Consumers, Start Praying

by Byron King

On Oct. 11, The Daily Reckoning wrote, “Greenspan’s low rates lured consumers to buy bigger houses and bigger cars. Now they’re paying nearly $2 for gasoline…and hoping the winter is not too cold.”

Consumers had better do more than hope. They had better get some religion and start praying. I had a gas-driller in the office today to sign a few documents. We started talking oil patch. In his own words…

“It is just unbelievable. I am paying three times what I used to pay just a couple of years ago for delay rentals on leases. All those farmers have gotten pretty smart about what is under their feet. Rig rates are up. Cost of insurance for the workers is up. Costs of permits are up. Diesel fuel is up, plus surcharges for immediate delivery of large volumes. Cost of drill pipe has way more than doubled because of the price of steel. Drill bits are through the roof. They must be making valves and meters out of gold, because they are climbing like the Space Shuttle.

“Down-hole services like well-logging and “frac’-ing” are costing more, and harder to schedule so you are stuck paying demurrage on the rig and equipment while you wait for the service call. Cement is way up, particularly the good stuff that you have to use to cement a well. In less than a year, the cost to drill a 4,500-foot Devonian play has gone up by at least 50%. And we are producing a lot of brine water with the gas out of our leases, and the cost of brine disposal has at least doubled in the past year.

“Yes, we are being paid more for the gas we sell, but it is costing us more in every way to get it out of the ground and to the wellhead. And then, it goes into the gathering system and a lot of our gas is piped directly to an electric utility for base-load power production. Unbelievable! We go to all that work and expense to find, drill, and produce that gas, and then it gets burned up to spin a turbine to push electrons through a power line, with all the net-energy loss that occurs along the way. And then people use the electricity to keep the lights on in empty rooms. Our economy is just chock-a-block with the wrong economic incentives. And most people don’t even have a clue. Our grandchildren will hate us.”

And, predicts your man in Pittsburgh, our grandchildren will hate Alan Greenspan.

As the yoga teacher says…”Think of a happy place.”

Byron King is a graduate of Harvard University and currently serves as an attorney in Pittsburgh, Pennsylvania.