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The Price of Oil Is About to Blow a Hole in Corporate Accounting
- tls 12y agoAsk the author this: why did he not ask: "Postphoned the reckoning of _what_???" what is this FEAR he is trying to spread?
- aaron_m04 12y agoIsn't the price being held at an unsustainably low price by OPEC? If so, then any accounting problems would be short lived. Once OPEC cuts supply, the prices will bounce back to ~$100/barrel, I would expect.
- cheriot 12y agoIt looks like the reverse; OPEC stopped holding prices up.
- hga 12y agoIndeed. The theory here is that besides a demand drop due to the general world economy, and the US swimming in oil, the Saudis have decided to stop playing the swing producer game because they've noticed when they tighten the spigot, they permanently lose market share. The current US inventory issue is akin to this, because it exists in part because refineries are tuned to the types of oil they use, and we've spent quite a bit making a lot of them take heavy, sour crude, and fracking tends to produce light, sweet crude. Which is good stuff, and in high world wide demand, but due to another one of those insane '70s energy policies, no one is allowed to export crude (with I think one exception, to refineries that immediately return the distillates to the US). E.g. we should have exported a lot of Alaskan oil to Japan, when California was not set up to take all of it, and it would have cost less to transport it to Japan and equivalent oil to the US.
- CapitalistCartr 12y agoCurrent oil storage is nearing full. With present condition, they will be full sometime in April. It will take some months, maybe a year for storage to empty out enough to support high prices. http://blogs.wsj.com/moneybeat/2015/03/05/the-newest-commodity-oil-storage-space/ http://blogs.wsj.com/moneybeat/2015/03/05/the-newest-commodi... http://www.forbes.com/sites/christopherhelman/2015/03/04/u-s-running-out-of-oil-storage-blame-canada/ http://www.forbes.com/sites/christopherhelman/2015/03/04/u-s...
- matt4077 12y agoThere's a lot of speculation on OPEC's motives and power. They could be trying to shut down exploration in the US. The Saudis could be doing the US a favour by trying to destabilise russia. They could be trying to sabotage green energy for a while. Their coalition might just be powerless because everyone needs to pump out as much oil as possible, especially at these price levels. Regarding future price levels the efficient market hypothesis probably holds: nobody without inside information knows which way the oil price is going.
- WallWextra 12y agoThe reasons I've heard were to kill US oil exploration, and also to teach the high-cost producers (Venezuela, etc) in OPEC a lesson. It's common for these countries to "accidentally" pump over quota to make some extra cash. So Saudi just refused to cut the quota this time around. The Saudis could also be interested in messing with Iran, which has much higher production costs.
- aikah 12y agoI read a lot about the subject and couldn't come up with a satisfying answer as to why the Saudis are doing that. All I know is they are playing a very dangerous game and Washington is letting them do it. People say,there will be no consequences for USA,but oil prices will go up again sooner or later. What then ? I don't believe shale oil is an explanation.
- tptacek 12y agoYou don't believe shale oil is an explanation... why? Have you looked at the barrels/day production figures for shale oil? They are gargantuan.
- adventured 12y agoIt isn't only OPEC. The US dollar shaved at least 20%+ off the price of oil, and likely instigated this crash (the world was swimming in oversupply of oil for quite some time before the crash). The US dollar began skyrocketing, due to the end of QE, at exactly the same time oil began crashing. Not a coincidence, given oil is priced in dollars and the US dollar is on its greatest one year run in decades. Look at July 1st USD http://finviz.com/futures_charts.ashx?t=DX http://finviz.com/futures_charts.ashx?t=DX Oil http://finviz.com/futures_charts.ashx?t=CL http://finviz.com/futures_charts.ashx?t=CL
- smcl 12y agoCan you help me get my head around the USD chart? In my head it only makes sense to value one currency vs another (i.e. the USD to GBP exchange rate) so seeing one chart which simply plots "USD" over time is a bit tough to wrap my head around.
- protomyth 12y agoIts more like Saudi Arabia is not reducing production and certain countries such as Russia and Venezuela cannot survive at that price. I think they're trying to force closure of US fracking sites, but they can go down lower than a lot of countries.
- frandroid 12y agoIt's held at an unsustainly low price by OPEC, but not for OPEC... Saudis can sell oil at $20 per barrel if they feel like it. The pain they're causing Iran right now is probably not coincidental to the nearing of a nuclear deal that would lift the current sanctions and give the regime a lot of wings.
- cheriot 12y agoIn case anyone forgets that it can go too far in the opposite direction: http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-market_accounting http://en.wikipedia.org/wiki/Enron_scandal#Mark-to-market_ac...
