Friday, September 4, 2015

Frack You

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.

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Sources:

Lynda at Sonoran Sun | Private Equity Investments 







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