Oil

Don't expect oil prices to rebound anytime soon

Global forces conspire to keep energy prices low, for better and worse.

 

It’s not even 8 a.m. and rush hour is on in northwestern New Mexico. Dozens of big white trucks and water tankers, neon flags flying, head north to the gas patch. I’m driving south, through Aztec, and as I pass the retro-orange A&W on the edge of town, I pull up alongside a drilling rig. The thing’s huge, too huge, it seems, to be rolling along the same road as my little Nissan. Yet the strange, rolling infrastructure has been a familiar site around here for decades — back in 1948, when a UFO purportedly crashed out on a nearby mesa, the government disguised the recovery mission as an oil and gas drilling operation, which makes perfect sense.

But rolling drill rigs are becoming a little less common around here. Back in 2008 natural gas prices crashed, putting a huge dent in extraction of the region’s main cash crop. Now oil prices have slumped, too, dealing another blow to the main local economic driver.

A pumpjack, with Farmington and the Sleeping Ute Mountain in the background.
Jonathan Thompson

My efforts to photograph the drill rig make me late to the “Thriving in the New Normal” workshop at San Juan College in Farmington, but I arrive in time to hear Dr. Daniel Fine, from the New Mexico Energy Policy Center, deliver a grim speech. Tall and thin in a rumpled suit and wire-rimmed glasses, it's fair to say Fine doesn't fit into this crowd of big men, most of whom work in the oil and gas industry, their blonde hair shorn close to the skull, wearing beat-up boots and fleece vests adorned with company logos.

Fine is hardly an inspirational speaker, nor is he an optimist. The Saudis, he says, have waged a price war on the American shale drilling revolution and its producers. And the Saudis are winning.

Fine, who has testified before Congress on energy issues, lays out a world of geopolitical intrigue and scheming that plays out in the oil and gas fields just outside the room in which he speaks. The Organization of Petroleum Exporting Countries (OPEC) has long been concerned about the shale revolution in the U.S., and its potential for eroding the cartel's global market share. And OPEC officials have kept a very close eye on what's going on in North Dakota's Bakken, in the Permian Basin in Texas and southern New Mexico and, more recently, in the San Juan Basin in northwestern New Mexico. The U.S. rig count, Fine says, is translated into Arabic shortly after it's published here.

Saudi oil ministers were well aware, then, that while the shale revolution has been a rousing success, pumping U.S. production up to levels that haven't been seen since the mid 1980s, it is also expensive to do  — costing three to ten times the production price of a Saudi Arabian barrel of oil. Many U.S. companies have gone deeply into debt to finance their costly drilling operations, making them especially vulnerable to any decreases in oil prices.

Sign, San Juan Basin, New Mexico.
Jonathan Thompson

During the summer of 2014, oil prices began to ebb slightly as global supplies caught up with and then exceeded global demand. It was the window Saudi Arabia had been looking for, and rather than curtail production to stabilize prices, as many expected the nation to do, it continued to pump oil at a high rate, even going so far as to offer discounts to Asian nations. Prices plummeted from $100 per barrel to $80 to right around $50 today, a level that had seemed impossible in July. Already, the oil and gas industry here in the U.S. has taken serious casualties. The number of rigs operating — a barometer of the industry’s economic activity — has crashed. Oilfield service companies have laid off thousands of workers. Boomtowns are on the verge of going bust. Even apartment rental rates in North Dakota’s oil patch have started to wane.

“It’s similar to 1985 and 1986, when the same OPEC offensive took place,” says Fine. Back then, it took more than two years for prices to recover, and far longer for the industry and the communities that relied on it to get out of the hole. While price drops take just a few months to be manifested in rig counts and employment levels, the response to price increases is usually a lot slower. “Will oil rebound to $100? I’m here to say no.”

Sure, low prices at the pump will encourage American drivers to buy bigger cars and drive them more miles, thereby increasing demand, according to the “nothing helps low prices like low prices” supply-and-demand adage. And someday, Saudi Arabia, having worn down the American oil industry adequately, will start cutting production to bring prices back up, if only just to help their OPEC cartel-mates like Venezuela and Iran, which, like America’s “petro-states” such as Alaska and Wyoming, are struggling mightily under the low prices.

But another dynamic that’s currently playing out is, on the one hand, keeping prices from falling more than they have: Major oil traders and brokers, from Shell to Koch Industries, are buying up millions of barrels of oil while prices are low, and storing them in supertankers off the coast. This helps prop up demand now. But when prices go back up — even by a relatively small amount — the brokers can sell all that oil at a huge profit. Doing so will flood the market with oil, pushing prices right back down, perhaps even lower than they are now. One analyst even suggested that prices could hit $20 per barrel. That may be a little extreme, but it also seems unlikely that they’ll go back up to break-even drilling prices for producers in America’s shale plays anytime soon.

“There’s a new reality,” says Fine. “And it’s uncomfortable.”

I’m at the workshop to try to better understand what that “new normal” will look like, and to see how low oil and natural gas prices will ripple through the economy, the culture and the landscape in Farmington and beyond. Stay tuned for my High Country News cover story on the topic, online and in print March 16, as well as more dispatches from the oil and gas patch here at hcn.org.

Jonathan Thompson is a senior editor at High Country News. 

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