This article was published by The McAlvany Intelligence Advisor on Wednesday, August 3, 2016:  

Looking down from Heaven, George Mitchell must be pleased with what’s going on below: oil inventories are growing to the point where offshore tankers and railroad tank cars are having to be used for storage, oil and gas prices are dropping along with the costs of all the other 6,000 consumer products made from petroleum, rig counts are increasing, production costs are dropping, and, best of all, ’s influence is waning daily.

The Economist called Mitchell the father of fracking in its eulogy following his death in July, 2013. They referred to him as “a one-man refutation of the declinist hypothesis [everything is going to hell in a handbasket].” Mitchell was convinced that massive stores of energy resided just below the earth’s surface and spent decades finding out how to gain access to them. Said the Economist: “The result was a revolution.”

Indeed. The United States has come a very long way from the gas lines in the 1970s wrought by Saudi Arabia and its cartel. This writer remembers waiting in those lines, the odd-even rationing based on license plate numbers, the posting of flags by gas stations: green, we have gas; red, we don’t. He remembers the double-nickel – speed limits cut to 55 mph in order to save gas. He remembers being sold the idea that daylight savings time, implemented in 1974, would somehow save gas. He remembers calling the second disruption in 1979 “the moral equivalent of war” on the U.S. by OPEC.

All distant memories and, happily, likely to remain so, thanks to Mitchell.

Even $100 a barrel oil is a distant memory, fading in the rear view mirror. In November 2014 Saudi Arabia’s energy minister announced that his country (and by implication every other member of the cartel) would continue pumping at maximum rates despite the precipitous decline in the price of crude. Although never spoken in so many words, the minister intimated that the cartel, and Saudi Arabia in particular, had so much oil, and so much in reserve currencies, that it would produce the oil industry out of business. It would force the price of oil so far below the cost of production that the industry would be decimated, after which it could once again drive prices higher. They could, and would, wait the Americans out.

For a moment there it looked like the strategy would work. Marginal U.S. producers with heavy debt on their balance sheets began declaring bankruptcy. Frackers began stacking their rigs. Production began to drop. Prices that were projected to drop into the 20s reversed in the mid-30s and moved higher, touching the mid-50s.

Last week the president of Pioneer Natural Resources threw down the gauntlet: his company’s production costs in the Permian Basin in West Texas have fallen to – ready? – just $2.25 a barrel. He said, “Definitely we can compete with anything that Saudi Arabia has. We have the best rock.”

And lots of it, too. Pioneer boasts that it is sitting on estimated recoverable oil reserves of 75 billion barrels.

And not just Pioneer. Continental Resources, Harold Hamm’s company, is planning on increasing its capital investment and expects its production to increase by ten percent next year. Whiting Petroleum, the biggest shale oil developer of the Bakken formation in North Dakota, has said it would start deploying new rigs shortly as well. Hess Corporation, which also is developing Bakken, has cut its production costs by nearly 30 percent in just the last year.

Not only is the North oil industry cutting its costs, it is extending the life of its existing wells. And it has an estimated 3,900 DUC wells – drilled but uncompleted – just waiting for the breakeven point to drop enough to make them profitable.

The oil patch is enjoying the fruits of its innovation: presently stacked rigs can come back on stream in less than 30 days, while new rigs, starting from scratch, are operational in 135 days. Up to six wells can be drilled from just one surface pad, and production from those wells is being substantially extended as well.

All of which is putting OPEC, and particularly the gang of thugs running Saudi Arabia, into a terrific and increasingly painful bind. There’s no more boasting of their huge foreign currency reserves, there’s no more boasting about outlasting the Americans. Those reserves have plummeted by 25 percent since their 2014 declaration, and their cash flow has been going negative at the rate of $11 billion every month. And that’s happening even as they are borrowing billions to stanch the hemorrhaging. They’re discovering just how expensive it is to provide cradle-to-grave security for its people, and just how upset those folks might become if those benefits were cut.

Their conundrum is this: if they keep producing flat out, they simply add to the supply, keeping prices down. If they cut production, they will lose customers to the Americans, who no doubt would be glad to take them.

Retribution is delicious. Mitchell must be pleased.


The Economist: The Father of Fracking: George Mitchell

What gas lines looked like in the 1970s  

The Telegraph: Texas shale oil has fought Saudi Arabia to a standstill

The Journal: Oil Holds Near Three-Month Low With Surplus in Focus

The Journal: U.S. Oil-Rig Count Gains by Three in Latest Week

Reuters: U.S. shale’s message for OPEC: above $40, we are coming back

Bloomberg: Growing Oil Glut Shows Investors There’s Nowhere to Go But Down

Background on Pioneer Natural Resources

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