What low oil prices mean for the environment

December 2, 2014

Are low oil prices good or bad for the environment?

From one perspective, they’re bad: lower oil prices mean lower gas prices, which in turn encourage people to drive rather than use more environmentally friendly means of transportation.

But in the case of U.S. shale oil, lower prices are good for Mother Earth, if only temporarily. Oil prices have been falling steadily since June, and given OPEC’s recent decision not to curb production, it seems they’ll remain low for a while. As Myles Udland pointed out in Business Insider last week, a lot of shale projects have break-even prices beneath the $80-per-barrel price level, but producers become less and less incentivized to start new projects as prices fall.

 As this Reuters graphic shows, shale drilling permits fell 15 percent across 12 major shale formations in October, a sign that shale producers are willing to slow their rapid expansion until they can get more bang for their buck. It comes down to opportunity cost. As Harold Hamm, an early shale pioneer who has lost $10 billion since August (let that sink in), told Bloomberg, “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Many see OPEC’s refusal to curb output as a multi-billion-dollar game of chicken with U.S. shale producers, whose booming production can be credited with the recent fall in world oil prices. Early evidence shows that it may be working—for now; fuelfix.com reported yesterday that Texas shale permits were down 50 percent in November.

Ultimately, the case can be made that low oil prices are bad for the environment, as they encourage more oil use now, which makes investments in alternative energy less urgent. And the shale isn’t going anywhere–it’s just waiting there patiently for prices to become sufficient for new extraction projects.

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2 comments

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Drilling permits always fall off at the start of winter.

Posted by Dutchman61 | Report as abusive

Say what??? Corones has no clue about how the oil market works or what is happening.

First, shale oil cost $80 to drill in 2004 when the first started and when they could go 1 mile horizontally. Today, they drill nearly 15 miles which slashes the drilling costs by easily 60%. Fracking (1 million wells since 1948) methods have also dramatically improved and they learned how to optimize them for horizontal wells. The result is yields 2 to 3 times as high per mile drilled. Just in the last few days, there have been multiple reports that shale producers can hit 10% return with $42/barrel. Even the small plays are coming in under $50. The same advances in technology apply to Canadian oil sands production. They cost $78/barrel in 2004. Today, most production is under $50/barrel.

Second,the cost to produce the oil is only part of the total cost. Oil that costs $40 in Saudi Arabia will cost $60 delivered at the refinery in Europe, China or the US because you have to ship it! The MSM’s demonstrate an amazing ignorance of how this works. Most oil in the Middle East costs $20-30 per barrel to load it on the tanker. It costs the Russians $30 to get it to the major pipelines (most still gets loaded on tankers). The Saudis, UAE, and Kuwait are the lowest cost producers and they are still at roughly $20. With zero profits, the oil would still cost $40-50/barrel delivered to the major markets. US producers shipping via pipelines have a $3-6/barrel cost. Canadian oil has a $8/barrel cost so the new players are competitive. It must also be pointed out that only a few energy companies financed the north American energy boom with debt. The Feds dumped the QE money into the stock market and the hands of the speculators and next to none has been seen in the mainstream economy. The result is producers have paid for everything and are either getting profits or recovering investment with no debt pressures.

Third, 3/4 of oil producers are national companies or government controlled and they have to support government budgets. Their politicians have been as bad as Obama and have grossly over spent and now need a huge markup to support themselves. The numbers range, but data shows Kuwait needs $15/barrel, Saudi $35, Iran $60, Russia $60, Nigeria $75, Venezuela $90 over and above the sales price. On the other hand, Mexico is $15 (but next to the US with $5 shipping), Canada $6, and the US on average $6. When these costs are added to the mix, there is no way even the Saudis can sustain pressure to shut down any significant production. In fact, another 1.5 million barrels of INCREASED USA capacity is being added because the pipes are now being hooked up to wells that are already drilled and ready to be turned on.

So what are the Saudis doing? Simple really: they are fighting a threat that could overthrow their government and destroy their way of life. They are using oil as a weapon to stop Iran from getting the BOMB. Iran and Saudis have been fighting a proxy war in Yemen, Syria, Iraq, and Libya for years. It was at a slow boil while the US maintained large military forces there, but with the Obama bug out, the heat has leaped up. For the first time since the 1940’s the Saudis do not believe that in the end the US will protect the oil fields. Russia has also moved to re-establish itself in the Middle East and are actively working with Iran as is Venezuela. Those three have no reserve oil production capacity and need over $105 per barrel to support their adventures. Slashing prices to the $65/barrel range cripples them financially. The hit is worse since Saudi is ramping up an additional 2 million barrels per day to make up the lost revenue, taking more market share from them and hurting them further. Venezuela is getting crushed by new Mexican and Canadian heavy crude which is a lot cleaner (meet EPA regs, Venez does not) than their super heavy goo. Saudi can survive for a decade at $65. Venezuela might default in a few weeks. Iran will run out of cash by May or June. Russia might last 1 year. Rising North American oil actually helps the Saudis since that actually reinforces their actions and insures the US has energy to re-engage after 2016. In a nutshell, the Saudis are using their heavy weapon to fight Iran. Meanwhile Obama putts on the golf course while the Middle East burns, The American Nero.

Posted by Dutchman61 | Report as abusive