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Started By
Message
Need Help with the O&G Industry Economics
Posted on 4/14/15 at 3:15 pm
Posted on 4/14/15 at 3:15 pm
I've seen all manner of gloom and doom regarding oil prices in the last two months. Humor me.
So for as long as I can remember, I've been hearing every O&G person and politician screaming "Drill baby drill!" "Remove our dependence on foreign oil." A host of other O&G memes.
So, as far a I can tell, it appears that we've drilled baby drilled to the point where the US made significant enough gains in the world oil supply market to force a reaction from OPEC. Basically, since they obtain their oil "conventionally" where we were making inroads using "unconventional" methods such as fracking, they can drop the price of oil hitting the market to force the price down making fracking unprofitable. Do I have that right?
So a couple of questions:
#1: What was keeping oil prices so high? Supply has been at an all time high for awhile now?
#2: Surely the brainpower behind the O&G industry knew that this was a possible outcome of cutting into the OPEC market share. Its economics 101. So why now all the gloom and doom?
#3: Oil currently sits at $53/barrel roughly. Looking at this chart,
it was around this level in 2002. From roughly 84-02, it was below this. I was born in 82, I know the oil bust in the early 80s, but for the bulk of my childhood I remember Oil being a pretty popular field going all the way into choosing my major when entering college. So my question is, are we just seeing another correction in a volatile industry thats to be expected? Was the TX economy cratering in the 90's when oil was below what it is now?
So for as long as I can remember, I've been hearing every O&G person and politician screaming "Drill baby drill!" "Remove our dependence on foreign oil." A host of other O&G memes.
So, as far a I can tell, it appears that we've drilled baby drilled to the point where the US made significant enough gains in the world oil supply market to force a reaction from OPEC. Basically, since they obtain their oil "conventionally" where we were making inroads using "unconventional" methods such as fracking, they can drop the price of oil hitting the market to force the price down making fracking unprofitable. Do I have that right?
So a couple of questions:
#1: What was keeping oil prices so high? Supply has been at an all time high for awhile now?
#2: Surely the brainpower behind the O&G industry knew that this was a possible outcome of cutting into the OPEC market share. Its economics 101. So why now all the gloom and doom?
#3: Oil currently sits at $53/barrel roughly. Looking at this chart,
it was around this level in 2002. From roughly 84-02, it was below this. I was born in 82, I know the oil bust in the early 80s, but for the bulk of my childhood I remember Oil being a pretty popular field going all the way into choosing my major when entering college. So my question is, are we just seeing another correction in a volatile industry thats to be expected? Was the TX economy cratering in the 90's when oil was below what it is now?
6
Posted on 4/14/15 at 8:20 pm to elprez00
One thing to take into account is that most oil being extracted these days in the U.S. costs a lot more to extract than in the 80's-90's.
Aside from having more regulations to deal with, the deeper you go the more specialized materials you need to deal with the harsher conditions you are faced with.
Aside from having more regulations to deal with, the deeper you go the more specialized materials you need to deal with the harsher conditions you are faced with.
This post was edited on 4/14/15 at 8:23 pm
Posted on 4/14/15 at 8:30 pm to elprez00
quote:
#1: What was keeping oil prices so high? Supply has been at an all time high for awhile now?
Demand, primarily in China, which has slowed significantly in the past year. Supply has been growing steadily with shale and tight oil coming online in the U.S. in the past few years.
quote:
#2: Surely the brainpower behind the O&G industry knew that this was a possible outcome of cutting into the OPEC market share. Its economics 101. So why now all the gloom and doom?
The doom and gloom is mostly from oil service companies and smaller, leveraged E&P companies. Oil is a commodity - commodities are cyclical. The majors will survive, likely acquire some mid size firms and continue on. The marginal producers, primarily smaller U.S. producers, may not make it. Such is the business cycle.
quote:
So my question is, are we just seeing another correction in a volatile industry thats to be expected? Was the TX economy cratering in the 90's when oil was below what it is now?
The cost of producing oil has increased, particularly for the marginal producer. More NGOs have control of oil supplies; more exploration in deepwater; higher cost shale wells. So yes, my opinion it is a "correction" or rather just part of a commodity cycle. Marginal producers will fall off (rig count in U.S. is down significantly), supply will balance with demand, and hopefully global demand will recover in the next few years. Also, any major global event in the Middle East could change supply dynamics quickly as well.
Just my two cents
Posted on 4/14/15 at 8:39 pm to elprez00
There was this assumption that OPEC would project the high price based on OPEC nations national budgets.
It is no secret they require higher dollar oil to operate, but they have also been hoarding cash.
We will truly never know all the exact details, but Saudi will clearly regain market share from this.
There are low cost plays in the US and technology such as EOR will keep some of the big players profitable for years to come.
Also, I wouldn't say it is so much "doom and gloom" as it is the cash flow has slowed.
Many millionaires were made over these past few decades.
It is no secret they require higher dollar oil to operate, but they have also been hoarding cash.
We will truly never know all the exact details, but Saudi will clearly regain market share from this.
There are low cost plays in the US and technology such as EOR will keep some of the big players profitable for years to come.
Also, I wouldn't say it is so much "doom and gloom" as it is the cash flow has slowed.
Many millionaires were made over these past few decades.
Posted on 4/14/15 at 9:38 pm to elprez00
Step one when answering your questions and looking at your graph......adjust for inflation.
Posted on 4/14/15 at 11:01 pm to Stingray
quote:You mean how it says "in 2011 dollars"?
Step one when answering your questions and looking at your graph......adjust for inflation.
Posted on 4/15/15 at 10:50 am to elprez00
quote:
So, as far a I can tell, it appears that we've drilled baby drilled to the point where the US made significant enough gains in the world oil supply market to force a reaction from OPEC.
US production displaced US imports, particularly Nigerian imports and drove them into the Asian markets which impinged on Saudi market share. The US bans the export of domestic crude except (and until very recently) very light, sweet condensate, which isn't significant enough to have created the international glut.
quote:
#1: What was keeping oil prices so high? Supply has been at an all time high for awhile now?
The supply hasn't been at a static "all time high"...it has been growing significantly since 2011. There was going to be a domestic price issue regardless of international oversupply because US oil is for the most part trapped - our market is somewhat disconnected from the international market which is why WTI trades at a discount to Brent. And companies react to price or projected pricing and there were no $50 projections.
Posted on 4/15/15 at 12:25 pm to elprez00
quote:
#2: Surely the brainpower behind the O&G industry knew that this was a possible outcome of cutting into the OPEC market share. Its economics 101. So why now all the gloom and doom?
Well first of all the industry is a collective, its a bunch of indivduals, if its economic to drill, people will drill.
Lots though OPEC would cut production to maintain high prices. They didn't.
quote:
So my question is, are we just seeing another correction in a volatile industry thats to be expected?
Oil is an asset intensive commodities business. Its going to be cyclical.
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