Wow, it is getting difficult to keep track of all of these bubbles supposedly forming all around us. Bonds, stocks, housing, Bitcoin, gold and silver are just some of the items associated with that “bubble” word of late. Now here comes the latest in the form of the recent shale oil boom happening here in the United States. What seems to be a silver lining in an otherwise dismal American economy, may be reaching its zenith, at least temporarily. The oil rush has apparently driven up prices to such a degree that profitability may require higher oil prices than most had assumed:
But it must be said that when you take into account all the costs incurred in acquiring and developing unconventional oil fields today, many plays are already balanced on the knife-edge of profitability, and any down draft in oil pricing could dry up activity real quick.
What? How can that be? Oil prices are pretty darned high right now. Well, it turns out that many companies were paying prices for land and drilling rights that may have been overly optimistic. In addition to that, there was a built in time value of money premium that is looking less and less rosy. When some firms were buying into the boom, they were willing to wait for years until the drilling actually turned a profit. If the price of oil drops that day until profitably drifts further and further away. And it does seem undeniable that some companies simply over paid and/or underestimated the costs of drilling as some of the economics seem out of whack:
What’s more, the researchers found an “unprecedented” jump in the marginal costs of U.S. fields, from $89 a barrel in 2011 to $114 a barrel in 2012.
Whoa. You don’t have to be very proficient in math to see how those numbers are a problem. To be fair, and this is pointed out in the article at the link as well, the above quote refers to the “marginal” fields. Some of the more above average fields are said to be profitable anywhere from $64 to $80 a barrel. Hardly a big cushion, but clearly a much better situation to be in. Alright so, the shale oil boom may have gotten a bit aggressive, but what “bubble” are they talking about?
Well, there are signs that some of the boom may have gotten ahead of itself — by a lot:
Last year Chesapeake Energy sold 1 million acres in the Permian basin to Shell and Chevron. It expected to get $6 billion, but had to settle for just $3.3 billion. (Last year Chesapeake wrote billions in once-heralded gas reserves off its books.)Early this year Hess sold out of its Eagle Ford acreage for $6,000; just 18 months earlier good acreage in the region was going for $24,000. There is tons of acreage on the market right now, enough stuff to keep the industry drilling for hundreds of years. But who’s going to buy it?
Those are numbers that are hard to argue about. And if you have to ask the question “who’s going to buy it”, then I think it is safe to say that there is some worry at the very least. In fact, if those numbers above are any indication of the entire market, it just may be that the “bubble” may be over. Now, when bubbles pop it is as difficult to call the bottom as it was the top as the “bubble” was inflating prices. But if land values are dropping by 75%, then it seems clear that the top has already been passed. Let’s hope for the sake of the economy and all of those jobs that things begin to work themselves out soon. The upside for those of us not in the industry may be that this is one “bubble” that we don’t have to add to our list of worries as it has already burst before most of us even knew it was a “bubble” to begin with. And there are enough of those now as it is.