Thursday, January 29, 2015

What if oil doesn't go back up?


I have to walk back some of my comments about low oil prices. I generally feel low oil prices are a net positive. After the destruction is over. You can't have the price of goods in any sector fall 50% and not expect a lot of destruction.

If oil prices were to stay low for a very long time - that would be the best thing that ever happened to this country in the long run. Of course, a lot of "green energy" would die. Not like I think that is a bad thing.  It's a very inefficient way to produce electricity. Green energy is an albatross. I don't care how you feel about Mother Earth.

Anyway...

The past couple of weeks  I've been trying to figure out if the low oil prices are "transitory" like the Fed says, or something deeper. I'm voting for deeper since last week they said we were sitting on the most oil in 80 years. Almost since the Great Depression!

Yesterday I went over to find how much oil we had in floating storage. Because during the recession we had around 100 million barrels in floating storage. I was curious about this because we've been in contango for a few months. This is where people buy oil and store it to sell at a later date. I started wondering how much it costs to store this oil. I mean, how this could be cost effective? What if oil doesn't go back up very quickly?

In Feb of 2009 prices bottomed out at 43 bucks a barrel. If you can believe the above chart. I've read reports of oil getting to 35 bucks a barrel during that time, and this chart doesn't reflect that. By May of 2009 oil had snapped back to roughly 65 bucks a barrel. It took until Nov 2009 to get back to 85 dollars a barrel which is where oil was in the winter 2006.

Why do I bring this up? Because we are clearly floating in oil, yet the giant tankers they use to store this oil for future sale are only on third full. Self I said - how can we have the most oil we've had in 80 years, and the storage vessels are only a third full?

I think this only can be true if they don't expect a 2009 like rebound in the price of oil. If they don't want to risk storing this oil for sale later in the year, maybe they don't think oil will recover by the end of the year. In 2009 it sounded like a lot of people made a ton of money that way.

Of course these are just assumptions. No one really knows the answer to any of this. I do find it interesting that the above chart shows the price of oil going back to 1946. It looks to me like oil wants to have some natural equilibrium. The outlier spikes have been during the rough times for the US. The late 1970's, The early 90's when we apparently had an 8 month recession. 2006-2008 and the current crappyness. It makes you think these periods are anomalies and "not the new normal" as it's been called.

The dark side of this whole thing is energy was one of the few bright spots the US had for growth. I think it's going to take a while to work through this. And that is going to butt hurt.

2 comments:

Anonymous said...

The price or availability of oil is not likely to impact the price of electricity. Oil fired generation accounts for a miniscule amount of total generation in the US. See figure MT-34 in the U.S. Energy Information Administration’s 2014 Annual Energy Outlook

she_said said...

It's a good point. I agree. My thought process was more towards the cars. But it's good to separate that from electricity. Thanks.