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Make No Mistake, The Oil Slump Is Going To Hurt The US Too
Submitted by Marin Katusa via Casey Research,
If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scot free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told.
In reality, though, many of the jobs the US energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.
The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on US-made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it.
Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.
The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.
If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.
True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.
In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It’s no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.
Even if oil were to recover to $70, $1 trillion of global oil-sector capital expenditure—in fields representing up to 7.5 million bbl/d of production—would be at risk, according to Goldman Sachs. And that doesn’t even include the US shale sector!
Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil- and gas-related capital expenditure in the US is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.
We’re not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out—and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.
There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma-based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that’s made up of energy loans.
If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don’t make money below $55. And fully 50% are uneconomic at $50.
So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the too-big-to-fail banks slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill-advised derivatives trades!
We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It’s hard to see why it should be different this time.
It’s a crying shame. The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve’s easy money policy.
* * *
To find out more, sign up for Marin Katusa’s just-launched advisory, The Colder War Letter.
You’ll also receive monthly updates on the latest geopolitical moves in this struggle to control the world’s oil pricing and the energy sector at large and what it means for your personal wealth. Plus, you’ll get a free hardback copy of Marin’s New York Times bestselling book, The Colder War, just for signing up today. Click here for all the details.
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Yes, but that hurt is down the line. Cheaper gas pump prices now are all that counts to U.S. drivers unless they are frackers.
my roomate's ex-wife makes $76 every hour on the laptop . She has been out of work for ten months but last month her income was $13335 just working on the laptop for a few hours. read... WWW.WORKS3.COM
yeah, well, my roomates mom make $200 an hour taking it up the yam yam....so there
Upvote for "yam yam". :)
Merry Christmas!
I hate it when self-styled "energy analysts" make huge, glaring errors, such as this one: "The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. "
What's this "could become an oil importer again" business?
The US still is an importer of oil and unless it figures out how to increase it's oil production by another 5 million barrels a day from today's levels it will always be an oil importer.
Spoiler alert...The US is never going to increase production by another 5 mbd and the shale rout is going to expose just how true that really is.
Not to mention that Butane and Ethane ain't oil in the first place....
Also, anyone working for Casey should know better than to promote the "dependent upon foreign oil" meme. On a planet of scarce resources, inefficient production is not a good thing.
it's more of that new math (and old propaganda)
if i lost the mile race by 25%, I'd be one lap behind
Long sweet potatoes.
Talking with a BK lawyer last night who stated he was swamped with BK's on commercial and resi property developers in ND allready. Also on a synthetic oil company that was betting on $130 oil that's now bust.
Works for one of the largest Firms here in Mn. So my guess is his clients are all the larger not smaller developers. FWIW.
Not surprised at all. I've got a brother who's an attorney here in MN too. His only connection to the ND oil patch is a client in a custody fight who has just lost lucrative employment out there, which doesn't bode well for him getting his kids away from meth-addicted Mom (who has a rich daddy).
The fallout is going to be really bad. ND exempted the oil drillers from any of the public costs of the boom. Now they've got trashed roads, hastily-built housing that's going to rot, a lot more meth and other drugs than they've ever had, businesses legal and otherwise that are now going to collapse etc. Just like the Wild West; the boom only lasts a short time, the money leaves town and the locals are left flat broke to clean up the mess.
The mightY Fed Printing press shall save the day. US is in great hands like the rest of prudently run Europe. Merry Xmas to all ;-)
Again, anachronistic assumptions. As long as the US media can effectively sell the "cheap oil is economically stimulative" story, the alogs shall comply.
No way. Not when there are banks ultra long oil. They'll crumble when they get margin called. Bear Stears 2.0 on deck.
It'll hurt the banking sector the most. Just imagine when it comes out the MS desk was long oil leveraged 40 to 1.
Me thinks I'll spend my OPEC dividend on Obamacare.
Slump, pump, dump, tumble, plunge, boom, bust, crash, soar, dive, rip, sink, levitate...
Because Obama.
Cash costs in the $30 range (for shale)? ROFLMAO.
Seriously.
I thought is was at least 50-60$, maybe 70$
Cash cost means cost to pump it out and sell it after the wells are drilled. Oil at $30-$50 means the wells already drilled keep running, no new wells drilled, so output from shale wells will decline quickly. Companies with lots of debt will go bankrupt, but even then, someone else (or possibly the same company after restucturing) will continue to operate the wells until the decline is enough to make operating them more costly than the oil is selling for.
