The price for a barrel of oil is dancing in and out of the $20 range, the first time since 2003. And the analyst chatter is reveling in its bearish tone, skeptical of any meaningful recovery anytime soon, even after today’s half-hearted OPEC announcement.
“I think it’s a competition to see which pundit can justify a lower price for longer,” mused a friend of mine.
“I agree,” I said nodding with a wry smile, “the one-upmanship – or one-downmanship – reminds me of bad reality TV. But the consequences of all this spreadsheet jockeying go far beyond counting barrels and price forecasts.”
“You mean the upshot of one of the world’s largest industries being gradually dragged into bankruptcy?”
I nodded again, “Yeah that’s one part of it. You don’t need a spreadsheet to figure out where this is headed.”
My friend and I kept walking to the restaurant discussing oil, gas and the world’s ills on hungry stomachs; not a great recipe for fulfillment.
I explained that the price fall from $100 a barrel to $50 had economists pulling out cost curves to figure out who could keep drilling and still make money. The list was pretty lean, which is why dozens of megaprojects were shelved or cancelled over the past 18 months. At year-end, oil prices slid from $50 to $40. The difference wasn’t measured in dollars, but in units of anxiety. But it didn’t stop there; going to the $30 range a month ago caused white faces and a sense of panic in the industry. Pundits closed their drilling spreadsheets and opened the ones that spoke to covering operating costs – in other words the oil price at which producers start losing money just by turning on their pump jacks.
“Apparently, a lot of oil production can keep pumping for under $20 a barrel; that’s what the operating cost curves are showing.”
“Maybe,” I replied, “but I haven’t seen any companies moving their head office into tents by their pump jacks. Those analyst numbers you see being quoted are operating costs at the wellhead. They don’t include salaries, office overheads, rents, fixed fees, local taxes, and of course the corporate debt.”
I explained that therein lies the problem with oil prices in the sub $30 range – most of the world’s oil industry – Canada not being unique – is gasping through a snorkel for cash. Forget about investment dollars; there isn’t any money to drill new wells when prices are below $30. Natural gas prices have collapsed too, as have petroleum products and refining margins more recently. The flow in ‘cash flow’ is drying up fast. For a lot of companies just keeping the lights on and the bankers behind the portcullis is a money-losing proposition.
“Some analysts believe that prices are going to go sub-$20,” noted my friend as we walked up to the restaurant door. “The world is awash in oil; too much of it in white storage tanks, underground caverns and floating tankers.”
“That’s true,” I said, “and that’s what has me concerned. People are starting to trivialize cheap, sub-$30 oil in the belief that it’s eternally plentiful. It’s not.”
Think of it this way: imagine that grocery stores have a lot of food on the shelves, but behind the scenes the farmers and ranchers are going out of business. By analogy, imagine that farm implement companies are also going bankrupt and farmhands are being laid off never to return; that’s what’s happening to equipment and labor in the global oilfield service sector.
“Like it or not, oil is still a vital commodity that is growing in demand,” I said, “and the world’s oil supply system is on the verge of being permanently damaged at these prices.”
We sat down for lunch. My friend was connecting the dots, “So if this continues, upstream supply will be trashed and the pundits will soon be scrubbing their spreadsheets to see who can justify higher prices for longer.” Amused by his own analysis, he zeroed in on a conclusion, “The next couple of years could be really volatile.”
“Get ready for a seesaw oil price recovery” I replied. Menu open, I was hungry yet thankful that food prices hadn’t tanked and that the agrarian economy was still viable. At least one element of our societal subsistence was stable, I thought.
© 2016 ARC ENERGY RESEARCH INSTITUTE. All Rights Reserved.