining companies must dig new holes, year after year, to extract reserves of copper or iron ore.
Today the breakeven cost for producing shale oil is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research. Producing shale oil at $65 a barrel and selling it at $48 is a rapid way to go broke.
To make matter worse, we are seeing the same actions that every crises causes. I just read that the count of rotary rigs in use has fallen from 1,930 to 1,881 since October. We saw the same reduction in offshore rigs when our government over regulated an entire industry because of the isolated drilling accident in the Gulf of Mexico. The US government is a bigger enemy than OPEC. Living in Texas it is sad to see the thousands of jobs we have created that are vanishing with the small operators going broke.
If demand for oil rebounds as some say it will and the price of oil rises above $65 again, producing shale oil may once again be profitable. I for one will be surprised if the enemies of fracking, our government and Saudi Arabia, will ever allow that to happen. I just read that the Saudis have invested heavily to gain extra capacity of 2 million barrels a day. The Saudis with our government support will use that excess to hold prices at $50 a barrel to stop all shale production.
Maintaining current production will take a massive new conventional drilling program. I am sure that the current US President and Congress will make sure that this does not happen. The political points they will enjoy with $2.00 a gallon gas will far outweigh the loss of many thousands of lost jobs that are inevitable.
If buying OPEC oil and cheaper gasoline makes you happy just re-elect your Congressperson and Hillary in 2016. If you are an unemployed petroleum industry American and you really want to work for an above average living you probably live in the wrong country.
The political views are mine alone. I wonder how many Americans agree with me? C Brewer
Very good article and economically accurate in my opinion. Good work Clyde