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The Price Of Oil Exposes The True State Of The Economy
Submitted by Raul Ilargi Meijer via The Automatice Earth blog,
Jack Delano Cafe at truck drivers’ service station on U.S. 1, Washington DC Jun 1940
We should be glad the price of oil has fallen the way it has (losing another 6% today as we write this). Not because it makes the gas in our cars a bit cheaper, that’s nothing compared to the other service the price slump provides. That is, it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system.
It shows us the huge extent to which consumer spending is falling, how much poorer people have become as stock markets set records. It also shows us how desperate producing nations have become, who have seen a third of their often principal source of revenue fall away in a few months’ time. Nigeria was first in line to devalue its currency, others will follow suit.
OPEC today decided not to cut production, but whatever decision they would have come to, nothing would have made one iota of difference. The fact that prices only started falling again after the decision was made public shows you how senseless financial markets have become, dumbed down by easy money for which no working neurons are required.
OPEC has become a theater piece, and the real world out there is getting colder. Oil producing nations can’t afford to cut their output in some vague attempt, with very uncertain outcome, to raise prices. The only way to make up for their losses is to increase production when and where they can. And some can’t even do that.
Saudi Arabia increased production in 1986 to bring down prices. All it has to do today to achieve the same thing is to not cut production. But the Saudi’s have lost a lot of clout, along with OPEC, it’s not 1986 anymore. That is due to an extent to American shale oil, but the global financial crisis is a much more important factor.
We are only now truly even just beginning to see how hard that crisis has already hit the Chinese export miracle, and its demand for resources, a major reason behind the oil crash. The US this year imported less oil from OPEC members than it has in 30 years, while Americans drive far less miles per capita and shale has its debt-financed temporary jump. Now, all oil producers, not just shale drillers, turn into Red Queens, trying ever harder just to make up for losses.
The American shale industry, meanwhile, is a driverless truck, with brakes missing and fueled by on cheap speculative capital. The main question underlying US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow. And the press are really only now waking up to the Ponzi character of the industry.
In a pretty solid piece last week, the Financial Times’ John Dizard concluded with:
Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.
While Reuters on November 10 (h/t Yves at NC) talked about giant equity fund KKR’s shale troubles:
KKR, which led the acquisition of oil and gas producer Samson for $7.2 billion in 2011 and has already sold almost half its acreage to cope with lower energy prices, plans to sell its North Dakota Bakken oil deposit worth less than $500 million as part of an ongoing downsizing plan.
Samson’s bonds are trading around 70 cents on the dollar, indicating that KKR and its partners’ equity in the company would probably be wiped out were the whole company to be sold now. Samson’s financial woes underscore how private equity’s love affair with North America’s shale revolution comes with risks. The stakes are especially high for KKR, which saw a $45 billion bet on natural gas prices go sour when Texas power utility Energy Future Holdings filed for bankruptcy this year.
And today, Tracy Alloway at FT mentions major banks and their energy-related losses:
Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.
That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.
The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.
The amount of money lost in the ‘overinvestment cycle’ will be stupendous, and you don’t need to ask who’s going to end up paying. Pointing to past oil bubbles risks missing the point that the kind of leverage and cheap credit heaped upon shale oil and gas, as Dizard also says, is unprecedented. As Wolf Richter wrote earlier this year, the industry has bled over $100 billion in losses for three years running.
Not because they weren’t selling, but because the costs were – and are – so formidable. There’s more debt going into the ground then there’s oil coming out. Shale was a losing proposition even at $100. But that remained hidden behind the wagers backed by 0.5% loans that fed the land speculation it was based on from the start. WTI fell below $70 today. You can let your 3-year old do the math from there.
I wonder how many people will scratch their heads as they’re filling up their tanks this week and wonder how much of a mixed blessing that cheap gas is. They should. They should ask themselves how and why and how much the plummeting gas price is a reflection of the real state of the global economy, and what that says about their futures.
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Well. They are letting the cottage burn down.
Http://hedgeaccordingly.com
Wow, they are really whacking silver. Explosions Monday?
Anticipating defeat of the Swiss referendum?
^^^ This. The Swiss will kick themselves over it eventualy, but for now they are voting against gold.
For 95% of American cheap gasoline is a boon.
Who is responsible for the price cuts?
I would bet Russia and the Saudis, despite their public facade.
Live by the Financial Engineer, die by the Financial Engineer.
All the oil markets were manipulated higher going into 2008.
Don't see that in he article. Now everyone is crying because they can't get the free money anymore.
Capex on oil has been increasing by ~11%/yr since 2000 without the proportionate gains in production. 2008 was an overshoot on price. This is turning out to be an undershoot. This is what happens in a financialized economy.
So much for that pause in decline...
