Ken Barrows
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jal,
Are you saying Bakken oil is positive cash flow (or even close) at current prices? If you are, I want to see some data.Huck,
My man. The value of an asset, of course, is dependent on the ability to acquire more debt somewhere in the system. And don’t everyone sell at once! I have no disagreement that the society you love continues as long as credit flows. And I suppose you think it will flow forever: there’s the disagreement.It is also true that the value of these assets, e.g. buildings, are dependent on a supply of relatively cheap oil, gas, and electricity. If that ends, values will change rapidly.
In the long term, if there isn’t a price where marginal oil production can be profitable to the producer AND affordable to the consumer, our way of life is sunk, which is probably as it should be.
I don’t doubt that the margin of error on these numbers is large. However, having worked at a state department of labor in the 1990s, I can say that the establishment survey covers a much larger sample than the household one.
I don’t think Chandler has it right. The drop of oil will indeed mean shale is not profitable. Heck, it wasn’t profitable for many operators at $100/barrel. Drillers need the financing because it’s negative cash flow (chronically) and NOT profitable.
One may ask how can a drilling operation get financing and not be profitable. The answer: Ponzi scheme.
The USA seems to get a 20%+ increase in online sales every year. That’s a doubling in less than four years. So, I guess we’ll all be millionaires in a short period of time. Ain’t consumerism grand?
jal,
No argument about much lower cost for Middle East oil. It may be that a credit crunch means that even $10/barrel oil is unaffordable.
jal,
Maybe EIA is pulling these numbers out of its a**? Here’s the Bakken:
https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf
Assuming $6M per well may be overstating cost and, of course, costs can go down. Then, again maybe not:
https://www.willistonherald.com/most_recent/bakken-future-is-bright/article_4ebec138-bff9-11e3-b9ca-0019bb2963f4.html
So can Bakken producers cut lifting costs by 80-90%? It’s quite the challenge.iulian,
I think you’re wrong and you’re almost certainly wrong on new production. But post a link or two if you like.EM’s profit per dollar of revenue is MUCH lower than, say, Apple or JPMorganChase.
The Fed isn’t audited, so who knows what it buys. It has admitted to buying mortgage backed securities (MBS) as well as Treasuries.
We know that the cost of shale oil is $60/barrel? No one ever shows their work on this issue.
I say higher:
https://www.dmr.nd.gov/oilgas/stats/statisticsvw.aspIf it is $60, no worries right now just a lower profit margin. If higher, drillers are strongly negative cash flow. I used to think that mattered, but maybe not. Government can always subsidize a little more.
If subsidies reign, then we’re looking at energetic limits. Less energy recovered in the extraction than in the input.
Isn’t the simple fact that one makes a living trading the “markets” (however well) indication enough that s/he isn’t really concerned with societal well-being? The trader may think s/he creates wealth (you define it!) that will trickle down, but such an opinion is wrong.
So Bloomberg sees 104 million barrels per day oil consumption in 2040. Is their only analytical tool a ruler?
One has to admire, if detached, how the system keeps going. If you told me at the beginning of 2014 that the S & P would be up about 11% on November 10th while oil prices would be down about 20%, I’d would have laughed. Stock and bond prices are all that TPTB have got left. It may have a while to run, but when it goes, that’s when it gets interesting…and scary.
The perception, IMO, is that the Fed still is ready to backstop if needed. When that goes, look out!
Fed has been buying up collateral. The banks aren’t loaning extravagantly with the credit received from the Fed. So why keep doing QE? As long as the system knows the Fed has its back if necessary, it’s all good. The private sector can create its own money/credit (for stock purchases) in the meantime.
So health care workers will risk their lives to treat Ebola victims in West Africa but ONLY IF they are not imprisoned for three weeks after? Do I have that right?
Hmmm. Credit is the tightest in decades, but total market credit debt continues to rise. What a conundrum!
https://research.stlouisfed.org/fred2/series/TCMDO
I guess it’s because it’s still easy for corporations and government to borrow.Growth (net of debt) ended in the USA and Europe about when Robert Kennedy was assassinated. Japan’s ended by the late 80s, if not sooner. China’s has ended. It just takes a while for the political class to realize it: a half century or more.
