Low Oil Prices: Boom or Bust? A Virtuous Cycle Of Prosperity Follows
13 December 2014
By Stephen Lendman
World oil prices are nearly half their year ago price.
Triggered by global economic weakness. Market
Saudi overproduction. OPEC oversupply. US producers
flooding world markets with oil. Paul Horsnell heads
Standard Chartered's commodities research.
He sees chaotic market conditions likely over the next
few months. Saying "Opec’s decision not to cut output
marks the end of four years of remarkably stable oil
"With Opec, at least temporarily, abdicating its role
as a price stabilizer, the market has by default taken
over that role."
"The past 150 years have been marked by frequent boom
and bust cycles in oil, with each low of the cycle
squeezing longer-term investment and creating the base
for the next boom whenever demand improves again."
Horsnell thinks this cycle is no different from
previous ones. With a few new features. Key are
fracking and US shale oil production.
Made profitable by $100 dollar a barrel oil. How
producers cope to lower prices remains to be seen, he
Calling shale oil "something of a cash monster."
Because of reduced output. Requiring deeper drilling.
At higher cost.
For diminishing returns. Squeezing producers
financially. Forcing them "to delay drilling and hold
back on committing cash," said Horsnell.
He expects significantly less drilling "over the next
two months, and should low prices continue throughout
the first quarter of 2015, US oil output growth is
likely to fade."
Zero Hedge has a different view. Saying America is
about to be "flooded with record oil production…"
Saying plunging prices normally curtain production.
Affecting high-cost producers most.
Yet Bloomberg reports US production in 2014 is set to
reach a 42-year high. "(A)s drillers ignore the recent
decline in price, pointing them in the opposite
Eckard Global's Troy Eckard sees more crude production
in 2015. Because of declining equipment costs.
Improved drilling techniques. More than offsetting
lower prices. According Zero Hedge:
"(O)il companies are, logically, shutting down
"However, in borrowing a page from the playbook of the
iron ore producers who also are caught in an AMZNian
race to the bottom, and are producing more raw
materials than ever in hope of putting their
competitors out of business as fast as possible…"
"(W)hat they are also doing is shifting their focus to
their most-prolific, lowest-cost fields, which means
extracting more oil with fewer drilling rigs."
Citing Goldman Sachs Group Inc. as its source.
"Global giant Exxon Mobil Corp. the largest US energy
company, will increase oil production next year by the
biggest margin since 2010."
"So far, the Organization of Petroleum Exporting
Countries' month-old bet that American drillers would
be crushed by cratering prices has been a bust."
US energy producers are following OPEC's strategy.
Battling low prices and demand with record production.
According to Mount Lucas Management's Timothy Rudderos:
"Companies that are already producing oil will
continue to operate those wells because the cost of
drilling them is already sunk into the ground."
"But I wouldn't want to have to be making longterm
production decisions with this kind of volatility."
Zero Hedge says US producers hope cheap oil will
eliminate high-cost producers. Causing an
unprecedented surge in supply.
Perhaps a greater crash ahead in prices before
reversing to more stable equilibrium.
"(A)t some point in the distant future," Zero Hedge
US oil production reached 9.42 million barrels a day
in May. The highest monthly output since November
"Existing wells remain profitable even as benchmark
crude futures hover near the $55-barrel mark…" Because
future operating costs are usually $25 or less.
Most US shale oil production is unprofitable below $60
a barrel. Low out-of-pocket costs for existing wells
keeps them operating.
Until diminishing returns changes things. Then wells
Zero Hedge sees capital spending and growth projects
"frozen for years to come." Producers hope to make up
for low prices with higher volume.
To knock out competitors before they eliminate you. A
race to the bottom is ongoing. Who'll win or lose
remains to be seen.
Still another view from RT International. Headlining
"Crude price drop triggers major layoffs in US oil
Eliminating thousands of jobs. Affecting at least four
US oil-producing states. Alaska, Louisiana, Oklahoma
Facing budget problems. Because of decreasing oil
revenues. A plus for consumers harms America's energy
sector. And states where they operate.
Goldman Sachs estimates oil producers will lose $1
trillion if prices stay below $60. At $70 a barrel,
oil companies wil have to cut expenses by up to 30% to
make projects economically viable.
At risk overall is $930 billion. Companies are
scrambling to cope. Scrapping high-cost projects.
Reviewing capital expenditures. Considering large
asset sales. According to Goldman's European energy
research head Michele della Vigna:
"This environment of project deferral and cost
deflation will be extremely challenging for oil
service providers, especially capital-intensive
companies such as drillers, subsea construction and
seismic survey groups."
Goldman's corporate research head Simon Flowers
believes producers will "have to reduce their budgets
because projects that worked at $80 to $90 (a barrel)
are hard to justify at current prices."
Oil industry employment rose 50% since 2009. Creating
779,000 new jobs through October.
If oil prices stay below $60 a barrel through mid-2015
or longer, thousands of jobs may be lost. High-paying
ones at over $1,700 a week on average.
When people have money they spend it. A virtuous cycle
of prosperity follows. Polar opposite today's
Americans aren't prepared "for another drop in their
living standards and ability to cope," says Paul Craig
Roberts. On top of all they've been force-fed so far
In an economy Roberts calls "a house of cards." Based
on "the illusion of recovery…created with fraudulent
What happens if oil prices fall further and stay
unprofitably low longer than expected remains to be
seen. For sure ordinary people will be hurt most.
Stephen Lendman lives in Chicago. He can be reached
at email@example.com. His new book as
editor and contributor is titled "Flashpoint in
Ukraine: US Drive for Hegemony Risks WW III." http://www.claritypress.com/LendmanIII.html
Visit his blog site at sjlendman.blogspot.com. Listen
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