Why Oil Price Declines Are a Good Thing
The headlines in late 2014 have focused on Ebola (no longer front page news in the U.S.), the early winter in the lower 48 (surprise! Winter arrives every year!), and the drop in crude oil prices. Of course, this latter news item is of particular concern to those in the oil and gas business, as it should be. Remember, though, that the news media tends to be alarmist when reporting a story. For example: global warming – recently renamed “climate change” since the “warming” aspect hasn’t been working out – is the latest bugaboo that will end all civilization as we know it. The media needs to market a compelling story to sell papers (apparently this model isn’t working out very well as newspaper subscriptions continue to slide, however.) Oil price declines are a fun subject to throw out onto front pages as 2014 comes to an end. Sure, oil prices are declining. And yes, this means that drilling activity, especially in certain high-cost shale plays, will slow down. But we decided to list a few reasons why oil price declines are a good thing:
- Oil isn’t going away any time soon. You would think that the media is reporting on oil as somehow entering its “last gasp” of usefulness to society. Hilarious. Now, take a look around you the next time you drive to the grocery store. What do you see on the road and in the parking lot all around you? That’s right: cars. Lots of them. They aren’t going away. If anything, they are increasing in number. Yes, there are a handful of electric-powered Chevy Volts and Teslas out there. Frankly, that’s just fine. More cars running on different fuels? Bring ’em on! That means more jobs in battery manufacturing. Besides: tires, windshields, and seating materials will still have to be made somehow, no matter what the car uses for fuel.
- OPEC and Russia are losing influence, thanks to fracking. OPEC has never been a warm and fuzzy entity towards the U.S. or other western nations. Take a look at some of the members of OPEC: Iran, Venezuela, and Nigeria, for example. Real sweethearts. OPEC members are taking a hit due to the worldwide decline in oil prices? Awesome. Even Russia, though not a member of OPEC, has to be sweating the recent drops in crude prices. As Vladimir Putin wrings his hands over the prospect of European countries getting liquified natural gas (LNG) via tanker from shale producers in the U.S., Iran simultaneously has less money to spend on placating its restive population and a belligerent nuclear energy program. Another of the world’s largest oil producers, Nigeria, has developed a well-deserved reputation for exporting con jobs and scams to upstanding citizens the world over. We don’t wish poverty or strife for the average folks in any of these countries, but we would hope that the (usually authoritarian) governments of these nations would learn to diversify their economies and back away from causing global problems. Problems such as: invading the Ukraine, threatening Israel, or stealing money from elderly U.S. citizens via fraud. OPEC’s disappearance from the world stage is a welcome development.
- Saudi Arabia isn’t the only elephant in the room. The Saudis have long had a lot of control in setting oil prices worldwide, both within and outside of OPEC. This has allowed the desert kingdom to turn screws to get its way with western nations by just threatening to curtail oil production and allow crude prices to rise. This ability, while not completely removed, has been altered, to say the least. Yes, plenty of pundits are speculating that the Saudis have allowed crude prices to plunge (what at least one investor has termed “the worst commodity trading decision ever”) because they want to put U.S. shale producers out of business. Good luck with that, Saudi Arabia. For one, shale producers are many and varied. Sure, a few of them are laden with debt and will struggle to survive the current lowered prices of crude. But not all. In fact, a much-needed consolidation of oil producers is probably due. Stronger players will buy up the weaker ones while more efficient and less costly drilling methods will come online. As oil becomes cheaper, more oil will be purchased due to the age-old laws of supply and demand. More oil will have to be produced, whether from the sands near Riyadh or within the Bakken area of North Dakota. The Saudis will still get their oil money. Just not as much of it as in the past, and not at the prices they used to enjoy. That’s probably not so great for a sheik and his ten wives who are forbidden to drive a car in a backwards regime, but fantastic for the rest of the world.
- Oilfield companies will still have job openings. Can you make a lot of money hauling crude, sand, or water in the oilfields? Yes, you can. Will you be able to make that same amount of money as the price of oil remains low? Probably not. And that’s not so bad. Here’s why: for one thing, no human being can continue to work 60- , 70- , or 80+ hours per week without hitting a wall and blowing up. It’s not only unhealthy, it’s hell on your family and relationships. Working 50 hours a week, and bringing home $70k per year as opposed to $120k per year should be satisfying to anyone. At the same time, stories about having to pay insane amounts of money to rent rooms in a boomtown will eventually become the stuff of legendary tales around campfires.
- No more stupid government spending on “green” energy. Because it isn’t cost-effective, and much less so as fossil fuels become ever cheaper, so-called “green” energy businesses require government subsidies to stay afloat. Almost every attempt by our current U.S. government to keep green energy manufacturers in business has fallen flat at a cost of millions of wasted taxpayer dollars. Enough is enough. The government needs to get out of, and stay out of, crony capitalism, which is essentially what green energy subsidies are. Market forces should be determining which energy sources the world should use. And it’s also time to stop listening to the doom-and-gloom green energy crowd which weirdly almost wishes for some sort of environmental catastrophe to befall the world’s population so that it can say, “we told you so”. The world isn’t overheating and technology is allowing fossil fuels to operate with more efficiency and less pollution. Even leading climatologists are debunking the hyperbole of “climate change” alarmism.
- Improvements in safety and sensibility. As hydraulic fracturing and horizontal drilling techniques have spurred oil production, there have been negatives generated by the oil boom. These include: increasing numbers of freight trains pulling ever-growing numbers of oil tankers loaded with flammable crude near vulnerable villages. Rising crime rates in oil towns that once faced declining populations. Too many underqualified employees with too little training driving big rigs and manning drilling operations. Overburdened communities ill-equipped to handle overnight increases of job seekers as housing prices soar and families are forced to live apart. How to fix these social ills? A ratcheting down from the craziness created by overly high crude oil prices is one solution. As crude prices stay in a moderate price range, oilfield communities can catch their collective breaths and work to improve infrastructures, housing stocks, and training programs.
- We’ve seen drops in oil prices before. Who knew, right? Oil, like the stock market, goes up. And goes down! Shocking! As the chart from Macrotrends below shows, the historical price of oil has bottomed out at $25.17 per barrel (July ’86), $16.38 per barrel (Dec. ’98), $43.93 per barrel (Feb. ’09), and now hovers in the $50’s in December 2014. (All dollar amounts have been adjusted for inflation.) Oil prices also hit some crazy, unsustainable highs, and did so very briefly. Yes, we remember paying up to $5 per gallon for gas in the summer of 2008. Will the current price of oil continue to fall? Well, who knows? It certainly won’t hit zero, and it will always be in demand the world over. (Ok, well, at least until we invent cars that run on laser beams.) Go ahead and bet on a continued fall in oil prices from where they are today – about $58 per barrel – but you’ll be taking a huge risk.
Oh yeah, almost forgot…one other reason why oil price declines are a good thing: more money in your wallet, whether you work in the oilfields or not!
The next time you read or hear a news report stating how crashing oil prices will negatively impact the fracking world, take that report with a grain of salt. Will there be adjustments within the oil and gas business as crude prices remain low? Yes, of course. The “boom” era was probably more of a “bubble” era, which can’t last forever and was never meant to. But the world still needs oil, and will continue to need it for decades to come. Whether that oil comes from a once dominant desert outpost that used to control oil prices but no longer does, or whether it flows from increasingly efficient and cost-effective producers in the U.S., the oil market is changing. For the better. Become a part of it today…