Today I want to answer a question that I’ve heard from more than one reader about the North American oil patch, and what it’s doing to world markets. Consider this your cheat sheet.
Doubtless, you’ve heard stories about how U.S. and Canadian oil output is climbing. All true — well, most of it. In the U.S., it’s the “shale gale,” with all the new output from fracking in shale, tight sands and such. In Canada, it’s a similar share story and, of course, the oil sands boom.
I’ve written about the shale gale, both to describe it with admiration, for the technology and ingenuity involved. Also, I’ve offered cautions about believing too much of the press release kind of news, about so-called “energy independence” based on vast new volumes of oil from shale. One big issue is the “drilling treadmill” — the need to drill more and more wells to keep output up.
Let’s set that matter aside, and look at some trends…
The fact is that, drilling treadmill or no, U.S. oil output is increasing. And U.S. oil imports are declining. What does it mean?
It means that U.S. imports are falling from nations like Saudi Arabia, Kuwait, Venezuela, Angola, Nigeria, Morocco and Mexico. It also means that these nations have to find new markets for their oil. It’s easy enough to say “China will buy it,” but that’s not entirely the solution. Even China has its limits, believe it or not.
Basically, the global numbers show that more and more tanker loads of oil don’t have a home. So more and more oil hits the spot market, and this has a downward effect on overall world oil pricing — the Brent Price being the best indicator.
To some extent, it’s demonstrable that Saudi has cut back on export volumes, to keep up the price. But even then, Saudi has to export a certain amount of oil, and ring the cash register for a certain amount of money, just to balance its books. So how much can Saudi cut back? We’ll find out — sooner, likely, than later.
Consider, also, that much Iranian oil is holed up, in the Persian Gulf, due to international sanctions, while Iraq is ramping up its oil output. When these two nations kick into higher gear, a few years downstream, we’ll see more supply pressure on prices.
At the same time, North American shale oil is not just complex technology, it’s expensive, too. The economics of the new oil patch dictate prices in the range of $60 and more, per barrel, to keep the wells pumping. Yes, new barrels are coming. But they’re not cheap, and every operator has a hard nut to crack every month, to pay the bills.
A North American “Lid” On Oil Prices
The good news, in all of this, is that new North American supply seems to be keeping a lid on upward trends in oil prices. World oil demand is increasing, and every barrel gets used. One estimate is that for every 1% shortfall on global supply, the marginal price could spike up by 20%. Wow. There’s huge pricing risk built into a stalled oil supply. So let’s hope that it doesn’t stall, or you’ll pay $6 per gallon for gas, instead of $4.
Meanwhile, the economics of that North American oil have a floor, below which oil can’t fall for too long without severe disruption to supply. It’s like we’re in the eye of an energy storm. Enjoy it while we’re there.
In other words, with North American oil output growing, there’s a lid on upward price spikes. As for a price drop into the doldrums? Well, not without a global recession to kill off large parts of world demand.
Another benefit? Most of the new North American oil is moving by rail car. In terms of numbers, about 60% of “new” supply moves by rail, versus 40% by pipeline.
For example, oil from the Bakken play in North Dakota is going by rail to Philadelphia, to the old Trainor Refinery. There, the North Dakota oil gets cracked into jet fuel for Delta Airlines. Delta pipes the fuel to JFK, and has the lowest fuel-cost among all the carriers that fly across the Atlantic. North Dakota oil helps win the business for transatlantic air travel. Who could’ve predicted that?
Consider also, that much of the U.S. coal industry is in the doldrums, what with the closure of coal-fired electric power plants and lack of construction of new coal plants. Most of that coal used to move by rail, from the mines to the power stations.
Now, the slack in coal shipments is being taken up by rail shipments of oil. Again, who would’ve predicted that? We’re sort of back in the days of John Rockefeller, who controlled the oil biz by making deals about shipping oil with railroads.
Anymore? No idea is too crazy. Things that people — including me — thought were nuts just five years ago, are now the common wisdom.
Thanks for reading.
Original article posted on Daily Resource Hunter
Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.
Since when Morocco is an oil exporter ?
I am sorry Byron but there is little evidence in the production data that shale oil is a viable solution or that there is profit to be made outside of a few of the core areas. From what I see the entire profitability question rests on the EURs matching the actual ultimate ultimate recovery rates. But I do not see that as a remote possibility. And once the depreciation costs have to reflect the actual ultimate recovery rates most wells are not profitable even at $100 oil. We all know that shale is a bubble that depends on easy access to credit and investors that do not look at the balance sheets or cash flow statements too carefully as well as analysts that do not question the funding gap issue on the conference calls. But that game will soon be over and once the decline in shale gas production sheds some light on the relevant issues we could have a rout in the sector and an explosion in price that takes the companies with conventional reserves, as well as the coal and uranium players, much higher.
Maybe, despite the high extraction cost the fresh shale could be run
similarly to the debt-fueled business. Rising oil befriending rising debt.
Living in the moutainous debt is not something new but rare oxygen
in high altitude poses serious challenge.
Balance sheet has yet to challenge its integrity, whether honest or
Ever look at the shale producer balance sheets? The debt explodes as projects are not self financing and need more and more borrowing. We saw this with Chesapeake and a number of the shale gas players who are now trying to sell off pieces of themselves to stay in business.
A film somewhat like “when the last drop of oil is consumed ..” screened
recently has given some impression. If the desperate oil scenerio were
to arrive, chances are that a version of Oil QE resembling monetary QE
would be fired. I could virtually imagine, hyper debt would be called to
get oil out of ground, instead of encountering darkness, mass starvation
or stagnation. That means debt-fueled energy, Oil QE 1.
Given a choice, Bernanke will likely strangle the currency (your money)... in favor of “strengthening” the economy.
Eventually, economic reality and markets will collide -- unfortunately, the higher the market, the harder the fall.
How certain business practices wind up jacking up costs before sticking you with the bill.
The Japanese Nikkei fell flat on its face overnight.
While Bernanke Runs Wild, Let’s Talk Ponies