Saturday, 15 October 2016

$50 Oil. Everything's Relative

We've long noted that everyone, from Saudi Arabia to the Green Party, misunderstands the logic of the US onshore oil & gas industry, namely that it (a) is rational; (b) is flexible; (c) understands sunk costs; (d) has ready access to equally flexible and rational finance; and (e) is constantly innovating - in the direction of reducing costs.  And thus it defies predictions every time.

This cartoon says it all really.
If you want some words to go with it, there's always Nick 'sometimes useless, sometimes not' Butler blogging in the FT.
[Saudi] strategy has not only failed but has caused serious damage to the Saudis themselves. Prices fell much further than anyone anticipated because other participants in the market did not respond as expected. The Saudi increase in production has not destroyed the US industry – American output has fallen only marginally despite a 70 per cent drop in prices. The kingdom simply underestimated the resilience of the US producers and their ability to cut costs.
Ain't that the truth.  



Blue Eyes said...

"[Saudi] strategy has not only failed but has caused serious damage to the Saudis themselves."

Oh well, never mind.

Steven_L said...

Aberdeen is like a ghost town compared to 2012/2013.

Bloke In North Dorset said...

Nick probably knows this but here's the always excellent Planet Money team explaining how the fracking industry innovated themselves in to profitabilty. Its a great story and the guy who first did it made nowt:

John in Cheshire said...

And now, with our sterling-dollar exchange rate, won't our fracking industry take off and help reduce our balance of trade deficit?

Anonymous said...

I think the Saudi policy was aimed at Iran rather than at the US.

Don Cox

Electro-Kevin said...

For a moment I thought I'd read "The Saudia Arabia Green Party".

Heaven forfend.

Arab-IAN Green Party !

Anonymous said...

What's the point of market signalling when they will (can only) ignore....

Doesn't just apply to oil though if anyone has gone up against a US company in a global market. When the internal US market is buoyant they concentrate there. When there is a drop in US demand, they dump / marginal cost.

AFAIK there are severe penalties against US companies for anti-competitive behaviour - which is what they tell you are they trash your market.

Nick Drew said...

I think the Saudi policy was aimed at Iran rather than at the US. Don Cox

the Butler piece makes that point, too

lilith said...

Hi all, excuse me, Kev please empty your spam. Emails bouncing due to full inbox?

Electro-Kevin said...


My recent email to you bounced too. I have left a message on your blog.

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