THIS week we saw oil prices soar from
$39 to near $50 per barrel because OPEC announced that it is considering
cutting world oil supplies...again.
These days most people are just
happy to fill up their vehicles with inexpensive gas without caring why the
price of oil – and gas – is so low.
As a little kid, I remember the gas shortage of the early 1970’s.
I thought that there was a shortage because there was no more oil.
I didn’t know about OPEC (Organization of the Petroleum
Exporting Countries) didn’t get the concept of an embargo.
Media coverage
certainly wasn’t as all encompassing as it is now.
In fact, I just Googled “OPEC” and
got this from the OPEC website:
OPEC's objective is to co-ordinate and unify
petroleum policies among Member Countries, in order to secure fair and stable
prices for petroleum producers; an efficient, economic and regular supply of
petroleum to consuming nations; and a fair return on capital to those investing
in the industry.
I marveled when prices
stabilized, and then just as I became a driver, I watched the price hike happen
again in the late 70’s. This time oil production had decreased due to the
Iraq-Iran conflict.
Central and South American
nations evolved into top producers along with the Soviet Union. Alaska
blossomed into a producer as well. There was great incentive to produce oil
when the prices were high. Profit outweighed R&D and risk.
Back to today’s pumps….
Everyone knows that there is a finite
amount of this resource on the planet. It may not all have been found, but
there is only so much. It boggles the mind to see it
selling relatively inexpensively in the past year.
Some analysts are saying it’s the
Chinese economy. “They are experiencing a downturn…” and “They aren’t using as
much oil and gas…”
OK, that’s probably true. But let me ask you this:
If OPEC secures “fair and stable
prices for petroleum producers” why hasn’t it cut or slowed production to
increase prices –and profits – for
OPEC members?
That would make sense, wouldn’t
it?
Hmmmm…..
Fracking has been around since
the 1940’s. However in the 1980s, Mitchell Energy & Development Corp. (now
part of Devon Energy) began experimenting with hydraulic fracturing (fracking) in horizontal wells in Texas. An
economic way extract large amounts of natural gas from the shale formations was
found. The potential application to the petroleum industry was quickly
recognized for use in Arkansas, Pennsylvania, and North Dakota for shale.
As of 2013, massive hydraulic
fracturing is being applied on a commercial scale to shale in the United
States, Canada, and China. With oil prices high, a lot of new companies embarked
on fracking in the USA and Canada. Oil production rose.
OPEC, realizing that it was
losing control over oil production came to an historic understanding in the
fall of 2014 , in spite of protests from some member countries, that it would
not defend its prices (AKA: manipulate the oil market).
While this was concerning for Venezuela
and Algeria – countries who use oil profits to balance their budgets and
maintain their governments:
“Venezuelan Foreign Minister
Rafael Ramirez said he accepted the decision as a collective one and hoped that
lower prices would help drive some of the higher-cost U.S. shale oil production
out of the market.” ~Reuters
With oil prices at record lows,
the fracking industries couldn’t justify the cost of production versus the price
per barrel.
So while the Fed is still
debating on whether to increase interest rates and end economic stimulus,
American oil producing companies are under a strategic business attack by OPEC.
If the fracking industry goes under due to weak oil prices and jobs are lost
when these companies close, the economy will certainly take a hit.
Enjoy the prices while they last.
As the oil prices go up and down these past weeks as OPEC nations no doubt bicker as to whether they should raise prices again, I have realized that my own smart money has been safe and secure, growing and giving steady returns…elsewhere.
_________________________________________
Sources:
Lynda at Sonoran Sun | Private Equity Investments
Sources:
Lynda at Sonoran Sun | Private Equity Investments
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