Opec chose not to decrease oil production today. Oil (WTI) closed as 69.05 / bbl.
To quote a Russian oligarch reported via Bloomberg:
“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
To give you some idea of what is likely to happen, here is a chart of oils, inflation adjusted, historical oil prices:
If prices revert to the mean, oil is going down to a range between $20 and $40. Even if it does not, most shale plays (requiring fracking) just went belly up. Bloomberg has a nice chart on the subject:
So what does this all mean?
1. Natural gas prices are going to rise. Shale wells spew out a lot of natural gas (and oil). This has crashed the price of natural gas.
2. Rising natural gas prices mean that wind and solar just got a lot more competitive. Actually utility scale wind has been competitive for quite some time. From the
New York Times:
According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.
3. A transition to Electric Vehicles (EVs) is now a national security issue. This is the second time that OPEC has crashed oil prices when American production began to ramp up, the first being in 1986. Energy independence is a laudable goal, OPEC isn't going to let that happen. The only way to end geopolitical reliance on the middle east is to end our reliance on oil as a transportation fuel.
4. Somebody is holding a bunch of junk bonds issued by drillers. Most of these will probably default. If banks or retirement funds are holding these things, we could have a problem. If its mainly hedge funds, well hedge fund performance hasn't kept up with inflation this year, let alone the S&P 500 (or the yield on the 10-year treasury!). I'm not sure what will happen if hedge funds lose yet more money, but it isn't exactly going to be unexpected.
5. A number of red states are toast. It seems like a larger commodity bubble is bursting. I once had the mayor of a town in the East Texas oil patch explain it to me. When oil prices are going up you can do no wrong. When they go down you are an idiot no matter what you do. The current crop of Republicans are an adequate choice if your income is tied to commodities with prices that are, essentially, uncorrelated to your leaders ability to govern. They, probably cannot deal effectively with a boom cycle turning into a bust.
6. Unemployment will now do some whacky things. Employment growth has been strongest in energy producing states. Falling oil prices might stimulate the economy, but this may not be enough to offset job loses in the energy sector. A strong fiscal stimulus plan with provisions aimed at helping rural America would seem to be called for. Unfortunately, see point number 5 above.
7. Extreme political instability is possible in the United States. It's the economy, stupid. It's always the economy, stupid. That doesn't mean we are not going to see an ideological freak show as the Republicans try to distract from dismal red state economic performance.
Edit - Just to be clear higher natural gas prices - most likely - mean a shift to cleaner energy sources. New coal plants face major hurdles. Improved fuel economy in motor vehicles has more to do with government action than the willingness of automakers to produce cars the acceptable fuel economy and performance.
Sources of CO2 as per the EPA.
1:05 PM PT: Background on OPEC from Bloomberg:
The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.
In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.
So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.
“1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”
Yes the Saudi's are trying to drive American oil producers out of business. The fact that this move will also hurt ISIS and Iran is an added bonus.
