Marita Noon: Oil At $200 a Barrel — Not Likely


OPEC prediction of $200 a-barrel-oil ignores market realities—or maybe not

OPEC’s Secretary General Abdulla al-Badri made headlines when he announced that the oil price may have bottomed out—indeed, we had four straight days of increase—and predicted “you will see more than $200 when it comes to future oil prices.”

Al-Badri makes a strong argument. In the current reduced-oil-price environment, we see oil companies cut back on budgets, curtail exploration, and pull in rigs—as in many places it costs more to get the oil out of the ground than the present sales price. The Wall Street Journal (WSJ) reports: “the number of rigs drilling in the U.S. has sunk to a three-year low.” Reuters states: “The rig count is down 29 percent from its October peak … a clear sign of the pressure that tumbling crude prices have put on oil producers.”

In today’s market for crude oil, a reduction in the number of drilling rigs in the U.S. does not mean overall production declines. It only means less future production, Tim Snyder, an energy economist with Lubbock, Texas, based Pro Petroleum Inc., who analyzes trends to help his company, and others, make educated decisions and manage risk, told me: “We anticipate a decrease in ‘new’ production in the U.S. as exploration and production companies reallocate capital expenditures and reduce drilling exposure.”

Economics 101 tells us that less supply results in higher prices. Addressing the recent up-tick in prices, Yahoo News says: “Investors bet supplies would tighten in the long term because major oil companies were scaling back investments and drilling to cope with falling prices.

Al-Badri extrapolates this scenario out to a future of $200 a-barrel oil.

What he apparently misses is that as soon as prices increase, activity in the oil industry will pick back up. Snyder says: “Once prices reach the $70-75 per barrel range, the more complex drilling solutions begin to become attractive and we will see new production increasing; putting downward pressure on prices all over again.

There are plenty of smaller companies that can be very nimble. The equipment they have pulled and the employees whose jobs they cut can get back in the field quickly—in fact, they must. Every day that equipment sits on a lot, they are losing money. The trained talent wants to be working.

Yes, it will take some time to get the bigger projects up and running again and to build the needed infrastructure, but as prices climb, more and more production will come back online—bringing balance to the markets.

When prices are high, human ingenuity comes in and finds a solution—which is how the technologies of horizontal drilling and hydraulic fracturing combined to unleash America’s new era of energy abundance and helped lower prices worldwide.

Maybe al-Badri’s comments were designed to talk the markets up—after all, several OPEC countries’ economies are grim due to the drop in oil prices. For example, oil-rich Venezuela is facing default and is rationing food. Business Insider reports: “The country is broke … in large part because oil prices are so low. And now … its economic crisis is leading to a health crisis”—a pack of 36 condoms costs about $750. Both Venezuela and Iran have called “for OPEC’s cooperation in stabilizing oil prices,” but Saudi Arabia—OPECs biggest producing member—is maintaining its current output.

Al-Badri is not stupid. He has held several high-ranking positions in his native Libya, starting in 1990 as Minister for Oil. He was appointed Secretary General for OPEC in 2007. His January 26 $200-a-barrel prediction focuses on the future production losses that will result from the industry pulling back—which, as outlined above, are not likely to result in $200 oil.

Snyder believes al-Badri may be signaling something bigger: “The only way for prices to reach the level mentioned is for there to be a decline in available supply through a disruption in production or a break in the supply chain.”

Libya, al-Bardi’s homeland, has the largest oil reserves in Africa. It, according to the WSJ, “helped trigger the world-wide rout in oil prices” when it “surprised the world with a sudden burst of new oil” last summer. However, as Reuters points out: “Libya is in the middle of a struggle between two governments and parliaments allied to armed factions fighting for legitimacy and territory.” In the WSJ, Richard Mallinson, an analyst at London-based consultancy Energy Aspects explains: “There was an implicit agreement between the different factions to avoid disrupting oil production. Now the parties have realized that controlling oil means power.” As a result of the fighting, “Libyan oil output has fallen to about 325,000 barrels a day in January from nearly 900,000 barrels a day in October.”

The situation in Libya is deteriorating and western oil companies are pulling out. Then, on Sunday, security guards at the last functioning export port, that used to export 120,000 barrels a day, went on strike because their salaries were not being paid—which closed the port and lowers Libya’s oil output to less than 300,000 barrels a day.

Libya does have one remaining port open, but it is used to supply the Zawiya refinery with crude rather than for export. Reuters states: “All other ports and most oilfields have shut down due to fighting nearby or pipeline blockages by rival factions.”

Snyder posits: “Maybe al-Badri is telling the world that, left unattended, the rapid increase in terrorist activity seen lately could be the only thing to lead to the $200 level in crude oil—which will have catastrophic results.”

With Jordan’s accelerated air strikes, and the United Arab Emirates rejoining the fight against ISIS, added to the already troubled situation in Libya, a major supply disruption becomes extremely plausible.

Maybe al-Badri is right—though not for the reasons he outlined. Maybe he knows more than his simplistic explanation revealed. If he is, if he does, the U.S. is going to need every drop of oil found within our borders, including the Arctic resources that President Obama just proposed be permanently put off limits.

With the current low oil prices, we can easily think that we have too much oil already—after all, last week’s sudden price drop came after the release of official data remain a factor and, if al-Badri is correct, America’s energy abundance can provide us with energy security and global stability—not to mention the economic benefit of supplying our allies with oil and refined-petroleum products. Suddenly, the Keystone pipeline’s critical role becomes perfectly clear.

The author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc. and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE). She hosts a weekly radio program: America’s Voice for Energy—which expands on the content of her weekly column.

Marita Noon: Obama kicking again

Obama loves to sneak things under the door when few are watching.  Ms. Noon reports on his recent efforts involving the oil and gas industries.  As usual her reporting is spot-on.