It is not really a ressult of a "financialized" economy but a result of oil supply being determined by capitalist oil producers, at least at the margin. The largest oil companies are government owned. The large publicly owned multinationals are limited in production and processing by government entities in most of the world which own the mineral rights. Except in the US, where it has been Drill Baby. DRILL. That increase in marginal supply from US production has been enough to break the State Owned Monopolies on supply and price.
(Oil is traded on the commodities market. It is financialized.)
^^^^^^^^
Nonsense.
LOL
http://www.cmegroup.com/trading/energy/
There's some paper oil in there for you. Notice that the volume was 447,212 contracts, where each contract is for 1,000 barrels of oil. That's just one day of trading. So 447,212,000 barrels of paper oil were traded today. Oil is financialized.
El Vaquero - You are correct. In 2008 I did research for President Bush through Jeb Bush on how much speculation was occuring per barrel of oil. It was 17%. That did not include indirect manipulation such as false investor reporting or 26 miles of oil tankers parked offshore to increase scarcity. I could go on and on. Augustus you are wrong and El Vaquero is correct.
"it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system."
Oh, not to worry, bank bailouts might happen anyway when all those loans made to the exploration and drilling companies start to go all Non-Performing and stuff.
I read somewhere the other day Wells (or was it Citi?) was on the hook for a $850MM loan to somebody in the energy space and things were starting to look shaky. And there's never just one roach.
So banks lose money. Good.
They will sell their now-worthless fracking bonds to the muppets. Don't you want to make 10%?
Shale oil stocks are getting hammered.
Goodrich Petroleum down 30%
Sanchez, Clayton, Laredo, Oasis all down 25%
Stone, Triangle, EP down 20%
we will see bloodbath soon.
The two most protected/subsidized industries in the US are oil and banking, this is a match made in heaven for bailouts. Any bloodbath is just for show.
Yeah, but don't you worry, the Russians are fucked... /s
Look at ticker WLL - Whiting.
Down over 50% from year's high.
Good operator and good acreage.
Debt on balance sheet and high discount on Bakken production.
CLR and EOG also getting hammered.
WTI continues to hit new lows on the day.
The price of oil has NOTHING to do with the true state of the economy.
Remember $150 oil in the summer of 2008? We were six months into the worst global recession since the Great Depression and oil shot to the moon thanks to the good guys at GSCI like Arjun Murti who take the necessities of life (oil, corn, wheat, soy beans, etc.), and push prices to whatever extremes they want with 40X leverage. The big banks should NOT be allowed to convert the necessities of life into gambling tokens for their own proprietary desks.
The economic miracle attributed to William Jefferson Clintoon was a result of falling oil prices. Final bottom in prices was $10 a bbl. He was just a lucky SOB then and has reamained lucky. So, yes, lowering energy costs allows the whole system to operate with more investment in other forms than distribution.
fuk da gummint
Future?
"...it is murder."
"Won't be nothing, nothing you can measure anymore."
The paper oil market was created to manipulate the price of oil, to disconnect the real price from the economy, to use the paper price of oil as a weapon and rip off some folks and makes other folks billionaires.
"The paper ______ market was created to manipulate the price of ______, to disconnect the real price from the economy, to use the paper price of _______ as a weapon and rip off some folks and makes other folks billionaires."
Fill in the blanks with pretty much anything.
And yet people get paid to write this stuff.
Aren't these the same Tylers who have been peak oilers for the last FIVE YEARS?
Hmmm. They must have meant peak oil prices;)
How does a price crash disprove anything peak oil related?
I don't recall ZH to be particularly Peak Oil, but the supply side argument is moot if demand collapses.
Demand is not collapsing at a rate of 10% per day!
This is clearly a reaction to OVERSUPPLY as far into the future as anyone can see.
It is not just about fracking, but also the switch to nat gas and eventually methanol.
The Saudi's can't hold the price any longer as the "marginal" producer. What you are seeing, after decades, is a free market price of oil. There is much to learn from that.
The daily oil price decline reflects a rerating of OPEC's near-term (90 day) intent. Today's move is primarly about how 1 oligopoly competitor can move the market with its ability to influence supply. Expectation was likely for a 1-1.5MM barrel daily production cut.
Isn't what you generically describe kind of how HFT works in practice/theory?
dup from maintenance mode observation
The oil-war on Russia
http://failedevolution.blogspot.gr/2014/11/the-oil-war-on-russia.html
Hopefully this all points to a lot fewer people soon.
No no no
Those really big blinding bright flashes will all point to a lot fewer people soon.
That could be nukes or Ferguson on a national scale.
Or both.
yeah, too many people like you cluttering up the world.
Be the change you want to see.
Lead by example.
Kill yourself
The USD rally will provide a super boost to whatever is left of the US export market, especially on top of the NSA effect on IT exports.
Could it be that the rising stock market is growing the Saudis sovereign fund so fast that they are able to drop the price of oil and still grow? Maybe as long as the markets rise the price of oil will stay low.
Interesting observation.
