This article first appeared at The McAlvany Intelligence Advisor on Friday, November 28, 2014:
It’s a safe bet that Americans, in compiling their list of blessings for which they were most thankful on Thanksgiving Day, didn’t put George Mitchell at the top. It’s even safer to bet that most Americans don’t even know who he was, or how his life has made life better for nearly every American today.
The Economist had it right: “Few businesspeople have done as much to change the world as George Mitchell.” The founder of Mitchell Energy & Development Company located in Galveston, Texas, Mitchell was responsible for drilling more than 10,000 natural gas wells and, in the process, resetting the world’s energy equation.
Although he passed away over a year ago at the age of 94, Mitchell’s advances in fracking technology are continuing to delight American drivers with the lowest gasoline prices in recent memory, while giving America’s enemies serious indigestion.
Mitchell was certain that there was an economical way to obtain the natural gas in the Barnett Formation, but it took him 10 years and $6 million of his company’s money to find it. That fracking technology has been successfully incorporated in the development of crude oil in fields from Pennsylvania to North Dakota and, even on Thanksgiving Day, reverberated from Vienna, Austria where OPEC just wrapped up its one-day meeting.
In a terse announcement, OPEC said that the oil cartel was not going to cut production quotas in order to “stabilize” crude oil prices. The oil futures market reacted violently, sending West Texas Intermediate (WTI) January delivery to $70 a barrel and Brent crude to $73. When it was learned that crude inventory increased far above estimates, it set the stage for further declines, perhaps into the mid-60s.
Some still remember that OPEC was the big gorilla with its 30 million barrels per day production, causing heartburn for American drivers: 55 mile per hour speed limits – the “double nickel” – and long lines at gas stations offering gas only on “odd”- or “even”-numbered days. It was back when the government pressured power plants to use coal instead of oil, and prohibited the sale of crude to foreigners: it was needed here.
OPEC is a ghost of its former self. The big gorilla on the scene is the United States, thanks to George Mitchell. The benefits to the American consumer go far beyond saving a few bucks at the gas pump, although, measured by the millions of drivers on the road over the Thanksgiving Day weekend, the savings are in the hundreds of millions of dollars. Plastics cost less, reducing packaging prices and, along with them, food prices. Electric bills are declining, reflecting the shrinking cost of energy. The American dollar continues to strengthen against foreign currencies, giving Americans another boost in their purchasing power when buying foreign goods. The cost of living is going down and, coupled with low interest rates, Americans are boosting car sales and the home building sector.
In addition, American manufacturers who moved their plants abroad are now moving them back to take advantage of the lower costs of energy. Methanex, the world’s largest methanol producer, is dismantling its methanol plant in Chile and rebuilding it in Louisiana. Dow Chemical and other energy-related giants are making new investments in the US, while Price Waterhouse is estimating that those lower energy costs could boost employment in American factories by a million jobs over the next ten years.
Even local municipalities are benefitting as the costs of heating and cooling schools and office buildings continue to decline.
Behind the scenes in Vienna was much angst about the American miracle, especially for those who consider themselves America’s enemies. Members of the cartel have budgeted expectations of continued high oil prices into their calculations and are spending every penny of those expectations. For instance, Libya – headed until recently by the terrorist Muammar Gaddafi – needs crude prices at $185 a barrel to balance its budget. Iran – presided over by another terrorist – the “Supreme Leader” Ali Khamenei – needs crude oil prices at $133 to fund its commitments.
Vladimir Putin’s Russia (not a member of OPEC but guilty of the same miscalculations) isn’t in much better shape. According to Goldman Sachs, it needs to sell its crude at $101 a barrel to fund its militarist adventures. With crude at close to $70, it is going in the hole by $100 billion a year, or more. And that doesn’t include the $40 billion it is spending in its militarist adventures in the Ukraine. That likely explains the ruble’s 40% tumble just since the first of the year.
There was a warning shot fired also on Thursday, a potential precursor of trouble in the oil patch if crude goes down too far and stays down too long. Holders of shares of SeaDrill, a small Norwegian offshore drilling company that has leveraged itself to the hilt, lost 23% of their portfolios after the company announced it was suspending its dividend in order to conserve cash. SeaDrill is learning the same lesson as OPEC: bubbles burst, the energy business is volatile, and it doesn’t pay to engage in straight-line thinking in a curvilinear world.
Americans, thankful for living in America and expressing that by celebrating Thanksgiving Day, don’t know George Mitchell. Just as they don’t know the impact other unsung, unheralded, unacknowledged heroes have had, and are continuing to have, on their steadily improving standard of living. But the 12 members of the OPEC cartel most certainly know George Mitchell, and it’s giving them serious indigestion.
Just another reason to be thankful.
MarketWatch: Oil ends at four-year low ahead of OPEC meeting
LightFromTheRight.com: George Mitchell, the Father of Fracking, Dead at 94