There is no shortage and there isn’t going to be. You could see a short-term price spike because it has already happened but $4 a gallon is right about the limit. What people don’t understand is there is no shortage of oil especially with modern technology. There is an overproduction of most of it. It just depends on current market conditions to make it viable to sell. Parts of North Dakota were more expensive than Manhattan just a few years ago until the market collapsed but it will happen again.
My future also depends on oil and natural gas. The market is very volatile and goes through extreme boom and bust cycles but there is no shortage of supply. You don’t need Iraq, Iran or Saudi Arabia for anything. Known domestic petroleum supplies can easily last decades.
There would be big economic incentive for state and local governments to embrace the drilling. If oil is at $300-$500 a barrel, it would bring massive drilling revenue to the region, wherever it is.
There would be even more incentive to find alternative sources of energy. By the public certainly, probably followed by government.
Electric cars are already close to or cheaper to operate than oil engines; the higher original price is the main deterrent. If gas prices go up 6-10 times, the trend to electric or natural gas cars will greatly accelerate.
While politicians are arguing about solar electricity, individual people are installing solar panels regularly now. Half my electricity is provided by the solar panels on my roof. But I had to wait for over a year and a half for them, because the installation company was so busy. And obstructionist tactics by the electric company & their allies in local government added a few more weeks to that. But I still got it done, nd sneer at them every time I get my electric bill. And the solar company is even busier this year, and several neighbors have talked to me about solar panels.
My sister-in-law has a lengthy commute (carpools) to her job, but her carfull of employees tele-commute one day a week. Plus anytime the Minnesota winter weather is too rough. Her company is considering expanding tele-commuting. If gas prices spike that high, I think a lot more companies would do so.
They built an ethanol plant near my hometown about a decade ago, to produce gas from excess local crops. It’s running faster than ever. I expect if oil prices spiked that high, they’d build a lot more, quickly.
I’d expect that the economic incentive of supply-and-demand could handle a 40% reduction in the supply of oil, after a year or two of adjustment. After all, in WWII, Germany lost 50% of its oil supplies due to the Allied embargo, and Japan lost even more. But they continued to fight on for years.
Something that has always perplexed me… Perhaps you would explain?
Hypothetical here: Oil @ $200/bbl, so I poke a horizontal for around $2.5 million and it proves to have good production potential. Shortly thereafter, oil drops to $100/bbl so I stop production, waiting for the rebound. And I wait, and I wait, and I wait…
Makes good business sense if one can afford to sit upon such huge debt. (Especially times 200+:eek:) Knowing that (at least around here) rights acquisition, drilling, fracking, and production are at best run on a shoestring budget, it seems there would be a rather immediate break point, financially, that owners of production capable wells would be forced to produce (or divest)…
So my question is: How can owners afford to sit on such huge investments, and, why not settle for less than optimal/projected profits, as opposed to going bankrupt?*** Or more accurately stated in this situation:*** How do you keep from going bankrupt?
Individual mineral rights owners don’t generally pay to drill their own wells. The drilling companies do. They split the profits with the mineral rights owners and there are usually many of those for fracking wells because they cover such a large area. The drilling company can also halt drilling a new well if there is a sudden price drop or even shut down the well completely.
The lifespan of a fracked well generally isn’t that long (sometimes just 5 - 10 years) but the output is huge so the drilling company usually gets their drilling costs back fairly quickly. That said, they do make mistakes sometimes. Chesapeake Energy for example greatly overplayed their hand around 2009 with mineral and drilling rights acquisitions and has suffered greatly for it. Their stock was trading at over $60 a share in 2009 and it is down to $4.52 today because overproduction collapsed the market. There is no point in running a well at a loss if it costs more to send it to market than you get from selling it. The oil and natural gas have been in the ground for many millions of years already and aren’t going anywhere.
However, fracked wells aren’t the only kind. There are also tons of old-school conventional wells that have been steadily producing for decades and will continue to do so. Once the infrastructure is in place, it just requires a single employee to drive around, check on hundreds of them and turn them on or off as needed. Most of those don’t produce that much individually but they do in aggregate. Production in the single digit or tens of barrels a day is common for many of them but they don’t cost much to run either. When I say that I am the partial owner of 200+ wells, that is true but over half of them are of this type. It is common to get a monthly royalty check for $5 or even just a few cents for some of the slow but steady producers. The fracked wells bring in major money but drilling those can only happen when the price supports it.
For what it is worth from the IEA report
May global production was 97million barrels per day. ( all numbers in millions from now on)
Of which 21.5 came from Saudi, UAE Kuwait, Iraq and Qatar.
So we lose 21.5. However Saudi alone had a demand of 3.2 so that goes away as well, and so does the demand from Qatar UAE etc.call that a total of 5.
So the world has a net loss of 16-17 million barrels per day.
That is quite a lot and not easily replaced.
The US is producing 12.9 which has been pretty consistent for the last couple of years. Drilling has ground to a halt and there are a lot of drilled but uncompleted well around ,but not 17mmbpd . May be get another 1-2 but things will get expensive quickly for services and leases.