But the revenue from oil is actually a flow of currency; the stocks sitting in the wealth fund aren't paying much in the way of dividends and are just burgeoning numbers in the asset column and can't be converted to spondulaks unless the positions are sold.
In order for prices to go back up, OPEC needs to quit pumping 1m bpd over their production target. Don't blame shale producers in the US who only produce about 2-3m bbl/day anyhow.
Here is a payoff computation assuming a 25% royalty and $7m completion cost using the initial year of production data from two wells that are typical of the Wolfcamp. These simultaneous equations are solved to determine the minimum price of gas and oil needed to break even given the current amount of production from these wells since they were first drilled in late 2013. X is the price of gas with liquids included and Y is the price for condensate.
http://tinyurl.com/ng7ctgv
.75(820,892*X + 140,181*Y) =7,000,000
http://tinyurl.com/q9n9p6o
.75(1,039,157*X + 69,651*Y) = 7,000,000
This is high school algebra but the answer is
X=7.43 Y=23.07
That would imply a $5/mcf average price for NYMEX gas during the year
The price of gas is something that the local producers in the US do in fact control and could ensure that they get this much if oil drops as low as $23/bbl but it won't get that low, maybe $40 before OPEC starts squealing like a pig.
The fact is, wells like the ones I just posted are the norm in the Wolfcamp and so what is going to be the result of this silly action by OPEC is that the best areas will be the subject of E&P budgets which will result in more oil and gas, not less. As I posted before, this is going to be like high grading gold when prices are low. The people running OPEC are morons or else they are after something else and I don't know what that might be.
Finally, even if what they wanted to do was force the US E&P outfits to cut back, they have no lever other than price and unfortunately, that still leaves them in no more control than someone trying to herd cats.
Both of these wells are paid for in less than a year at the old prices. The new prices could be a lot lower on the oil side of the equation and they would pay off in a year if a driller drilled two equivalent wells in 2015 with lower prices and assuming these types of production profiles.
the biggest problem with your equations is that they assume constant oil production, which is unreasonable even over the short term. shale oil is not a proposition about 2 wells, it is about a network of wells which vastlly complicates your simplistic assumptions. you may need differential equations, rather than simple high school algebra, to properly model the economics of shale and its quickly depleted production. shale was problematic at 100usd/bbl, and is vastly more troubled at 75. the bad loans will ripple. not just within the oil industry but financial as well. your optimism seems entirely misplaced, as the evidence of financial impairment is already in evidence.
They don't assume constant oil production where did you get that? I explained that this is the actual first year production from two wells drilled in the Wolfcamp. These are real wells, the links to the RRC data show you when they started producing and how much they have produced in total over the last year or 13 months depending on which well you look at. The equations give you the minimum price needed for oil and gas in order to pay them off given the total production so far. These wells are hugely profitable because the price for oil given by the solution is $27/bbl while the average price over the last year was probably in excess of $85 at the wellhead. The gas price is probably about $1.50 higher so an adjustment to the profit would have to be made there.
The point here is to show people how wrong all these speculations about shale are. EVEN AT MUCH LOWER OIL PRICES THESE WELLS WILL BE PROFITABLE IN ONE YEAR!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Sorry for shouting but people don't seem to get it. The comments you made are moronic and demonstrate you don't even understand the equations I wrote. This isn't about two wells, these are typical wells in the Wolfcamp. That means this argument applies to a whole lot of wells in the Wolfcamp.
Whatever, dude ! You can show some equations proving that those guys will be fine even if there are to give it for free... if it makes you feel good. Do you realize how stupid you sound ? But hey, it's great entertainment so keep going by all means...
I am not pointing to any specific producer but the two wells that I showed you are owned by BHP and Cimarex who aren't weakly capitalized small fries. Now my operator might fall into that category but he has a 50% WI partner in HAL so he isn't hurting yet I don't believe. If you don't understand what I posted then you might want to reconsider who is stupid and who isn't. Those wells are currently producing free money. More like them can be drilled and be profitable in less than a year at today's prices. I predict more of these type of wells will be drilled by operators with the cash flow to do so.
I am ignorant of how oil works, does this include refining costs? I thought that was where the problem with fracked oil came into play.
Thanks wrs,
This is a "sky is falling" blog, all day every day, and many can't see past that,
but some of us read for exactly this sort of "boots on the ground" info. Well done.
wrs1,
Great post.
That is exactly the way it works for the drillers. When others rant about well economics, they really don't understand that the cost is returned on these wells in 12 to 18 months. Whatever is left has some value, maybe an unknown estimated value, but a positive.
Drill On, Baby. Keep the tools on bottom and turning to the right.
I am 100 percent certain that Obozo hasn't got a clue about any of this.
I am 100% sure he approves of the result though-- more economic chaos, more destabilization of the American economy, and American society.
And anybody who thinks that they can control the coming chaos is a fool. They may be able to get a handle on the next crisis, but I wouldn't bet on it. This obsession with maintaining the status quo guarantees that their precious little system will break so badly that they become irrelevant.
