By Joe Petrowski
At first we had:
“WE are running out of oil, peak oil is here.”
Then:
OPEC “needs $100 dollar oil.”
Now:
“This is not all good. The price slide is a sign of world deflation, capital investment will dry up, we should not invest in energy infrastructure and exports will hurt us.
Nonsense.
The reality of what has happened and what is happening now is a simple case of movement along the supply and demand curve. Demand for energy has dampened because of several factors including efficiency, demographics and regulatory mandates. While U.S. low-cost shale supply has displaced high cost producers whose own ineptitude, corruption and capital-starved diet has made them even higher-cost producers (Venezuela, Mexico, Nigeria, Iran, and Russia.)
What is less appreciated and less understood is the curve has shifted because of U.S. ingenuity, and the wonders of capitalism. This is a discovery more shocking and terrifying to most liberals than the fact that hydrocarbons are not practically finite, but ubiquitous to the universe and whose supply is determined by price and technology. This movement along the curve as well as the shift is demonstrated in the accompanying graph. The cost to find, drill, and extract oil and gas has fallen actually faster than the overall price.
Click chart to enlarge.
While permits for new drilling have softened, and the disposition of existing leaseholds has increased, we are still producing more hydrocarbons per well through the more efficient use of rigs, pads and frac stagings. While we were at one time drilling 10 wells off of one pad, we are now doing 30 to 40 with as many 16-20 stages per well. This has not only increased the amount of gas and oil produced, but has also lowered the per-unit extraction cost dramatically due to the efficiencies generated through multi-staging in sand, fluid use and removal. There are still a significant number of projects that will be drilled below $50 in the United States.
In fact, much of the capital investment that has, and is, being made in United States drilling (and has apparently has been missed by some prognosticators, even those with Nobel prizes), has been in seismic technology, lateral drilling techniques, fracking fluid composition, recovery and disposition. These investments have contributed to a revolution in how we find and remove oil. “Trees do not grow to the sky,” and while technology does not get “unlearned” it will be difficult to sustain the cost improvements in the United States much beyond $40/barrel. With $10/Barrel in refining, $6/barrel in wholesale and transport, and $8 in retailing a $64/barrel seems to be the target price for gasoline before taxes. That is $1.53/gallon, or just under $2 for gasoline with taxes (and expect higher taxes.) If anyone does not think this is positive for American and equities please, burn your money to put it to a better use.
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008 he was named CEO of the now combined Gulf Oil and Cumberland Farms whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is now managing director of Mercantor Partners, a private equity firm investing in convenience and energy distribution.
