Woe is me? Not really. It’s January 2009 and the oilfield has slowed waaaay down. There is a glut of oil on the market and prices have come down farther than even I thought they would. People in the oilfield are getting panicky and you would think that there is another bust coming reminiscent of the 1980′s crash.
I tell you folks, it ain’t happening.
Here is what did happen. Oil went way up to fast. People that owned oil pumped as much as they could and sold it while it was high. Tankers full of the stuff went to every country in the world where they could sell it – and sell it they did…for a while. Then, omg, there was too much oil on the market and an oversupplied market means prices come down. Then, as Gomer Pyle says, “Surprise, surprise, surprise”, as prices came down and reserves filled up there were still huge tankers full of the stuff on the way to ports and they had to park and wait. Yeah, everyone connected to OPEC had tried to sell as much as they could as fast as they could and it screwed up the market. Why is oil down at this time? Greed. Pure unadulterated greed. Not that I blame them, hell, oil pays my salary, taxes and feeds my family. You know me, I say, “Drill baby drill”. But OPEC wears two faces. One face says we must produce a certain amount of oil to supply the market and keep prices high and the other face says, “Screw everyone else, lets sell as much as we can right now”. And of course the world was in the middle of a recession which was exacerbated by unsustainable oil prices and no one would admit that we were in trouble economically. When that caught up to us, the reserves were full and more tankers were on the way then prices crashed.
What about natural gas, you ask? Excellent question. Natural gas is married to oil. Now I’m not saying that natural gas is the groom or the bride – that is for more obtuse people than myself to figure out, but they are married nonetheless. Oil goes up, so does natural gas. Oil goes down, so does natural gas. Now, ok, not always. I never have known a bride and groom that agreed 100% of the time, but for the most part they do agree. And, naturally in a recession we are going to conserve energy and that means we use less than we normally would. I find it unusual that the New York City gate spot market may be selling natural gas for $14 per million btu’s when the Henry Hub future is five bucks, but the speculators have got to make a buck too. I mean, their moms aren’t going to make the payments on their Lear Jets for them, are they?
I was at the Arlington Hotel in Hot Springs, Arkansas in the late summer and ran into an older gentleman who is a “king maker” of sorts – you know the type, he helps politicians get elected or kicked out due to ignorance, and a couple of people who were just concerned with the price of oil and the high prices we were paying for gasoline at the time. I told them the same thing – and remember that oil was around $140 a barrel at the time – that oil was going to come down soon, and fast! I told them I thought oil would get to $60 a barrel – maybe a little lower – but would stay there until the economy improved. Ok, so I missed the bottom. If I could reliably predict the highs and lows of any commodity I would be the richest man in the world. But come down it did, and stay down it will until the economy improves. I apologize for breaking into “Yoda-ese” there, but that is my nature. I am short in stature and have fuzzy ears just like Yoda.
Part of the reason the worlds economy accelerated into a recession was because oil was too danged high! You can only suck so much money out of an economy in a given period before that economy crashes to the ground. When you have drained excess cash from an economy we go into a period of deflation which then causes EVERYTHING to be worth less than it was. The only people who like deflation are your log cabin living, tin foil hat people who don’t rely on currency on a regular basis because it validates their reasoning for storing a thousand cases of green beans in a cave near their domicile. Every one else hates it because their wages and goods go down in value and because not everything tanks at the same rate there are people who are hurt badly first – before everyone else gets hurt. The guys that drained all that cash from the world economy now find that their sources of income are worth much less than they were…Oh woe is me!
Now you know, I should be in a panic right now because things aren’t looking good for the oilfield in the immediate future, and my source of income may be cut off – but I am not. Why? Unlike Venezuela and the other OPEC countries that arbitrarily decided that oil was going to be high forever and started spending money they didn’t have, and making promises they couldn’t keep, I put my money in the bank – or maybe it is under my mattress, if I were you I wouldn’t try to find out. But seriously, I didn’t buy any gold-plated yachts or promise my friends a communist environment where I would pick up the tab. I’ve been here before and I didn’t like it the last time. The oilfield will come back. It always does, and sometimes it takes a while, but we need oil, and I promise you it will come back. The when will it come back is the “crux of the biscuit” as Mr. Zappa would say.
When will oil come back? I wish I knew, but my best guess is towards the middle of 2009. Will it come back to $140 a barrel? Hell no. If the oil producers were to cut production enough to cause an expected rise in the price to that level, world economies would tank before it got there, thus causing the price not to rise to that level due to, you guessed it, deflation. People would be jumping off that bus so fast you’d think Sandra Bullock had just informed us that the bus was going to explode. I should qualify that statement in that oil won’t come back to that price anytime soon, but due to inflation it will eventually get there. Want to know why? Sure you do. It won’t come back to those prices immediately because the free market oil companies will have learned a lesson from this most recent price drop. That lesson is this: “It is better to supply the market what it needs and make a reasonable profit than to make an unreasonable short term profit that the market can’t afford”. OPEC will likely never learn that lesson. They don’t have the solidarity to really control prices well. Members will always try to cheat a little and sell more than they are supposed to. This action will cause volatility in the market, but our American oil companies will continue to do what they do well – drill baby drill, sell baby sell, and keep a little in the ground for a rainy day.