The Return of Cheap Oil?

Will new energy discoveries and new technology sink oil prices? Will lower oil prices rescue the world from the Great Correction?

Maybe, say Porter Stansberry and a good number of the analysts and experts here.

We’re attending an investment conference — for professionals only. It’s a beautiful place for one. The island is a barrier island, mostly sand…surrounded by ocean or marshland. There is a golf course…tennis courts…bocce courts… Maybe even a kangaroo court. Or an appeals court. And a royal court. Not to mention a food court.

The lodge looks like it was built in the ’20s…it has that glamorous look that seems to call out for a white sweater and white flannel pants… You feel you should dress like Cary Grant and hope to meet Claudette Colbert on the lawn.

The rooms are luxurious…large and quiet, while the lobby is lush with rich fabrics and comfortable chairs. The staff is poised, gracious and almost genteel. They would be good people to look after you if you were going broke or insane. Not that we’re planning on either. But it’s always a good idea to be prepared. Whether you lost your mind or your money, the nice people running the place would probably wait a few days before kicking you out.

There seems to be almost no one here. The lobby is empty most of the day. We wonder how it stays in business.

This is also where George W. Bush convened a meeting of the G7 heads of state. In the room next to ours, the walls are hung with photos of Tony Blair, Silvio Berlusconi, George W. Bush…and others.

They’re all gone from office now. Except one, Vladimir Putin, a man who looks like he might never leave.

But the news down here is upbeat. Thanks to fracking and horizontal drilling. They say these techniques are making billions of barrels of oil available. Believe it or not, the US is set to be the world’s top producer by 2020, according to a Goldman Sachs study.

An oilman from Texas showed us a map. It included a large chunk of Southwest Texas, colored to show where drillers had bought oil rights and where they were operating.

Heck, there is hardly an empty county in the whole state! The expert took the map apart, analyzing who was working where…and how much oil they were likely to get.

The results were staggering.

“Oil will fall below $40 a barrel,” predicted Porter Stansberry, our host.

Whether that will happen or not, we don’t know. But it got the group talking excitedly.

“Cheap oil will set off an industrial renaissance in America,” one suggested.

“Sell the oil and gas companies,” recommended another.

“It will help put the US economy on the road to real recovery,” said another.

But hold on a minute. A report at The Financial Times tells us that “the era of cheap oil is over,” because “marginal oil production costs are heading towards $100 a barrel”:

Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.

Here at The Daily Reckoning we’re not getting worked up one way or another. We’d like to pay less for oil. But we’ll wait to get exciting until we see lower prices.

While the wildcatters and roughnecks are coaxing more oil from the Texas dirt, the mad hatters and pencil-necks at the Fed are ready to print dollars too.

And not just at the Fed. “This is the first time in history that all central banks have printed money at the same time,” observes WashingtonsBlog.

The central banks of Europe, the UK, China, India, Japan and the US are all adding to their holdings (thus increasing the base money supplies of their respective countries). We’ve never seen anything like it. A coordinated, worldwide effort to inflate the money supply. State-sponsored counterfeiting on an epic scale.

But all this money printing is not bringing a worldwide recovery. Instead it is “failing miserably.”

In Europe, the following countries are now in recession:

Czech Republic

In America, the last reported GDP results were positive. But take out inventory build-ups and the growth rate was only 1.6%. Not very exciting. Almost every report in the financial press said the results were “disappointing.” But why would they be disappointed? Don’t they know we’re in a Great Correction? They’re lucky there was any growth at all. And if you took out all the stimulus spending, ZIRP, LTRO, TARP, QEI, QEII, Operation Twist, and all the increases in disability…and other transfer payments…

…what do you have?

Most likely, you’d be in the same situation as the UK, Spain and all the other recessed economies.

And here’s more downbeat, but fully expected, news from the US:

(Reuters) — US companies hired the fewest people in seven months in April, a worrisome sign for a labor market that has struggled to gain traction and adding to concerns that the economy has lost some momentum.

The ADP National Employment Report on Wednesday showed the private sector added 119,000 jobs last month, below economists’ expectations for a gain of 177,000 jobs. The March figure was also revised lower.

The report comes two days before the government’s broader and much-watched monthly jobs report.

“This is an upsetting report,” said David Carter, chief investment officer at Lenox Advisors in New York.

“The strength of the US economic rebound is clearly still uncertain. Hopefully we don’t get a third consecutive summer of weaker growth.”

Recent data, including softer labor market figures, have fueled fears that the economy may have lost some strength as the second quarter got under way. Those worries were partly offset by data from an industry group on Tuesday that showed a better-than-expected pick-up in the manufacturing sector last month.

But government data on Wednesday showed new orders for factory goods suffered their biggest decline in three years in March as demand for transportation equipment and a range of other goods dried up.

*** And what’s this? Bloomberg reports that Americans are bolting for freedom:

Rich Americans renouncing US citizenship rose sevenfold since UBS AG (UBSN) whistle-blower Bradley Birkenfeld triggered a crackdown on tax evasion four years ago.

About 1,780 expatriates gave up their nationality at US embassies last year, up from 235 in 2008, according to Andy Sundberg, secretary of Geneva’s Overseas American Academy, citing figures from the government’s Federal Register. The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports.

The US, the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb the budget deficit. Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a US passport.

A conversation on the subject erupted at dinner:

“Yeah…makes sense that so many people would leave. They just want to save money. Can’t blame them for that.”

“I think there’s more to it. It’s not clear that you can actually save money. Tax rates in the US aren’t that high. And rich people always have ways of sheltering their money.”

“You’d think they wouldn’t leave if they didn’t have to.”

“Well, a lot of people just don’t like to have to report everything they do…they don’t like having Big Brother breathing down their necks.”

“Wouldn’t they just have some other Big Brother breathing down their necks?”

“No…I’ve spent much of my life overseas. Many other countries just don’t try to poke their noses into your affairs the way the US does. And many have more civilized tax collection systems. For one thing they only tax you if you actually live in their countries. You don’t have to file taxes…and disclosure forms…if you live somewhere else.

“The US keeps its citizens on a tight leash. A lot of people want to slip the leash, even if they don’t save any money. They want to be real Americans…not bullied and harassed wimps with no backbone… They want to be free people. And they can’t do that and remain American citizens.”


Bill Bonner
for The Daily Reckoning

The Daily Reckoning