Dupe
Well now that's an interesting point. Here's what Obumble will be asking hisself - if oil is cheaper, will people buy more of it and create more evil CO2? Solution obvious - better tax the hell out of oil! For the children.
Or, will he stand around slapping himself on the back, that all his green energy enthusiasms are paying off? Though I'm not sure how that explains copper dropping 4% in one day.
Should he give Elon Musk the medal of freedom? Or hit him with a drone strike?
One 375ml can of Coca Cola contains 1.4 litres of Carbon Dioxide…
Coca-Cola doesn’t seem to publish figures on how much coke is sold, but it does make the claim on its website that there are “1.2 billion servings of Coke a day”....
1,200,000,000 servings x 1.4 litres of carbon dioxide = 1,680,000,000 litres of carbon dioxide
If 50 grams of carbon dioxide = 25.46 litres (that adds up to) 3,299 tonnes a day
http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/commen...
Where do they get said carbon dioxide?
The Coca Cola Carbon Dioxide is removed from the atmosphere and then released into the atmosphere. Net contribution is ZERO. The article does represent a good example of nonsense analysis from a newspaper journalist.
Commercial CO2 is a byproduct of oil refining. It's pulled out of the stacks before the CO2 stack sensors see it, along with hydrogen and some others. It goes into commercial products, and the refiner has lower CO2 emissions.
I have to disagree with WB7 on this.
I suspect that BHO got the full skinny on "doing God's work" back when he and McCain were called in to discuss in private the need for the first bank bailout. That was before that election and remember how both McCain and BHO came out to support the Bush planned bailouts? In that meeting, they probably got some of the real forward looking analysis and real data and real insight on how the world economy might fare in the coming decade. So things got real. And things got serious. And you do know what happens when things get serious, don't you? So I disagree. I do think he has more than a clue. BHO has probably seen all the real data. Being one of the most important world leaders, I would like to think he and his people have had access to the most important facts. Those facts might not show outwardly in policy. His people probably have even paid attention to Zero Hedge, The Oil Drum, Heinberg, Martenson, Tverberg, Korowicz Tullet and Prebon, etc.
And likely Putin's people too. And _____'s people too. (Fill in the blank please).
In the years since BHO got elected, it's even more likely that he has talked to some of the best and most informed minds out there.
I don't get why people still buy into us vs. them.
Obama's people = Bush's people = Clinton's people ...
The oligarchs have always been running things, these guys just do as instructed.
You got that right. Where's he been hiding lately?
All this mumbo jumbo analysis is not worth the paper it is written on, IMHO.
The main reason of the oil price collapse is due to Saudi and USA falling apart.
Saudi has internal issues due to people returning from Syria, Iraq etc. US continues to create what it does best!
Saudi has now changed sides and is on the other side of the team where Russia, Iran, Venezuela already have a seat. They must be welcoming Saudi with both their arms!
The price of oil has a lot more to decline, because the main reason is to bankrupt US and all its shale oil companies whose cost of production is the highest in the world around USD 100 per barrel while the cost of the rest of the world is much much lower and dont forget Saudi, UAE, etc have lot of cushion being their reserves while Russia has almost no foreign debt and China keeps giving advance payments ro Russia while China just supported Venezuela and Aregentina with billions in cash.
IMHO, this is between US and the Saudis! Saudi is just doing whatever is in its interests which is to bring US shale oil companies down so that they cannot flood or control the market in the future, which is what the Saudi oil minister alluded to in Vienna as well!
The price of oil has a lot more to decline, because the main reason is to bankrupt US and all its shale oil companies whose cost of production is the highest in the world around USD 100 per barrel while the cost of the rest of the world is much much lower and dont forget Saudi, UAE, etc have lot of cushion being their reserves while Russia has almost no foreign debt and China keeps giving advance payments ro Russia while China just supported Venezuela and Aregentina with billions in cash.
Why don't you have a look at the post I made just above this showing how low the cost of production actuallyis for shale wells in the Wolfcamp and how they can pay back in one year at much lower prices for oil than OPEC could tolerate. This area is where most of the new production is coming from. Saudi Arabia is pissing up a rope if they hope to bust the shale producers.
I dont know where you get your information from because most of it is incorrect. Starting from the US tight oil production. You mention it as 2-3mbpd. Which is wrong.
It has risen from 0.5mbpd in 2009 to 4mbpd in 2014. It will rise much more every single month because the productivity gains on each well in the US are astounding!
Look here what the EIA is saying: http://www.eia.gov/pressroom/presentations/sieminski_09292014.pdf
The cost of production is around USD 70 but I believe it is higher: http://www.gbm.scotiabank.com/English/bns_econ/bnscomod.pdf
Here is Bloomberg with higher cost prices: http://www.bloomberg.com/news/2014-10-17/oil-is-cheap-but-not-so-cheap-t...
