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Cheap Oil A Boon For The Economy? Think Again

Tyler Durden's picture




 

Submitted by Raul Ilargi Meijer via The Automatic Earth,

I thought it might be a nice idea to question a certain someone’s theories using their own words, while at the same time showing everybody what the dangers are from falling oil prices. There are many ‘experts and ‘analysts’ out there claiming that economies will experience a stimulus from the low prices, something I’ve already talked about over the past few days in The Price Of Oil Exposes The True State Of The Economy and OPEC Presents: QE4 and Deflation. And I’ve also already said that I don’t think that is true, and I don’t see this ending well.

Today, our old friend Ambrose Evans-Pritchard starts out euphoric, only to cast doubt on his self-chosen headline. He’d have done better to focus on that doubt, in my opinion. And I have his own words from earlier in the year to support that opinion. Ambrose is bad at opinions, but great at collecting data; his personal views are his achilles heel as a journalist. That’s maybe why he fell into the propaganda trap of picking this headline; after all, if you write for the Daily Telegraph you’re supposed to write positive things about the economy.

Oil Drop Is Big Boon For Global Stock Markets, If It Lasts

Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand

 

Roughly one third of the current oil slump is a shortfall in expected demand, caused by China’s industrial slowdown and Europe’s austerity trap. The other two thirds are the result of a sudden supply glut, which Saudi Arabia and the Gulf states have so far chosen not to offset by cutting output. This episode looks relatively benign. Nick Kounis from ABN Amro says it will add $550 billion of stimulus to world markets. “That is fantastic news for the global economy,” he said. But it comes at a time when stocks are already high if measured by indicators of underlying value. The Schiller 10-year price earnings ratio is at nose-bleed levels above 27.

 

Tobin’s Q, a gauge based on replacement costs, is stretched to near historic highs. Andrew Lapthorne from SocGen says the MSCI world index of stocks has risen 38% over the last three years but reported profits have risen just 3%. “Valuations, as measured by median price to cash flow ratios, are near historical highs. As US QE has come to an end, depriving the world of $1 trillion printed dollars a year, there are plenty of reasons to be nervous,” he said.

Ambrose’s gauge of share values is dead on, and far more important than he seems to realize. He knows full well there are tons of reasons to doubt his own headline. But he still leaves out many of those reasons in that article today. So let’s move back in time to look at what he wrote this summer, before the drop in oil prices.

Here are a few lines from Ambrose on July 9 2014:

Fossil Industry Is The Subprime Danger Of This Cycle

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

 

This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950 billion last year. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion [..]

 

upstream costs in the oil industry have risen 300% since 2000 but output is up just 14% [..] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.

 

companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.

… the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161 billion on operations and dividends last year, but generated $121 billion in cash flow. They face a $40 billion deficit even though Brent crude prices were buoyant near $100 ..

… the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel.

 

What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner.

 

… the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]

 

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades , compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

 

By their actions, the oil companies implicitly dismiss the solemn climate pledges of world leaders as posturing, though shareholders are starting to ask why management is sinking so much their money into projects with such political risk.

Those numbers alone, combined with the knowledge that prices are off close to 40% by now, should be enough to give anyone the jitters, about the oil industry, and therefore about the global economy. Any industry that’s so deeply in debt cannot afford a 40% dip in revenue, not even for a short while. Dominoes must start tumbling in short order.

And of course saying ‘any industry so deeply in debt’ is already a bit misleading, because there is no industry like oil in the world (except maybe steel, and look how that’s doing), and it’s highly doubtful there’s another one with such debt levels. Oil stocks are down somewhat, but it’s hard to see how they could not fall a lot further. And as for the huge amounts invested in energy junk bonds, one can but shudder.

On August 11 2014, Ambrose had some more:

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106 billion in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time.

 

They also sold off a net $73 billion of assets. [..] The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568 billion over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

 

… the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18 billion in 2010 to $110 billion during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39 billion on repurchases since 2011.

 

… “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. [..] upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9% in 2012, and 11% last year. Upstream costs rose by 12% a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs.

 

Global output of conventional oil peaked in 2005 despite huge investment. [..] the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” ..

 

Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the “single-most important source of new low-cost world oil supply.” The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50% deeper than BP’s disaster in the Gulf of Mexico.

