Why Oil Prices Will Tank

[TJones]

Does that strike you as unusual?

No, it backs up my point that MasterCard is worried that they aren't gonna see that interest rate because people are using cash to pay for gas instead of using their cards. What IS a little unusual I suppose, is that this particular Chevron I use has 4 registers going at the same time most all the time with 3 to 4 people deep in line to purchase, I wouldn't say that is the norm for any gas station up until I saw this one, but I think it is good planning ahead on their part.

Red, not everyone has a charge/debit card. Some, maybe 3.8% to 5.2%, have Charge only cards.

[RedScare]

Red, not everyone has a charge/debit card. Some, maybe 3.8% to 5.2%, have Charge only cards.

I'm not going to start teaching statistics on an oil topic. You are on your own as to why MasterCard's credit card usage might mean something.

Two words: diminishing returns. Not every firm needs access to the region's entire labor pool. Sometimes having access to only a few hundred thousand willing commuters is enough.

Nice job at at changing the parameters of my post. I knew it was coming, since you were boxing yourself in. I'll let you entertain yourself with thinking you proved something. My point has been made.

[TheNiche]

Nice job at at changing the parameters of my post. I knew it was coming, since you were boxing yourself in. I'll let you entertain yourself with thinking you proved something. My point has been made.

Apparently it was lost on me. The basic theory is most definitely circular, there's no doubt about that. And trying to take one position and saying that that is what firms will tend to do may seem like boxing oneself in, but with an understanding of market segmentation and basic statistical concepts, the general tendency is actually really intuitive.

And I think that you are way the hell off in saying that non-consumer-driven firms are mostly in the inner city, and that you underestimate the Energy Corridor in particular, but also many other edge cities.

One other thing. I didn't spot that you made this comment:

Note, mass transit allows one to stay in the burbs and commute inexpensively.

But it is not necessarily correct. There is more to expense than out-of-pocket costs.

[20thStDad]

Isn't there suppose to be like two trillion barrels of oil in Colorado? Some in South Dakota, too? We have a ton of supply in the US.

Yes, the Barnett Shale in Colorado is crazy active right now, and is relatively new in terms of U.S. oil field ages. Same goes for the Bakken in the Dakotas. There a TON of drilling going on there, production is still only beginning to ramp up. But I don't know, maybe Mark does, those areas might only be making up for the declines being felt in the other older fields around the U.S.

[TJones]

Yes, the Barnett Shale in Colorado is crazy active right now, and is relatively new in terms of U.S. oil field ages. Same goes for the Bakken in the Dakotas. There a TON of drilling going on there, production is still only beginning to ramp up. But I don't know, maybe Mark does, those areas might only be making up for the declines being felt in the other older fields around the U.S.

Mark I believe does know. Yes Trae, there is apparently more oil under the Rocky Mountains than there has ever been in all the Arab countries. So, "what is the hold up", you were probably going to ask. It's about how to get at it with destroying as LITTLE as possible. You may have heard of "footprints". Dems. don't believe the oil companies when they tell congress that they can get in there and sideways drill and they have all this NEW technology and new techniques and leave very little turned up or disturbed. You do have to crack a few eggs to make an omlette, but the Dems. in congress don't like eggs. Oil Shale is much harder to get than drilling into a nice big pocket of free bubblin' crude under the surface of some nice, soft Texas Gulf Coast. It's there though, it costs more, alot more, for the oil companies to produce it for refining, but it's there.

[RedScare]

Water usage. Gas aint much use if you die of thirst.

[brerrabbit]

My two cents.

I work for one of those big ole nasty multinational oil companies in of all areas, retail. Friends yell at me a lot because they think I have something to do with the price at the pumps. I don't, I just am the guy that makes sure gas gets to terminals so it can be picked up and moved to the stations. If Mastercard thinks sales on credit cards are down a little big deal. Consider this when gas was a dollar a gallon and you used a credit card or debit card to pay the banks and MC and Visa got 3 cents a gallon or 3% for handling the transaction. Now with gas at $4 a gallon they are collecting 12 cents for doing the same thing. 300% increase in revenue at little or no cost to them (only additional cost could be credit risk or failure to pay on larger amounts) So credit card sales go down 5% big deal, their making money hand over foot. Increased refining capacity, you got it (well not yet but its coming as fast as they can build it) Search the web for refinery expansions and you will find a lot. Motiva in Port Arthur doubling capacity, Valero increasing etc. It's happening all over. But remember this refining is a pretty darn big role of the dice. Your feedstock is crude, which trades on a commodity market where prices are set by traders, and gasp speculators. You invest billions of dollars to build the refinery and get ready to sell your products and guess what? Those prices are set by those nasty old traders and speculators as well. Your only input into the earnings surrounding your plant is how effciently you operate. The crack spreads are pretty much dictated by the market. Now how many of you guys want to pool up our savings and go buil a $10 billion refinery and hope we make money at it? Any takers? Bueller? Bueller? Didn't think so.