Also, (this came from an article on Zero Hedge) companies have committed to lease drill rigs something like 6 months out, so shale output may increase regardless of oil price until around mid 2015, then fall like a rock after all drilling stops.
I have stripper wells that have been pumping just a few barrels a day for years, cost to produce is extremely minimal, say $10/bbl, that shit just goes on and on. Those wells declined 50% the first year and more slowly thereafter but they never produced much to begin with. That is the way most conventional wells drilled after the 70s here in the US operate. The shale wells produce 20 - 50 times more initially than these pieces of shit do and they drop 50-60% the first year. We dont have a lot of data past that but what we do have doesn't suggest that magnitude drop in subsequent years. Thus, shale wells may still be producing 100 bbl/day in 10 years and your thesis then becomes wrong, badly wrong.
"Thus, shale wells may still be producing 100 bbl/day in 10 years and your thesis then becomes wrong, badly wrong."
We have plenty of data on the hyperbolic decline rates of shale wells. Tons. Years and years, with wells sorted by vintage, lateral length, company, geographic coordinates, etc.
Averaged across over 6,000 wells here's the actual data for the Bakken play:
You add all that up and in just four years the average Bakken well is producing just 70 barrels per day.
So it's pretty safe to say that shale wells will not be producing 100 bbls/day in 10 years.
If the U.S. were smart it would be purchasing vast amounts of cheap Saudi oil and pumping it down the wells we currently have in production. Later, when the Saudi's run out we can pump it back up and sell it.
The oil they are selling cheap is low quality sludge.
I am not talking about the Bakken and why don't you give some links to your data. I am talking about Eagleford and Wolfcamp in the Permian. The production from the Wolfcamp is huge and as I said, there is no data to support this shale decline thesis. In addition, averaging across 6000 wells doesn't say anything other than you are attempting to dilute the data. Average across the 20% of the wells where 80% of the oil comes from and then check back with us.
.
Pretty obvious that TPTB want a round of deflation, so that they can scoop up real assets like oil leases, pipelines, companies cheap with printed money from the previous bailout/QE.
Rinse and repeat. The playbook is getting old and predictable.
PRINT MOAR OIL!
laser-printed 3D oil??????
Worse still for the way the US economy actually works would be if people took the $500 or so per year they're saving on gasoline and used it to pay down existing debt. That would be a double-whammy for Finance.
You know what? I'll go for 10 years of $30/barrel oil, and so would the US economy. This will primary hurt those who invested in $100 or $50 oil. The rest of us, including innovative producers, will not only be fine, but GREAT.
(Bankrupting Russia, Venezuela and Iran wouldn't be horrible either)
Venezuela and Nigeria will be suffering total chaos in a few months. Not sure they'll be able to keep the pumps running in the midst of the revolution.
~"Venezuela and Nigeria will be suffering total chaos in a few months."~
Are you joking or have you not been following what's going on in Venezuela? Venezuela has "suffering total chaos" down cold. Fuck, they've got so much of it they could bottle it and sell it.
China will step in and 'save' them.
Just what they want and what the US can live with.
I realize some people check in occasionally. Isn't Z/H for the people that "pay attention 24/7?"
I feel a bit insulted.
These crooks got everyone going on shale, issued junk bonds, leveraged it all, then went to SA and had their partners cut the oil price. They insured themselves with tax money, and now all they have to do is wait until the frackers default and steal all their stuff. The Saudis probably got paid in gold for helping out.
Then there is the cherry on top if Russian oil falls into their grubby little hands...
Is there anything the FED hasen't mucked up?
Mucked up my ass. This whole plan was concocted well in advance of what is transpiring now. Right on cue.
I call BS on all of this pessimism. Lower oil prices will only hurt the bad guys. Yes, and you who relied upon high oil prices. SORRY, NOT SORRY.
I guess the 10 million Americans working in oil related jobs are the bad guys.
Even before you do that, look at the lower curve... the one without royalties.
And then figure out which countries are positioned to tough it out, and still endure a colored revolution.
If it hurts Texans, its a good thing. Getting Texans and Russians to suffer at the same time makes the best holiday ever!
