At the Opec meeting in Vienna last week, the cartel members agreed to cut production in order to decrease supply. Their hope is that prices will increase beyond the average $50 a barrel level. All members are keenly aware of the fact that a huge cache of oil and natural gas has been located by the USGS near Midland, Texas.
How much oil was found, you ask? How about the largest ever found in the US? We’re talkin’ 20 billion barrels of oil and 16 trillion cubic feet of natural gas? So where was this oil hiding? In plain sight, apparently. What’s different is the new technologies that let shale oil come to the surface. New technologies? Yes – the F word…no not that one, Fracking. Yes, boys & girls, we’ll be seeing lots more fracking in the future. That technology that has caused earthquakes in Oklahoma and that utilizes billions of gallons of water for extraction. What’s the problem with that? Well, I wouldn’t like to live in Oklahoma and have a building fall on me – or live in Midland and have my water well run dry from the cumulative effect of lowering the aquifer in an area destined to be extremely dry as a function of global warming. So, in essence, we’ll be trading oil now for habitability then. Well, there’s lots more real estate in the US – big deal. Tell that to those folk that like living there.
The effect of fracking on the price of oil has been significant. As I detailed in a post from a year or so ago, the producer making money at current prices is Saudi Arabia. Canada, Russia, the US and China have producer prices less than current, but not nearly as much less as the Saudis. So, reluctantly, the Kingdom agreed to curtail production. Why reluctantly? They need the income to stave off dissent. Russia needs the production because of sanctions causing their budget deficit. Canada and China are in the middle somewhere, and the US is on the verge of developing this Wolfcamp shale formation to produce even more oil. Even at $51 a barrel, the economics are there to frack that shale. So OPEC is living on borrowed time and they know it. With the Middle East being a cauldron of distress, the next couple years’ are going to be difficult for Saudi Arabia, the UAE, Iran, Iraq and Kuwait. But oil prices won’t help any of those folks in OPEC quell their dissenters. Venezuela is probably in the most trouble, due to a combination of bad governance and declining capacity from lack of cash. That country is about to implode, with hyperinflation and starvation right around the corner. Can you spell revolución?
Prepare ye the way of the loud – and hope it doesn’t come to a town or city near you.