The price of oil is down, WAY down. How do we deal with such a cliff dive in crude prices and not freak out?
Media in the U.S. appear to stress the positive impact of the falling crude prices. There are a number a reasons of why high crude prices are TERRIBLE for the economy long-term. It’s a double-edged sword guys; if we were talking about how the economy is struggling with high prices of crude, then we would want to have low crude prices, and vice-versa. Sadly, we have EXPLOSIVELY low crude prices. If the prices keep dropping at this continued low level, then there is going to be no need to try to get oil & natural gas out of the ground because companies cannot make money. This means NO JOBS for workers.
Without trying to freak you folks out; there is a case based on past history that this is going to cause more damage for a longer healing process to get out of this situation, than a quick ‘snap of the fingers’ recovery. We’re pushing our North American oil and gas sector to the absolute limits against the stranglehold of OPEC’s cartel power over crude prices.
The Vicious Cycle of Oil Prices
(Oil prices and spending 2000-2015.)
Because of how low crude has been, the economy has been having exponentially decreasing returns that is causing low income for workers. This still boggles my mind and should make your jaw drop because when wages are dropping for oil and gas workers, the overall cost of getting the oil out of the ground has been increasing by nearly 11% per year since 1999 (Source: Koptis).
So you’re saying we’re looking at higher costs of doing the work to get oil out of the ground and paying workers less than before? Yes! So insane:
-How many people can afford the oil? -Let’s say oil price = oil production cost, what happens to cost of oil?
Back in Q1 2014 the price of oil was not increasing as much to balance the oil production costs. So upstream oil companies did not worry about the situation until shit hit the fan (drop in oil prices in late Q2 2014).
This led to 2 debt strategies that were happening under the table to hide the increasing costs of oil production in which most buyers could not afford to pay.
-They have this thing called “Quantitative Easing,” this government strategy provides super low interest rates that persuades people to get loans from banks. -You heard about the Chinese ghost towns that no one inhabits? This was also built upon debt manipulations too.
Good news is, the Chinese government has pulled back on the building of cities for the sake of burring a hole in their budget since the start of the fall of oil prices in late Q2 2014. The U.S. ended their Quantitative Easing in Q4 2014. All these ’cause and effect’ moves led to Chinese real estate prices falling since the start of oil prices dropping.
The problem with going full speed ahead in dumping a bunch of money into programs like these are that they take time to build and reap rewards. Once the price of oil started to drop, these governments started to pull back into investing into these programs at the beginning stages which lead to tax payers money wasted to kickstart the programs. We then began to see coal and iron, which are consumed heavily by China decrease drastically, which are to having oil prices at a level where people can afford it. The economy will be using coal, gas, iron, and other fuels that are cheaper than oil prices because people can afford the goods.
So when can the U.S Quantitative Easing policy and Chinese rapid city building be regenerated back to where they left off to stimulate GDP? The policies have already reached their potential and are tailoring off for any more benefits for the economy. I cringe when I see more funds being dumped back into shale formations that will not gain profit and cost tax-payers more money. Even worse this money could be dumped into solar power or wind power production that cannot be profitable without high oil prices, which costs tax-payers MORE money. Here is a clip showing the battle between crude oil vs. green energy here: Future of Green Energy vs. Fossil Fuels
Scratching the Surface of the Oil and Gas Problem
Rising debt. More debt problems are obviously going to occur. First, E&P companies that specialize in oil production are strangled by low crude prices. Then the oil and gas workers are incurring debt because they are laid off from oil companies not making money because of low prices. Since the power of the American U.S. dollar is low compared to other countries with higher GDP growth like Brazil, Russia, India, etc. it creates more debt which is difficult to repay because of the mismatch in country currencies is confusing. Not to mention the amount of debt already owed to the Chinese rapid real estate building and the falling of Greece and Venezuela which some higher power will have to bail out.
Interest rates soaring. So debt is increasing. What does that mean? Interest rates should increase too. Which means that the companies creating loans will be making money off consumers for the increased risk of taking on debt. I predict the Federal Reserve will increase rates for 2015. I’ve been hearing about this for a while to balance out loans.