It won't hurt Texans. We still have lots of cattle and we like BBQ a lot more than oil anyway.
Why are you so hateful against Texans?
Did you come home to find the Dallas Mavs running train on your old lady or something?
I hope your mother suffers from cancer of the asshole and it will be the best holiday ever!!!
Cancer? Texas leads the nation? South east Texas area?
Based on info you pulled form your ass?
Anyways #1 cancer area will soon be the left coast due to all that nice radiation from fuck you shima
That's why they call it an energy "cycle".
Nothing new here folks. Move along...
How many times do I have to tell you, "Cheap Oil Prices will Not Hurt The US." We are already totally screwed in so many ways that the oil price will not matter one bit. Collapse is Collapse. That's where we are headed and the fed has the train rolling to the crash point at full speed already. We don't know when it will come off the rails but we know it will and the oil price does not change the inevitable. I am going to stop reading oil price collapse articles and think about Christmas for awhile.
All the oil slump will do to shale oil is put the north dakota fields in fewer and fewer well lubricated hands.
Market economics is about taking risks, sometimes you win, sometimes you lose.
I can certainly understand being blind sided by the Saudi move to protect their market share of the declining petro-market, but, thats the nature of investment risk. Those folks that took the plunge into the shale boom are going to take a loss, c'est la vie.
Those that counted on the OPEC cartel to continue to drive petro commodities prices were probably shocked as well....it appears the Saudis have come to understand what competative free market capitalism is all about.
To be honest, I have little sympathy for this market segment. Over the decades since Jimmy Carter's deregulation of the US petroleum industry this market segment didnt mind capitalizing on any and every event in the marketplace to jack up commodity prices and sock it to the US consumer.
The decrease in the price of oil is a great event for the US consumer on multiple fronts, from the price of consumer goods, transportation, agricultural products, etc....just like the increase in the price of oil several years ago was detrimental to the US consumer on multiple fronts.
Welcome to the new paradigm.
We can save all of our shale oil jobs and continue drilling at the same pace, and even increase it. All we have to do is set the floor price at $80 for oil produced in the U.S. or imported. Anything imported below $80, would be taxed to make the price $80. This would guarantee the shale industry. Simple solution. Of course they will never do it, because it would make America look like it is controlling the free market system -- globalism -- which we espouse to the rest of the world.
Anyone who thinks that low oil prices are going to last for more than a few months is dreaming. The short-term low prices are going to take out many of the shale companies -- and hundreds of thousands of jobs -- and then the price of oil will rocket back up to $80+. It's in our interest to just keep the price up and protect the shale industry and all of those jobs.
$80 oil is $3 a gallon gasoline. We can afford that. We're already used to it. If we want to keep it at $80 instead of $100, then the shale industry is our best chance. I personally think that $100 oil is coming very soon. The Saudi oil fields are all over 70 years old. Once their production slows, the global exports are going to decline and then it's energy crisis time.
Just when you finally realized you were getting screwed by Obamacare, along comes somebody suggesting for another 'model' version of it.
This is a very sensible approach if you ask me. These people talking about how cheap gas is good for the consumer are going to be the bitches whining about $10/gallon gas in two years but then we will be punching wells again and taking their money and there won't be any Al Naimi to dump sludge again. This is the kind of job that is going to be lost first, the support roles that make good money but would make minimum wage otherwise.
http://i60.tinypic.com/dh94ea.jpg
I think oil will be around US$60 on the basis of supply and demand.
That is low enough for fracking to not be viable for 70% of the US fracking companies.
USA: unemployment will be up. There will be deflation in the USA. A lot of banks will get hit and the US government will be forced to QE again in some form.
Russia: will have to fall to this price and still very viable for the companies but not the Russian governmnet. But why shouldn't the Russian government start printing rubles like everyone else?
China: will be able to buy this cheaper oil from Russia and make larger profits on exports to the west in the short term.
Japan: will be happy because their energy costs will also go down and make them more competative.
The longer term is that we will get deflation in the west as things (especially plastic) will cost less and so will manufacturing and transporting anything.
Where are all those "Peak Oil" preachers?
Gold Price: I would think the price of oil will fall for a while and then later people may buy it for insurance once they start to relaise that the real value of currency is woth less.