 

Petrobras is committed to spending $102 billion on development by 2018. It already has $112 billion of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras’s share price has fallen by two-thirds since 2010.

 

… global investment in fossil fuel supply rose from $400 billion to $900 billion during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950 billion last year. [..] Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

 

companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120 . The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

 

For now the major oil companies are mostly pressing ahead with their plans. ExxonMobil began drilling in Russia’s Arctic ‘High North’ last week with its partner Rosneft, even though Rosneft is on the US sanctions list. “Exxon must be doing a lot of soul-searching as they get drawn deeper into this,” said one oil veteran with intimate experience of Russia. “We don’t think they ever make any money in the Arctic. It is just too expensive and too difficult.”

Plummeting oil prices not only mirror the state of the – real – economy, they will also drag the state of that economy down further. Much further. If only for no other reason than that today’s oil industry swims in debt, not reserves. Investment policies, both within the industry and on the outside where people buy oil company stocks and – junk – bonds, have been based on lies, false presumptions, hubris and oil prices over $100.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. The industry’s debt levels were, in Ambrose’s words, at a ‘danger level’ when oil was still at $110.

Is Big Oil still a going concern? You tell me. I don’t want to tell the whole story bite-sized on a platter, there’s more value in providing the numbers, this time from Ambrose but there are many other sources, and have you make up your own mind, do the math etc.

Ambrose’s exact numbers can and will be contested three ways to Sunday, but his numbers are not that far off, and if anything, he may still be sugarcoating. WTI closed at $66.15 on Friday, Brent is at $70.15. Given the above data, where would you think the industry is headed? What will happen to the trillions in debt the industry was already drowning in when oil was still above $100?

And how will this be a boon to the economy even if, as Ambrose puts it, the ”oil drop lasts”? Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government? I would almost say you don’t want to know.

There can be very little doubt that oil prices will at some point rise again from whatever bottom they will reach. Even if nobody knows what that bottom will be. At the same time, there can also be very little doubt that when that happens, the energy industry’s ‘financial landscape’ will look very different from today. And so will the – real – economy.

Cheap oil a boon for the economy? You might want to give that some thought.

 

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Sun, 11/30/2014 - 16:34 | 5502177 X-defiler
X-defiler's picture

Cuunts

Sun, 11/30/2014 - 16:41 | 5502194 Cognitive Dissonance
Cognitive Dissonance's picture

Big business is the ultimate in herd mentality in action. As long as every one else is suicidal what's the problem?

Sun, 11/30/2014 - 16:45 | 5502205 Headbanger
Headbanger's picture

Another ponzi  scheme bites the dust.

It'll drag down the stawk """market""" ponzi scheme with it fast!

Sun, 11/30/2014 - 16:56 | 5502239 sun tzu
sun tzu's picture

Bullardish because the sheeple will have more money to spend at wally world

Sun, 11/30/2014 - 17:20 | 5502307 James_Cole
James_Cole's picture

Breaking news from zh: oil price up, bad for economy. Oil price down, bad for the economy. Stocks up, ponzi about to crash, stocks down, ponzi about to crash, gold price up buy buy buy. Gold price down, buy buy buy. Might be trend in theres somewheres...

Sun, 11/30/2014 - 17:29 | 5502322 Publicus
Publicus's picture

Yeah, ZeroHedge is pretty pathetic when it comes to oil and gold.

Sun, 11/30/2014 - 18:23 | 5502491 disabledvet
disabledvet's picture

So the conclusion is valid namely "where is the economic boom?" Obviously collapsing energy prices is great news for the human race. If all you're into is leverage (cough, cough Wall Street cough cough) then obviously "Houston, we have problem." And of course if all you are into is debt (cough, couch DC cough, cough) this is equally bad news.

My county currenty has over three hundred million in debt "and a plan for laundering money." There are projects going on and what not but I sure want to be the pension fund manager.

Sun, 11/30/2014 - 18:27 | 5502493 disabledvet
disabledvet's picture

.

Sun, 11/30/2014 - 18:25 | 5502494 negative rates
negative rates's picture

Good, it means less butane in gasoline, check your mileage folks, it's 25% less efficient in winter because of the allowed mix.

Sun, 11/30/2014 - 19:16 | 5502660 Creepy A. Cracker
Creepy A. Cracker's picture

Butane?  I thought is was alcohol.

