The low price at the pumps has been a welcome boon or many struggling families this Christmas. I would be lying to say I don’t like it. However while I work on adding to my gas stockpile I have looked at this decrease with skepticism knowing that only in deflation or fierce market competition do prices go down. A friend of mine in the energy sector connected a few dots for me. Ultimately the prices will rise and there will be some serious negatives on the otherside. Which may include massive job layoffs in the USA, or a drop in the dollar’s value as the OPEC nations begin steering away from the petroleum dollar.
Why are gas prices so Low
The biggest reason for the low gas prices are due to a large increase in domestic production of oil through fracking. At the same time the oil that is being produced in the middle east and OPEC nations is continuing to be produced at the same pace. This means a larger supply is available on the market and the countries have to aggressively price their oil to sell to the refineries. Simply cutting back production on any side of the equation will cause the prices to rise. This leads to the current $54 per barrel of oil and the resulting $1.85 per gallon price point at the pumps.
It’s about cost and profit margins
To the OPEC nations the cost of producing oil is $30 a barrel. SO as of right now they can still make a $24 a barrel profit. However for the fracking companies you have the cost per barrel being between $46 and $85 a barrel depending on the company and location. That means some are still making a profit while the small oil business are starting to loose money. This is what OPEC is hoping for. Their goal is to reduce the price so low that the US shale can’t compete and drive them out of business to retain their market and monopoly. Here are the break even points by company.
|Basin||Breakeven Oil Price Per Barrel|
|Eagle Ford-Liquids Rich||$46.05|
|Wolfcamp-N. Midland (Horizontal)||$53.92|
|Eagle Ford-Oil Window||$55.29|
|Wolfcamp-S. Midland (Horizontal)||$61.57|
|Wolfcamp-N. Delaware (Horizontal)||$68.54|
|Granite Wash-Liquids Rich (Horizontal)||$73.10|
|Barnett Shale-Southern Liquids Rich||$84.45|
The affect on Russia
As you can see in the news Russia’s economy is collapsing with a huge dependency on oil exports to drive the GDP. When it was at $100 a barrel they were making a lot of money and saw rapid growth of their economy and military. However now that the price is half that their economy is collapsing and the estimates are they can only maintain for about 1 year with prices below $60 a barrel.
The affect on terrorists
It’s no secrete that groups like Islamic state rely on oil money to fund their ventures. With the lower price in oil they are losing some of their funding, much like if your boss said tomorrow you were only going to get paid half what you were before. So they have start looking at black market human organs and other means to fund their organization. On the flip sides countries like Iraq that are trying to battle against Islamic state and other terrorist are also being weakened by the decrease in oil prices. These means they are more vulnerable to being overrun by the extremists.
Possible Scenarios based off these events
- Lean Processes and Technology to the rescue — Much like the dotcom burst in the 2000s the shale industry is going to get put to the test. Those who can develop lean processes and technology to keep up with the falling oil prices will stay around. While the smaller companies will be absorbed by the bigger or go out of business.
- OPEC Wins — Depending on how low they are willing to go without other players getting involved OPEC and keep the prices low for years to come in order to drive out the competition from US Shale and Fracking. In this scenario you would see massive job loss and a hit to our economy.
- US Government intervention — The government could step in and add an import tax to foreign oil which would cause refineries to focus on purchasing domestic oil as it will be cheaper. This artificial price increase would stabilize the domestic oil companies but also hurt relations with OPEC. This in term could cause more countries to give up the petroleum dollar and start accepting gold or other currencies.
- Russia Steps up — Russia, facing collapse could step up aggression against OPEC nations in an effort to reverse decline. Their actions in Crimea shows they are willing to do whatever they can get away with. This could create a new armed conflict which in turn would increase the demand for oil and the price.
Potential Side Effects
- Petroleum Dollar — OPEC decides to reverse the decision to use US Dollars as the only currency accepted to purchase oil. As a result the value of the dollar rapidly decreases due to the poor financial state our country is in. The oil backed dollar is the only thing propping the country up since leaving the gold standard.
- Bank and Investment problems — Many banks are investing heavily in the oil industry and junk energy bonds. If the business start to go under this could drastically impact these banks similar to the housing market bubble burst.
- Job Loss — If US Shale companies start going out of business then jobs are at risk. Not only those who work for these companies but also those who help supply the companies. I have seen estimates as high as 500,000 jobs are at risk
- Armed Conflict and War — while very unlikely, a nation like russia with a massive military and facing an economic collapse might consider a military action to change the tide.
My thoughts on the matter.
Prices will start to go the other way at some point. I am thinking that businesses will use this as motivation to streamline and innovate. But ultimately it’s in no oil companies best interest for the price to remain this low. No matter what happens the prices will rise over time. I think you should enjoy the prices while you can. do some extra traveling, or start your gas prepping. However don’t get to use to it. I would recommend you pretend the gas prices are still $3 a gallon and pay yourself the difference. Maintain the $3 a gallon budget and save the money. Invest it into silver or your prepping. While I don’t see this as an economic collapse for the USA I do see it as potentially troubling. However if the players in this game are creative and can find solutions to the troubles ahead this could seriously improve the United States economic standing by reducing the OPEC states hold on our country. Have a wonderful New Year!