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Oil and the Economy: Where are We Headed in 2015-16?
Oil and the Economy: Where are We Headed in 2015-16?
The price of oil is down. How should we expect the economy to perform in 2015 and 2016?
Newspapers in the United States seem to emphasize the positive aspects of the drop in prices. I have written Ten Reasons Why High Oil Prices are a Problem. If our only problem were high oil prices, then low oil prices would seem to be a solution. Unfortunately, the problem we are encountering now is extremely low prices. If prices continue at this low level, or go even lower, we are in deep trouble with respect to future oil extraction.
It seems to me that the situation is much more worrisome than most people would expect. Even if there are some temporary good effects, they will be more than offset by bad effects, some of which could be very bad indeed. We may be reaching limits of a finite world.
The Nature of Our Problem with Oil Prices
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Resource Insights: Five energy surprises for 2015: The possible and the improbable
Resource Insights: Five energy surprises for 2015: The possible and the improbable.
The coming year is likely to be as full of surprises in the field of energy as 2014 was. We just don’t know which surprises! I am not predicting that any of the following will happen, and they will be surprises to most people if they do. But, I think there is an outside chance that one or more will occur, and this would move markets and policy debates in unexpected directions.
1. U.S. crude oil and natural gas production decline for the first time since 2008 and 2005, respectively. The colossal markdown in world oil prices has belatedly been followed by a slightly smaller, but nevertheless dramatic markdown in U.S. natural gas prices. The drop in prices has already resulted in announcements from U.S. drillers that they will curtail their drilling operations significantly next year.
But drilling that is already contracted for will likely go forward, and wells waiting for completion will be completed. It can be costly to pull out of drilling contracts. And, failing to complete already successful wells and bring them into production is downright foolish since the costs incurred in drilling the wells including future debt payments remain. In those circumstances, some revenue at lower prices is preferable to no revenue at all.
Having said all that, scaled-down drilling plans when combined with what’s left in drillers’ immediate inventory both to drill and complete may not be enough to overcome the prodigious production decline rates from existing wells in deep shale deposits of oil and gas which have provided almost all the recent growth in U.S. production. The decline rates are 60 to 91 over three years for tight oil plays and 74 to 88 percent over three years for shale natural gas plays.
Falling Oil Prices Could Rock Canada’s Politics: Expert | The Tyee
Falling Oil Prices Could Rock Canada’s Politics: Expert | The Tyee.
What do the plummeting oil prices tell us not only about our near term economic future in Canada, but the political fragility of the world’s petro states?
If Canada fully joins the petro state club, as our prime minister and his party desire, is oil’s volatility just the cost of doing business, or a threat to our nation’s well-being?
The ideal person to ask is Terry Lynn Karl, one of North America’s foremost experts on the politics of oil. The Tyee recently caught up with Karl, who teaches at Stanford University and lives in San Francisco.
Asked in a wide ranging interview what Canadians might expect if oil prices stay low for a few years, she predicted “a rapidly declining Canadian dollar, greater problems over pipelines, the reduction of future investments, and a very bumpy oil ride, especially for Alberta.
“Any adverse effect low oil prices will have on Canada’s high cost oil industry will have a multiplier effect on the economy and polity. Government services will be cut back, house sales will decline, and banking will slow down. Canadians will not be so happy with their government.”
More To Ruble’s Collapse Than Meets The Eye
More To Ruble’s Collapse Than Meets The Eye.
The ruble is dying, and fast. In what is now being dubbed ‘Black Monday’ the ruble’s value to the dollar dropped nearly 15 percent. Tuesday brought no respite and the ruble fell another 10 percent. The ruble’s collapse follows a similar – though by no means as extreme – slump in oil prices. Still, the Russian economy’s troubles are deeper than that and President Vladimir Putin will be hard-pressed to find an easy out. With a recession looming, state energy companies are struggling to stay afloat, if not directly contributing to the country’s woes.
On the year, the ruble has lost more than 55 percent of its value against the dollar, breaking psychological barrier after psychological barrier. Tuesday’s low of 80 marks a new record and harkens back to the period of hyperinflation that characterized post-Soviet Russia. Then, as now, citizens are seeing their material wealth disintegrate amid rising costs domestically.
Related: Sanctions, Oil Prices Push Russia Into Currency Crisis
Source: QZ
Crash-O-Matic Finance | KUNSTLER
Crash-O-Matic Finance | KUNSTLER.
“Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47 percent decline…!”
–James Puplava, The Financial Sense News Network
May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop!
This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing.
It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.
US Shale Under Pressure From More Than Just Low Prices
US Shale Under Pressure From More Than Just Low Prices.
Hydraulic fracturing, or fracking, has come full circle in Denton, Texas after a controversial ban on the practice entered into effect on Tuesday. Denton is one of several cities located on top of the massive Barnett shale formation, regarded as the birthplace of modern fracking. The ban, while incomplete, gives strength to what is a growing anti-fracking movement in the United States.