Oil is out there but what is left is pretty expensive to find and ain't the best quality. So as more of the nasty stuff comes to market the more we have to invest in refineries to process the crud.

I must admit I have no idea where the price is going and that with prices this high people are looking for someone to blame, and speculators are good ones to aim at and have big old targets on their backs so lock and load. But before you pull the trigger remember this those same speculators were the ones who set prices, provided liquidity, and financed the initial commodities markets that allowed the put upon farmers to hedge there crops in those early days. They have their place. Having worked for many years as a fundementals trader in Natural Gas I can tell you that I have called them more names than you can probably think of over the years but even still they have their value. One year with gas storage completely full in September (storage season runs to October) and a milder summer, the NYMEX NG prices continued to go up dispite every indicator to the contrary. I lost a lot of money (or should I say my company lost a lot of money) and an after the fact autopsy of the body revealed that Hedge Funds had dumped a couple of billion on the gas market with a bias towards higher prices. That was back when gas was still $3.00/MMBtu and they could really move things if they wanted. Even given my personal experience and bias I still contend they serve a purpose and eliminating them would not lower prices.

I think we all need to find the nearest train, bus, bike or walking trail and just try and get where wer'e going with a little less gas and hope this all blows over at some point.

[Trae]

Mark I believe does know. Yes Trae, there is apparently more oil under the Rocky Mountains than there has ever been in all the Arab countries. So, "what is the hold up", you were probably going to ask. It's about how to get at it with destroying as LITTLE as possible. You may have heard of "footprints". Dems. don't believe the oil companies when they tell congress that they can get in there and sideways drill and they have all this NEW technology and new techniques and leave very little turned up or disturbed. You do have to crack a few eggs to make an omlette, but the Dems. in congress don't like eggs. Oil Shale is much harder to get than drilling into a nice big pocket of free bubblin' crude under the surface of some nice, soft Texas Gulf Coast. It's there though, it costs more, alot more, for the oil companies to produce it for refining, but it's there.

With the added cost to get it, would that do anything at all to help oil prices? Wouldn't they stay relatively the same? Oil companies have to make a profit.

[Mark F. Barnes]

Yes, the Barnett Shale in Colorado is crazy active right now, and is relatively new in terms of U.S. oil field ages. Same goes for the Bakken in the Dakotas. There a TON of drilling going on there, production is still only beginning to ramp up. But I don't know, maybe Mark does, those areas might only be making up for the declines being felt in the other older fields around the U.S.

Well since you called on me I'll answer up. The Barnett Shale is primarily in the Ft. Worth area. It actually stretches from the Permian Uplift through Ft. Worth up over the Arbuckle fold into southwestern Oklahoma where it's pinched off just West of Poteau, Another trend of it picks up again below the southern Ozarks where they refer to it as the Fayetteville Shale in some circles. Both are from the same Mississippian Era and are similarly structured. However it produces no oil and is a poor grade dry gas, that yields below 900 BTU normally and very little sell able condensate.

The play in the Rifle/Grand Junction Colorado area as well as the lower Green River Basin and Pinedale Anticline is mostly all Lower Mesa Verde Sands, which yields a good grade 1100+ BTU gas that also produces good sell able quantities of condensate, every once in a while you will drill some that has some life left in the Green River Sands that hasn't been already depleted by well drilled in the area 50 years ago, and they will produce a 50-100 bbl/day well.

Now the Bakken is a descent oil producer in the Elm Coulee Oil Field of Montana, and is fair over in the Parshall, North Dakota area. However our real biggies for oil production are the North Slope and GOM. That where the big quantities come from. However what some people fail to realize is the majority of the oil produced here in the US is a strain of Lower Cretaceous Heavy Oil. West Texas is a major producer of high quality light oil (when I say light I am referring to API Gravity) Light crude oil is more desirable than heavy oil since it produces a higher yield of gasoline, and usually the heavier oils have a lot more environmental issues. (i.e. sulfur standards etc.) The Middle East has the high quality light crude in abundance. We cannot compete with that domestically, that's a given. And that's the main reason middle eastern oil is sought after and brings the bigger dollar. See oil traders are worse than used car dealers on North Shepherd. Less and less benchmark crude oil is being produced each year, and prices may be benched for Oman Light or West Texas light and what is actually being delivered is some hybrid blend of Russian Export or Nigerian Tar. It's a dirty business, no pun intended. A lot of variables involved.