- iwwr 12y agoI take it no serious investor makes any decision based on that arbitrary number, do they? So then, why require it?
- matt4077 12y agoInvestors, suppliers, the taxman: everybody makes decisions on a company's balance sheet. Accounting like this is done for everything. Oil, cars, computers, cash, bonds, buildings etc. No analyst has the resources to hunt down all these numbers and even if they would, it's often quite hard to decide what a 'fair' value for a given asset should be. A lot of that information probably isn't even public. It's also done for legal and tax reasons. If your assets lose value, you may run into insolvency (net assets < debt). Your balance sheet should reflect reality and the result can be that you have to shut down the business even though you have money in the bank.
- hristov 12y agoMost serious investors consider this number very important when making decisions. By this number i mean the amount of reserves. Yes, some of the methods of calculating it are a little arbitrary but it is the best information investors have as to the value of a company's reserves. Thus, it is very important. And it is not completely arbitrary. For example the rules are the same for all oil companies at the same time. So the number is by no means random. And while the results depend on the price of oil on particular days, everyone knows the price of oil and what the key days are. So if some investors believe oil will climb back up, they can do some math and arrive with a number that better suits their view of the future.
- jerf 12y agoWell, if the stock market reacts by savaging the prices of these companies, sounds to me like a fantastic long-term investment opportunity will be opening up. However large this may be, it's still a transient price drop with a lot of politics in it, and in the long term prices are still only going to go back up. Most of that oil in the ground is still going to be pumped up at much higher prices, and not all that many years from now.
- imaginenore 12y agoYou don't know that. The world is really on the way of getting rid of oil. Electric cars, bioplastics, solar panels getting exponentially cheap. From my point of view the only thing that stops us all from switching to electric cars is the battery technology. When it comes to the industrial use of solar energy, we already have the technology of storing energy - flywheel (google Beacon Power).
- SixSigma 12y ago> exponentially cheap Solar is following an exponential fall, but the tail has long been wagged http://io9.com/solar-powers-epic-price-drop-visualized-510448484 http://io9.com/solar-powers-epic-price-drop-visualized-51044...
- crdoconnor 12y agoIt's funny how the amount of FUD has shot up as the price has precipitously dropped: * They're unreliable. * The intermittency makes it impossible to use. * It's unfair on the monopolistic power companies.
- SixSigma 12y agoThat last one is particularly egregious. They could have been reaping the benefits themselves but they, like incumbents everywhere, sat on their hands and watched the cash roll past.
- JosephHatfield 12y ago
- rcarrigan87 12y agoI bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of these issues. It's almost like low oil prices will inevitably lead to high oil prices. Of course, this is all speculative (mostly for fun for me although it is real money). I would never invest money I couldn't lose based on this loose reasoning. But now I get to call myself an "oil man."
- dmix 12y agoThe middle east is where the vast majority of geopolitical conflict happens these days and the middle eastern powerhouses (Saudis, Iran, etc) are the ones driving the price down. I doubt they'd do this if it created a security risk internally. So I'm curious what ripple effect you expect might happen as a result of this decline? South American oil countries? Africa?
- hkmurakami 12y agoRussia.
- bd_at_rivenhill 12y agoMore like the Saudis are driving the price down partly in order to inflict damage on the Iranians, with whom they are engaged in something close to a cold war, but mostly to choke out the high cost producers in the US and make future investments in that sector look very risky. There is definitely a strong destabilizing effect on Russia, Iran, and Venezuela at the very least.
- URSpider94 12y agoPublic service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors. The upshot is that you can lose money on oil futures even if prices don't go any lower, and you may lose money even if prices go up, if it takes a long time for that to happen. tl;dr -- there's no clear way to make an investment that cleanly tracks the price of oil, like there is for the Dow or the S&P 500 or the Japanese Yen.
- tim333 12y agoThe article's a bit melodramatic about what is everyday accounting. The price of oil always fluctuates so accountants have to use some historical price for calculating reserves so the figure will always be off at a later date when the price has moved. Pretty much anyone capable of reading and understanding the accounts of oil companies will know that.
- Animats 12y agoAccounting usually tends to trail events. That's not a bad thing. More problems come from valuations of future events. Oil may go up tomorrow. The short-term price is driven more by political events than drilling activity.
- cpwright 12y agoIts useful to point out that although the standard accounting method was used for the official numbers, at least one of the drilling companies in this article also included the impact of current prices on their reserves. Investors care about this, know about it, and at least some of the the companies give them information so it can be properly priced in.