Current Oil Price

[raspberry-blower]

That was the week that Stock Markets tanked in lockstep with crashing oil prices.

Brent ends on $45.30
WTI ends on $40.26

DJIA down over 5% in the past two days plenty more froth to come from there (specifically caused through share buy-backs being conducted at record levels)
The BBC report FTSE 100 posts biggest loss this year

Oh dear. What a shame. Never mind...

[biffvernon]

Spikes in energy prices do cause recessions

The direction of causality needs to be established before ascribing causality to association.

[johnhemming2]

Well I would not say an recession causes a spike in energy prices. Would you? Also I think that causality has to be sequential going forward in time.

[biffvernon]

Well I would not say an recession causes a spike in energy prices. Would you?

Of course not, but that does not mean that a spike caused a recession. One needs to determine what caused the spike and what caused the recession before one investigates how the two are connected.

[vtsnowedin]

Macroeconomics is far different to household economics.

One is the sum of all the rest.
So if fuel droops a $1.00 a gallon times 75,000,000 bls a day at 42 gallons per bl. that's $3,150,000,000 per day or 1.149 TRILLION in a year . That is one whale of a stimulus program.
And the best part is it is not borrowed money and we don't have to raise taxes in the future to pay it back.

[johnhemming2]

The logic of a price cut in energy is that more energy ends up getting used (compared to not having a price cut) this leads to more economic activity of some form and hence an increase in GDP.

The converse also being true.

[biffvernon]

The logic of a price cut in energy is that more energy ends up getting used (compared to not having a price cut) this leads to more economic activity of some form and hence an increase in GDP.

The converse also being true.

But that's just not true! Lower price means less profit for oil companies so marginal production gets shut down and new projects delayed or abandoned. Higher price and the producers head for deep water and other unconventionals. The amount of energy used is the amount of energy produced. I'm surprised after all these years of discussing peak oil folk here still have such a naive view of the wat things work.

[johnhemming2]

It is a question of timescales. Changes to projects occur on a multi year timescale as a rule. If you shut down marginal production you cut your income completely, but don't cut the capital costs as they have already been spent.

[vtsnowedin]

The logic of a price cut in energy is that more energy ends up getting used (compared to not having a price cut) this leads to more economic activity of some form and hence an increase in GDP.

The converse also being true.

But that's just not true! Lower price means less profit for oil companies so marginal production gets shut down and new projects delayed or abandoned. Higher price and the producers head for deep water and other unconventionals. The amount of energy used is the amount of energy produced. I'm surprised after all these years of discussing peak oil folk here still have such a naive view of the wat things work.

Your too energy focused. Energy is just one of the things we produce and consume. If you reduce the cost of energy by a large margin you will increase demand for that energy, but cutting the price in half won't double demand. It is not that direct a relationship. Once the gas tank is full consumers will happily turn to other things with their left over money increasing demand for these consumer goods and services many of which involve little energy per dollar of value created and what energy is involved will also be cheaper as well.

[raspberry-blower]

It is a question of timescales. Changes to projects occur on a multi year timescale as a rule. If you shut down marginal production you cut your income completely, but don't cut the capital costs as they have already been spent.

It's also a matter of finance arrangements as well. Many offshore and fracking companies have been issuing high coupon rated bonds which means that they will keep on producing, even when the price is low, in order to fulfil the initial payments. This has the effect of distorting the market with oversupply when there isn't the demand thus suppressing prices into a deflationary spiral.

The problem with high yield bonds (often referred to as Junk bonds) is that the initial payments often turn out to be little more than a liquidation payment as the said company collapses. Wolf Richter explains
here about Hercules Offshore, a rig contractor company that has gone into Chapter 11.

Offshore drillers have been buffeted from two directions: the collapse of drilling activity and the collapse in the daily rates they can charge for their offshore drilling rigs. So fewer rigs, and less money for each of the fewer rigs: Hercules’ revenues in the second quarter plunged 67% from a year ago!

And junk-rated companies like Hercules that need new money to stay afloat and service their debts are finding out that their burned investors have shut off the spigot.

“A leading indicator of further bankruptcies among other challenged high yield (HY) offshore drillers,” is what Fitch Ratings calls Hercules.

A severe haircut for investors but there again if you put money into risky ventures chasing a quick buck then you should expect this to happen..

[Tarrel]

WTI now at $38.84

[biffvernon]

Just had a phone call from a local newspaper journalist wanting to learn about prospects for fracking in Lincolnshire.
With Brent trading at $44 and WTI at $39 does anybody seriously think there's money to be made by selling fracked gas? Seriously?
Our benighted government is just the biggest Ponzi Scheme promoter ever.

[PS_RalphW]

In the UK I think most NG is sold in long term contracts where the sale price is based on the current oil price, presumably Brent. I do not know how new contracts are negotiated, will a new peg against the Brent price be set based on the current spot price for NG? NG demand is not high at present either, as we have not had a cold winter recently, global demand for LNG is not so strong, and Russia has not cut off Ukraine recently.

I cannot see fracking NG in the UK being economic in the next year or two given the current oil and NG demand. However, I can imagine, if the drillers set a price linked to Brent in the current market that takes into account the very low value of oil relative to NG at present, in a couple of years when PO starts to bite hard then the contract price will rise sharply and fracking will be cost effective.

The drillers are taking a longer term view (and assuming a BAU economy). It will be a few years before commercial fracking would begin.

The advantage of fracking (from the drillers point of view) is that the small scale of the individual drilling operations means that they can respond to changes in demand (on the drilling side) faster than big oil, like deep water drilling, which needs a decade or more.

Get the exploration, licensing and test drilling done now, suffer the protests and backlash, then lie low and quietly pick up the drilling again when the price rises and the protesters have gone home.

[biffvernon]

By which time everybody will have realised that global warming is actually a thing.

[raspberry-blower]

Our benighted government is just the biggest Ponzi Scheme promoter ever.

The whole economic system is one big Ponzi scheme