Low oil prices

Confession time: I didn't expect ever see gasoline selling for under $3 ever again. My thinking was that if it did, we'd have such seriously bad deflation such that no one could afford it at $3.

Here we are; the US economy is still functioning and yet oil prices have dropped. I'm not quite sure what's going on here, but I'm got some niggling suspicions.

The fracking boom is obviously part of the reason. There's a bump in US production. Here's the thing that bothered me. “Experts” were saying that fracking could only make money at $90/barrel. Then they said it would have be at least $70. Today I heard another “expert” claiming they could make money at $45.

There are existing contracts and production already in the works. Even if they are losing money on paper, they'll keep pumping for at least another 6 months, maybe up to 12.

In many fields it appears that investors have turned fracking into just another investment bubble. When that type of thinking takes hold, the underlying fundamentals are forgotten. There are indicators the bubble is about to burst. Reality votes last. Everything eventually comes down to earth.

Maybe there are some places where costs really are lower than $45/barrel. They'll work those until they die. Places that require $90/barrel will sooner or later shut down -I'm better sooner rather than later. By the way, the Canadian tar sands look to be one of those more costly areas.

The US is benefiting from the economies that are doing much worse. Those countries cannot afford to use as much oil, so there's more on the market, driving down prices.

Producers like Saudi Arabia and Russia can't afford to cut back on production. They need every bit of income they can generate to support their economies.

Take the fracking oil production bump out of the equation and the charts look a lot like the charts the Peak Oil people have been putting out for years. A zig zag effect was predicted. Oil supplies become tight, driving up the price. The high prices encourage people to stop buying petroleum products. That causes the price to drop, once again stimulating demand. Rinse and repeat.

So what's an average Joe supposed to do? Well if you can't trust the oil companies, who can you trust? (Just about anybody else?) I've done a lot of research into oil: the geology, the business models, politics, and everything else. One of the conclusions I've come to is that there are an awful lot of secrets surrounding oil. Without access to privileged sources, it's impossible to really know what's going on.

Which brings me back to trust issues. I don't trust anyone associated with oil and I certainly don't trust the long term viability of low gas prices. Every year my household uses less and less petroleum products. For me, that seems like the best long term bet. Low gas prices are like low illegal drug prices. They want to sucker you in until you are addicted, then the price goes up.

Only a fool would make plans that assume long term low prices.

-Sixbears