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How low can oil go? I'm betting $36 per barrel.
Oil's Heading For $40, For Shale Oil Is A Free Market And Opec's A Cartel
In fact, prices are being forced down not by any action (or inaction) of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits. “Collectively, they’re not the most sophisticated folks, especially when it comes to world markets,” says Charles Ebinger, a senior fellow in the Energy Security Initiative at the Brookings Institution.
With apologies to Ebinger, the shale producers don’t need to be sophisticates. Each operator is so small, it can increase production without pushing down the market price. That makes them price “takers,” not price setters. And because shale wells are short-lived, producers don’t have to plan far ahead, says Karr Ingham, a petroleum economist in Amarillo, Texas. Singly the shale busters are nothing. Collectively, their breakneck production is breaking OPEC’s neck. This is the remorseless, leaderless free market at work.
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For a shale well the costs are mostly upfront. Drilling and fracking the well itself, of course. Once that has been done there’s minimal cost in collecting the resultant production. This means that pretty much whatever the oil price you’re going to keep in production a well that you’ve already drilled. Say, just to invent a number, it costs $5 million to get a well going. Once you’ve done that whether the well is going to be profitable overall is entirely irrelevant. You’ve got large sunk costs there, sure, but the relevant number for whether to keep collecting the oil is whether the price you get for it is higher than the costs of collecting it, not higher than the costs of drilling in the first place. Further, you don’t produce enough to change the price you receive (well, not quite, each barrel of production does change the global price infinitessimaly, we’ve a Sorites Paradox here, but no individual producer is going to notice by how much they change that global price). Thus the sensible option is, once you’ve drilled the well, simply to keep pumping whatever the price.
In fact, prices are being forced down not by any action (or inaction) of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits. “Collectively, they’re not the most sophisticated folks, especially when it comes to world markets,” says Charles Ebinger, a senior fellow in the Energy Security Initiative at the Brookings Institution.
With apologies to Ebinger, the shale producers don’t need to be sophisticates. Each operator is so small, it can increase production without pushing down the market price. That makes them price “takers,” not price setters. And because shale wells are short-lived, producers don’t have to plan far ahead, says Karr Ingham, a petroleum economist in Amarillo, Texas. Singly the shale busters are nothing. Collectively, their breakneck production is breaking OPEC’s neck. This is the remorseless, leaderless free market at work.
...
For a shale well the costs are mostly upfront. Drilling and fracking the well itself, of course. Once that has been done there’s minimal cost in collecting the resultant production. This means that pretty much whatever the oil price you’re going to keep in production a well that you’ve already drilled. Say, just to invent a number, it costs $5 million to get a well going. Once you’ve done that whether the well is going to be profitable overall is entirely irrelevant. You’ve got large sunk costs there, sure, but the relevant number for whether to keep collecting the oil is whether the price you get for it is higher than the costs of collecting it, not higher than the costs of drilling in the first place. Further, you don’t produce enough to change the price you receive (well, not quite, each barrel of production does change the global price infinitessimaly, we’ve a Sorites Paradox here, but no individual producer is going to notice by how much they change that global price). Thus the sensible option is, once you’ve drilled the well, simply to keep pumping whatever the price.
U.A.E. Sees OPEC Output Unchanged Even If Oil Falls to $40
According to Reuters, the OPEC chief said the group’s decision to leave its output levels unchanged last month was not aimed at any other crude producer: “Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran. And Russia. This also is incorrect.”
At the same Dubai event, Suhail Al-Mazrouei, the energy minister of the United Arab Emirates, said OPEC will not immediately change its Nov. 27 decision to keep the group’s collective output level at 30 million barrels per day, Bloomberg News reported. “We are not going to change our minds because the prices went to $60 or to $40,” he told the news agency. Before calling an emergency meeting, he said, “We need to wait for at least a quarter.”
According to Reuters, the OPEC chief said the group’s decision to leave its output levels unchanged last month was not aimed at any other crude producer: “Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran. And Russia. This also is incorrect.”
At the same Dubai event, Suhail Al-Mazrouei, the energy minister of the United Arab Emirates, said OPEC will not immediately change its Nov. 27 decision to keep the group’s collective output level at 30 million barrels per day, Bloomberg News reported. “We are not going to change our minds because the prices went to $60 or to $40,” he told the news agency. Before calling an emergency meeting, he said, “We need to wait for at least a quarter.”
Looks like the good old free market is poking at the cartel and there ain't nothing nobody can do about it.
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