US Dollar: ironically the US Dollar will go up as it has been of late as people buy it against risk of their local currency.
This is all logical analysis I have made but for the last 7 years nothing has been logical.
MOAR WAR!!!1
Any attmepts to corner the market by the Saudis will not succeed ultimately. These aren't love taos the Saudis are doing now, they are attempting to inflict harm to US and UK oil interests among others, including Russia, in an attempt to protect their market share. A more realistic scenario based on history is regime change. i am sure the evil masterminds in the Rothschild clan and the US government are already devising a proxy strategy for dealing with the House of Saud, including perhaps letting Iran expand its inflience in the area which would be easy enough to let happen. The Saudis don't get to enjoy security protection from Uncle Sam, yet hurt the US byy ourperforming the US with lower costs to produce oil to maintain their market. The Saudis could get away with it if they were strong militarily, since they are not, if there is significant damage being done to western economies based on what the Saudis are doing, the Saudis will be brought to heel (or they will be kicked out of the way, and their wealth confisctaed). There are many cases in history where powerful regimes coveted natural resources and took them if they wanted if they didn't get good trade or accomondation from the other country. To the victor goes the spoils, the Saudis are pretty damn stupid if they don't foresee what could potentially happen here. It is naive for them to ponder that milirary action could not be used against them if what they are doing is hurting other countries and their economies.
SA is mostly attemptung to inflict pain on Iran-their religious and political opponent- first and foremeost.
As the man said in 2008 : the next bubble will be in energy.
He targeted renewables. He was not far wrong, as shale is a cousin to renewables, a half way house.
Its that half way house thingie which makes it smelly as a sustainable solution; a true new paradigm.
As its all about using risky technology with huge downside (ecological and well depletion rates) to achieve productivity gains in the fossil fuel patch; aka in a domain of finite extractable energy from Mother Earth, already badly phuked up by man's greed.
What renewables achieve is to USE only technology to harness FREE resourced energy (wind, ocean, solar) by making the experience curve effect make that "technology enabler" more cost effective.
Once we can go down that curve (as we will), once we can store and flux it (this new freely available energy), we will be closer to a paradigm change where cost of energy will be truly affordable, and Man freed from Oil's dirty power plays for oligarchies vying to be "top of the heap" thanks to its control.
First they controlled the Caesar's empire meme to enslave us, then the God meme to control us, now they control the fossil energy meme ! (Not saying they won't invent something else around the corner to emulate Schumpeter's creative destruction gale in a Darwinian world).
"What renewables achieve is to USE only technology to harness FREE resourced energy "
Are yuu serious? What do you think "only technology" is obtained with?
Well mining equipment, refineries, manufacturing plants, road and rail transport, etc., ALL powered by oil in one form or another ... not to mention plastc components obtained from oil.
Yes it is what I call the "technology enabler". But not in the source of "consumable" energy. which is free.
Today BOTH the technology AND the combustilbe is FOSSIL based. It is the combustible which is now running out.
In the future the portion of extractable combustible will diminsih if the car and the plane and the factories only consume renewables as Combustibles for every day work.
One day, when we know how to eliminate even oil energy from capital equipment used for extraction; aka replace the internal combustion engine vehicle and go "all" electrical for our robotics, we will have achieved total independence from fossils.
It is just a question of time as Man has that capability now.
Plastics are fine but they also one day will be replaced by renewable equivalents. And in the meantime they can become totally recyclable.
The slump in oil prices results in a massive amount of capital being moved from the corporate balance sheet into the hands of the consumer in the form of cheaper gasoline prices. First this will not be tolerated, and secondly it will hurt those responsible for sustaining those prices and eveyone downstream in the oil/gas busisness. Capitalism and free markets simply will not be tolerated in the future. The idea of self equilibrating markets driven by supply and demand with the inefficient forced out of busisness is just too vague a concept for the greed of the banker elite
It will hurt the US oil industry, but not the US as a whole. It will help the overall US economy. Every $10 drop in the price of oil, sustained for one year, adds 0.3% GDP.
According to the article, the U.S. has created about 1 million jobs since 2009. But that not right even by their own chart. That's only the net number from that January. Since July of 09, its been 7 million jobs, only 1 million of which are shale.
And the 41 states who saw their unemployment rate drop last month might take issue with the "5 shale states" description.
C'mon man