Tuesday, December 2, 2014

Oil Patch Competition ... My Bet is on the U.S. and Low Prices for a Long Time to Come

Last week Saudi Arabia threw down the gauntlet on America's oil producers when it decided to start a price war and not reduce its output any time soon.

By so doing, they have big a huge mistake. U.S. producers are ready to compete and will further increase global supply to more than offset worldwide demand, which in turn will lead to supply driven low pricing in the oil patch. Today's low prices are headed lower.

So as market forces allow the world's low cost producers to set prices in the oil patch, my bet is simply this --- American oil companies are going to occupy the winner's circle when the 'competitive' dust has settled. And as a result, American consumers, businesses, and (other than OPEC, Russia, Iran, Venezuela and their pals) free markets and the global economy will be the biggest winners of all.

The basic game plan of the Saudis and OPEC is that the U.S. tight oil and shale producers will cry uncle soon. Then OPEC will quickly resume it's monopolistic pricing power and high prices will return to the global oil market, including North America's. While Russia, Iran and Venezuela will experience low prices for their oil in the near term, the cartel decided that the short term pain will be worth the long term gain, and that energy prices will soon rise again to what until recently were deemed to be 'normal' levels. Well, they're wrong about that.

What the Saudis and their non-market driven price fixing friends don't realize is that American ingenuity and free market competition have just begun to put a permanent hurt on OPEC's long standing pricing monopoly.

OPEC is wrong to think it can outlast U.S. on oil prices is subtitled 'Technology is cheaper and West doesn't use oil to fund a welfare state:'

"Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker’s bet. . . .

The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine. “Naimi declares price war on U.S. shale oil,” a Reuters headline shouted, referring to Saudi Arabia Oil Minister Ali al-Naimi.

But there are at least three big problems with this strategy. One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back.

In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive.

But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says. Another 27 rigs are around $29.

That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled. . . .

Yes, it costs Saudi Arabia only about $2 a barrel to get crude out of the ground.

But analysts insist the Saudis’ real pain point is more than $100 a barrel — more than $30 higher than its price now — because of what they do with the money once they have it.

In 2010, for example, the Saudis spent $130 billion to combat the Arab Spring, the Persian Gulf Fund reports. Some of that money went for better education and health care, and a little for infrastructure.

Then there was a 15% raise for government employees, higher unemployment benefits, a government-subsidized minimum wage hike and 500,000 new homes in a nation of 28 million people. It cost 30% of Saudi gross domestic product. . . .

Naimi’s strategy to squeeze North Dakota and Texas is a bet that in the long run, low prices will force a cut in production and a return to Saudi leverage. But it will be much easier to further trim North American production costs than to convince whole nations to eat less."

Summing Up

Free market competition will serve the long term interests of the U.S. well. It also will result in long term benefits for oil consumers and businesses throughout the free world.

OPEC doesn't have a competitive chance of winning the pricing and output game against the North American free market and shale revolution, assuming U.S. government officials stay on the sidelines.

Let's all hope the U.S. government will simply stand by and allow us 'stupid people' to reap the benefits of free market private sector investment and American innovation.

That's my take.

Thanks. Bob.

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