Unemployment is increasing. Because of the oil and gas shale formations in the U.S., it shook the nation out from The Great Recession which increased employment exponentially. Once these programs are placed on the back burner, U.S. employment will fall, the European market will have increased unemployment due to slashes in oil production, and South America who relies heavily on their exports to get revenue for their country will have a jump in unemployment because of the lack of consumers willing to spend.
(Correlation of oil prices & unemployment for 25 years, 1976-2011.)
Long recession. Inflated interest rates + increasing unemployment = recession. Companies that already have less than stellar credit ratings will be bombarded with an onslaught of credit to pay.
Diminishing amount of oil. As seen now and especially for Q4 2015, we can expect more workover rigs placed on production by companies because the vast majority of costs have been paid off. This creates a steady revenue stream with low expense overhead to keep oil companies increasing cash flow. Also companies who paid a fixed price when oil prices were on land and mineral rights when costs were low will also have an edge to continue to drill.
Uprisings in countries that export oil. Nigeria, Russia, and Venezuela make money off taxes with oil commodity exports. If the oil price falls sharply like it has, the tax on that oil will fall just as much. This will create cutbacks in food and healthcare which will then make civilian riots. This then could lead to the governments being overthrown. This is what happened to Russia when the Soviet Union dissolved. A whole new government will be formed creating a different way of how their oil and gas sector will be utilized.
Long term low crude prices. We’re talking about prices that stay stagnant for a long period of time without any increases in price. Obviously, it’s high price and low demand; which no one can afford anyways nor would want.
Falling stocks. The U.S. has been using their Quantitative Easing trump card policy to inflate stock prices value since The Great Recession of 2008. You can only fluff the stocks so much to these savvy investors with high interest rates because these consumers will back off from the market due to the stocks roller-coasting up and down. Historically, stock prices will fall when their is increasing unemployment and less goods being produced.
Shift in European countries. The European Union is having massive amount of problems which are becoming more difficult as the wealthier countries are losing vast amounts of money and power.
(Breakdown of how oil prices will effect each country on GDP growth.)
So where am I getting to with all of this? We could experience a worse scenario than what happened in The Great Recession. There’s plenty of other factors that have to take effect (depending on circumstances in the middle east), in order to see what happens to oil prices. The prediction is that countries that import oil will be fine. However, it’s thought that later down the road after certain causes take into effect, that will eventually create a ton of problems such as the ones listed above.
Big Time Issues
Cannot kickstart oil production. It doesn’t even matter if crude prices do rise. Low-interest rates have been fortunate for the shale formations in America. Imagine there is a huge wave of debt incurred by onshore oil and gas production; the interest rates won’t fall back to the low levels that they were due to massive amount of shale production happening right now. High-interest rates will make oil prices increase even more so than what they would have been a couple of years ago. We’re looking at more than $100/bbl. Plus, the high prices will have to be steady for a while for production to gain enough traction for it to be a benefit for oil companies margins. The supply chain can only move so fast to keep up with the ongoing barrage of scenarios that could happen.
So in order to prevent something like The Great Recession from happening again (like with what’s going on with low crude prices), the government will sort problems out to control them from happening. What will happen is that part of the people depositing the money will have a percentage taken out for their losses. That’s pretty brutal.
This is the breakdown: Governments will take part in losses which will have a percentage of their deposits through sharing. This sounds like it would work on paper, but we have to understand is that the government has not tried to do this before. What happens when they have to take out their chunk of the deposit out to share the losses on their own? If it’s never been applied before historically, how are we certain as tax payers there isn’t going to be any consequences for US?
Oil has reached its limits. Some pros are saying that the amount of oil in the ground will hit 100% capacity level by the end of 2015 or early 2016. The point here is that low oil prices instead of high oil prices will create low income that won’t incur any debt that changes the income received by workers. Because it’s focusing on consumers being able to afford the oil based on the consumer’s budget. This will have another “domino effect” that will be taking down all energy source commodities with a market crash.
