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It probably won't ever go back to $120. What we're seeing is the dynamics of energy deflation. The world economy simply cannot function with the price of oil mu
by a8da6b0c91d 11y ago
It probably won't ever go back to $120. What we're seeing is the dynamics of energy deflation. The world economy simply cannot function with the price of oil much above $75. When it crosses that threshold the economy slows and sputters, credit contracts, and nobody can afford oil, thus driving the price down. The wrinkle is that the cost of producing oil is forever edging upward. Most oil cannot be brought to market with prices lower than about $75. 20th century style economic growth was fun, but it's over now.
http://www.economic-undertow.com/ http://www.economic-undertow.com/
- giarc 11y agoSo to cater to OP's comment, if it needs to get to $75, how does he/she invest.
- a8da6b0c91d 11y agoPhysical USD cash. There's going to be a lot of deflation as huge defaults, including national defaults, sweep the land. I don't think you understand the dynamics. Oil will stay down and much less will be pumped. Without cheap abundant oil you don't get enough credit circulating in the economy that people can afford higher prices. There is no more cheap abundant oil. The higher cost drillers will simply go bankrupt and all that expensive oil will stay in the ground forever because nobody can afford it.
- saryant 11y agoAmerica is now the world's swing producer, because our drillers are more sensitive to market pressure than the sovereign producers of OPEC or Russia. If supply becomes tight, American producers can very quickly ramp up production and then shut it in again when demand falls. There's also no reason to believe that further technological innovation won't further reduce the costs of American production, especially in tight oil. Nobody thought that was even possible 15 years ago, today everyone in the country has an opinion on fracking. Domestic producers have already shown tremendous resiliency in the face of the current glut—the smart ones have learned to cut costs in the same way the Seven Sisters did during previous oil crises. The fortress balance sheets of the majors will also shield the industry and allow continued R&D investment. Furthermore, America's mature capital markets will ensure that capital is available to the new industry of independent producers driving the surge in domestic production. They can quickly respond to market signals and demand rises and falls. Higher cost drillers will go bankrupt, the smart ones will survive and buy up the assets of the fallen.
- a8da6b0c91d 11y agoAmerican producers are bankrupt. The fields are worth pennies on the dollar. Wake up. It's over.
- saryant 11y agoAnd the remaining producers and service providers will buy the others for pennies and bide their time. Halliburton bought Baker Hughes. Weatherford cut costs and will be fine. The resiliency of the American energy industry should not be underestimated.
- maxerickson 11y agoDemand and supply have both increased during the price decline: https://www.iea.org/oilmarketreport/omrpublic/ https://www.iea.org/oilmarketreport/omrpublic/ That suggests that supply has increased more than demand.
- a8da6b0c91d 11y agoThis is temporary. The fracking operations are in the process of going belly up, but pumping like mad in the meantime.
- maxerickson 11y agoDemand going up is not sputtering, it is contrary to your theory. It seems likely that fracking is more viable at $40 than you think.