Marita says:

Happy New Year!

Now the holidays are officially over. It is time to get back to work. Though I wrote this week’s column (attached and pasted-in-below): Obama Administration kicks the oil-and-gas industry while it is down, while I was still a bit into holiday mode—which means it is shorter than my usual. But I think it is good and complete. I hope you agree! The news about the new regulations the Obama Administration is introducing on the oil-and-gas industry came out during the holidays and likely was overlooked by most. I believe the news is worthy of additional attention. The new regulations also give the new GOP controlled Congress increased rationale for limiting the EPA’s aggressive power.

Please help me spread the work by posting, passing on, and/or personally enjoying Obama Administration kicks the oil-and-gas industry while it is down.

Marita Noon

Marita Noon

Marita Noon

Executive Director, Energy Makes America Great, inc.

PO Box 52103, Albuquerque, NM 87181

505.239.8998

For immediate release: January 5, 2014.

Commentary by Marita Noon

Executive Director, Energy Makes America Great Inc.

Contact: 505.239.8998, marita@responsiblenergy.org

Obama Administration kicks the oil-and-gas industry while it is down

For the past six years, the oil and gas industry has served as a savior to the Obama presidency by providing the near-lone bright spot in economic growth. Increased U.S. oil-and-gas production has created millions of well-paying jobs and given us a new energy security. The president often peppers his speeches with braggadocio talk about our abundant supplies and decreased dependence on foreign oil.

So now that the economic powerhouse faces hard times, how does the Administration show its appreciation for the oil-and-gas industry boon to the economy over the past six years?

By introducing a series of regulations—at least nine in total, according to the Wall Street journal (WSJ)—that will put the brakes on the US energy boom through higher operating costs and fewer incentives to drill on public lands.

WSJ states: “Mr. Obama and his environmental backers say new regulations are needed to address the impacts of the surge in oil and gas drilling.”

U.S. oil production, according to the Financial Times: “caught Saudi Arabia by surprise.” The kingdom sees that US shale and Canadian oil-sand development “encroached on OPEC’s market share” and has responded with a challenge to high-cost sources of production by upping its output—adding to the global oil glut and, therefore, dropping prices.

Most oil-market watchers expect temporary low-priced oil, with prediction of an increase in the second half of 2015, and some saying 2016. North Dakota Petroleum Council President Ron Ness believes “We’re in an energy war.” He sees “the price slump could last 16 months or even one to two years as U.S. supply stays strong, global demand remains weak and OPEC continues to challenge U.S. production.” However, Ibrahim al-Assaf, Saudi Arabia’s finance minister, recently said: “We have the ability to endure low oil prices over the medium term of up to five years, even if it means delving into fiscal reserves to cover a large deficit.”

While no one knows how long the low-price scenario will last—geopolitical risk is still a factor.

Many oil companies are already re-evaluating exploration, reining in costs, and cutting jobs and/or wages. “In the low price circumstance like today,” Jean-Marie Guillermou, the Asian head of the French oil giant Total, explained: “you do the strict minimum required.”

In December, the WSJ reported: “Some North American companies have said they plan to cut their capital spending next year and dial back on exploring for new oil.” It quotes Tim Dove, President and COO for Pioneer Natural Resources Co.: “We are seeking cost reductions from all our suppliers.”

Last month, Enbridge Energy Partners said: “it has laid off some workers in the Houston area”—which the Houston Chronicle (HC) on December 12 called: “the latest in a string of energy companies to announce cutbacks.” The HC continued: “Other key energy companies have also announced layoffs in recent days as oil tumbles to its lowest price in years. Halliburton on Thursday said it would slash 1,000 jobs in the Eastern Hemisphere as part of a $75 million restructuring. BP on Wednesday revealed plans to accelerate job cuts and pare back its oil production business amid crumbling oil prices.” Halliburton said: “we believe these job eliminations are necessary in order to work through this market environment.”

Civeo, a lodging and workforce accommodation company for the oil-and-gas industry has cut 30 percent of its Canadian workforce and 45 percent of its U.S. workforce. President and CEO Bradley Dodson said: “As it became evident during the fourth quarter that capital spending budgets among the major oil companies were going to be cut, we began taking steps to reduce marketed room capacity, control costs and curtail discretionary capital expenditures.”

I have warned the industry that while they have remained relatively unscathed by harsh regulations—such as those placed on electricity generation—their time would come. Now, it has arrived. The WSJ concurs: “In its first six years, the administration released very few regulations directly affecting the oil-and-gas industry and instead rolled out several significant rules aimed at cutting air pollution from the coal and electric-utility sectors.”

According to the WSJ: “Some of the rules have been in the works for months or even years.” But that doesn’t mean the administration should introduce them now when the industry is already down—after all, the administration delayed Obamacare mandates due to the negative impact on jobs and the economy.

Greg Guidry, executive vice president at Shell, recently said that he doesn’t want the EPA to “impose unnecessary costs and burden on an industry challenged now by a sustained low-price environment.”

Different from Obama, Canada’s Prime Minister Stephen Harper gets it. Under pressure from the environmental lobby to increase regulations on the oil-and-gas industry, he, during a question session on the floor of the House of Commons in December, said: “Under the current circumstances of the oil and gas sector, it would be crazy—it would be crazy economic policy—to do unilateral penalties on that sector.” He added: “We are not going to kill jobs and we are not going to impose a carbon tax.”

Introducing the new rules now kick the industry while it is down and shows that President Obama either doesn’t get it, or he cares more about burnishing his environmental legacy than he does about American jobs and economic growth.

(A version of this content was originally published at Breitbart.com)

The author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc. and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE). She hosts a weekly radio program: America’s Voice for Energy—which expands on the content of her weekly column.