Among these reasons for being optimistic about low oil prices far into the future are the following: (1) a strong U.S. dollar, and one which will stay strong as U.S. interest rates gradually rise and the economies of most of the rest of the world remain even weaker than ours, thereby keeping their interest rates lower and their currencies weaker than ours; (2) heavily indebted and slow growing commodity supplying economies adjusting to China no longer producing at record growing levels to support its manufacturing-for-export needs; (3) U.S. politicians finally ending their stupid and wrongheaded ban on U.S. energy exports the past four decades; (4) the OPEC and friends (such as Russia and Iran) global oil cartel becoming a toothless tiger as new Iranian oil production adds to the already existing supply glut; and (5) the biggest and most important factor of all --- U.S. production and private sector innovation providing a growing supply of cost effective shale oil and other energy supplies.
Although we must never underestimate the ability of our politicians to screw up a good thing, even they will have a great deal of difficulty making a mess out of the developing U.S. and entire North American energy patch scenario for at least the next several decades.
Energy prices have fallen dramatically over the past several months and accelerated their precipitous decline recently. North American oil is currently priced at ~$35 per barrel, after falling ~11% in just this past week. And the price for a barrel of oil is now approximately 67% lower than last year's price of $100+.
Several factors have come together which portend low energy prices as the norm for years to come.
1- One big reason is that the U.S. dollar is strong and will stay strong as the Fed raises interest rates over the next several years. Most economies are much weaker than ours, and are likely to remain that way.
2- In that regard, China's recently slowing economy suggests that lower commodity pricing (including oil, copper, steel and various agricultural prices, as examples) due to a debt ridden global economy and lower global demand will be with us for the foreseeable future.
{NOTE: U.S. dollar strength means that oil prices will stay low, since oil is priced globally in U.S. dollars.}
3- And another reason for continuing low energy prices is that it's likely that the U.S. Congress is going to lift a 40+ year ban on exporting U.S. oil and finally allow the export of domestic energy to global markets. See Congress Seen Likely to Lift U.S. Oil-Export Ban.
If so, that will put even more pressure on energy prices and make U.S. production an even larger factor in the world market for oil. U.S production has doubled since 2009 and there's more potential oil to be shipped if our politicians get their act together and start acting like Americans.
4- OPEC is producing flat out in an effort to get U.S. producers and other 'high cost' countries to curtail production. Then OPEC will try to drive prices higher. But OPEC is going to fail.
And they will fail to fix prices for a simple reason -- the law of supply and demand -- and it couldn't happen to a more deserving bunch of price fixing guys. Countries like Russia, Venezuela, Saudi Arabia, and Iraq have been joined by the U.S. and now Iran with lots of additional production coming on stream. Meanwhile, demand is flat to down due to the public sector government dominated, debt ridden and slow growing global economy.
5- But the U.S and private sector market innovation is the real game changer.
How OPEC's Strategy Is Backfiring has the story about the big surprise that's in store for OPEC and the rest of the price fixers that, due to U.S. private sector innovation, will no longer be able to control, aka fix, energy prices:
- A derrick pumps oil on a hill above Alexander, N.D, and the town’s school. The oil boom in what is known as the Bakken region has increased the population in and around Alexander, bringing in enough players for the school to have its own football program for the first time in nearly 30 years.
"Global oil demand growth is on pace for its third strongest year of this century. American motorists have taken to the roads in record numbers—increasingly in pickup trucks and SUVs. And global upstream oil investment has plummeted for two consecutive years, something not seen since the early 1980s.
Despite all this, it is the latest data out of the U.S. shale patch that markets should be focused on.
And contrary to what you might expect, it should have OPEC—Saudi Arabia in particular—beginning to worry. Despite a 63% drop in rigs drilling for oil in the three key shale regions since last November, oil production in those regions has barely budged from peak levels in 2015.
In fact, new wells in the Bakken are pumping up to 50% more oil than those drilled at the beginning of 2015. Operators are finding ways to do more with less.
A debate is raging among oil watchers about whether these efficiency gains are permanent or simply a result of focusing on the best drilling locations.
But evidence suggests that there is still enormous room for improvements in shale industry economics. Consider this: a recently released working paper that examined industry practices across more than 4,000 wells suggests that the shale oil industry in North Dakota alone might have left as much as $36 billion in profits on the table between 2005 and 2012.
Why?
It turns out that most operators didn’t systematically experiment with their fracking techniques. Instead, innovation occurred somewhat randomly and almost exclusively after companies started to see something new working over a period. In other words, firms were risk averse with their technology choices.
With oil prices at $100 per barrel, they had that luxury.
So here is a prediction: the current price environment will force the U.S. shale oil industry to get its act together to focus on more purposeful—and longer lasting—innovation. As a result, U.S. oil production will be stronger for longer than most people expect, pushing the oil price recovery back by several years.
If you think this kind of resilience is without precedent, just look at natural gas. There are 199 rigs drilling for natural gas today, down from more than 1,600 in 2008. During the period when low natural gas prices were reshaping that industry, we heard a lot of the same talk we now hear about shale oil: high marginal costs and unsustainable investment needs were supposed to lead to plummeting production. And yet, U.S. shale gas production today is at record levels even as prices test new lows.
The idea that shale oil could be as durable as shale gas must be a frightening prospect for OPEC. Last month, the IMF warned that even Saudi Arabia is starting to feel the pinch of low oil prices.
In betting against innovation, OPEC picked the wrong strategy."
Summing Up
Here at home we have serious economic problems, including burdensome debt levels, excessive government interference and the resultant limited private sector driven growth opportunities. But all these issues can be quickly addressed and eventually solved, assuming the political will to do exists, both from We the People as well as our elected representatives.
Meanwhile, other nations and regions of the world, and specifically oil and other commodity dependent producers, have much more serious and seemingly insoluble long term issues. So do the vast majority of government dominated and socialistic European countries where high unemployment is accompanied by slow growth and high debt levels.
But here at home, maybe -- just maybe --- Congress and the President are about to start paying attention to some relatively easy solutions, beginning with the high price of energy. If so, it will put both a volume and pricing squeeze on the 'bad guys' in the global energy patch who have had it their way for far too long.
More good jobs, higher tax receipts, lower prices at the pump and making the world's bad guys, including ISIS and Iran, squirm at the thought of greater U.S. energy production and a stronger U.S. economic machine await us.
Practical American energy independence is an idea whose time has come. U.S. politics used to stop at our shores. It needs to be that way again.
That's the winning American way, and here's my take. We're #1.
Thanks. Bob.
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