The article below shows how important the shale oil boom has been to the US economy since 2009. It has accounted for a huge portion of employment and industrial production growth. The plunge in oil prices will bring this to an end, but it will be a two year relentless downturn as new investment dries up and the existing wells are depleted. We are in the Wile E Coyote phase of this wealth destruction. Gravity is a bitch.
The November industrial production data reported yesterday shows no slowdown yet in US oil and gas production, and as goes oil and gas, so goes the US economy.
The Oil and Gas Production Index for November rose by 1.55 points to 161.04 (2007= 100). This is one of the rare series where there’s no seasonality, so I need not rant about the media not reporting the actual, not seasonally adjusted data like I usually do. In fact, the media doesn’t even bother to report the oil and gas production component index of industrial production, so, sadly, there’s nobody to harangue. I miss it.
The year to year gain was 11.5%. That’s a bit of deceleration from the peak growth rate of 13.9% that was hit in June, but it’s still not too shabby. The oil and gas drilling boom/bubble–whatever you want to call it–was still raging last month while prices were already collapsing.
The question is how long this can go on.
It may take a while for production to be shut in. Exploration activity will slow but the drilling that has started but is not yet producing will continue to come on stream. That’s because the bulk of production costs are in finding oil. Once found, the lifting costs are very low. Where the oil has been found or almost found, the drilling and production will go on.
The US EIA said that lifting costs of US oil in 2007-09 were less than $13/BBL. Inflation might have added a bit to that since then, but one of the big component costs is energy, and that will obviously be lower now. Taxes will also be lower.
Under any circumstances, the current lifting costs are still a long way below current market prices even after the crash. So it’s likely that wells that are being drilled will continue to come on stream for a while longer. Due to the short productive life of fracked wells, existing production falls off quickly, but there’s no evidence that is having an impact yet.
The US oil boom should continue to contribute to the world wide oil glut for some months to come. While we may hear anecdotal reports of production shutdowns, the industrial production data should be the first hard data we get on that.
The oil and gas boom and its ripple effects throughout the entire energy and industrial complex have contributed mightily to overall US growth. Without the boom, US growth would look a lot more like the rest of the world, that is, moribund. Which leads to the questions, when the wells stop what happens to the US economy and…
What Becomes of the North Dakotans (with apologies to Jimmy Ruffin)
As I walk this field where I once grew beans,
I have visions of many things.
But the oil boom was just an illusion,
Trailed by bad debts and confusion.
What becomes of a broken market,
which had a boom that’s now departed?
I know we’re going to find,
A price where we can hold the line.
Maybe.
Drilling rigs grow all around
But for me they come a tumblin’ down.
Every day when the price goes much lower,
I want to stick my head in a snow blower!
I walk in shadows,
Searching for price lows.
Offers alone,
No buyers in sight.
Hoping and praying for someone who’ll cover,
Price is moving and goin’ lower.
(Refrain)
I’m searching though I don’t succeed,
For someone’s rigs, there’s a growing need.
All is lost, there’s no place for beginning,
All that’s left is an unhappy ending.
(Refrain)
I’ll be searching everywhere,
Just to find some gas to flare.
I’ll be looking everyday,
I know I’m gonna find a play.
Nothings gonna stop me now,
I don’t want no farm to plow.
I’ll be searching everywhere…
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“Plunging crude prices threaten the axe for $1 trillion of energy projects,” screams a headline in the Financial Times.
Lower on the front page:
“Russia ramps up interest rate to 17% in ‘shock and awe’ bid to shore up the ruble.”
Stripper wells, offshore wells, shale wells, the Russian economy – all are in danger. Prices are not high enough to justify further investment or operations.
But imagine you have borrowed heavily for expensive oil extraction. You have to service your debt, whether the price falls or not.
What do you do? You pump all you can! And the increased supply further depresses oil prices.
Bubble-Mongering
On display is the whole bubble-mongering humbug – from Alpha to Omega – of the Fed’s zero-interest-rate policy.
US oil producers borrowed some $500 billion of high-yielding (junk) debt and used it to increase oil production from shale by four times. This was proclaimed as a kind of New Deal for US industry.
But now we see it’s the same old false shuffle by the central bankers. Bubbles… bubbles… bubbles. From dot-coms… to houses… and now to energy.
The idea of the ultra-low rates is to bring about investment, jobs, and spending. Paul Krugman still believes in it. The author of End This Depression Now! is urging the Fed to continue with its zero-interest-rate program:
It’s a pretty weak world economy out there, we don’t see any inflation, and the risk if we raise rates and it turns out we were mistaken is just so huge.
