Peter Tertzakian: World’s oil supply on the brink of being permanently damaged at these prices

The price for any barrel of oil is dancing in and out of the $20 range, the very first time since 2003. And the analyst chatter is reveling in its bearish tone, skeptical of any meaningful recovery anytime soon, despite today’s half-hearted OPEC announcement.

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“I think it’s a competition to see which pundit can justify a cheaper price . for longer,” mused a friend of mine.

“I agree,” I said nodding with a wry smile, “the one-upmanship C or one-downmanship C jogs my memory of bad reality TV. But the consequences of this spreadsheet jockeying go far beyond counting barrels and value forecasts.”

“You mean the upshot of one of the world’s largest industries being gradually dragged out of business?”

I nodded again, “Yeah that’s one part of it. You do not need a spreadsheet to figure out where this really is headed.”

My friend and that i kept walking to the restaurant discussing oil, gas and also 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 taking out cost curves to figure out who can keep drilling but still earn money. The list was pretty lean, which is why a large number of mega projects were shelved or cancelled in the last 18 months. At year-end, oil prices slid from $50 to $40. The main difference wasn’t measured in dollars, but in units of tension. However it didn’t stop there; likely to $30 a couple weeks ago caused white faces and a feeling of panic in the industry. Pundits closed their drilling spreadsheets and opened the ones that spoke to covering operating costs C in other words the oil price where producers start taking a loss just by activating their pump jacks.

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“Apparently, a lot of oil production can keep pumping for less than $20 a barrel; that’s what the operating cost curves are showing.”

“Maybe,” I replied, “but I’ve not seen any companies moving their scalp office into tents by their pump jacks. Those analyst numbers the thing is being quoted are operating costs at the wellhead. They do not include salaries, office overheads, rents, fixed fees, local taxes, not to mention the corporate debt.”

I explained that therein lies the problem with oil prices in the $20-range: Most of the world’s oil industry (Canada not unique) is gasping through a snorkel for cash. Ignore investment dollars; there’s no money to drill new wells when prices are below $30 let alone $20. Natural gas prices have collapsed too, as have petroleum products recently. The flow in ‘cash flow’ is drying up fast. For several companies just keeping the lights on and also the bankers behind the portcullis is really a money-losing proposition.

“Some analysts think that costs are likely to go sub-$20,” noted my friend as we walked as much as the restaurant door. “The world is awash in oil; an excessive amount of it in white storage tanks, underground caverns and floating tankers.”

“That’s true,” I said, “and that is what has me concerned. Individuals are starting to trivialize cheap, sub-$30 oil within the belief that it’s eternally plentiful. It isn’t.”

Think of it this way: imagine that supermarkets possess a large amount of food on the shelves, but behind the scenes the farmers and ranchers are going bankrupt. By analogy, suppose farm implement information mill also going bankrupt and farmhands are being laid off never to return; that’s what’s happening to equipment and labour within the global oilfield service sector.

“Like it or not, oil is still a vital commodity that’s growing in demand,” I said, “and the world’s oil supply system is near being permanently damaged at these prices.”

We sat down for supper. My friend was connecting the dots, “So if the continues, upstream supply is going to be trashed and the pundits will quickly be scrubbing their spreadsheets to see who can justify higher prices for extended.” Amused by their own analysis, he zeroed in on a conclusion, “The next few years could be really volatile.”

“I’ll refrain from investment recommendations until after lunch,” I replied. Menu open, I had been hungry yet thankful those meals prices hadn’t tanked and that the agrarian economy was still viable. At least one element of our societal subsistence was stable, I figured.