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Cobb: Narrative of American oil self-sufficiency ‘is about to take a big hit’

Kurt Cobb, who writes about energy and the environment, has a piece in The Christian Science Monitor about how OPEC is targeting the U.S. shale-oil “revolution.’

Cobb says it was folly for some proponents of U.S. drilling to think that oil would remain above $100 a barrel indefinitely. At $70, U.S. operations aren’t profitable enough to remain at that output level.

Cobb begins:

To paraphrase Mark Twain: Rumors of OPEC’s demise have been greatly exaggerated.

Breathless coverage of the rise in U.S. oil production in the last few years has led some to declare that OPEC’s power in the oil market is now becoming irrelevant as America supposedly moves toward energy independence. This coverage, however, has obscured the fact that almost all of that rise in production has come in the form of high-cost tight oil found in deep shale deposits.

The rather silly assumption was that oil prices would continue to hover above $100 per barrel indefinitely, making the exploitation of that tight oil profitable indefinitely. Anyone who understood the economics of this type of production and the dynamics of the oil market knew better. And now, the overhyped narrative of American oil self-sufficiency is about to take a big hit.

Economist predicts ‘barbarity’ and ‘looting’ in Venezuela

The oil price slide has hit some countries much harder than others, and cracks already are beginning to appear in Venezuela’s socioeconomic system.

As NBC News reports, shortages of basic products, like toilet paper, toothpaste and medical supplies, have worsened as the price of oil has plummeted. The South American country, which is an OPEC member nation, pleaded with the cartel to reduce output to stabilize prices, but OPEC last week announced it would maintain production levels.

Venezuela, the world’s 12th-largest oil producer, needs oil to be about $200 a barrel to balance its budget, one analyst says. There have been sporadic protests over the shortages, and experts say that if the economy continues to falter and President Nicolas Maduro’s government has to raise taxes or eliminate gas subsidies for citizens, there could be unrest similar to the “Caracas disaster” of 1989, when falling prices brought on riots in which hundreds of people were killed.

The NBC story goes on:

Experts predict the situation in Venezuela will worsen as early as the first half of 2015.

“It will be a year of extreme scarcity,” Venezuelan economist Angel Garcia Banchs said. “What’s coming to Venezuela is chaos that will probably lead to barbarity and people looting. “

Hofmeister interviewed on NBC’s ‘Meet The Press’

John Hofmeister, a Fuel Freedom board advisor and the former president of Shell Oil Co., appeared on NBC’s “Meet the Press” on Nov. 23 to discuss the falling price of oil.

Watch a clip here:

Watch the entire “MTP” program here (Hofmeister comes on about the 35:20 mark), and read the transcript here.

Hofmeister, appearing along with author Daniel Yergin, was asked by host Chuck Todd whether lower-priced oil amounted to an extra sanction against Russia and Iran, which already are burdened by sanctions — Russia for its actions in Ukraine and Iran for its pursuit of a nuclear program.

Hofmeister replied:

It is. It’s an extra sanction because it reduces their economic clout. Well, we’ve seen what happened to the Russian ruble. Iran is not able to subsidize many of its programs.

CHUCK TODD:

They need to have oil to be at $100 or more a barrel for them to balance their budget.

JOHN HOFMEISTER:

Yeah, the estimates are Russia needs well over $100, Iran even more. And the consequence of that is the people of Russia, the people of Iran will suffer as a consequence of the low oil price. That’s why the panicked feeling within the OPEC meeting coming up on Thursday.

As we know, at that meeting, OPEC decided not to cut production quotas, effectively ensuring that oil prices would not stabilize in the near future.

As The Wall Street Journal reports, Saudi Arabia, OPEC’s largest producer, now believes that oil will settle at about $60, down from about $110 over the summer.

Hofmeister said that, despite the worldwide surplus of oil, the U.S. should keep pumping, in anticipation of demand coming back:

… the reality is, we will be short of oil in the world over the next several years as global growth exceeds oil production. So we need all the production we can have. We need all the infrastructure we can build to make sure the U.S. is taken care of.

Hofmeister, author of the book Why We Hate the Oil Companies, has much more to say about oil in the Fuel Freedom-produced documentary PUMP. The film is now available for pre-order on iTunes. Visit PumpTheMovie.com to watch a trailer and learn more.