What about the risks in choking, squeezing and beating down interest rates? As the great Austrian School economist Ludwig von Mises tells us, every boom caused by cheap credit ends in a bust.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The only question is whether the crisis comes sooner, as a result of the voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the fiat currency system.
The oil production boom was largely a product of the Fed’s low rates. Without them, the industry would not exist in its current form. It couldn’t have financed so much risky capital investment.
But there’s always a snake in the woodpile. Low rates alone weren’t enough. Oil prices had to stay high too.
The Fed may control the earth, the moon and the stars. But the House of Saud controls oil prices. And the Saudis are happy to see prices fall further to put the hurtin’ on their higher-cost competitors.
And so… the bubble bursts!
And since so much money ran into energy products… and so many jobs came from it… mightn’t the “recovery” turn out to be a bubble too?
Bill Bonner
Isn’t this how we lured Japan into attacking? Cut off their oil, cut off their way to pay?
History may not repeat, but………
Comstock Suspends Drilling In Eagle Ford Due To Plunging Oil Prices
Submitted by Tyler Durden on 12/18/2014 16:26 -0500
Shale 0 – Saudi Arabia 1
Following one after another major and shale company announcing plans to trim capex (even as they miraculously still get to keep their revenue and EPS projections intact, for now), the latest victory handed to Saudi Arabia on a silver platter comes courtesy of Comstock Resources (Total Debt/EBITDA 2.4x, EBITDA $421MM, CapEx $674MM) Comstock Resources said earlier today that in response to low oil prices, plans to suspend oil directed drilling activity in its Eagle Ford shale properties and in Tuscaloosa Marine shale.
It was not immediately clear how many high-paying oilfield jobs would be promptly terminated as a result of this unambiguously good development.
Full press release:
Comstock Resources, Inc. (“Comstock” or the “Company”) (NYSE:CRK) announced that it has budgeted $307 million in 2015 for its drilling and completion activities. In response to low oil prices, the Company plans to suspend its oil directed drilling activity in its Eagle Ford shale properties in South and East Texas and in the Tuscaloosa Marine shale in Mississippi. Comstock has released its rig in the Tuscaloosa Marine shale and will postpone its drilling activity there until oil prices improve. Comstock currently has four operated rigs drilling on its Eagle Ford shale properties. The Company will release two of these rigs in early 2015 and will move the other two rigs to North Louisiana to start up a drilling program on its Haynesville shale natural gas properties. Comstock believes that improved completion technology, including longer laterals, will provide strong returns on drilling projects at current natural gas prices.
Comstock has budgeted to drill 19 (18.6 net) horizontal wells in 2015. The Company expects to spend $161 million for drilling 14 (14.0 net) Haynesville/Bossier shale natural gas wells and $34 million for drilling five (4.6 net) wells on its East Texas and South Texas Eagle Ford shale acreage. The 2015 budget includes $49 million for completion costs of 13 (11.9 net) Eagle Ford shale wells that were drilled in 2014 but will be completed in 2015 and $63 million on facilities, recompletions and for other capital projects. Comstock plans to refrac ten of its existing Haynesville shale producing wells as part of the 2015 program.
Comstock estimates that the drilling program will generate Company-wide oil production of 3.5 to 3.9 million barrels in 2015 and natural gas production of 55 to 60 Bcf.
The punchline:
After three years of natural gas production declines, 2015 will mark a turnaround for the Company’s natural gas production. The Company will continue to assess the oil and natural gas markets throughout 2015 and will adjust its drilling program to reflect the appropriate mix of oil and natural gas wells in order to maximize returns.
Good luck.
US Oil Rig Count Tumbles Most In Over 5 Years,”Demand From Oilfield Customers Dropping Rapidly”
Submitted by Tyler Durden on 12/19/2014 13:24 -0500
“Unequivocally” not good. Following last week’s surge in initial jobless claims for ‘Shale’ states, Baker Hughes confirms rig counts continue to tumble. The last two weeks have seen the total US rig count fall the most since 2009 (and Canada down 9.3% this week alone). Seemingly confirming this weakness, The Kansas City Fed notes respondents see non-durable (petroleum) demand “sluggish”, and rather awkwardly against the “everything’s great meme,” one respondent exclaims, “demand from oilfield customers is dropping rapidly.” The current US rig count is now the lowest in 5 months.