[Mark F. Barnes]

Here's another fine example of the reason they'd rather drill in the Middle east. This picture was taken on a Sante Fe rig in the sand box.

You pull this kind of crap in the US and they'll hang you from a yard arm. And the EPA and BLM paperwork will blind you.

Here's a nice flyover shot of Nabors 714 drilling in East Texas on an Edwards Well, pits all contained and bermed properly, all nice and neat. That was Johnny Frazier's rig, he always took great care of it and the ground under it.

Here's a couple of mine up in Wyoming, all kept clean and organized, to keep the BLM off of your backside.

The costs to drill cut a wide swath as to why and how. But none the less it's an expensive venture. I am sitting right this minute on a small rig, that we are doing this wild catting up in West Virginia with and it's burning $160K/day in expenses, and that's cheap. Deep water GOM will run you $500K-$600K/day. That adds up PDQ.

Then you get these days offshore when the cash register is clicking off $350K to $450K per day and it's all you can do is pray to whatever god you can to free your stuck pipe, so you can go on and drill.

[cottonmather0]

Is "correction" a technical term? And if so, does it apply to the price of everything, anything, and all combinations of anythings? I submit to you that a brightline 10% rule is absurdity. At the very least, there ought to be three variables accounted for: price, volatility, and peak-to-trough delay.

http://www.investopedia.com/terms/c/correction.asp

Yes, the Barnett Shale in Colorado is crazy active right now, and is relatively new in terms of U.S. oil field ages.

The Barnett Shale is primarily in the Ft. Worth area.

Beat me to it!

Speculation in commodity markets should be illegal. I am thinking felony, 10 years in the slammer as a first offense. Didn't know how pretty the HCJ was, until I saw this:

If you do not have the means to intake, process, and then produce a product based on the raw material you have a contract on (oil, wheat, corn, you name it) - you have ZERO commercial interest at stake. If you have no commercial interest at risk, you should be banned from that market, period. Let the true supply and demand dynamics balance themselves out. Some say that the current price of oil is not due to speculation... others say it is... If it is true market forces working - then so be it. If it's speculation... well... time for a stay at the HCJ (or perhaps the nearest federal prison as we're talking felony here).

The only exception I would make might be gold and silver. Buy as much of that junk as you want, and hope the greater fool buys even higher. But when it comes to our food and energy... that should be off limits (to speculative "investment.")

This is one of the most absurd comments I have read in a very long time.

[Subdude]

Speculation in commodity markets should be illegal. I am thinking felony, 10 years in the slammer as a first offense. Didn't know how pretty the HCJ was, until I saw this:

If you do not have the means to intake, process, and then produce a product based on the raw material you have a contract on (oil, wheat, corn, you name it) - you have ZERO commercial interest at stake. If you have no commercial interest at risk, you should be banned from that market, period. Let the true supply and demand dynamics balance themselves out. Some say that the current price of oil is not due to speculation... others say it is... If it is true market forces working - then so be it. If it's speculation... well... time for a stay at the HCJ (or perhaps the nearest federal prison as we're talking felony here).

The only exception I would make might be gold and silver. Buy as much of that junk as you want, and hope the greater fool buys even higher. But when it comes to our food and energy... that should be off limits (to speculative "investment.")

You say it should be illegal, but don't really explain why. I'm still not convinced there's a downside. Should investors be forbidden from speculating on stocks, or bettors on sports teams? Besides, a lot of "speculation" is simply hedging of physical positions, If it doesn't take place on US exchanges then it will simply happen in London. Oil is a global commodity. The correct reaction to a price bubble is to produce more or use less, not shut down commodity exchanges. I'm really not seeing the logic.

[memebag]

Less and less benchmark crude oil is being produced each year, and prices may be benched for Onan Light ...

Fascinating post, but did someone really name an oil field after that dude who spilled his seed on the ground?

[BryanS]

This is one of the most absurd comments I have read in a very long time.

Other than saying its absurd... you don't provide any other explanation... would love to hear your take on it...

