Monday, September 14, 2015

Understanding Oil And Oil Prices .....AN ABSOLUTE MUST READ!

Understanding Oil And Oil Prices

It's not the oil prices that are significant; it's the change in oil prices. If you own an oil field and it costs you $75 to produce a barrel, at $110 a barrel ($110/bbl), you're OK. If oil drops to $45/bbl, you're in serious trouble.

In the shale oil sector, producers were taking out hundreds of billions of dollars in loans to finance shale oil that was costing them about $110/bbl to produce. It looked good on paper, but was a disaster waiting to happen. A lot of people in the shale oil business will soon be going out of business.

This could start World War III. The United States is the biggest oil producer in the world today, and Russia is number two. Russia's economy is based on oil priced at $110/bbl. They are very angry at the U.S. and Saudi Arabia for the games that have been played in oil. Oil at $45/bbl is not sustainable. 

It could bring down the world's financial system all by itself.

The real cost of energy today is $60 to $70/bbl. Oil is way below the cost of production, and that's going to hurt a lot of people.

The Saudis are doing this to wipe out some of the Russian, shale and deepwater production.

It's an economic act of war. The Saudis did it to get at the Russians and to get at Iran and the U.S. The Saudis have the cheapest cost of oil in the world. They could put everybody else out of business. The Saudis think that's a good thing. It's an extremely dangerous thing. It's like pulling the pin off a hand grenade and playing hot potato with it. At the end of the day the potato blows up.

Everybody is overproducing to beat demand. The volume of oil in storage is as high as it has ever been. Oil is selling at about $50/bbl today, but if you store it for three months you can get $60/bbl for it. That gives everybody a big incentive to buy oil and store it.

I would guess that 98% of a producer's sunk costs have been spent before he produces his first barrel. There's no economic incentive for shutting the well off.

Shale wells, on the other hand, deplete very rapidly. Once you've spent the money, you have to produce like crazy to pay for production, no matter what the oil price is.

I'm not sure we've seen the bottom. Oil could and probably will drop to $30/bbl. The longer low prices continue, the more destructive it will be to both the financial and political systems. An oil price below $40/bbl could mean a shooting war.

The catalyst was the U.S. spending $5 billion interfering in Ukraine over the last 10 years. We paid for a coup d'├ętat. We overthrew Ukraine's legitimate government, and we're supplying arms and ammunition to the thugs now running Ukraine. Our government is demonizing Vladimir Putin, but Ukraine was part of Russia for 500 years. We are supporting the terrorism, and Putin is actually being quite rational. When he says this could start a shooting war, I believe him. And we will lose again, just as we have all the other insane wars of the last 15 years.

President Obama has threatened to kick Russia out of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which would mean Russians could no longer receive or send money abroad. That's an act of war.

We are trying to affect regime change in Russia. It's not going to work any more than it did in Afghanistan, Iraq, Iran or Libya. We are fooling with things that we just simply shouldn't be fooling with.

We've been fighting with Russia for 10 years. Now Russia may decide that it wants to fight with us. Actually, I was wrong about the price of oil when it came to a shooting war: It wasn't $40/bbl oil. It was sub-$50/bbl oil. There is a shooting war going on in the Ukraine right now.

Will a shooting war expand beyond Ukraine?

When any war begins, people start off stupid and they only get dumber. So the answer is yeah, absolutely.

Will the European Union (EU) get involved?

The EU is already involved. If the EU had any sense, it would step back and stop the sanctions. When the Russians countered the sanctions, it hurt the EU tremendously.

Russia has an advantage over the EU since it's acquired the vast majority of the EU's natural gas. Russia has some pretty powerful weapons.

How are oil companies surviving at $40-50/bbl oil? What will be the fallout of that price point?

The fallout of all of this will be $200/bbl oil, once this all plays out, the price of oil will scream higher based on supply and demand fundamentals and the economic repercussions will be catastrophic!  

The strongest companies will survive because they don't spend money extracting oil. They spend money drilling for oil. When the price goes down, they stop drilling. The number of rigs in service is getting slashed at a tremendous rate and will continue.

That has an equal and opposite reaction. If you go for six or 12 months without drilling wells, you end up with a shortage as the older wells deplete. And that's when you end up with $200/bbl oil.

Companies are surviving because they're on the tail of the investment. How long will the tail last before we see depletion in oil production?

Six months to a year, which is a long time in the oil business.

It all goes back to derivatives and central banks going into quantitative easing. When you can borrow an unlimited amount of money to drill for shale oil, you don't care about viability. If the price of oil goes up, you make money. If the price of oil goes down, you declare bankruptcy and stiff the bank. That's a foolish way to conduct business, but it's what we've gotten into with these enormous sums of money sloshing around. It's a scary time. 

We're going to look back and say, why didn't somebody warn us? Why didn't somebody tell the truth? GREED!

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