By all measures of Trump's yapping "drill, baby, drill" during his campaign one would think all the oil producers would be hot to get on board. Not quite! According to a piece in the WSJ Business Exchange ('Trump Nominee's Oil Math Doesn't Add Up', Nov. 29, p. B10) the drill, baby, drill scenario is more likely dead on arrival. How so? Let's let the columnist explain:
"First of all, convincing oil and gas companies to produce more - the equivalent of over a fifth of total U.S. production today - will be a near impossible task. The industry was scarred by years of overproduction during the shale boom, and investors no longer tolerate wildcatter behavior. They would rather see cash returns over excessive fracking."
Indeed, as recently as June, 2019, The Wall Street Journal was warning about the perils of shale oil overproduction and what it portended ( Frackers Scrounge For Cash As Wall Street Shuts Spigot'', p. B1):
"The companies behind the U.S. fracking boom are turning to asset sales, drilling partnerships and other alternative financing to supplement their cash flow. These forms of funding often come with higher interest rates or other downsides - such as giving outside investors a hefty share of future oil and gas profits."
And further (p. B2):
"Producers have been forced to get creative about financing because Wall Street began shutting off the cash spigot last year after frackers routinely failed to turn a profit over the last decade."
Worse, only a tenth - 10 percent - of large shale companies saw a positive cash flow in the first quarter of 2019. This according to a Rystad Energy analysis of 40 drillers. And to sustain or increase their production these companies have had to drill new wells, as opposed to seeing greater production from each existing well . The piece also noted some companies have become so desperate for cash to jump start new wells that they are starting to turn to junk bonds. Well, talk about batting on a losing wicket.
The glut basically meant oil prices were collapsing because of oversupply, and as we all know - who studied any economics - the "law of supply and demand" dictates when supplies are excessive, the price of the resource shrinks. At the time of the fracking oil glut prices were barely at $50 per barrel and often lower.
Flash forward to the recent WSJ piece, and one reads:
"U.S. energy companies on average say they need WTI crude prices to be at least $65 a barrel for drilling to be profitable and $89 a barrel for them to increase drilling substantially, according to the latest survey by the Kansas City Federal Reserve. With prices today below $70 a barrel there is scant incentive for drillers to increase production."
When I worked for an oil company (Pan American Oil Corporation) in New Orleans in the late 60s this was also a basic rubric. Unless the per barrel price of oil was high enough it simply didn't warrant the enormous expense of setting up oil exploration operations. Even the cost of geophones, e.g.
which were used to detect seismic waves from controlled detonations in the field, were exorbitantly expensive. Plus, oil companies needed trained analysts, geophysicists and their assistants (my role) to carefully measure and mark the seismic sections that resulted from the interception of reflected waves;
to reveal the most likely locations for drilling, e.g.
Most people - like Trump - are yokels when it comes to the fine details of petroleum exploration and what is involved. So it's easy to babble "drill, baby, drill" when you have no clue what that really means. I did, as my job was to carefully assemble seismic sections from geophone data, and mark them with timing intervals, fiducial marks, etc. for further interpretation.
All these costs added up and oil companies didn't just embark on drilling on a lark as Trump (and so many in his incoming bunch) seem to believe.
All of this means that the pick (Scott Bessent) nominated by Trump for his Treasury Secretary, needs to carefully reconsider before trying to go forward with his "3-3-3" deficit reduction plan. (Which includes the U.S. producing an additional 3 million barrels of oil equivalent a day).
As the WSJ piece puts it: "Not only does that plan seem impossible, it makes little sense."
Clearly the new Treasury guy needs to check his math again, and maybe consult with those in the oil exploration business.
See Also:
Brane Space: Why Are The Frackers Losing Money And Resorting To Junk Bonds To Stay Viable?
And:
by Robert Reich | November 25, 2024 - 6:36am | permalink
— from Robert Reich's Substack
Will anything stop Trump?
He will have control over both chambers of Congress, a tractable Supreme Court, a political base of fiercely loyal MAGAs, a media ecosystem that amplifies his lies (now including Musk’s horrific X as well as Rupert Murdoch’s reliably mendacious Fox News), and a thin majority of voters in the 2024 election.
He doesn’t worry about another election because he won’t be eligible to run again (or he’ll ignore the Constitution and stay on).
Of course, there are the midterm elections of 2026. But even if Democrats take back both chambers, Trump and his incipient administration are aiming to wreak so much havoc on America in the meantime that Democrats can’t remedy it.
The Republican-controlled Senate starting January 3 won’t restrain Trump. Yes, Trump overreached with his pick of Matt Gaetz for attorney general. Apparently even Senate Republicans can’t abide sex trafficking girls for drug-infested orgies, but this is a very low bar.
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