Terrel L. Shields
Elite Member
- Joined
- May 2, 2002
- Professional Status
- Certified General Appraiser
- State
- Arkansas
Not exactly. It had little to do with the economy, rather it was supply and demand. And demand was high even when the economy bobbled. Oil prices peaked in August 2008 as it finally was realized that the prices were unsustainable. Then really collapsed as the economy tanked but was recovering until 2014 when once again over-production occurred. It occurred because the natural gas "shale gas" drilling was tried about 2010-2011 for oil and was successful. Until then it was assumed that oil molecules were too large to be produced by fracking. By 2012 drilling ramped up in the Permian, Niobrara, Bakken, and Oklahoma quickly overwhelming demand. Prices for oil then once again collapsed 2014 due to this glut, and natural gas by this time- completely bloated because so much gas was being produced associated with the oil, went to barely a buck (1975 prices). Wall St. hedge funds then were dominating the industry and drilling of marginal properties led to any number of bankruptcies and the solution to them was to drill more- like kiting a check, you keep putting more and more money in while your losses are in the "float" between banks hoping for a break to catch up. Finally in the spring of 2020 - the coup de grâce was delivered and the market seized up. Covid knocked demand and the futures market of oil went negative.
Recovery in the oil price is never independent of the economy but the economy does not impact the price of oil more than oil impacts the economy. High priced oil slows the economy and there is a lag to it before the economy slows enough for oil to leave contango and go into backwardation. Then the futures fall and oil spot prices with it. Although futures went negative in April 2020, the actual price of oil in the field didn't. It still sold - cheap - but not much sold under $20/bbl. and that was not premium oil, rather second rate (thick, gassy, or sour) as refiners cherry picked the best crude oil to buy. So it is a chicken and egg argument. Whom came first?
As you can see the steady growth of the economy through the 1980s and 1990s was a time of low steady oil prices. When prices increased, the economy went south and stayed south in the last year of Bush and the Obama administration. Lower prices during Trump's term led to the accelerated growth seen then. Those low prices are a reflection of global markets. OPEC and Russia had to compete with a country that once again, first time since the 1960s, a net exporter of oil. Now we are back at a point that either the prices begin to stabilize for the economy to remain strong or if prices go much higher the economy will suffer. And as our reserves fall, that price will be dictated by Iran, OPEC, the Saudi's (our marginal "friend") and Russia plus demand from China and India.
Higher gas and oil prices impact the cost to heat your house, the cost of electricity, the cost of driving. It impacts costs for all businesses. 62 million homes have gas - either heaters, water heaters, or stoves. 40% of all fossil energy is consumed by commercial and industrial. Truck transport is highly dependent upon gas prices. Even my rural trash hauler charges a fuel surcharge when gas prices reach $3 a gallon. I've saved $2 a month for several years because of that. High gas prices will be a huge drag upon our economy and the housing market.
The key about fracking and horizontal drilling is that wells produce a lot of oil quickly with this technique. Few wells won't produce at least 80% of their product in the first 5 years and after that the remaining 20% may take 10-30 years to produce. Therefore, drilling has to remain high. It only takes 6 to 8 horizontal wells to extract most of the oil from a sq. mile of land. To extract the equivalent with vertical wells would take 64. And they would produce much more slowly over a longer period. With the proposed ban on fracking, Biden is basically "taking" the mineral rights from millions of Americans and shutting down the oil business...wind and solar cannot possibly replace that. And no one seems to want to do the obvious- build nuclear plants. We need to construct one nuclear plant per WEEK between now and 2030 to meet Biden's goal of eliminating all fossil power plants. And we haven't got much chance of even getting thru the permitting process in less than 5 years for each and every one. Do you want a nuke on the San Andres?
