Lifehacker put together a good article on what low oil prices mean to our economy. There’s always more to it than one would think. In fact, predicting oil prices might be one of the more complicated things that your Average Joe probably thinks about.
http://twocents.lifehacker.com/what-cheap-gas-means-for-the-economy-and-your-wallet-1752384280
The Chinese refiner, Sinopec, bought 600,000 barrels of oil from a U.S. firm, and the shipment left a port in the Gulf Coast. The number isn’t large, but Sinopec’s statement regarding the purchase is. Sinopec said that it was buying from the U.S. in order to diversify its source of oil. So in spite of the fact that Saudia Arabia is willing to pump and sell as much oil as anyone wants to buy, Sinopec wants to buy from other sources. That indicates that there will be an available, if small, market for U.S. oil. Hopefully that will be enough to keep some U.S. fracking companies above water. In the meantime, we can only hope that decreased prices for oil will lead to increased utilization and decreased investment in high-cost drilling programs, which will eventually decrease the oversupply and drive prices back up to a slightly more healthy level.
We don’t often run across a good rule of thumb that we don’t know at this point. Here’s one that’s new. Outside of some occasional spikes, oil will always hover around $30 per barrel when adjusted for inflation.
There are a couple of other items of interest in this article by Anya Litvak of the Pittsburgh Post-Gazette. The big takeaway for everybody, though, is that $30 figure for the inflation-adjusted price of oil. When oil prices start to rise, we can know they will drop. How it got to over $100 per barrel for a while there is beyond my ken. It stayed there for quite a while, too.
Taking a look at the historical values for WTI crude oil prices, you can see some lengthy spikes. Make sure to remove the options for “Log Scale” and “Show Recessions” just above the graph. The interesting thing to note is that when prices climb above about $80 they usually stay up for about five years. The major spikes were in 1980 and in 2008. The major crashes were in 1985 and in 2009. The crash just after 9/11 wasn’t as big as we would have expected. Interestingly, the crash in 2009 was followed by a huge spike which lasted for about five years.
All of the major crashes look to me like they followed a stock market crash. You’re welcome to correct me if I’m wrong. The times when oil prices really did well were times when the economy was humming right along in the 1980s and when there was a lot of money being put into the economy by “easing”. I don’t have the economic background to explain what was going on just before the 2009 crash, but I imagine someone reading this can explain that for us.
Regardless, the price of oil isn’t going to stay below $30 for long if it drops below that, and it’s not going to get back up to $100 any time soon. I’ll be surprised if it gets above $50 per barrel any time soon, to be honest. The frackers just have too many wells ready to produce when the price starts to rise. I think this bodes well for the economy as a whole in the near future. Cheap and less volatile energy prices are great for the United States economy, and probably for the world economy as well.
They heyday of ridiculously high bonus amounts for signing oil and gas leases is over. Luckily in West Virginia the bonus amounts never got ridiculously high. We’re still seeing bonus amounts surprisingly close to what we saw two years ago. Royalty amounts are holding pretty steady, too. It’s still a good time to own oil and gas mineral and royalty rights in West Virginia
Here is an interesting article in the Pittsburgh Post-Gazette. FirstEnergy closed down a coal-fired power plant in 2013, and had no plans to re-open it. In the last few months, however, they have changed their minds. At least, they have changed their minds about looking at the possibility of re-opening it.
The article states that market conditions have changed. The price of electricity hasn’t gone up much, but the price of oil and gas has gone way, way down. Who wants to bet that that one factor alone has reduced costs?
One other interesting point that was made in the article is that building a brand new gas-fired plant would (just a couple years ago) have been cheaper than converting the coal-fired plant to gas.
You won’t hear this phrase on this blog very often: the information in this article blew my mind. Andrew Follett wrote an article published at the Daily Caller that describes five facts about fracking that haven’t gotten much traction in the news. Most of them are extremely interesting. The point about Russia’s economy shrinking because we no longer rely on their oil could have both good and bad long-term effects. Click on over and read. It’ll make you think.
In this article in the Wall Street Journal, you can see that the price of oil is not going to jump up any time soon. Any industry that relies on high oil prices to get by is going to have a bad couple of years. Luckily there aren’t very many industries that rely on high oil prices. There are quite a few more industries which do significantly better when oil prices are low. Also, American consumers benefit greatly when oil prices are low. It seems that America and maybe the world in general is going to have a pretty hot economy in the next couple of years, just because energy is going to be so affordable. While this firm may suffer some in the short term, we expect to benefit from an improved economy. Here’s to shale development and the Saudi war on shale!
This article from eaglefordtexas.com has some interesting information on the Utica and Marcellus shales. It’s short and data-dense, so it’s not worth trying to summarize here. Read it.
Karma is coming back to bite the Saudis in the butt. The Saudis are cutting back their budget in 2016. Their budget deficit is being reduced, but at the expense of spending, not because their income is increasing. The reduction in spending is going to make the lower classes unhappy, and give the political opposition to the Saudi royal family something to work with. Things won’t come to a head in 2016, because there just won’t be enough unrest in Saudi Arabia, but if things keep going this way it will come to a head eventually. It’s going to be an interesting show to watch.
The steep drop in energy prices is a really good thing for most everybody, but a bad thing for mineral owners and those few poor lawyers who make their living helping mineral owners. We won’t cry over it, we’ll just work a little harder and a little smarter, just like all the drillers are.
Down in New Jersey, residential and small commercial customers are getting a rate reduction in their natural gas bill, and a credit back on their statements. How cool is that?! When’s the last time anybody was happy to see their gas bill?
The really awesome thing is, it’s mostly due to unprecedented output of natural gas in the Marcellus and Utica shale areas. We’re proud to be a small part of that. The other factor has been the increased production from Saudi Arabia as it tries to keep its share of the oil market and drive American oil developers into bankruptcy. Everyone can see the direct effect on prices at the gas pump.
The great news is that low energy prices are going to heat our economy back up. We think that one of the reasons the fed raised interest rates for the first time in years is because they see the economy taking off, in part to low energy prices. Low energy prices make manufacturing and petrochemical industries in the United States more competitive. It also makes it easier for transportation companies to make ends meet. It also makes it easier to take that Great American Road Trip, and more interesting to buy big gas guzzlers. It also puts a few more dollars into the wallets of every consumer. All of the above will translate into jobs and greater energy demands. It’s going to take a while, but low energy prices are going to help improve our economy, which will drive demand for energy back up, which will drive the price of energy back up.
The disappointing part of low energy prices is that it will drive down the demand for renewable energy sources. I’m no tree hugging environmentalist, but I still think renewables are cool and would like to see that industry take off.
In the meantime, we hope that people will take a look at gas prices and decide to go visit both sets of grandmas this Christmas, and turn the heat up a bit.
The drop in oil and natural gas prices doesn’t just affect the price of gas at the pump or your monthly utility bill. It also hits energy companies awfully hard, and not in ways you might expect. In this case, over a billion barrels of oil are going to just disappear off of Chesapeake’s books. That’s billion with a B. That’s disappear as in no longer exist.
How does that happen?
Oil and gas companies are allowed to give a value to their wells even before drilling them and producing gas from them. They do that to get loans from banks. There’s a formula provided by the SEC (not the football conference) that they use to determine that value. The formula includes the price of oil or the price of gas, depending on which the company is expecting to produce. When the price goes down, the value of the undrilled wells goes down. It has more to do with what’s economically producible than anything, so a lot of properties that were marginally economic are no longer considered economic, and so have no value. Poof, $1.1 billion dollars in value just disappears.
Oil and gas is just crazy.