The Barnett shale covers an area of more than 5,000 square miles with depths between 5,000 and 8,000 feet. With more than 40 trillion cubic feet (Tcf) of technically recoverable gas, the Barnett holds approximately 12% of the nation’s proved reserves. Over the past decade, activity on the shale skyrocketed and over 15,000 wells have been drilled to date. For the state, the benefits are clear – in 2011 alone, Barnett production added nearly $13.7 billion to the Texas economy. However, productionpeaked in 2012 at 2 Tcf and will plummet by more than half toward 2030 – recent ban notwithstanding.
Source: EIA
Despite the success, fracking is not a victimless pursuit and its spread has been met with an unequal, but growing amount of public criticism; local bans and national moratoriums prove not everyone is on board. Earlier this year, Exxon CEO Rex Tillerson became party to a suit, which sought to remove fracking-related infrastructure from his Dallas suburb.
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Epsilon Theory – Salient Partners | Signs and Portents
Epsilon Theory – Salient Partners | Signs and Portents.
Like the criminals that Bruce Wayne fought as Batman, we investors are a superstitious, cowardly lot. We are constantly ascribing way too much import to this sign or that sign, constantly freaking out over the meaning and significance of this market event or that market event. It doesn’t help that the financial media world has devolved into fiefdoms of rah-rah soothsayers on the one hand and doom-seeing end-timers on the other, so that whatever our predispositions might be we can easily find Voices of Authority to read the entrails to our liking. And it really doesn’t help that we are in the midst of the greatest crisis of faith in the markets since the 1930’s, so that – as Stephen King wrote – we survive by looking for day-to-day signs to show us what to do.
And yet sometimes a little freaking out over the signs and portents is clearly the right thing to do. Sure, if your nanny declares her loyalty to your adopted-under-mysterious-circumstances devil-child as she hangs herself outside the nursery window it’s probably a case of mental illness, but I’d also listen a little more closely to what that pesky priest says. If you’re Pierce Brosnan in the “Bag of Bones” mini-series and you think that your dead wife is sending you cryptic messages via a handful of refrigerator magnets … well, maybe you should drive into town and buy more refrigerator magnets, see if she’s got anything interesting to say. If you’re Desdemona and you’re worried that Othello’s lip-biting is a sign that he’s about to fall into a jealous, murderous rage … well, maybe you should run out of the room instead of hanging around to see if you’re right.
It’s a tough call, evaluating what’s a “true” sign and what’s a “false” sign. Are we being foolish to sell our energy stocks after oil prices took another big hit, or are we reading the market’s tea leaves correctly and saving ourselves a lot of future pain? Are we acting as Shakespeare says any wise person would in a knowable and deterministic world, by putting on our cloaks as clouds appear and looking for the night as the sun sets? Or are we mistaking our play-acting market world for the real world, putting on our cloaks as the projectionist shows us a picture of clouds and looking for the night as the stage lights dim?
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Oil-Producing Countries’ Currencies Are Getting Crushed | Zero Hedge
Oil-Producing Countries’ Currencies Are Getting Crushed | Zero Hedge.
While most people’s attention has been focused on the demise of the Russian Ruble this year, since the June highs in Crude Oil, the oil-producing nations of the world have seen their currencies devalue rapidly. From Brazil to Nigeria and Algeria, the impact of lower oil revenues is starting to create a vicious circle for many of these nations… and having consequences for the very Petrodollar flows that the US relies upon…
Mission Accomplished – if the goal was crashing Russia’s Ruble – but the consequences of the collapsing Petrodollar flows (as we noted here) may wellcome back to bite…
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Why Environmentalists Love Plummeting Oil Prices
Why Environmentalists Love Plummeting Oil Prices.
NEW YORK — Deepwater drilling rigs are sitting idle. Fracking plans are being scaled back. Enormous new projects to squeeze oil out of the oilsands of Canada are being shelved.
Maybe low oil prices aren’t so bad for the environment after all.
The global price of oil has plummeted 31 per cent in just five months, a steep and surprising drop after a four-year period of prices near or above $100 a barrel.
Not long ago a drop of that magnitude would have hit the environmental community like a gut-punch. The lower the price of fossil fuels, the argument went, the less incentive there would be to develop and use cleaner alternatives like batteries or advanced biofuels.
But at around $75 a barrel, the price is high enough to keep investments flowing into alternatives, while giving energy companies less reason to pursue expensive and risky oil fields that also pose the greatest threat to the environment.
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Will US Shale Oil Undermine Its Own Success?
Will US Shale Oil Undermine Its Own Success?.
The US shale revolution has remarkably influenced global energy markets over the past five years. Can falling oil prices tarnish the extraordinary success of hydraulic fracturing in the US and turn it into a victim of its own success?
The continuous fall in oil prices over the past five months has created a significant stir in global oil markets. Key reasons for this sudden fall lie in a combination of factors: weak demand in Europe and Asia, higher than expected levels of production in politically unstable areas such as Libya and Iraq, increased US production and OPEC’s decision not to cut production. The downward oil price trend might continue in 2015. Analysts predict that prices could fall to $70 and $80 for the WTI and Brent benchmarks respectively in the second quarter of 2015.
It is still unclear why the OPEC, and its leading member Saudi Arabia, decided to keep relatively high levels of production, considering the fact that the oil glut might additionally slash oil prices. One potential scenario allows the possibility that the Saudis are counting on the negative effect which low prices might have on the US shale producers.
