So, we have had oil prices so low lately that in America we can buy gas for less than $3.00 a gallon for the first time in years! I recall when G. Bush left office in ’08 that gas sold for about $1.98 / ga.. Then after the election the price soared across the country to close to $4.00 /ga.. They would bob up and down between $3.20 – $3.75 and an occasional spike to $4.00 over the next 6 years. Then, just before the mid-term elections this year we saw them fall below $3.00/ga! You could practically hear the hallelujah chorus singing in the streets.
I said back in ’09 that the oil companies were going to get us used to paying well over $3.00/ga so they could milk us for all our money. People forgot what $1.98 / ga felt like, and now anything close to $3.00 / ga seems like mercy. The real question is why has the price changed recently? Was it political? I mean we see little games around election time, but in this case I am thinking it’s not quite the game being played. It’s politics on the world stage. Anyone who remembers the oil embargoes and lines at the gas stations in ’70’s must recall what stopped this problem. It was the fact that America actually started to move forward with new oil fields and was talking about building more refineries that caused OPEC to lower the prices finally to stop us from competing with them. They lowered the price of oil (sweet crude) so much that we simply could not pump ours out of the ground and be profitable at such prices, and it’s happening again folks.
With N. Dakota fields pumping millions upon millions of sweet crude out of the ground daily, OPEC has been forced to lower their prices and pump more of their oil. It’s simple supply and demand. Hardinvestorassets.com has the interview with Phil Flynn a senior energy analyst and a futures account exec. at Chicago based – Price Futures Group. I picked up the interview at ETF.com.
HardAssetsInvestor: What’s the biggest reason oil prices have dropped so dramatically in recent weeks?
Phil Flynn: If I only have to give you one reason, it would be the rise of U.S. oil production. It’s really changed the world. We also have a slowing global economy, and Saudi Arabia is raising oil production, along with other OPEC members. They wouldn’t be doing that if they weren’t concerned about losing market share to non-OPEC producers such as the United States and Russia.
We’re in this dynamic because the U.S. oil producers are shaking up the Saudis a little bit. And in return, the Saudis are trying to send the U.S. oil producers a message by producing more oil. It’s a combination of those factors that’s driving prices down.
HAI: Do you think that these lower prices are going to derail the U.S. oil boom?
Flynn: That’s what the Saudis hope. But I don’t think we’re there yet. A lot of people say the marginal cost for U.S. production is $80/barrel. Yet even at $80, we’re above breakeven for most producers. I’ve seen estimates that suggest many producers can produce profitably at $30. It really depends on the people you talk to.
Overall, the ability of the U.S. oil producer to withstand a sell-off in price is a lot stronger than it would have been, say, in the 1980s, when the Saudis broke the back of the Texas producers. That said, we’re probably getting close to the point where the producers are going to start feeling the pain.
HAI: Are there any similarities to the natural gas market? There we saw prices crater, yet production continued to rise.
Flynn: There are some similarities. But one of the reasons natural gas production continues to rise is because producers can make money selling other liquids such as oil. But that dynamic might change if oil prices continue to plummet. But your general point is right: These shale producers have confounded the experts time and time again.
People have underestimated the shale producers and they’re likely overestimating the breakeven price of U.S. shale. It would be a risky play for the Saudis to try to sink the U.S. oil producers. Or maybe the Saudis are just trying to get other producers like Russia to consider cutting back production. Whatever is behind it, it definitely is raising the concerns that we could see a major price collapse in this market.
So, what has caused the lower prices in gas? More production has done this. What has caused more production in gas? America is pumping oil out of the ground. America has a LOT of oil. What does the American economy need to rebound? We are screaming for jobs! Where are Walmart cashiers making $20/hr? They are making record hourly wages in N. Dakota because everyone wants to work the oil fields and make $100,000.00/yr with little or no experience which drives up wages for non-oil jobs! Thus, if America were to start pumping oil from Alaska, Dakotas, Gulf of Mexico we would see a massive job boom and economic recovery and gasoline around $1.00/gallon once again! What would we do with all this money? We would pay taxes and rebuild our infrastructure which would mean MORE JOBS! How hard is this to understand folks? Lastly, ask yourself why the Middle East is so important. What does it matter who our friends are? How would your energy bill doubling or tripling affect your bottom line each month?
Domestically, it can be found in many different states and could potentially produce between 1.2-1.8 trillion barrels of oil in the future. To put these numbers into context; America consumed an estimate of 7 billion barrels of oil in 2011 according to the U.S. Energy Information Administration. The Royal Dutch Shell have viewed the extreme amounts of shale oil in America as an opportunity to expand and multiple their production in future years. SOURCE