Oil makes biggest one-day price jump in 2 years

Have we seen the bottom of the great oil-price plunge of 2014?

Experts say not yet. But oil prices rose sharply Monday, making their biggest jump in two years: Nymex crude-oil futures rose 4.78 percent, to $69.31 a barrel. And Brent crude, the international benchmark, rose 3 percent, to $72.54. It had been down as low as $67.53 earlier in the day, the lowest it’s been since July 2009.

Oil is down about one-third since June, and late last week the commodity plunged even more precipitously after OPEC announced it would not stem the price drop by ramping up production among its 12 member nations. But some analysts saw Monday’s jump as merely profit-taking after last week’s sell-off.

From The Wall Street Journal:

… many market watchers were skeptical that Monday’s gains signaled that oil prices had reached their bottom, pointing to global supplies that continue to overwhelm demand.

Many investors and analysts believe with OPEC on the sidelines it will take cutbacks by companies in the U.S. and Canada to bring supply and demand in line and pull the market out of its swoon. That day may not come until deep into 2015 or beyond, some analysts say.

From Reuters:

“The market clearly got a little overdone to the downside and now it’s coming back up, proof that there will be a response from the shale patch to these low prices,” said John Kilduff, partner at energy hedge fund Again Capital in New York. “Several shale companies are already reporting capital expenditure reductions next year as their profit margins get thinned out.”

On Wall Street, shares of shale energy companies such as Denbury Resources (DNR.N) and Newfield Exploration (NFX.N) took a beating for a second straight session, down about 5 percent each in late afternoon trade.

Data reviewed by Reuters on Monday showed the new low-price environment for oil might have started affecting U.S. shale production, with a 15 percent drop in permits issued for new shale wells in October.

Fight oil addiction on Cyber Monday: Pre-order PUMP on iTunes

Sure, you could spend your hard-earned money on just about anything on this Cyber Monday.

But while you’re busy pointing and clicking and helping the U.S. economy, don’t miss the chance to be among the first shoppers to pre-order the Fuel Freedom-produced documentary PUMP. It’s available for presale on iTunes.

Go to this link to learn more: http://bit.ly/1yyMEMD

The cost is $9.99 for standard definition, or $12.99 for high-def. By pre-ordering, you’ll be first in line when the film is released digitally on Jan. 13, 2015.

PUMP, directed by Joshua Tickell and Rebecca Harrell Tickell, and narrated by Jason Bateman, tells the story of America’s addiction to oil, from its corporate conspiracy beginnings to its current monopoly. The film combines fascinating historical context with inspiring, practical lessons from today. The film explains clearly and simply how we can end our oil dependence, and finally win choice at the pump.

PUMP-Poster_postForcing gasoline to compete at the pump with cleaner-burning, domestically produced replacement fuels like ethanol, methanol and compressed natural gas (CNG) will:

  • keep fuel costs low for consumers, insulating them from inevitable price shocks
  • strengthen the U.S. economy by keeping more of our fuel dollars here at home
  • create millions of jobs thanks to higher demand for homegrown fuels
  • improve air quality, bringing down incidence of asthma and heart disease
  • cut carbon emissions that trap heat in the atmosphere

Visit PumpTheMovie.com to watch the trailer; learn more about the making of the film; meet some of its stars (including Tesla founder Elon Musk and former Shell Oil president John Hofmeister); and read the favorable reviews PUMP received upon its release in theaters in September. Spend a few minutes on the site and you’ll see just how crucial this issue is for Americans.

Pre-order PUMP on iTunes today!

(Photo above: Auto engineer John Brackett shows in PUMP how to optimize a gasoline-powered vehicle to run other types of fuel, including cleaner-burning, higher-octane ethanol and methanol. Credit: Submarine Deluxe)

OPEC stands pat … will $70 oil be the new normal?

The big news in the international oil markets last week was that OPEC decided not to cut production, which would have propped up free-falling prices, at least temporarily.

OPEC’s non-action sent oil prices falling further Friday, with the Brent benchmark slipping below $70 for the first time in four years.

