Rollercoaster Gasoline Prices

Are you ready for some $1.50 per gallon gasoline? Sounds pretty good, huh? Well, in my opinion, it’s heading down the pike. Yep, filling up a 20 gallon tank is going to cost you around $30. But there’s a hook, and the hook is $5.00 a gallon gasoline is also a virtual certainty. That would move your SUV to $100 for a fillup: now here’s why; earlier this month the Saudis and

Russians announced they were splitting up their little honeymoon, where they co-operated to cut oil production in order to prop up prices to around $50 to $60 a barrel. That sent shock waves through the already depressed coronavirus oil market, and the price of a barrel of oil dropped from nearly $50 per barrel all the way down to $30 per barrel. (It’s in the $20s as I write this.) The President has announced the Feds will start buying oil to put in the Strategic Oil Reserve, but that’s about like putting the Smackover Fire Department in charge of putting out the California wildfires. The outlook is beyond grim.

According to a press release by the Saudis, as of April 1st, they are going to ramp up their 9,000,000 barrels of oil a day to somewhere around 13,000,000 during the year. The Russians, not to be outdone, announced they were also opening the taps for an unannounced major hike in oil production, and the Persian Gulf States, allies of the Saudis, said they are along long with the Saudis to boost production. As part of the same announcement the Saudis said they were cutting the price of current deliveries $4 to $6 per bbl. If you do the math, that puts somewhere around 8,000,000 bbls a day of new oil on an already depressed global market during 2020. That’s why oil dropped nearly $20 per barrel, and I’m very sorry to say, that’s not even close to the bottom of the price slide.

Why are the Saudis and Russians trying to drive the price down? Well, if you read their comments, it’s because they want to kill the high cost producers who are taking advantage of their price stabilization. Of course, the target is the American Shale Oil Drillers, who have put several million barrels of new oil on the market making the United States the leading oil producer in the world. However, that oil come with a high price tag, and I won’t go into why, but believe me the drilling of a 10,000 foot well, half of which is horizontal, shooting holes in 30 to 50 places in the pipe, and then blasting these holes with a sandy, water mixture that forces a couple of million pounds of sand into the ground is damn expensive. To justify spending 10 to 15 million dollars a well, the price of oil must be $40 to $50 at a minimum.

The American Oil Industry has developed a brilliant method of getting oil out of rocks that before were considered non-productive, and that technology has put several million extra barrels per day on the world market. The Saudis and Russians feel like they have been propping up the price of oil while the United States increases production and takes up more of their share of the world market. Very simply put, they are committed to put a stop to that.

Consider this: if just the threat of increasing production dropped the price of oil $20 per barrel, what will happen if the Saudis and Russian actually put an extra 8,000,000 barrels of oil on the world market? Both countries have already committed they are willing to reduce their price in order to keep their market share, so the price of oil will tumble. When you drop below $30 per barrel that puts most of the shale wells uneconomical, and a further drop to $15 per barrel, which is possible, essentially put all high cost oil wells uneconomical. That is the Saudis and Russian goal, and to keep prices low until the American Oil Industry is in shambles.

Of course, they are targeting the American Oil Shale producers, but in the crossfire are several thousand small oil and gas operators who don’t produce one drop of shale oil, but they are operating what are known as stripper wells, which produce sometimes as low as 3 to 5 barrels a day. These wells are only economical is the price of oil is high because many of them with high labor costs and the disposal of sometimes several hundred barrels of saltwater along with the oil, must have a high price for oil or their wells won’t be economical. Those producers are in every state in the country that produces oil, and an extremely low price for oil will severely impact them. Thousands of small operators will go out of business, and some of them will be in Arkansas.

This is the outlook, assuming the Saudis and Russians don’t kiss and makeup. The small to medium size oil companies that are heavily invested in drilling for shale oil, and are dependent upon extensive bank financing, will go bankrupt. The banks that are heavy into financing these companies will take huge losses. The companies with strong balance sheets will pull

back from drilling and several thousand drilling rigs will be stacked. Several hundred thousand oil workers will lose their jobs.

The United States oil production will begin a decline this year that will ultimately be as much as three to five million barrels a day. That is the Saudis and Russians goal. However, the real question is how long will they hold down the prices by overproducing? I have a gut feeling, since they tried this once back in the 1980s, and they did cut production but it went right back up quickly, that this time they will try to finish the job and the oil industry in the United State will suffer not just a few months, but maybe as long as two years.

Well, that’s the $1.50 gas time. Now, if we look to the future, we know exactly what will happen, but not the timing. When the Saudis and Russians see the drop in oil production from the United

States is sufficient to resume their proration, and our infrastructure is sufficiently damaged, they will agree to curb production and the price of oil will steadily climb. How much? The Russians need $40 to $50 per barrel for their country’s budget and the Saudis need at least $80 per barrel, so prices will climb back to above that level. However, in the past, a Saudi oil minister stated he thought $100 per barrel was a fair price for oil. Will the Russians and Saudis stop at $100 per barrel? What do you think?

The bottom line is simple: cheap gasoline seems like a good deal, but the long term costs to get that $1.50 gasoline for a year or so, will greatly overshadow the short term benefits. Well, I’m sitting here with the coronavirus sweeping the country, oil prices whistling down, and the stock market dropping like a rock, wondering, “Where am I going, and why am I in this handbasket?”