Iran could crank up 0.5,maybe the price rise would help Venezuela out na bit and they could up another 0.5. Price rises would spur activity in the north sea ,may be 0.5 at a reach.
Russia , again looking at 1-2 production increase and maybe 1 out of the rest of opec, if the extra inc9me helps resolve some stability issues.
Another 1 - 2 being generous from Canada and the south America, maybe 1 from China and Asia.
So with a massive investment and a lot of optimism maybe get 9mmbpd from areas with some sort of existing infrastructure, and that’s taking high number ranges and a lot of investment.
Now we just need another 8mmbpd to get to 92. Assume some demand reduction due to price and other sources of energy , I would imagine we would be burning a lot more coal as natural gas prices rose with oil price. That’s not a 1-1 relationship,but we can assume a rise.
Anyway we would still be looking at several million barrels per day deficit.
OECD stocks are somewhere in the order of 4,500 million barrels , in crude and products between govt and industry. So there is a pretty decent buffer.
Still a big deficit to overcome and certainly not easy.
Often the guys that drilled the wells DO go bankrupt. And what happens then? They owe, say $5 million to their creditors, and they have a well that cost $2.5 million to drill, but it can be run economically at current prices.
So they go out of business and the well is put on the market. And just because it cost $2.5 million to drill doesn’t mean it’s worth $2.5 today now that oil prices are so low. So it’s bought for $1 million by some other company who knows it isn’t worth turning on today, but might be next year if prices rise again.
If a well isn’t economical to produce at a given price, it doesn’t matter how much it cost to drill the well if you’re losing money for each barrel you pump.
Then there’s the scenario where you will never get back your capital costs from the well, but you can still make a small profit on each barrel, even though the whole project will be a loss it will still be less of a loss for each barrel you pump.
The Strategic Petroleum Reserve currently holds about 700 million barrels (Strategic Petroleum Reserve Inventory 2005) The countries from whom oil stops flowing produce about 21 million barrels a day (see post above), about 25 percent of the world total.
So in principle the SPR could make up the difference for about a month.
(Maybe the mechanics of removing oil from the SPR limit it to a lower amount.)
Oil demand is fairly inelastic; in order to reduce demand by 25 percent probably requires at least a tripling in price, from current $40 /barrel to $120.
The effects would probably be similar to the oil embargoes of the 1970s - a fair amount of disruption to economic life, but not a catastrophe.
You have to knock out the countries that disappeared own demand , which helps.
Also as noted it is not just the US reserve but also industry and the rest of the OECD, which is 4600mmbbl (including refined products )That doesn’t include none OECD countries .
So a decent buffer, but yes prices will skyrocket.
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In our area (Marcellus shale) the leaseholder, (not the driller) splits the profit with the mineral rights owner. Of course, the cost of drilling, fracking, and production are under the control and responsibility of the leaseholder, not the mineral rights owner.
And this begs the question: Do the drilling/fracking operations operate on a “time & material basis”? Perhaps a flat rate? Better yet, maybe a percent of production? Who is in control?.. And what are the motives to cease production on a good well in a depressed market? It seems to me, a* little* profit is preferable to a big loss.
Happens all the time around here, but: See above.
They were still buying** HUGE** blocs of leases in 2012 around here. Apparently they’re a little slow on the uptake.
There are many old, circa 1970’s “shallow” and “non horizontal” wells in our area that fit your above description of minimally producing wells, yet they were ALL fracked. Fracking is not a new technology, it is just “new” to some folks because of their recent awareness of the increased impact it has when utilized in vastly deeper, and wider (horizontal) wells.
“And this begs the question: Do the drilling/fracking operations operate on a “time & material basis”? Perhaps a flat rate? Better yet, maybe a percent of production? Who is in control?.. And what are the motives to cease production on a good well in a depressed market? It seems to me, a little profit is preferable to a big loss.”
The operator ( Chesapeake COT, Pioneer Shell etc etc) are the ones who put up the money. They will contract a drilling rig on a day rate basis (12-20k per day in the permian) they will also contract someone to build the pad, provide the directional drillijng services, the fluids, casing cementing etc etc. Then they contract the fracing services proivider and all the sand / propant. The operator then pays for all the pipelines / collection etc and sell the oil.
The operator is the owner and the project manager for getting the well drilled . They are also the knowledge holders for the subsurface information on the geology and reservoir engineering.
There are many pricing models between the operator and service companies / rig contractors from turn key to daily flat rate, it all depends on risk tolerance, intimately the operator pays pretty much on a time and materials basis for the services used to get the well drilled. The operator owns the well and gets to decide when to turn it on and off.
You could switch off a well that is producing due to low prices, but more often than not the operators need cash flow to pay back debt and fund ongoi my drilling. If you have paid off your debt and don’t need cash then you are free to do as you wish. Depending on the reservoir there can be some impact to production after a shut in, often good impact, but not always.