The problem of US shale producers is not just the cost of production but their associated costs and the inflation and the debt. Talks of bankruptcy already started last month at USD 80, now it is at USD 69 levels. Not to mention that US producers do not have the Govt reserves at their hands. The US Govt has more debt than all other nations combined so they dont have any support to be given to US producers unlike in Saudi where they have cushion plus are Govt owned anyways! The problem is the debt of creating an oil well done less than 5 years ago and prices are going under....This is just like constructing a building at a certain cost payable over a decade and then the rentals start falling...guess what comes next? and oil wells do not get paid off in a decade! http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/1123138...
The imports by developed countries are dropping and so is US consumption....https://www.efgam.com/Portals/0/investment_solutions/pdf/ALL%20INVESTMEN...
All this amounts to only one thing....an OIL WAR!
And if you dont believe me, this is what the Saudi Minister said an hour ago:
Inside OPEC room, Naimi declares price war on U.S. shale oilhttp://www.reuters.com/article/2014/11/28/us-opec-meeting-idUSKCN0JC1GK2...
I thought fracking wells do pay off under ten years. That is, depreciate or amortize faster. They'd better, since they don't produce at high levels that long, right?
Most pay off in about one week.
Lot less risk than building a fifty billion dollar off shore drilling rig in the Gulf.
I am not an oil expert or anything.....
I was using an analysis that a hotel or a commercial tower needs 10-12 years to pay off if the room rates or rentals hold up at inception.
Currently, the opposite is happening for shale oil. Prices are declining, costs are rising, rates are rising, and demand is declining. For any business this is doomsday scenario!
I aint sure if billions of dollars can be paid off in under a decade, especially in the above scenario.
The Telegraph article is good but that guy Dryden has no clue what crap he is spouting! Most top advisors in banks are liars!
Although S&P are even worse than the bankers and hence this 2011 report said oil will only go UP! The IRR for shale oil was estimated between 3% to 40% at that time which I am sure has come down dramatically as 80% of wells were unprofitable at USD 80. Probably 96% are now unprofitable so the pay off period will be kicked down for several long years more than a decade. http://www.standardandpoors.com/spf/swf/oilandgas/data/document.pdf
This is an interesting report from March 2014 and is independent so has much more credibility. USD 35bn by some estimates has already been written off just in the US. One large investor stated that he has invested USD 24bn and has already written off several billions and says that shale oil has not met expectations. This means more will go down! : http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/03/US-shale-ga...
This provides analysis whether to invest or not: https://www.ceres.org/resources/reports/oil-shale-coal-to-liquids
Last week's article sums it aptly - although if this was about China...the headline would have stated 80% of oil wells in China are making massive losses as bankruptcy of banks and oil companies looms :)
Nineteen U.S. shale regions will no longer be profitable at $75 oilThey pay off in under a year or two. Look at the ones I posted. Those 19 regions account for 413kbbl/day of production but what you are missing is that the 2-3m bpd that I reference is the low cost high profit production that won't be affected by the OPEC stupidity. Why don't you do yourself a favor and do some research on the Wolfcamp and Eagleford.
I dont know where you get your information from because most of it is incorrect. Starting from the US tight oil production. You mention it as 2-3mbpd. Which is wrong.
No, it's not wrong it's the production that matters, the profitable production. The data on the wells I showed is from the Texas Railroad Comission, try arguing with that.
The problem of US shale producers is not just the cost of production but their associated costs and the inflation and the debt. Talks of bankruptcy already started last month at USD 80, now it is at USD 69 levels. Not to mention that US producers do not have the Govt reserves at their hands. The US Govt has more debt than all other nations combined so they dont have any support to be given to US producers unlike in Saudi where they have cushion plus are Govt owned anyways! The problem is the debt of creating an oil well done less than 5 years ago and prices are going under....This is just like constructing a building at a certain cost payable over a decade and then the rentals start falling...guess what comes next? and oil wells do not get paid off in a decade! http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/1123138...
Did you read my post above or not? I just showed you two wells that were drilled in 2013 and are now paid off, they are free money coming out of the ground for their operators. That completely contradicts the bolded claim I quoted from your post.
If shale oil produces free money then why is Saudi and Russia not having the same 'free money'? It is because there are other costs to it like salaries, insurance, transportation...i.e. the regular costs to run any business.
That is also the reason everyone is talking for shale producers to go belly up! It is not me! Please see Telegraph and Bloomberg current articles as well as the one from EFG.
It is all over the news and with most research that below USD 70-75, shale oil is in trouble...no one is saying Russia and Saudi etc will not slow down but if push comes to shove, US shale oil guys dont have the money to stay alive for too long because there is mostly private money.
Market can stay irrational longer than one can stay insolvent!
Saudi and Russia have reserves and all wells are Govt owned, that is where lies the difference which is how the banks in US survived but not the shale oil guys because they are being led to slaughter!
