Is There a Bottom in the Energy Market?

[william the wie]

The cost/bbl from fracking is still going down more or:less on trendline and rig count is increasing not decreasing. So, what is happening?

Initially a huge collapse in asset values is a step function. As late as the first half of 2005 in the housing bubble a foreclosed house could be sold at a profit after foreclosure costs. Freefall didn't happen until 2008. Foreclosing oil fields is a bit different but danced to the same steps:

Proved reserves of @ 10 billion bbl have been written off since prices started their collapse.at about $140/bbl so there are reserves that were purchased with loans based on a market price of $140/bbl. About 1/3 of fields in operation are pumping at prices that only permit payment of interest and perhaps something to principal on their debts.

The next logical step for producers in the 20s or 30s for breakeven points is to issue class B common shares and/or preferred shares to buy up the written off reserves and put them in production. That much oil will reduce prices and will put the remaining fields and their reserves on the market. At this point three problems in the.US fracking industry will go critical:

Natural gas is in greater oversupply than crude.

US fracking fields are not the biggest nor the best.in the world. Russia, Brazil and probably Canada have us beat.

Fracking techniques are getting cheaper and better and should continue to do so for decades.

Natural Gas sells for the energy equivalent of less than 25% of crude so anywhere it can be substituted for oil it probably will be in the not too distant future.that will reduce demand. Other nations will also get into the act to increase supply. Fracking's continuous improvement will reduce costs and increase supply. So, at some unknown point 1-15 years in the future we will have a bigger and badder Lehman brothers moment.

 

[DarkFury]

VWoA is working on a NG powered car. That could change the entire dynamics of energy use. Air quality standards would go up greatly. People in the suburbs at least could fill their cars at home and just pay once a month. Durability of the engine could be increased 100%.

You find something that is positive both in economics and environment and you have a winner.

 

[HenryBHough]

CNG power vehicles have been around for a long time. Conversion kits had a certain vogue but, at the time, natural gas prices were high and people didn't like having a bomb in the trunk. These days, however, natural gas prices are low and people have come to accept that a tank of CNG is no more dangerous to have in the trunk than is a Muslim in the back seat. Now what good Democrat could find that risky?

 

[william the wie]

This kind of asset collapse was suggested on the MacAlvany Podcast show today so I tried to work out how that could happen with crude.since it is the lynchpin of the 1974-now asset bubble. This is scary but it holds together.

 

[westwall]

VWoA is working on a NG powered car. That could change the entire dynamics of energy use. Air quality standards would go up greatly. People in the suburbs at least could fill their cars at home and just pay once a month. Durability of the engine could be increased 100%.

You find something that is positive both in economics and environment and you have a winner.

Modern gasoline engines are already at near zero percent emissions. I don't know how you can get much better than that. CNG is not a world or energy use changing technology. Hydrogen powered fuel cells might be. A Tesla radiated power system WOULD be.

 

[william the wie]

$0.11/ gallon would be the equivalent price for LNG. 55 gallon barrel/equivalent at $10. I nearly freaked myself when I started running the numbers. HIGHLY COUNTER INTUITIVE ALL CAPS does not begin to do the results justice.

 

[william the wie]

Correction that should read $0.18/gal, which is still quite shocking.

 

[Shrimpbox]

Since there is generally always something to be learned from your posts WW I thought this article would be of interest. This web site I ran across by accident but they seeme to,have many worthwhile articles

What Experts Miss When Discussing Peak Oil | OilPrice.com

I am looking for,the one I read about long term prices. I don't know if that will support your case or not.......

$120 Oil As Soon As 2018? | OilPrice.com

So let me get this straight. If oil prices stay low it will cause a bankruptcy wave that will topple many financial institutions and cause another recession or worse. If oil prices go up dramatically the pressure will be relieved at the banks and the can will be kicked down the road. Question, why have the banks not learned their lesson about risky lending in the oil patch and does Dodd Frank not address this problem?

 

[william the wie]

Since there is generally always something to be learned from your posts WW I thought this article would be of interest. This web site I ran across by accident but they seeme to,have many worthwhile articles

What Experts Miss When Discussing Peak Oil | OilPrice.com

I am looking for,the one I read about long term prices. I don't know if that will support your case or not.......

$120 Oil As Soon As 2018? | OilPrice.com

So let me get this straight. If oil prices stay low it will cause a bankruptcy wave that will topple many financial institutions and cause another recession or worse. If oil prices go up dramatically the pressure will be relieved at the banks and the can will be kicked down the road. Question, why have the banks not learned their lesson about risky lending in the oil patch and does Dodd Frank not address this problem?

Three things are missing from the analyses.

!) That energy transmission, nano-tech, fracking and bio-tech are all increasing returns industries that can decrease the cost of energy and that can happen at any time.

2) Natural Gas is a slowly renewable resource while energy from nanotech/biotech is dependent on the cost of stock so research on energy from sewer sludge available at negative cost is being pursued by all of the majors. I don't know when that will hit but that will be a biggie.

3) Energy transmission costs are going down theoretically now but He3 from the solar wind will be one of the by-products of the coming space industrialization boom. Moon Express has already been given preliminary approval to attempt to mine the moon and the He3 trapped in the soil. That is very low cost/low pollution energy and crude from the ground will not be able to compete with it.

As to the banks they stayed out of this mess and simply underwrote high yield bonds. Their boilerplate very politely but firmly said, "Hey you idiots high returns = high risk." Or at least so I've been told

 

[Shrimpbox]

You are getting in the weeds for me. Your point seems to be that technology is going to keep oil prices low from a number of angles. Ok I can go along with that. But I am looking for how you think this will affect the big picture, the economy as a whole. When you mention Lehman brothers are you expecting another crash related to low oil prices and is that crash imminent?

Second, while all your references might make good investments and sound good in theory, are they really addressing the gorilla in the room, pollution and environmental destruction? I believe the majority of pollution comes from transportation and thenpower generation, I could easily be wrong on this, yes natural gas and hydrogen and electric vehicles can make a dent in this but the infrastructure for any of these will take decades to build. If Mathew is right, solar and wind will take even more of a bite out of hydrocarbons making oil even cheaper. so I guess the real question here, is in your opinion, has oil hit its zenith and it is now going the way of horse manure in the energy matrix?

Just as cell phones might be the greatest birth control devices ever made, self driving cars might cure the oil hunger. I just hope I am gone before these things are foisted on us. They will get my Camaro SS when they pry it from my cold dead hands.

 

[william the wie]

Much of the infrastructure is in place or under construction to use natural gas like with the buses in Vegas.or the Gulf Coast's exports of LNG and more is on the way. That kind of substitution will increase across the board. This will drop prices even further. The infrastructure for Boston and New Jersey to export LNG is under construction. Those same plants can provide Natural Gas for trucks, trains and boats to the entire Northeast.

But Matthew falls for the conventional within the box solutions and many others do as well. Oil is undergoing the early stages of the death of a 1,000 cuts but solar and wind are not and will not be among those cuts. By 2040 naturally occurring petroleum will be fighting to be a competitive chemical stock.

The use of below market interest rates by central banks is going to be a Lehman moment and the fracking boom will be part of it. But overfunding of increasing returns industries ultimately causes deflation that will come in waves for decades.