Sun, 11/30/2014 - 20:36 | 5502939 Tall Tom
Tall Tom's picture

Methyl-Tri-Butyl-Ethane (Butane component.)

 

Ethanol is in the Summer Blend.

Mon, 12/01/2014 - 03:23 | 5503784 rocker
rocker's picture

Peak Oil Theorist are screaming. Wait till they see it crash into the 30s. It's too funny.

They think the world will end. Yes, maybe for the Banksters, Private Equity, Kock Brosco and dirty hedge funds who robbed the poor for all these years. If they are too stupid to see it coming so be it. They are the ones who have killed demand. The world is a big boat that takes a long time to change direction. Once it has, it keeps going south for a long time. Might have beed different if they had lifted all the boats with QE everything. Problem is 90 % were left behind and most have not even deleveredged yet. For the 90% the Depression still exist. Oh, I said that wrong. I meant The Great Recession. LOL

Sun, 11/30/2014 - 20:48 | 5502975 Tall Tom
Tall Tom's picture

What you do not understand James Cole is that while volatility is good so that speculators may increase their Monopoly Money, it is fatal to an economy.

 

Stability is that which is required for the foundation of Economic Prosperity.

 

As long as the speculators continue to fatten themselves up as a result of the market volatility which they create then one cannot only guarantee the collapse of any economy which remains, but they will also guarantee their own destruction in the process.

 

Greed has so infected their minds that what remains is just an instinct for the consumption of remaining resources in a limited resource world.

 

It is like what happens to bacteria cultures in Petri Dishes after they have diminshed the supplies of nutient.

 

It does not end well for the bacteria. It will not end well for humans.

 

Go right on ahead and cheerlead that James Cole. Of course I will also cheerlead it as I know that it is mutually assured destruction as the parasite class will fall victim to horrors they cannot even conceive.

 

Enjoy it Mr. Cole. You can wager that I am.

 

1-800-GET-EVEN

Sun, 11/30/2014 - 17:09 | 5502276 Stoploss
Stoploss's picture

Massive job losses in the oil patch already.

They were the omly ones working, now, not so much.

 

Excellent work Liberal Progressive Democrats... Im sure their children will thank you... Over, and over and over.

Sun, 11/30/2014 - 17:29 | 5502329 James_Cole
James_Cole's picture

Itsssss dehhhhh libtards!! Get em! Then we can all go back to work at the shitfest 'oil patch.' Projects requiring 100+ to break even were ALWAYS a brilliant idea!

Take it from the folkz who just wrote off 6B loss in Canada, des guys is smrt! Commodities only go up!

Sun, 11/30/2014 - 17:25 | 5502310 Rusty Shorts
Rusty Shorts's picture

but.but this - 

 

German company says it has developed an engineering installation capable of synthesizing petroleum-based fuels from water and carbon dioxide.

http://rt.com/news/209619-sunfire-water-synthetic-fuel/

 

edit; we can now sequester all those carbon emissions and re-release it!!! a win - win situation

Sun, 11/30/2014 - 16:40 | 5502184 ekm1
ekm1's picture

The writer does not understand the concept of money. His wife knows physics very well, but those guys are into global warming religion.

Their religion makes them blind to normal life facts that abundance of energy expands the economy

Sun, 11/30/2014 - 17:03 | 5502255 buzzsaw99
buzzsaw99's picture

automatic earth has been screaming about the deflation booger man for five years now. since then oil, gold, and the S&P have all TRIPLED IN PRICE. they are full of beans.

Sun, 11/30/2014 - 17:31 | 5502337 logicalman
logicalman's picture

Back to that 'infinite growth on a finite planet' thing again.

Or is that religion too?

I bet you have to unzip your pants to count past 20.

Mon, 12/01/2014 - 00:38 | 5503557 DaveyJones
DaveyJones's picture

...as opposed to the resource forever religion

 

 

"… upstream costs in the oil industry have risen 300% since 2000 but output is up just 14%"

 

see a problem?

