Posted 12/16/14 (Tue)
By Neal A. Shipman
There seems to be a lot of people who are concerned with the worldwide rapid decline in oil prices. And for those people whose jobs depend on the oil industry, they may have reason to be concerned. After all, oil prices over the past few months have gone from highs of over $100 per barrel to around $50 a barrel today. And when oil prices start to tumble, as they have done in the past, you know changes are going to come to the oil patch.
For most long-term residents of the oil patch, we’ve seen what has happened when the oil goes bust. It’s not a pretty sight. Some companies lay off workers, pull up stakes and head to greener pastures. Other companies go into a belt-tightening mode and start to slash costs in order to stay in business. It’s not fun. But it is business.
But that said, while there is cause to be concerned, it is not time to be alarmed or panicked by this latest tumble in oil prices.
Why? Because oil is a commodity that is traded, just like wheat and steel. Prices go up, and prices go down. And the prices at which those commodities are traded don’t always make sense. For example, a predicted freeze can send prices of oranges on the commodity market soaring.
Is that the case with the sudden volatility in the price of oil? Some people will say that blame in oil prices lies at the feet of speculators on Wall Street. Others say that all of a sudden the world has too much oil and not enough demand for it. And others point their fingers at the Oil Producing Exporting Countries (OPEC) cartel, which has long set the world’s supply of oil and the price at which it is being traded.
I will let the energy experts have the final say on what is suddenly driving the price of oil down, but if I had to speculate, my guess is that much of the reason rests with OPEC.
America’s sudden discovery of billions of barrels of oil in the Shale-bearing formations, like the Bakken and Three Forks in North Dakota, has OPEC far more concerned than they will ever publicly reveal. The United States will always have to import oil from members of OPEC. But with every barrel of oil that we drill and produce in this country, we will be less reliant on the Middle East. And that prospect is probably very disconcerting to the members of OPEC. And that is the message that OPEC sent to the world two months ago when they refused to cut production in order to stabilize world oil prices.
So for the time being, we are going to have cheap oil prices and thereby, cheap prices at the gas pump. Which in itself is not all that bad.
This sudden dip in oil prices, is just that - a dip. In the short run, there is going to be some changes in the oil patch in western North Dakota. If prices stay low much longer, there will be fewer rigs drilling in the state. But, at the same time, where the cost of producing a barrel of oil is very low, such as in McKenzie County, there could actually be an increase in drilling activity. Obviously, with oil prices in the $50 per barrel range, the oil companies aren’t making as much money as they did when it was at $100. But they are still making money. And that is the important point to remember.
In the long run, oil prices will rebound. They always have. And, if I was a betting person, I’d guess that prices will start to bounce back up as soon as certain members of OPEC decide that they need higher priced oil in order to fund their countries.