Gold News

Is Cheap Oil Coming Back?

Some are predicting that new discoveries and improved technologies will cause oil prices to fall...

ARE NEW energy discoveries and new technology going to sink oil prices? asks Bill Bonner in his Daily Reckoning.

Will lower oil prices rescue the world from the Great Correction?

Maybe, say Porter Stansberry and a good number of the analysts and experts here.

We're attending an investment conference — for professionals only. It's a beautiful place for one. The island is a barrier island, mostly sand...surrounded by ocean or marshland. There is a golf course...tennis courts...bocce courts... Maybe even a kangaroo court. Or an appeals court. And a royal court. Not to mention a food court.

The lodge looks like it was built in the '20s...it has that glamorous look that seems to call out for a white sweater and white flannel pants... You feel you should dress like Cary Grant and hope to meet Claudette Colbert on the lawn.

The rooms are luxurious...large and quiet, while the lobby is lush with rich fabrics and comfortable chairs. The staff is poised, gracious and almost genteel. They would be good people to look after you if you were going broke or insane. Not that we're planning on either. But it's always a good idea to be prepared. Whether you lost your mind or your money, the nice people running the place would probably wait a few days before kicking you out.

There seems to be almost no one here. The lobby is empty most of the day. We wonder how it stays in business.

This is also where George W. Bush convened a meeting of the G7 heads of state. In the room next to ours, the walls are hung with photos of Tony Blair, Silvio Berlusconi, George W. Bush...and others.

They're all gone from office now. Except one, Vladimir Putin, a man who looks like he might never leave.

But the news down here is upbeat. Thanks to fracking and horizontal drilling. They say these techniques are making billions of barrels of oil available. Believe it or not, the US is set to be the world's top producer by 2020, according to a Goldman Sachs study.

An oilman from Texas showed us a map. It included a large chunk of Southwest Texas, colored to show where drillers had bought oil rights and where they were operating.

Heck, there is hardly an empty county in the whole state! The expert took the map apart, analyzing who was working where...and how much oil they were likely to get.

The results were staggering.

"Oil will fall below $40 a barrel," predicted Porter Stansberry, our host.

Whether that will happen or not, we don't know. But it got the group talking excitedly.

"Cheap oil will set off an industrial renaissance in America," one suggested.

"Sell the oil and gas companies," recommended another.

"It will help put the US economy on the road to real recovery," said another.

But hold on a minute. A report at The Financial Times tells us that "the era of cheap oil is over," because "marginal oil production costs are heading towards $100 a barrel":

Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.

Here at The Daily Reckoning we're not getting worked up one way or another. We'd like to pay less for oil. But we'll wait to get exciting until we see lower prices.

While the wildcatters and roughnecks are coaxing more oil from the Texas dirt, the mad hatters and pencil-necks at the Fed are ready to print Dollars too.

And not just at the Fed. "This is the first time in history that all central banks have printed money at the same time," observes WashingtonsBlog.

The central banks of Europe, the UK, China, India, Japan and the US are all adding to their holdings (thus increasing the base money supplies of their respective countries). We've never seen anything like it. A coordinated, worldwide effort to inflate the money supply. State-sponsored counterfeiting on an epic scale.

But all this money printing is not bringing a worldwide recovery. Instead it is "failing miserably."

In Europe, the following countries are now in recession:

Slovenia

Italy

Czech Republic

Ireland

Greece

Denmark

Portugal

Netherlands

Belgium

UK

Spain

In America, the last reported GDP results were positive. But take out inventory build-ups and the growth rate was only 1.6%. Not very exciting. Almost every report in the financial press said the results were "disappointing." But why would they be disappointed? Don't they know we're in a Great Correction? They're lucky there was any growth at all. And if you took out all the stimulus spending, ZIRP, LTRO, TARP, QEI, QEII, Operation Twist, and all the increases in disability...and other transfer payments...

...what do you have?

Most likely, you'd be in the same situation as the UK, Spain and all the other recessed economies.

Considering a Gold Investment? Find out more at BullionVault...

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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