My operator is private but his 50% WI partner is HAL and they fracked the wells. The wells I gave in the example are owned by Cimarex and BHP both of whom have plenty of money to stay afloat for longer than the price can stay low. If you look at those two wells, the Cimarex well has produced over $15m in revenue in the last year but only cost $7m to drill. The BHP well has poduce abou $10m in revenue but only cost about $7m to drill. So both wells are paid for and each one is producing between $500k and $1m/mo. That is free money and what about the profits of $8m and $3m respectively? Did those just disappear?
Not all shale is equal. Saudi Arabia uses their oil to support their economy instead of taxation. Their costs per barrel include the cost of their military and their govt, that isn't the case for the oil operators.
All very true. The problem the Saudis face is not one of supply and demand, but rather that the U.S. will not aid them when either the ISIS Devils or the Russians or the Iranians decide to take what they can. Then the price of oil returns higher.
Wahooo,
That is correct.
That is why Saudis have arrested hundreds of people just in the last month and put them in jail as they were creating 'unrest'.
I have no idea why US and Saudi have fallen apart but it seems many things have happened. One being ISIS returnees, second being domestic unrest, third being US base being shut down several years ago, fourth being the Syrian problem and returnees, fifth being the raproachment with Iran by US, sixth being domestic unemployment etc.
All these put together have made Saudi and US fall apart and even an Obama dinner was cancelled at the very last minute after Obama had landed in Saudi already about 2-3 months ago!
Due to all this, Saudi wants shale oil producers to go under so that US production and plans to control the global oil supply at ANY COST (despite evidence that fracking has already started impacting communities with oil in water and food and more ill health) shall come down.
Let us see how it all plays out.
What worries me more than we are repeating what happened in 2008 when oil went from USD 140 level to USD 36 level in a few months. However, that was orchestrated by the US.
This time Saudi is doing the same and price has come from USD 107 to USD 65 and the time frame is identical from July to Nov despite the world population having grown since 2008 and China is much bigger than in 2008 (by at least USD 3-4 trillion in GDP alone).
There are eerie similarities and the conseuqnece will be that some random things will start happening and other players will go bankrupt whether in hotels or real estate or airlines or banks or exporters or currencies....randomly.
Could be due to fraud like in OW Bunkers in Denmark. Could be overleveraging like that of Batista in Brazil. Could be low prices like that of coal in Indonesia's Bumi. Last time in 2008, we discovered Madoff and Corzine in the US aside from Lehman, Bear Stearns, Merrill Lynch collapses while Goldman and Morgan Stanley became pussies and sought protection by the Fed as banks, let us see what comes around this time in 2015!
This will create more chaos and more deglobalization and more problems for all of us. Because oil price is a leading global indicator and is warning us of worse things to come!
wrs1,
You are making a classic rookie mistake of equating revenues with gross profits and then deducting just the fixed costs to arrive at profits.
No business is created to be shut down in just 1 year.
No large business like a shale oil well can be started by borrowing money from friends and family. Hence there are interest costs to lenders and sharing of profits with equity holders etc.
Then there are recurring costs that remain high and inelastic regardless of market prices and sales volume and can only be controlled if employees are fired at which point the growth stops and decline begins.
I never said that the basic revenue could not exceed the cost of 1 year for running a business.
The well may have cost USD 7m to begin with but the costs do not stop at that point. There are massive recurring costs, taxes, dividends, bank interest rates to worry about that are usually fixed.
THe oil wells may have started to make a profit in the first year or two but if this price of oil declines at this speed, they will not remain functional nor profitable for too long.
The Saudis and Russians and Iranians and Venezeuelans have run these wells for decades and have long ago paid off their costs and in fact they are the ones who are having 'real free money'.
A small well producing revenues of USD 10-20m does not even count in the global space where oil remains the highest grossing single product in any category on the planet even including food!
You may be right on a single well but when we talk trillions of dollars this case does not hold up very well.
My main point was that the shale producers will go bankrupt and the reason whill be that the Saudis are upset and now anti America as well which will hurt the new producers more than it will hurt the big boys!
Wrs1 - I liked your posts. Dubai is right though in one area. The Saudis do not want an energy independent America. Tough shit, when you abuse your customers you lose them. A few of you reading this know exactly what I am speaking about.
I agree about the Saudi's but they can't raise production any more and are making a mistake thinking this is the same thing as in 1986. They are going to be the ones with the blood on their nose this time.
Yet the companies going after shale oil are going into debt and have been for a while. You can pay attention to that, or you can believe the mark-to-unicorn accounting.
:)
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The Saudis have their hands full with their own problems. Their stupid Islamic welfare state is on the verge of collapse. If the Saudis want $60 oil, it must be because they think that gives them the best chance to keep their society from completely unraveling. Any other consequences would be unintended.
nvm
Wait, isn't this economy supposedly recovering? Obama and the media keep telling us GDP growth is 3.9% so why is oil demand declining?
