Monday, January 25, 2016

Never Bet Against the Capitalists

There are two articles out that should be read.  As much as I respect the people who run the oil industry in Saudi Arabia, there is one immutable fact:  It's mostly a state run conglomerate.  And as long as that continues, they will make the mistakes that all governments are the best at:

Underestimating the Capitalist.

The Telegraph has an amazing article on Frackers in the USA:
Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.

“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph. The great unknown is how quickly the industry can revive once the global glut starts to clear - perhaps in the second half of the year - but it will clearly be much faster than for the conventional oil.

“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos. has an article that augments what is being said here:
What makes the current selloff and coming recovery different from previous market cycles is the advent of U.S. shale oil. The shale revolution has transformed oil market dynamics. It triggered the oil price collapse. It is now shaping the course of the recovery. It will eventually define the features of the energy landscape that will in due course emerge from the downturn.


But the factors that today incentivize producers to boost output at the expense of longer-term investment will inevitably undermine future production. The very rise of the shale oil industry, with its unique cost structure and short business cycle, undermines longer-term investment in high-cost conventional supply. The ability of the shale industry to ramp back production in a rebound is untested, however, and the market might find out when prices finally recover that its capacity has been durably degraded. In a best-case scenario, the market ought to brace itself for a period of heightened volatility, albeit perhaps in a relatively narrow band, if the shale oil industry manages to function as an effective swing producer. Alternatively, low prices today may set the stage for significant supply shortfalls tomorrow.

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