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 manipulation.

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 prices."

"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 believes.

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 direction."

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 expensive production."

"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 believes.

US oil production reached 9.42 million barrels a day in May. The highest monthly output since November 1972.

"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 shut down.

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 industry."

Eliminating thousands of jobs. Affecting at least four US oil-producing states. Alaska, Louisiana, Oklahoma and Texas.

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 conditions.

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 since 2009.

In an economy Roberts calls "a house of cards." Based on "the illusion of recovery…created with fraudulent statistics."

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 lendmanstephen@sbcglobal.net. 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 to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network. It airs three times weekly: live on Sundays at 1PM Central time plus two prerecorded archived programs. 

 

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