Here comes the nitty-gritty. All energy sources including commodities and fossil fuels will decline at the same rate because of low crude prices. What would an energy company do if it can’t operate to make money to pay forth it’s workers?
Well, it’s called long-term debt. This is the standard American policy; it’s in the consumer’s budget to have a need to grab these commodities for use. The prices are at the level where it makes sense for oil companies to keep continuing oil production. With this long-term debt, it keeps creating more debt because of the interest rates. These analysts that you see on CNN, Fox, or Fast Money state that if oil and natural gas prices fall, eventually the economy will stabilize to a point that there will be growth in the economy. These analysts fail to give a calculated percentage of how much growth and when the growth would occur from decreased crude prices.
Nearly every industry in this world needs some form of energy and other commodities to power up. Without these raw necessities, there would be NO economy. The long-term debt is increasing by the year and from the rate we are spending as a nation, it’s looking impossible to pay all the money back.
Powerful leaders in congress, special-interest groups, and lobbyists are running the country. This long-term debt problem is something that will not last forever, especially with how inflated commodities have been in the past several years.
And you may be thinking that our country hasn’t declined yet to the point where we are all living on the street with no electricity, food, shelter, or water. However, history shows that nations with large debts didn’t die instantly. These civilizations crumbled after a long cycle of continued borrowed money that was never paid back. Examples include the Roman Empire, Babylon, and Ancient Sumerians.
History shows us that large civilizations of all proportions dissolved in some shape or form. Nothing lasts forever, especially highly advanced countries. Everything living and non-living harness some sort of energy, and when these structures collapse or are erected, they use energy. This is how important energy revolves around everything around us.
Where do we place the foot down and either stop the problem to pay off debt or eventually decline as a civilization. Countries that have prospered have been the ones who have found new bodies of land, harnessed cheap fuels, and by trading goods.
Solar & wind power has been thought of as the answer to all the energy problems. The problem with these renewables is that the advancement as far as an energy source is concerned does not generate enough power to contribute to a large complex society. China decided to increase their coal consumption which helped out the world’s energy problems, but that can only take us so far.
Fixed prices for solar and wind energy sources are a problem, because when the energy commodities price drops, consumers won’t buy outside a certain price threshold. Banks stop lending money to companies that need to pay off debt, and by resorting to another source of energy isn’t going to solve the issue.
There has to be a way to implement a more efficient financial structure to adopt. It’s the growing debt which never stops growing that’s becoming the biggest tumor within the U.S. economy. Oil companies on the other hand can’t produce fuels without debt to take risk to drill for new wells because this debt allows cash flow to be rolled to the next project. This gives incentives to oil companies to pay for goods created by the fuels extracted. This financial structure will grow much more rapidly with oil and natural gas products than it would with green energy.
Just keep on piling on more debt, right? This, and pushing the interest rates down for a longer period of time is the common solution the U.S. has been doing to put off our economy from dropping into another severe recession. It’s 1 big question mark where the government is added more debt though. There are these bubbles in the stock market that are influenced towards investing in but they have TERRIBLE returns to pay dividends back.
It’s interesting to see that smaller civilizations of the years past were mostly farmers. They didn’t use oil or natural gas to survive. The population was just under 1 billion before the first use of fuels became a global commodity. At least they didn’t have to deal with debt, but they didn’t have smart phones so I doubt anyone in our generation would survive.
Exxon’s Chairman & CEO Rex Tillerson just stated at a conference in the city of Houston that low crude prices may occur for years. Yes, the oil refineries are roaring, but supplies in storage tanks are filling up to the very top. You can only sell so much at whatever the price the market is offering at the time, which will have to be sold off in order for prices to rebound back to where they were in early 2014.
Who knows what direction this will take us? I believe that with how cost conservative we’re running right now as a country, I can see the oil and gas industry be more cost-conscious in the next coming years. This can be stepping away from ultra deepwater projects, re-evaluating vendor costs, less riskier decisions on drilling, and more. I believe this is just 1 small bump in the road to the upcoming booming years to come. If there’s 1 thing humans are good at, it’s adapting to our environment and choosing the best possible outcome with the cards that we are dealt.