NPR reports that some experts say oil in the range of $70 a barrel could last through 2015:

Igor Sechin, the head of Russia’s Rosneft, says he thinks oil prices will average $70-75 per barrel through 2015. That prediction was in line with what Bill Hubard, chief economist at Markets.com, told Reuters: “I think $70 a barrel will be the new norm. We could see oil go considerably lower.”

Some OPEC member nations, including Iran and Venezuela, which need a higher oil price to pay for their generous public services, had been pushing for the cartel to ease back on production to halt the plunge in prices. A moderate pullback would have come amid a global oil glut, thanks in part to reduced demand in Asia and Europe, as well as soaring production in the U.S.

Iran’s oil minister, Bijan Namdar Zanganeh, said OPEC’s decision was no guarantee that the United States would scale back production in North Dakota and Texas, a surge aided by advances in hydraulic fracturing.

“High prices are a disadvantage to OPEC’s market share,” Zanganeh said, according to Bloomberg. “If you want to increase your share, you have to reduce prices, but you can’t do it through ‘shock therapy’ over the course of three months if you want to change everything.”

Whatever OPEC does, U.S. oil companies will keep drilling

Bloomberg has a story about what U.S. drillers will do in response to whatever OPEC does this week at its regular meeting.

OPEC, led by its top producer, Saudi Arabia, will do one of two things: Nothing, which means the cartel’s output will remain unchanged, and crude prices will say flat (or keep sliding). Or it could cut production, which “would lift prices and profits across the board and help finance further U.S. energy innovation,” the Bloomberg story says.

Either way, U.S. producers will have the same response: Drill on.

“The industry is very resilient, as strong as ever in recent history,” Tony Sanchez III, chief executive of Texas producer Sanchez Energy Corp. (SN), said in an interview. “The technological advances we’ve made underpin virtually everything right now.”

A continued price plunge would put more pressure on U.S. companies, but they’re increasingly insulated by OPEC’s actions, the story says.

The swagger of U.S. producers in the face of plunging oil prices shows the confidence they’ve gained from upending OPEC’s six decades of market dominance with technology that wrings oil from dense rock for prices as low as $40 a barrel. The shale boom has placed the U.S. oil industry in its strongest position since OPEC began flexing its pricing power in the early 1970s.

By health check or economic necessity: A tale of two oil industries and their response to illness

By John Hofmeister and Marshall Kaplan

shutterstock_118647259A bad cold starts with a tickle in the throat and a languid day. It grows to painful swallows, stuffed sinuses and likely a fever. Does the patient treat the symptoms? Does he or she transform to avoid illness in the future?

Few oil company players will admit to it yet, but the future threatens a very bad cold for the current industry, or worse. Very few feel it coming because current business plans are robust and the workload is on overload. When they are recognized, the threats to the current business model are going to take more than treating the symptoms; there are transformative requirements to avoid getting permanently sick, including, for many, a difficult transition to alternative fuels. The industry’s investors are not likely to remain committed to oil. Neither are the politicians, the Wall Street analysts and the public who, for different reasons, some economic and some with concerns for the environment, are already shaky with respect to the future of oil. Unenthused investors actions, however, will speak much louder than concerned words.

Everyone agrees that conventional oil has peaked. Unconventional oil may be abundant, but it’s expensive. It’s so expensive that industry valuation is already being impacted by worried investors who don’t like companies borrowing cash to pay dividends. Shale formation decline rates demand evermore drilling. Drilling costs increase as more wells per amount of production are completed, raising per barrel costs. Sweet spots are finite as the majors have learned the hard way. They bought into many plays too late. The Middle East is, well, the Middle East. Don’t look for reduced tension in the near future. Do look for OPEC nations to increasingly shift oil for export into oil for local consumption — a residual of the Arab Spring. Business as usual is history. Brazilian, East African, Russian and Arctic production opportunities abound, except that the degrees of difficulty are unclear and uncertain, but are sure to be costly. The high costs and regulatory uncertainties of oil limit global growth and nourish alternative fuel prospects. Oil investors don’t like sore throats emerging from hard to swallow realities. They will want to create a new reality to protect their financial wellbeing.