Sun, 11/30/2014 - 16:45 | 5502193 JustObserving
JustObserving's picture
Cheap Oil A Boon For The Economy


A boon for the economies of China, Japan and India.  A mixed boon for most countries.  A disaster for major oil exporters.  A disaster for major oil producers, ocean drilling rigs, shale and tar sands production.  But Obama has made the decision to instruct the Saudis to keep oil production high as a way to pressure Russia and Iran.  The 1986 Saudi surge in production caused oil to fall to $10 and caused the collapse of the Soviet Union.  Will Putin standby and watch the US/Saudi nexus attack his economy again?

THE collapse of the Soviet Union in 1991 had many causes. None was as basic as the fall in the price of oil, its main export, by two-thirds in real terms between 1980 and 1986. By the same token, the 14-year rule of Vladimir Putin, heir to what remained, has been bolstered by a threefold rise in the oil price.

http://www.economist.com/news/leaders/21627619-lower-price-will-boost-wo...

Sun, 11/30/2014 - 17:02 | 5502256 HardlyZero
HardlyZero's picture

And to keep expensive deeper, risky, sources off-line.  Who runs bartertown ?

Sun, 11/30/2014 - 17:09 | 5502274 Government need...
Government needs you to pay taxes's picture

Putin and Preezy to the Thunderdome, stat.

Sun, 11/30/2014 - 19:20 | 5502678 scrappy
scrappy's picture

The Oil Co.s just need to diversify

- into Investment Banking!

Problem Solved!

Zirp

Sun, 11/30/2014 - 16:43 | 5502195 zerozulu
zerozulu's picture

I don't care all the if's and but's. I just want a reset.

Sun, 11/30/2014 - 16:48 | 5502221 buzzsaw99
buzzsaw99's picture

this is utter crap:

Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand

Roughly one third of the current oil slump is a shortfall in expected demand, caused by China’s industrial slowdown and Europe’s austerity trap. The other two thirds are the result of a sudden supply glut...

No numbers, he just pulls it out of his ass. Furthermore Raul is terrible about making sweeping generalizations about the state of the economy with zero facts cited.

Sun, 11/30/2014 - 16:52 | 5502230 techstrategy
techstrategy's picture

Banksters again abusing asymmetric leverage to create claims on real assets.  Oil boys should convert 10% of cash to gold and the abuse of leverage would play out exactly the opposite...

 

It's time for those who create value to stand up against those who parasitically abuse control of the money supply.  They are extraordinarily vulnerable.   If people convert essentially fraudulently priced financial assets to gold,  the global economy will come back into balance and the real economy will heal. 

Sun, 11/30/2014 - 16:53 | 5502233 kchrisc
kchrisc's picture

Based on what is generally shown and known here at ZH, what is the REAL price of oil? And gold as well?

Whatever the thieves and criminals need it to be--for now.

An American, not US subject.

Sun, 11/30/2014 - 17:04 | 5502263 VWAndy
VWAndy's picture

 I need a raise in buying power not a loss in asset values.

Sun, 11/30/2014 - 20:56 | 5502994 Tall Tom
Tall Tom's picture

I am sorry to inform you that everybody loses.

 

It goes along the lines to the Third Law of Thermodynamics...entropy.

 

But in layman's terms...You cannot even break even. You lose when you play the Energy game.

 

It is just that some will lose less than others. But everybody loses at the End Game. It is just a matter of how much.

Sun, 11/30/2014 - 16:53 | 5502234 yrbmegr
yrbmegr's picture

On second thought, of course it's good for the economy.  Then again, yes, it's a great boon to the economy.  Every time I think about it, it's even better for the economy.

Sun, 11/30/2014 - 17:05 | 5502245 HardlyZero
HardlyZero's picture

Really like Ambrose...he has good stats, and good article to review Ambrose's on The Automatic Earth.

Expect the new Economic word to be "dismal"; Dismal will be in the air for many decades to come.  Many macro changes.

Not 'recession'. Not 'depression'.  Old world concepts will lead to new normal concepts.

Riding on the dismal inch-high wave with massive M&A activity for decades to come.

Sun, 11/30/2014 - 17:02 | 5502253 directaction
directaction's picture

http://resourceinsights.blogspot.com/2014/11/turnabout-opec-shows-us-oil...

And this from one of the brightest oil analysts around, Kurt Cobb, reaffirms the dire and immediate economic risks associated with sustained lower oil prices. 

