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Crude Economics
America the Marginal?

America may be supplanting—or at least joining—Saudi Arabia as the world’s go-to swing supplier of crude. Late last month, OPEC decided not to cut production, and to allow the price of oil to continue its steady decline. In the past, the cartel has tightly controlled supply in order to keep prices high, but under direction from the Saudis, it seems OPEC is content to allow the market correct itself this time.

At the heart of all of this is Saudi Arabia’s desire to challenge America’s newfound clout as a major oil supplier. The shale revolution shoulders plenty of blame for the current oversupply of crude that led to today’s bear market, and the Saudis would rather see shale producers bow to price pressures and cut production (something we’re seeing evidence of) than interrupt their own supply. But, as the Economist writes, America’s energy forecast is still looking bright:

This shake-out will be painful. But in the long run the shale industry’s future seems assured. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. IHS, a research firm, reckons the cost of a typical project has fallen from $70 per barrel produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one. […]

[I]nvestments in shale oil come in conveniently small increments. The big conventional oilfields that have not yet been tapped tend to be in inaccessible spots, deep below the ocean, high in the Arctic, or both…[S]hale firms know where the shale deposits are and it is pretty easy to hire new rigs; the only question is how many wells to drill. The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.

Moreover, global markets are looking a lot more stable these days, now that the U.S. looks poised to take on the role of marginal supplier:

[T]he economics of oil have changed. The market will still be subject to political shocks: war in the Middle East or the overdue implosion of Vladimir Putin’s kleptocracy would send the price soaring. But, absent such an event, the oil price should be less vulnerable to shocks or manipulation. Even if the 3m extra b/d that the United States now pumps out is a tiny fraction of the 90m the world consumes, America’s shale is a genuine rival to Saudi Arabia as the world’s marginal producer. That should reduce the volatility not just of the oil price but also of the world economy.

The Economist report is an incisive look at the state of play of the global crude market these days, and you’d do well to read the whole thing. It wasn’t too long ago that Malthusians had the public’s ear with their cries over peak oil, yet today we’re dealing with issues of oversupply and abundance. Those are the kinds of problems we’d like to have.

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  • rheddles

    This is based on a leader (editorial) from the Economist. Far more informative and analytical is this from Robert Samuelson.

    • Andrew Allison

      Bad link.

      • rheddles

        Right you are, Andrew, Sorry. Try This

  • Andrew Allison
  • Corlyss

    Eight years ago John Batchelor often opened his shows with “Energy security! There is none! Energy security will be the dominant theme of the new century.” What a relief that there is plenty of cheap energy to be had if only we can dispose of the destructive mindset policymakers have developed since the oil shocks of the 70s. Right now, and perhaps since the 70s, the greatest and most persistent threat to cheap energy and the prosperity it guarantees is misguided politicians beholden to ruthlessly aggressive environmental activists untroubled by their own fanaticism. The mindset discourages any reasonable attempt to expand cheap energy options in favor of very expensive boutique sources distinguished by their inability to deliver energy in quantities sufficient to sustain widespread prosperity.

  • Jacksonian_Libertarian

    So a found a link for drilling rigs in operation in the US, and it shows that in the northern US and Canada drilling nearly stops in the winter. Also that while the US production of oil has been climbing at a constant pace the number of drilling rigs in operation declined from over 2000 to 1750 from 2011 to 2013 held flat for 2013 and then climbed to 1925 through 2014. Recently a drop in drilling permits has led some to believe that the drop in oil prices is causing a drop in development, but it is more likely to be the winter season is causing the normal seasonal drop in the icy winter north. Also since the production of oil doesn’t seem to track very closely to the number of rigs in operation, drilling permits are likely even less of an indicator of future American oil production.

    • Tom Lindmark

      Be wary of equating rig counts with activity in the US. Once a horizontal well is completed numerous pools of tight oil can be accessed. It’s not a falacious indicator, just one that doesn’t mean as much as it does in traditional E&P.

  • FriendlyGoat

    1) Some people have suspected that a trader “premium” of as much as $20 has existed in the price of oil for years. At the moment, it’s not there and may remain gone for quite some time to come.

    2) Within a few months we will see several nations and many, many companies doing everything they can think of to raise the price.
    There will be little difference between the motivations of OPEC and some American companies. Consumers simply do not get permanent windfalls. This is all too much fun, and fairly soon we will see it creeping back up to some middle ground from an oversold low. Americans will be told there are compelling reasons to export oil and gas (for balance of payments or God only knows what other justifications too complex for anyone to actually understand—–but big polarization nonetheless.)

    3) Lower prices increase demand—–in this country and everywhere else.

    4) I don’t opine on man-caused global warming, because I don’t “know”. I do know that lower prices could invite carbon taxes. I also know that “IF” the deniers are wrong, lower prices and increased usage could go down as seven billion people being very, very stupid.

    • Suzyqpie

      BOP is not complex, any transaction that causes money to flow into a country is a credit to its BOP acct. Any transaction that causes money to flow out is a debit. I know Democrats don’t do math (especially not actuarial math), so I hope that was thankful. A big excel spreadsheet tracts all of the number. But please keep in mind that 0bama, camarilla, & clerisy who compile BOP are all Democrats (who don’t do math) so the numbers could be suspect. You know me, always trying to be helpful.

      • FriendlyGoat

        The BOP is said to have been a big problem for a long time. Except that almost no citizen has ever been able to notice what that “problem” actually is.

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