And the acidification of oceans, too.
I don’t know why, but 99% of Americans feel the gravy train is endless. We think they’re wrong. Culture and media aside, what does that say about human nature?
It’s either humans are a mindless ape or the small minority is very deluded. I hope I am deluded; )
Bakken adds about 1800 new wells per year at $6M apiece. From that activity, less than $1B additional revenue year over year (assuming $100/barrel). If the State of North Dakota table is close to right, it costs not UP TO $80 but much more than $80/barrel.
I wonder what TPTB think about the effects of rising rates. I see it burying the American debtor and ending the fracking boom quickly, but who knows?
I am sure that we’ll get a comment or two about no climate change going on. If that’s so, the ocean acidification will get us instead.
I have heard Schiff on video a couple of times and get the suspicion he’s a sociopath. But why psychoanalyze?
I was worried until this piece of news hit the wire:
https://www.zerohedge.com/news/2014-09-24/new-home-sales-explode-higher-thanks-record-high-average-new-home-prices
Got to love the seasonally adjusted annualized rate (SAAR)!The SNP may be really awful, but devolution will be a trend throughout this century. So why not become independent now and then try to elect good candidates? Doing so in a nation of 5 1/2 million is a lot easier than 60+ million.
Right. And that’s why I think that TPTB don’t want interest rates to rise. If they do, TPTB have lost control. At this point, they still have it–albeit tenuously.
Debt may not be necessary, but take it away and we better transfer away from oil really quick. Giving up our cars would be a start.
The good thing about the argument that growth is over without debt is that future statistics can, in theory, disprove it. But they won’t.
Have to disagree here. Any additional interest income from higher rates will be wiped out by greater defaults. I don’t think the US economy can grow with a 10Y UST much above 3%. If the economy isn’t perceived to be growing, the big banks won’t be very profitable. Low rates and deflation is TAE’s position, right?
To keep the US, EU, Japan, China, etc. going, interest rates have to be low. Maybe Ms. Yellen thinks a higher interest rate will aid her constituency, but she does have a history of being pretty clueless.
As time passes, the Federal Reserve will appear to be comedy. It is an institution claiming to create wealth but failing to realize that just about all members of society don’t create wealth. Rather we take and take some more. FR will continue to talk about productivity but fail to realize that if the economy were really productive, total debt wouldn’t skyrocket. Let’s have a good laugh.
Oil should rise to cover the costs of drilling for new oil, but a growing economy cannot afford it so it doesn’t. In the geopolitical turmoil of a few weeks back, the increases were more subdued than the Syrian headlines last year. I think prices across the economy will rise before the oil price. Remember, finance is absurd and banks are stupid. Drillers in the Bakken will continue intensive drilling until the financial institutions give the thumbs down.
Professorlocknload,
I think you’re right about demand destruction or perceived destruction anyway. Cash flow is so negative even at $100, so a price drop just makes it slightly more negative. For whatever reason, drilling isn’t slowing in the Bakken yet . Finance is a magical, and absurd, thing.
Incredibly, I think we underestimate the absurdity of the economy. At $100/barrel for oil, the marginal cost in the Bakken is multiples over marginal revenue. Yet oil heads south from $100 and now below $95. Furthermore, the drillers keep drilling, maybe even faster. So, interest rates rising may not cause havoc; a few well placed bankruptcies might. Such insolvencies, though, may not happen anytime soon.
Polistra,
If the environmentalists caused American manufacturing to leave, you’d think big corporate would have given them a hearty thank you for making it easier to switch to cheaper labor (which started earlier from the northern US to the southern).
As a America, I think our culture is indeed sleepwalking. Don’t know, though, about putting MLK and Muhammad Ali in the same sentence.
What does it mean? It means a growing economy cannot take higher prices for oil. It will be interesting to see how long prices can fall and production rise in tandem. Any wagers?