Sun, 11/30/2014 - 17:03 | 5502259 Hamm Jamm
Hamm Jamm's picture

Debt doesn't matter to Debt slaves !    lol

 

hey, since when do the oil companies not make money ....LOL, all the books are cooked

maybe everyone believes the astronomical development costs... hahahaha...   for a free resource, just drill a wee hole

 

oh oh  and your vote counts in a democracy ...   hahahahaahahahahaha...   keep voting, thats an even bigger lie than the oil companies not making money....  

you have to believe in the FAKE SYSTEM for it to work

Sun, 11/30/2014 - 17:17 | 5502297 HardlyZero
HardlyZero's picture

It is remarkable that US QE ended in October, and perhaps much of the leveraged investment and buybacks were funded by the cheap money flowing into WallStreet.

 

It appears the other G20 countries (Japan, EU, etc.) will not be investing in highly leveraged energy investments, but instead their own governments.

MASSIVE Debt will rule their economies.

Sun, 11/30/2014 - 17:32 | 5502345 logicalman
logicalman's picture

It's called the American Dream because you have to be asleep to believe it

Carlin.

Sun, 11/30/2014 - 17:05 | 5502265 Government need...
Government needs you to pay taxes's picture

The 'sky is falling' argument rests heavily on new restrictive 'global warming' limits and oil prices remaining below $70 bucks for the next 2 years.  Author also screams about a 'glut' of debt without offering any comparative context, i.e. oil industry debt versus .gov debt or consumer debt, or (gasp) green-NRG company debt.  Given the known information, this appears a remote probability.  In the background is the dysfunction/malinvestment caused by interest rate suppression.  No insight is offered into the durability of the interest rate suppression trend. . .

The blog is garbage, the argument quality is low, and some fantastic assumptions are involved.  Unlikely that Congress would sign off on new job-growth-restricting, cost-of-business increasing carboncrap between now and 2016.  Also unlikely that oil remains below $70 for more than 12 months.  After all, the current state of affarirs relates to an excess 1MM barrels of daily production versus demand.  Given that global demand is >80MM barrels per day, it's a stretch to assume this continues for long, even with BRICS growing <5% per annum.  Third, we all know interest rates cant go up, so free money for E&P companies with rational business plans should continue to be available.  

Sun, 11/30/2014 - 17:08 | 5502270 lakecity55
lakecity55's picture

There is no Oil Shortage, men,we have leveraged it up 200%!

200% moar Oil! Hurrah!

Sun, 11/30/2014 - 17:09 | 5502278 arby63
arby63's picture

I will wait for Orlov to tell us how Putin can fix it all for us. 

Sun, 11/30/2014 - 17:27 | 5502321 kowalli
kowalli's picture

Some people wiil die, i hope banksters and crony capitalists die first.

Sun, 11/30/2014 - 17:23 | 5502314 wrs1
wrs1's picture

I keep hearing about all this debt as though it just suddenly appeared after prices got above $100.  Do they not realize this has been going on for about 8 years now? The whole frac for oil got going after some natural gas wells turned out to produce a lot of oil down in South Texas.  That was called the Eagleford. I have a friend whose company had about 17,000 acres in a couple of the hot counties down there and they were interested in the Austin Chalk because prices had gotten high enough that the Chalk with it's 50 bbl/day wells drilled for $1m would be profitable if oil stayed above $40/bbl.  Keep in mind that is close to the price oil from the chalk was selling for when the Saudis crushed the market back in 1986.  So my friend's company founld oil in the chalk around 2006 and oil went up to $80/bbl and in 2008 went briefly crazy.   In 2009 I talked to him after oil had dropped below $75 and he thought that might be the point at which the guys in the Eagleford gave up but as it turned out, his company sold their 17,000 acres of deeper rights for $8,000/acre and then drilled a bunch more wells in the chalk.  They have done fantastic with their shitty chalk wells as they had a $140m development budget so they could drill a lot of those 50bbl/day wells.  They don't have debt, they are still making money and still drilling the chalk.  As long as oil stays over $40, the chalk will get punched by the smaller operators for these 50bbl/day wells.  That isn't going away but neither is the Eagleford below $75/bbl, those guys were making money in 2009 and the wells weren't producing like they are today.  In fact, well spacing in the Eagleford is down to about 80 acres.