[BryanS]

You say it should be illegal, but don't really explain why. I'm still not convinced there's a downside. Should investors be forbidden from speculating on stocks, or bettors on sports teams? Besides, a lot of "speculation" is simply hedging of physical positions, If it doesn't take place on US exchanges then it will simply happen in London. Oil is a global commodity. The correct reaction to a price bubble is to produce more or use less, not shut down commodity exchanges. I'm really not seeing the logic.

Because you

[Jeebus]

Let me get this straight. So, we let our own economy implode first, while we continue to use foriegn oil that isn't going to dry up until the year 8236 if we continue using it at the rate we do today, THEN once our once great country is nothing more than a suburb of China and Venenzuela, we start drilling for ours ? Yep, sounds like a sure fire plan to me. Hey Red, you buy the ammo, I'll bring the guns and we'll reinforce your neighbor's blue shop/house, and become Omega men !!

You should give McCain a call, I heard he's looking for a young V.P.

I also see 7 dollar gas virtually stopping all downtown, inner loop development. Why the hell build the office in DT Houston, when people would rather just work where they live - in an office park, in their cozy suburbs. Energy corridor... Clear Lake/NASA...

Yes and no. Certain suburbs will emerge as "edge cities", but most will not. Red explained it fairly accurately. Ultimately, without rail, people will not be able to travel far for work.

[Mark F. Barnes]

Fascinating post, but did someone really name an oil field after that dude who spilled his seed on the ground?

Typo should have been Oman......It all BryanS's fault he said type with my eyes closed!!!!!!!!!

[CDeb]

According to MasterCard, gas consumption dropped 3.8% last week alone, and 5.2% over the last 4 weeks. Doesn't sound like refining capacity is the problem.

http://www.msnbc.msn.com/id/12400801/

Refining capacity CAN be a short-term or seasonal cause of price increases when refineries need to shut down to switch to the different blends they are required to produce in different seasons, or if a major hurricane impacts gulf coast refineries, etc. But I think these problems are relatively minor these days compared to the cost of crude.

As far as MasterCard goes, a possible confounding factor is that people may just be using THEIR card less. Ever time I fill up, I am staring at a pump advertisement for that particular gasoline company's credit card with offers of $0.10-$0.20/gallon discounts for using their card or a gas gift card for signing up. Maybe more people are taking them up on it these days.

[20thStDad]

The Barnett Shale is primarily in the Ft. Worth area.

Duh - getting my fields confused. I was thinking of the Piceance field, which I think is in Colorado. I think it's mainly gas though. All of our big clients are busy in that area.

[Mark F. Barnes]

The oil companies aren't making huge profits at the refineries, it's upstream where they net the big bucks. That's why they aren't so willing to invest a huge amount in a new refinery compared to exploration and production. If production levels off or increases slightly, world refining capacity can handle it. You also have to realize how old these refineries are - building one now would have to comply with infinitely more stringent regulations than the last one built (30+ years ago) so the cost probably is not justified by the gains that would come from it.

This is very true, if you do your homework well. You can make big and just as easy lose big if you drill a duster. And I touched on the dirty business downstream with the Three Card Monte going on with the traders. Refining is a tough business, and has gotten tighter over the years. Emissions have been monitored more closely than ever, when before they more or less had a free pass. Plastics have made a huge impact in the downstream end of business. However it's still a tough hustle, but has it's nice margins as well, with a lot less risk. These rack prices are off the chart here lately, it's hard to watch the line any more.

[Mark F. Barnes]

Just to define TJ's term "footprint", here the location after I just moved the two big rigs off the day before. The BLM grants us locations, and designates size and shape, and we cram as many wells on the footprint as we can. There are 14 wells on this location up in Wyoming, branching out in extended directions, sub-surface, what we call a spider plot, because it at times resembles a spider web if you draw it out in CAD. We also have time restraints on drilling in the BLM prairie, because of the Prairie Chickens and Black Footed Ferrets, so we have to move up on the Mesa for the summer months and drill while they make babies, and then the Elk Migration starts and we move back down on the Prairie for winter. And if you are drilling along the Green River or New Fork River and a Bald Eagle decides to nest nearby, you are shut down till they move on, you can't even move your rig out of the way. We had a huge argument with some wildlife so called experts, we had an Eagle nesting in the crown section of the rig while we were drilling without our knowledge for over a month, but when discovered we were shut down. Well then it seemed the Eagle wasn't happy that the warmth that came from the rig disappeared, and she abandoned her eggs and they had to be sent to an incubator, at our cost of course and hatched. If we'd left her alone and drilled all would have been fine. So my argument was what actual adverse impact were we having. Of coarse they had no explanation for that. Which is the argument on the ANWR, nothing really lives there, the just cross it twice a year during migration. It's a barren tundra for the most part. If we take the same measures we do in Wyoming, what's the issue?