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Early Signs Of A Pullback In Drilling Activity
Early Signs Of A Pullback In Drilling Activity.
With oil prices low and showing no sign of an immediate rebound, the industry is beginning to pull back on spending.
Oil prices have dropped around 30 percent since summer highs, raising fears among producers across the globe. Yet, many oil majors are relatively diversified, with large holdings downstream. For example, ExxonMobil and Chevron have been insulated in the third quarter because of their large holdings in refining. Steep declines in oil prices may hurt their production sectors, but with lower priced oil as an input, big oil’s refining assets become more profitable.
For the third quarter, ExxonMobil reported a 3 percent rise in earnings compared to quarter three in 2013. That was largely driven by the Texas-based oil giant’s refining assets, which saw its profits rise by more than 70 percent from $592 million to $1.02 billion. Chevron’s refining program succeeded in quadrupling its profits in the third quarter, more than offsetting the hit the company has taken from the slide in oil prices.
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RESOURCE CRISIS: The collapse of oil prices and energy security in Europe
RESOURCE CRISIS: The collapse of oil prices and energy security in Europe.
Ladies and gentlemen, first of all, let me say that it is a pleasure and an honor to be addressing this distinguished audience today. I am here as a faculty member of the University of Florence and as a member of the Club of Rome, but let me state right away that what I will tell you are my own opinions, not necessarily those of the Club of Rome or of my university.
This said, let me note that we have been discussing so far with the gas crisis and the Ukrainian situation, but I have to alert you that there is another ongoing crisis – perhaps much more worrisome – that has to do with crude oil. This crisis is being generated by the rapid fall in oil prices during the past few weeks. I have to tell you that low oil prices are NOT a good thing for the reasons that I will try to explain. In particular, low oil prices make it impossible for many oil producers to produce at a profit and that could generate big problems for the world’s economy, just as it already happened in 2008.
So, let me start with an overview of the long term trends of oil prices. Here it is, with data plotted from the BP site.
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Oil Price Slide – No Good Way Out | Our Finite World
Oil Price Slide – No Good Way Out | Our Finite World.
The world is in a dangerous place now. A large share of oil sellers need the revenue from oil sales. They have to continue producing, regardless of how low oil prices go unless they are stopped by bankruptcy, revolution, or something else that gives them a very clear signal to stop. Producers of oil from US shale are in this category, as are most oil exporters, including many of the OPEC countries and Russia.
Some large oil companies, such as Shell and ExxonMobil, decided even before the recent drop in prices that they couldn’t make money by developing available producible resources at then-available prices, likely around $100 barrel. See my post, Beginning of the End? Oil Companies Cut Back on Spending. These large companies are in the process of trying to sell off acreage, if they can find someone to buy it. Their actions will eventually lead to a drop in oil production, but not very quickly–maybe in a couple of years.
So there is a definite time lag in slowing production–even with very low prices. In fact, if US shale production keeps rising, and Libya and Iraq keep work at getting oil production on line, we may even see an increase in world oil production, at a time when world oil production needs to decline.
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Resource Insights: Is there really an oil glut?
Resource Insights: Is there really an oil glut?.
Back in March 1999 “The Economist” magazine carried a cover photo of two men drenched in oil as they attempted to close a faulty valve that was spraying a huge stream of crude skyward. Over the photo was the headline: “Drowning in oil.” At the time it really did seem as if the world were drowning in oil.
The previous December crude oil on the New York Mercantile Exchange touched $10.72 per barrel. That month U.S. gasoline prices averaged 95 cents per gallon. “The Economist” opined that oil might go down to $5 per barrel.
But, of course, in retrospect the magazine’s cover proved to be the perfect contrarian indicator, for oil had already begun its historic ascent toward $147 per barrel. The 2008 price spike was the culmination of a 10-year bull market that had begun in December 1998.
After dipping briefly to around $35 per barrel at the end of 2008 in the wake of the financial crisis, the new oil bull market sent world benchmark Brent Crude to a daily average of more than $100 per barrel for all of 2011, 2012 and 2013. Through October 27 the average daily price for this year has been $104.86, not all that different from the last three years.
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OPEC Chief Warns Against Oil Price Panic
OPEC Chief Warns Against Oil Price Panic.
OPEC Secretary-General Abdalla Salem el-Badri says he doesn’t expect demand for the cartel’s oil or its production levels to change in the coming year, and he is urging member states not to be alarmed by oil’s current low prices.
“Don’t panic,” el-Badri said Oct. 29 at an impromptu news conference in London, where he was attending a conference. “I am sure the market will balance itself.”
The concern, if not the panic, already is present. The price of the global petroleum benchmark, Brent crude, plunged a little more than $87 a barrel the day he made those comments — nearly $30 less than it was in June, a loss of about one-fourth of its value.
Al-Badri shrugged off this loss, saying he wasn’t worried because price fluctuations don’t reflect “the fundamentals” of the oil market. “Demand is still growing, supply is also growing. OPEC is reviewing the situation,” he said. “There is nothing wrong with the market.”