I just would like to know if the people writing these articles don't understand that the real production isn't coming from the overleveraged people that wanted to pump any oil they could at $105/bbl but that the real production is coming from outfits that have been doing shale for 5-10 years now and know how to make money at much lower prices than we have now.  The biggest production increases are out of the Permian and Eagleford according to the RRC data.  The wells are paying back in less than a year at the higher prices but will take 18 months at the $60-70 type of price range.  Those are still good numbers.  I don't see a lot of this production going away.  I do think there will be overleveraged players that fold up with oil this low.  The guys we leased our Eaglebine acreage to in 2013 come to mind.  They paid us $700/acre for 3200 acres so we made out like bandits because they won't have the money to drill now.  In 2016 when those leases expire, the POO will be back over $100 and we should make $1000/acre to lease them again.  This is a cycle, right now this is a low spot but it might not be low for that long.  Guess we will see.

Sun, 11/30/2014 - 17:31 | 5502340 post turtle saver
post turtle saver's picture

I truly wish more folks here would listen to what wrs1 has to say... if I could give more than a +1 I would

Sun, 11/30/2014 - 17:25 | 5502315 VWAndy
VWAndy's picture

What does this do too the demand for petro dollars?

Sun, 11/30/2014 - 17:25 | 5502319 djsmps
djsmps's picture

I saved nearly ten dollars on my last fill-up. I plan to use that towards a 48" flat screen TV and a Ford F150.

Sun, 11/30/2014 - 19:00 | 5502615 lotsoffun
lotsoffun's picture

djsmps - great idea.  and a happy meal also - save the toy, it might be worth something in a few years.  you are a financial engineer of the highest order :)

 

Sun, 11/30/2014 - 17:32 | 5502341 kowalli
kowalli's picture

bloodbath will come

Sun, 11/30/2014 - 17:32 | 5502347 A Lunatic
A Lunatic's picture

They make these things called storage tanks in which you store cheap energy at your convenience for a future time of need. BTFD........

Sun, 11/30/2014 - 17:39 | 5502359 VWAndy
VWAndy's picture

You would think so. But it seems to me if the market was over satuerated then walking from usd would be very easy? No.

Sun, 11/30/2014 - 17:33 | 5502350 Seize Mars
Seize Mars's picture

Ok first of all, it isn't "fossil fuel." Plant life does not spontaneously transform into crude oil, I don't care how much time, I don't care how much pressure. They've found it 40,000 feet down, there were never any ancient forests down there.

Anyways, somebody explain to me how it's really bad for me that I spend less on gas now?

Sun, 11/30/2014 - 18:44 | 5502554 VWAndy
VWAndy's picture

Reduced demand for dollars. On a global scale.

Sun, 11/30/2014 - 19:04 | 5502624 Seize Mars
Seize Mars's picture

Right, I understand that. I think maybe you meant reduced value of printed dollars.

Anyways my question is how exactly is it bad for me?

Sun, 11/30/2014 - 19:52 | 5502789 VWAndy
VWAndy's picture

Correct.

 

Sun, 11/30/2014 - 21:07 | 5503007 Tall Tom
Tall Tom's picture

Does he lose $64,000 for his correct response?

 

For the humor...See this Clarke and Dawe video.

 

https://www.youtube.com/watch?v=thSTpGnWEAs

 

NOTE THE DATE...

Mon, 12/01/2014 - 01:34 | 5503657 bk1037
bk1037's picture

When you lose your job potentially, you will have your answer. Until then, enjoy.

Tue, 12/02/2014 - 01:23 | 5507553 Seize Mars
Seize Mars's picture

Spoken like a true statist. I will lose my job because my expenses went down. Right. So I really "need" an overinflated expense structure, because after all it boosts GDP.

 

Sun, 11/30/2014 - 20:02 | 5502766 scrappy
scrappy's picture

The Deep Hot Biosphere: The Myth of Fossil Fuels Paperback –by Thomas Gold

http://www.amazon.com/Deep-Hot-Biosphere-Fossil-Fuels/dp/0387952535/ref=...

Thomas Gold is no hack, check his bio.

https://en.wikipedia.org/wiki/Thomas_Gold

From a seminar. Dr. Gold started out, "I always thought it strange that before the dinosaurs died, the majority of them hiked to Saudi Arabia!"