Please note the pits are all lined with double layer 200 mil plastic liner, and will be pumped out and hauled of to an incinerator, reduced to ash, and disposed of properly. The sage brush will be reclaimed and we even paint the surface hardware in camouflage to blend in with the prairie.

[crunchtastic]

Water usage. Gas aint much use if you die of thirst.

Yep. I think the people of California (and the entire southwest and west) might have something to say if their drinking and irrigation water is diverted upstream for drilling. There's far more to it from an ecosystem perspective, than simply blaming democrats and hippies for not being allowed to drill because of some wildlife. Water, it's the new oil.

[Mark F. Barnes]

Yep. I think the people of California (and the entire southwest and west) might have something to say if their drinking and irrigation water is diverted upstream for drilling. There's far more to it from an ecosystem perspective, than simply blaming democrats and hippies for not being allowed to drill because of some wildlife. Water, it's the new oil.

Three words, and then quit their whining. "reverse osmosis desalination" and now go lay down!

[crunchtastic]

Three words, and then quit their whining. "reverse osmosis desalination" and now go lay down!

Is it the expense that keeps industry from desalination?

The best tasting water I've ever had was from a desalination plant! I think because they filtered it with coral. And it didn't hurt that it was in Aruba.

[cottonmather0]

Other than saying its absurd... you don't provide any other explanation... would love to hear your take on it...

OK, I'm game. I can tell this is going to be rather pedantic, but I'll play along.

First answer this hypothetical question for me so we can be sure we're coming from a common knowledge base:

If the Exxon Baytown refinery purchases a spot tanker of Saudi oil one day in September, how do "speculators" in June affect the price that Exxon pays for that shipment three months later and the price that Exxon eventually charges for the refined products that are produced?

If you think the "speculators" are engaging in criminal activity, you should be able to answer this rather easily.

[Mark F. Barnes]

Is it the expense that keeps industry from desalination?

The best tasting water I've ever had was from a desalination plant! I think because they filtered it with coral. And it didn't hurt that it was in Aruba.

Well it's not as bad as it use to be, brackish water can be desalted the most economically on a large scale by reverse osmosis or electro-dialysis at costs of about $1.50 to $2.50 per 1,000 gallons. Seawater desalination on a large scale by reverse osmosis or distillation costs about $4 to $6 per 1,000 gallons (under optimum operating conditions) and can increase to as much as $10 per 1,000 gallons if equipment isn't operated efficiently. It's done all the time in other parts of the world. Now we pay on average $1.19 for a 20 oz. bottle of Evian, I'm thinking it's very feasible, however some people would rather just delicate flower about it, and sit on their duffs and whine. With all the water problems in California, they are self made. They can build 16 Million dollars mansions that take a lot of water to operate, but they can't build a desalination plant to fill their need for H2O. Kinda ludicrous if you ask me, but no one's asking..............

[jgriff]

Or, it could spike up the inner loop housing construction, as there are a ton of offices in the Inner Loop. People already live close to their jobs (generally) on the West side of town. It is the other areas (Pearland, Cypress, etc.), that are just out there.

I mean, if you could live in the loop and be able to ride light rail to your job, that would make life a whole lot easier than driving.

My company that is based on the West side of town has opened offices in Clear Lake and Baytown just to keep employees who live there from having to drive across Houston every day. Compaines like mine who work with people in India everday don't have any problem with people working in an office across town.

I'm interviewing for a new job right now. One of the first things I did was look at housing prices in the area. I will not live far from work. It's no problem selling the house and moving closer.

[crunchtastic]

They can build 16 Million dollars mansions that take a lot of water to operate, but they can't build a desalination plant to fill their need for H2O. Kinda ludicrous if you ask me, but no one's asking..............

I'm with ya, Mark!

[lockmat]

Last night on PBS' News Hour, they stated that the govt. announced the price of oil will most likely stay at or above $134 for the rest of the year.

[crunchtastic]

Last night on PBS' News Hour, they stated that the govt. announced the price of oil will most likely stay at or above $134 for the rest of the year.

USA Today recently posted the same story--retail prices to remain around $4 a gallon for the next year.

http://www.usatoday.com/money/industries/e...as-prices_N.htm