A Couple Thoughts on Current Oil Prices

full recSaturday morning I filled up my tank at $1.999/gal and on Monday night It was $2.069/gal, still a good price but up about 15 cents from it’s lowest point. Let’s talk for a minute about prices going down and about them going back up. I want to talk about the effects on people of it going down and when/why it is/will go up. If you want to learn about why it went down there are tons of articles about that all over the internet from some pretty good sources, like WSJ. Let me give you a little background, first, I am in the oil & gas industry, specifically upstream, and have been for the last 8+years. Price at the pump is affected most directly by the price of crude oil, which is measured by the barrel. Right now crude oil is at about $50/bbl.
About six weeks ago I went to Denver with a client, during that visit I unintentionally nearly gave him a heart attack and assured I would not be invited to any birthday parties with one simple number – 19. I was asked “What’s the bottom, how low can oil go?” “Nineteen.” He choked on his water as his eyeballs tried to escape their sockets. I realize this is a low number, and realistically the lowest we will ever see oil is $30/bbl, but the lowest I think it could go (if not this time then sometime in the future) is $19/bbl. That is neither here nor there, but it is a fun story.

How the price-drop affected EVERYONE
The low oil prices are good for most people; there are more people not in the oil industry than there are in it. I’ve seen plenty of articles about how that one industry taking a hit hurts others, and it does – kinda (more on that in the next section), but more than that it is a stimulus because people have more money to spend on food, pay off debt, or do fun stuff. Most people have to buy gas, I know I do. And having prices go down about 40% at the pump is saving us $100/month, and that means I can either put some money in savings or (more likely) I can use that for school supplies or new clothes for my daughters (or something else along those lines). So, in general, lower oil prices means lower prices at the pump and that saves people money and saving people money is a good thing.

How the price-drop affected THE O&G INDUSTRY
There is a bumper sticker on the wall of our office that reads “Drill Here. Drill Now. Pay Less.” (that’s also the name of a book I haven’t read and won’t comment on). Now that has happened and oil companies don’t seem to thrilled about it. I know some people are unhappy because their stock portfolio has become less valuable, others are unhappy because they got laid off. I’m unhappy they got laid off too. Companies are taking this time to “clear the books” while everyone is “looking bad”, and that means getting rid of lower producing properties, accounting for any and all losses (or potential losses), and laying off a bunch of people. This is for one reason, call it “an obligation to their shareholders”, call it greed (those are just opposite ends of the spectrum), the reason is to save money and maximize profits. Sadly the priority is not to keep people employed and productive, it is to “improve the bottom line” as much as possible. That’s the way businesses work, if you want companies that aren’t focused on benefiting the few people in charge as much as possible then you need a radically different economic system.
Could companies maintain their staff and not suffer big losses? Yes. Will they keep people that they don’t consider absolutely necessary when they have the option not to? No. So the reality of the situation is that low oil prices means that a lot of people lose their jobs. And that is not a good thing, not good at all.

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WHY the price will go back up
The price will go up because:
1. Crisis in the Middle East
2. Increased travel (especially during the summer)
3. OPEC nations and Russia are tired of the low prices and want to increase their profits
The USA is still a net importer of gasoline, which means that these prices are what we could expect to pay if we were producing enough oil from our own reserves.

WHEN the price of oil will go up
I’m not a seer, and I’ve seen people who get paid a lot more than I do to think about these things say everything from  “it is never going up” to “it’ll nearly double in price int he next couple of months).  So, no one really knows.  But I think we will see $70/bbl oil and $3.00+/gal gasoline (here in the Houston area) before the end of this year.  The price won’t sky rocket until some foreign interests really get threatened.

So there you go, no real answers, just some information for you to think about. Let me do a quick recap for you though, low oil prices are the result of multiple factors (if we were self sufficient these are the prices we would have all the time), and low oil prices are good for most people, but low oil prices means a lot people become unemployed unwillingly which is not good.  Now is the time for the energy sector to start really diversifying and make geothermal, hydro, solar, and wind energy sources a widespread, economical product.

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