The costs of carbon have yet to be added onto oil and we know they’re coming. There’s debate over the form of payment, not the reality. Take a look not only at the number of governments backing carbon constraints coming out of this year’s climate meeting at the UN, but, more importantly, count the companies! Count the crowd recently claiming the high ground from Central Park to Midtown in New York and other cities around the world. The oil industry’s low favorability gives it limited public influence. While special-interest money may run out the clock on near-term legislation in the next Congress, for the industry, it not a long term solution. Civil society and political trends are inevitably contrary to the industry’s status quo interests. The rhetoric alone will tax the bronchial capacity of oil and gas leaders; investors will cease shaking hands with infected stocks.

Cash is to oil what gasoline is to the internal combustion engine. Higher upstream costs and more expensive fuels reduce consumer demand and, inevitably, cash flow. Downstream cash can’t make up the difference for higher upstream capital (cash) outlays when consumers drive less or take advantage of increasing availability of lower-cost alternative fuels, despite the BTU and/or mileage disadvantages of alcohol fuels versus oil products.

Finally, when divestment trends start to impact the industry, perhaps initially not directly through actual shifting of resources, but because of the growing perceptions of the risk of stranded assets, opportunity costing equations will begin to hit hard. The value associated with increasing capital costs for oil development will be muted. With ever higher costs, more difficult unconventional production, more challenging resource basins and tighter regulatory scrutiny, along with environmental constraints, existing assets may never get produced. The probable reserve that never makes it to proven becomes ever less valuable with time, perhaps even worthless. Investors don’t like that. Oil price to support such production is unsustainable; the price rises until it crashes; production cannot recover from the collapse because sustainable alternative fuels will have taken increasing market share. To remain competitive, oil may not be able to climb above the $55 – 75 range. This prospect will cause full blown pneumonia for oil companies. Most still do not see it coming. For OPEC countries who are under inconsistent pressures — first to increase exports for needed revenues at home to fund services for an often restive population; second, to reduce exports to provide energy and gasoline products to larger population numbers, it could present real challenges affecting political stability.

Some companies that sense it coming will not wait for the cold symptoms to lodge in their respiratory systems. They will get out in front with natural gas, using an entirely different cost/price structure to displace high cost oil by producing natural gas for fuels, including ethanol, methanol, CNG and LNG. They’ll also embrace biofuels as a sustainable and carbon-reducing alternative to oil products only. In both cases, their cash flows and capital outlays will fund reasonable and rational alternative investments in downstream and midstream infrastructure to produce, distribute and sell alternative fuels, extending their business models and capabilities rather than risking everything on their past model. They’ll choose investor and their own health and economic necessity as the basis of a new business model transforming the mobility industry with fuels competition.

A handful of smart companies will astutely come to grips with their industry’s endemic inability to change their historic focus on oil as their base business. They’ll see diversity as an opportunity to run the race with competitive fuels, and they’ll recognize that oil and gasoline will only be able to sustain their monopoly status at the pump for a relatively short period of time. They will trade one form of steel in the ground for another, bringing the competencies of size, scale and execution to an ever-growing, oil-displacing, alternative fuels industry. In the process, they will simultaneously reduce the size of the oil upstream capital, cash, environmental and stranded asset problems that alienated investors, and, at times, the public, particularly related to emissions and other pollutants.

With a proper health check, after scanning the industry’s economic and environmental horizons, they acknowledge the inevitability of the changing critical role of investors. Their own financial health and economic necessity will redefine the role of oil and change the competitive landscape.

 

John Hofmeister, Former President Shell Oil Company (retired), Founder and CEO Citizens for Affordable Energy, Author of Why We Hate the Oil Companies: Straight Talk from an Energy Insider (Palgrave Macmillan 2010)

Marshall Kaplan, Advisor Fuel Freedom and Merage Foundations, Senior Official in Kennedy and Carter Administrations, Author

Religion, structural changes in the oil Industry and the price of oil and gasoline

