$40/barrel?

 

Driven by Saudi Arabian efforts, the price of petroleum oil is falling through the floor.  When I last checked, it was down under $70/bbl.  I read a prediction the other day that it may actually fall as low as $40/bbl. While I haven't checked to make sure, at $40/bbl, it will be at a historic low in real terms.  That is, in actual value, it would never have been that cheap before.

I've been sort of waiting for something like this to happen for awhile, but not quite in this fashion. That's mostly due to having a long term memory.  I have lived here my entire life, and I well remember the last time the price of oil went through the floor.  The irony of our local economy has long been that if the price of oil is high, the times are good here, and the economy super heated.  If the price is low, we locally slide into a recession or even a depression.  For those who experienced this in the early 1980s, a recollection of an oilfield depression is pretty strong.  For those of us who are older with good memories, or who had parents who recalled it, a similar event was also strongly recalled that occurred in the 1960s.  And for students of history, we now that another one happened right after World War One, in the 1930s, and again in the 1940s following World War Two.

Now, not all of these events were the same in scope or impact, although they were all big deals locally. The size of some towns decreased by about 80% following the one in the late 1940s.

Of course, some things have changed.  For one thing, the cause and circumstances of the prior falls were all a bit different than what we're currently seeing.  The declines after World War One and World War Two came during an era when we were a net oil exporter and there was a sudden global decline in demand due to the end of the wars.  The decline in the 1930s was due to a global depression when all economic output drastically declined.

The most recent decline, of the early 1980s, was due to increased Arabian production combined with a fall at the pump, as OPEC began to become a bit unraveled and also as it became clear to the Saudi Arabians that a distressed American economy was bad for its long term economic stability.  That came in an era when we were desperately dependant on Arabian oil, something that came about unnoticed during the 1960s but which became obvious in 1973 when OPEC enacted an embargo on export to the U.S. due to our support of Israel during the Yom Kippur War.  Every year after that the US tried to become more independent of foreign oil but failed, leading to a decade of rising oil prices, until OPEC, or really Saudi Arabia, fearing American economic instability, dropped the prices, and as OPEC lost a lot of its steam in the wake of the Iranian revolution.

The decline of the early 1980s lead to an oil patch depression that really only slowly began to go away in the late 1980s, going into an oil patch recession that really lasted up until the mid 1990s at least. There was some stability after that, and then a boom erupted in the last decade that remains unabated.  Local economist debate if there is a boom, but there is.  Anyone can see it with their naked eyes.  The cost of anything land related has shot up, as its become scarce, and we're up over 100% statistical full employment.

But that's how things were around 1980-1982 as well, and hence the waiting for the other shoe to drop that long term locals have had, and indeed that some in the industry have had.  It can't go on forever, it would seem.  But recently people have sort of dared to think it sort of might, even though that clearly cannot happen. Once all the fields are drilled, they're drilled. That creates its own infrastructure, of course, which must be serviced, but still, it isn't the same as when all the regional rigs are working.

But the times aren't quite what they were in the early 80s either.  For one thing, and apparently the cause of the current Saudi effort, the US is not really that dependant on foreign oil anymore.  Advances in technology have opened up vast resources in the U.S., and the U.S. is an energy, albeit not oil, exporter.   As prices have stabilized at a fairly high, by historical standards, pump rate, it's also been the case that Americans acclimated to it, which nobody expected, making the demand fairly stable.  And as that's occurred, its actually declined.  A new generation of Americans is not car enamored.  And the historical memory of foreign oil enslavement remains strong such that there is widespread support for increased CAFE standards and even from shifting away for oil entirely, if possible, for fuel.  So price stability hasn't resulted so far in a price fall, exploration has kept on keeping on bringing more resources to the global supply at what was the existing rate, thereby increasing the profitable supply while decreasing the foreign imports. And, as North American is one continent and one giant oil province, the technological advances that have made this possible in the United States, that being horizontal drilling, have also made it possible in Canada, which has pretty much supplanted Arabia as our go to source for petroleum.

It took the Saudis a long time to awaken to this, and they probably just didn't believe it would last, but they're awake now and according to what I've read, and what industry insiders have told me, this is a calculated Saudi effort to shut down American exploration.  The thesis is that by depressing the price it'll fall below the level at which it will be profitable to explore in the United States and Canada, and it seems to be working.  According to what I'm reading, drilling is in fact being postponed.  It isn't as if the newly known fields are going to go away, but contrary to what some of the news was on these fields earlier in the recent boom, it isn't as if all of these fields weren't known in some way before.  Some are wholly new, however.

The long term impact of this will be really interesting.  Chances are pretty good that in the new oil provinces in the United States and Canada there will be an economic downturn.  My guess is that it might be pretty stout in North Dakota, which hadn't seen exploration of this type since the Williston Basin days of the late 1970s and early 1980s, and which otherwise had a relatively depressed farm economy.  In Wyoming and Montana, where the boom has been very real but somewhat muted, the impact is unlikely to be as severe.  This will mean, I suspect, that the percentage of oil the U.S. imports will rise, but my guess is that it won't rise as spectacularly as the Saudis hope it will.  Perhaps showing how severe it was, the memory of the import crisis of the 1970s has not really ever gone away and there remains pretty strong support for more and more fuel efficient vehicles, a movement that's also tied into increasing environmental concerns.  Somewhat related in terms of impact, it appears that the American cultural fascination with automobiles is ending, and that also means that cars are viewed increasingly as only one of several utilitarian options for getting around, and not one that's seen as glamorous or even desirable by younger people, who are willing to buy what's economical and abandon cars altogether if economically rational.  Moreover, given the advance in technology in oil production, the United States will retain at this point an ability to increase production, which will mean that the Saudis will have to keep the price low in order to keep their share of production high. That has long term impacts on them, as even though they'll be making money, they have to do it through low prices and high production, a program that has long term impacts on their reserves and their own economy.