Last week, when Saudi Arabia let it leak that the kingdom has no intention of leading OPEC toward another cut in production to accommodate the growing volumes of oil from American shale deposits, it was another sign that the Saudi war on shale actually never ended.
To properly understand this announcement, we need to return to last fall. Most people believed then that the cuts agreed to by OPEC under Saudi leadership marked the end of Saudi Arabia's war on shale oil in America. At the time I cautioned against such a conclusion, and said I was doubtful that there would actually be any decline in world oil production because the Saudis didn't really want a decline.
And, guess what? The OPEC cuts have yet to be fully implemented and have been offset by rising production elsewhere. Furthermore, the Saudis are now complaining that the Russians who, though not part of OPEC, agreed to cuts to support prices, are not keeping their end of the bargain. The Saudis are practicing a marvelous bit of misdirection to keep any blame away from themselves. With the Saudis, it's always necessary to look at the entire game board in order to understand their moves.
So, why are the Saudis content to allow oil prices to remain this low and possibly drift lower? I believe it's because their war on shale never ended; they mean to destroy the long-term financial viability of oil from shale deposits--and that job won't be finished until investors say, "Never again!" Related: Can Oil Supply Keep Up With Surging Demand?
Apparently, investors in American shale deposits have very short memories, or they have not had enough punishment. They continue to pour money into the Permian Basin located in Texas and New Mexico. The Permian is likely to be the only U.S. shale oil deposit that will see growth in oil production this year as low prices continue to take their toll on other shale plays such as the Bakken in North Dakota.
But there are only so many profitable sites in the Permian, and with the continuing rush of capital into the area, the good ones will start to run short at some point. We'll only know that's happened when the second great wave of wealth destruction in the shale fields begins as I suspect it will in the not-to-distant future.
And don't be surprised if the Saudis are content to let oil prices drop into the $20 range again just to get their point across.
As the next round of capital destruction begins, be prepared for stories about how dramatic efficiency gains in drilling operations are making it possible to bank profits in the Permian at an oil price of $40 per barrel. Then watch the same story repeat for $30 per barrel. Related: Why Is Big Oil Backing The Paris Climate Agreement?
The last time we saw this movie there were dubious claims that oil in the higher-cost Bakken could be extracted profitably even with prices at $30 per barrel. As prices have stabilized around $50 per barrel, Bakken production has continued to decline. In part this has been because realized prices have been much lower due to lack of pipeline capacity. This has meant most Bakken oil must be shipped by rail tank car which is expensive.
Maybe this time investors will finally feel the pain from their shale investments so profoundly that even a subsequent substantial rise in the price of oil won't lure many of them back. If so, the Saudis will finally achieve their goal, and the war on shale will end.
By Kurt Cobb via Resource Insights
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That said, i think the industry is really doing a great job in killing itself over this war price.
If the old gurus are starting more and more to leave the industry, what to say about young people just starting their careers looking at virtually no chances of getting a job when facing this crisis, fueled by this hopeless market share dispute.
A young guy looks at this fight and asks the same questions not for today, but for 10/20 years in the future. Are you really telling everyone that investor burn is what will save the industry when price gets steadily to a profitable price (tomorrow, in 1 year, 5, 10, whatever)?
Please once and for all just acknowledge at the obvious, and by saying that, i'm addressing everyone... If price is around 30 to 40$, shale is produced. If the industry standard is going to be short boosts of price to the 50/60$, staying there for a time and then dropping back down to 40 or even 30 when an IEA report says nasty things about whatever, then sure enough, shale will accommodate yet again to the new reality. In the meanwhile, if things are kept running like we are living bad times and waiting for everything to be back to the business as usual, it is my strong conviction that very few people reading this article today will be in the industry in the next decade.
I think it's more or less obvious by now that i am a young professional. I keep being told by the "old" guys that this is just another cycle... I have a hard time believing this. This is not "just a cycle", this is the setting of a new price that is coming here to stay. It's something fundamentally different from other previous cycles. Technology has fundamentally changed! This is the key point. I know the financial people also have to make a living writing their articles and opinions, but the fact there is a market share in dispute to be talked about is merely the end result of a critical technological breakthrough in the industry. If people really understood what this means, half of the stuff that is written and that further elude everyone interested in a knowledgeable debate, wouldn't come to fruition.
Just my 2 cents...
The Saudis are like the "Black Knight" in 'Monty Python and the Holy Grail,' claiming it's "just a flesh wound" as he gets dismembered.
Sure there is a threshold of pain, but if it was easy....well you know the rest. It's hard to believe that there isn't someone out there who has a plan to play the markets in such a fashion maybe even hedging with futures when the price is right like agriculture does. Seems reasonable to me that someone can figure this out. Racing around drilling and spending while prices are high and then hoping it all works out seems to be relegated to the trash heap at this point in history...it's a new oil world these days, but I suspect with plenty of opportunity.
No, no, no! The profound pain should, and perhaps will, be on the Middle East side investors when they reimburse 6 trillion dollars for the US wars over there!