Oil platform. Source: Wikipedia
You puttin’ the hurtin’ on ‘em now.– Tommy Wilkerson
Dear Diary,
Again, we quote our old friend.
Mr. Market has been puttin’ the hurtin’ on gold bulls.
Yesterday, he went after the gold shorts. Gold rose $42.60 – or 3.6%. That’s proportionally equal to a move of 640 points on the Dow.
But today our sympathies go to poor Vladimir Putin and Nicolás Maduro. In Russia, the ruble is falling and growth is grinding to a halt. In Venezuela, the whole economy is falling apart. The proximate cause of this hurtin’ is a fall in the price of oil.
Yesterday, US crude oil rose $2.85 – or 4.3% – to $69 a barrel, its largest daily gain since August 2012. But it’s still down 32% from its 52-week high, set in June.
Outside of the big oil exporting countries and the US shale-oil business this big drop in prices is widely seen as good news.
Consumers fill their tanks at lower gas prices and have a few bucks left over – money that can be used to buy things. According to the current and conventional delusions of the economic profession, this leads to sustained higher economic growth, more jobs and a cure for impotence.
But dear reader, was there ever in the history of the world a hurtin’ that stayed put?
That’s the trouble with hurtin’: It moves around.
In today’s Diary we look more closely at the subject of hurtin’ generally… and the effect of lower oil prices, specifically.
In passing, we observe that the secret to investing success is to buy what is hurtin’ when it is hurtin’ most… and to sell what ain’t.
Economic Warfare
It came out last week that OPEC is deliberately adding to the suffering of US shale-oil producers.
At its meeting in Vienna last Thursday, the 12-nation oil cartel decided to leave its output ceiling at 30 million barrels of oil a day, where it has been for the last three years.
As Chris put it yesterday in The B&P Briefing – our subscriber-only bonus letter – this is economic warfare.
OPEC believes, or so it seems, that cheaper oil prices will put pressure on high-cost US shale-oil producers. Although production costs vary, fracking costs more than pumping straight up.
Middle Eastern oil comes as readily up from the sand as water from a hand-dug well. That’s why the Saudis are the world’s lowest-cost producers – at just $2 a barrel.
All else being equal, the more they pump, the lower prices go, and the harder it is to make a good living in South Texas or West Siberia.
Conventional Middle Eastern oil is still profitable – even with oil as low as $67 a barrel. Unconventional shale and offshore oil may not be. Abdalla El-Badri, OPEC’s secretary-general, reckons half of all US shale output is unprofitable below an oil price of $85 a barrel.
Still, you may say, lower energy costs will revive the US consumer economy… no matter who pumps it. (Chris wrote about this recently here.)
Lower oil prices make it possible for Americans to buy more stuff. Or even save their money!
Pity the poor Russians and Venezuelans: They’ll have to live with less.
A World of Hurt
On this point, we congratulate Mr. Maduro for his deep philosophical reflection on the nature of hurtin’. Rather than whine about it, he noted it was “an opportunity to end superfluous luxuries and unnecessary spending.”
So you see, the hurtee may come out ahead. He may emerge from the hurtin’ in better shape – like the gold mining companies that have had to take free soda machines out of their corporate dining rooms.
When the hurtin’ moves to someone else, they are leaner and meaner than ever.
For instance, low oil prices squeeze out capital investment in the energy sector.
Who wants to drill a new well with the price falling? Who wants to put in solar panels? Who wants to buy a new Prius or a new Tesla? Who invests in future production?
No one.
Higher-cost shale-oil producers go out of business. Alternative energy producers go to sleep. The bulls go broke and the shorts count their money. Then, the hurtin’ is ready to move on – from the producers to the consumers.
Low oil prices have the same sort of unintended, but fully predictable, consequences as low interest rates. Consumers catch a break – temporarily. But capital investment goes down. And output declines.
Worldwide, oil use is still increasing. Without more investment to bring forth more supply, prices will shoot up again.
Gold is hurtin’. Oil is hurtin’. Russia is hurtin’. Venezuela is hurtin’. Greece is hurtin’.
Our back is hurtin’ from lifting those poles.
Eventually, the pain will go away. But the hurtin’ may also get worse before the hurtin’ moves on.
Regards,
Bill
Further Reading: Legendary natural resource investor Rick Rule will be answering questions about how to navigate the energy markets at the private meeting Bill and his family are putting on early next year at the luxury Rancho Santana resort on Nicaragua’s Pacific Coast.
Bill will be there too. As will some of his close personal advisors. If you’re interested in learning about growing and protecting wealth in 2015 – as well as meeting in person with Rick, Bill and other likeminded Diary readers – please respond to this short and urgent invitation as soon as possible.
I was beginning to believe we were looking at a repeat of the 1986 price slam where the US flooded the market with Saudi oil and pushed the price to $10 per barrel which caused the Soviets to tank. Russia has a circle of friends now.
Gas was up 20 cents per gallon today from yesterday where I live.
repercussions coming fast and furious in the oil biz
Exclusive: New U.S. oil and gas well November permits tumble nearly 40 percent
http://www.reuters.com/article/2014/12/02/us-usa-oil-permits-idUSKCN0JG2C120141202
There is a difference between now and 1986. Horizontal drilling was just beginning to become controllable and semi practical back then. There were a few people messing with it in the Austin Chalk riding on the hype of a few spectacular successes drowning out the many failures. Pretty much the same as the earlier conventional Austin Chalk craze. The Austin chalk breaks most everyone who plays in it sooner or later. Most everything being drilled then was still conventional and not in shale. Most everything today is horizontal and in shale. Today they specialize in pop corn farts and lots of them to put out the grease.
The boom from the mid 70’and early 80’s did not do much to increase production nationally. It didn’t really even mask the overall decline in production as many of the great fields were reaching their end. Many independent oil companies both large and small were deeply in debt at $40 and expecting $50 when prices dropped to about $30 in 1981. Economics were still good for many prospects at even at $25 so those not leveraged to the moon were able to keep the rigs running. You could also get on the phones and find your own investors back in those days so you were not at the mercy of regulations and bankers as much as today.
Then came 1986 and prices under $10. The prices only recovered a little and stayed low until the after the Iraq War got going. The whole industry was decimated. It consolidated with bigger companies absorbing smaller companies who in turn were absorbed by even larger companies or by majors. The Saudis ramped up production and crashed oil prices in 1986 more to punish and whip into line the allowance cheating OPEC nations more than disrupting US oil and gas operations though that was certainly a bonus for them.
Today we have the horizontal shale wells many of which were never profitable or only marginally profitable. The Initial production after the massive fracs can be strong but it dies out fast. So many shale wells have been drilled in a relatively short period of time that national production has increased dramatically, but unless much higher prices return soon new wells drilled will slow to a stop and production will drop like a lead balloon. The shale boom was BS to begin with from an economic stand point unless you were an oil and gas promoter, contract driller, field service company, pipe or equipment supplier or a banker. Investors private, institutional or international would be left holding an empty bag and would stop funding shale projects as soon as they figured it out. So this bubble was going to pop sooner or later anyway.
The Camel Riders over in Saudi Arabia are fucked up greedy Islams but not stupid. I’m sure they understand the economic problems with shale production. They probably figured that by keeping production at current levels they would pop the shale bubble but more importantly slow exploration in general around the world and keep world output more profitably inline with world demand. The OPEC crowd might take some pain in the near term but maybe they feel that’s better than much greater pain and loss in the long term. I would not be one bit surprised if someone was not closing in on a potentially mega discovery ( most likely the Russians) that would require higher oil prices to initially fund.