The core of the earth is constantly giving off gasses, Dr. Gold termed it "out-gassing"; methane and carbon dioxide being the most abundant. As these various hydrocarbons rise through pores in the rock, they encounter proven life forms that love to eat methane. These life forms, as a bi-product, leave behind the fuels we use; oil, natural gas and coal. Oil companies have capped "drained" oil wells, only to come back thirty years later to find they are full again!

German-made ‘miracle’ machine turns water into gasoline

Published time: November 30, 2014 08:35

http://rt.com/news/209619-sunfire-water-synthetic-fuel/

https://en.wikipedia.org/wiki/Fischer-Tropsch_process

 

Sun, 11/30/2014 - 17:40 | 5502362 Smegley Wanxalot
Smegley Wanxalot's picture

It's a boon to me and 98% of the people out there, so fuck you Automatic Earth corporatist shill bitch.

Sun, 11/30/2014 - 17:41 | 5502371 XqWretch
XqWretch's picture

"Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government?"

 

Dont have a pension or a money market fund, and I dont receive anything from the government. Fuck em! Let this sucker burn!

Sun, 11/30/2014 - 17:44 | 5502380 p00k1e
p00k1e's picture

The so-called..,  recently “legaleds” will rake up the dough on that project.  Tee-hee, hee…  

Sun, 11/30/2014 - 17:52 | 5502401 viedoklis_lv
viedoklis_lv's picture

For countries which import oil - this is good.

"Falling oil prices mean that some oil exporters are bracing themselves for significant revenue shortfalls, while some importing countries could benefit economically as consumers pay less for energy and have more to spend elsewhere."

http://www.bbc.com/news/business-29643612

For those who export like Putn regime.. well... it's sucks for him :)

"Ruble Crashes Past Historic 50 to U.S. Dollar as OPEC Lets Oil Price Fall"

http://www.themoscowtimes.com/business/article/ruble-sinks-to-record-low...

 

Learn more about crashin Putin regime:

https://twitter.com/StopPutinRegime

Sun, 11/30/2014 - 18:02 | 5502436 bid the soldier...
bid the soldiers shoot's picture

Hello  sad Latvian guy

What are one potato say other potato?

Premise ridiculous. Who have two potato?

 

You have laughing?

Sun, 11/30/2014 - 17:59 | 5502409 slingshot
slingshot's picture

HYG JNK  banks leveraged into oil related junk bonds the new subprime    watch closely

 

http://signalinea.com/why-a-credit-crisis-in-the-energy-sector-may-be-co...

Sun, 11/30/2014 - 17:54 | 5502418 bid the soldier...
bid the soldiers shoot's picture

This isn't cheap oil. And it's not massive supply oil.

It's low-demand-because-of-great-recession oil.

You can decide for yourselves if that's good or bad.

 

Oh, and given TPTB's past record, as soon a the Christmas shopping season is over the price of oil will return to it's rightful place in the pantheon of fixed price resources.

 

 


Sun, 11/30/2014 - 18:12 | 5502457 Semi-employed W...
Semi-employed White Guy's picture

If you want your shale boom, you can have your shale boom...until it's a shale bust!

Sun, 11/30/2014 - 18:25 | 5502496 roadhazard
roadhazard's picture

I thought about it and My bottom line is I want cheaper gas than higher gas. duh

Sun, 11/30/2014 - 18:33 | 5502520 observer007
observer007's picture

OIL: next step 50

latest

http://tersee.com/#!q=oil&t=text

 

 

 

A renewed plunge in oil prices is a worrying sign of weakness in the global economy that could shake governments dependent on oil revenues. Yet it is also a bonus for consumers as prices fall at the pump, giving individuals more spending money and…

Sun, 11/30/2014 - 19:22 | 5502679 J J Pettigrew
J J Pettigrew's picture

The Federal Reserve cannot promote inflation with oil crashing..

Oil never should have been this high and now it comes crashing down...

what is next to crash?  What has been too long at levels artificial? (oil, stocks, interest rates)

Sun, 11/30/2014 - 19:33 | 5502721 yogibear
yogibear's picture

All those outstanding share buy-backs. What happens when they really need the cash?

Mon, 12/01/2014 - 01:31 | 5503649 bk1037
bk1037's picture

Thats's why they do buybacks instead of dividends. They do change their minds on this, there is no comiitment to buyback, only intent. Companies make me sick how cold and calculating they can be.