Are we being lied to by Obama?
Yhe illegal muslim alien ain't called the pathological liar in chief fudgepacker for nuttin'....
It's due to those 50,000 Teslas sold the past 6 years.
I think 80% of our growth in our economy the last 6 years has been from the oil and gas exploration......if that shuts back down....so goes our economy...and tax revenues..and good paying jobs...
80% of usa gdp is a paper.
That is all we have left, oil and weapons manufacture. Without oil, get ready for war.
lower oil price - faster dedollarization will going
Izz you in or izz you ain't. Unfortunately these mupperts are ALL IN.
Well, all I can say : Kudos to Wolf for having seen this and written about it.
The rest is part of the great game : 1949 : We've lost China... 2014 : We've lost Backen and Eagleford!
PS / Just one minor precision as I worked in the Oi industry. In 1982, Saud decided to MAINTAIN its production at around 10 million and that started the Oil slide down from 36 to around 25. That was at Reagan's demand during Iraq-Iran war.
But the slide to 12 occurred when Cantarel and North Sea along with Swing producer of Opec, Saud, kept the Oil flowing, always to please Reagan's great game. (AS collateral to that, SHeikh Yamani was kicked out as Saud's Opec spokeman, the key man in Opec since 1973, as he wanted to maintain price above 18, the break even for Saud's huge military plus infrastructure spending !)
PPS / Just for argument's sake here is another projection of Oil project B/E scale; I don't know what truth this portends.
http://www.financialsense.com/contributors/oil-price/u-s-shale-breakeven...
You don't need to buy gas to drive to a job you don't have.
Even $1.00 less per gallon doesn't mean shit when you have health insurance premiums of $750/month with an $8,000 deductible and a 20% "co-pay" (-20% actual insurance).
+1000
So true! My insurance cost went up again to $621/mo with a $5000 deductible EACH before the insurance company pays a penny. I'm basically self insured now. Thanks Obama, you fucker.
obamacare = the great wealth sponge
better to "let it out" during the hopium time of year.
People will be driving duallies and crazy lifted trucks in no time. Maybe they will bring back Hummer.
No it doesn't. The proported benign state of the economy is a sham for sure. But, geopolitically manipulated oil price tells us nothing, except what the assholes are up to politically.
Why did reserve currencies in the past fail instead of doing what the US has done since WW2?
They all spent too much and went heavily into debt.Every single one
The Bitish because of WWI causing debt and the loss of their foreign market .
History rythmes.
A lot of these countries who have big sovergien funds full of US treasuries...and the price of oil below their sustainability number....they are going to have to sell some treasuries to fund their economies I would think...first you will see rigs shutting down...layoffs...those boomtowns in ND going bust....the strippers going back home....trailers on the road....refiners should do well...I bet we have a cold winter so Natural gas prices might even go up...Russia..Venzuela and Nigeria will have financial problems....bigtime...they rely 100% on their oil sales...to much so that they are going to be in deep doo doo
KKR just normal cluster f%Ck from surge and Krugman... the plan man "tin foil hat" on conspircy I mean Truth
http://www.kkr.com/our-firm/leadership/david-h-petraeus
Gold:Silver 75
as always, there are so many chefs in the kitchen stirring the petroleum brew. lower prices reflect in part basic economic realities, but the prices remained unreasonably high during the trough of the depression due in large measure due to bankster manipulation of oil just as with gold. banksterism rsulted in 20-50% higher petroleum prices than what a free market would bear. while i have often thought that the plunge in oil prices was due to the cia/mossad/rothschild satanists wishing to punish russia, it may be the case that the oil price plunge injures the west more as suggested by this article. not only does it put shale business on the ropes - and will effectively end it should prices continue at these levels for another 6 months, but it threatens the banks funding these ponzi schemes. us banks are in no better shape than 2009/10 and their mountains of derivatives are more vulnerable with their loans taking on junk status. it only takes a butterfly wing flap to knock over those drug money laundering institutions. if the satanists are behind the price drop, they have shot themselves in the foot. if the sini-russo-saudi axis are behind it, it is retaliation for iran and ukraine of a very clever sort.
Your missing something here. The traffic is so bad in LA that many people are taking the commuter express buses instead of driving. Cheaper gasoline means more EBT drivers crowding the freeways and ever more productive people giving up driving in favor of the bus. Nobody needs more gasoline and nobody needs more junk either. Everyone should stay at home like me and slave away at studying the exact time and place that the singularity will occur.
Shale Oil miracle is based on free investment capital based on manipulated interest rates and the money printing Fed. The cost of a lease, the drilling rig and crew, aan all the chemical,water and sand hauled to the drill, and the cost of trucking oil to rail heads? It makes $100+ a barrel the on;y profitable reality. Cheap oil will catch up with the ponzi scheme nature of fracking. I am familiar with a series of MidWestern Sand mines which provide sand to North Dakota. The investment and costs to mine and ship sand alone is huge, fracking works, beacue the investment input is huge, at some point the oil will have to pay for it's cost of productin!
