The price for a barrel of oil is dancing in and out of the $20 range, the first time since 2003. And also the analyst chatter is reveling in its bearish tone, skeptical of any meaningful recovery anytime soon, despite today’s half-hearted OPEC announcement.
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“I think it is a competition to see which pundit can justify a cheaper price . for extended,” mused a buddy of mine.
“I agree,” I said nodding with a wry smile, “the one-upmanship C or one-downmanship C reminds me of bad reality TV. However the consequences of all this spreadsheet jockeying go far beyond counting barrels and value forecasts.”
“You mean the upshot of one of the world’s largest industries being gradually dragged into bankruptcy?”
I nodded again, “Yeah that’s one part of it. You don’t need a spreadsheet to figure out where this really is headed.”
My friend and I kept travelling to the restaurant discussing oil, gas and also the world’s ills on hungry stomachs; not a great recipe for fulfillment.
I explained the price fall from $100 a barrel to $50 had economists taking out cost curves to figure out who could keep drilling but still earn money. Their email list was pretty lean, and that’s why a large number of mega projects were shelved or cancelled in the last 1 . 5 years. At year-end, oil prices slid from $50 to $40. The main difference wasn’t measured in dollars, but in units of anxiety. But it didn’t hold on there; going to $30 a few weeks ago caused white faces along with a feeling of panic in the market. Pundits closed their drilling spreadsheets and opened the ones that spoke to covering operating costs C in other words the oil price at which producers start taking a loss just by turning on their pump jacks.
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“Apparently, a lot of oil production will keep pumping for under $20 a barrel; that’s what the operating cost curves are showing.”
“Maybe,” I replied, “but I haven’t seen any companies moving their head office into tents by their pump jacks. Those analyst numbers you see being quoted are operating costs in the wellhead. They do not include salaries, office overheads, rents, fixed fees, local taxes, and of course the organization debt.”
I explained that therein lies the issue with oil prices within the $20-range: The majority of the world’s oil industry (Canada not unique) is gasping via a snorkel for money. Ignore investment dollars; there isn’t any money to drill new wells when costs are below $30 let alone $20. Natural gas prices have collapsed too, as have petroleum products recently. The flow in ‘cash flow’ is drying up fast. For a lot of companies just keeping the lights on and also the bankers behind the portcullis is really a money-losing proposition.
“Some analysts believe that prices are likely to go sub-$20,” noted my friend once we walked up to the restaurant door. “The world is awash in oil; too much of it in white storage tanks, underground caverns and floating tankers.”
“That’s true,” I said, “and that’s what has me concerned. Individuals are beginning to trivialize cheap, sub-$30 oil in the thought that it’s eternally plentiful. It isn’t.”
Think from it this way: suppose supermarkets have a large amount of food on the shelves, but behind the scenes the farmers and ranchers are going out of business. By analogy, imagine that farm implement companies are also going bankrupt and farmhands are being laid off not to return; that’s what’s happening to equipment and labour within the global oilfield service sector.
“Like it or otherwise, oil is still an important commodity that’s growing in demand,” I said, “and the world’s oil supply system is on the verge of being permanently damaged at these prices.”
We sat down for supper. My friend was connecting the dots, “So if this continues, upstream supply will be trashed and the pundits will soon be scrubbing their spreadsheets to determine who are able to justify higher prices for extended.” Amused by his own analysis, he zeroed in on a conclusion, “The next few years might be really volatile.”
“I’ll avoid investment recommendations until after lunch,” I replied. Menu open, I had been hungry yet thankful that food prices hadn’t tanked and that the agrarian economy was still being viable. A minumum of one component of our societal subsistence was stable, I thought.
