I am so glad I am no longer involved in these happenings… :
“Last Tuesday, Oilfield services provider Baker Hughes, which is being acquired by Halliburton for almost $35 billion in a masterful piece of Wall Street engineering, chimed in with its own job cuts; its customers in the oil patch are slashing their capital expenditures and what they will pay Baker Hughes as their revenues are plunging due to the collapsing price of oil. The chain reaction goes on. Baker Hughes is going to axe 7,000 employees, mostly in the first quarter. That’s about 11.5% of its headcount!” and “Last Monday, oilfield services giant Schlumberger said it would cut 9,000 jobs. BP and ConocoPhillips already announced major budget cuts, as have dozens of smaller companies. Charge-offs are piling up. And it’s just the beginning.” via http://dailyreckoning.com/irony-debt-fueled-oil-boom/
I have been asked, like I was some expert in the oil business, when will oil prices will come back? I have no real clue but did put some thoughts into what I have read and know from living through 3 busts… First off the oil business has almost always been a cyclical business… we are so busy making money when it is going upwe can’t see how high it has gone and can’t figure out the direction of things… we are too busy spending that money to save enough to live out the busts… When it busts we always pray for another boom and promise to not “piss it off like the last time” and that just never happens… So…
What will turn this around?
1. First the global oil production will need to drop by about 1million barrels per day. (forcing supply to equal demand, with no reserve, will start to push prices up).
2. The global conditions will have to remain the same along with #1 above. ( all bets are off if there is some nut that starts a war, or some big disaster happens to immediately cut that amount of oil from the markets)
How will this happen?
3. Oil production is a declining number. From the minute you put a new well into production it will continually make less from month to month and year to year until it reaches some point of “long term” equalization flow… then other things can happen to the well… but suffice to say just because we have production in the US at 9+ million per day doesn’t mean it will stay there… so it likely will be the US Shale production that will have to drop the biggest amount of that 1 million BPD… I am assuming that it took 4 years to ramp up from say 5MPD to 9MPD and it will take about 1 to 2 years to see the 1MPD drop in production (some of that is because there are still “drilled” well sites or “fracked” sites that have not been completed to production and typically that delay can be about 6 months).
4. It is also evident that many of the “country run” oil companies can’t afford the lower price either but they have little alternative other than produce as they run their countries on the oil money and they for sure will be hurting and likely will max out what they can in production to “pay the bills”.
5. Price dictates the amount of drilling to replace declining production… right now…in the US, the drilling is essentially being cut in half or less because the “fracking” production costs a lot more than some other types of production and if it doesn’t pay to drill new “high cost” wells then they are not drilled. I have seen estimates that for shale production a price of $50 to $85 per barrel is needed to make it profitable so all those potentials are being shut down and money focused on oil finding that can be done at current prices… Note here is, that shale production improved by “fracking” is a much more rapid decline than other processes so the shale revolution will probably take the hardest hit in slow down, job loss, hard times.
When will it happen? Your guess is as good as any…
6. From the above general statement it will take another 3 to 4 months for the actual slow down in US drilling to really be felt – in production terms…It will be felt in economic terms immediately… then it will take a year or so for declining production to drop global amounts the 1MPD… Then prices will start to go back up… and about a year or so later when prices get back above $85 or $90 , the drilling will start to ramp up but ramping up takes about 4 times longer than it takes to shut it all down so the oil price and basis will start back up in maybe 18 months to 2 years but the return of the economic boost all the drilling and jobs and such gave may not return for 3 to 5 years… the reason for extended time to rebuild…when drillers and oil companies are burnt in such a steep drop they will be reluctant to jump back in, wouldn’t you? and many of the small companies that were in the current increase will be gone.
At this point we have not really felt the economic sting of the falling prices… above were “announcement” of cuts but the cuts will be bigger and bigger as long as the price stays down… and the economic outcome will be worse and worse the longer it takes to cut that 1MPD from global production… now all that said the world is a fluid thing and right now the global economics do not look like we are building much demand so I expect things to be flat for some time… economic growth feeds on economic growth but the inverse is true as well…
So like I said at the start… I am so glad I am not living in fear that my job will be terminated, I am also glad that I have a plan, reasonable savings, and can adjust my spending because I don’t have many committed costs anymore… I do fear that I don’t have enough money, if things get real bad, to live on and stay retired but I will work that out when it happens…
WD0AJG