I agree with those facts, but not so sure about the outcome. The sunk costs for the fracking companies have been significantly large enough for the "investors" (Free capital = squids and the govt) to think twice before pulling their money out. Will they can print indefinitely to support the companies? Or Will they allow the only growth industry the past couple of years to perish? The Saudis do what they are told and they certainly seem to have no intention of cutting production to allow the price to crawl back up.
Could it be as simple as the economists telling themselves that oil built the civilisations of the 20th century, therefore cheap oil = engine for growth? One more QE into the oil, having exhausted all other avenues in QE manipulating the markets? It also puts a dampner on the recent energy deals between Russia and China since the biggest importer of energy products now has abundant cheap suppliers elsewhere. We'll see how long this "cheap" oil phase lasts, but I have a feeling we might be in it for the long haul. Until something breaks, of course.
indeed
I love to stand right underneath an avalanche and watch the rocks or snow come rushing down the mountainside at me. I get a much better perspective on how avalanches really work and not Wikipedia's slanted view.
As poet said
We're too busy fighting boogey-men all over the world and too busy refilling the military-industrial's EBT card to really be concerned with or to explore credible solutions to our society's most pressing ills....Washington, D.C - where 535 "bought and paid for" Jokers are running wild...
The real economy hasn't changed in the last 5 years. Why such a change in the price of oil? Now that the banksters have been uncovered manipulating commodities, does anyone see an issue here?
For 5 years, people around the globe have paid insane prices for gas. These criminals have gotten away with financial murder and no one says a thing. We hear that now that gas prices are going down, so people can shop more. Does that mean that the powers to be know that there is nothing left of the real economy and they are panicing trying to get people to spend?
We are inches from the cliff and both commodities and bonds are screaming to run for cover!
Alibaba Massive Fraud
Unrelated, but I believe highly important none the less. We have some smart people on ZH and curious if anyone else has heard or read about this. I am hoping someone that has the time and resources can look in to this and do some homework.
I was listening to The John Batchelor Show one night about a week or so again. He is on the radio and can be found online. Incredibly well versed on many international topics and world history. I highly recommend you tune in to him when you have a chance.
In any event, he had three guests (from China) on and the discussion was surrounding a massive fraud at Alibaba. The story goes something like this. Alibaba is a marketplace and they collect a fee on each purchase from merchandisers that operate via their website. Alibaba understands net profits and margins are of little concern to Wall Street, but growth in revenues and now we are talking. Many multiples for "growth" in a global economy that is barely creeping along. So, Alibaba hires a network of thousands to simply buy and return products all day. If Alibaba held inventory this fraud would be somewhat more difficult to pull off, but with thousands of businesses connected to Alibaba it is very easy to hide the costs of labor and returns in underlying (most likely very closely held) companies. Afterall, billions of $'s in stock price appreciation will pay a lot of people to sit on a computer all day and buy and return stuff on their website.
This is massive securities fraud and according to the guests, the scheme is "well known" in China. Besides the financial statement fraud, one would have to wonder what type of due diligence was done by the investment bankers that brought Alibaba to market?
I don't know about you, but I think this could be a watershed Enron-like, Madoff-like story.
That would help explain the reason the the follow up bond issue. Get that cash before the game is known.
I call bullshit. I buy from Alibaba and there's too many companies that would cry foul for this to be true. Too many people in the know make it impossible for it to be a conspiracy.
There are far too many fucking nuts and crackpots on the net. What's the fucker's name that runs infowar? He's the leader of the "full of shit" club.
Normal people set up accounts and sell high priced items to their friends, return it, buy it, to increase their rating online sales sites and get discounts and other such things. Go look, things for sale for 9,999,999 Yuan. Launder money, increase site sales and revenue growth, pad your VIP rating, and so on. I buy it from you, you sell it back to me. Sales show 20mn Yuan in revenue.
The article is correct.
Now wait for the derivatives blow up, that this will trigger.
And the US$ bull that gets fueled by this asset deflation.
Between the fall in asset prices ( not just oil ) and the
US$ bull market, we'll see if this obvious deflation doesn't
really make a mess of things.
We'll also get to see if TBTF really can be floated for much longer...
When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar. The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy.
When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion. A great deal of the shadow banking world overlaps and falls into the grey world of derivatives. The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system. The article below delves deeper into the problems caused by falling oil prices.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
Is any 'American Economy' watcher really surprised that the price of oil began to fall 2 months before Christmas 2014?
Two questions remain.
1) how low will the average price of petrol get by December 25?
2) how soon after Christmas will the low price of a barrel of oil -- having put more money into the pockets of the consumer and having made it cheaper to drive to the mall -- start going up?