Oil barrelAmericans — in light of the decline in oil and gas prices — don’t take happy selfies just yet! Clearly, the recent movement of oil prices per barrel below $80 and the cost of gasoline at the pump below $3 a gallon lend cause for, at least strategically, repressed joy among particularly low-income consumers, many of whose budgets for holiday shopping have been expanded near 10 percent. Retail stores are expressing their commitment to the holiday by beginning Christmas sales pre-Thanksgiving. Sure, sales profits were involved in their decisions, once it appeared to them that lower gas prices were here to stay, at least for a while. But don’t be cynical; I am sure the spirit moved them to play carols as background music and to see if in-store decorations made it easier for shoppers to get by headlines of war, climate change and other negative stuff and into, well yes, a buying mood. If retail sales exceed last year’s and GNP is positively affected, it will provide testimony and reaffirm belief that God is on America and the free market’s side, or at least the side of shopping malls and maybe even downtowns. Religious conversions might be up this year…all because of lower costs of gasoline at the pump. The power of the pump!

But, holy Moses (I am ecumenical), we really haven’t been taken across the newly replenished figurative Red Sea yet. There are road signs suggesting we won’t get there, partly because of the historical and current behavior of the oil industry. Why do I say this?

If history is prologue, EIA’s recent projections related to the continued decline of oil and gasoline prices will undergo revisions relatively soon, maybe in 6 months to a year or so. I suspect they will reflect the agency’s long-held view that prices will escalate higher during this and the next decade. Tension in the Middle East, a Saudi/OPEC change of heart on keeping oil prices low, a healthier U.S. economy, continued demand from Asia (particularly China), slower U.S. oil shale well development as well as higher drilling costs and the relatively short productive life span of tight oil wells, and more rigorous state environmental as well as fracking policies, will likely generate a hike in oil and gasoline prices. Owners, who were recently motivated to buy gas-guzzling vehicles because of low gas prices, once again, may soon find it increasingly expensive to travel on highways built by earthlings.

Forget the alternative; that is, like Moses, going to the Promised Land on a highway created by a power greater than your friendly contractor and with access to cheap gas to boot. Moses was lucky he got through in time and his costs were marginal. He was probably pushed by favorable tides and friendly winds. The wonderful Godly thing! He and his colleagues secured low costs and quick trips through the parting waters.

Added to the by-now conventional litany concerning variables affecting the short- and long-term cost and price of gasoline and oil (described in the preceding paragraph), will likely be the possible structural changes that might take place in the oil industry. If they occur, it will lead to higher costs and prices. Indeed, some are already occurring. Halliburton, one of the sinners in Iraq concerning overpricing services and other borderline practices (motivated by the fear of lower gas prices), has succeeded in taking over Baker Hughes for near $35 billion. If approved by U.S. regulators, the combined company will control approximately 30 percent of the oil and gas services market. According to experts, the new entity could capture near 40 percent relatively quickly. Sounds like a perfect case for anti-trust folks or, if not, higher oil and gas costs for consumers.

Several experts believe that if low gas prices continue, oil companies will examine other profit-making, competition-limiting and price-raising activities, including further mergers and acquisitions. Some bright iconoclasts among them even suggest that companies may try to develop and produce alternative fuels.

Amen! Nirvana! Perhaps someday oil companies will push for an Open Fuels Law, conversion of cars to flex-fuel vehicles and competition at the pump…if they can make a buck or two. Maybe they will repent for past monopolistic practices. But don’t hold your breath! Opportunity costing for oil companies is complex and unlikely to quickly breed such public-interest related decisions. Happy Thanksgiving!

Brent crude falls below $80 for first time since 2010

The price of Brent crude, the global benchmark for oil, dropped Wednesday below $80 for the first time since 2010.

As Financial Times points out, the price fell despite OPEC announcing that crude output had declined by about 230,000 barrels a day in October, compared with September.

But markets didn’t perceive this as a deeper change in policy and instead focused on comments made by Saudi Arabia’s oil minister, Ali al-Naimi.

Mr. Naimi broke months of silence on Wednesday to speak publicly about the Gulf nation’s stance on the oil market.

He kept mum on whether Saudi Arabia would cut output to remove surplus oil from the market in response to dramatically lower Brent crude prices. However he dismissed claims that it had triggered a “price war”.

“Talk of a price war is a sign of misunderstanding, deliberate or otherwise, and has no basis in reality,” Mr Naimi said, according to Reuters. “We do not set the oil price. The market sets the prices.”