 

 

Sun, 11/30/2014 - 19:48 | 5502767 Chuck Knoblauch
Chuck Knoblauch's picture

Isn't the buyback strategy the only strategy left.

Nothing left in the bag of tricks?

How long before the Government controls everything?

Even exeutive pay, oh my!

 

Sun, 11/30/2014 - 20:00 | 5502801 Calmyourself
Calmyourself's picture

Just checked my "WORRY" tank,  sorry its as empy as that gas tank.. Whatever either it helps or hurts the economy.  I will stand for Freedom how about you?  And yes already doing so in many more ways than 99% of you..  (for the trolls)

Sun, 11/30/2014 - 20:28 | 5502914 williambanzai7
williambanzai7's picture

Another day another malinvestment...

Sun, 11/30/2014 - 20:40 | 5502947 Amerikan Patriot
Amerikan Patriot's picture

On Zero Hedge you get articles telling you that spendy oil is bad for the economy AND articles telling you that cheap oil is bad for the economy.

The bottom line according to Zero Hedgers is that EVERYTHING is bad for the economy.

Hilarious!

Sun, 11/30/2014 - 21:40 | 5503131 coast
coast's picture

Its not that oil is going down AP, it is going down too fast and the reprocussions will be felt...All because Putin wont play ball with the banksters...the banksters are insane

Sun, 11/30/2014 - 20:59 | 5503009 Amerikan Patriot
Amerikan Patriot's picture

For Russia, watching the price of oil go down is the same as watching your country's tax revenue go down.

Why?  Because oil and gas revenues account for 52% of Russia's federal budget revenue and over 70% of total exports.

In other words, because oil is such a large part of the Russian economy, cheaper oil means a weaker Russia, less able to impose its will on others.

Rejoice!

 

Sun, 11/30/2014 - 21:32 | 5503110 coast
coast's picture

That is the point AP...dt hurt Russia...but Russia has the moral ground and enough to get them by, while the U.S. gets shot in the foot and bye bye shale gas...and with gas cheaper in the U.S. people will just buy more stuff from China....dear Lord the U.S. is totally fricked...

Mon, 12/01/2014 - 01:28 | 5503646 bk1037
bk1037's picture

Moral ground? LOL, nice try

Sun, 11/30/2014 - 21:54 | 5503164 barroter
barroter's picture

Energy speculators will now demand a tax payer bailout...

Sun, 11/30/2014 - 21:58 | 5503182 Pumpkin
Pumpkin's picture

Looks like some strong hands are shaking out some week hands. 

Sun, 11/30/2014 - 23:44 | 5503453 hedgiex
hedgiex's picture

When the real economy collides with the financial economy and where both are not clearing prices due to the collapsing price discovery mechanism caused by debts along side with fiat paper notes, paradoxically you have the right price for oil.

No single (nation, corporations, impacted sector, etc) can dominate the demand/supply equation exacerbated by their self effacing "beggar your neighbor" policies along side the "currency war".

Like gold, oil should be considered as a store of value in its physical form. Conversely, treat it as an anchor currency to play the other fiat papers. Best if you can straddle both sides (the physical and paper markets).

Fallouts are indeterminate that you can argue ad infinitum as to which economy (real or financial) in which (nation) and whether short term or long term shall benefit or suffer.

All you focus upon is the volatility now compressed within shorter time frame. The volatility made worse by expected endless interference by the bureaucrats who are not in control of this global commodity.

All spins are just noises particularly from those with no skin in the game. (Think out of the box).

Mon, 12/01/2014 - 09:57 | 5504191 AdvancingTime
AdvancingTime's picture

How these lower prices effect a particular nation will vary and will effect both their currency and how competitive they will be going forward. The decision by OPEC members Thursday to keep their production ceiling unchanged has sent crude prices into a tailspin. Dropping oil prices add a new surprising new dimension to the stability of the world financial system.

While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales. The shale boom has been one of the bright spots in the economy in recent years and acted as a tailwind that accounted for much of America's growth. Expect this to come to an abrupt halt and with it thousands of jobs. The article below delves deeper into the dark side of falling oil prices.

http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html

Do NOT follow this link or you will be banned from the site!